CIVREV Digest Compilation

CIVIL LAW REVIEW 2: Contracts Atty Tizon

MetroBank v. Rosales G.R. No. 183204, January 13, 2014 Sources of Obligation Doctrine: The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of the sources of obligation enumerated in Article 1157 of the Civil Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict

OBLIGATIONS

Facts: Petitioner Metropolitan Bank and Trust Company is a domestic banking corporation duly organized and existing under the laws of the Philippines. Respondent Ana Grace Rosales (Rosales) is the owner of China Golden Bridge Travel Services, a travel agency. Respondent Yo Yuk To is the mother of respondent Rosales. In May 2002, respondent Rosales accompanied her client Liu Chiu Fang, a Taiwanese National applying for a retiree’s visa from the Philippine Leisure and Retirement Authority (PLRA), to petitioner’s branch in Escolta to open a savings account, as required by the PLRA. Since Liu Chiu Fang could speak only in Mandarin, respondent Rosales acted as an interpreter for her. Fang has another account with the bank in which she withdrew the money to be used in opening the new savings account in Escolta. Petitioner claims that it was the deception employed by respondent Rosales that caused petitioner’s employees to release Liu Chiu Fang’s funds to the impostor. Petitioner issued a "Hold Out" order against respondents’ accounts and through its Special Audit Department Head Antonio Ivan Aguirre, filed before the Office of the Prosecutor of Manila a criminal case for Estafa through False Pretences, Misrepresentation, Deceit, and Use of Falsified Documents against respondent Rosales. Petitioner accused respondent Rosales and an unidentified 1


woman as the ones responsible for the unauthorized and fraudulent withdrawal of US$75,000.00 from Liu Chiu Fang’s dollar account with petitioner’s Escolta Branch. Respondents filed a Complaint for Breach of Obligation and Contract with Damages, against petitioner. Respondents alleged that they attempted several times to withdraw their deposits but were unable to because petitioner had placed their accounts under "Hold Out" status. No explanation, however, was given by petitioner as to why it issued the "Hold Out" order. Thus, they prayed that the "Hold Out" order be lifted and that they be allowed to withdraw their deposits.

In this case, petitioner failed to show that respondents have an obligation to it under any law, contract, quasi-contract, delict, or quasi-delict. And although a criminal case was filed by petitioner against respondent Rosales, this is not enough reason for petitioner to issue a "Hold Out" order as the case is still pending and no final judgment of conviction has been rendered against respondent Rosales. In fact, it is significant to note that at the time petitioner issued the "Hold Out" order, the criminal complaint had not yet been filed. Thus, considering that respondent Rosales is not liable under any of the five sources of obligation, there was no legal basis for petitioner to issue the "Hold Out" order.

Issue: Whether petitioner breached its contract with respondents because they had placed the respondents’ accounts under “Hold Out” status. Ruling: The "Hold Out" clause does not apply to the case. Generally, the Bank may, at any time in its discretion and with or without notice to all of the Depositors, assert a lien on any balance of the Account and apply all or any part thereof against any indebtedness, matured or unmatured, that may then be owing to the Bank by any or all of the Depositors. It is understood that if said indebtedness is only owing from any of the Depositors, then this provision (hold out clause) constitutes the consent by all of the depositors to have the Account answer for the said indebtedness to the extent of the equal share of the debtor in the amount credited to the Account However, the "Hold Out" clause applies only if there is a valid and existing obligation arising from any of the sources of obligation enumerated in Article 1157 of the Civil Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict.

2


PSBA v CA (1992) DOCTRINE: In other words, a contractual relation is a condition sine qua non to the school's liability. The negligence of the school cannot exist independently of the contract, unless the negligence occurs under the circumstances set out in Article 21 of the Civil Code. This Court is not unmindful of the attendant difficulties posed by the obligation of schools, above-mentioned, for conceptually a school, like a common carrier, cannot be an insurer of its students against all risks.

Article 2180, in conjunction with Article 2176 of the Civil Code, establishes the rule of in loco parentis. Article 2180 plainly provides that the damage should have been caused or inflicted by pupils or students of he educational institution sought to be held liable for the acts of its pupils or students while in its custody. However, this material situation does not exist in the present case for, as earlier indicated, the assailants of Carlitos were not students of the PSBA, for whose acts the school could be made liable. However, does the appellate court's failure to consider such material facts mean the exculpation of the petitioners from liability?

FACTS: Carlitos Bautista, a 3rd year student of PSBA majoring in commerce, was stabbed by outsiders while on the 2 nd floor premises of the school. The parents of the deceased filed a suit for damages against the school and its officers.

When an academic institution accepts students for enrollment, there is established a contract between them, resulting in bilateral obligations which both parties are bound to comply with.

The parents want the defendants liable for the victim’s demise due to their alleged negligence, recklessness and lack of security precautions, means and methods before, during and after the attack on the victim.

Because the circumstances of the present case evince a contractual relation between the PSBA and Carlitos Bautista, the rules on quasi-delict do not really govern. A perusal of Article 2176 shows that obligations arising from quasi-delicts or tort, also known as extra-contractual obligations, arise only between parties not otherwise bound by contract, whether express or implied.

The petitioners avert that academic institutions are beyond the ambit of the rule as stated under art 2180 of the Civil Code. The trial court favored the parents. The CA affirmed the trial court’s ruling and primarily anchored its decision on the law of quasi-delicts in Art 2176 and 2180. ISSUE: Whether the school should be liable for the death of its student. HELD: YES, but not under the law on quasi-delicts

In the circumstances obtaining in the case at bar, however, there is, as yet, no finding that the contract between the school and Bautista had been breached thru the former's negligence in providing proper security measures. This would be for the trial court to determine. And, even if there be a finding of negligence, the same could give rise generally to a breach of contractual obligation only. 3


Using the test of Cangco, supra, the negligence of the school would not be relevant absent a contract. In fact, that negligence becomes material only because of the contractual relation between PSBA and Bautista. In other words, a contractual relation is a condition sine qua non to the school's liability. The negligence of the school cannot exist independently of the contract, unless the negligence occurs under the circumstances set out in Article 21 of the Civil Code. This Court is not unmindful of the attendant difficulties posed by the obligation of schools, above-mentioned, for conceptually a school, like a common carrier, cannot be an insurer of its students against all risks. This is specially true in the populous student communities of the so-called "university belt" in Manila where there have been reported several incidents ranging from gang wars to other forms of hooliganism.

Cruz v Gruspe Sources: Contract Facts: A mini bus owned and operated by Rodolfo Cruz and driven by Arturo Davin collided with the car of Atty. Delfin Gruspe. Cruz, along with Leonardo Ibias, went to Gruspe’s office, apologized for the incident, and executed a Joint Affidavit of Undertaking promising jointly and severally to replace the Gruspe’s damaged car in 20 days, or until November 15, 1999, of the same model and of at least the same quality; or, alternatively, they would pay the cost of Gruspe’s car amounting to P350,000.00, with interest per month for any delayed payment after November 15, 1999, until fully paid. When Cruz and Leonardo failed to comply with their undertaking, Gruspe filed a complaint for collection of sum of money against them before the RTC. Cruz and Leonardo denied Gruspe’s allegation, claiming that Gruspe, a lawyer, prepared the Joint Affidavit of Undertaking and forced them to affix their signatures thereon, without explaining and informing them of its contents; Cruz affixed his signature so that his mini bus could be released as it was his only means of income; Leonardo, a barangay official, accompanied Cruz to Gruspe’s office for the release of the mini bus, but was also deceived into signing the Joint Affidavit of Undertaking. RTC ruled in favor of Gruspe. CA affirmed the RTC decision. It declared that despite its title, the Joint Affidavit of Undertaking is a contract, as it has all the essential elements of consent, object certain, and consideration required under Article 1318. CA further said that Cruz and Leonardo failed to present evidence to support their contention of vitiated consent. By signing the Joint Affidavit of Undertaking, they voluntarily assumed the obligation for the damage they caused to Gruspe’s 4


car; Leonardo, who was not a party to the incident, could have refused to sign the affidavit, but he did not. Cruz and Esperanza (Leonardo’s widow) assail the CA ruling, contending that the Joint Affidavit of Undertaking is not a contract that can be the basis of an obligation to pay a sum of money in favor of Gruspe. They consider an affidavit as different from a contract: an affidavit’s purpose is simply to attest to facts that are within his knowledge, while a contract requires that there be a meeting of the minds between the two contracting parties. Even if the Joint Affidavit of Undertaking was considered as a contract, Cruz and Esperanza claim that it is invalid because Cruz and Leonardo’s consent thereto was vitiated; the contract was prepared by Gruspe who is a lawyer, and its contents were never explained to them. Moreover, Cruz and Leonardo were simply forced to affix their signatures, otherwise, the mini van would not be released. Also, they claim that prior to the filing of the complaint for sum of money, Gruspe did not make any demand upon them. Hence, pursuant to Article 1169, they could not be considered in default. Without this demand, Cruz and Esperanza contend that Gruspe could not yet take any action.

There is also no merit to the argument of vitiated consent. An allegation of vitiated consent must be proven by preponderance of evidence; Cruz and Leonardo failed to support their allegation. Although the undertaking in the affidavit appears to be onerous and lopsided, this does not necessarily prove the alleged vitiation of consent. They, in fact, admitted the genuineness and due execution of the Joint Affidavit and Undertaking when they said that they signed the same to secure possession of their vehicle. If they truly believed that the vehicle had been illegally impounded, they could have refused to sign the Joint Affidavit of Undertaking and filed a complaint, but they did not. That the release of their mini bus was conditioned on their signing the Joint Affidavit of Undertaking does not, by itself, indicate that their consent was forced – they may have given it grudgingly, but it is not indicative of a vitiated consent that is a ground for the annulment of a contract.

Issue: Whether or not the joint affidavit of undertaking may be the source of obligation of the petitioners. Ruling: Yes. The Joint Affidavit of Undertaking contains stipulations characteristic of a contract. The Joint Affidavit contained a stipulation where Cruz and Leonardo promised to replace the damaged car of Gruspe, 20 days from October 25, 1999 or up to November 15, 1999, of the same model and of at least the same quality. In the event that they cannot replace the car within the same period, they would pay the cost of Gruspe’s car in the total amount of P350,000.00, with interest at 12% per month for any delayed payment after November 15, 1999, until fully paid. These are simple terms that both Cruz and Leonardo could easily understand. 5


ACE Foods, Inc. v. Micro Pacific G.R. No. 200602, December 11, 2013 Topic: Contract, NCC 1159 Doctrine: A contract is what the law defines it to be, taking into consideration its essential elements, and not what the contracting parties call it. The real nature of a contract may be determined from the express terms of the written agreement and from the contemporaneous and subsequent acts of the contracting parties. However, in the construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued. The denomination or title given by the parties in their contract is not conclusive of the nature of its contents. Facts: ACE Foods is a domestic corporation engaged in the trading and distribution of consumer goods in wholesale and retail bases, while MTCL is one engaged in the supply of computer hardware and equipment. On September 26, 2001, MTCL sent a letter-proposal for the delivery and sale of the subject products to be installed at various offices of ACE Foods. Aside from the itemization of the products offered for sale, the said proposal further provides for the following terms, viz.: TERMS : Thirty (30) days upon delivery VALIDITY : Prices are based on current dollar rate and subject to changes without prior notice. DELIVERY : Immediate delivery for items on stock, otherwise thirty (30) to forty-five days upon receipt of [Purchase Order]

WARRANTY : One (1) year on parts and services. Accessories not included in warranty. On October 29, 2001, ACE Foods accepted MTCL’s proposal and accordingly issued Purchase Order No. 100023 (Purchase Order) for the subject products amounting to P646,464.00 (purchase price). Thereafter, or on March 4, 2002, MTCL delivered the said products to ACE Foods as reflected in Invoice No. 7733 (Invoice Receipt). The fine print of the invoice states, inter alia, that "[t]itle to sold property is reserved in MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of the terms and conditions of above and payment of the price" (title reservation stipulation). After delivery, the subject products were then installed and configured in ACE Foods’s premises. MTCL’s demands against ACE Foods to pay the purchase price, however, remained unheeded. Instead of paying the purchase price, ACE Foods sent MTCL a Letter dated September 19, 2002, stating that it "ha[s] been returning the [subject products] to [MTCL] thru [its] sales representative Mr. Mark Anteola who has agreed to pull out the said [products] but had failed to do so up to now." Eventually, or on October 16, 2002, ACE Foods lodged a Complaint against MTCL before the RTC, praying that the latter pull out from its premises the subject products since MTCL breached its "after delivery services" obligations to it, particularly, to: (a) install and configure the subject products; (b) submit a cost benefit study to justify the purchase of the subject products; and (c) train ACE Foods’s technicians on how to use and maintain the subject products. ACE Foods likewise claimed that the subject products MTCL delivered are defective and not working. For its part, MTCL, in its Answer with Counterclaim, maintained that it had duly complied with its obligations to ACE Foods and that the subject products were in 6


good working condition when they were delivered, installed and configured in ACE Foods’s premises. Thereafter, MTCL even conducted a training course for ACE Foods’s representatives/employees; MTCL, however, alleged that there was actually no agreement as to the purported "after delivery services." Further, MTCL posited that ACE Foods refused and failed to pay the purchase price for the subject products despite the latter’s use of the same for a period of nine (9) months. As such, MTCL prayed that ACE Foods be compelled to pay the purchase price, as well as damages related to the transaction.

A contract of sale may be absolute or conditional. (Emphasis supplied)

ISSUE: Whether or not ACE Foods is liable to pay Micro Pacific

In contrast, a contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the property despite delivery thereof to the prospective buyer, binds himself to sell the property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, i.e., the full payment of the purchase price. A contract to sell may not even be considered as a conditional contract of sale where the seller may likewise reserve title to the property subject of the sale until the fulfillment of a suspensive condition, because in a conditional contract of sale, the first element of consent is present, although it is conditioned upon the happening of a contingent event which may or may not occur.

HELD: Yes RATIO: A contract is what the law defines it to be, taking into consideration its essential elements, and not what the contracting parties call it. The real nature of a contract may be determined from the express terms of the written agreement and from the contemporaneous and subsequent acts of the contracting parties. However, in the construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued. The denomination or title given by the parties in their contract is not conclusive of the nature of its contents. The very essence of a contract of sale is the transfer of ownership in exchange for a price paid or promised. This may be gleaned from Article 1458 of the Civil Code which defines a contract of sale as follows: Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

Corollary thereto, a contract of sale is classified as a consensual contract, which means that the sale is perfected by mere consent. No particular form is required for its validity. Upon perfection of the contract, the parties may reciprocally demand performance, i.e., the vendee may compel transfer of ownership of the object of the sale, and the vendor may require the vendee to pay the thing sold.

In this case, the Court concurs with the CA that the parties have agreed to a contract of sale and not to a contract to sell as adjudged by the RTC. Bearing in mind its consensual nature, a contract of sale had been perfected at the precise moment ACE Foods, as evinced by its act of sending MTCL the Purchase Order, accepted the latter’s proposal to sell the subject products in consideration of the purchase price of P646,464.00. From that point in time, the reciprocal obligations of the parties – i.e., on the one hand, of MTCL to deliver the said products to ACE Foods, and, on the other hand, of ACE Foods to pay the purchase price therefor within thirty (30) days from delivery – already arose and consequently may be demanded. 7


Locsin II v. Mekeni Food Corporation December 9, 2013 Topic: Quasi Contract Doctrine: Article 2142 of the Civil Code clarifies that there are certain lawful, voluntary and unilateral acts which give rise to the juridical relation of quasi-contract, to the end that no one shall be unjustly enriched or benefited at the expense of another. In the absence of specific terms and conditions governing the car plan arrangement between the petitioner and Mekeni, a quasi-contractual relation was created between them. Facts: Respondent Mekeni is the employer of petitioner Locsin. When the latter was hired he was offered a car plan, under which ½ of the cost of the vehicle is to be paid by the company and the other ½ to be deducted from petitioner’s salary. Petitioner began working on March 17, 2004, the car furnished to him is a used Honda Civic valued at P280,000. Petitioner paid for his 50% share through salary deductions of P5,000 each month. Subsequently, petitioner resigned effective February 25, 2006. By then, a total of P112,500 had been deducted from his monthly salary and applied as part of the employee’s share in the car plan. In his resignation letter, petitioner made an offer to purchase his service vehicle by paying the outstanding balance thereon. However, the parties could not agree on the terms of the proposed purchase. Petitioner thus returned the vehicle to Mekeni on May 2, 2006. Petitioner made personal and written follow-ups but to no avail. Mekeni even replied that the company car plan benefit applied only to employees who have been with the company for five years. On May 3, 2007, petitioner filed against Mekeni a 8


complaint for recovery of monetary claims and recovery of monthly salary deductions which were earmarked for his costsharing in the car plan with the NLRC. Labor Arbiter: Judgment is rendered directing Mekeni to turn-over to petitioner the vehicle upon his payment of the sum of P100,435.84. On appeal; NLRC: LA reversed and set aside and ordering Mekeni to pay petitioner monetary claims and REIMBURSEMENT of petitioner’s payment under the car plan agreement in the amount of P112,500 and the equivalent share of the company as part of the petitioner’s benefit under the car plan 50/50 sharing amounting to P112,500. It ruled that petitioner’s amortization payments on his service vehicle should be reimbursed; if not, UNJUST ENRICHMENT would result, as the vehicle remained in the possession and ownership of Mekeni. In addition, Mekeni’s share in the monthly car plan should likewise be awarded to petitioner because it forms part of the latter’s benefits under the car plan. CA; Petition for Certiorari: GRANTED. Resolution of NLRC, modified. Reimbursement of petitioner’s payment under the car plan and payment to him to Mekeni’s 50% share are DELETED. The CA applied the ruling in Elisco Tool Manufacturing Corporation v. CA wherein it held that there should be no reimbursement because there are stipulations in the car plan agreements to the effect that “should the employment of the employee concerned be terminated before all installments are fully paid, the vehicle will be taken by the employer and all installments paid shall be considered rentals per agreement”. So in the absence of stipulation in the car plan agreement between Mekeni and petitioner, the CA treated petitioner’s monthly contributions as rentals for the use of his service vehicle for the duration of his employment. Moreover, it ruled that petitioner cannot recover Mekeni’s share in the

purchase price as this would constitute UNJUST ENRICHMENT on the part of petitioner at Mekeni’s expense. Issue: WON the petitioner is entitled to refund of all amounts applied to the cost of the service vehicle under the car plan. Held: YES, but only to his monthly contributions in the car plan agreement. From the evidence on record, it is seen that the Mekeni car plan offered to petitioner was subject to no other term or condition than that Mekeni shall cover one-half of its value, and petitioner shall in turn pay the other half through deductions from his monthly salary. Mekeni has not shown, by documentary evidence or otherwise, that there are other terms and conditions governing its car plan agreement with petitioner. There is no evidence to suggest that if petitioner failed to completely cover one-half of the cost of the vehicle, then all the deductions from his salary going to the cost of the vehicle will be treated as rentals for his use thereof while working with Mekeni, and shall not be refunded. Indeed, there is no such stipulation or arrangement between them. Thus, the CA’s reliance on Elisco Tool is without basis, and its conclusions arrived at in the questioned decision are manifestly mistaken. It was a patent error for the appellate court to assume that, even in the absence of express stipulation, petitioner’s payments on the car plan may be considered as rentals which need not be returned. Indeed, the Court cannot allow that payments made on the car plan should be forfeited by Mekeni and treated simply as rentals for petitioner’s use of the company service vehicle. Nor may they be retained by it as purported loan payments, as it would have this Court believe. In the first place, there is precisely no stipulation to such effect in their agreement. Secondly, it may not be said that the car plan arrangement between the parties was a benefit that the petitioner enjoyed; on the contrary, it was 9


an absolute necessity in Mekeni’s business operations, which benefited it to the fullest extent. In light of the foregoing, it is unfair to deny petitioner a refund of all his contributions to the car plan. Under Article 22 of the Civil Code, “every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.” Article 2142 of the same Code likewise clarifies that there are certain lawful, voluntary and unilateral acts which give rise to the juridical relation of quasi-contract, to the end that no one shall be unjustly enriched or benefited at the expense of another. In the absence of specific terms and conditions governing the car plan arrangement between the petitioner and Mekeni, a quasi-contractual relation was created between them. Consequently, Mekeni may not enrich itself by charging petitioner for the use of its vehicle which is otherwise absolutely necessary to the full and effective promotion of its business. It may not, under the claim that petitioner’s payments constitute rents for the use of the company vehicle, refuse to refund what petitioner had paid, for the reasons that the car plan did not carry such a condition; the subject vehicle is an old car that is substantially, if not fully, depreciated; the car plan arrangement benefited Mekeni for the most part; and any personal benefit obtained by petitioner from using the vehicle was merely incidental. Conversely, petitioner cannot recover the monetary value of Mekeni’s counterpart contribution to the cost of the vehicle; that is not property or money that belongs to him, nor was it intended to be given to him in lieu of the car plan.

Barredo v Garcia 73 Phil. 607 (1942) Quasi-Delict Doctrine: A quasi-delict is “a separate legal institution under the Civil Code, with a substantivity of its own, and individuality that is entirely apart and independent from a delict or crime Facts: At about 1:30am on May 3, 1936, Fontanilla’s taxi collided with a “kalesa” thereby killing the 16 year old Faustino Garcia. In the criminal action, the parents of the victim reserved their right to file a separate civil action. After conviction of the driver with the charge of homicide thru reckless imprudence, they proceeded to file a separate civil action against the taxi-owner based on Article 2180 of the New Civil Code. The taxi-owner met this with the argument that the driver having been convicted of criminal negligence, Article 100 in relation to Articles 102-o3 of the Revised Penal Code should govern his liability, which, pursuant to said provisions is only subsidiary, but since the driver has not been sued in a civil action and his property not yet exhausted, the plaintiffs have no recourse against him. Issue: Whether or not Barredo is just subsidiarily liable. Ruling: The Court, in said case, ruled in favor of the plaintiff, holding that a quasi-delict is “a separate legal institution under the Civil Code, with a substantivity of its own, and individuality that is entirely apart and independent from a delict or crime. He is primarily liable under Article 1903 which is a separate civil action against negligent employers. Garcia is well within his rights in suing Barredo. He reserved his right to file a separate 10


civil action and this is more expeditious because by the time of the SC judgment Fontanilla is already serving his sentence and has no property. It was also proven that Barredo is negligent in hiring his employees because it was shown that Fontanilla had had multiple traffic infractions already before he hired him – something he failed to overcome during hearing. Had Garcia not reserved his right to file a separate civil action, Barredo would have only been subsidiarily liable. Further, Barredo is not being sued for damages arising from a criminal act (his driver’s negligence) but rather for his own negligence in selecting his employee (Article 1903).

Gutierrez v Gutierrez (1931) Malcolm, J. Re: Quasi-delict FACTS In its broader aspects, the case is one of two drivers approaching a narrow bridge from opposite directions, with neither being willing to slow up and give the right of way to the other, with the inevitable result of a collision and an accident. On February 2, 1930, a passenger truck and an automobile of private ownership collided while attempting to pass each other on the Talon bridge on the Manila South Road in the municipality of Las Piñas. The driver of the car is an 18 y/o boy, son of the car’s owners. Trial court found that both the boy and the driver of the autobus were negligent by which neither of them were willing to slow up and give the right of way to the other. Plaintiff is the passenger of the bus who as a result of the incident fractured his right leg. Thus, plaintiff sued the boy, his parents as owners of the car, the bus driver and its owner for damages. The trial court ruled in favor of plaintiff. Hence, this appeal. ISSUE: What are the bases of the parties’ liabilities? HELD The case is dealing with the civil liability of parties for obligations that arise from fault or negligence. For the boy, it is his father who is liable (based on culpa aquiliana) to the plaintiff because of the following conditions: 1. first, the car was of general use of the family, 11


2. second, the boy was authorized or designated by his father to run the car, 3. third, at the time of the collision the car is used for the purpose not of the child’s pleasure but that of the other members of the car owner’s family members. The theory of the law is that the running of the machine by a child to carry other members of the family is within the scope of the owner’s business, so that he is liable for the negligence of the child because of the relationship of master and servant. For the chauffer and the bus owner (based on culpa contractual), their liability rests upon the contract (the safety that is assured by the operator upon the passenger) whereas that degree of care expected from the chauffer is lacking. The liability of the owner of the truck, and of his chauffeur rests on a different basis, namely, that of contract which, we think, has been sufficiently demonstrated by the allegations of the complaint, not controverted, and the evidence. The reason for this conclusion reaches to the findings of the trial court concerning the position of the truck on the bridge, the speed in operating the machine, and the lack of care employed by the chauffeur.

Llana v Biong Quasi-delict Doctrine: Under Art. 2176, the elements necessary to establish a quasi-delict case are: (1) damages to the plaintiff; (2) negligence, by act or omission, of the defendant or by some person for whose acts the defendant must respond, was guilty; and (3) the connection of cause and effect between such negligence and the damages. These elements show that the source of obligation in a quasidelict case is the breach or omission of mutual duties that civilized society imposes upon its members, or which arise from non-contractual relations of certain members of society to others. Facts: On March 30, 2000, Juan dela Llana was driving a car with his sister, Dra. Leila dela Llana, seated at the front passenger seat. Juan stopped the car when the signal light turned red. A dump truck suddenly rammed the car’s rear end, violently pushing the car forward. Due to the impact, the car’s rear end collapsed and its rear windshield was shattered. Glass splinters flew, puncturing Leila. Apart from these minor wounds, Leila did not appear to have suffered from any other visible physical injuries. It was reported that the truck driver, Joel Primero, employee of Rebecca Biong, was recklessly imprudent in driving the truck. In the first week of May 2000, Leila began to feel mild to moderate pain on the left side of her neck and shoulder. The pain became more intense as days passed by. Her injury became more severe. Her health deteriorated to the extent that she could no longer move her left arm. On June 9, 2000, she consulted with Dr. Rosalinda Milla, a rehabilitation medicine specialist. Dr. Milla told her that she suffered from a whiplash injury. Dr. 12


Milla required her to undergo physical therapy to alleviate her condition. Leila, on October 16, 2000, demanded from Rebecca compensation for her injuries, but Rebecca refused to pay. Thus, on May 8, 2001, Leila sued Rebecca for damages before the RTC. She alleged that she lost the mobility of her arm as a result of the vehicular accident and claimed compensation for medical expenses and for lost income. In defense, Rebecca maintained that Leila had no cause of action against her as no reasonable relation existed between the vehicular accident and Dra. dela Llana’s injury. She pointed out that Dra. dela Llana’s illness became manifest 1 month and 1 week from the date of the vehicular accident. The RTC ruled in favor of Dra. dela Llana and held that the proximate cause of Dra. dela Llana’s whiplash injury to be Joel’s reckless driving. CA reversed the RTC ruling. It held that Dra. dela Llana failed to establish a reasonable connection between the vehicular accident and her whiplash injury by preponderance of evidence. Issue: Whether Joel’s reckless driving is the proximate cause of Dra. dela Llana’s whiplash injury. Ruling: No. Article 2176 provides that "[w]hoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is a quasi-delict." Based on the requisites, Dra. dela Llana must first establish by preponderance of evidence the 3 elements of quasi-delict before we determine Rebecca’s liability as Joel’s employer. She should show the chain of causation between Joel’s reckless driving and her whiplash injury. Only after she has laid this foundation can the presumption - that Rebecca did not exercise the diligence of a good father of a family in the selection and supervision of Joel -

arise. Once negligence, the damages and the proximate causation are established, this Court can then proceed with the application and the interpretation of the 5th paragraph of Article 2180. Under Article 2176, in relation with the 5th paragraph of Article 2180, "an action predicated on an employee’s act or omission may be instituted against the employer who is held liable for the negligent act or omission committed by his employee." The rationale for these graduated levels of analyses is that it is essentially the wrongful or negligent act or omission itself which creates the vinculum juris in extra-contractual obligations. In civil cases, a party who alleges a fact has the burden of proving it. The burden of proving the proximate causation between Joel’s negligence and Leila’s whiplash injury rests on Leila. Leila anchors her claim mainly on 3 pieces of evidence: (1) the pictures of her damaged car, (2) the medical certificate, and (3) her testimonial evidence. However, none of these pieces of evidence show the causal relation between the vehicular accident and the whiplash injury. A. The pictures of the damaged car only demonstrate the impact of the collision - These pictures indeed demonstrate the impact of the collision. However, it is a far-fetched assumption that the whiplash injury can also be inferred from these pictures. B. The medical certificate cannot be considered because it was not admitted in evidence - Even if we consider the medical certificate, the medical certificate has no probative value for being hearsay. It is a basic rule that evidence, whether oral or documentary, is hearsay if its probative value is not based on the personal knowledge of the witness but on the knowledge of another person who is not on the witness stand. C. Dra. dela Llana’s opinion that Joel’s negligence caused her whiplash injury has no probative value - Leila was the lone physician-witness during trial. She merely testified as an 13


ordinary witness. Despite the fact that Leila is a physician and even assuming that she is an expert in neurology, we cannot give weight to her opinion that Joel’s reckless driving caused her whiplash injury without violating the rules on evidence. There is a substantial difference between an ordinary witness and an expert witness. Leila’s medical opinion cannot be given probative value for the reason that she was not presented as an expert witness. As an ordinary witness, she was not competent to testify on the nature, and the cause and effects of whiplash injury. Furthermore, we emphasize that Leila, during trial, nonetheless did not provide a medical explanation on the nature as well as the cause and effects of whiplash injury in her testimony. The Supreme Court cannot take judicial notice that vehicular accidents cause whiplash injuries - This proportion is not public knowledge, or is capable of unquestionable demonstration, or ought to be known to judges because of their judicial functions. We have no expertise in the field of medicine. Justices and judges are only tasked to apply and interpret the law on the basis of the parties’ pieces of evidence and their corresponding legal arguments.

Chavez v Gonzales 32 SCRA 547, April 30, 1970 TOPIC: Nature and Effects of Obligations; Kinds of Prestations; To do, NCC 1167 Doctrine: Where the defendant virtually admitted nonperformance of the contract by returning the typewriter that he was obliged to repair in a non-working condition, with essential parts missing, Article 1197 of the Civil Code of the Philippines cannot be invoked. The fixing of a period would thus be a mere formality and would serve no purpose than to delay. Facts: "In the early part of July, 1963, the plaintiff delivered to the defendant, who is a typewriter repairer, a portable typewriter for routine cleaning and servicing. The defendant was not able to finish the job after some time despite repeated reminders made by the plaintiff. The defendant merely gave assurances, but failed to comply with the same. In October, 1963, the defendant asked from the plaintiff the sum of P6.00 for the purchase of spare parts, which amount the plaintiff gave to the defendant. On October 26, 1963, after getting exasperated with the delay of the repair of the typewriter, the plaintiff went to the house of the defendant and asked for the return of the typewriter. The defendant delivered the typewriter in a wrapped package. On reaching home, the plaintiff examined the typewriter returned to him by the defendant and found out that the same was in shambles, with the interior cover and some parts and screws missing. On October 29, 1963. the plaintiff sent a letter to the defendant formally demanding the return of the missing parts, the interior cover and the sum of P6.00 (Exhibit D). The following day, the defendant returned to the plaintiff some of the missing parts, the interior cover and the P6.00. 14


"On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business Machines, and the repair job cost him a total of P89.85, including labor and materials (Exhibit C). "On August 23, 1965, the plaintiff commenced this action before the City Court of Manila, demanding from the defendant the payment of P90.00 as actual and compensatory damages, P100.00 for temperate damages, P500.00 for moral damages, and P500.00 as attorney’s fees.

appealed decision. For such contravention, as appellant contends, he is liable under Article 1167 of the Civil Code. jam quot, for the cost of executing the obligation in a proper manner. The cost of the execution of the obligation in this case should be the cost of the labor or service expended in the repair of the typewriter, which is in the amount of P58.75. because the obligation or contract was to repair it.

"In his answer as well as in his testimony given before this court, the defendant made no denials of the facts narrated above, except the claim of the plaintiff that the typewriter was delivered to the defendant through a certain Julio Bocalin, which the defendant denied allegedly because the typewriter was delivered to him personally by the plaintiff. "The repair done on the typewriter by Freixas Business Machines with the total cost of P89.85 should not, however, be fully chargeable against the defendant. The repair invoice, Exhibit C, shows that the missing parts had a total value of only P31.10. "WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum of P31.10, and the costs of suit. "SO ORDERED." Issue: Whether or not defendant should be liable not only for the cost of the materials but also for the whole cost of expenses for the repair of the machine. Held: Yes Ratio: It is clear that the defendant-appellee contravened the tenor of his obligation because he not only did not repair the typewriter but returned it "in shambles", according to the 15


Tanguilig v. CA (January 2, 1997) Topic: Kinds of Prestations; Obligations to do Doctrine: If an obligation is not part of the contract then there is no legal nor factual basis by which the Court can impose an obligation to a party who did not expressly assume nor ratify the same. Facts: Jacinto Tanguilig, owner of JMT Engineering and General merchandise, was contracted by Vicente Herce to construct a “windmill” for P 60,000. Herce paid P30,000 down payment, an instalment of P15,000, and left a balance of P15,000. Petitioner Tanguilig filed a complaint for non-payment of the remaining balance. Respondent answered saying that he already paid remaining balance to San Pedro General Merchandising Inc., a third party who constructed the deep well connected to the windmill. Also, respondent claimed that P15,000 balance should be offset since the windmill collapsed after a strong wind hit it. Respondent contends that since petitioner did not have the capacity to install the deep well the latter agreed to have a third party do the work the cost of which was to be deducted from the contract price. He presented Guillermo Pili of SPGMI who declared that petitioner Tanguilig approached him with a letter from respondent Herce Jr. asking him to build a deep well pump as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig." Trial Court: Deep well was NOT PART of the contract and that there is NO clear showing that there is defect in the construction.

CA: REVERSED TC decision. Deep well was part of the contract. Petitioner Tanguilig should reconstruct the windmill. Issues: 1) WON the deep well was part of the contract thus will for part of Tanguilig’s obligation to construct. Held: NO There is absolutely no mention in the two (2) documents that a deep well pump is a component of the proposed windmill system. The contract prices fixed in both proposals cover only the features specifically described therein and no other. The words "deep well" and "deep well pump” merely describe the type of deep well pump for which the proposed windmill would be suitable. For if the real intent of petitioner was to include a deep well in the agreement to construct a windmill, he would have used instead the conjunctions "and" or "with". It is a cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial consideration and, in case of doubt, their contemporaneous and subsequent acts shall be principally considered. The circumstances in this case only show that the construction of the well by SPGMI was for the sole account of respondent and that petitioner merely supervised the installation of the well because the windmill was to be connected to it. There is no legal nor factual basis by which this Court can impose upon petitioner an obligation he did not expressly assume nor ratify. The claim of Pili that Herce Jr. wrote him a letter is unsubstantiated. The alleged letter was never presented in court by private respondent for reasons known only to him thus respondent cannot claim the benefit of the law concerning "payments made by a third person”. The Civil Code provisions do not apply in the instant case because no creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI has been established regarding the construction of the deep well. Specifically, witness Pili did not testify that he 16


entered into a contract with petitioner for the construction of respondent's deep well. If SPGMI was really commissioned by petitioner to construct the deep well, an agreement particularly to this effect should have been entered into. Woodhouse v Halili 93 Phil 526 (1953) Fraud Doctrine: The incidental fraud does not render the contract null and void but only such as to hold the plaintiff liable for damages. Facts: The Plaintiff entered into an agreement with the defendant for the establishment of a partnership for bottling and distribution of Mission soft drinks. Before the partnership was actually established the defendant required the plaintiff to secure an exclusive franchise for the said venture. In behalf of the said partnership and upon obtaining the said exclusive franchise the defendant stipulated to pay the plaintiff 30% of the profits. The plaintiff sought to obtain the said exclusive franchise but was only given a temporary one, subject only to 30 days. The parties then proceeded with the signing of the agreement. The partnership was still not initiated, only the agreement to work with each other, with the plaintiff as manager and the defendant as financer, was established. Together the two parties went to the US to formally sign the contract of franchise with Mission Dry Corporation. The defendant then found out about the temporary franchise right given to the plaintiff, different from the exclusive franchise rights they stipulated in their contract.

When the operations of the business began he was paid P 2,000 and was allowed the use of a car. But in the next month, the pay was decreased to P 1,000 and the car was withdrawn from him. The plaintiff demanded the execution of the partnership, but the defendant excused himself, saying that there was no hurry to do so. The Court of First Instance ordered the defendant to render an accounting of the profits and to pay the plaintiff 15% of such amount. It also held that execution of the contract of partnership cannot be enforced upon the defendant and that fraud as alleged by the defendant was also not proved. Hence the present action. Issues: Whether the representation of the plaintiff in saying that he had exclusive franchise rights rather than the actual temporary right he possessed invalidated the contract Ruling: Fraud was undoubtedly employed by the plaintiff to secure the consent of the defendant to enter into the contract with him by representing himself as holder of exclusive franchise rights when in fact he only holds a temporary franchise right good for 30 days. The fraud employed was not such as to render the contract null and void but only such as to hold the plaintiff liable for damages. Such fraud is merely incidental (dolo incidental) and not the causal fraud (dolo causante) that is detrimental to a contract. It does not invalidate the contract since fraud was only employed to secure the 30% stipulated share from the partnership. The 15% that the Trial court ordered the defendant to pay the plaintiff is deemed to be the appropriate and reasonable. Such amount was the spontaneous reaction of the defendant upon knowledge of the misrepresentation of the plaintiff and amounts to the virtual modification of their contract.

17


Geraldez v CA (1994) Regalado, J. Re: Fraud FACTS: An action for damages by reason of contractual breach was filed by petitioner Lydia L. Geraldez against private respondent Kenstar Travel Corporation. Sometime in October 1989, Petitioner came to know about private respondent from numerous advertisements in newspapers of general circulation regarding tours in Europe. She then contacted private respondent by phone and the latter sent its representative, who gave her the brochure for the tour and later discussed its highlights. The European tours offered were classified into four, and petitioner chose the classification denominated as "VOLARE 3" covering a 22-day tour of Europe for S2,990.00. She paid the total equivalent amount of P190,000.00 charged by private respondent for her and her sister, Dolores. Petitioner claimed that, during the tour, she was very uneasy and disappointed when it turned out that, contrary to what was stated in the brochure, there was no European tour manager for their group of tourists, the hotels in which she and the group stayed were not first-class, the UGC Leather Factory which was specifically added as a highlight of the tour was not visited, and the Filipino lady tour guide by private respondent was a first timer, that is, she was performing her duties and responsibilities as such for the first time.

other party would not have entered into the contract. Dolo incidente, or incidental fraud which is referred to in Article 1344, are those, which are not serious in character and without which the other party would still have entered into the contract. Dolo causante determines or is the essential cause of the consent, while dolo incidente refers only to some particular or accident of the obligations. The effects of dolo causante are the nullity of the contract and the indemnification of damages, and dolo incidente also obliges the person employing it to pay damages. In either case, whether private respondent has committed dolo causante or dolo incidente by making misrepresentations in its contracts with petitioner and other members of the tour group, whichdeceptions became patent in the light of after-events when, contrary to its representations, it employed an inexperienced tour guide, housed the tourist group in substandard hotels, and reneged on its promise of a European tour manager and the visit to the leather factory, it is indubitably liable for damages to petitioner.

ISSUE Whether the respondent company committed fraud in order for the petitioner to enter into the contract. HELD: This fraud or dolo, which is present or employed at the time of birth or perfection of a contract, may either be dolo causante or dolo incidente. The first, or causal fraud referred to in Article 1338, are those deceptions or misrepresentations of a serious character employed by one party and without which the 18


Metropolitan Fabrics, Inc. (MFI) v. Prosperity Irregularity in the performance: attributable to the debtor: fraud (dolo) Doctrine: Fraud cannot be presumed but must be proved by clear and convincing evidence. Whoever alleges fraud affecting a transaction must substantiate his allegation, because a person is always presumed to take ordinary care of his concerns, and private transactions are similarly presumed to have been fair and regular. To be remembered is that mere allegation is definitely not evidence; hence, it must be proved by sufficient evidence. Facts: In July 1984, MFI sought from PCRI a loan. PCRI was represented by Domingo Ang, its president, and his son Caleb, vice–president. The parties knew each other because they belonged to the same family association. Caleb recommended the approval of the P3.44 million with an interest ranging from 24% to 26% per annum and a term of between 5-10 years. It sufficed for Caleb that Enrique was a well–respected Chinese businessman, that he was the president of their Chinese family association, and that he had other businesses aside from MFI. On August 3, 1984, even before the signing of the mortgage and loan documents, PCRI released the loan to MFI. It found that the blank loan forms, consisting of the real estate mortgage contract, promissory note, comprehensive surety agreement and disclosure statement, which Domingo himself handed to Enrique, “had no entries specifying the rate of interest and schedules of amortization.” To reciprocate the gesture of PCRI, Enrique, together with his wife Natividad Africa, vice–president, and son Edmundo signed the blank forms at their office. The signing was allegedly witnessed by Vicky, Ellen and Alice, all surnamed Ang, without any PCRI representative present.

Immediately thereafter, Enrique and Vicky proceeded to the PCRI office. It was in order to return the trust of Domingo and Caleb and their gesture of the early release of the loan that Enrique and Vicky entrusted to them their 7 titles of land. She testified that they left it to defendants to choose from among the 7 titles those which would be sufficient to secure the loan. It was agreed that once PCRI had chosen the lots to be covered by the mortgage, the defendants would return the remaining titles to the plaintiffs. The plaintiffs delivered to PCRI 24 checks, bearing no dates and amounts, to cover the amortization payments, all signed in blank by Enrique and Natividad. In September 1984, the first amortization check bounced for insufficient fund due to MFI’s continuing business losses. It was then that the appellees allegedly learned that PCRI had filled up the 24 blank checks with dates and amounts that reflected a 35% interest rate per annum, instead of just 24%, and a 2–year repayment period, instead of 10 years. Plaintiffs repeatedly asked the defendants to return the rest of the titles in excess of the required collateral to which defendants allegedly routinely responded that their committee was still studying the matter. Caleb assured Vicky that PCRI would also lower the rate of interest to conform to prevailing commercial rate. Talks were held between Domingo and Enrique as well as between Vicky and Caleb concerning the possible offsetting of the loan by ceding some of their properties to PCRI. Domingo and Caleb tried to appease the plaintiffs by assuring them that they would return the rest of the titles anytime they would need them, and that they could use them to secure another loan from them or from another financing company. They would also reconsider the 35% interest rate, but when the discussion shifted to the offsetting of the properties to pay the 19


loan, the defendants’ standard answer was that they were still awaiting the feedback of their committee. On September 4, 1986, Enrique received a Notice of Sheriff’s Sale, announcing the auction of the 7 lots due to unpaid indebtedness of P10.5 million. Vicky insisted that prior to the auction notice, they never received any statement or demand letter from the defendants to pay P10.5 million, nor did the defendants inform them of the intended foreclosure. The last statement they received was dated February 12, 1986, and showed amount due of only P4,167,472.71. Vicky recalled that from June 1, 1986 to July 1986, they held several meetings to discuss the options available to them to repay their loan, such as the offsetting of their rent collectibles and properties to cover the amortizations and the loan balance. MFI protested the foreclosure, and the auction was reset after they assured PCRI that they had found a serious buyer for 3 of the lots. In the meeting held at defendants’ office, the buyer, Winston Wang of Asia Cotton was present. It was agreed to release the mortgage upon payment of P3.5 million. Wang would pay to MFI P500,000.00 as down–payment, which MFI would in turn pay to PCRI as partial settlement of the P3.5 million loan. Winston Wang was given 15 days to pay the P500,000.00. On January 19, 1987, Wang confronted Vicky about their sale agreement and PCRI’s refusal to accept their P3 million payment, because according to Caleb, the 3 lots had been foreclosed. Vicky was shocked, because the agreed period to pay the P3 million was to lapse on January 13, 1987 yet. At the auction sale on October 27, 1986, PCRI was the sole bidder for P6.5 million. Discussions continued on the agreement to release 3 lots for P3.5 million. The reduction of interest rate and charges and the condonation of the attorney’s fees for the foreclosure proceedings were also sought.

Petitioners insist that respondents committed fraud when the officers of Metropolitan were made to sign the deed of real estate mortgage in blank. Issue: Whether or not petitioners clearly and convincingly establish their allegation of fraud in the execution of the deed of real estate mortgage. Ruling: No. According to Article 1338, there is fraud when one of the contracting parties, through insidious words or machinations, induces the other to enter into the contract that, without the inducement, he would not have agreed to. Yet, fraud, to vitiate consent, must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract. Causal fraud is defined as “a deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the other.” Fraud cannot be presumed but must be proved by clear and convincing evidence. Whoever alleges fraud affecting a transaction must substantiate his allegation, because a person is always presumed to take ordinary care of his concerns, and private transactions are similarly presumed to have been fair and regular. To be remembered is that mere allegation is definitely not evidence; hence, it must be proved by sufficient evidence. The contested deed of real estate mortgage was a public document by virtue of its being acknowledged before a notary public. As a notarized document, the deed carried the evidentiary weight conferred upon it with respect to its due execution, and had in its favor the presumption of regularity. Hence, it was admissible in evidence without further proof of its authenticity, and was entitled to full faith and credit upon its face. To rebut its authenticity and genuineness, the contrary evidence must be clear, convincing and more than merely preponderant; otherwise, the deed should be upheld. 20


Petitioners failed to adduce clear and convincing evidence against the genuineness and authenticity of the deed. Their actuations even demonstrated that their transaction with respondents had been regular and at arms–length, belying the intervention of fraud.

respondents on the partial redemption of three of the 7 lots. They also took the trouble of finding a buyer (Mr. Winston Wang of Asia Cotton) of some of the lots. Had the mortgage been fraudulent, they could have instead instituted a complaint to nullify the real estate mortgage and the foreclosure sale.

The evidence adduced by Vicky Ang, the lone witness for petitioners, tried to cast doubt on the contents and due execution of the deed of real estate mortgage by pointing to certain irregularities. But she could not be effective for the purpose because she had not been among the signatories of the deed. The signatories were father Enrique Ang, her mother Natividad Africa, and her brother Edmundo Ang, none of whom came forward to testify against the deed, or otherwise to assail the genuineness and due execution of the deed by any other means. They would have been in the better position than Vicky to substantiate the allegation of fraud if that was the case. Their silence reflected the inanity of the allegation of fraud by Vicky.

And, lastly, Vicky’s own letters to respondents had an apologetic tenor, and was seeking leniency from them. Such tenor and tone of her communications were antithetical to her allegation of having been the victim of their fraudulent acts. These circumstances tended to indicate that fraud was not attendant during the transactions between the parties. As between the duly executed real estate mortgage and the unsubstantiated allegations of fraud, the Court affords greater weight to the former.

Secondly, petitioners freely and voluntarily surrendered to respondents the 7 TCTs of their lots. Such surrender of the TCTs evinced their intention to offer the lots as collateral for the performance of their obligations contracted with respondents. They thereby confirmed the genuineness and due execution of the deed of real estate mortgage. Surely, they would not have surrendered the TCTs had their intention been otherwise. Thirdly, another circumstance belying the commission of fraud by respondents was petitioners’ pleading with respondents for the resetting of foreclosure sale of the properties after receiving the notice of the impending sale. As a result, the sale was reset thrice. Had the mortgage and its foreclosure been unreasonable or fraudulent, petitioners should have instead resolutely contested respondents’ move to foreclose. Fourthly, even after their properties were eventually sold as the consequence of the foreclosure, petitioners negotiated with 21


Surviving Heirs v Lindo Et Al. G.R. No. 208232, March 10, 2014 TOPIC: Irregularity in Performance; Fraud; Effects of Fraud; Specific Performance Doctrine: Having fully participated in all stages of the case, and even invoking the RTC’s authority by asking for affirmative reliefs, respondents can no longer assail the jurisdiction of the said trial court. Simply put, considering the extent of their participation in the case, they are, as they should be, considered estopped from raising lack of jurisdiction as a ground for the dismissal of the action. Facts: Alfredo R. Bautista (Bautista), petitioner’s predecessor, inherited in 1983 a free-patent land located in Poblacion, Lupon, Davao Oriental and covered by Original Certificate of Title (OCT) No. (1572) P-6144. A few years later, he subdivided the property and sold it to several vendees, herein respondents, via a notarized deed of absolute sale dated May 30, 1991. Two months later, OCT No. (1572) P-6144 was canceled and Transfer Certificates of Title (TCTs) were issued in favor of the vendees. Three years after the sale, or on August 5, 1994, Bautista filed a complaint for repurchase against respondents before the RTC, Branch 32, Lupon, Davao Oriental, docketed as Civil Case No. 1798, anchoring his cause of action on Section 119 of Commonwealth Act No. (CA) 141, otherwise known as the "Public Land Act," which reads: SECTION 119. Every conveyance of land acquired under the free patent or homestead provisions, when proper, shall be subject to repurchase by the applicant, his widow, or legal heirs, within a period of five years from the date of the conveyance.

Respondents, in their Answer, raised lack of cause of action, estoppel, prescription, and laches, as defenses. Meanwhile, during the pendency of the case, Bautista died and was substituted by petitioner Epifania G. Bautista (Epifania). Respondents Francisco and Welhilmina Lindo later entered into a compromise agreement with petitioners, whereby they agreed to cede to Epifania a three thousand two hundred and thirty square meter (3,230 sq.m.)-portion of the property as well as to waive, abandon, surrender, and withdraw all claims and counterclaims against each other. The compromise was approved by the RTC in its Decision dated January 27, 2011. Other respondents, however, filed a Motion to Dismiss dated February 4, 2013, alleging that the complaint failed to state the value of the property sought to be recovered. Moreover, they asserted that the total selling price of all the properties is only sixteen thousand five hundred pesos (PhP 16,500), and the selling price or market value of a property is always higher than its assessed value. Since Batas Pambansa Blg. (BP) 129, as amended, grants jurisdiction to the RTCs over civil actions involving title to or possession of real property or interest therein where the assessed value is more than PhP 20,000, then the RTC has no jurisdiction over the complaint in question since the property which Bautista seeks to repurchase is below the PhP 20,000 jurisdictional ceiling. RTC dismissed case due to lack of jurisdiction. Issue: Whether or not it is correct for the RTC to have dismissed the case Held: No Ratio: Here, we note that aside from the belated filing of the motion to dismiss––it having been filed nine (9) years from the filing of the complaint––respondents actively participated in the proceedings through the following acts: 22


1. By filing their Answer and Opposition to the Prayer for Injunction dated September 29, 1994 whereby they even interposed counterclaims, specifically: PhP 501,000 for unpaid survey accounts, PhP 100,000 each as litigation expenses, PhP 200,000 and PhP 3,000 per daily appearance by way of attorney’s fees, PhP 500,000 as moral damages, PhP 100,000 by way of exemplary damages, and costs of suit; 2. By participating in Pre-trial; 3. By moving for the postponement of their presentation of evidence; 4. By presenting their witness; and 5. By submitting the compromise agreement for approval. Having fully participated in all stages of the case, and even invoking the RTC’s authority by asking for affirmative reliefs, respondents can no longer assail the jurisdiction of the said trial court. Simply put, considering the extent of their participation in the case, they are, as they should be, considered estopped from raising lack of jurisdiction as a ground for the dismissal of the action.

Boysaw v. Interphil Promotions (March 20, 1987) Topic: Rescission Doctrine: Where one party did not perform the undertaking which he was bound by the terms of the agreement to perform, he is not entitled to insist upon the performance of the contract by the other party, or recover damages by reason of his own breach. Facts: Petitioner Solomon Boysaw, signed with defendant Interphil Promotions, Inc., a contract to engage Gabriel "Flash" Elorde in a boxing contest for the junior lightweight championship of the world. It was stipulated that Boysaw would not, prior to the date of the boxing contest, engage in any other such contest without the written consent of Interphil. Thereafter, Interphil signed Gabriel "Flash" Elorde to a similar agreement—that is, to engage Boysaw in a title fight. The managerial rights over Boysaw was assigned and eventually reassigned to petitioner Alfredo Yulo, Jr. without the consent of Interphil in violation of their contract. When informed of the change, Interphil referred the matter to the Games and Amusement Board culminating to a decision by the board to approve a new date for the match. Yulo protested against the new date even when another proposed date was within the 30day allowable postponements. Both Boysaw and Yulo filed for breach of contract when the fight contemplated in the original boxing contract did not materialize. Issue: WON the offending party may, in a reciprocal obligation, compel the other party for specific performance. Held: NO. 23


The evidence established that the contract was violated by Boysaw when, without the approval or consent of Interphil, he fought a boxing match in Las Vegas. Another violation was the assignment and transfer of the managerial rights over Boysaw without the knowledge or consent of Interphil. While the contract imposed no penalty for such violation, this does not grant any of the parties the unbridled liberty to breach it with impunity. Our law on contracts recognizes the principle that actionable injury inheres in every contractual breach. Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the terms thereof, are liable for damages. —Article 1170, Civil Code.

Under the law, when a contract is unlawfully novated by an applicable and unilateral substitution of the obligor by another, the aggrieved creditor is not bound to deal with the substitute. However, from the evidence, it is clear that the Interphil, instead of availing themselves of the options given to them by law of rescission or refusal to recognize the substitute obligor, really wanted to postpone the fight date owing to an injury that Elorde sustained in a recent bout. That Interphil had justification to renegotiate the original contract, particularly the fight date is undeniable from the facts. Under the circumstances, Interphil's desire to postpone the fight date could neither be unlawful nor unreasonable.

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, Civil Code. The contract in question gave rise to reciprocal obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other. —Tolentino, Civil Code of the Philippines, Vol. IV, p. 175. The power to rescind is given to the injured party. Where the plaintiff is the party who did not perform the undertaking which he was bound by the terms of the agreement to perform, he is not entitled to insist upon the performance of the contract by the defendant, or recover damages by reason of his own breach. —Seva vs. Alfredo Berwin, 48 Phil. 581.

24


U.P. v De los Angeles 35 SCRA 365 (1970) Rescission Doctrine: There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract. Facts: On November 2, 1960, UP and ALUMCO entered into a logging agreement whereby the latter was granted exclusive authority to cut, collect and remove timber from the Land Grant for a period starting from the date of agreement to December 31, 1965, extendible for a period of 5 years by mutual agreement. On December 8, 1964, ALUMCO incurred an unpaid account of P219,362.94. Despite repeated demands, ALUMCO still failed to pay, so UP sent a notice to rescind the logging agreement. On the other hand, ALUMCO executed an instrument entitled “Acknowledgment of Debt and Proposed Manner of Payments. It was approved by the president of UP, which stipulated the following: o In the event that the payments called for are not sufficient to liquidate the foregoing indebtedness, the balance outstanding after the said payments have been applied shall be paid by the debtor in full no later than June 30, 1965. o In the event that the debtor fails to comply with any of its promises, the Debtor agrees without reservation that Creditor shall have the right to

consider the Logging Agreement rescinded, without the necessity of any judicial suit… ALUMCO continued its logging operations, but again incurred an unpaid account. On July 19,1965, UP informed ALUMCO that it had, as of that date, considered rescinded and of no further legal effect the logging agreement, and that UP had already taken steps to have another concessionaire take over the logging operation. ALUMCO filed a petition to enjoin UP from conducting the bidding. The lower court ruled in favor of ALUMCO, hence, this appeal. Issue: Can petitioner UP treat its contract with ALUMCO rescinded, and may disregard the same before any judicial pronouncement to that effect? Ruling: Yes. In the first place, UP and ALUMCO had expressly stipulated that upon default by the debtor, UP has the right and the power to consider the Logging Agreement of December 2, 1960 as rescinded without the necessity of any judicial suit. As to such special stipulation and in connection with Article 1191 of the Civil Code, the Supreme Court, stated in Froilan vs. Pan Oriental Shipping Co: o “There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract.”

25


Vda de Mistica v Naguiat (2003) Panganiban, J. Re: Rescission FACTS: Eulalio Mistica is the owner of a parcel of land located at Malhacan, Meycauayan, Bulacan. A portion thereof was leased to respondent Naguiat. Consequently, Mistica entered into a contract to sell with respondent over a portion of lot containing an area of 200 sq. mtrs. The agreement was reduced to writing in a document entitled “Kasulatan sa Pagbibilihan” P20k – as the total purchase; P2k – upon signing;P18k – to be paid within 10yrs; In case non payment, vendee shall pay an interest of 12% per annum. Pursuant to said agreement, respondent gave a down payment of P2K & made another partial payment of P1K & thereafter failed to make any payments. Eulalio Mistica died sometime in Oct. 1986. Petitioner claims that she is entitled to rescind the Contract under Article 1191 of the Civil Code, because respondents committed a substantial breach when they did not pay the balance of the purchase price within the ten-year period. ISSUE: Whether petitioner is entitled to rescind the contract? NO Whether the contract is in the nature of a potestative obligation? NO HELD: Petitioner is not entitled to rescind the contract

the Civil Code, the right to rescind an obligation is predicated on the violation of the reciprocity between parties, brought about by a breach of faith by one of them. Rescission, however, is allowed only where the breach is substantial and fundamental to the fulfillment of the obligation. In the present case, the failure of respondents to pay the balance of the purchase price within ten years from the execution of the Deed did not amount to a substantial breach. In the Kasulatan, it was stipulated that payment could be made even after ten years from the execution of the Contract, provided the vendee paid 12 percent interest. The stipulations of the contract constitute the law between the parties; thus, courts have no alternative but to enforce them as agreed upon and written. Petitioner never made any demand for the balance of the purchase price. Petitioner even refused the payment tendered by respondents during her husband’s funeral, thus showing that she was not exactly blameless for the lapse of the ten-year period. Had she accepted the tender, payment would have been made well within the agreed period. Contract is not in the nature of a potestative obligation The Kasulatan does not allow it to be converted to a potestative obligation. First, nowhere is it stated in the Deed that payment of the purchase price is dependent upon whether respondents want to pay it or not. Second, the fact that they already made partial payment thereof only shows that the parties intended to be bound by the Kasulatan.

In a contract of sale, the remedy of an unpaid seller is either specific performance or rescission. Under Article 1191 of 26


Fil-Estate Golf and Development, Inc. (FEGDI) Vertex Sales and Trading, Inc.

v

Rescission Doctrine: FEGDI failed to deliver to Vertex the stock certificates within a reasonable time from the point the shares should have been delivered. This was a substantial breach of their contract that entitles Vertex the right to rescind the sale. It is not entirely correct to say that a sale had already been consummated as Vertex already enjoyed the rights a shareholder can exercise. The enjoyment of these rights cannot suffice where the law, by its express terms, requires a specific form to transfer ownership. Facts: FEGDI is a stock corporation whose primary business is the development of golf courses. FELI is a stock corporation engaged in real estate development. FEGDI was the developer of the Forest Hills Golf and Country Club (Forest Hills) and, in consideration for its financing support and construction efforts, was issued several shares of stock of Forest Hills. In August 1997, FEGDI sold, on installment, to RS Asuncion Construction Corporation (RSACC) one Class "C" Common Share of Forest Hills for P1,100,000. Prior to the full payment of the purchase price, RSACC sold, on February 11, 1999, the Class "C" Common Share to Vertex. RSACC advised FEGDI of the sale to Vertex and FEGDI, in turn, instructed Forest Hills to recognize Vertex as a shareholder. For this reason, Vertex enjoyed membership privileges in Forest Hills.

demanding the issuance of a stock certificate in its name. FELI replied, initially requested Vertex to first pay the necessary fees for the transfer. Although Vertex complied with the request, no certificate was issued. This prompted Vertex to make a final demand on March 17, 2001. As the demand went unheeded, Vertex filed on January 7, 2002 a Complaint for Rescission with Damages and Attachment against FEGDI, FELI and Forest Hills. It averred that the petitioners defaulted in their obligation as sellers when they failed and refused to issue the stock certificate covering the subject share despite repeated demands. Vertex prayed for the rescission of the sale and demanded the reimbursement of the amount it paid (or P1,100,000), plus interest. During the pendency of the rescission action (or on January 23, 2002), a certificate of stock was issued in Vertex’s name, but Vertex refused to accept it. The RTC dismissed the complaint for insufficiency of evidence. It ruled that delay in the issuance of stock certificates does not warrant rescission of the contract as this constituted a mere casual or slight breach. It also observed that notwithstanding the delay in the issuance of the stock certificate, the sale had already been consummated; the issuance of the stock certificate is just a collateral matter to the sale and the stock certificate is not essential to "the creation of the relation of shareholder." CA reversed the RTC and rescinded the sale of the share. Citing Section 63 of the Corporation Code, the CA held that there can be no valid transfer of shares where there is no delivery of the stock certificate. It considered the prolonged issuance of the stock certificate a substantial breach that served as basis for Vertex to rescind the sale. Issue: Whether the delay in the issuance of a stock certificate can be considered a substantial breach as to warrant rescission of the contract of sale.

Despite Vertex’s full payment, the share remained in the name of FEGDI. 17 months after the sale, Vertex wrote FEDGI a letter 27


Ruling: Yes. Physical delivery is necessary to transfer ownership of stocks. Vertex fully paid the purchase price by February 11, 1999 but the stock certificate was only delivered on January 23, 2002 after Vertex filed an action for rescission against FEGDI. Under these facts, considered in relation to the governing law [Corporation Code, Sec. 63], FEGDI clearly failed to deliver the stock certificates, representing the shares of stock purchased by Vertex, within a reasonable time from the point the shares should have been delivered. This was a substantial breach of their contract that entitles Vertex the right to rescind the sale under Article 1191 of the Civil Code. It is not entirely correct to say that a sale had already been consummated as Vertex already enjoyed the rights a shareholder can exercise. The enjoyment of these rights cannot suffice where the law, by its express terms, requires a specific form to transfer ownership. "Mutual restitution is required in cases involving rescission under Article 1191" of the Civil Code; such restitution is necessary to bring back the parties to their original situation prior to the inception of the contract. Accordingly, the amount paid to FEGDI by reason of the sale should be returned to Vertex.

Gutierrez v Gutierrez (1931) Malcolm, J. Re: Quasi-delict FACTS: In its broader aspects, the case is one of two drivers approaching a narrow bridge from opposite directions, with neither being willing to slow up and give the right of way to the other, with the inevitable result of a collision and an accident. On February 2, 1930, a passenger truck and an automobile of private ownership collided while attempting to pass each other on the Talon bridge on the Manila South Road in the municipality of Las Piñas. The driver of the car is an 18 y/o boy, son of the car’s owners. Trial court found that both the boy and the driver of the autobus were negligent by which neither of them were willing to slow up and give the right of way to the other. Plaintiff is the passenger of the bus who as a result of the incident fractured his right leg. Thus, plaintiff sued the boy, his parents as owners of the car, the bus driver and its owner for damages. The trial court ruled in favor of plaintiff. Hence, this appeal. ISSUE: What are the bases of the parties’ liabilities? HELD: The case is dealing with the civil liability of parties for obligations that arise from fault or negligence. For the boy, it is his father who is liable (based on culpa aquiliana) to the plaintiff because of the following conditions: 4. first, the car was of general use of the family, 5. second, the boy was authorized or designated by his father to run the car, 28


6. third, at the time of the collision the car is used for the purpose not of the child’s pleasure but that of the other members of the car owner’s family members.

Vasquez v. Borja (1944) Topic: Negligence; Effects

The theory of the law is that the running of the machine by a child to carry other members of the family is within the scope of the owner’s business, so that he is liable for the negligence of the child because of the relationship of master and servant. For the chauffer and the bus owner (based on culpa contractual), their liability rests upon the contract (the safety that is assured by the operator upon the passenger) whereas that degree of care expected from the chauffer is lacking.

Doctrine: The fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence in the fulfillment of the contract did not make Vazquez principally or even subsidiarily liable for such negligence. Since it was the corporation’s contract, its non-fulfillment, whether due to negligence or fault or to any other cause, made the corporation and not its agent liable.

The liability of the owner of the truck, and of his chauffeur rests on a different basis, namely, that of contract which, we think, has been sufficiently demonstrated by the allegations of the complaint, not controverted, and the evidence. The reason for this conclusion reaches to the findings of the trial court concerning the position of the truck on the bridge, the speed in operating the machine, and the lack of care employed by the chauffeur.

Facts: In 1932, Francisco De Borja entered into a contract of sale with the NVSD (Natividad-Vasquez Sabani Development Co., Inc.). The subject of the sale was 4,000 cavans of rice valued at Php2.10 per cavan. On behalf of the company, the contract was executed by Antonio Vasquez as the company’s acting president. NVSD only delivered 2,488 cavans and failed and refused despite demand to deliver the rest hence De Borja incurred damages (apparently, NVSD was insolvent). He then sue Vasquez for payment of damages. Issue: WON Vasquez is liable for damages. Held: NO. Vasquez is not party to the contract as it was NVSD which De Borja contracted with. It is well known that a corporation is an artificial being invested by law with a personality of its own, separate and distinct from that of its stockholders and from that of its officers who manage and run its affairs. The mere fact that its personality is owing to a legal fiction and that it necessarily has to act thru its agents, does not make the latter personally liable on a contract duly entered into, or for an act lawfully performed, by them for an in its behalf. 29


The fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence in the fulfillment of the contract did not make Vazquez principally or even subsidiarily liable for such negligence. Since it was the corporation’s contract, its non-fulfillment, whether due to negligence or fault or to any other cause, made the corporation and not its agent liable. Justice Paras, dissenting: Vasquez as president of NVSD is liable for damages. Vasquez, as acting president and manager of NVSD, and with full knowledge of the then insolvent status of his company, agreed to sell to De Borja 4,000 cavans of palay. Further, NVSD was soon thereafter dissolved.

Federal Builders v Foundation Specialists G.R. No. 194507, September 8, 2014 Negligence Facts: On August 20, 1990, Federal Builders, Inc. (FBI) entered into an agreement with Foundation Specialists, Inc. (FSI) whereby the latter, as sub-contractor, undertook the construction of the diaphragm wall, capping beam, and guide walls of the Trafalgar Plaza located at Salcedo Village, Makati City. FSI filed a complaint for Sum of Money against FBI before the RTC of Makati City seeking to collect the amount of One Million Six Hundred Thirty-Five Thousand Two Hundred Seventy-Eight Pesos and Ninety-One Centavos (P1,635,278.91), representing Billings No. 3 and 4, with accrued interest from August 1, 1991 plus moral and exemplary damages with attorney’s fees. In its complaint, FSI alleged that FBI refused to pay said amount despite demand and its completion of ninety-seven percent (97%) of the contracted works. In its Answer with Counterclaim, FBI claimed that FSI completed only eighty-five percent (85%) of the contracted works, failing to finish the diaphragm wall and component works in accordance with the plans and specifications and abandoning the jobsite. FBI maintains that because of FSI’s inadequacy, its schedule in finishing the Project has been delayed resulting in the Project owner’s deferment of its own progress billings. It further interposed counterclaims for amounts it spent for the remedial works on the alleged defects in FSI’s work. FBI is claiming P8,582,756.29 representing the cost of the measures it undertook to rectify the alleged defects. After evaluating the evidence of both parties, the RTC ruled in favor of FSI awarding the sum of P1,024,600.00 representing 30


billings 3 and 4, less the amount of P33,354.40 plus 12% legal interest from August 30, 1991;The sum of P279,585.00 representing the cost of undelivered cement; the sum of P200,000.00 as attorney’s fees; and the cost of suit. On appeal, the CA affirmed the Decision of the lower court, but deleted the sum of P279,585.00 representing the cost of undelivered cement and reduced the award of attorney’s fees to 50,000.00. In its Decision, the CA explained that FSI failed to substantiate how and in what manner it incurred the cost of cement by stressing that its claim was not supported by actual receipts. Also, it found that while the trial court did not err in awarding attorney’s fees, the same should be reduced for being unconscionable and excessive. It also dismissed FBI’s counterclaim.

must necessarily fail. In fact, as the lower court noted, at the time when FBI had evaluated FSI’s works, it did not categorically pose any objection thereto. Thus, in the absence of any record to otherwise prove FSI’s neglect in the fulfilment of its obligations under the contract, this Court shall refrain from reversing the findings of the lower courts, which are fully supported by and deducible from, the evidence on record. FBI failed to present any evidence to justify its refusal to pay FSI for the works it was contracted to perform. As such, the court do not see any reason to deviate from the assailed rulings.

Issue: Whether or not the CA committed an error when it dismissed the counterclaim of the petitioner notwithstanding the overwhelming evidence supporting its claim of P8,582,756.29 as actual damages. Ruling: It is clear from the case that contrary to the allegations of FBI, FSI had indeed completed its assigned obligations, with the exception of certain assigned tasks, which was due to the failure of FBI to fulfil its end of the bargain. It can similarly be deduced that the defects FBI complained of, such as the misaligned diaphragm wall and the erroneous location of the rebar dowels, were not only anticipated by the parties, having stipulated alternative plans to remedy the same, but more importantly, are also attributable to the very actions of FBI. Accordingly, considering that the alleged defects in FSI’s contracted works were not so much due to the fault or negligence of the FSI, but were satisfactorily proven to be caused by FBI’s own acts, FBI’s claim of P8,582,756.29 representing the cost of the measures it undertook to rectify the alleged defects 31


SSS

vs. Moonwalk Development Corporation (1993) Campos, Jr. J.

and

Housing

Re: Delay DOCTRINE: Default begins from the moment the creditor demands the performance of the obligation. FACTS: Plaintiff SSS approved the application of Defendant Moonwalk for a loan of P30,000,000 for the purpose of developing and constructing a housing project. Out of P30,000,000 approved loan, the sum of P9,595,000 was released to defendant Moonwalk. A third Amendment Deed of Mortgage was executed for the payment of the amount of P9,595,000. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of P12,254,700. After settlement of the account, SSS issued to Moonwalk the release of Mortgage for Moonwalk’s Mortgaged properties. In letter to Moonwalk, SSS alleged that it committed an honest mistake in releasing defendant.

In this case, although there were late amortizations there was no demand made by SSS for the payment of the penalty hence Moonwalk is not in delay in the payment of the penalty. No delay occurred and there was no occasion when the penalty became demandable and enforceable. Since there was no default in the performance of the main obligation-payment of the loan- SSS was never entitled to recover any penalty. If the demand for the payment of the penalty was made prior to the extinguishment of the obligation which are: 1. The principal obligation 2. The interest of 12% on the principal obligation 3. The penalty of 12% for late payment for after demand, Moonwalk would be in delay and therefore liable for the penalty.

That Moonwalk has still 12% penalty for failure to pay on time the amortization which is in the penal clause of the contract. Moonwalk’s counsel told SSS that it had completely paid its obligation to SSS and therefore there is no recovery of any penalty. ISSUE: Is the penalty demandable extinguishment of the principal obligation?

even

after

the

HELD: No. There has been a waiver of the penal clause as it was not demanded before the full obligation was fully paid and extinguished. Default begins from the moment the creditor demands the performance of the obligation. 32


Abella v Gonzaga Mora solvendi Doctrine: Although there was a delay in the performance of the plaintiff’s obligation to pay the installments, he is still considered to have complied with his obligation since the defendant accepted the former’s late payments. Facts: On February, 1921, the defendant, Mariano Gonzaga, agreed to purchase 70 parcels of land from the Mandaluyong Estate, including lot No. 9. Gonzaga made several payments on account of said 70 parcels of land. On December 16, 1922, Gonzaga agreed with the owners of the Mandaluyong Estate to apply P13,563.20 of the amount he had paid to the payment in full of the price of 22 parcels of land, and these terms were set out in the deed executed on that date, December 16, 1922. It was also agreed to apply the P652.50, the balance of the amount paid by Gonzaga, to the payment of a portion of the price of the 48 remaining parcels of land, another deed of sale having been executed in favor of Gonzaga by Messrs. Whitaker and Ortigas, whereby Gonzaga bound himself to pay the balance of the price. Gonzaga entered into a contract of lease with Cirili Abella (lessee), including a stipulation as follows: “In consideration of P1,392.92 which the tenant has now paid, and his promise to pay the rent of the remaining 19 quarters at the periods fixed in the preceding clause, the owner undertakes at the termination of this contract to transfer free of charge to the tenant the full ownership of the leased property, provided the tenant has made the aforesaid payments.”

against the defendant, requiring the transfer of the land to the plaintiff. Issue: Whether or not the delayed payment of the plaintiff results into non-performance. Ruling: No. The land was a part of the estate denominated the Mandaluyong Estate. The defendant had an understanding with the owners to purchase a large tract of it including the land in question. Pending proceedings for the registration of the land which the defendant desired to purchase, he entered into an agreement with the plaintiff evidenced by the contract called "Special Contract of Lease." The parties had agreed upon the sale of the land for about P7,000. The plaintiff then paid P1,392.92, and the remainder was to be paid in 5 yearly installments of P1,114,34 each. These installments were paid. Some of these yearly payments were delayed somewhat, but the defendant admitted the payment for, as the plaintiff stated, he agreed to pay 10% interest upon the arrearage, and this statement was admitted by the court below. Since the plaintiff has fulfilled his obligations under that contract of sale called "Special Contract of Lease," he may compel the defendant to execute the proper deed of transfer of the full ownership of the property in question.

The plaintiff demands specific performance of the contract. The defendant contends in his answer that the conditions have not been complied with, but violated by the plaintiff, who made the last payment over a year after the obligation had become due, that is, on March 27, 1927, instead of March 5, 1926. CFI ruled 33


Foundation v Santos (2004) G.R. No. 153004, Nov. 4, 2004 TOPIC: Delay; Kinds of Delay; Mora Solvendi; NCC 1169 Doctrine: The two-year period must be counted from the date of execution of the compromise agreement, and not on the judicial approval of the compromise agreement. Facts: Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and defendant, respectively, in several civil cases filed in different courts in the Philippines. On October 26, 1990, the parties executed a Compromise Agreement which amicably ended all their pending litigations. In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of the aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real properties involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance of P13 million. Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real properties, which were previously subjects of lis pendens. Discovering the disposition made by the petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the remaining P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991, the Regional Trial Court of Makati City, Branch 62, issued a Decision6approving the compromise agreement. On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would pay the balance of P13 million. There was no response from petitioner. Consequently,

respondent Santos applied with the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ of execution of its compromise judgment dated September 30, 1991. The RTC granted the writ. Thus, on March 10, 1993, the Sheriff levied on the real properties of petitioner, which were formerly subjects of the lis pendens. Petitioner, however, filed numerous motions to block the enforcement of the said writ. The challenge of the execution of the aforesaid compromise judgment even reached the Supreme Court. All these efforts, however, were futile. On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga were auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was issued a Certificate of Sale covering the real properties subject of the auction sale. Subsequently, another auction sale was held on February 8, 1995, for the sale of real properties of petitioner in Bacolod City. Again, Riverland, Inc. was the highest bidder. The Certificates of Sale issued for both properties provided for the right of redemption within one year from the date of registration of the said properties. On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and Damages alleging that there was delay on the part of petitioner in paying the balance of P13 million. They further alleged that under the Compromise Agreement, the obligation became due on October 26, 1992, but payment of the remaining P12 million was effected only on November 22, 1994. Thus, respondents prayed that petitioner be ordered to pay legal interest on the obligation, penalty, attorney's fees and costs of litigation. Furthermore, they prayed that the aforesaid sales be declared final and not subject to legal redemption. In its Answer, petitioner countered that respondents have no cause of action against it since it had fully paid its obligation to the latter. It further claimed that the alleged delay in the payment of the balance was due to its valid exercise of its rights 34


to protect its interests as provided under the Rules. Petitioner counterclaimed for attorney's fees and exemplary damages. On October 4, 1996, the trial court rendered a Decision dismissing herein respondents' complaint and ordering them to pay attorney's fees and exemplary damages to petitioner. Respondents then appealed to the Court of Appeals. The appellate court reversed the ruling of the trial court. Issue: Whether or not respondents are entitled to legal interest Held: Yes Ratio: The two-year period must be counted from October 26, 1990, the date of execution of the compromise agreement, and not on the judicial approval of the compromise agreement on September 30, 1991. When respondents wrote a demand letter to petitioner on October 28, 1992, the obligation was already due and demandable. When the petitioner failed to pay its due obligation after the demand was made, it incurred delay. Article 1169 of the New Civil Code provides: Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied]

In the case at bar, the obligation was already due and demandable after the lapse of the two-year period from the execution of the contract. The two-year period ended on October 26, 1992. When the respondents gave a demand letter on October 28, 1992, to the petitioner, the obligation was already due and demandable. Furthermore, the obligation is liquidated because the debtor knows precisely how much he is to pay and when he is to pay it. The second requisite is also present. Petitioner delayed in the performance. It was able to fully settle its outstanding balance only on February 8, 1995, which is more than two years after the extra-judicial demand. Moreover, it filed several motions and elevated adverse resolutions to the appellate court to hinder the execution of a final and executory judgment, and further delay the fulfillment of its obligation. Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an extra-judicial demand contemplated by law. Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This is provided for in Article 1170 of the New Civil Code.

Delay as used in this article is synonymous to default or mora which means delay in the fulfillment of obligations. It is the nonfulfillment of the obligation with respect to time. In order for the debtor to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially. 35


Vasquez v. Ayala Corp. (2004) (November 19, 2004) Topic: Delay; Kinds; Mora Solvendi Doctrine: Obligations for whose fulfillment a day certain has been fixed shall be demandable only when that day comes. Thus without a certain date on when the obligation must be fulfilled there will be no cause for delay, unless such circumstance will fall under the exceptions provided under 1169. Facts: April 23, 1981, spouses Vasquez entered into a Memorandum of Agreement (MOA) with AYALA Corporation with Ayala buying from the Vazquez spouses, all of the latter’s shares of stock in Conduit Development, Inc. The main asset of Conduit was a 49.9 hectare property in Ayala Alabang which was then being developed by Conduit under a development plan where the land was divided into Villages 1, 2 and 3 of the “Don Vicente Village.” The development was then being undertaken for Conduit by G.P. Construction and Development Corp. Under the MOA, Ayala was to develop the entire property, less what was defined as the “Retained Area” consisting of 18,736 square meters. Ayala agreed to offer 4 lots adjacent to the retained area for sale to the Vazquez spouses at the prevailing price at the time of purchase. Pertinent provision in the MOA: “5.7. The BUYER hereby commits that it will develop the ‘RemainingProperty’ into a first class residential subdivision of the same class asits New Alabang Subdivision, and that it intends to complete the firstphase under its amended development plan within three (3) years fromthe date of this Agreement. x x x”

After the execution of the MOA, Ayala caused the suspension of work on Village 1 of the Don Vicente Project. Because of this there were suits between the subcontractor Lancer, GP Construction and Ayala but were later terminated on February 19, 1987 after Ayala paid both Lancer and GP Construction. Vasquez spouses then sent several “reminder” letters of the approaching so-called “deadline” on Ayala’s obligation to sell 4 lots to them. However, no demand after April 23, 1984, was ever made by the Vasquez spouses for Ayala to sell the 4 lots. One of the letters signed by their authorized agent, Engr. Eduardo Turla, categorically stated that they expected “development of Phase 1 to be completed by February 19, 1990, three years from the settlement of the legal problems with the previous contractor.” By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered for sale. The four lots were then offered to be sold to the Vasquez spouses at the prevailing price in 1990. This was rejected by the Vasquez spouses who wanted to pay at 1984 prices. Issue: WON Ayala corporation is in default for failure to finish the development of the phase in question within 3 years. Held: NO. Art. 1169 states that those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially. Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been fixed shall be demandable only when that day comes. There was no fixed date in the MOA, and the “demand letters” which were mere reminders were sent 36


even before three years could pass after the signing. Since the MOA does not specify a period for the development of the subject lots, petitioners should have petitioned the court to fix the period in accordance with Article 1197 of the Civil Code. As no such action was filed by petitioners, their complaint for specific performance was premature, the obligation not being demandable at that point. Accordingly, AYALA Corporation cannot likewise be said to have delayed performance of the obligation. Moreover, a representative of the spouses even told AYALA that the date of reckoning shall be from the date the case with lancer was finished.

Agner v BPI (2013) G.R. No. 182963, June 3, 2013 Delay – Mora Solvendi Doctrine: The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time the obligor demands the fulfillment of the obligation from the obligee. However, the law expressly provides that demand is not necessary under certain circumstances, and one of these circumstances is when the parties expressly waive demand. Hence, since the co-signors expressly waived demand in the promissory notes, demand was unnecessary for them to be in default. Facts: Petitioners spouses Deo Agner and Maricon Agner executed a Promissory Note with Chattel Mortgage in favor of Citimotors, Inc. The contract provides, among others, that: for receiving the amount of Php834, 768.00, petitioners shall pay Php 17,391.00 every 15th day of each succeeding month until fully paid; the loan is secured by a 2001 Mitsubishi Adventure Super Sport; and an interest of 6% per month shall be imposed for failure to pay each installment on or before the stated due date. On the same day, Citimotors, Inc. assigned all its rights, title and interests in the Promissory Note with Chattel Mortgage to ABN AMRO Savings Bank, Inc. (ABN AMRO), which, on May 31, 2002, likewise assigned the same to respondent BPI Family Savings Bank, Inc. For failure to pay four successive installments, respondent, through counsel, sent to petitioners a demand letter, declaring the entire obligation as due and demandable and requiring to 37


pay Php576,664.04, or surrender the mortgaged vehicle immediately upon receiving the letter. 6 As the demand was left unheeded, respondent filed an action for Replevin and Damages before the RTC. A writ of replevin was issued. Despite this, the subject vehicle was not seized. Trial on the merits ensued. The RTC ruled for the respondent and ordered petitioners to jointly and severally pay the amount of Php576,664.04 plus interest at the rate of 72% per annum from August 20, 2002 until fully paid, and the costs of suit. Petitioners appealed the decision to the Court of Appeals (CA), but the CA affirmed the lower court’s decision and, subsequently, denied the motion for reconsideration; hence, this petition. Issue: Whether or not the petitioner cannot be considered to have defaulted in payment for lack of competent proof that they received the demand letter. And whether or not the respondent’s remedy of resorting to both actions of replevin and collection of sum of money is contrary to the provision of Article 1484 of the Civil Code. Ruling: On the first issue, the records bear that both verbal and written demands were in fact made by respondent prior to the institution of the case against petitioners. Even assuming, for argument’s sake, that no demand letter was sent by respondent, there is really no need for it because petitioners legally waived the necessity of notice or demand in the Promissory Note with Chattel Mortgage, which they voluntarily and knowingly signed in favor of respondent’s predecessor-in-interest. Said contract expressly stipulates that in case of failure to pay, no prior notice or demand, is required and the debt immediately becomes due and payable.

The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time the obligor demands the fulfillment of the obligation from the obligee. However, the law expressly provides that demand is not necessary under certain circumstances, and one of these circumstances is when the parties expressly waive demand. Hence, since the co-signors expressly waived demand in the promissory notes, demand was unnecessary for them to be in default. Further, the Court even ruled in Navarro v. Escobido 15 that prior demand is not a condition precedent to an action for a writ of replevin, since there is nothing in Section 2, Rule 60 of the Rules of Court that requires the applicant to make a demand on the possessor of the property before an action for a writ of replevin could be filed. As to the second issue, the court ruled that the remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars the exercise of the others.. Here, the vehicle subject matter of this case was never recovered and delivered to respondent despite the issuance of a writ of replevin. As there was no seizure that transpired, it cannot be said that petitioners were deprived of the use and enjoyment of the mortgaged vehicle or that respondent pursued, commenced or concluded its actual foreclosure. The trial court, therefore, rightfully granted the alternative prayer for sum of money, which is equivalent to the remedy of "exacting fulfillment of the obligation." Certainly, there is no double recovery or unjust enrichment to speak of.

38


Claudina Vda. De Villaruel v Manila Motor (1958) Reyes, JBL. Re: Mora accipiendi DOCTRINE: Refusal to accept the current rentals without qualification placed them in default. As a result, they had to bear all supervening risks of accidental injury or destruction of the leased premises. FACTS: On May 31, 1940, the plaintiffs Villaruel and defendant Manila Motor Co. Inc. entered into a contract whereby the defendant agreed to lease plaintiffs building premises. On October 31, 1940, the leased premises were placed in the possession of the defendant until the invasion of 1941. The Japanese military occupied and used the property leased as part of their quarters from June, 1942 to March, 1945, in which no payment of rentals were made. Upon the liberation of the said city, the American forces occupied the same buildings that were vacated by the Japanese. When the United States gave up the occupancy of the premises, defendant decided to exercise their option to renew the contract, in which they agreed. However, before resuming the collection of rentals, Dr. Alfredo Villaruel upon advice demanded payment of rentals corresponding to the time the Japanese military occupied the leased premises, but the defendant refused to pay. As a result plaintiff gave notice seeking the rescission of the contract and the payment of rentals from June, 1942 to March, 1945; this was rejected by the defendant. Despite the fact the defendant under new branch manager paid to plaintiff the sum of P350 for the rent, the plaintiff still demanded for rents in arrears and for the rescission of the contract of lease.

The plaintiff commenced an action before the CFC of Neg. Occidental against defendant company. During the pendency of the case, the leased building was burned down. Because of the occurrence, plaintiffs demanded reimbursement from the defendants, but having been refused, they filed a supplemental complaint to include a 3rd cause of action, the recovery of the value of the burned building. The trial court rendered judgment in favor of the plaintiff. Hence the defendants appeal. ISSUE: Is Manila Motor Co. Inc. liable for the loss of the leased premises? HELD: No. Clearly, the lessor's insistence upon collecting the occupation rentals for 1942-1945 was unwarranted in law. Hence, their refusal to accept the current rentals without qualification placed them in default (mora creditoris or accipiendi) with the result that thereafter, they had to bear all supervening risks of accidental injury or destruction of the leased premises. While not expressly declared by the Code of 1889, this result is clearly inferable from the nature and effects of mora. In other words, the only effect of the failure to consign the rentals in court was that the obligation to pay them subsisted and the lessee remained liable for the amount of the unpaid contract rent, corresponding to the period from July to November, 1946; it being undisputed that, from December 1946 up to March 2, 1948, when the commercial buildings were burned, the defendants appellants have paid the contract rentals at the rate of P350 per month. But the failure to consign did not eradicate the default (mora) of the lessors nor the risk of loss that lay upon them.

39


Tengco v CA Mora Accipiendi Doctrine: The ownership of the property had been transferred to the private respondent and the person to whom payment was offered had no authority to accept payment. The petitioner should have tendered payment of the rentals to the private respondent and if that was not possible, she should have consigned such rentals in court. Facts: On 16 September 1976, private respondent, Benjamin Cifra, Jr., claiming to be the owner of the premises at No. 164 Int Gov. Pascual St., Navotas, Metro Manila, which he had leased to the petitioner, Emilia Tengco, filed an action for unlawful detainer with the Municipal Court, to evict the petitioner for her alleged failure to comply with the terms and conditions of the lease contract by failing and refusing to pay the stipulated rentals despite repeated demands. MC ruled against the petitioner. CFI and CA affirmed. According to the petitioner: in 1942, petitioner entered into a verbal lease agreement with Lutgarda Cifra over the premises which belonged to the latter. Aside from the amount of rentals, no other condition or term was agreed upon. The rentals were collected from her residence by the lessor's collector who went to her house to demand and collect payment from time to time, with no fixed frequency. In 1974, the lessor's collector stopped going to the petitioner's residence to collect her rentals, as she had done in the past. The petitioner waited for the collector to come but the latter never showed up again in his neighborhood. Since no demand for payment was made upon her, the petitioner decided to keep the money until the collector comes again to demand and collect payment. In May, 1976, petitioner received a letter from Aurora Recto, sister of private respondent,

informing the former that the latter, was the owner of the property, was offering the same for sale. In August 1977, petitioner received another letter, this time from the private respondent, demanding the surrender of the possession of the premises, also claiming to be the owner of the property. Upon receipt of this letter, petitioner went to the residence of the collector, another sister of the private respondent to whom she had been paying her rentals, and there tendered payment but this was refused without any justification. Issue: Whether or not the private respondent was guilty of mora accipiendi when his sister refused to accept the proffered rentals. Ruling: No. Under the circumstances, the refusal to accept the proffered rentals is not without justification. The ownership of the property had been transferred to the private respondent and the person to whom payment was offered had no authority to accept payment. It should be noted that the contract of lease between the petitioner and Lutgarda Cifra, the former owner of the land, was not in writing and, hence, unrecorded. The Court has held that a contract of lease executed by the vendor, unless recorded, ceases to have effect when the property is sold, in the absence of a contrary agreement. The petitioner cannot claim ignorance of the transfer of ownerhip of the property because, by her own account, Aurora Recto and the private respondent, at various times, had informed her of their respective claims to ownership of the property occupied by the petitioner. The petitioner should have tendered payment of the rentals to the private respondent and if that was not possible, she should have consigned such rentals in court.

40


Central Bank v CA (1985) 139 SCRA 46 (1985) TOPIC: Delay; Kinds of delay; Compensatio morae Doctrine: The mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him. Facts: On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision. On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the contract at semi-annual installments of P3,459.00. An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance. The Bank, thru its vice-president and

treasurer, promised repeatedly the release of the P63,000.00 balance. On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued Resolution No. 1049. On June 14, 1968, the Monetary Board, after finding that Island Savings Bank failed to put up the required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22, 1969. On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage. On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage. 41


On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks. On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure. On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan. Issue: Whether or not Island Bank incurred delay Held: Yes Ratio: When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the

obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question. The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him.

42


Nakpil v. CA (1986) Topic: Not attributable to the debtor; Fortuitous event Doctrine: To be exempt from liability due to an act of God, the engineer/architect/contractor must not have been negligent in the construction of the building. Facts: Private respondents – Philippine Bar Association (PBA) – a non-profit organization formed under the corporation law decided to put up a building in Intramuros, Manila. Hired to plan the specifications of the building were Juan Nakpil & Sons, while United Construction was hired to construct it. The proposal was approved by the Board of Directors and signed by the President, Ramon Ozaeta. The building was completed in 1966. In 1968, there was an unusually strong earthquake which caused the building heavy damage, which led the building to tilt forward, leading the tenants to vacate the premises. United Construction took remedial measures to sustain the building. PBA filed a suit for damages against United Construction, but United Construction subsequently filed a suit against Nakpil and Sons, alleging defects in the plans and specifications. Technical Issues in the case were referred to Mr. Hizon, as a court appointed Commissioner. PBA moved for the demolition of the building, but was opposed. PBA eventually paid for the demolition after the building suffered more damages in 1970 due to previous earthquakes. The Commissioner found that there were deviations in the specifications and plans, as well as defects in the construction of the building. Issue: WON an act of God (fortuitous event) exempts from liability parties who would otherwise be due to negligence. Held: NO.

An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains or care, reasonably to have been expected, could have been prevented. There is no dispute that the earthquake which took place in 1968 was a fortuitous event or an act of God. Art. 1723 dictates that the engineer/architect and contractor are liable for damages should the building collapse within 15 years from completion. Art. 1174 of the NCC, however, states that no person shall be responsible for events, which could not be foreseen. But to exempt the obligor from liability due to an act of God, the following must occur: 1) Cause of breach must be independent of the will of the debtor 2) Event must be unforeseeable or unavoidable 3) Event must be such that it would render it impossible for the debtor to fulfill the obligation 4) Debtor must be free from any participation or aggravation of the industry to the creditor.

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability. The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence of nature and all human agencies are to be excluded 43


from creating or entering into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and removed from the rules applicable to the acts of God. In the case at bar, although the damage was ultimately caused by the earthquake which was an act of God, the defects in the construction, as well as the deviations in the specifications and plans aggravated the damage, and lessened the preventive measures that the building would otherwise have had. As correctly assessed by both courts, the defects in the construction and in the plans and specifications were the proximate causes that rendered the PBA building unable to withstand the earthquake of 1968. For this reason the defendant and thirdparty defendants cannot claim exemption from liability.

Fil-Estate v Ronquillo (2014) G.R. No. 185789, January 13, 2014 Fortuitous Event Doctrine: the Asian financial crisis is not a fortuitous event that would excuse petitioners from performing their contractual obligation Facts: Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower while co-petitioner Fil-Estate Network, Inc. is its authorized marketing agent. Respondent Spouses Conrado and Maria Victoria Ronquillo purchased from petitioners a condominium unit for a preselling contract price of FIVE MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND ONLY (P5,174,000.00). As agreed upon, respondents paid the full downpayment of P1,552,200.00 and had been paying the P63,363.33 monthly amortizations until September 1998. Upon learning that construction works had stopped, respondents likewise stopped paying their monthly amortization. Claiming to have paid a total of P2,198,949.96 to petitioners, respondents through two (2) successive letters, demanded a full refund of their payment with interest. When their demands went unheeded, respondents were constrained to file a Complaint for Refund and Damages before the Housing and Land Use Regulatory Board (HLURB). Respondents prayed for reimbursement/refund of P2,198,949.96 representing the total amortization payments, P200,000.00 as and by way of moral damages, attorney’s fees and other litigation expenses.

44


On 21 October 2000, the HLURB issued an Order of Default against petitioners for failing to file their Answer within the reglementary period despite service of summons. Petitioners filed a motion to lift order of default and attached their position paper attributing the delay in construction to the 1997 Asian financial crisis. Petitioners denied committing fraud or misrepresentation which could entitle respondents to an award of moral damages. Issue: Whether or not the Asian financial crisis constitute a fortuitous event which would justify delay by petitioners in the performance of their contractual obligation; Ruling: According to the Supreme Court, the rulings were consistent that first, the Asian financial crisis is not a fortuitous event that would excuse petitioners from performing their contractual obligation; second, as a result of the breach committed by petitioners, respondents are entitled to rescind the contract and to be refunded the amount of amortizations paid including interest and damages; and third, petitioners are likewise obligated to pay attorney’s fees and the administrative fine. The court cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the control of a business corporation. It is unfortunate that petitioner apparently met with considerable difficulty e.g. increase cost of materials and labor, even before the scheduled commencement of its real estate project as early as 1995. However, a real estate enterprise engaged in the pre-selling of condominium units is concededly a master in projections on commodities and currency movements and business risks. The fluctuating movement of the Philippine peso in the foreign exchange market is an everyday occurrence, and fluctuations in currency exchange rates happen everyday, thus, not an instance of caso fortuito.

In said case, the Court ordered the refund of the total amortizations paid by respondents plus 6% legal interest computed from the date of demand. The Court also awarded attorney’s fees.

Khe Hong Cheng v CA (2001) Kapunan, J. Re: Accion Pauliana DOCTRINE: When the law is silent as to when the prescriptive shall commence, general rule must apply that it will commence when the moment the action accrues. An action for rescission must be the last resort of the creditors and can only be availed after the creditor had exhausted all the properties. FACTS: Petitioner is the owner of Butuan Shipping Line. In one the vessels owned by the petitioner, Philippine Agricultural Trading Corporation boarded 3,400 bags of copra to be shipped from Masbate to Dipolog City and which said shipment of copra was insured by PhilAm. While on board, the ship sank amounting to total loss of the shipments. Because of the loss, the insurer paid the damages to the consignee. Having subrogated the rights of the consignee, PhilAm instituted a civil case to recover the money paid to the consignee based on breach of contract of carriage. While the case was pending, petitioner executed deeds of donations of parcels of land to his children. The trial court rendered judgment against the petitioner Ke Hong Cheng in the civil case on December 29, 1993. After the decision became final a writ of execution was issued but it was not served, Therefore an alias writ was was applied for which 45


was granted. The sheriff did not found any property under Butuan Shipping Lines and/or Ke Hong Cheng. In 1997, PhilAm filed complaint for annulling the deeds of donation made by herein petitioner to his children and alleged the donation was to defraud his creditors including PhilAm. Petitioner filed an answer stating that the action had already prescribed. ISSUE: Whether or not the action to rescind the donation had already prescribed. HELD: According to the trial court, the period began from December 29, 1993 when the civil case was resolved. Thus, The CA maintained that, that the four year period began only on January 1997, the time when it first learned that the judgment award could not be satisfied because the Ke Hong Cheng had no more properties in his name. Article 1389 of the Civil Code simply provide that "The action to claim rescission must be commenced within four years." When the law is silent as to when the prescriptive shall commence, general rule must apply that it will commence when the moment the action accrues. An action for rescission must be the last resort of the creditors and can only be availed after the creditor had exhausted all the properties. The herein respondent came to know only in January 1997 about the unlawful conveyances of the petitioner when together with the sheriff and counsel were to attach the property of the petitioner and it was then only when they found out it is no longer in the name of the petitioner. Since the respondent filed accion pauliana on February 1997, a month after the discovery that petitioner had no property in his name to satisfy the judgment, action for rescission of subject deeds had not yet prescribed.

Siguan v Lim Accion Pauliana Doctrine: The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. Facts: On 25 and 26 August 1990, Rosa Lim issued 2 checks payable to cash. Upon presentment by petitioner with the drawee bank, the checks were dishonored for the reason “account closed.” Demands to make good the checks proved futile. A criminal case for violation of BP 22 was filed by petitioner against Lim. RTC convicted Lim as charged. The case is pending before this Court for review. On 31 July 1990, Lim was convicted of estafa by the RTC filed by Victoria Suarez. This decision was affirmed by the CA. However, this Court, acquitted Lim but held her civilly liable in the amount of P169,000, as actual damages, plus legal interest. On 2 July 1991, a Deed of Donation conveying several parcels of land and purportedly executed by Lim on 10 August 1989 in favor of her children, Linde, Ingrid and Neil, was registered. New TCTs were issued in the names of the donees. On 23 June 1993, petitioner filed an accion pauliana against Lim and her children before the RTC to rescind the Deed of Donation. Petitioner claimed that Lim fraudulently transferred all her real property to her children in bad faith and in fraud of creditors, 46


including her; that Lim conspired with her children in antedating the Deed of Donation, to petitioner’s and other creditors’ prejudice; and that Lim, at the time of the fraudulent conveyance, left no sufficient properties to pay her obligations. RTC ordered the rescission of the deed of donation. CA reversed the decision of the RTC. It held that 2 of the requisites for filing an accion pauliana were absent, namely, (1) there must be a credit existing prior to the celebration of the contract; and (2) there must be a fraud, or at least the intent to commit fraud, to the prejudice of the creditor seeking the rescission. The Deed of Donation, which was executed and acknowledged before a notary public, appears on its face to have been executed on 10 August 1989. Under Section 23 of Rule 132, the Deed, being a public document, is evidence of the fact which gave rise to its execution and of the date thereof. No antedating of the Deed of Donation was made, there being no convincing evidence on record to indicate that the notary public and the parties did antedate it. Since Lim’s indebtedness to petitioner was incurred in August 1990, or a year after the execution of the Deed of Donation, the first requirement for accion pauliana was not met. Anent petitioner’s contention that assuming that the Deed was not antedated it was nevertheless in fraud of creditors because Suarez became Lim’s creditor on 8 October 1987, CA found the same untenable, for the rule is basic that the fraud must prejudice the creditor seeking the rescission. Issue: Whether the questioned Deed of Donation was made in fraud of petitioner and, therefore, rescissible. Ruling: No. Article 1381 enumerates the contracts which are rescissible, and among them are “those contracts undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them.” The general rule is that rescission requires the existence of creditors at the time of the alleged fraudulent alienation, and

this must be proved as one of the bases of the judicial pronouncement setting aside the contract. Without any prior existing debt, there can neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the credit was constituted. The alleged debt of Lim in favor of petitioner was incurred in August 1990, while the deed of donation was purportedly executed on 10 August 1989. We are not convinced with the allegation of the petitioner that the deed was antedated to make it appear that it was made prior to petitioner’s credit. Notably, that deed is a public document, it having been acknowledged before a notary public. As such, it is evidence of the fact which gave rise to its execution and of its date, pursuant to Section 23, Rule 132. The fact that the Deed was registered only on 2 July 1991 is not enough to overcome the presumption as to the truthfulness of the statement of the date in the deed, which is 10 August 1989. Petitioner’s claim against Lim was constituted only in August 1990, or a year after the alienation. Thus, the first 2 requisites for the rescission of contracts are absent. Even assuming arguendo that petitioner became a creditor of Lim prior to the celebration of the contract of donation, still her action for rescission would not fare well because the third requisite was not met. Under Article 1381, contracts entered into in fraud of creditors may be rescinded only when the creditors cannot in any manner collect the claims due them. Also, Article 1383 provides that the action for rescission is but a subsidiary remedy which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. The term “subsidiary remedy” has been defined as “the exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission is resorted to.” It is, therefore, essential that the party asking for rescission prove 47


that he has exhausted all other legal means to obtain satisfaction of his claim. Petitioner neither alleged nor proved that she did so. On this score, her action for the rescission of the deed is not maintainable even if the fraud charged actually did exist.” The fourth requisite for an accion pauliana to prosper is not present either. Article 1387, first paragraph, provides: “All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors when the donor did not reserve sufficient property to pay all debts contracted before the donation.” Likewise, Article 759, second paragraph, states that the donation is always presumed to be in fraud of creditors when at the time thereof the donor did not reserve sufficient property to pay his debts prior to the donation. For this presumption of fraud to apply, it must be established that the donor did not leave adequate properties which creditors might have recourse for the collection of their credits existing before the execution of the donation. Petitioner’s alleged credit existed only a year after the deed of donation was executed. She cannot, therefore, be said to have been prejudiced or defrauded by such alienation. Besides, the evidence disclose that as of 10 August 1989, when the deed of donation was executed, Lim still had several properties. It was not sufficiently established that the properties left behind by Lim were not sufficient to cover her debts existing before the donation was made. Hence, the presumption of fraud will not come into play. Nevertheless, a creditor need not depend solely upon the presumption laid down in Articles 759 and 1387. Under the third paragraph of Article 1387, the design to defraud may be proved in any other manner recognized by the law of evidence. Thus in the consideration of whether certain transfers are fraudulent, the Court has laid down specific rules by which the

character of the transaction may be determined. The following have been denominated by the Court as badges of fraud: (1) The fact that the consideration of the conveyance is fictitious or is inadequate; (2) A transfer made by a debtor after suit has begun and while it is pending against him; (3) A sale upon credit by an insolvent debtor; (4) Evidence of large indebtedness or complete insolvency; (5) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially; (6) The fact that the transfer is made between father and son, when there are present other of the above circumstances; and (7) The failure of the vendee to take exclusive possession of all the property. The above enumeration is not an exclusive list. The circumstances evidencing fraud are as varied as the men who perpetrate the fraud in each case. This Court has therefore declined to define it, reserving the liberty to deal with it under whatever form it may present itself. Petitioner failed to discharge the burden of proving any of the circumstances enumerated above or any other circumstance from which fraud can be inferred. Accordingly, since the 4 requirements for the rescission of a gratuitous contract are not present in this case, petitioner’s action must fail. Petitioner brings to our attention the 31 July 1990 Decision of the RTC wherein Lim was held guilty of estafa and was ordered to pay Victoria Suarez P169,000 for the obligation Lim incurred 48


on 8 October 1987. This decision was affirmed by the CA. Upon appeal, however, this Court acquitted Lim of estafa but held her civilly liable for P169,000 as actual damages. It should be noted that the complainant in that case, Victoria Suarez, albeit a creditor prior to the alienation, is not a party to this accion pauliana. Article 1384 provides that rescission shall only be to the extent necessary to cover the damages caused. Thus, only the creditor who brought the action for rescission can benefit from the rescission; those who are strangers to the action cannot benefit from its effects. And the revocation is only to the extent of the plaintiff creditor’s unsatisfied credit; as to the excess, the alienation is maintained. Thus, petitioner cannot invoke the credit of Suarez to justify rescission of the deed of donation.

Gaite v Fonacier 2 SCRA 830 (1961) TOPIC: Kinds of Obligations; According to Demandability; Conditional Obligations Facts: Defendant-appellant Fonacier was the owner/holder of 11 iron lode mineral claims, known as the Dawahan Group, situated in Camrines Norte. By “Deed of Assignment, Respondent constituted and appointed plaintiff-appellee Gaite as attorney-in-fact to enter into contract for the exploration and development of the said mining claims on. On March 1954, petitioner executed a general assignment conveying the claims into the Larap Iron Mines, which owned solely and belonging to him. Thereafter, he underwent development and the exploitation for the mining claims which he estimates to be approximately 24 metric tons of iron ore. However, Fonacier decide to revoke the authority given to Gaite, whereas respondent assented subject to certain conditions. Consequently a revocation of Power of Attorney and Contract was executed transferring P20k plus royalties from the mining claims, all rights and interest on the road and other developments done, as well as , the right to use of the business name, goodwill, records, documents related to the mines. Furthermore, included in the transfer was the rights and interest over the 24K+ tons of iron ore that had been extracted. Lastly the balance of P65K was to be paid for covering the first shipment of iron ores. To secure the payment of P65k, respondent executed a surety bond with himself as principal, the Larap Mines and Smelting Co. and its stockholder as sureties. Yet, this was refused by petitioner. Appelle further required another bond underwritten by a bonding company tosecure the payment of the balance. 49


Hence a second bond was produced with Far Eastern Surety as an additional surety, provided the liability of Far Eastern would only prosper when there had been an actual sale of the iron ores of not less than the agreed amount of P65k, moreover, its liability was to automatically expire on December 1955. On December 1955, the second bond had expired and no sale amounting to the stipulation as prior agreed nor had the balance been paid to petitioner by respondent. Thus such failure, prompted petitioner to file a complaint in the CFI of Manila for the payment of the balance and other damages. The Trial Court ruled in favor of plaintiff ordering defendant to pay the balance of P65k with interest. Afterwards an appeal was affected by the respondent where several motions were presented for resolution: a motion for contempt; two motions to dismiss the appeal for becoming moot and academic; motion for a new trial, filed by appellee Gaite. The motion for contempt was held unmeritorious, while the rest of the motions were held unnecessary to resolve Issue: Whether or not the Lower Court erred in holding the obligation of appellant Fonacier to pay appelle Gaite the balance of P65k, as one with a period or term and not one with a suspensive condition; and that the term expired on December 1955 Held: No Ratio: Error was found, affirming the decision of the lower court. Gaite acted within his rights in demanding payment and instituting this action one year from and after the contract was executed, either because the appellant debtors had impaired the securities originally given and thereby forfeited any further time within which to pay; or because the term of payment was originally of no more than one year, and the balance of P65k, became due and payable thereafter.

The Lower Court was legally correct in holding the shipment or sale of the iron ore is not a condition or suspensive to the payment of the balance of P65k, but was only a suspensive period or term. What characterizes a conditional obligation is the fact that its efficacy or obligatory force as distinguished from its demandability, is subordinated to the happening of a future and uncertain event; so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed. The sale of the ore to Fonacier was a sale on credit, and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid at all; and that the previous sale or shipment of the ore was not a suspensive condition for the payment of the balance of the agreed price, but was intended merely to fix the future date of the payment. While as to the right of Fonacier to insist that Gaite should wait forthe sale or shipment of the ore before receiving payment; or, in other words, whether or not they are entitled to take full advantage of the period granted them for making the payment. The appellant had indeed have forfeited the right to compel Gaite to wait for the sale of the ore before receiving payment of the balance of P65,000.00, because of their failure to renew the bond of the Far Eastern Surety Company or else replace it with an equivalent guarantee. The expiration of the bonding company's undertaking on December 8, 1955 substantially reduced the security of the vendor's rights as creditor for the unpaid P65,000.00, a security that Gaite considered essential and upon which he had insisted when he executed the deed of sale of the ore to Fonacier (first bond). Under paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines: ART. 1198. The debtor shall lose every right to make use of the period: “(2) When he does not furnish to the creditor the guaranties or securities which he has promised. (3) When by his own acts he has impaired said guaranties or securities after 50


their establishment, and when through fortuitous event they disappear, unless he immediately gives new ones equally satisfactory.” Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the securities given to the creditor (appellee Gaite), unless immediately renewed or replaced. Nevertheless, there is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with full knowledge that on its face it would automatically expire within one year was a waiver of its renewal after the expiration date. No such waiver could have been intended, for Gaite stood to lose and had nothing to gain barely; and if there was any, it could be rationally explained only if the appellants had agreed to sell the ore and pay Gaite before the surety company's bond expired on December 8, 1955. But in the latter case the defendantsappellants' obligation to pay became absolute after one year from the transfer of the ore to Fonacier by virtue of the deed, first bond.

Gonzales v. Heirs of Thomas (1999) Topic: Kinds of Obligations; According to Demandability; Conditional Obligations Doctrine: A condition is every future and uncertain event upon which an obligation or provision is made to depend or 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 such property. Facts: On December 1, 1983, Paula Año Cruz together with the plaintiffs heirs of Thomas and Paula Cruz entered into a contract of lease with the defendant, Felix L. Gonzales of a half portion of a land containing an area if 12 hectares, more or less, and an accretion of 2 hectares, more or less, situated in Rodriguez Town, Province of Rizal. As stipulated therein: “Paragraph 9 – The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct TCT over the herein leased portion to the LESSEE within a reasonable period of time which shall not in any case exceed four (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.” The contract’s term is for a period of one year upon the signing thereof. After the period, Gonzales shall purchase the property P1,000,000.00, 2 years payable with 12% per annum interest subject to the devalued amount of the Philippine Peso. Gonzales shall also pay annual rental equivalent to P2,500.00 per hectare, upon the signing of this contract and that the lessors (CRUZ) shall undertake to obtain a separate certificate over leased 51


portion to the LESSEE within a reasonable period of time which shall not in any case exceed four (4) years. A new Contract shall then 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. Under the contract, Gonzales paid the rental fees but did not choose to exercise the option of paying the 1,000,000 purchase price. A letter was issued by one of the heirs to rescind the said contract following the breach and ordered Gonzales to vacate the premises within 10 days. Gonzales did not vacate. A few days later, Paula Cruz died. As case was launched in Court by the heirs of Paula Cruz.

buy the land and to pay the sums stated in the contract be enforced within the period stipulated. Verily, the petitioner’s obligation to purchase has not yet ripened and cannot be enforced until and unless respondents can prove their title to the property subject of the contract. The Court also held that there can be no rescission (or resolution) of an obligation as yet nonexistent, because the suspensive condition has not happened.

Issue: WON paragraph 9 of the Lease/Purchase Contract a condition precedent before petitioner could exercise his option to buy the property. Held: YES. Paragraph 9 required respondents to obtain a separate and distinct TCT in their names and not in the name of petitioner. It logically follows that it was a condition precedent to the latter’s obligation to purchase and pay for the land. When an 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. 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. If a stipulation in a contract admits of several meanings, it shall be understood as bearing that import most adequate to render it effectual. An obligation cannot be enforced unless the plaintiff has fulfilled the condition upon which it is premised. The 9 th provision was intended to ensure that respondents would have a valid title over the specific portion they were selling to petitioner. Only after the title is assured may the obligation to 52


Coronel v CA (1996) Melo, J. Re: Suspensive condition DOCTRINE: The case is a contract of sale subject to a suspensive condition in which consummation is subject only to the successful transfer of the certificate of title from the name of petitioners' father, to their names. Thus, the contract of sale became obligatory.

pendens in the title was annotated after she bought the property is of no merit. In case of double sale, what finds relevance and materiality is not whether or not the second buyer was a buyer in good faith but whether or not said second buyer registers such second sale in good faith, that is, without knowledge of any defect in the title of the property sold. The ruling should be in favor of Alcaraz because Mabanag registered the property two months after the notice of lis pendens was annotated in the title and hence, she cannot be a buyer in good faith.

FACTS: Coronel et al. consummated the sale of his property located in Quezon City to respondent Alcaraz. Since the title of the property was still in the name of the deceased father of the Coronels, they agreed to transfer its title to their name upon payment of the down payment of 50K and thereafter an absolute deed of sale will be executed. Alcaraz’s mother paid the down payment in behalf of her daughter and as such, Coronel made the transfer of title to their name. Notwithstanding this fact, Coronel sold the property to petitioner Mabanag and rescinded its prior contract with Alcaraz. ISSUE: Whether the rescission of the first contract between Coronel and Alcaraz is valid. HELD: The case is a contract of sale subject to a suspensive condition in which consummation is subject only to the successful transfer of the certificate of title from the name of petitioners' father, to their names. Thus, the contract of sale became obligatory. With regard to double sale, the rule that the first in time, stronger in right should apply. The contention of the petitioner that she was a buyer in good faith because the notice of lis 53


Parks v Prov of Tarlac Types of conditions: resolutory condition Doctrine: The characteristic of a condition precedent is that the acquisition of the right is not effected while said condition is not complied with or is not deemed complied with. Meanwhile nothing is acquired and there is only an expectancy of right. Consequently, when a condition is imposed, the compliance of which cannot be effected except when the right is deemed acquired, such condition cannot be a condition precedent. Facts: On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land, donated it perpetually to the municipality of Tarlac, Province of Tarlac, under certain conditions specified in the public document in which they made this donation. The donation was accepted by Santiago de Jesus in the same document on behalf of the municipal council of Tarlac of which he was the municipal president. The parcel donated was later registered in the name of the donee, the municipality of Tarlac. On January 15, 1921, Cirer and Hill sold this parcel to plaintiff George Parks. On August 24, 1923, the municipality of Tarlac transferred the parcel to the Province of Tarlac which, by reason of this transfer, applied for and obtained the registration thereof in its name, the corresponding certificate of title having been issued to it. Parks, alleging that the conditions of the donation had not been complied with and invoking the sale of this parcel of land made by Cirer and Hill in his favor, brought this action against the Province of Tarlac, the municipality of Tarlac, Cirer and Hill and prayed that he be declared the absolute owner entitled to the possession of this parcel, that the transfer of the same by the municipality of Tarlac to the Province of Tarlac be annulled, and the transfer certificate issued to the Province of Tarlac cancelled.

Issue: Whether or not the condition that one of the parcels donated was to be used absolutely and exclusively for the erection of a central school and the other for a public park is a condition precedent imposed on the donation. Ruling: No. Parks contends that a condition precedent having been imposed in the donation and the same not having been complied with, the donation never became effective. The appellant refers to the condition imposed that one of the parcels donated was to be used absolutely and exclusively for the erection of a central school and the other for a public park, the work to commence in both cases within the period of six months from the date of the ratification by the parties of the document evidencing the donation. It is true that this condition has not been complied with. The allegation, however, that it is a condition precedent is erroneous. The characteristic of a condition precedent is that the acquisition of the right is not effected while said condition is not complied with or is not deemed complied with. Meanwhile nothing is acquired and there is only an expectancy of right. Consequently, when a condition is imposed, the compliance of which cannot be effected except when the right is deemed acquired, such condition cannot be a condition precedent. In the present case the condition that a public school be erected and a public park made of the donated land, work on the same to commence within 6 months from the date of the ratification of the donation by the parties, could not be complied with except after giving effect to the donation. The donee could not do any work on the donated land if the donation had not really been effected, because it would be an invasion of another's title, for the land would have continued to belong to the donor so long as the condition imposed was not complied with.

54


Central Philippines v CA (2995) 246 SCRA 511 (1995)

certificate of title without a fixed period when to comply with such conditions; 2) Whether or not there is a need to fix the period for compliance of the condition

TOPIC: Types of Conditions; As to effect on obligation; Resolutory (condition subsequent)

Held: 1) YES 2)NO

Doctrine: Thus, when a person donates land to another on the condition that the latter would build upon the land a school is such a resolutory one. The donation had to be valid before the fulfillment of the condition.

Ratio: 1)Under Art. 1181, on conditional obligations, the acquisition of rights as well the extinguishment or loss of those already acquired shall depend upon the happening of the event which constitutes the condition. Thus, when a person donates land to another on the condition that the latter would build upon the land a school is such a resolutory one. The donation had to be valid before the fulfillment of the condition. If there was no fulfillment with the condition such as what obtains in the instant case, the donation may be revoked & all rights which the donee may have acquired shall be deemed lost & extinguished.

Facts: In 1939, Don Ramon Lopez Sr. executed a deed of donation in favor of Central Philippines University together with the following conditions: a) The land should be utilized by CPU exclusively for the establishment & use of medical college; b) The said college shall not sell transfer or convey to any 3rd party; c) The said land shall be called “Ramon Lopez Campus” and any income from that land shall be put in the fund to be known as “Ramon Lopez Campus Fund”. However, on May 31, 1989, private respondents, who are the heirs of Don Ramon filed an action for annulment of donation, reconveyance & damages against CPU for not complying with the conditions. The heirs also argued that CPU had negotiated with the NHA to exchange the donated property with another land owned by the latter. Petitioner alleged that the right of private respondents to file the action had prescribed. Issue: 1) Whether or not petitioner failed to comply the resolutely conditions annotated at the back of petitioner’s

More than a reasonable period of fifty (50) years has already been allowed petitioner to avail of the opportunity to comply with the condition even if it be burdensome, to make the donation in its favor forever valid. But, unfortunately, it failed to do so. Hence, there is no more need to fix the duration of a term of the obligation when such procedure would be a mere technicality and formality and would serve no purpose than to delay or lead to an unnecessary and expensive multiplication of suits. Records are clear and facts are undisputed that since the execution of the deed of donation up to the time of filing of the instant action, petitioner has failed to comply with its obligation as donee. Petitioner has slept on its obligation for an unreasonable length of time. Hence, it is only just and equitable now to declare the subject donation already ineffective and, for all purposes, revoked so that petitioner as donee should now return the donated property to the heirs of the donor, private respondents herein, by means of reconveyance. 55


2) Under Art. 1197, when the obligation does not fix a period but from its nature & circumstance it can be inferred that the period was intended, the court may fix the duration thereof because the fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for compliance therewith & such period has arrived. However, this general rule cannot be applied in this case considering the different set of circumstances existing more than a reasonable period of 50yrs has already been allowed to petitioner to avail of the opportunity to comply but unfortunately, it failed to do so. Hence, there is no need to fix a period when such procedure would be a mere technicality & formality & would serve no purpose than to delay or load to unnecessary and expensive multiplication of suits. Under Art. 1191, when one of the obligors cannot comply with what is incumbent upon him, the obligee may seek rescission before the court unless there is just cause authorizing the fixing of a period. In the absence of any just cause for the court to determine the period of compliance there is no more obstacle for the court to decree recission.

Quijada v. CA (1998) Topic: Kinds of Obligation; According to Demandability; Conditional Obligations; As to Effect; Resolutory Doctrine: It has been ruled that when a person donates land to another on the condition that the latter would build upon the land a school, the condition imposed is not a condition precedent or a suspensive condition but a resolutory one. Facts: On April 5, 1956, Trinidad Quijada and her sisters executed a deed of conditional donation in favor of the Municipality of Talacogon, the condition being that the land shall be used exclusively for the construction of a provincial high school. Trinidad remained in possession of the land. However, on July 29, 1962, Trinidad sold the land donated to the Municipality of Talacogon to respondent Regalado Mondejar. In 1980, the heirs of Trinidad, herein petitioners, filed a complaint for forcible entry against the respondent. In 1987, the proposed campus did not materialize, and the Sangguniang Bayan enacted a resolution donating back the land to the donor. In the meantime, respondent Mondejar conveyed portions of the land to the other respondents. On July 5, 1988, petitioners filed a complaint for quieting of title, recovery of possession and ownership of the land. Issue: WON the sale between Trinidad and Regalado is valid considering the capacity of the vendor to execute the contract in view of the conditional deed of donation. Held: No. The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters was subject to the condition that the 56


donated property shall be "used solely and exclusively as a part of the campus of the proposed Provincial High School in Talacogon." The donation further provides that should "the proposed Provincial High School be discontinued or if the same shall be opened but for some reason or another, the same may in the future be closed" the donated property shall automatically revert to the donor. Such condition, not being contrary to law, morals, good customs, public order or public policy was validly imposed in the donation. When the Municipality's acceptance of the donation was made known to the donor, the former became the new owner of the donated property -- donation being a mode of acquiring and transmitting ownership- notwithstanding the condition imposed by the donee. The donation is perfected once the acceptance by the donee is made known to the donor. Accordingly, ownership is immediately transferred to the latter and that ownership will only revert to the donor if the resolutory condition is not fulfilled.

herein when the donee-Municipality manifested through a resolution that it cannot comply with the condition of building a school and the same was made known to the donor. Only then when the non-fulfillment of the resolutory condition was brought to the donor's knowledge - that ownership of the donated property reverted to the donor as provided in the automatic reversion clause of the deed of donation. The donor may have an inchoate interest in the donated property during the time that ownership of the land has not reverted to her. Such inchoate interest may be the subject of contracts including a contract of sale. In this case, however, what the donor sold was the land itself which she no longer owns. It would have been different if the donor-seller sold her interests over the property under the deed of donation which is subject to the possibility of reversion of ownership arising from the nonfulfillment of the resolutory condition.

In this case, that resolutory condition is the construction of the school. It has been ruled that when a person donates land to another on the condition that the latter would build upon the land a school, the condition imposed is not a condition precedent or a suspensive condition but a resolutory one. Thus, at the time of the sales made in 1962 towards 1968, the alleged seller (Trinidad) could not have sold the lots since she had earlier transferred ownership thereof by virtue of the deed of donation. So long as the resolutory condition subsists and is capable of fulfillment, the donation remains effective and the donee continues to be the owner subject only to the rights of the donor or his successors-in-interest under the deed of donation. Since no period was imposed by the donor on when must the donee comply with the condition, the latter remains the owner so long as he has tried to comply with the condition within a reasonable period. Such period, however, became irrelevant 57


Lim v CA (1990) 191 SCRA 156 (1990) Potestative Suspensive Condition Doctrine: The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter. Facts: Private respondent entered into a contract of lease with petitioner for a period of three (3) years, that is, from 1976 to 1979. After the stipulated term expired, private respondent refused to vacate the premises, hence, petitioner filed an ejectment suit against the former in the City Court of Manila. The case was terminated by a judicially approved compromise agreement of the parties providing in part: o That the term of the lease shall be renewed every three years retroacting from October 1979 to October 1982; after which the above named rental shall be raised automatically by 20% every three years for as long as defendant needed the premises and can meet and pay the said increases, the defendant to give notice of his intent to renew sixty (60) days before the expiration of the term; By reason of said compromise agreement the lease continued from 1979 to 1982, then from 1982 to 1985. On April 17, 1985, petitioner advised private respondent that he would no longer renew the contract effective October, 1985. However, on August 5, 1985, private respondent informed petitioner in writing of his intention to renew the contract of lease for another term,

commencing November, 1985 to October, 1988. In reply to said letter, petitioner advised private respondent that he did not agree to a renewal of the lease contract upon its expiration in October, 1985. Because of private respondent's refusal to vacate the premises, petitioner filed another ejectment suit. In its decision, said court dismissed the complaint on the grounds that (1) the lease contract has not expired, being a continuous one the period whereof depended upon the lessee's need for the premises and his ability to pay the rents; and (2) the compromise agreement entered into in the aforesaid Civil Case constitutes res judicata to the case before it. Issue: Whether the lease contract has not expired, being a continuous one the period whereof depended upon the lessee's need for the premises and his ability to pay the rents; and whether the compromise agreement entered into in the aforesaid Civil Case constitutes res judicata to the case before Ruling: Contrary to the ruling of the lower court, the disputed stipulation "for as long as the defendant needed the premises and can meet and pay said increases" is a purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is likewise a suspensive condition because the renewal of the lease, which gives rise to a new lease, depends upon said condition. It should be noted that a renewal constitutes a new contract of lease although with the same terms and conditions as those in the expired lease. It should also not be overlooked that said condition is not resolutory in nature because it is not a condition that terminates the lease contract. The lease contract is for a definite period of three (3) years upon the expiration of which the lease automatically terminates. The invalidity of a condition in a lease contract similar to the one at bar has been resolved in Encarnacion vs. Baldomar, et 58


al. where the court ruled that in an action for ejectment, the defense interposed by the lessees that the contract of lease authorized them to continue occupying the premises as long as they paid the rents is untenable, because it would leave to the lessees the sole power to determine whether the lease should continue or not. This, of course, is prohibited by the aforesaid article of the Civil Code. The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter. Mutuality does not obtain in such a contract of lease and no equality exists between the lessor and the lessee since the life of the contract is dictated solely by the lessee. As for the second issue, the fourth requisite of res judicata is lacking. Although there is identity of parties, there is no identity of subject matter and cause of action. The subject matter in the first ejectment case is the original lease contract while the subject matter in the case at bar is the lease created under the terms provided in the subsequent compromise agreement. The lease executed in 1978 is one thing; the lease constituted in 1982 by the compromise agreement is another. There is also no identity, in the causes of action. The test generally applied to determine the identity of causes of action is to consider the identity of facts essential to their maintenance, or whether the same evidence would sustain both causes of action. In the case at bar, the delict or the wrong in the first case is different from that in the second, and the evidence that will support and establish the cause of action in the former will not suffice to support and establish that in the latter.

Silos v PNB (2014) Del Castillo, J. Re: Potestative obligation DOCTRINE: Any modification in the contract, such as the interest rates, must be made with the consent of the contracting parties. In the case of loan agreements, the rate of interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect FACTS: Spouses Silos have been in the business of operating a department store for two decades. To secure a 1-year revolving credit line, petitioner Spouses constited a real estate mortgage. They issued eight promissory notes and signed a credit agreement. This July 1989 Credit Agreement contained a stipulation on interest which provides as follows: 1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest shall be payable in advance every one hundred twenty days at the rate prevailing at the time of the renewal. (b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in the future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum, which is equal to the 59


Bank’s spread over the current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time depending on whatever policy it may adopt in the future. (Emphases supplied)

relegated to PNB the sole power to fix interest rates based on arbitrary criteria or factors such as bank policy, profitability, cost of money, foreign currency values, and bank administrative costs.

The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase or reduce interest rates “within the limits allowed by law or by the Monetary Board.” The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates “at any time depending on whatever policy PNB may adopt in the future.”

In its Answer, PNB denied that it unilaterally imposed or fixed interest rates; that petitioners agreed that without prior notice, PNB may modify interest rates depending on future policy adopted by it; and that the imposition of penalties was agreed upon in the Credit Agreement.

The parties made an amendment to credit agreement with the following stipulation: 1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up to but not including the date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the date of each Availment. (Emphases supplied) The spouses issued 18 promissory notes. the 9 th to 17th promissory notes provide for the payment of interest at the “rate the Bank may at any time without notice, raise within the limits allowed by law x x x.” Spouses defaulted on their obligations. The bank foreclosed the real estate mortgage. Spouses filed for a petition for annulment of the foreclosure sale and accounting of PNB credit. Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to Credit Agreement should be declared null and void, for they

ISSUE: Whether the stipulation allowing PNB to increase the interest rates even without notice and consent from the spouses is valid. HELD: Stipulation is invalid. In a number of decided cases, the Court struck down provisions in credit documents issued by PNB to, or required of, its borrowers which allow the bank to increase or decrease interest rates “within the limits allowed by law at any time depending on whatever policy it may adopt in the future.” 1. In Philippine National Bank v. Court of Appeals (1991), such stipulation and similar ones were declared in violation of Article 1308 of the Civil Code. 2. Philippine National Bank v. Court of Appeals (1994), the very same stipulations found in the credit agreement and the promissory notes prepared and issued by the respondent were again invalidated. 3. Spouses Almeda v. Court of Appeals (1996), the Court invalidated the very same provisions in the respondent’s prepared Credit Agreement

60


4. Philippine National Bank v. Court of Appeals (1996), the above doctrine was reiterated

5. We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v. Philippine National Bank

6. Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora (2009), the above pronouncements were reiterated to debunk PNB’s repeated reliance on its invalidated contract stipulations Verily, all these cases, including the present one, involve identical or similar provisions found in respondent’s credit agreements and promissory notes. These stipulations must be once more invalidated, as was done in previous cases. The common denominator in these cases is the lack of agreement of the parties to the imposed interest rates. For this case, this lack of consent by the petitioners has been made obvious by the fact that they signed the promissory notes in blank for the respondent to fill. We find credible the testimony of Lydia (petitioner) in this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa admitted that interest rates were fixed solely by its Treasury Department in Manila, which were then simply communicated to all PNB branches for implementation. If this were the case, then this would explain why petitioners had to sign the promissory notes in blank, since the imposable interest rates have yet to be determined and fixed by respondent’s Treasury Department in Manila.

currency values, bank administrative costs, profitability, and considerations which affect the banking industry – it can be seen that considerations which affect PNB’s borrowers are ignored. A borrower’s current financial state, his feedback or opinions, the nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his business or borrowing, etc. – these are not factors which influence the fixing of interest rates to be imposed on him. Clearly, respondent’s method of fixing interest rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary for there is no fixed standard or margin above or below these considerations. To repeat what has been said in the above-cited cases, any modification in the contract, such as the interest rates, must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan agreements, the rate of interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect

Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes – such as cost of money, foreign 61


Naga Telephone Co., Inc. (NATELCO) v CA Types of conditions: as to cause: casual Doctrine: The contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance, hazard or the will of a third person, which do not invalidate the subject provision. Facts: On November 1, 1977, the parties entered into a contract for the use by petitioners in the operation of its telephone service the electric light posts of private respondent in Naga City. In consideration therefor, petitioners agreed to install, free of charge, 10 telephone connections for the use by private respondent in several places. Said contract also provided: “(a) That the term or period of this contract shall be as long as the party of the first part has need for the electric light posts of the party of the second part it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned [sic] its operation as a public service and it becomes necessary to remove the electric lightpost;”

as long as private respondent is in operation. A similar provision in a contract of lease wherein the parties agreed that the lessee could stay on the leased premises "for as long as the defendant needed the premises and can meet and pay said increases" was held by SC as invalid for being "a purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee." Further held SC: “The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter. Mutuality does not obtain in such a contract of lease of no equality exists between the lessor and the lessee since the life of the contract is dictated solely by the lessee.” According to CA, the same can also be said of the agreement. There is no mutuality and equality between them under the subject provision since the life and continuity of said agreement is made to depend as long as petitioner needs private respondent’s electric posts. Issue: Whether or not the contract was subject to a potestative condition that is void.

After the contract had been enforced for over 10 years, private respondent filed on January 2, 1989 with the RTC against petitioners for reformation of the contract with damages, on the ground, among others, that it is too one-sided in favor of petitioners.

Ruling: No. Petitioners allege that there is nothing purely potestative about the prestations of either party because petitioner's permission for free use of telephones is not made to depend purely on their will, neither is private respondent's permission for free use of its posts dependent purely on its will.

RTC ruled in favor of private respondent. While the contract appeared to be fair to both parties when it was entered into, it had become disadvantageous and unfair to private respondent because of subsequent events and conditions.

Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment of which depends upon the sole will of the debtor, in which case, the conditional obligation is void. Based on this definition, respondent court's finding that the provision in the contract is a potestative condition, is correct. However, it must have overlooked the other conditions in the same provision, to wit:

CA held that the subject stipulation is invalid for being purely potestative on the part of petitioner as it leaves the continued effectivity of the agreement to the latter's sole and exclusive will

62


. . . it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part (private respondent) is forced to stop, abandoned (sic) its operation as a public service and it becomes necessary to remove the electric light post (sic); which are casual conditions since they depend on chance, hazard, or the will of a third person. In sum, the contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance, hazard or the will of a third person, which do not invalidate the aforementioned provision.

Osmena v Rama (1909) 14 Phil 99 (1909) TOPIC: Types of Conditions; As to cause or Origin; mixed (PS: this is the case itself, maikli na sya to digest) It appears from the record that upon the 15th day of November, 1890, the defendant herein executed and delivered to Victoriano Osmeña the following contract. "EXHIBIT A. P200.00. "CEBU, November 15, 1890. "I, Doña Cenona Rama, a resident of this city, and of legal age, have received from Don Victoriano Osmeña the sum of two hundred pesos in cash which I will pay in sugar in the month of January or February of the coming year, at the price ruling on the day of delivering the sugar into his warehouses, and I will pay him interest at the rate of half a cuartillo per month on each peso, beginning on this date until the day of the settlement; and if I can not pay in full, a balance shall be struck, showing the amount outstanding at the end of each June, including interest, and such balance as may be outstanding against me shall be considered as capital which I will always pay in sugar, together with the interest mentioned above. I further promise that I will sell to the said Señor Osmeña all the sugar that I may harvest, and as a guarantee, pledge as security all of my present and future property, and as special security the house with tile roof and ground floor of stone in which I live in Pagina; in proof whereof, I sign this document, and he shall be entitled to make claim against me at the expiration of the term stated in this document. 63


(Signed) "CENONA RAMA. "Witnesses: "FAUSTO PEÑALOSA. "FRANCISCO MEDALLE." On the 27th day of October, 1891, the defendant executed and delivered to the said Victoriano Osmeña the following contract: "EXHIBIT B. "CEBU, October 27, 1891. "On this date I have asked for a further loan and have received from Don Victoriano Osmeña the sum of seventy pesos in cash, fifty pesos of which I have loaned to Don Evaristo Peñares, which we will pay in sugar in the month of January of the coming year according to the former conditions. (Signed) "CENONA RAMA. "FROM Don Evaristo Peñares P50 "Doña Cenona Rama 20 ____

On the 15th day of March, 1902, the plaintiff presented the contracts to the defendant for payment and she acknowledged her responsibility upon said contracts by an indorsement upon them in the following language:jgc:chanrobles.com.ph "EXHIBIT C. "CEBU, March 15, 1902. "On this date I hereby promise, in the presence of two witnesses, that, if the house of strong materials in which I live in Pagina is sold, I will pay my indebtedness to Don Tomas Osmeña as set forth in this document. (Signed) "CENONA RAMA." The defendant not having paid the amount due on said contracts; the plaintiff, upon the 26th day of June, 1906, commenced the present action in the Court of First Instance of the Province of Cebu. The complaint filed in said cause alleged the execution and delivery of the above contracts, the demand for payment, and the failure to pay on the part of the defendant, and the prayer for a judgment for the amount due on the said contracts. The defendant answered by filing a general denial and setting up the special defense of prescription.

"Received — Evaristo Peñares."

The case was finally brought on to trial in the Court of First Instance, and the only witness produced during the trial was the plaintiff himself. The defendant did not offer any proof whatever in the lower court.

Some time after the execution and delivery of the above contracts, the said Victoriano Osmeña died. In the settlement and division of the property of his estate the above contracts became the property of one of his heirs, Agustina Rafols. Later, the date does not appear, the said Agustina Rafols ceded to the present plaintiff all of her right and interest in said contracts.

After hearing the evidence adduced during the trial, the lower court rendered a judgment in favor of the plaintiff and against the defendant for the sum of P200 with interest at the rate of 18 3/4 per cent per annum, from the 15th day of November, 1890, and for the sum of P20, with interest at the rate of 18 3/4 per cent per annum, from the 27th day of October, 1891, until the

P70

64


said sums were paid. From this judgment the defendant appealed. The lower court found that P50 of the P70 mentioned in Exhibit B had not been borrowed by the defendant, but by one Evaristo Peñares; therefore the defendant had no responsibility for the payment of the said P50. The only questions raised by the appellant were questions of fact. The appellant alleges that the proof adduced during the trial of the cause was not sufficient to support the findings of the lower court. It was suggested during the discussion of the case in this court that, in the acknowledgment above quoted of the indebtedness made by the defendant, she imposed the condition that she would pay the obligation if she sold her house. If that statement found in her acknowledgment of the indebtedness should be regarded as a condition, it was a condition which depended upon her exclusive will, and is, therefore, void. (Art. 1115, Civil Code.) The acknowledgment, therefore, was an absolute acknowledgment of the obligation and was sufficient to prevent the statute of limitation from barring the action upon the original contract. We are satisfied, from all of the evidence adduced during the trial, that the judgment of the lower court should be affirmed. So ordered.

Smith, Bell & Co. v Sotelo Matti (1992) Topic: Kinds of Obligation; According to Demandability; Conditional Obligations; As to cause or origin; Mixed Doctrine: When the time of delivery is not fixed in the contract, time is regarded unessential. In such cases, the delivery must be made within a reasonable time. FACTS: Plaintiff Smith, Bell & Co and the defendant Mr. Vicente Sotel entered into a contract. Plaintiff has to deliver (1) two steel tanks shipped from New York to Manila within three or four months, (2) two expellers shipped from SanFrancisco in the month of September 1918 or as soon as possible, and (3) two electric motors with “approximate delivery within ninety days. – This is not guaranteed.” The tanks arrived at Manila on 27 April 1919; the expellers on 26 October 1918; and the motors on 27 February 1919. Upon notification from plaintiff, defendant refused to receive any of the goods or to pay for their price. Plaintiff alleged that the expellers and motors were in good condition. Plaintiff filed a complaint against the defendant. The defendant, Mr Sotelo and intervenor, Manila Oil Refining and By-Products Co., Inc., denied the plaintiff’s allegations. They allege that due to plaintiff’s delay in the delivery of goods, the intervenor suffered damages. The lower court absolved the defendants from the complaint insofar as the tanks and the electric motors were concerned, but rendered judgment against them ordering them to receive expellers and pay the sum of P50,000, with legal interest and cost. Both parties appealed to the Court.

65


ISSUE: What period was fixed for the delivery of the goods? Did the plaintiff incur delay in the delivery of goods? HELD: In all these contracts, there is a final clause as follows: “The sellers are not responsible for delays cause by fires, riots on land or on the sea, strikes or other causes known as ‘force majeure’ entirely beyond the control of the sellers or their representatives.

When the time of delivery is not fixed in the contract, time is regarded unessential. In such cases, the delivery must be made within a reasonable time. Xxx Reasonable time for the delivery of the goods by the seller is to be determined by circumstances attending the particular transactions. Whether of not the delivery of the machinery in litigation was offered to the defendant within a reasonable time, is a question to be determined by the court. Xxx The plaintiff has not been guilty of any delay in the fulfillment of its obligation.

Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the goods. xxx. From the record it appears that thee contracts were executed at the time of the world war when there existed rigid restrictions on the export from the united States xxx; hence clauses were inserted in the contracts, regarding “Government regulations, railroading embargoes, lack of vessel space, the exigencies of the requirements of the United States Government” xxx. At the time of the execution of the contracts, the parties were not unmindful of the contingency of the United States Government not allowing the export of the goods xxx. We cannot but conclude that the term which parties attempted to fix is so uncertain that once cannot tell just whether, as a matter of fact, those articles could be brought to manila or not. The obligation must be regarded as conditional. The delivery was subject to a condition the fulfillment of which depended not only upon the effort of the plaintiff, but upon the will of third persons who could in no way be compelled to fulfill the condition. It is sufficiently proven in the record that the plaintiff has made all the efforts it could possibly be expected to make under the circumstances, to bring the goods in question to Manila, as soon as possible. Xxx it is obvious that the plaintiff has complied with its obligation.

66


Rustan Pulp v IAC (1992) 214 SCRA 665 (1992) Doctrine: 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. Facts: Petitioner Rustan established a pulp and paper mill in Baloi, Lano del Norte. Respondent Lluch, who is a holder of a forest products license, transmitted a letter to petitioner Rustan for the supply of raw materials by the former to the latter. In response thereto, petitioner Rustan proposed, among other things, in the letter-reply: o That the contract to supply is not exclusive because Rustan shall have the option to buy from other suppliers who are qualified and holder of appropriate government authority or license to sell and dispose pulp wood. These prefatory business proposals culminated in the execution, during the month of April, 1968, of a contract of sale whereby Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill, Inc. undertook to pay the price of P30.00 per cubic meter of pulp wood raw materials to be delivered at the buyer's plant in Baloi, Lanao del Norte. Of pertinent significance to the issue at hand are the following stipulations in the bilateral undertaking: o That BUYER shall have the option to buy from other SELLERS who are equally qualified and holders of appropriate government authority or license to sell or dispose, that BUYER shall not buy from any other seller whose pulp woods being sold shall have been established to have emanated from

the SELLER'S concession…

lumber

and/or

firewood

o And that SELLER has the priority to supply the pulp wood materials requirement of the BUYER; o 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. On January 23, 1969, the complaint for contractual breach was filed which, but was dismissed. Respondent Court found it 67


ironic that petitioners had to exercise the prerogative regarding the stoppage of deliveries via the letter addressed to Iligan Diversified Project, Inc. on September 30, 1968 because petitioners never really stopped accepting deliveries from private respondents until December 23, 1968. Issue: Whether or not the petitioner can validly stop accepting deliveries from private respondents. Ruling: Insofar as the express discretion on the part of petitioners is concerned regarding the right of stoppage, the court ruled that there is clear basis for private respondent's concern on the deceptive continuation 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. 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. However, it cannot be applied in this case because the petitioners continue to accept deliveries from other sources. According to the court, 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. However, the petitioners are of the impression that the letter dated September 30, 1968 sent to private respondents is 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 the court 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. The court also dismissed 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. The demeanor of petitioners along this line was sought to be justified as an act of generous accommodation, which entailed greater loss to them and "was not motivated by the usual businessman's obsession with profit" (Page 34, Petition; Page 40, Rollo). Altruism may be a noble gesture but petitioners' stance in this respect hardly inspires belief for such an excuse is inconsistent with a normal business enterprise which takes ordinary care of its concern in cutting down on expenses (Section 3, (d), Rule 131, Revised Rules of Court). Knowing fully well that they will encounter difficulty in producing output because of the defective machinery line, petitioners opted to open the plant to greater loss, thus compounding the costs by accepting additional supply to the stockpile. Verily, the petitioner's action when they acknowledged that "if the plant could not be operated on a 68


commercial scale, it would then be illogical for defendant Rustan to continue accepting deliveries of raw materials."

Romero v CA (1995) Vitug, J. Re: mixed condition DOCTRINE: Mixed condition is dependent not on the will of the vendor alone but also of third persons like the squatters and government agencies and personnel concerned. FACTS: Romero, a civil engineer, was engaged in the business of production, manufacture and exportation of perlite filter aids, permalite insulation and processed perlite ore. In 1988, he decided to put up a central warehouse in Metro Manila. Flores and his wife offered a parcel of land measuring 1,952 square meters. The lot was covered in a TCT in the name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the property and, except for the presence of squatters in the area, he found the place suitable for a central warehouse. Flores called on petitioner with a proposal that should he advance the amount of P50,000.00 which could be used in taking up an ejectment case against the squatters, private respondent would agree to sell the property for only P800/square meter. Romero agreed. Later, a "Deed of Conditional Sale" was executed between Flores and Ongsiong. Purchase price = P1,561,600.00; Down payment = P50K; Balance = to be paid 45 days after the removal of all the squatters; upon full payment, Ongsiong shall execute deed of absolute sale in favor of Romero. Ongsiong sought to return the P50,000.00 she received from petitioner since, she said, she could not "get rid of the squatters" on the lot. She opted to rescind the sale in view of her failure to get rid of the squatters. Regional Trial Court of Makati rendered 69


decision holding that private respondent had no right to rescind the contract since it was she who "violated her obligation to eject the squatters from the subject property" and that petitioner, being the injured party, was the party who could, under Article 1191 of the Civil Code, rescind the agreement.

This option clearly belongs to petitioner and not to private respondent. There was no potestative condition on the part of Ongsiong but a "mixed" condition "dependent not on the will of the vendor alone but also of third persons like the squatters and government agencies and personnel concerned."

ISSUE: Is there a perfected contract of sale?

Roman Catholic Archbishop v CA Types of conditions: As to possibility – possible and impossible

HELD: YES. A sale is at once perfected when a person (the seller) obligates himself, for a price certain, to deliver and to transfer ownership of a specified thing or right to another (the buyer) over which the latter agrees. (BILATERAL and RECIPROCAL CHARACTERISTIC OF SALE). In determining the real character of the contract, the title given to it by the parties is not as much significant as its substance. For example, a deed of sale, although denominated as a deed of conditional sale, may be treated as absolute in nature, if title to the property sold is not reserved in the vendor or if the vendor is not granted the right to unilaterally rescind the contract predicated on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on the property. The ejectment of the squatters is a condition the operative act of which sets into motion the period of compliance by petitioner of his own obligation, i .e to pay the balance of the purchase price. Private respondent’s failure "to remove the squatters from the property" within the stipulated period gives petitioner the right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the Civil Code.

Doctrine: The prohibition in the deed of donation against the alienation of the property for 100 years, being an unreasonable emasculation and denial of an integral attribute of ownership, should be declared as an illegal or impossible condition within the contemplation of Article 727. Thus, as stated in said statutory provision, such condition shall be considered as not imposed. Facts: On November 29, 1984, private respondents filed a complaint for nullification of deed of donation, rescission of contract and reconveyance of real property with damages against petitioners Florencio and Soledad Ignao and the Roman Catholic Bishop of Imus, Cavite, together with the Roman Catholic Archbishop of Manila, before the RTC. Private respondents alleged that on August 23, 1930, the spouses Eusebio de Castro and Martina Rieta executed a deed of donation in favor of Roman Catholic Archbishop of Manila covering a parcel of land. The deed of donation provides that the donee shall not dispose or sell the property within 100 years from the execution of the deed of donation, otherwise a violation of such condition would render ipso facto null and void the deed of donation and the property would revert to the estate of the donors. On June 30, 1980, while still within the prohibitive period to dispose of the property, petitioner Roman Catholic Bishop of Imus executed a deed of absolute sale of the property in favor of petitioners Ignao. 70


It is the contention of petitioners that the cause of action of private respondents has already prescribed, invoking Article 764 of the Civil Code which provides that "(t)he donation shall be revoked at the instance of the donor, when the donee fails to comply with any of the conditions which the former imposed upon the latter," and that "(t)his action shall prescribe after four years from the non-compliance with the condition, may be transmitted to the heirs of the donor, and may be exercised against the donee's heirs. Issue: Whether or not the condition that the property donated should not be sold within a period of 100 years from the date of execution of the deed of donation is valid. Ruling: No. Said condition constitutes an undue restriction on the rights arising from ownership of petitioners and is, therefore, contrary to public policy. Donation, as a mode of acquiring ownership, results in an effective transfer of title over the property from the donor to the donee. Once a donation is accepted, the donee becomes the absolute owner of the property donated. Although the donor may impose certain conditions in the deed of donation, the same must not be contrary to law, morals, good customs, public order and public policy. The condition imposed in the deed of donation constitutes a patently unreasonable and undue restriction on the right of the donee to dispose of the property donated, which right is an indispensable attribute of ownership. Such a prohibition against alienation, in order to be valid, must not be perpetual or for an unreasonable period of time.

It is significant that the provisions therein regarding a testator also necessarily involve, in the main, the devolution of property by gratuitous title hence, as is generally the case of donations, being an act of liberality, the imposition of an unreasonable period of prohibition to alienate the property should be deemed anathema to the basic and actual intent of either the donor or testator. For that reason, the regulatory arm of the law is or must be interposed to prevent an unreasonable departure from the normative policy expressed in Articles 494 and 870 of the Code. The prohibition in the deed of donation against the alienation of the property for an entire century, being an unreasonable emasculation and denial of an integral attribute of ownership, should be declared as an illegal or impossible condition within the contemplation of Article 727. Consequently, as specifically stated in said statutory provision, such condition shall be considered as not imposed. No reliance may accordingly be placed on said prohibitory paragraph in the deed of donation. The net result is that, absent said proscription, the deed of sale supposedly constitutive of the cause of action for the nullification of the deed of donation is not in truth violative of the latter hence, for lack of cause of action, the case for private respondents must fail.

Certain provisions of the Civil Code illustrative of the aforesaid policy may be considered applicable by analogy. Under the third paragraph of Article 494, a donor or testator may prohibit partition for a period which shall not exceed 20 years. Article 870 declares that the dispositions of the testator declaring all or part of the estate inalienable for more than 20 years are void. 71


Araneta v Phil. Sugar Estates Development Co. (1967) 20 SCRA 330 (1967) TOPIC: Obligations with a term. Types of period/term; as to source Doctrine: Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial court's amended decision nowhere declared any such fact) still, the complaint not having sought that the Court should set a period, the court could not proceed to do so unless the complaint included it as first amended Facts: J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, and on July 28, 1950, [through Gregorio Araneta, Inc.] sold a portion thereof to Philippine Sugar Estates Development Co., Ltd. The parties stipulated, among in the contract of purchase and sale with mortgage, that the buyer will build on the said parcel land the Sto. Domingo Church and Convent while the seller for its part will construct streets. But the seller, Gregorio Araneta, Inc., which began constructing the streets, is unable to finish the construction of the street in the Northeast side because a certain third-party, by the name of Manuel Abundo, who has been physically occupying a middle part thereof, refused to vacate the same; Both buyer and seller know of the presence of squatters that may hamper the construction of the streets by the seller. On May 7, 1958, Philippine Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co., Inc., and instance, seeking to compel the latter to comply with their obligation, as stipulated in the above-mentioned deed of sale, and/or to pay

damages in the event they failed or refused to perform said obligation. The lower court and the appellate court ruled in favor of Phil. Sugar estates, and gave defendant Gregorio Araneta, Inc., a period of two (2) years from notice hereof, within which to comply with its obligation under the contract, Annex "A". Gregorio Araneta, Inc. resorted to a petition for review by certiorari to this Court. Issue: Whether or not there is a period fixed? Held: Yes Ratio: The fixing of a period by the courts under Article 1197 of the Civil Code of the Philippines is sought to be justified on the basis that petitioner (defendant below) placed the absence of a period in issue by pleading in its answer that the contract with respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable time within which to comply with its obligation to construct and complete the streets." If the contract so provided, then there was a period fixed, a "reasonable time;" and all that the court should have done was to determine if that reasonable time had already elapsed when suit was filed if it had passed, then the court should declare that petitioner had breached the contract, Was it within the powers of the lower court to set the performance of the obligation in two years time? NO. Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial court's amended decision nowhere declared any such fact) still, the complaint not having sought that the Court should set a period, the court could not proceed to do so unless the complaint included it as first amended; 72


Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is defective in that no basis is stated to support the conclusion that the period should be set at two years after finality of the judgment. The list paragraph of Article 1197 is clear that the period cannot be set arbitrarily. The law expressly prescribes that “the Court shall determine such period as may under the circumstances been probably contemplated by the parties.” It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that "the obligation does not fix a period" (or that the period is made to depend upon the will of the debtor)," but from the nature and the circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court must then proceed to the second step, and decide what period was "probably contemplated by the parties" (Do., par. 3). So that, ultimately, the Court can not fix a period merely because in its opinion it is or should be reasonable, but must set the time that the parties are shown to have intended. As the record stands, the trial Court appears to have pulled the twoyear period set in its decision out of thin air, since no circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code. Does “reasonable time” mean that the date of performance would be indefinite? The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is what explains why the agreement did not specify any exact periods or dates of performance.

Central Philippines v. CA (1995) Topic: Kinds of Obligation; According to Demandability; Obligation with a Term Doctrine: Exception to the general rule that the court may fix the period: There is no need to fix a period when such procedure would be a mere technicality & formality & would serve no purpose than to delay or load to unnecessary and expensive multiplication of suits Facts: In 1939, Don Ramon Lopez Sr. executed a deed of donation in favor of CPU together with the following conditions: a) The land should be utilized by CPU exclusively for the establishment & use of medical college; b) The said college shall not sell transfer or convey to any 3rd party; c) The said land shall be called “Ramon Lopez Campus” and any income from that land shall be put in the fund to be known as “Ramon Lopez Campus Fund”. However, on May 31, 1989, private respondents, who are the heirs of Don Ramon filed an action for annulment of donation, reconveyance & damages against CPU for not complying with the conditions. The heirs also argued that CPU had negotiated with the NHA to exchange the donated property with another land owned by the latter. Petitioner alleged that the right of private respondents to file the action had prescribed. Issue: WON there is a need to fix the period for compliance of the condition. 73


Lafarge Cement v Continental Cement (2004) Held: NO. Under Art. 1197, when the obligation does not fix a period but from its nature & circumstance it can be inferred that the period was intended, the court may fix the duration thereof because the fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for compliance therewith & such period has arrived. However, this general rule cannot be applied in this case considering the different set of circumstances existing more than a reasonable period of 50yrs has already been allowed to petitioner to avail of the opportunity to comply but unfortunately, it failed to do so. Hence, there is no need to fix a period when such procedure would be a mere technicality & formality & would serve no purpose than to delay or load to unnecessary and expensive multiplication of suits. Under Art. 1191, when one of the obligors cannot comply with what is incumbent upon him, the obligee may seek rescission before the court unless there is just cause authorizing the fixing of a period. In the absence of any just cause for the court to determine the period of compliance there is no more obstacle for the court to decree rescission.

Solidary Obligation Doctrine: A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. Facts: Petitioner Lafarge Cement Philippines, Inc. (Lafarge) -on behalf of its affiliates and other qualified entities, including Petitioner Luzon Continental Land Corporation (LCLC) -agreed to purchase the cement business of Respondent Continental Cement Corporation (CCC). Both parties entered into a Sale and Purchase Agreement (SPA). At the time of the foregoing transactions, petitioners were well aware that CCC had a case pending with the Supreme Court. In anticipation of the liability that the High Tribunal might adjudge against CCC, the parties, under Clause 2 (c) of the SPA, allegedly agreed to retain from the purchase price a portion of the contract price in the amount of P117,020,846.84 -- the equivalent of US$2,799,140. This amount was to be deposited in an interest-bearing account in the First National City Bank of New York (Citibank) for payment to APT. However, petitioners allegedly refused to apply the sum to the payment to APT, the repeated instructions of Respondent CCC. Fearful that nonpayment to APT would result in the foreclosure, not just of its properties covered by the SPA with Lafarge but of several other properties as well, CCC filed before them a “Complaint with Application for Preliminary Attachment” against petitioners. The Complaint prayed, among others, that 74


petitioners be directed to pay the “APT Retained Amount” referred to in Clause 2 (c) of the SPA. Petitioners moved to dismiss the Complaint on the ground that it violated the prohibition on forum-shopping. Respondent CCC had allegedly made the same claim it was raising in another action, which involved the same parties and which was filed earlier before the International Chamber of Commerce. After the trial court denied the Motion to Dismiss, petitioners elevated the matter before the Court of Appeals. In the meantime, to avoid being in default and without prejudice to the outcome of their appeal, petitioners filed their Answer and Compulsory Counterclaims ad Cautelam before the trial court. In their Answer, they denied the allegations in the Complaint. They prayed -- by way of compulsory counterclaims against Respondent CCC, its majority stockholder and president Gregory T. Lim, and its corporate secretary Anthony A. Mariano -- for the sums of (a) P2,700,000 each as actual damages, (b) P100,000,000 each as exemplary damages, (c) P100,000,000 each as moral damages, and (d) P5,000,000 each as attorney’s fees plus costs of suit. Petitioners alleged that CCC, through Lim and Mariano, had filed the “baseless” Complaint in Civil Case No. Q-00-41103 and procured the Writ of Attachment in bad faith. Relying on this Court’s pronouncement in Sapugay v. CA, petitioners prayed that both Lim and Mariano be held “jointly and solidarily” liable with Respondent CCC. On behalf of Lim and Mariano who had yet to file any responsive pleading, CCC moved to dismiss petitioners’ compulsory counterclaims on grounds that essentially constituted the very issues for resolution in the instant Petition.

On May 22, 2002, the Regional Trial Court of Quezon City (Branch 80) dismissed petitioners’ counterclaims for several reasons, among which were the following: a) the counterclaims against Respondents Lim and Mariano were not compulsory; b) the ruling in Sapugay was not applicable; and c) petitioners’ Answer with Counterclaims violated procedural rules on the proper joinder of causes of action. Issue: Whether or not the RTC gravely erred in ruling petitioners’ counterclaims against Respondents Lim Mariano are not compulsory; and whether or not counterclaim for damages against Respondents CCC, Lim Mariano is “joint and solidary,” in character.

that and the and

Ruling: In relation to the first issue, the court held using the “compelling test of compulsoriness,” that, clearly, the recovery of petitioners’ counterclaims is contingent upon the case filed by respondents; thus, conducting separate trials thereon will result in a substantial duplication of the time and effort of the court and the parties. On the second issue, the court cited that obligations may be classified as either joint or solidary. “Joint” or “jointly” or “conjoint” means mancum or mancomunada or pro rata obligation; on the other hand, “solidary obligations” may be used interchangeably with “joint and several” or “several.” Thus, petitioners’ usage of the term “joint and solidary” is confusing and ambiguous. The ambiguity in petitioners’ counterclaims notwithstanding, respondents’ liability, if proven, is solidary. This characterization finds basis in Article 1207 of the Civil Code, which provides that obligations are generally considered joint, except when otherwise expressly stated or when the law or the nature of the obligation requires solidarity. However, obligations arising from tort are, by their nature, always solidary 75


In a “joint” obligation, each obligor answers only for a part of the whole liability; in a “solidary” or “joint and several” obligation, the relationship between the active and the passive subjects is so close that each of them must comply with or demand the fulfillment of the whole obligation. The fact that the liability sought against the CCC is for specific performance and tort, while that sought against the individual respondents is based solely on tort does not negate the solidary nature of their liability for tortuous acts alleged in the counterclaims. Article 1211 of the Civil Code is explicit on this point: o “Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions.” The solidary character of respondents’ alleged liability is precisely why credence cannot be given to petitioners’ assertion. According to such assertion, Respondent CCC cannot move to dismiss the counterclaims on grounds that pertain solely to its individual co-debtors. In cases filed by the creditor, a solidary debtor may invoke defenses arising from the nature of the obligation, from circumstances personal to it, or even from those personal to its co-debtors. Article 1222 of the Civil Code provides: o A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible.

The act of Respondent CCC as a solidary debtor -- that of filing a motion to dismiss the counterclaim on grounds that pertain only to its individual co-debtors -- is therefore allowed. However, a perusal of its Motion to Dismiss the counterclaims shows that Respondent CCC filed it on behalf of Co-respondents Lim and Mariano; it did not pray that the counterclaim against it be dismissed. Be that as it may, Respondent CCC cannot be declared in default. Jurisprudence teaches that if the issues raised in the compulsory counterclaim are so intertwined with the allegations in the complaint, such issues are deemed automatically joined. Counterclaims that are only for damages and attorney’s fees and that arise from the filing of the complaint shall be considered as special defenses and need not be answered. While Respondent CCC can move to dismiss the counterclaims against it by raising grounds that pertain to individual defendants Lim and Mariano, it cannot file the same Motion on their behalf for the simple reason that it lacks the requisite authority to do so. A corporation has a legal personality entirely separate and distinct from that of its officers and cannot act for and on their behalf, without being so authorized. Thus, unless expressly adopted by Lim and Mariano, the Motion to Dismiss the compulsory counterclaim filed by Respondent CCC has no force and effect as to them. Respondent CCC or any of the three solidary debtors (CCC, Lim or Mariano) may include, in a Motion to Dismiss, defenses available to their co-defendants; nevertheless, the same Motion cannot be deemed to have been filed on behalf of the said codefendants.

76


Rivelisa Realty v First Sta. Clara (2014) Perlas-Bernabe, J. Re: According to Sanction for Breach DOCTRINE: Quantum meruit means that, in an action for work and labor, payment shall be made in such amount as the plaintiff reasonably deserves FACTS: Rivelisa Realty entered into a JVA with First Sta. Clara for the construction and development of a residential subdivision located in Cabanatuan City (project). According to its terms: 

First Sta. Clara was to assume the horizontal development works in the remaining 69% undeveloped portion of the project owned by Rivelisa Realty, and complete the same within twelve (12) months from signing.

During the course of the project, First Sta. Clara hired a subcontractor to perform the horizontal development work as well as the additional works on the riprap and the elevation of the road embankment. Since First Sta. Clara ran out of funds after only two (2) months of construction, Rivelisa Realty was forced to shoulder part of the payment due to the subcontractor. First Sta. Clara manifested its intention to back out from the JVA and to discontinue operations when Rivelisa Realty refused to advance any more funds until 60% of the project had been accomplished. Rivelisa Realty readily agreed to release First Sta. Clara from the JVA and estimated its actual accomplishment at P4,000,000.00. First Sta. Clara, however, insisted on a valuation of its accomplished works at P 4,578,142.10, which, less the cash advances and subcontractor’s fees, should leave a net reimbursable amount of P3,000,000.00 in its favor.



Upon its completion, 60% of the total subdivided lots shall be transferred in the name of First Sta. Clara.



Also, since 31% of the project had been previously developed by Rivelisa Realty which was assessed to have an aggregate worth of P10,000,000.00, it was agreed that First Sta. Clara should initially use its own resources (in the same aggregate amount of P10,000,000.00) before it can start claiming additional funds from the pre-sale of the 31% developed lots.

Rivelisa Realty agreed to reimburse First Sta. Clara the amount of P3,000,000.00, emphasizing that the amount is actually over and beyond its obligation under the JVA. However, the reimbursable amount of P 3,000,000.00 remained unpaid despite several demands. Hence, First Sta. Clara filed a complaint for rescission of the JVA against Rivelisa Realty before the RTC, claiming the payment of damages for breach of contract and delay in the performance of an obligation. For its part, Rivelisa Realty asserted that it was not obligated to pay First Sta. Clara any amount at all since the latter had even failed to comply with its obligation to initially spend the equivalent amount of P10,000,000.00 on the project before being entitled to cash payments.



40% of the cost of additional works not originally part of the JVA was to be shouldered by Rivelisa Realty, while 60% by First Sta. Clara.

RTC dismissed the complaint. CA overturned the lower court’s decision and ruled that First Sta. Clara is entitled to compensation.

77


ISSUE: Whether First Sta. Clara is entitled to compensation for the development works it had accomplished although it failed to fulfill its entire obligation under the agreement.

Lambert v Fox

HELD: YES. The Court concurs with the CA that First Sta. Clara is entitled to be compensated for the development works it had accomplished on the project based on the principle of quantum meruit. Case law instructs that under this principle, a contractor is allowed to recover the reasonable value of the thing or services rendered despite the lack of a written contract, in order to avoid unjust enrichment. Quantum meruit means that, in an action for work and labor, payment shall be made in such amount as the plaintiff reasonably deserves. The measure of recovery should relate to the reasonable value of the services performed because the principle aims to prevent undue enrichment based on the equitable postulate that it is unjust for a person to retain any benefit without paying for it. In this case, it is undisputed that First Sta. Clara already performed certain works on the project with an estimated value of P4,578, 152.10. Clearly, to completely deny it payment for the same would result in Rivelisa Realty's unjust enrichment at the former' s expense. Besides, as may be gleaned from the parties' correspondence, Rivelisa Realty obligated itself to unconditionally reimburse First Sta. Clara the amount of P3,000,000.00 (representing First Sta. Clara's valuation of its accomplished works at P4,578,152.10, less the cash advances and subcontractor's fees) after the JV A had already been terminated by them through mutual assent. As such, Rivelisa Realty cannot unilaterally renege on its promise by citing First Sta. Clara's non-fulfillment of the terms and conditions of the terminated JVA. For all these reasons, the CA' s ruling must be upheld.

Doctrine: The party to whom payment of the penalty is to be made is entitled to recover the sum stipulated without the necessity of proving damages.

Obligations with a penal clause

Facts: In 1911, the creditors of John R. Edgar & Co., including the plaintiff and the defendant, agreed to take over the business, incorporate it and accept stock therein in payment of their respective credits. The plaintiff and the defendant became the 2 largest stockholders in the new corporation called John R. Edgar & Co., Inc. After the incorporation was completed, plaintiff and defendant entered into an agreement wherein the parties mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any part of their present holdings of stock, till after 1 year. Either party violating this agreement shall pay to the other P1,000 as liquidated damages, unless previous consent in writing to such sale, transfer, or other disposition be obtained. The defendant Fox on October 19, 1911, sold his stock to E. C. McCullough, a strong competitor. This sale was made by the defendant against the protest of the plaintiff and with the warning that he would be held liable under the contract. In fact, the defendant offered to sell his shares of stock to the plaintiff for the same sum that McCullough was paying them less P1,000, the penalty specified in the contract. The trial court ruled in favor of Fox. Fox urges that the plaintiff cannot recover because he did not prove damages, and cites numerous American authorities to the effect that because stipulations for liquidated damages are generally in excess of actual damages and so work a hardship upon the party in default, courts are strongly inclined to treat all such agreements as imposing a penalty and to allow a recovery for actual damages only. He also cites authorities holding that a penalty, as such, will not be enforced and that the party suing, in 78


spite of the penalty assigned, will be put to his proof to demonstrate the damages actually suffered by reason of defendants wrongful act or omission.

SSS Moonwalk

Issue: Whether or not plaintiff may recover only upon proof of damages.

TOPIC: According to Sanction for Breach; Obligations with a Penal Clause, NCC 2226-2228

Ruling: No. In this jurisdiction penalties provided in contracts of this character are enforced. It is the rule that parties who are competent to contract may make such agreements within the limitations of the law and public policy as they desire, and that the courts will enforce them according to their terms. The only case recognized by the Civil Code in which the court is authorized to intervene for the purpose of reducing a penalty stipulated in the contract is when the principal obligation has been partly or irregularly fulfilled and the court can see that the person demanding the penalty has received the benefit of such or irregular performance. In such case the court is authorized to reduce the penalty to the extent of the benefits received by the party enforcing the penalty.

Doctrine: There has been a waiver of the penal clause as it was not demanded before the full obligation was fully paid and extinguished.

In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal results are concerned. Whatever differences exists between them as a matter of language, they are treated the same legally. In either case the party to whom payment is to be made is entitled to recover the sum stipulated without the necessity of proving damages. Indeed one of the primary purposes in fixing a penalty or in liquidating damages, is to avoid such necessity.

G.R. No. 73345, April 7, 1993

Facts: "On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of First Instance of Rizal against Moonwalk Development & Housing Corporation, Moonwalk for short, alleging that the former had committed an error in failing to compute the 12% interest due on delayed payments on the loan of Moonwalk — resulting in a chain of errors in the application of payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on the said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979. Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain the truth but failed to do so. The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving both parties thirty (30) days within which to submit a stipulation of facts. The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on September 19, 1980 of the following stipulation of Facts: "1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of 79


developing and constructing a housing project in the provinces of Rizal and Cavite; "2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973; "3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D' providing for restructuring of the payment of the released amount of P9,595,000.00. "4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated Construction and Surveys Corporation, Philippine Model Homes Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos, as solidary obligors; "5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and Rosita U. Alberto; "6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS for defendant; "7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H' on October 9, 1979 and October 11, 1979 respectively.

"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing defendant. "9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid its obligations to SSS; "10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O' inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to the plaintiff are admitted. "Manila for Pasay City, September 2, 1980." 2 On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and by the latter's act of cancelling the real estate mortgages executed in its favor by defendant Moonwalk. The Motion for Reconsideration filed by SSS with the trial court was likewise dismissed by the latter. These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?" 3 As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished and affirmed the trial court. Issue: Whether or not the penalty is demandable even after the extinguishment of the principal obligation? Held: No 80


Ratio: There has been a waiver of the penal clause as it was not demanded before the full obligation was fully paid and extinguished. Default begins from the moment the creditor demands the performance of the obligation. In this case, although there were late amortizations there was no demand made by SSS for the payment of the penalty hence Moonwalk is not in delay in the payment of the penalty. No delay occurred and there was no occasion when the penalty became demandable and enforceable. Since there was no default in the performance of the main obligation-payment of the loan- SSS was never entitled to recover any penalty. If the demand for the payment of the penalty was made prior to the extinguishment of the obligation which are: 1. the principal obligation 2. The interest of 12% on the principal obligation 3.The penalty of 12% for late payment for after demand, Moonwalk would be in delay and therefore liable for the penalty.

Robes-Francisco v. CFI (October 30, 2978) Topic: Obligations with a Penal Clause Doctrine: To be considered an obligation with a penal clause, the clause must actually convey a penalty. Otherwise, Art. 1226 of the Civil Code is not applicable. Facts: May 1962- petitioner company agreed to sell a parcel of land to Lolita Millan worth P3,864 payable in installments. She complied with her obligation finishing the payment on December 21, 1971. She made repeated demands for the company to execute the deed of sale and transfer certificate title. It was stipulated in their contract that this should be done within six months after the full payment was made. If not, the vendee is entitled to refund with4% interest per annum. The company failed to comply so Millan filed against them for specific performance and damages. She asked that the deed of absolute sale be executed as well as the transfer certificate title, or if not, pay her the present value of the land which was around P27,000, and to pay her for damages. Petitioner contends that the deed of absolute sale executed between the parties stipulates that should the vendor fail to issue the transfer certificate of title within six months from the date of full payment, it shall refund to the vendee the total amount paid for with interest at the rate of 4% per annum, hence, the vendee is bound by the terms of the provision and cannot recover more than what is agreed upon. Presumably, petitioner in invoking Article 1226 of the Civil Code which provides that in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. During trial, the court found that the company could not execute the deed of sale nor the transfer certificate title because the same land was mortgaged to the GSIS to secure a prior 81


obligation of P10,000,000. Millan asks for the compensatory damages despite the return rate of 4%interest in the contract. Issue: WON Millan should be entitled to the P27,000 nominal damages despite the stipulation in the contract of the 4% interest in the event of delay or failure to deliver. Held: No. The foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the clause in question were to be considered as a penal clause. Nevertheless, for very obvious reasons, said clause does not convey any penalty, for even without it, pursuant to Article 2209 of the Civil Code, the vendee would be entitled to recover the amount paid by her with legal rate of interest which is even more than the 4% provided for in the clause. It is therefore inconceivable that the aforecited provision in the deed of sale is a penal clause which will preclude an award of damages to the vendee Millan. In fact the clause is so worded as to work to the advantage of petitioner corporation. Though Millan failed to present evidence on the amount of damage caused to her, she is still entitled to nominal damages because her right to acquire the land she bought was violated. As the company acted in neglect, they are to be held liable for damages to Millan. However, her right to claim the damages is limited because the contract already covers for compensatory damages in such an occasion of non-performance on the part of the company.

Metro Concast Steel Corp., et al. v. Allied Bank Corporation G.R. No. 177921, December 4, 2013 Extinguishment of Obligation FACTS Article 1231 of the Civil Code states that obligations are extinguished either by payment or performance, the loss of the thing due, the condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor, compensation or novation. Metro Concast, a engaged in the business of manufacturing steel, through its officers, obtained several loans from Allied Bank. Petitioners failed to settle their obligations, hence, Allied Bank, sent them demand letters, seeking payment of the total amount of P51,064,093.62, but to no avail. Thus, Allied Bank was prompted to file a complaint for collection of sum of money (subject complaint) against petitioners before the RTC. In order to settle their debts with Allied Bank, petitioners offered the sale of Metro Concast’s remaining assets, consisting of machineries and equipment, to Allied Bank, which the latter, however, refused. Instead, Allied Bank advised them to sell the equipment and apply the proceeds of the sale to their outstanding obligations. Accordingly, petitioners offered the equipment for sale, but since there were no takers, the equipment was reduced into ferro scrap or scrap metal over the years. In 2002, Peakstar Oil Corporation (Peakstar), expressed interest in buying the scrap metal. During the negotiations with 82


Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s legal department, acted as the latter’s agent. Eventually, with the alleged conformity of Allied Bank, through Atty. Saw, a Memorandum of Agreement dated November 8, 2002 (MoA) was drawn between Metro Concast, represented by petitioner and Peakstar. Unfortunately, Peakstar reneged on all its obligations under the MoA. Now, petitioners essentially argue that their loan obligations to Allied Bank had already been extinguished due to Peakstar’s failure to perform its own obligations to Metro Concast pursuant to the MoA. Issue: Whether the loan obligations incurred by the petitioners under the subject promissory note and various trust receipts have already been extinguished.

contracts should be treated separately and distinctly from each other, such that the existence, performance or breach of one would not depend on the existence, performance or breach of the other. In the foregoing respect, the issue on whether or not Allied Bank expressed its conformity to the assets sale transaction between Metro Concast and Peakstar (as evidenced by the MoA) is actually irrelevant to the issues related to petitioners’ loan obligations to the bank. Besides, as the CA pointed out, the fact of Allied Bank’s representation has not been proven in this case and hence, cannot be deemed as a sustainable defense to exculpate petitioners from their loan obligations to Allied Bank. Now, anent petitioners’ reliance on force majeure, suffice it to state that Peakstar’s breach of its obligations to Metro Concast arising from the MoA cannot be classified as a fortuitous event under jurisprudential formulation.

Ruling: Article 1231 of the Civil Code states that obligations are extinguished either by payment or performance, the loss of the thing due, the condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor, compensation or novation. At the outset, the Court must dispel the notion that the MoA would have any relevance to the performance of petitioners’ obligations to Allied Bank. The MoA is a sale of assets contract, while petitioners’ obligations to Allied Bank arose from various loan transactions. Absent any showing that the terms and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the MoA, said 83


ARCO Pulp v Lim (2014) Leonen, J. Re: Extinguishment of obligations DOCTRINE Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may be implied only if the old and new contracts are incompatible on every point. FACTS Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business. He delivered scrap paper to ARCO. The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent value. Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check. The check was however dishonored. Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement where Arco Pulp and Paper bound themselves to deliver their finished products to Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw materials would be supplied by Lim, through his company, Quality Paper and Plastic Products. Lim sent a letter to Arco Pulp and Paper demanding payment of the amount of 7,220,968.31, but no payment was made to him. Lim sued ARCO for collection of sum of money. RTC dismissed

the case on the basis that when ARCO and Eric Sy entered into the memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s obligation to Lim. CA overturned the decision, hence this case. Petitioners argue that the execution of the memorandum of agreement constituted a novation of the original obligation since Eric Sy became the new debtor of respondent. Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no proper novation in this case. ISSUE Whether the obligation between the parties was extinguished by novation HELD The memorandum ofagreement did not constitutea novation of the originalcontract. The trial court erroneously ruled that the execution of the memorandum of agreement constituted a novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to deliver the finished products to a third person, it did not novate the original obligation between the parties. Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or when there is subrogation of the creditor. It occurs only when the new contract declares so "in unequivocal terms" or that "the old and the new obligations be on every point incompatible with each other." In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from — and may even be made without the knowledge of — the debtor, since it consists of a third person’s assumption of the obligation. As such, it 84


logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the debtor require the consent of the creditor. Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is made either by changing the object or the principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal novation. For novation to take place, the following requisites must concur: 1) There must be a previous valid obligation. 2) The parties concerned must agree to a new contract. 3) The old contract must be extinguished. 4) There must be a valid new contract. Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point. The test of incompatibility is whether the two obligations can stand together, each one with its own independent existence. Because novation requires that it be clear and unequivocal, it is never presumed, thus: In the civil law setting, novatio is literally construed as to

make new. So it is deeply rooted in the Roman Law jurisprudence, the principle — novatio non praesumitur —that novation is never presumed.At bottom, for novation tobe a jural reality, its animus must be ever present, debitum pro debito — basically extinguishing the old obligation for the new one. (Emphasis supplied) There is nothing in the memorandum of agreement that states that with its execution, the obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead. The consent of the creditor must also be secured for the novation to be valid: Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the absence of any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old agreement. (Emphasis supplied) In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract need not be secured. This is clear from the first line of the memorandum, which states: Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . . If the memorandum of agreement was intended to novate the original agreement between the parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of agreement must also state in clear and unequivocal terms that it has replaced the original obligation of 85


petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case. Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged nor consented to the latter as his new debtor. These acts, when taken together, clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of P7,220,968.31.

PNB v Dee Dacion en pago Facts: Teresita Tan Dee bought from Prime East Properties Inc. (PEPI) a residential lot. PEPI assigned its rights over a property to the Armed Forces of the Philippines-Retirement and Separation Benefits System, Inc. (AFP-RSBS), which included the property purchased by Dee. PEPI obtained a loan from PNB, secured by a mortgage over several properties, including Dee’s property. After Dee’s full payment of the purchase price, a deed of sale was executed by PEPI and AFP-RSBS in Dee’s favor. Dee sought from PNB the delivery of the owner’s duplicate title over the property, to no avail. Thus, she filed with the HLURB a complaint for specific performance to compel delivery of the TCT by PNB, PEPI and AFP-RSBS, among others. HLURB ruled in favor of Dee, which was affirmed by its Board of Commissioners. On appeal, the Board of Commissioners’ decision was affirmed by the OP. Hence, PNB filed a petition for review with the CA, which, in turn, affirmed the OP decision. PEPI claims that the title over the property is one of the properties due for release by PNB as it has already been the subject of a MOA and dacion en pago entered into between them. The agreement was reached after PEPI filed a petition for rehabilitation, and contained the stipulation that PNB agreed to release the mortgage lien on fully paid mortgaged properties upon the issuance of the certificates of title over the dacioned properties. Issue: Whether or not PNB may be compelled to deliver the owner’s duplicate title over the property. 86


Ruling: Yes. The RTC order approved PEPI’s modified Rehabilitation Plan, which included the settlement of the latter’s unpaid obligations to its creditors by way of dacion of real properties. RTC also incorporated certain measures that were not included in PEPI’s plan, one of which is that "[t]itles to the lots which have been fully paid shall be released to the purchasers within 90 days after the dacion to the secured creditors has been completed." The agreement stipulated that as partial settlement of PEPI’s obligation with PNB, PEPI absolutely and irrevocably conveys by way of "dacion en pago" the properties listed therein, which included the lot purchased by Dee. PNB also committed to release its mortgage lien on fully paid Mortgaged Properties upon issuance of the certificates of title over the Dacioned Properties in the name of PNB. PNB undertook to cause the transfer of the certificates of title over the Dacioned Properties and the release of the Mortgaged Properties with reasonable dispatch.

There is nothing on record showing that the MOA has been nullified or is the subject of pending litigation; hence, it carries with it the presumption of validity. Consequently, the execution of the dation in payment effectively extinguished PEPI’s loan obligation to PNB insofar as it covers the value of the property purchased by Dee. This negates PNB’s claim that PEPI must first redeem the property before it can cancel or release the mortgage. As it now stands, PNB already stepped into the shoes of PEPI and there is no more reason for PNB to refuse the cancellation or release of the mortgage, for in accepting the assigned properties as payment of the obligation, the bank has assumed the risk that some of the assigned properties are covered by contracts to sell which must be honored under PD 957. Whatever claims the petitioner has against PEPI and AFPRSBS, monetary or otherwise, should not prejudice the rights and interests of Dee over the property, which she has already fully paid for.

Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. It is a mode of extinguishing an existing obligation and partakes the nature of sale as the creditor is really buying the thing or property of the debtor, the payment for which is to be charged against the debtor’s debt. Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement – express or implied, or by their silence – consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. 87


Magbanua v Uy (2005) G.R. No. 161003. May 6, 2005 TOPIC: Novation Doctrine: Rights may be waived through a compromise agreement, notwithstanding a final judgment that has already settledthe rights of the contracting parties. To be binding, the compromise must be shown to have been voluntarily,freely and intelligently executed by the parties, who had full knowledge of the judgment. Furthermore, it must not be contrary to law, morals, good customs and public policy. Facts: As a final consequence of the final and executory decision of the Supreme Court in Rizalino P. Uy v. Nationa lLabor Relations Commission, et. al. (GR No. 117983, September 6, 1996), hearings were conducted to determine the amount of wage differentials due the eight (8) complainants therein, now [petitioners]. As computed, the award amounted to P1,487,312.69 x x x. On February 3, 1997, [petitioners] filed a Motion for Issuance of Writ of Execution. On May 19, 1997, [respondent] Rizalino Uy filed a Manifestation requesting that the cases be terminated and closed, stating that the judgment award as computed had been complied with to the satisfaction of [petitioners].Said Manifestation was also signed by the eight (8) [petitioners]. Together with the Manifestation is a Joint Affidavit dated May 5, 1997 of [petitioners], attesting to the receipt of payment from [respondent] and waiving all other benefits due them in connection with their complaint.

On June 3, 1997, [petitioners] filed an Urgent Motion for Issuance of Writ of Execution wherein they confirmed that each of them received P40,000 from [respondent] on May 2, 1997. On June 9, 1997, [respondent] opposed the motion on the ground that the judgment award had been fully satisfied. In their Reply, [petitioners] claimed that they received only partial payments of the judgment award. On October 20, 1997, six of the eight petitioners filed a Manifestation requesting that the cases be considered closed and terminated as they are already satisfied of what they have received from respondent. Together with said Manifestation is a Joint Affidavit in the local dialect, of the six petitioners attesting that they have no more collectible amount from respondent and if there is any, they are abandoning and waiving the same. Labor Arbiter: issued an order denying the motion for issuance of writ of execution. NLRC: reversed, holding that a final and executory judgment can no longer be altered and that quitclaims and releases are normally frowned upon as contrary to public policy. CA: held that compromise agreements may be entered into even after a final judgment. Thus, petitioners validly released respondent from any claims, upon the voluntary execution of a waiver pursuant to the compromise agreement. Issues: Whether or not the final and executory judgment of the Supreme Court could be subject to compromise settlement;

88


Whether or not the petitioners’ affidavit waiving their awards in the labor case executed without the assistance of their counsel and labor arbiter is valid Held: 1. Yes A compromise agreement is a contract whereby the parties make reciprocal concessions in order to resolve their differences and thus avoid or put an end to a lawsuit. The issue involving the validity of a compromise agreement notwithstanding a final judgment is not novel. Jesalva v. Bautista upheld a compromise agreement that covered cases pending trial, on appeal, and with final judgment. The Court noted that Article 2040 impliedly allowed such agreements; there was no limitation as to when these should be entered into. There is no justification to disallow a compromise agreement, solely because it was entered into after final judgment. The validity of the agreement is determined by compliance with the requisites and principles of contracts, not by when it was entered into. As provided by the law on contracts, a valid compromise must have the following elements: (1) the consent of the parties to the compromise, (2) an object certain that is the subject matter of the compromise, and (3) the cause of the obligation that is established.

In the present factual milieu, compliance with the elements of a valid contract is not in issue. Petitioners do not challenge the factual finding that they entered into a compromise agreement with respondent. There are no allegations of vitiated consent. Instead, petitioners base their argument on the sole fact that the agreement was executed

despite a final judgment, which the Court had previously ruled to be allowed by law. The principle of novation supports the validity of a compromise after final judgment. Novation, a mode of extinguishing an obligation, is done by changing the object or principal condition of an obligation, substituting the person of the debtor, or surrogating a third person in the exercise of the rights of the creditor. For an obligation to be extinguished by another, the law requires either of these two conditions: (1) the substitution is unequivocally declared, or (2) the old and the new obligations are incompatible on every point. A compromise of a final judgment operates as a novation of the judgment obligation, upon compliance with either requisite. In the present case, the incompatibility of the final judgment with the compromise agreement is evident, because the latter was precisely entered into to supersede the former. 2. Yes The presence or the absence of counsel when a waiver is executed does not determine its validity. There is no law requiring the presence of a counsel to validate a waiver. The test is whether it was executed voluntarily, freely and intelligently; and whether the consideration for it was credible and reasonable. Where there is clear proof that a waiver was wangled from an unsuspecting or a gullible person, the law must step in to annul such transaction. In the present case, petitioners failed to present any evidence to show that their consent had been vitiated. The law is silent with regard to the procedure for approving a waiver after a case has been terminated. Relevant, however, is this reference to the NLRC’s New Rules of Procedure: “Should the parties arrive at any agreement as to the whole or any part of the dispute, the same shall be reduced to writing and signed by the parties and their respective counsel, or authorized representative, if any, before the Labor Arbiter. “The settlement shall be approved by the 89


Labor Arbiter after being satisfied that it was voluntarily entered into by the parties and after having explained to them the terms and consequences thereof. “A compromise agreement entered into by the parties not in the presence of the Labor Arbiter before whom the case is pending shall be approved by him, if after confronting the parties, particularly the complainants, he is satisfied that they understand the terms and conditions of the settlement and that it was entered into freely and voluntarily by them and the agreement is not contrary to law, morals, and public policy. ”This provision refers to proceedings in a mandatory/conciliation conference during the initial stage of the litigation. Such provision should be made applicable to the proceedings in the pre-execution conference, for which the procedure for approving a waiver after final judgment is not stated. There is no reason to make a distinction between the proceedings in mandatory/conciliation and those in preexecution conferences.

Phil. Charter v. Petroleum (2012) Topic: As to prestation; Novation Doctrine: Novation of a contract is never presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. Facts: On January 27, 1999, respondent Petroleum Distributors and Services Corporation (PDSC), through its president, Conrado P. Limcaco, entered into a building contract with N.C. Francia Construction Corporation (FCC), represented by its president and chief executive officer, Emmanuel T. Francia, for the construction of a four-story commercial and parking complex located at MIA Road corner Domestic Road, Pasay City, known as Park ‘N Fly Building (Park ‘N Fly). Under the contract, FCC agreed to undertake the construction of Park ‘N Fly for the price of ₱45,522,197.72. The parties agreed that the construction work would begin on February 1, 1999. Under the Project Evaluation and Review Technique Critical Path Method (PERT-CPM), the project was divided into two stages: Phase 1 of the construction work would be finished on May 17, 1999 and Phase 2 would begin on May 18, 1999 and finish on October 20, 1999. The project should be turned over by October 21, 1999. It was further stipulated that in the event FCC failed to finish the project within the period specified, liquidated damages equivalent to 1/10 of 1% of the contract price for every day of delay shall accrue in favor of PDSC. To ensure compliance with its obligation, FCC’s individual officers signed the Undertaking of Surety holding themselves personally liable for the accountabilities of FCC. Also, FCC procured Performance Bond amounting to ₱6,828,329.00 from petitioner Philippine Charter Insurance Corporation (PCIC) to 90


secure full and faithful performance of its obligation under the Building Contract.

a complaint impleading PCIC, claiming coverage under Performance Bond No. 31915 in the amount of ₱6,828,329.66.

The construction of the Park ‘N Fly started on February 1, 1999. Pursuant to the Building Contract, PDSC sourced out construction materials and subcontracted various phases of the work to help obtain the lowest cost of the construction and speed up the work of the project. These resulted in the reduction of the contract price. During the Phase 1 of the project, PDSC noticed that FCC was sixteen (16) days behind schedule. In a Letter, it reminded FCC to catch up with the schedule of the projected work path, or it would impose the penalty of 1/10 of the 1% of the contract price. The problem, however, was not addressed, as the delay increased to 30 days and ballooned to 60 days.

The PCIC denied liability contending that the contract was novated without its consent.

Consequently, on September 10, 1999, FCC executed a deed of assignment, assigning a portion of its receivables from Caltex Philippines, Inc. (Caltex), and a chattel mortgage, conveying some of its construction equipment to PDSC as additional security for the faithful compliance with its obligation. On even date, PDSC and FCC likewise executed a memorandum of agreement (MOA), wherein the parties agreed to revise the work schedule of the project. As a consequence, Performance Bond No. 31915 was extended up to March 2, 2000. For failure of FCC to accomplish the project within the agreed completion period, PDSC, in a letter informing FCC that it was terminating their contract based on Article 12, Paragraph 12.1 of the Building Contract. Subsequently, PDSC sent demand letters to FCC and its officers for the payment of liquidated damages amounting to ₱9,149,962.02 for the delay. In the same manner, PDSC wrote PCIC asking for remuneration pursuant to Performance Bond No. 31915. Despite notice, PDSC did not receive any reply from either FCC or PCIC, constraining it to file

Issue: WON the principal contract was novated when PDSC and FCC executed the September 10, 1999 MOA, without informing the surety, which, in effect, extinguished its obligation. Held: NO. A surety agreement has two types of relationship: (1) the principal relationship between the obligee and the obligor; and (2) the accessory surety relationship between the principal and the surety. The obligee accepts the surety’s solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in any material way the obligee’s relationship with the principal obligor. Neither does it make the surety an active party in the principal obligor-obligee relationship. It follows, therefore, that the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the obligor’s default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor. Furthermore, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and new obligation be in every point incompatible with each other. Novation of a contract is never presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. Undoubtedly, a surety is released from its obligation when there is a material alteration of the principal contract in connection with which the bond is given, such as a change which imposes a 91


new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form. In this case, however, no new contract was concluded and perfected between PDSC and FCC. A reading of the September 10, 1999 MOA reveals that only the revision of the work schedule originally agreed upon was the subject thereof. The parties saw the need to adjust the work schedule because of the various subcontracting made by PDSC. In fact, it was specifically stated in the MOA that “all other terms and conditions of the Building Contract of 27 January 1999 not inconsistent herewith shall remain in full force and effect.” There was no new contract/agreement which could be considered to have substituted the Building Contract.

ACE Foods, Inc. v. Micro Pacific (2013) G.R. No. 200602, December 11, 2013 Topic: Contract, NCC 1159 Doctrine: Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken Facts: ACE Foods is a domestic corporation engaged in the trading and distribution of consumer goods in wholesale and retail bases, while MTCL is one engaged in the supply of computer hardware and equipment. On September 26, 2001, MTCL sent a letter-proposal for the delivery and sale of the subject products to be installed at various offices of ACE Foods. Aside from the itemization of the products offered for sale, the said proposal further provides for the following terms, viz.: TERMS : Thirty (30) days upon delivery VALIDITY : Prices are based on current dollar rate and subject to changes without prior notice. DELIVERY : Immediate delivery for items on stock, otherwise thirty (30) to forty-five days upon receipt of [Purchase Order] WARRANTY : One (1) year on parts and services. Accessories not included in warranty. On October 29, 2001, ACE Foods accepted MTCL’s proposal and accordingly issued Purchase Order No. 100023 (Purchase 92


Order) for the subject products amounting to P646,464.00 (purchase price). Thereafter, or on March 4, 2002, MTCL delivered the said products to ACE Foods as reflected in Invoice No. 7733 (Invoice Receipt). The fine print of the invoice states, inter alia, that "[t]itle to sold property is reserved in MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of the terms and conditions of above and payment of the price" (title reservation stipulation). After delivery, the subject products were then installed and configured in ACE Foods’s premises. MTCL’s demands against ACE Foods to pay the purchase price, however, remained unheeded. Instead of paying the purchase price, ACE Foods sent MTCL a Letter dated September 19, 2002, stating that it "ha[s] been returning the [subject products] to [MTCL] thru [its] sales representative Mr. Mark Anteola who has agreed to pull out the said [products] but had failed to do so up to now." Eventually, or on October 16, 2002, ACE Foods lodged a Complaint against MTCL before the RTC, praying that the latter pull out from its premises the subject products since MTCL breached its "after delivery services" obligations to it, particularly, to: (a) install and configure the subject products; (b) submit a cost benefit study to justify the purchase of the subject products; and (c) train ACE Foods’s technicians on how to use and maintain the subject products. ACE Foods likewise claimed that the subject products MTCL delivered are defective and not working. For its part, MTCL, in its Answer with Counterclaim, maintained that it had duly complied with its obligations to ACE Foods and that the subject products were in good working condition when they were delivered, installed and configured in ACE Foods’s premises. Thereafter, MTCL even conducted a training course for ACE Foods’s representatives/employees; MTCL, however, alleged that there was actually no agreement as to the purported "after delivery

services." Further, MTCL posited that ACE Foods refused and failed to pay the purchase price for the subject products despite the latter’s use of the same for a period of nine (9) months. As such, MTCL prayed that ACE Foods be compelled to pay the purchase price, as well as damages related to the transaction. ISSUE: Whether or not ACE Foods is liable to pay Micro Pacific HELD: Yes A contract is what the law defines it to be, taking into consideration its essential elements, and not what the contracting parties call it. The real nature of a contract may be determined from the express terms of the written agreement and from the contemporaneous and subsequent acts of the contracting parties. However, in the construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued. The denomination or title given by the parties in their contract is not conclusive of the nature of its contents. The very essence of a contract of sale is the transfer of ownership in exchange for a price paid or promised. This may be gleaned from Article 1458 of the Civil Code which defines a contract of sale as follows: Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. Corollary thereto, a contract of sale is classified as a consensual contract, which means that the sale is perfected by mere consent. No particular form is required for its validity. 93


Upon perfection of the contract, the parties may reciprocally demand performance, i.e., the vendee may compel transfer of ownership of the object of the sale, and the vendor may require the vendee to pay the thing sold. In contrast, a contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the property despite delivery thereof to the prospective buyer, binds himself to sell the property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, i.e., the full payment of the purchase price. A contract to sell may not even be considered as a conditional contract of sale where the seller may likewise reserve title to the property subject of the sale until the fulfillment of a suspensive condition, because in a conditional contract of sale, the first element of consent is present, although it is conditioned upon the happening of a contingent event which may or may not occur.

stipulation, changed the complexion of the transaction from a contract of sale into a contract to sell. Records are bereft of any showing that the said stipulation novated the contract of sale between the parties which, to repeat, already existed at the precise moment ACE Foods accepted MTCL’s proposal. To be sure, novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. In either case, however, novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.

In this case, the Court concurs with the CA that the parties have agreed to a contract of sale and not to a contract to sell as adjudged by the RTC. Bearing in mind its consensual nature, a contract of sale had been perfected at the precise moment ACE Foods, as evinced by its act of sending MTCL the Purchase Order, accepted the latter’s proposal to sell the subject products in consideration of the purchase price of P646,464.00. From that point in time, the reciprocal obligations of the parties – i.e., on the one hand, of MTCL to deliver the said products to ACE Foods, and, on the other hand, of ACE Foods to pay the purchase price therefor within thirty (30) days from delivery – already arose and consequently may be demanded. On the issue of novation: The Court must dispel the notion that the stipulation anent MTCL’s reservation of ownership of the subject products as reflected in the Invoice Receipt, i.e., the title reservation 94


ARCO Pulp v Lim (2014) Leonen, J. Re: Extinguishment of obligations DOCTRINE Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may be implied only if the old and new contracts are incompatible on every point. FACTS Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business. He delivered scrap paper to ARCO. The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent value. Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check. The check was however dishonored. Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement where Arco Pulp and Paper bound themselves to deliver their finished products to Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw materials would be supplied by Lim, through his company, Quality Paper and Plastic Products. Lim sent a letter to Arco Pulp and Paper demanding payment of the amount of 7,220,968.31, but no payment was made to him. Lim sued ARCO for collection of sum of money. RTC dismissed

the case on the basis that when ARCO and Eric Sy entered into the memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s obligation to Lim. CA overturned the decision, hence this case.

Petitioners argue that the execution of the memorandum of agreement constituted a novation of the original obligation since Eric Sy became the new debtor of respondent. Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no proper novation in this case. ISSUE: Whether the obligation between the parties was extinguished by novation HELD The memorandum ofagreement did not constitutea novation of the originalcontract. The trial court erroneously ruled that the execution of the memorandum of agreement constituted a novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to deliver the finished products to a third person, it did not novate the original obligation between the parties. Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or when there is subrogation of the creditor. It occurs only when the new contract declares so "in unequivocal terms" or that "the old and the new obligations be on every point incompatible with each other." In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from — and may even be made without the knowledge of — the debtor, since it consists of a third person’s assumption of the obligation. As such, it 95


logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the debtor require the consent of the creditor. Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is made either by changing the object or the principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal novation. For novation to take place, the following requisites must concur: 1) There must be a previous valid obligation. 2) The parties concerned must agree to a new contract. 3) The old contract must be extinguished. 4) There must be a valid new contract. Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point. The test of incompatibility is whether the two obligations can stand together, each one with its own independent existence. Because novation requires that it be clear and unequivocal, it is never presumed, thus: In the civil law setting, novatio is literally construed as to

make new. So it is deeply rooted in the Roman Law jurisprudence, the principle — novatio non praesumitur —that novation is never presumed.At bottom, for novation tobe a jural reality, its animus must be ever present, debitum pro debito — basically extinguishing the old obligation for the new one. (Emphasis supplied) There is nothing in the memorandum of agreement that states that with its execution, the obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead. The consent of the creditor must also be secured for the novation to be valid: Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the absence of any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old agreement. (Emphasis supplied) In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract need not be secured. This is clear from the first line of the memorandum, which states: Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . . If the memorandum of agreement was intended to novate the original agreement between the parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of agreement must also state in clear and unequivocal terms that it has replaced the original obligation of 96


petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case. Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged nor consented to the latter as his new debtor. These acts, when taken together, clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of P7,220,968.31.

Philippine Commercial International Bank (PCIB) v Franco Time and place of performance Facts: Arturo Franco filed an action for damages against PCIB, alleging that he secured from PCIB trust indenture certificates and that despite demands, PCIB refused to return to Franco the trust amounts, plus interest. Franco’s request for payment was denied because all outstanding PCIBank trust indenture accounts were converted into common trust certificates, so that all such PCIBank trust indenture certificates have been rendered "null and void." RTC ruled in favor of Franco. Considering that the 4 TICs have not been replaced or cancelled, the RTC held that the relationship of express trust between PCIB and Franco still subsists at the time the latter demanded the withdrawal of his funds under them. CA affirmed the RTC, holding that PCIB failed to adduce any documentary evidence to establish the alleged fact that the 4 TICs were already paid or cancelled, or that Franco’s participation therein was already withdrawn. Issue: Whether or not the allegation of payment by PCIB on the subject trust certificate indentures extinguishes its obligation. Ruling: No. Jurisprudence abounds that, in civil cases, one who pleads payment has the burden of proving it. Even where the plaintiff must allege non-payment, the general rule is that the burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-payment. When the creditor is in possession of the document of credit, he need not prove nonpayment for it is presumed. The creditor's possession of the 97


evidence of debt is proof that the debt has not been discharged by payment. In this case, respondent's possession of the original copies of the subject TICs strongly supports his claim that petitioner Bank's obligation to return the principal plus interest of the money placement has not been extinguished. The TICs in the hands of respondent is a proof of indebtedness and a prima facie evidence that they have not been paid. Petitioner Bank could have easily presented documentary evidence to dispute the claim, but it did not. In its omission, it may be reasonably deduced that no evidence to that effect really exist. Worse, the testimonies of petitioner Bank's own witnesses, reinforce, rather than belie, respondent's allegations of non-payment.

Filinvest v Philippine Acetylene 111Scra 421 (1982) TOPIC: DACION EN PAGO Facts: The Philippine Acetylene Co., Inc. purchased from one Alexander Lim, as evidenced by a Deed of Sale, a motor vehicle described as Chevorlet, 1969 model, paying a down payment and the balance payable at 34 monthly installments. As security for the payment of said promissory note, PAC executed a chattel mortgage over the same motor vehicle in favor of said Alexander Lim.-Subsequently, Alexander Lim assigned to the Filinvest Finance Corporation all his rights, title, and interests in the promissory note and chattel mortgage by virtue of a Deed of Assignment. Thereafter, the Filinvest Finance Corporation, as a consequence of its merger with the Credit and Development Corporation assigned to the new corporation, Filinvest Credit Corporation, all its rights, title, and interests on the aforesaid promissory note and chattel mortgage, which, in effect, the payment of the unpaid balance owed by PAC to Alexander Lim was financed by Filinvest Credit Corporation such that Lim became fully paid. PAC failed to comply with the terms and conditions set forth in the promissory note and chattel mortgage since it had defaulted in the payment of nine successive installments. Filinvest Credit Corporation then sent a demand letter whereby its counsel demanded "that you (appellant) remit the aforesaid amount in full in addition to stipulated interest and charges or return the mortgaged property to my client at its office at 2133 Taft Avenue, Malate, Manila within five (5) days from date of this letter during office hours. " Replying thereto, PAC, thru its assistant generalmanager, wrote back advising Filinvest Credit Corporation of its 98


decision to "return the mortgaged property, which return shall be in full satisfaction of its indebtedness pursuant to Article 1484 of the New Civil Code." Accordingly, the mortgaged vehicle was returned Filinvest Credit Corporation to the together with the document "Voluntary Surrender with Special Power of Attorney To Sell" executed by PAC. Filinvest Credit Corporation wrote a letter to PAC informing the latter that Filinvest Credit Corporation cannot sell the motor vehicle as there were unpaid taxes on the said vehicle. On the last portion of the said letter, Filinvest Credit Corporation requested the PAC to update its account by paying the installments in arrears and accruing interest. Filinvest Credit Corporation, in a letter, offered to deliver back the motor vehicle to the PAC but the latter refused to accept it, so Filinvest Credit Corporation instituted an action for collection of a sum of money with damages. In its answer, PAC, while admitting the material allegations of the Filinvest Credit Corporation’s complaint, avers that Filinvest Credit Corporation has no cause of action against it since its obligation towards the Filinvest Credit Corporation was extinguished when in compliance with the Filinvest Credit Corporation's demand letter, it returned the mortgaged property to the Filinvest Credit Corporation, and that assuming arguendo that the return of the property did not extinguish its obligation, it was nonetheless justified in refusing payment since the Filinvest Credit Corporation is not entitled to recover the same due to the breach of warranty committed by the original vendorassignor Alexander Lim. LC: Ordered PAC to pay the outstanding unpaid obligation and to accept the delivery of the motor vehicle subject of the chattel mortgage. Issue:

Whether or not the return the return of the mortgaged property by the mortgagor to the mortgagee constituted dacion en pago or Dation in payment.

Held: The mere return of the mortgaged motor vehicle by the mortgagor, PAC, to the mortgagee, Filinvest Credit Corporation, does not constitute dation in payment or dacion en pago in the absence, express or implied of the true intention of the parties. Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of obligation. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale or innovation to have the effect of totally extinguishing the debt or obligation.-The evidence on the record fails to show that the mortgagee, the herein appellee, consented, or at least intended, that the mere delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as actual payment, more specifically dation in payment or dacion en pago. 99


The fact that the mortgaged motor vehicle was delivered to him does not necessarily mean that ownership thereof, as juridically contemplated by dacion en pago, was transferred from appellant to appellee. In the absence of clear consent of appellee to the proferred special mode of payment, there can be no transfer of ownership of the mortgaged motor vehicle from appellant to appellee. If at all, only transfer of possession of the mortgaged motor vehicle took place, for it is quite possible that appellee, as mortgagee, merely wanted to secure possession to forestall the loss, destruction, fraudulent transfer of the vehicle to third persons, or its being rendered valueless if left in the hands of the appellant.

Tan Shuy v. Sps. Maulawin (F2012) Topic: Dacion En Pago Doctrine: Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement – express or implied, or by their silence – consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. Facts: Tan Shuy is engaged in the business of buying copra and corn in the 4th district of Quezon Province. According to his son, Vicente Tan, whenever they would buy copra or corn from crop sellers, they would prepare and issue a pesada1 in their favor. When a pesada contained the annotation “pd” on the total amount of the purchase price, it meant that the crop delivered had already been paid for by Tan Shuy. Guillermo Maulawin is a farmer businessman engaged in buying and selling copra and corn. On July 10, 1997, Tan Shuy extended a loan of P420K to Guillermo. In consideration thereof, Guillermo obligated himself to pay the loan and to sell lucad or copra to petitioner. Below is a reproduction of the contract: No

2567

Lopez, Quezon 1997

July 10,

Tinanggap ko kay G. TAN SHUY ang halagang ……………………………………………………………. (P420,000.00) salaping Filipino. Inaako ko na isusulit sa kanya ang aking LUCAD at babayaran ko ang nasabing halaga. Kung hindi ako makasulit ng LUCAD o makabayad bago sumapit ang ……………………., 19 …… maaari niya akong ibigay sa may kapangyarihan. Kung ang pagsisingilan ay makakarating sa Juzgado ay 1

A pesada is a document containing details of the transaction, including the date of sale, the weight of the crop delivered, the trucking cost, and the net price of the crop 100


sinasagutan ko ang

lahat ng kaniyang gugol. [Sgd. by respondent] …………………………………….

P………………………................

Lagda

The transactions between Tan Shuy and Guillermo were coursed through Tan Shuy’s daughter Elena. She served as cashier in the business of Tan Shuy, who primarily prepared and issued the pesada. When she’s absent, Vicente would issue the pesada. Vicente also helped Tan Shuy in buying copra and granting loans to customers [copra sellers]. According to him, part of their agreement with Guillermo was that they would put the annotation “sulong” on the pesada when partial payment on the loan had been made. But despite repeated demands, Guillermo remitted only P23k in August 1998 and P5.5k in October 1998, or atotal of P28.5K. Claiming that Maulawin had an outstanding balance of P391.5K and convinced that he no longer had any intention to pay, Ran Shuy went to the Lupon Tagapamayapa. Failing to reach a settlement, he filed acomplaint before the RTC. Maulawin’s Arguments: 1. Loan had already been paid in full. 2. He continuously delivered and sold copra to petitioner from April 1998 to April 1999. An oral arrangement that the net proceeds thereof shall be applied as installment payments for the loan was made. His deliveries amounted to P420,537.68 worth of copra. 3. To bolster his claim, he presented copies of pesadas issued by Elena and Vicente. The pesadas did not contain

the notation "pd," which meant that actual payment of the net proceeds from copra deliveries was not given to him, but was instead applied as loanpayment. 4. Tan Shuy filed a complaint because he got angry when Maulawin sold copra to other copra buyers. RTC: The net proceeds from Guillermo's copra deliveries -represented in the pesadas, which did not bear the notation "pd" should be applied as installment payments for the loan. It Gave credence to the pesadas, as their due execution and authenticity was established by Elena and Vicente. But the RTC did not credit the net proceeds from 12 pesadas, as they were deliveries for corn and not copra. Guillermo testified that it was the net proceeds from the copra deliveries to be applied as installment payment for the loan. Thus, P41,585.25, which corresponded to the net proceeds from corn deliveries, should be deducted from the amount of P420,537.68claimed by Guillermo to be the total value of his copra deliveries. There exists, therefore, a balance of P41,047.57 in Guillermo’s loan. CA: Affrirmed RTC Issue: WON the delivery of copra amounted to installment payments for the loan obtained by Guillermo from Tan Shuy. Held: YES. Tan Shuy’s Arguments: Guillermo undertook two separate obligations: 1) Pay for the loan in cash; and 2) Sell lucad or copra. Since the written agreement did not specifically provide for the application of the net proceeds from the deliveries for the loan, Tan Shuy argues that he cannot be compelled to accept copra as payment for the loan. The pesadas did not specifically indicate that the net proceeds from the copra deliver is were to be used as installment payments for the loan. Guillermo’s copra deliveries were duly 101


paid in cash. The pesadas were in fact documentary receipts for those payments.

There was partial payment every time Guillermo delivered copra to Tan Shuy, whenever he chose not to collect the net proceeds of his copra deliveries, and instead applied the collectible as installment payments for his loan from Tan Shuy.

Supreme Court Ruling: Pursuant to Art. 1232 of the Civil Code, an obligation is extinguished by payment or performance. There is payment when there is delivery of money or performance of an obligation. Art. 1245 provides for a special mode of payment known as dation in payment. Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement – express or implied, or by their silence – consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. In this regard, the RTC made the following findings: a) Pesadas from April 1998 to April 1999shows that Guillermo only gets the payments for trucking while the total amount which represent the total purchase price for the copras that he delivered to the plaintiff were all given to Elena Tan Shuy as installments for the loan he owed to plaintiff. Such claim was bolstered by the testimony of Apolinario Cariño which affirmed that he also sold copras to the plaintiff Tan Shuy. Guillermo also said that he incurred indebtedness to Tan Shuy and whenever he delivered copras the amount of the copras sold were applied as payments to his loan. The CA fully subscribed to the findings of the RTC. The subsequent arrangement between Tan Shuy and Guillermo can thus be considered as one in the nature of dation in payment. 102


Reparations Commission Fishing (1978) Application of Payment

v

Universal

Deep

Sea

Doctrine: The rules contained in Articles 1252 to 1254 of judgment, Civil Code apply to a person owing several debts of judgment, same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular, which in this case is the full and faithful compliance with the terms of the contract of conditional purchase and sale of reparations goods. Facts: 

The Reparations Commission awarded six (6) trawl boats to the Universal Deep-Sea Fishing Corporation which were delivered two at a time, each delivery being covered by a Contract of Conditional Purchase and Sale providing for identical schedules of payments.



The first installment representing 10% of the total cost was to be paid 24 months after delivery and the balance of the total cost to be paid in ten (10) equal installments, which, in the schedule were numbered as "1", "2", "3", etc., the first of which was due one year after the first installment.



When the Reparations Commission sued Universal and its surety to recover various amounts of money due under the contracts, they claimed that the amounts were not yet due and demandable.



Universal alleged that there was an obscurity in the terms of the contracts in question which was caused by the plaintiff as to the amounts and due dates of the first

installments which should have been first fixed before the creditor could demand its payment from the debtor, specifically referring to the schedule of payments which allegedly indicated two (2) due dates for the payment of the first installment. Issue: Whether there was an obscurity in the terms of the contracts which was caused by the plaintiff as to the amounts and due dates of the first installments which should have been first fixed before the creditor could demand its payment from the debtor Ruling: The Supreme Court found the terms of the contracts clear and left no doubt as to the intent of the contracting parties that the first installment due 24 months after delivery was different from the first ten (10) equal yearly installment of the balance of the purchase price (which are not designated as "first", "second", "third", etc., installments). The obligation included the payment, not only of the first installment in the amount of P53,643.00, but also of the ten (10) equal yearly installments of P56,597.20 per annum. The amount of P10,000.00 was, indeed, deducted from judgment, amount of P53,643.00, but then judgment, first of judgment, ten (10) equal yearly installments had also accrued, hence, no error was committed in holding judgment, surety company to judgment, full extent of its undertaking. The rules contained in Articles 1252 to 1254 of judgment, Civil Code apply to a person owing several debts of judgment, same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular, which in this case is the full and faithful compliance with the terms of the contract of conditional purchase and sale of reparations goods. 103


Paculdo v Regalado (2000) Pardo, J. Re: Application of Payment DOCTRINE Under the law, if the debtor did not declare at the time he made the payment to which of his debts with the creditor the payment is to be applied, the law provided the guideline; i.e. no payment is to be applied to a debt which is not yet due and the payment has to be applied first to the debt which is most onerous to the debtor. FACTS: On December 27, 1990, petitioner Nereo Paculdo and respondent Bonifacio Regalado entered into a contract of lease over a parcel of land with a wet market building, located at Fairview Park, Quezon City. The contract was for twenty five (25) years, commencing on January 1, 1991 and ending on December 27, 2015. For the first five (5) years of the contract beginning December 27, 1990, Nereo would pay a monthly rental of P450,000, payable within the first five (5) days of each month with a 2% penalty for every month of late payment. Aside from the above lease, petitioner leased eleven (11) other property from the respondent, ten (10) of which were located within the Fairview compound, while the eleventh was located along Quirino Highway Quezon City. Petitioner also purchased from respondent eight (8) units of heavy equipment and vehicles in the aggregate amount of Php 1, 020,000. On account of petitioner’s failure to pay P361, 895.55 in rental for the month of May, 1992, and the monthly rental of P450, 000.00 for the months of June and July 1992, the respondent sent two demand letters to petitioner demanding payment of the back rentals, and if no payment was made within fifteen (15) 104


days from the receipt of the letter, it would cause the cancellation of the lease contract.

objection, as evidenced by his signature signifying his conformity thereto.

Without the knowledge of petitioner, on August 3, 1992, respondent mortgaged the land subject of the lease contract, including the improvements which petitioner introduced into the land amounting to P35, 000,000.00, to Monte de Piedad Savings Bank, as a security for a loan.

Meanwhile, in an earlier letter, dated July 15, 1991, respondent informed petitioner that the payment was to be applied not only to petitioner’s accounts under the subject land and the Quirino lot but also to heavy equipment bought by the latter from respondent. Unlike in the November letter, the July letter did not contain the signature of petitioner.

On August 12, 1992, and the subsequent dates thereafter, respondent refused to accept petitioner’s daily rental payments. Subsequently, petitioner filed an action for injunction and damages seeking to enjoin respondents from disturbing his possession of the property subject of the lease contract. On the same day, respondent also filed a complaint for ejectment against petitioner. The lower court rendered a decision in favor of the respondent, which was affirmed in toto by the Court of Appeals. ISSUE Whether the petitioner was truly in arrears in the payment of rentals on the subject property at the time of the filing of the complaint for ejectment. HELD NO, the petitioner was not in arrears in the payment of rentals on the subject property at the time of the filing of the complaint for ejectment. As found by the lower court there was a letter sent by respondent to herein petitioner, dated November 19, 1991, which states that petitioner’s security deposit for the Quirino lot, be applied as partial payment for his account under the subject lot as well as to the real estate taxes on the Quirino lot. Petitioner interposed no

Petitioner submits that his silence is not consent but is in fact a rejection. As provided in Article 1252 of the Civil Code, the right to specify which among his various obligations to the same creditor is to be satisfied first rest with the debtor. In the case at bar, at the time petitioner made the payment, he made it clear to respondent that they were to be applied to his rental obligations on the Fairview wet market property. Though he entered into various contracts and obligations with respondent, all the payments made, about P11,000,000.00 were to be applied to rental and security deposit on the Fairview wet market property. However, respondent applied a big portion of the amount paid by petitioner to the satisfaction of an obligation which was not yet due and demandable- the payment of the eight heavy equipment. Under the law, if the debtor did not declare at the time he made the payment to which of his debts with the creditor the payment is to be applied, the law provided the guideline; i.e. no payment is to be applied to a debt which is not yet due and the payment has to be applied first to the debt which is most onerous to the debtor. The lease over the Fairview wet market is the most onerous to the petitioner in the case at bar. 105


Petition granted.

Meat Packing Corporation of the Philippines (MPCP) v Sandiganbayan Tender of payment and consignation Facts: MPCP is a corporation wholly owned by the GSIS. It is the owner of 3 parcels of land, as well as the meat processing and packing plant thereon. MPCP and the Philippine Integrated Meat Corporation (PIMECO) entered into an Agreement whereby MPCP leased to PIMECO, under a lease-purchase arrangement, its property. The Agreement contained rescission clauses. On March 17, 1986, the PCGG sequestered all the assets, properties and records of PIMECO. The sequestration included the meat packing plant and the lease-purchase agreement. MPCP gave notice to PIMECO of the rescission of the leasepurchase agreement on the ground, among others, of nonpayment of rentals of more than P2,000,000 for the year 1986. GSIS asked the PCGG to exclude the meat packing plant from the sequestered assets of PIMECO, inasmuch as the same is owned by MPCP. PCGG denied the request. MPCP sought the turnover to it of the meat packing plant on the ground that the lease-purchase agreement had already been rescinded. PCGG acceded to this request. Meanwhile, PCGG instituted with the Sandiganbayan a complaint for reconveyance, reversion, accounting, restitution and damages, entitled, "Republic vs Peter Sabido, et al." The complaint alleged that Sabido obtained, under favored and very liberal terms, huge loans from the GSIS in favor of PIMECO, was beneficially held and controlled by defendants Sabido et al. Sabido filed an Urgent Manifestation and Motion, alleging that, according to newspaper accounts, PCGG had already turned over the management and operation of PIMECO to the 106


GSIS/MPCP. Thus, he prayed that the transfer of the management, control and possession of PIMECO to GSIS be declared null and void ab initio for having been done without the approval of the Sandiganbayan. Sandiganbayan received a letter from members of the PIMECO Labor Union, praying for the maintenance of the status quo to enable PIMECO to continue its business operations and to ensure their continuity of work and security of tenure. Sandiganbayan issued a TRO commanding the PCGG to cease and desist from enforcing the contemplated turnover to MPCP. Sandiganbayan, finding that the PCGG committed grave abuse of authority, power and discretion in unilaterally terminating the lease-purchase agreement of PIMECO with MPCP and in turning over its management, control and operation to the latter, ordered the issuance of a writ of preliminary injunction. PCGG filed a Motion for Reconsideration, which the Sandiganbayan granted. Thereafter, the Sandiganbayan declared the turn-over of the meat packing plant to GSIS null and void. PIMECO filed with the Sandiganbayan a petition entitled, “PIMECO vs MPCP and PCGG," captioned as for "Declaratory Relief and Other Similar Remedies.” PIMECO alleged that from 1981 to 1985, PIMECO has been regularly paying the annual rentals; and that prior to its sequestration in January 1986, PIMECO was able to pay MPCP P846,269.70. However, after its sequestration, the PCGG Management Team that took over the plant became erratic and irregular in its payments of the annual rentals to MPCP, thus presenting the danger that PIMECO may be declared in default in the payment of rentals equivalent to 3 annual installments and causing the cancellation of the leasepurchase agreement. Hence, PIMECO prayed for a declaration that it is no longer bound by the provisions of the rescission clause of the lease-purchase agreement. In the meantime, PCGG tendered to MPCP 2 checks (total of P5,000,000), representing partial payment of accrued rentals on the meat packing plant, which MPCP refused to accept on the

theory that the lease-purchase agreement had been rescinded. Thus, the PCGG filed an Urgent Motion praying that the Sandiganbayan order MPCP to accept the tendered amount. MPCP alleged that its lease-purchase agreement with PIMECO has been rescinded; and that PIMECO was in arrears in the payment of rentals in the amount of P12,378,171.06, which is more than the equivalent of 3 cumulative rentals at the annual rate of P3,346,269.70. The Sandiganbayan held that the tender of payment has been validly made. To rule otherwise would be unfair and unjust to PIMECO considering that during the time the PCGG had possession and control of the sequestered assets and records, PIMECO was not in the position to take steps necessary for the preservation and conservation of those assets and records. Meanwhile, Sandiganbayan dismissed the petition for declaratory relief, it appearing that while the unpaid rentals as of January 27, 1991 have reached P7,530,036.21, PCGG’s tender of payment and consignation of P5,000,000.00 averted the accumulation of the unpaid rentals to 3 yearly rentalsinstallments. Consequently, the petition for declaratory relief has become moot and academic. Hence, MPCP brought this petition for certiorari, mandamus and prohibition, arguing in fine that the PCGG is in estoppel because it has already admitted that the lease-purchase agreement between MPCP and PIMECO has been rescinded. Issue: Whether or not the lease-purchase agreement between MPCP and PIMECO has been validly rescinded, making the Sandiganbayan’s approval of the consignation by PCGG as payment for back rentals or accrued amortizations on the meat packing plant, after the MPCP refused the tender of payment of the same, improper. 107


(5) When the title of the obligation has been lost.

Ruling: No. Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment, and it generally requires a prior tender of payment. It should be distinguished from tender of payment. Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. Tender and consignation, where validly made, produces the effect of payment and extinguishes the obligation. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect;

There was prior tender by PCGG of the amount of P5,000,000.00 for payment of the rentals in arrears. MPCP’s refusal to accept the same, on the ground merely that its leasepurchase agreement with PIMECO had been rescinded, was unjustified. From January 29, 1986 to January 30, 1990, PIMECO paid, and GSIS/MPCP received, several amounts due under the lease-purchase agreement, such as annual amortizations or rentals, advances, insurance, and taxes, in total sum of P15,921,205.83. Surely, the acceptance by MPCP and GSIS of such payments for rentals and amortizations negates any rescission of the lease-purchase agreement. In support of its contention that the lease-purchase agreement has been rescinded, MPCP makes reference to the resolutions of the PCGG turning over to the GSIS the meat packing complex and the land on which it is situated. MPCP argues that PCGG was estopped from taking a contrary position. A closer perusal of the resolutions, however, readily shows that the turn-over was explicitly made dependent on certain conditions precedent, among which was the approval by the Sandiganbayan and the execution of a MOA between PCGG and MPCP. A MOA was in fact executed on April 28, 1989, although the same suffers from formal and substantial infirmities. However, no approval was sought from the Sandiganbayan. On the contrary, the Sandiganbayan, in its Resolution declaring the turn-over null and void, refused to honor the PCGG resolutions, reasoning thus: First, what was approved by the PCGG in its resolutions of September 20, 1988, and January 24, 1989, is the transfer of the "meat packing complex including the land located at Barrio Ugong, Pasig, Metro Manila," and not "the management and operation of PIMECO." It is, however, the latter that the 108


Memorandum of Agreement, executed on April 28, 1989, pursuant to the said resolutions, transferred to the GSIS. Second, the second resolution made the turnover of the "meat packing complex including the land located at Barrio Ugong, Pasig Metro Manila," "upon compliance with these conditions, to be implemented by the [PCGG] Operations and Legal Departments: . . . (b) approval by the Sandiganbayan . . ." Until now, however, no motion has been presented to secure that approval, and none can be expected because the same Memorandum of Agreement changed the requirement of approval to "(t)he Sandiganbayan shall be advised of this Agreement." Even the advice stipulated has never been given by the PCGG.

and directive for MPCP to accept the tendered payment, the lease-purchase agreement could not be said to have been rescinded.

Since the MOA was executed by one PCGG commissioner only, the same cannot validly amend the resolutions passed by the PCGG itself. Consequently, the turnover of the management and operation of PIMECO, which, of course, include the meat packing complex and the land of which it stands, stipulated in the MOA, cannot be legally enforced. Needless to say, the commissioners should be the first to abide by the PCGG’s resolutions. Under the terms of the lease-purchase agreement, the amount of arrears in rentals or amortizations must be equivalent to the cumulative sum of three annual installments, in order to warrant the rescission of the contract. Therefore, it must be shown that PIMECO failed to pay the aggregate amount of at least P10,038,809.10 before the lease-purchase agreement can be deemed automatically cancelled. Assuming in the extreme that, as alleged by MPCP, the arrears at the time of tender on January 30, 1991 amounted to P12,578,171.00,40 the tender and consignation of the sum of P5,000,000.00, which had the effect of payment, reduced the back rentals to only P7,578,171.00, an amount less than the equivalent of three annual installments. Thus, with the Sandiganbayan’s approval of the consignation 109


Sps. Cacyurin v AFPMB (2013) G.R. No. 171298, April 15, 2013 Topic: Tender of Payment and consignation Doctrine: Besides, as earlier stated, Article 1256 authorizes consignation alone, without need of prior tender of payment, where the ground for consignation is that the creditor is unknown, or does not appear at the place of payment; or is incapacitated to receive the payment at the time it is due; or when, without just cause, he refuses to give a receipt; or when two or more persons claim the same right to collect; or when the title of the obligation has been lost. Facts: Petitioner Oscar Cacayorin filed an application with AFPMBAI to purchase a piece of property which the latter owned in Puerto Princesa City, through a loan facility. On July 4, 1994, Oscar and his wife and the Rural Bank of San Teodoro executed a Loan and Mortgage Agreement with the former as borrowers and the Rural Bank as lender, under the auspices of Pag-IBIG or Home Development Mutual Fund’s Home Financing Program. The Rural Bank issued an August 22, 1994 letter of guaranty6 informing AFPMBAI that the proceeds of petitioners’ approved loan in the amount of P77,418.00 shall be released to AFPMBAI after title to the property is transferred in petitioners’ name and after the registration and annotation of the parties’ mortgage agreement.

AFPMBAI executed in petitioners’ favor a Deed of Absolute Sale, and a new title was issued in their name, with the corresponding annotation of their mortgage agreement with the Rural Bank. Unfortunately, the Pag-IBIG loan facility did not push through and the Rural Bank closed and was placed under receivership by the Philippine Deposit Insurance Corporation (PDIC). Meanwhile, AFPMBAI somehow was able to take possession of petitioners’ loan documents and the title, while petitioners were unable to pay the loan/consideration for the property. AFPMBAI made oral and written demands to petitioners. In July 2003, petitioners filed a Complaint for consignation of loan payment, recovery of title and cancellation of mortgage annotation against AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa City. Petitioners alleged in their Complaint that as a result of the Rural Bank’s closure and PDIC’s claim that their loan papers could not be located, they were left in a quandary as to where they should tender full payment of the loan and how to secure cancellation of the mortgage annotation on title of the land. AFPMBAI filed a Motion to Dismiss13 claiming that petitioners’ Complaint falls within the jurisdiction of the Housing and Land Use Regulatory Board (HLURB) and not the Puerto Princesa RTC, as it was filed by petitioners in their capacity as buyers of a subdivision lot and it prays for specific performance of contractual and legal obligations decreed under PD 957. It added that since no prior valid tender of payment was made by petitioners, the consignation case was fatally defective and susceptible to dismissal. L.C.: dismissed AFPMBAI motion C.A.: reversed decision and sided with AFPMBAI 110


Issue: 1)Whether or not consignation is proper 2) Whether or not RTC has jurisdiction

Held: 1) Applying Article 1256 to the petitioners’ case as shaped by the allegations in their Complaint, the Court finds that a case for consignation has been made out, as it now appears that there are two entities which petitioners must deal with in order to fully secure their title to the property: 1) the Rural Bank (through PDIC), which is the apparent creditor under the July 4, 1994 Loan and Mortgage Agreement; and 2) AFPMBAI, which is currently in possession of the loan documents and the certificate of title, and the one making demands upon petitioners to pay. Clearly, the allegations in the Complaint present a situation where the creditor is unknown, or that two or more entities appear to possess the same right to collect from petitioners. Whatever transpired between the Rural Bank or PDIC and AFPMBAI in respect of petitioners’ loan account, if any, such that AFPMBAI came into possession of the loan documents and TCT No. 37017, it appears that petitioners were not informed thereof, nor made privy thereto.

due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. The above provision clearly precludes consignation in venues other than the courts. Elsewhere, what may be made is a valid tender of payment, but not consignation. The two, however, are to be distinguished. 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. (8 Manresa 325). While it may be true that petitioners’ claim relates to the terms and conditions of the sale of AFPMBAI’s subdivision lot, this is overshadowed by the fact that since the Complaint in Civil Case No. 3812 pleads a case for consignation, the HLURB is without jurisdiction to try it, as such case may only be tried by the regular courts.

2) On the question of jurisdiction, petitioners’ case should be tried in the Puerto Princesa RTC, and not the HLURB. Consignation is necessarily judicial, as the Civil Code itself provides that consignation shall be made by depositing the thing or things due at the disposal of judicial authority, thus: Art. 1258. Consignation shall be made by depositing the things 111


Spouses Nameal and Lourdes Bonrostro v. Spouses Juan and Constancia Luna (2013) Topic: Tender of Payment and consignation Doctrine: For a tender of payment to take effect it must be accompanied by the means of payment and debtor must take immediate step to make a consignation. Facts: Constancia Luna, as buyer, entered into a contract to sell with Bliss Development Corporation involving a house located in Quezon City. A year after, Luna sold it to Lourdes Bonrostro under the ff. terms: The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following manner: (a) P200,000.00 upon signing x x x the Contract To Sell, (b) P300,000.00 payable on or before April 30, 1993, (c) P330,000.00 payable on or before July 31, 1993, (d) P417,000.00 payable to the New Capitol Estate, for 15 years at [P6,867.12] a month x x x In the event the VENDEE fails to pay the second installment on time, [t]he VENDEE will pay starting May 1, 1993 a 2% interest on the P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay the amount of P630,000.00 on the stipulated time, this CONTRACT TO SELL shall likewise be deemed cancelled and rescinded and x x x 5% of the total contract price [of] P1,250,000.00 shall be deemed forfeited in favor of the VENDOR. Unpaid monthly amortization shall likewise be deducted from the initial down payment in favor of the VENDOR.”

After execution of the contract, Bonrostro took possession of the property. However, except for P200,000.00 downpayment, she failed to pay subsequent amortization. Luna then filed before the RTC a Complaint for Rescission of Contract and Damages. This is a petition for review on certiorari assailing the decision of CA affirming with modification the decision of RTC in favor herein respondents. Issue: Whether or not delay in the payment of installment is a substantial breach of obligation as to warrant its rescission. Ruling: No, in a contract to sell, payment of the price is a positive suspensive condition. Failure of which is not a breach of contract warranting rescission under Article 1191 of the Civil Code, but rather just an event that prevents the supposed seller from being bound to convey title to the supposed buyer. The contract to sell entered by the parties refers to real property on installment basis, in which Art. 1191 cannot apply since they are governed by the Maceda Law. However, there being no breach, Bonrostro is still not excused from being made liable for interest on the installments due from the date of default until fully paid. Tender of payment, a manifestation by the debtor of a desire to comply with or pay an obligation, asserted by Bonrostro for the accrual of interest to be suspended is not a valid defense because for a tender of payment to take effect it must be accompanied by the means of payment and debtor must take immediate step to make a consignation, the deposit of the proper amount with a judicial authority, then interest is suspended from the time of such tender.

112


Del Carmen v Sabordo (2014) G.R. No. 181723, Aug. 11, 2014 Consignation Doctrine: It is settled that compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly with any of the requisites will render the consignation void. One of these requisites is a valid prior tender of payment. Facts: Subsequently, the Suico spouses and their business partners failed to pay their loan obligations forcing DBP to foreclose the mortgage. After the Suico spouses and their partners failed to redeem the foreclosed properties, DBP consolidated its ownership over the same. Nonetheless, DBP later allowed the Suico spouses and Reginald and Beatriz Flores (Flores spouses), as substitutes for Juliana Del Rosario, to repurchase the subject lots by way of a conditional sale for the sum of P240,571.00. The Suico and Flores spouses were able to pay the downpayment and the first monthly amortization, but no monthly installments were made thereafter. Threatened with the cancellation of the conditional sale, the Suico and Flores spouses sold their rights over the said properties to herein respondents Restituto and Mima Sabordo, subject to the condition that the latter shall pay the balance of the sale price. Subsequently, respondents were able to repurchase the foreclosed properties of the Suico and Flores spouses. Respondents Restituto Sabordo (Restituto) filed with the then Court of First Instance of Negros Occidental an original action

for declaratory relief with damages and prayer for a writ of preliminary injunction raising the issue of whether or not the Suico spouses have the right to recover from respondents Lots 506 and 514. The court ruled that the petioners can exercise their option to purchase or redeem the subject lots from respondents by paying the sum of P127,500.00. In the meantime, Toribio Suico (Toribio) died leaving his widow, Eufrocina, and several others, including herein petitioner, as legal heirs. Later, they discovered that respondents mortgaged Lots 506 and 514 with Republic Planters Bank (RPB) as security for a loan which, subsequently, became delinquent. Thereafter, claiming that they are ready with the payment of P127,500.00, but alleging that they cannot determine as to whom such payment shall be made, petitioner and her co-heirs filed a Complaint with the RTC of San Carlos City, Negros Occidental seeking to compel herein respondents and RPB to interplead and litigate between themselves their respective interests on the abovementioned sum of money. The Complaint also prayed that respondents be directed to substitute Lots 506 and 514 with other real estate properties as collateral for their outstanding obligation with RPB and that the latter be ordered to accept the substitute collateral and release the mortgage on Lots 506 and 514. Upon filing of their complaint, the heirs of Toribio deposited the amount of P127,500.00 with the RTC of San Carlos City, Branch 59. Respondents filed their Answer with Counterclaim praying for the dismissal of the above Complaint on the grounds that (1) the action for interpleader was improper since RPB is not laying any claim on the sum of P127,500.00; (2) that the period within which the complainants are allowed to purchase Lots 506 and 514 had already expired; (3) that there was no valid consignation, and 113


(4) that the case is barred by litis pendencia or res judicata. Issue: Whether the consignation made by the petitioners was a judicial deposit based on a final judgment and, as such, does not require compliance with the requirements of Articles 1256 and 1257 of the Civil Code. Ruling: The petition lacks merit. In the instant case, petitioner and her co-heirs, upon making the deposit with the RTC, did not ask the trial court that respondents be notified to receive the amount that they have deposited. In fact, there was no tender of payment. Instead, what petitioner and her co-heirs prayed for is that respondents and RPB be directed to interplead with one another to determine their alleged espective rights over the consigned amount; that respondents be likewise directed to substitute the subject lots with other real properties as collateral for their loan with RPB and that RPB be also directed to accept the substitute real properties as collateral for the said loan. Nonetheless, the trial court correctly ruled that interpleader is not the proper remedy because RPB did not make any claim whatsoever over the amount consigned by petitioner and her coheirs with the court. It is settled that compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly with any of the requisites will render the consignation void. One of these requisites is a valid prior tender of payment. Under Article 1256, the only instances where prior tender of payment is excused are: (1) when the creditor is absent or unknown, or does not appear at the place of payment; (2) when the creditor is incapacitated to receive the payment at the time it is due; (3) when, without just cause, the creditor refuses to give a receipt; (4) when two or more persons claim the same right to collect; and (5) when the title of the obligation has been lost.

None of these instances are present in the instant case. Hence, the fact that the subject lots are in danger of being foreclosed does not excuse petitioner and her co-heirs from tendering payment to respondents, as directed by the court.

Yam v CA (1999) Mendoza, J. Re: Condonation or remission of debt DOCTRINE Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of donation. Art. 748, par. 3 provides that the donation and acceptance of a movable, the value of which exceeds P5,000.00, must be made in writing, otherwise the same shall be void. In this connection, under Art. 417, par. 1, obligations, actually referring to credits, are considered movable property. FACTS Petitioners obtained an IGLF loan from private respondent in the amount of P300,000 with interest, monthly penalty, monthly service charge and attorney’s fees. It was secured by a chattel mortgage on their printing machineries. On April 2, 1985, private respondent was placed under receivership by the Central Bank. On July 31, 1986, petitioners paid private respondent P410,854.47 by means of a check corresponding to the principal amount of P295,469.47 and the interest of P165,385 less the partial payment of P50,000.00. It was received by the Central Bank-appointed in-house examiner Cristina Destajo who made a notation on the voucher: “full payment of IGLF loan.” Private respondent filed a collection 114


case against petitioners when the latter failed to pay the remaining balance of P266,146.88 plus interests, penalties and service charges on the loan. Petitioners, in their answer, claimed that Carlos Sobrepeñas, president of private respondent, after the corporation had been placed under receivership, agreed to waive or condone the penalties and service charges provided that they pay the principal and interest on the loan on or before July 30, 1986 to which they complied with. Petitioners added that the fact of full payment was reflected in the voucher accompanying the check which bore the notation: “full payment of IGLF.” Judgment was rendered by the trial court in favor of private respondent. The same was affirmed on appeal by the Court of Appeals. Hence, petitioners resorted to this action.

IGLF loan of P500,000.00. The appointment of a receiver operates to suspend the authority of a corporation and of its directors and officers over its properties and effects, such authority being reposed in the receiver. Thus, Sobrepeñas had no authority to condone the debt. The notation on the voucher covering the check payment wherein the in-house examiner made a notation of “full payment of IGLF loan” does not bind private respondent. It would have been different if the notation appeared in the receipt issued by the corporation through its receiver, which would then be an admission against interest.

ISSUE: Whether there was condonation. HELD: There was no condonation. Express condonation under Article 1270 of the Civil Code must comply with the forms of donation. Where the value of the movable exceeds P5,000.00 as in this case, the donation and acceptance must be made in writing, otherwise the same shall be void. Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check for P410,854.47, containing the notation that the amount is in full payment of IGLF loan, constitutes documentary evidence of such oral agreement. This contention is without merit. The notation in full payment of IGLF loan merely states petitioners' intention in making the payment, but in no way does it bind private respondent. It would have been a different matter if the notation appeared in a receipt issued by respondent corporation, through its receiver, because then it would be an admission against interest. Indeed, if private respondent really condoned the amount in question, petitioners should have asked for a certificate of full payment from respondent corporation, as they did in the case of their first 115


Gan Tion v CA Compensation Facts: Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961, Gan filed an ejectment case against Ong, alleging non-payment of rents for August and September 1961, at P180/month, or P360 altogether. Ong said that the agreed monthly rental was only P160, which he had offered to but was refused by Gan. Gan obtained a favorable judgment in the municipal court (of Manila), but upon appeal, the CFI reversed the judgment, dismissed the complaint, and ordered Gan to pay Ong P500 as attorney's fees. Gan served notice on Ong that he was increasing the rent to P180 a month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate amount of P4,320, corresponding to the period August 1961 to October 1963.

the real creditor with respect to the sum of P500 was the defendant's counsel. Issue: Whether or not there has been legal compensation between Gan Tion and Ong Wan Sieng. Ruling: Yes. This is not an accurate statement of the nature of an award for attorney's fees. The award is made in favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the former in the cases enumerated in Article 2208 of the Civil Code. It is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit, therefore, may properly be the subject of legal compensation. It would be unjust to compel petitioner to pay his debt for P500 when admittedly his creditor is indebted to him for more than P4,000.

In the meantime, Ong was able to obtain a writ of execution of the judgment for attorney's fees in his favor. Gan went on certiorari to the CA, where he pleaded legal compensation, claiming that Ong was indebted to him in the sum of P4,320 for unpaid rents. The CA accepted the petition but eventually decided for Ong, holding that although " Ong is indebted to the petitioner for unpaid rentals in an amount of more than P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust fund for the benefit of the lawyer, which would have to be turned over by the client to his counsel." The requisites of legal compensation, namely, that the parties must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each one of them must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not present in the instant case, since 116


Mirasol v Ca (2001) 351 SCRA 44(2001) TOPIC: Compensation Doctrine: compensation cannot take place where one claim, as in the instant case, is still the subject of litigation, as the same cannot be deemed liquidated. Facts: The Mirasols are sugarland owners and planters .Philippine National Bank (PNB) financed the Mirasols' sugar production venture FROM 1973-1975 under a crop loan financing scheme. The Mirasols signed Credit Agreements, a Chattel Mortgage on Standing Crops, and a Real Estate Mortgage in favor of PNB. The Chattel Mortgage empowered PNB to negotiate and sell the latter's sugar and to apply the proceeds to the payment of their obligations to it. President Marcos issued PD 579 in November, 1974 authorizing Philippine Exchange Co., Inc. (PHILEX) to purchase sugar allocated for export and authorized PNB to finance PHILEX's purchases. The decree directed that whatever profit PHILEX might realize was to be remitted to the government. Believing that the proceeds were more than enough to pay their obligations, petitioners asked PNB for an accounting of the proceeds which it ignored. Petitioners continued to avail of other loans from PNB and to make unfunded withdrawals from their accounts with said bank. PNB asked petitioners to settle their due and demandable accounts. As a result, petitioners, conveyed to PNB real properties by way of dacion en pago still leaving an unpaid amount. PNB proceeded to extrajudicially foreclose the mortgaged properties. PNB still had a deficiency claim.

Petitioners continued to ask PNB to account for the proceeds, insisting that said proceeds, if properly liquidated, could offset their outstanding obligations. PNB remained adamant in its stance that under P.D. No. 579, there was nothing to account since under said law, all earnings from the export sales of sugar pertained to the National Government. On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and damages against PNB. Issue: Whether or not there is a valid compensation between the parties Held: Petitioners now claim that the dacion en pago and the foreclosure of their mortgaged properties were void for want of consideration. Petitioners insist that the loans granted them by PNB from 1975 to 1982 had been fully paid by virtue of legal compensation. Hence, the foreclosure was invalid and of no effect, since the mortgages were already fully discharged. It is also averred that they agreed to the dacion only by virtue of a martial law Arrest, Search, and Seizure Order (ASSO). We find petitioners’ arguments unpersuasive. Both the lower court and the appellate court found that the Mirasols admitted that they were indebted to PNB in the sum stated in the latter’s counterclaim. Petitioners nonetheless insist that the same can be offset by the unliquidated amounts owed them by PNB for crop years 1973-74 and 1974-75. Petitioners’ argument has no basis in law. For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil Code must be present. Said articles read as follows: “Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

117


“Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (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 are due; (4) That they be liquidated and demandable;

Thus, as correctly found by the Court of Appeals, “there was nothing with which PNB was supposed to have off-set Mirasols’ admitted indebtedness.” Second, compensation cannot take place where one claim, as in the instant case, is still the subject of litigation, as the same cannot be deemed liquidated. With respect to the duress allegedly employed by PNB, which impugned petitioners’ consent to the dacion en pago, both the trial court and the Court of Appeals found that there was no evidence to support said claim. Factual findings of the trial court, affirmed by the appellate court, are conclusive upon this Court.

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.” In the present case, set-off or compensation cannot take place between the parties because: First, neither of the parties are mutually creditors and debtors of each other. Under P.D. No. 579, neither PNB nor PHILEX could retain any difference claimed by the Mirasols in the price of sugar sold by the two firms. P.D. No. 579 prescribed where the profits from the sales are to be paid, to wit: “SECTION 7. x x x After deducting its commission of two and one-half (2-1/2%) percent of gross sales, the balance of the proceeds of sugar trading operations for every crop year shall be set aside by the Philippine Exchange Company, Inc,. as profits which shall be paid to a special fund of the National Government subject to the disposition of the President for public purposes.”

118


Jesus M. Montemayor v Vicente D. Millora (2011) (July 27, 2011) Topic: Compensation Doctrine: A debt is liquidated when its existence and amount are determined. It is not necessary that it be admitted by the debtor. Nor is it necessary that the credit appear in a final judgment in order that it can be considered as liquidated; it is enough that its exact amount is known. And a debt is considered liquidated, not only when it is expressed already in definite figures which do not require verification, but also when the determination of the exact amount depends only on a simple arithmetical operation Facts: On July 24, 1990, respondent Atty. Vicente D. Millora obtained a loan of P400,000 from petitioner Dr. Jesus M. Montemayor as evidenced by a promissory note executed by Vicente. On August 10, 1990, the parties executed a loan contract wherein it was provided that the loan has a stipulated monthly interest of 2% and that Vicente had already paid the amount of P100,000 as well as the P8,000.00 representing the interest for the period July 24 to August 23, 1990. Subsequently and with Vicente’s consent, the interest rate was increased to3.5% or P10,500 a month. From March 24, 1991 to July 23, 1991, or for a period of four months, Vicente was supposed to pay P42,000 as interest but was able to pay only P24,000. This was the last payment Vicente made. Jesus made several demands for Vicente to settle his obligation but to no avail. Thus, on August 17, 1993, Jesus filed before the RTC of Quezon City a Complaint for Sum of Money against Vicente which was docketed as Civil Case No. Q-93-17255. On October 19, 1993,

Vicente filed his Answer interposing a counterclaim for attorney’s fees of not less than P500,000. Vicente claimed that he handled several cases for Jesus but he was summarily dismissed from handling them when the instant complaint for sum of money was filed. Issue: Whether compensation can properly be applied despite the absence of a specific amount in the decision representing respondent’s counterclaim against the specific amount of award mentioned in the decision in favor of the petitioner. Held: YES For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil Code, quoted below, must be present. ARTICLE 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. ARTICLE 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (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. When the defendant, who has an unliquidated claim, sets it up by way of counterclaim, and a judgment is rendered liquidating such claim, it can be compensated against the plaintiff’s claim from the moment it is liquidated by judgment. We have restated this in Solinap v. Hon. Del Rosario where we held that compensation takes place only if both obligations are liquidated. In the instant case, both obligations are liquidated. Vicente has the obligation to pay his debt due to Jesus in the amount of 119


P300,000 with interest at the rate of 12% per annum counted from the filing of the instant complaint on August 17, 1993 until fully paid. Jesus, on the other hand, has the obligation to pay attorney’s fees which the RTC had already determined to be equivalent to whatever amount recoverable from Vicente. The said attorney’s fees were awarded by the RTC on the counterclaim of Vicente on the basis of "quantum meruit" for the legal services he previously rendered to Jesus.

Union Bank v DBP (2014) G.R. No. 191555, January 20, 2014 Compensation Doctrine: The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby two persons in their capacity as principals are mutual debtors and creditors of each other with respect to equally liquidated and demandable obligations to which no retention or controversy has been timely commenced and communicated by third parties Facts: (I copied the entire facts of the case since it involves 4 other cases) Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank’s predecessor-in-interest, Bancom Development Corporation (Bancom), and to DBP. On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of Property In Payment of Debt 7(dacion en pago) whereby the former ceded in favor of the latter certain properties (including a processing plant in Marilao, Bulacan [processing plant]) in consideration of the following: (a) the full and complete satisfaction of FI’s loan obligations to DBP; and (b) the direct assumption by DBP of FI’s obligations to Bancom in the amount ofP17,000,000.00 (assumed obligations). On the same day, DBP, as the new owner of the processing plant, leased back9 for 20 years the said property to FI (Lease Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP and Bancom. 120


DBP also entered into a separate agreement with Bancom (Assumption Agreement) whereby the former: (a) confirmed its assumption of FI’s obligations to Bancom; and (b) undertook to remit up to 30% of any and all rentals due from FI to Bancom (subject rentals) which would serve as payment of the assumed obligations, to be paid in monthly installments. The pertinent portions of the Assumption Agreement reads as follows: WHEREAS, DBP has agreed and firmly committed in favor of Bancom that the above obligations to Bancom which DBP has assumed shall be settled, paid and/or liquidated by DBP out of a portion of the lease rentals or part of the proceeds of sale of those properties of the Assignors conveyed to DBP pursuant to the [Deed of Cession of Property in Payment of Debt dated May 21, 1979] and which are the subject of [the Lease Agreement] made and executed by and between DBP and [FI], the last hereafter referred to as the "Lessee" to be effective as of July 31, 1978. xxxx 4. DBP hereby covenants and undertakes that the amount up to 30% of any and all rentals due from the Lessee pursuant to the Lease Agreement shall be remitted by DBP to Bancom at the latter’s offices at Pasay Road, Makati, Metro Manila within five (5) days from due dates thereof, and applied in payment of the Assumed Obligations. Likewise, the amount up to 30% of the proceeds from any sale of the Leased Properties shall within the same period above, be remitted by DBP to Bancom and applied in payment or prepayment of the Assumed Obligations. x x x. Any balance of the Assumed Obligations after application of the entire rentals and or the entire sales proceeds actually received by Bancom on the Leased Properties shall be paid by DBP to Bancom not later than December 29, 1998. (Emphases supplied)

Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to Foodmasters Worldwide, Inc. (FW);11 while on May 9, 1984, Bancom conveyed all its receivables, including, among others, DBP’s assumed obligations, to Union Bank.12 Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank filed, on June 20, 1984, a collection case against DBP before the RTC, docketed as Civil Case No. 7648.13 In opposition, DBP countered, among others, that the obligations it assumed were payable only out of the rental payments made by FI. Thus, since FI had yet to pay the same, DBP’s obligation to Union Bank had not arisen. 14 In addition, DBP sought to implead FW as third party-defendant in its capacity as FI’s assignee and, thus, should be held liable to Union Bank.15 In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the ground that it had ceased to be a real-party-in-interest due to the supervening transfer of its rights, title and interests over the subject matter to the Asset Privatization Trust (APT). Said motion was, however, denied by the RTC in an Order dated May 27, 1988.16 The RTC Ruling in Civil Case No. 7648 Finding the complaint to be meritorious, the RTC, in a Decision17 dated May 8, 1990, ordered: (a) DBP to pay Union Bank the sum of P4,019,033.59, representing the amount of the subject rentals (which, again, constitutes 30% of FI’s [now FW’s] total rental debt), including interest until fully paid; and (b) FW, as third-party defendant, to indemnify DBP, as thirdparty plaintiff, for its payments of the subject rentals to Union Bank. It ruled that there lies no evidence which would show that DBP’s receipt of the rental payments from FW is a condition precedent to the former’s obligation to remit the subject rentals 121


under the Lease Agreement. Thus, when DBP failed to remit the subject rentals to Union Bank, it defaulted on its assumed obligations.18 DBP then elevated the case on appeal before the CA, docketed as CA-G.R. CV No. 35866. The CA Ruling in CA-G.R. CV No. 35866 In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the CA set aside the RTC’s ruling, and consequently ordered: (a) FW to pay DBP the amount of P32,441,401.85 representing the total rental debt incurred under the Lease Agreement, including P10,000.00 as attorney’s fees; and (b) DBP, after having been paid by FW its unpaid rentals, to remit 30% thereof (i.e., the subject rentals) to Union Bank.20 It rejected Union Bank’s claim that DBP has the direct obligation to remit the subject rentals not only from FW’s rental payments but also out of its own resources since said claim contravened the "plain meaning" of the Assumption Agreement which specifies that the payment of the assumed obligations shall be made "out of the portion of the lease rentals or part of the proceeds of the sale of those properties of [FI] conveyed to DBP."21 It also construed the phrase under the Assumption Agreement that DBP is obligated to "pay any balance of the Assumed Obligations after application of the entire rentals and/or the entire sales proceeds actually received by [Union Bank] on the Leased Properties . . . not later than December 29, 1998" to mean that the lease rentals must first be applied to the payment of the assumed obligations in the amount of P17,000,000.00, and that DBP would have to pay out of its own money only in case the lease rentals were insufficient, having only until December 29, 1998 to do so. Nevertheless, the monthly installments in satisfaction of the assumed obligations would still have to be first sourced from said lease rentals as stipulated in the assumption agreement. 22 In view of the foregoing, the CA ruled that DBP did not default in its

obligations to remit the subject rentals to Union Bank precisely because it had yet to receive the rental payments of FW.23 Separately, the CA upheld the RTC’s denial of DBP’s motion to dismiss for the reason that the transfer of its rights, title and interests over the subject matter to the APT occurred pendente lite, and, as such, the substitution of parties is largely discretionary on the part of the court. At odds with the CA’s ruling, Union Bank and DBP filed separate petitions for review on certiorari before the Court, respectively docketed as G.R. Nos. 115963 and 119112, which were thereafter consolidated. The Court’s Ruling in G.R. Nos. 115963 & 119112 The Court denied both petitions in a Resolution 24 dated December 13, 1995. First, it upheld the CA’s finding that while DBP directly assumed FI’s obligations to Union Bank, DBP was only obliged to remit to the latter 30% of the lease rentals collected from FW, from which any deficiency was to be settled by DBP not later than December 29, 1998. 25 Similarly, the Court agreed with the CA that the denial of DBP’s motion to dismiss was proper since substitution of parties, in case of transfers pendente lite, is merely discretionary on the part of the court, adding further that the proposed substitution of APT will amount to a novation of debtor which cannot be done without the consent of the creditor.26 On August 2, 2000, the Court’s resolution became final and executory.27 The RTC Execution Proceedings On May 16, 2001, Union Bank filed a motion for execution28 before the RTC, praying that DBP be directed to pay 122


the amount of P9,732,420.555 which represents the amount of the subject rentals (i.e., 30% of the FW’s total rental debt in the amount of P32,441,401.85). DBP opposed29 Union Bank’s motion, contending that it sought to effectively vary the dispositive portion of the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866. Also, on September 12, 2001, DBP filed its own motion for execution against FW, citing the same CA decision as its basis. In a Consolidated Order30 dated October 15, 2001 (Order of Execution), the RTC granted both motions for execution. Anent Union Bank’s motion, the RTC opined that the CA’s ruling that DBP’s payment to Union Bank shall be demandable only upon payment of FW must be viewed in light of the date when the same was rendered. It noted that the CA decision was promulgated only on May 27, 1994, which was before the December 29, 1998 due date within which DBP had to fully pay its obligation to Union Bank under the Assumption Agreement. Since the latter period had already lapsed, "[i]t would, thus, be too strained to argue that payment by DBP of its assumed obligation[s] shall be dependent on [FW’s] ability, if not availability, to pay."31 In similar regard, the RTC granted DBP’s motion for execution against FW since its liability to Union Bank and DBP remained undisputed. As a result, a writ of execution32 dated October 15, 2001 (October 15, 2001 Writ of Execution) and, thereafter, a notice of garnishment33 against DBP were issued. Records, however, do not show that the same writ was implemented against FW. DBP filed a motion for reconsideration 34 from the Execution Order, averring that the latter issuance varied the import of the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866 in that it prematurely ordered DBP to pay the assumed obligations to Union Bank before FW’s payment. The motion was, however, denied on December 5, 2001.35 Thus, DBP’s deposits were

eventually garnished.36 Aggrieved, DBP filed a petition for certiorari37 before the CA, docketed as CA-G.R. SP No. 68300. The CA Ruling in CA-G.R. SP No. 68300 In a Decision38 dated July 26, 2002, the CA dismissed DBP’s petition, finding that the RTC did not abuse its discretion when it issued the October 15, 2001 Writ of Execution. It upheld the RTC’s observation that there was "nothing wrong in the manner how [said writ] was implemented," as well as "in the zealousness and promptitude exhibited by Union Bank" in moving for the same. DBP appealed the CA’s ruling before the Court, which was docketed as G.R. No. 155838. The Court’s Ruling in G.R. No. 155838 In a Decision39 dated January 13, 2004 (January 13, 2004 Decision), the Court granted DBP’s appeal, and thereby reversed and set aside the CA’s ruling in CA-G.R. SP No. 68300. It found significant points of variance between the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866, and the RTC’s Order of Execution/October 15, 2001 Writ of Execution. It ruled that both the body and the dispositive portion of the same decision acknowledged that DBP’s obligation to Union Bank for remittance of the lease payments is contingent on FW’s prior payment to DBP, and that any deficiency DBP had to pay by December 29, 1998 as per the Assumption Agreement cannot be determined until after the satisfaction of FW’s own rental obligations to DBP. Accordingly, the Court: (a) nullified the October 15, 2001 Writ of Execution and all related issuances thereto; and (b) ordered Union Bank to return to DBP the amounts it received pursuant to the said writ. 40 Dissatisfied, Union Bank moved for reconsideration which was, however, denied by the Court in a Resolution dated March 24, 2004 with finality. Thus, the January 13, 2004 Decision attained finality on April 30, 2004.41 Thereafter, DBP moved for the execution of the 123


said decision before the RTC. After numerous efforts on the part of Union Bank proved futile, the RTC issued a writ of execution (September 6, 2005 Writ of Execution), ordering Union Bank to return to DBP all funds it received pursuant to the October 15, 2001 Writ of Execution.42 Union Bank’s Motion to Affirm Legal Compensation On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal Compensation,43 praying that the RTC apply legal compensation between itself and DBP in order to offset the return of the funds it previously received from DBP. Union Bank anchored its motion on two grounds which were allegedly not in existence prior to or during trial, namely: (a) on December 29, 1998, DBP’s assumed obligations became due and demandable;44 and (b) considering that FWI became nonoperational and non-existent, DBP became primarily liable to the balance of its assumed obligation, which as of Union Bank’s computation after its claimed set-off, amounted toP1,849,391.87.45 On November 9, 2005, the RTC issued an Order 46 denying the above-mentioned motion for lack of merit, holding that Union Bank’s stated grounds were already addressed by the Court in the January 13, 2004 Decision in G.R. No. 155838. With Union Bank’s motion for reconsideration therefrom having been denied, it filed a petition for certiorari 47 with the CA, docketed as CA-G.R. SP No. 93833. Pending resolution, Union Bank issued Manager’s Check48 No. 099-0003192363 dated April 21, 2006 amounting toP52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution dated September 6, 2005 Writ of Execution. DBP, however, averred that Union Bank still has a balance of P756,372.39 representing a portion of the garnished funds of

DBP,49 which means that said obligation had not been completely extinguished. The CA Ruling in CA-G.R. SP No. 93833 In a Decision50 dated November 3, 2009, the CA dismissed Union Bank’s petition, finding no grave abuse of discretion on the RTC’s part. It affirmed the denial of its motion to affirm legal compensation considering that: (a) the RTC only implemented the Court’s January 13, 2004 Decision in G.R. No. 155838 which by then had already attained finality; (b) DBP is not a debtor of Union Bank; and (c) there is neither a demandable nor liquidated debt from DBP to Union Bank. 51 Undaunted, Union Bank moved for reconsideration which was, however, denied in a Resolution52 dated February 26, 2010; hence, the instant petition. Issue: 

The sole issue for the Court’s resolution is whether or not the CA correctly upheld the denial of Union Bank’s motion to affirm legal compensation.

Ruling: 

The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby two persons in their capacity as principals are mutual debtors and creditors of each other with respect to equally liquidated and demandable obligations to which no retention or controversy has been timely commenced and communicated by third parties. 53 The requisites therefor are provided under Article 1279 of the Civil Code which reads as follows: 124


o Art. 1279. In order that compensation may be proper, it is necessary: (1)That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;(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. 

The rule on legal compensation is stated in Article 1290 of the Civil Code which provides that "[w]hen all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation."



In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken place in order to effectively offset (a) its own obligation to return the funds it previously received from DBP as directed under the September 6, 2005 Writ of Execution with (b) DBP’s assumed obligations under the Assumption Agreement.



However, legal compensation could not have taken place between these debts for the apparent reason that requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBP’s assumed obligations to Union Bank for remittance of the lease payments are – in the Court’s words in its Decision dated January 13, 2004 in

G.R. No. 155838 – " contingent on the prior payment thereof by [FW] to DBP," it cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil Code). Also, in the same ruling, the Court observed that any deficiency that DBP had to make up (by December 29, 1998 as per the Assumption Agreement) for the full satisfaction of the assumed obligations “cannot be determined until after the satisfaction of Foodmasters’ obligation to DBP." In this regard, it cannot be concluded that the same debt had already been liquidated, and thereby became demandable (requisite 4 of Article 1279 of the Civil Code). 

In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred in this case, no legal compensation could have taken place between the abovestated debts pursuant to Article 1290 of the Civil Code. Perforce, the petition must be denied, and the denial of Union Bank’s motion to affirm legal compensation sustained.

125


First United Constructors Corp v Bayanihan Automotive (2014) Beramin, J. Re: Compensation DOCTRINE A debt is liquidated when its existence and amount are determined. Legal compensation takes place when the requirements set forth in Article 1278 and Article 1279 of the Civil Code. Article 1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 of the Civil Code are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount. FACTS Petitioners First United Constructors Corporation and Blue Star Construction Corporation were associate construction firms sharing financial resources, equipment and technical personnel on a case-to-case basis. From May 27, 1992 to July 8, 1992, they ordered six units of dump trucks from the respondent. On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime Mover and ordered again on September 29, 1992, one unit of Isuzu Transit Mixer. For the two purchases, FUCC partially paid in cash, and the balance through post-dated checks. Upon presentment of the checks for payment, the respondent learned that FUCC had ordered the payment stopped. The respondent immediately demanded the full settlement of their obligation from the petitioners, but to no avail. The petitioners informed the respondent that they were withholding payment of the checks due to the breakdown of one of the dump trucks they had earlier purchased from respondent.

The petitioners submit that they were justified in stopping the payment of the two checks due to the respondent’s breach of warranty by refusing to repair or replace the defective second dump truck earlier purchased; that the withholding of payments was an effective exercise of their right of recoupment as allowed by Article 1599(1) of the Civil Code; xxx that recoupment should not be restrictively interpreted but should include the concept of compensation or set-off between two parties who had claims arising from different transactions; and that the series of purchases and the obligations arising therefrom, being interrelated, could be considered as a single and ongoing transaction for all intents and purposes. The respondent counters that the petitioners could not refuse to pay the balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer on the basis of the right of recoupment under Article 1599 of the Civil Code; that the buyer’s remedy of recoupment related only to the same transaction; and that compensation was not proper because the claims of the petitioners as alleged in their counterclaim were not liquidated and demandable. As to whether petitioners could avail themselves of compensation, both the RTC and CA ruled that they could not because the claims of petitioners against respondent were not liquidated and demandable. ISSUE Whether petitioners could avail themselves of compensation HELD: YES. Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which one is sued by means of a legal or 126


equitable right resulting from a counterclaim arising out of the same transaction. It is the setting up of a demand arising from the same transaction as the plaintiff’s claim, to abate or reduce that claim. The legal basis for recoupment by the buyer is the first paragraph of Article 1599 of the Civil Code. Legal compensation takes place when the requirements set forth in Article 1278 and Article 1279 of the Civil Code Considering that preponderant evidence showing that petitioners had spent the amount of P71,350.00 for the repairs and spare parts of the second dump truck within the warranty period of three months supported the finding of the two lower courts, the Court accepts their finding. Verily, factual findings of the trial court, when affirmed by the CA, are conclusive on the Court when supported by the evidence on record. A debt is liquidated when its existence and amount are determined. Accordingly, an unliquidated claim set up as a counterclaim by a defendant can be set off against the plaintiff’s claim from the moment it is liquidated by judgment. Article 1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 of the Civil Code are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount. With petitioners’ expenses for the repair of the dump truck being already established and determined with certainty by the lower courts, it follows that legal compensation could take place because all the requirements were present. Hence, the amount of P71,350.00 should be set off against petitioners’ unpaid obligation of P735,000.00, leaving a balance of P663,650.00, the amount petitioners still owed to respondent.

Starbright Sales Enterprises, Inc. (SSE) v Philippine Realty Corporation Novation: Subjective/personal Facts: On April 17, 1988, Ramon Licup wrote Msgr. Domingo Cirilos, offering to buy 3 parcels of land that The Holy See and Philippine Realty Corporation (PRC) owned for P1,240 per square meter. Licup accepted the responsibility for removing the illegal settlers on the land and enclosed a check for P100,000 to "close the transaction." He undertook to pay the balance of the purchase price upon presentation of the title for transfer and once the property has been cleared of its occupants. Cirilos, representing The Holy See and PRC, signed his name on the conforme portion of the letter and accepted the check. But the check could not be encashed due to Licup’s stop-order payment. Licup wrote Cirilos, requesting that the titles to the land be instead transferred to SSE. He enclosed a new check for the same amount. SSE’s representatives, Mr. and Mrs. Cu, did not sign the letter. Cirilos wrote SSE, requesting it to remove the occupants on the property and, should it decide not to do this, Cirilos would return to it the P100,000 that he received. SSE replied with an "updated proposal." It would be willing to comply with Cirilos’ condition provided the purchase price is lowered to P1,150 per square meter. Cirilos wrote back, rejecting the updated proposal. He gave SSE 7 days within which to buy the property at P1,400 per square meter, otherwise, Cirilos would take it that SSE has lost interest in the same. He enclosed a check for P100,000 in his letter as refund of what he earlier received. SSE wrote Cirilos that they already had a perfected contract of sale in the April 17, 1988 letter which he signed so he could no longer impose amendments such as the removal of the informal 127


settlers at the buyer’s expense and the increase in the purchase price. SSE claimed that it got no reply from Cirilos and that the next thing they knew, the land had been sold to Tropicana Properties. SSE demanded rescission of that sale. Meanwhile, Tropicana Properties sold parcels of land to Standard Realty. Its demand for rescission unheeded, SSE filed a complaint for annulment of sale and reconveyance with damages before the RTC. RTC treated the April 17, 1988 letter between Licum and Cirilos as a perfected contract of sale between the parties. Cirilos attempted to change the terms of contract and return SSE’s initial deposit but the parties reached no agreement regarding such change. Since such agreement was wanting, the original terms provided in the April 17, 1988 letter continued to bind the parties. CA reversed the RTC decision. It held that no perfected contract can be gleaned from the April 17, 1988 letter. The subsequent exchange of letters between SSE and Cirilos show that the parties were grappling with the terms of the sale. Cirilos made no unconditional acceptance that would give rise to a perfected contract. As to the P100,000 given to Cirilos, the CA considered it an option money that secured for SSE only the privilege to buy the property even if Licup called it a "deposit." Issue: Whether or not there is a perfected contract of sale between SSE and the land owners, represented by Msgr. Cirilos, giving the former a right to demand for rescission. Ruling: No. The April 17, 1988 letter constituted a perfected contract. When Msgr. Cirilos affixed his signature on that letter, he expressed his conformity to the terms of Licup’s offer appearing on it. There was meeting of the minds as to the object and consideration of the contract. But when Licup ordered a stoppayment on his deposit and proposed in his April 26, 1988 letter to Msgr. Cirilos that the property be instead transferred to SSE,

a subjective novation took place. A subjective novation results through substitution of the person of the debtor or through subrogation of a third person to the rights of the creditor. To accomplish a subjective novation through change in the person of the debtor, the old debtor needs to be expressly released from the obligation and the third person or new debtor needs to assume his place in the relation. Novation serves 2 functions – one is to extinguish an existing obligation, the other to substitute a new one in its place – requiring concurrence of 4 requisites: 1) a previous valid obligation; 2) an agreement of all parties concerned to a new contract; 3) the extinguishment of the old obligation; and 4) the birth of a valid new obligation. Licup and Cirilos affixed their signatures on the original agreement embodied in Licup’s letter of April 26, 1988. No similar letter agreement can be found between SSE and Cirilos. The proposed substitution of Licup by SSE opened the negotiation stage for a new contract of sale as between SSE and the owners. The succeeding exchange of letters between Mr. Stephen Cu, SSE’s representative, and Cirilos attests to an unfinished negotiation. Cirilos referred to his discussion with SSE regarding the purchase as a "pending transaction." Cu, on the other hand, regarded SSE’s first letter to Cirilos as an "updated proposal." This proposal took up 2 issues: which party would undertake to evict the occupants on the property and how much must the consideration be for the property. These are clear indications that there was no meeting of the minds between the parties. As it turned out, the parties reached no consensus regarding these issues, thus producing no perfected sale between them.

128


S.C. Megaworld Construction vs. Engr. Luis U. Parada (2013) G.R. No. 183804, September 11, 2013 Topic: Novation; subjective or personal Doctrine: Novation is never presumed but must be clearly and unequivocally shown. Facts: S.C. Megaworld Construction and Development Corporation (petitioner) bought electrical lighting materials from Gentile Industries, a sole proprietorship owned by Engineer Luis U. Parada (respondent), for its Read-Rite project in Canlubang, Laguna. The petitioner was unable to pay for the above purchase on due date, but blamed it on its failure to collect under its sub-contract with the Enviro Kleen. It was however able to persuade Enviro Kleen to agree to settle its above purchase, but after paying the respondent P250,000.00, Enviro Kleen stopped making further payments, leaving an outstanding balance of P816,627.00. It also ignored the various demands of the respondent, who then filed a suit in the RTC to collect from the petitioner the said balance. The petitioner in its answer denied liability, claiming that it was released from its indebtedness to the respondent by reason of the novation of their contract, which, it reasoned, took place when the latter accepted the partial payment of Enviro Kleen in its behalf, and thereby acquiesced to the substitution of Enviro Kleen as the new debtor in the petitioner’s place. After trial, the RTC rendered judgment in favor of the respondent. On appeal to the CA, the petitioner maintained that the trial court erred in ruling that no novation of the contract took

place through the substitution of Enviro Kleen as the new debtor. But for the first time, it further argued that the trial court should have dismissed the complaint for failure of the respondent to implead Genlite Industries as "a proper party in interest", as provided in Section 2 of Rule 3 of the 1997 Rules of Civil Procedure. In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that the defendant may move to dismiss the suit on the ground that it was not brought in the name of or against the real party in interest, with the effect that the complaint is then deemed to state no cause of action. In dismissing the appeal, the CA noted that the petitioner in its answer below raised only the defense of novation, and that at no stage in the proceedings did it raise the question of whether the suit was brought in the name of the real party in interest. Moreover, the appellate court found from the sales invoices and receipts that the respondent is the sole proprietor of Genlite Industries, and therefore the real party-plaintiff. Said the CA: Settled is the rule that litigants cannot raise an issue for the first time on appeal as this would contravene the basic rules of fair play and justice. In any event, there is no question that respondent Engr.Luis U. Parada is the proprietor of Genlite Industries, as shown on the sales invoice and delivery receipts. There is also no question that a special power of attorney was executed by respondent Engr.Luis U. Parada in favor of Engr. Leonardo A. Parada authorizing the latter to file a complaint against the petitioner. The petitioner also contended that a binding novation of the purchase contract between the parties took place when the respondent accepted the partial payment of Enviro Kleen of P250,000.00 in its behalf, and thus acquiesced to the 129


substitution by Enviro Kleen of the petitioner as the new debtor. But the CA noted that there is nothing in the two (2) letters of the respondent to Enviro Kleen, which would imply that he consented to the alleged novation, and, particularly, that he intended to release the petitioner from its primary obligation to pay him for its purchase of lighting materials. The appellate court cited the RTC’s finding that the respondent informed Enviro Kleen in his first letter that he had served notice to the petitioner that he would take legal action against it for its overdue account, and that he retained his option to pull out the lighting materials and charge the petitioner for any damage they might sustain during the pull-out. Respondent has served notice to the petitioner that unless the overdue account is paid, the matter will be referred to its lawyers and there may be a pull-out of the delivered lighting fixtures. It was likewise stated therein that incidental damages that may result to the structure in the course of the pull-out will be to the account of the petitioner. The CA concurred with the RTC that by retaining his option to seek satisfaction from the petitioner, any acquiescence which the respondent had made was limited to merely accepting Enviro Kleen as an additional debtor from whom he could demand payment, but without releasing the petitioner as the principal debtor from its debt to him. On motion for reconsideration, the petitioner raised for the first time the issue of the validity of the verification and certification of non-forum shopping attached to the complaint. CA denied the said motion for lack of merit. Issue: Whether or not there was novation between the parties Held: Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a

new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. It is "the substitution of a new contract, debt, or obligation for an existing one between the same or different parties." Thus, in order to change the person of the debtor, the former debtor must be expressly released from the obligation, and the third person or new debtor must assume the former’s place in the contractual relation. Article 1293 speaks of substitution of the debtor, which may either be in the form of expromision or delegacion, as seems to be the case here. In both cases, the old debtor must be released from the obligation, otherwise, there is no valid novation. From the circumstances obtaining below, we can infer no clear and unequivocal consent by the respondent to the release of the petitioner from the obligation to pay the cost of the lighting materials. It is evident from the two (2) aforesaid letters that there is no indication of the respondent’s intention to release the petitioner from its obligation to pay and to transfer it to Enviro Kleen Technologies, Inc. The acquiescence of Enviro Kleen Technologies, Inc. to assume the obligation of the petitioner to pay the unpaid balance of [P]816,627.00 to the respondent when there is clearly no agreement to release the petitioner will result merely to the addition of debtors and not novation. Hence, the creditor can still enforce the obligation against the original debtor. The settled rule is that novation is never presumed, but must be clearly and unequivocally shown. In order for a new agreement to supersede the old one, the parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one. Thus, the mere substitution of debtors will not result innovation, and the fact that the creditor accepts payments from a third person, who has assumed the obligation, 130


will result merely in the addition of debtors and not novation, and the creditor may enforce the obligation against both debtors. If there is no agreement as to solidarity, the first and new debtors are considered obligated jointly.

Magbanua v Uy (2005) Topic: Novation; Subjective or personal

The trial court found that the respondent never agreed to release the petitioner from its obligation, and this conclusion was upheld by the CA. We generally accord utmost respect and great weight to factual findings of the trial court and the CA, unless there appears in the record some fact or circumstance of weight and influence which has been overlooked, or the significance of which has been misinterpreted, that if considered would have affected the result of the case.We find no such oversight in the appreciation of the facts below, nor such a misinterpretation thereof, as would otherwise provide a clear and unequivocal showing that a novation has occurred in the contract between the parties resulting in the release of the petitioner.

Doctrine: Novation, a mode of extinguishing an obligation, is done by changing the object or principal condition of an obligation, substituting the person of the debtor, or surrogating a third person in the exercise of the rights of the creditor. For an obligation to be extinguished by another, the law requires either of these two conditions: (1) the substitution is unequivocally declared, or (2) the old and the new obligations are incompatible on every point. A compromise of a final judgment operates as a novation of the judgment obligation, upon compliance with either requisite. In the present case, the incompatibility of the final judgment with the compromise agreement is evident, because the latter was precisely entered into to supersede the former. Facts: As a final consequence of the final and executory decision of the Supreme Court in Rizalino P. Uy v. NLRC hearings were conducted to determine the amount of wage differentials due the eight complainants therein, now petitioners. As computed, the award amounted to P1,487,312.69. On February 3, 1997, petitioners filed a Motion for Issuance of Writ of Execution. On May 19, 1997, respondent Rizalino Uy filed a Manifestation requesting that the cases be terminated and closed, stating that the judgment award as computed had been complied with to the satisfaction of petitioners. Said Manifestation was also signed by the eight petitioners. Together with the Manifestation is a Joint Affidavit dated May 5, 1997 of petitioners, attesting to the receipt of payment from [respondent] and waiving all other benefits due them in connection with their complaint. 131


On June 3, 1997, petitioners filed an Urgent Motion for Issuance of Writ of Execution wherein they confirmed that each of them received P40,000 from respondent on May 2, 1997.“On June 9, 1997, respondent opposed the motion on the ground that the judgment award had been fully satisfied. In their Reply, petitioners claimed that they received only partial payments of the judgment award. Labor Arbiter issued an order denying the motion for issuance of writ of execution. NLRC: reversed, holding that a final and executory judgment can no longer be altered and that quitclaims and releases are normally frowned upon as contrary to public policy. CA: held that compromise agreements may be entered into even after a final judgment. Thus, petitioners validly released respondent from any claims, upon the voluntary execution of a waiver pursuant to the compromise agreement.

determined by compliance with the requisites and principles of contracts, not by when it was entered into. As provided by the law on contracts, a valid compromise must have the following elements: (1) the consent of the parties to the compromise, (2) an object certain that is the subject matter of the compromise, and (3) the cause of the obligation that is established. In the present factual milieu, compliance with the elements of a valid contract is not in issue. Petitioners did not challenge the factual finding that they entered into a compromise agreement with respondent. There are no allegations of vitiated consent. Instead, petitioners based their argument on the sole fact that the agreement was executed despite a final judgment, which the Court had previously ruled to be allowed by law. The principle of novation supports the validity of a compromise after final judgment.

Issue: Whether or not the final and executory judgment of the Supreme Court could be subject to compromise settlement. Held: YES. A compromise agreement is a contract whereby the parties make reciprocal concessions in order to resolve their differences and thus avoid or put an end to a lawsuit. The issue involving the validity of a compromise agreement notwithstanding a final judgment is not novel. Jesalva v. Bautista upheld a compromise agreement that covered cases pending trial, on appeal, and with final judgment. The Court noted that Article 2040 impliedly allowed such agreements; there was no limitation as to when these should be entered into. There is no justification to disallow a compromise agreement, solely because it was entered into after final judgment. The validity of the agreement is 132


Phil. Charter v Petroleum (2012) G.R. No. 180898, April 18, 2012 Novation Doctrine: In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and new obligation be in every point incompatible with each other. Novation of a contract is never presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.

and speed up the work of the project. These resulted in the reduction of the contract price. 

FCC was behind schedule and despite notice from the problem, was not addressed, as the delay increased to 30 days and ballooned to 60 days.



Consequently, FCC executed a deed of assignment, assigning a portion of its receivables from Caltex Philippines, Inc. (Caltex), and a chattel mortgage, conveying some of its construction equipment to PDSC as additional security for the faithful compliance with its obligation.



On even date, PDSC and FCC likewise executed a memorandum of agreement (MOA), wherein the parties agreed to revise the work schedule of the project. As a consequence, Performance Bond No. 31915 was extended up to March 2, 2000.



For failure of FCC to accomplish the project within the agreed completion period, PDSC, informed FCC that it was terminating their. Subsequently, PDSC sent demand letters to FCC and its officers for the payment of liquidated damages amounting to ₱9,149,962.02 for the delay. In the same manner, PDSC wrote PCIC asking for remuneration pursuant to Performance Bond No. 31915.



Despite notice, PDSC did not receive any reply from either FCC or PCIC, constraining it to file a complaint for damages, recovery of possession of personal property and/or foreclosure of mortgage with prayer for the issuance of a writ of replevin and writ of attachment, against FCC and its officers before the RTC. PDSC later filed a supplemental complaint impleading PCIC, claiming coverage under Performance Bond No. 31915 in the amount of ₱6,828,329.66.

Facts: 

Respondent Petroleum Distributors and Services Corporation (PDSCentered into a building contract with N.C. Francia Construction Corporation (FCC), for the construction of a four-story commercial and parking complex located at MIA Road corner Domestic Road, Pasay City, known as Park ‘N Fly Building (Park ‘N Fly). Under the contract, FCC agreed to undertake the construction of Park ‘N Fly for the price of ₱45,522,197.72.3



To ensure compliance with its obligation, FCC procured Performance Bond No. 31915 amounting to ₱6,828,329.00 from petitioner Philippine Charter Insurance Corporation (PCIC) to secure full and faithful performance of its obligation under the Building Contract.



The construction of the Park ‘N Fly started on February 1, 1999. Pursuant to the Building Contract, PDSC sourced out construction materials and subcontracted various phases of the work to help obtain the lowest cost of the construction

133












with regard to FCC and the other parties in the case. Hence, the Court shall limit its discussion to the liability of PCIC.

In its Amended Answer with affirmative defense and counterclaim, FCC admitted that it entered into a contract with PDSC for the construction of the Park ‘N Fly building. It, however, asserted that due to outsourcing of different materials and subcontracting of various phases of works made by PDSC, the contract price was invariably reduced to ₱19,809,822.12.

Issue:

FCC denied any liability to PDSC claiming that any such claim by the latter had been waived, abandoned or otherwise extinguished by the execution of the September 10, 1999 MOA. FCC claimed that in the said MOA, PDSC assumed all the obligations originally reposed upon it.

Ruling:

For its part, PCIC averred that as a surety, it was not liable as a principal obligor; that its liability under the bond was conditional and subsidiary and that it could be made liable only upon FCC’s default of its obligation in the Building Contract up to the extent of the terms and conditions of the bond. PCIC also alleged that its obligation under the performance bond was terminated when it expired on October 15, 1999 and the extension of the performance bond until March 2, 2000 was not binding as it was made without its knowledge and consent. Nonetheless, in the event that PCIC would be made liable, its liability should be in proportion to the liabilities of the other sureties. The RTC rendered its Decision in favor of PDSC. The RTC found FCC guilty of delay when it failed to finish and turn over the project. It pronounced FCC and PCIC jointly and severally liable and ordered them to pay PDSC the amount of ₱9,000,000.00 as damages and ₱50,000.00 as attorney’s fees plus interest. The CA also ruled in favor of PDSC. Thereafter, only PCIC appealed the CA’s decision. It became final and executory



The issues before the Court are (1) whether or not PCIC is liable for liquidated damages under the performance bond; (2) whether or not the September 10, 1999 MOA executed by PDSC and FCC extinguished PCIC’s liability under the performance bond



By the language of the performance bond issued by PCIC, it guaranteed the full and faithful compliance by FCC of its obligations in the construction of the Park ‘N Fly. In fact, the primary purpose for the acquisition of the performance bond was to guarantee to PDSC that the project would proceed in accordance with the terms and conditions of the contract and to ensure the payment of a sum of money in case the contractor would fail in the full performance of the contract. This guaranty made by PCIC gave PDSC the right to proceed against it (PCIC) following FCC’s non-compliance with its obligation.



The Court also found untenable the contention of PCIC that the principal contract was novated when PDSC and FCC executed the September 10, 1999 MOA, without informing the surety, which, in effect, extinguished its obligation.



A surety agreement has two types of relationship: (1) the principal relationship between the obligee and the obligor; and (2) the accessory surety relationship between the principal and the surety. The obligee accepts the surety’s solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in 134


any material way the obligee’s relationship with the principal obligor. Neither does it make the surety an active party in the principal obligor-obligee relationship. It follows, therefore, that the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the obligor’s default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor. 

Furthermore, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and new obligation be in every point incompatible with each other. Novation of a contract is never presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.



Undoubtedly, a surety is released from its obligation when there is a material alteration of the principal contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form.



In this case, however, no new contract was concluded and perfected between PDSC and FCC. A reading of the September 10, 1999 MOA reveals that only the revision of the work schedule originally agreed upon was the subject thereof. The parties saw the need to adjust the work schedule because of the various subcontracting made by PDSC. In fact, it was specifically stated in the MOA that “all other terms and conditions of the Building Contract of 27 January 1999 not inconsistent herewith shall remain in full force and effect.” There was no new

contract/agreement which could be considered to have substituted the Building Contract.

135


Arco Pulp and Paper Company, Inc. v Lim Novation: Subjective/personal Facts: Quality Paper and Plastic Products, Enterprises, owned by Dan Lim, delivered scrap papers worth 7,220,968.31 to Arco Pulp. The parties allegedly agreed that Arco Pulp would either pay Lim the value of the raw materials or deliver to him their finished products of equivalent value. Arco Pulp and Eric Sy executed a MOA where Arco Pulp bound themselves to deliver their finished products to Megapack Container Corp., owned by Sy, for his account. The MOA also stated that the raw materials would be supplied by Lim. Lim sent a letter to Arco Pulp demanding payment, but no payment was made to him. Lim filed a complaint for collection of sum of money with the RTC. RTC ruled against Lim, holding that when Arco Pulp and Sy entered into the MOA, novation took place, which extinguished Arco Pulp’s obligation to Lim. On appeal, Lim argued that novation did not take place since the MOA between Arco Pulp and Sy was an exclusive and private agreement between them. CA reversed and set aside the RTC judgment. Petitioners argue that the execution of the MOA constituted a novation of the original obligation since Sy became the new debtor of Lim. They also argue that when Lim allowed them to deliver the finished products to Eric Sy, the original obligation was novated. Issue: Whether or not the memorandum of agreement constituted a novation of the original contract. Ruling: No. When Arco Pulp opted instead to deliver the finished products to a third person, it did not novate the original obligation between the parties. Novation extinguishes an

obligation between 2 parties when there is a substitution of objects or debtors or when there is subrogation of the creditor. It occurs only when the new contract declares so "in unequivocal terms" or that "the old and the new obligations be on every point incompatible with each other." Garcia v. Llamas: “There are 2 modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from, and may even be made without the knowledge of, the debtor, since it consists of a third person’s assumption of the obligation. As such, it requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these 3 persons are necessary. Both modes of substitution by the debtor require the consent of the creditor.” “Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is made either by changing the object or the principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal novation. The following requisites must concur: 1) There must be a previous valid obligation; 2) The parties concerned must agree to a new contract; 3) The old contract must be extinguished; 4) There must be a valid new contract.” “Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point. The test of 136


incompatibility is whether the two obligations can stand together, each one with its own independent existence.” Because novation requires that it be clear and unequivocal, it is never presumed. For novation to be a jural reality, its animus must be ever present, debitum pro debito — basically extinguishing the old obligation for the new one. There is nothing in the MOA that states that with its execution, the obligation of Arco Pulp to Lim would be extinguished. It also does not state that Sy somehow substituted Arco Pulp as Lim’s debtor. It merely shows that Arco Pulp opted to deliver the finished products to a third person instead. The consent of the creditor must also be secured for the novation to be valid: “Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the absence of any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old agreement.” Lim was not privy to the MOA, thus, his conformity to the contract need not be secured. This is clear from the first line of the memorandum, which states: “Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . .” If the MOA was intended to novate the original agreement between the parties, Lim must have first agreed to the substitution of Sy as his new debtor. The MOA must also state in clear and unequivocal terms that it has replaced the original obligation of Arco Pulp to Lim. Neither of these circumstances is present in this case. Arco Pulp’s act of tendering partial payment to Lim also conflicts with their alleged intent to pass on their obligation to Sy. When Lim sent his letter of demand to Arco Pulp, and not to Sy, it showed that Lim neither acknowledged nor consented to Sy as his new debtor. These acts, when taken together, clearly show that novation did not take place. 137


Saura v DBP (1972) April 27, 1972

After 9 years, Saura Inc, commenced an actin against DBP for damages, alleging failure on the latter to comply with its obligations to release the loan applied for an approved.

Topic: Mutual desistance

Issue: Whether or not there was a perfected contract

Doctrine: Mutual Desistance is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment.

Held:

Facts: In July 1952, Saura, Inc., applied to Rehabilitation Finance Corp., now DBP, for an industrial loan of P500,000 to be used for the construction of a factory building, to pay the balance of the jute mill machinery and equipment and as additional working capital. Prior to the loan the jute mill machinery has already been purchased on the strengthe of the letter of credit extended by Prudential Bank, and to secure its release without paying a draft, Saura Inc., executed a trust receipt in favor of said bank. RFC approved the loan of 500,000 but thereafter Saura Inc., requested that it be reduced to 300,000. However, on June 1954 FR Halling cancelled its representation, as such, Saura Inc., requested RFC to restore the loan of P500,000. RFC then passed Resolution No. 9083 restoring the loan to its original amount of 500,000 with the condition that the raw materials needed by the company to carry out its operation are available in the immediate vicinity and that there should be an increased production of the raw materials to provide adequately for the requirement of the factory. Saura Inc. did not pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17 1955 RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura.

There was indeed a perfected consensual contract. Article 1934 provides: An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until delivery of the object of the contract. There was undoubtedly offer and acceptance in the case. The application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and registered. The defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages. When an application for a loan of money was approved by resolution of the respondent corporation and the responding mortgage was executed and registered, there arises a perfected consensual contract. However, it should be noted that RFC imposed two conditions (availability of raw materials and increased production) when it restored the loan to the original amount of P500,000.00. Saura, Inc. obviously was in no position to comply with RFC’s conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled. The action thus taken by both parties was in the nature of mutual desistance which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, 138


mutual disagreement extinguishment.

by

the

parties

can

cause

its

NATELCO VS. CA (1994) Topic: Rebus Sic Stantibus (1267) Doctrine: Article 1267 states in our law the doctrine of unforseen events. This is said to be based on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist. FACTS: Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance telephone service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of operating an electric power service in the same city. The parties entered into a contract for the use by petitioners in the operation of its telephone service the electric light posts of private respondent in Naga City. In consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone connections for the use by private respondent. Said contract also provided: (a) That the term or period of this contract shall be as long as the party of the first part has need for the electric light posts of the party of the second part it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned its operation as a public service and it becomes necessary to remove the electric lightpost. After the contract had been enforced for over ten (10) years, private respondent filed on with the RTC of Naga City against 139


petitioners for reformation of the contract with damages, on the ground that it is too one-sided in favor of petitioners. As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used 319 posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City, without any contract with it; that at the rate of P10.00 per post, petitioners should pay private respondent for the use thereof the total amount of P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had refused to pay private respondent said amount despite demands. And as third cause of action, private respondent complained about the poor servicing by petitioners of the ten (10) telephone units which had caused it great inconvenience and damages to the tune of not less than P100,000.00. In petitioners' answer to the first cause of action, they averred that it should be dismissed because (1) it does not sufficiently state a cause of action for reformation of contract; (2) it is barred by prescription, the same having been filed more than ten (10) years after the execution of the contract; and (3) it is barred by estoppel, since private respondent seeks to enforce the contract in the same action. Regarding the second cause of action, petitioners claimed that private respondent had asked for telephone lines in areas outside Naga City for which its posts were used by them. And with respect to the third cause of action, petitioners claimed, that their telephone service had been categorized by the National Telecommunication Corporation as "very high" and of "superior quality." The trial court found, as regards private respondent's first cause of action, that while the contract appeared to be fair to both parties when it was entered into by them during the first year of private respondent's operation and when its Board of Directors did not yet have any experience in that business, it had become disadvantageous and unfair to private respondent because of subsequent events and conditions, particularly the increase in

the volume of the subscribers of petitioners for more than ten (10) years without the corresponding increase in the number of telephone connections to private respondent free of charge. The trial court concluded that while in an action for reformation of contract, it cannot make another contract for the parties, it can, however, for reasons of justice and equity, order that the contract be reformed to abolish the inequities therein. As regards the second cause of action, the trial court held that for reason of equity, the contract should be reformed by including therein the provision that for the use of private respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00 per post, the payment to start on the date this case was filed, or on January 2, 1989, and private respondent should also pay petitioners the monthly dues on its telephone connections located outside Naga City beginning January, 1989. And with respect to private respondent's third cause of action, the trial court found the claim not sufficiently proved. Petitioners appealed to respondent Court of Appeals. CA affirmed the decision of the trial court, but based on different grounds to wit: (1) that Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a potestative condition which rendered said condition void. ISSUE: Whether article 1267 applicable. HELD: YES ARTICLE 1267, EVEN THOUGH NEVER RAISED BEFORE, IS APPLICABLE. ARTICLE 1267: Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. Taking into consideration the rationale behind this provision, the term "service" should be understood as referring to the "performance" of the obligation. In the present case, the 140


obligation of private respondent consists in allowing petitioners to use its posts in Naga City, which is the service contemplated in said article. Furthermore, a bare reading of this article reveals that it is not a requirement thereunder that the contract be for future service with future unusual change. According to Senator Arturo M. Tolentino, Article 1267 states in our law the doctrine of unforseen events. This is said to be based on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist. Considering practical needs and the demands of equity and good faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of the party prejudiced. The SC agreed with respondent court that the allegations in private respondent's complaint and the evidence it has presented sufficiently made out a cause of action under Article 1267. We, therefore, release the parties from their correlative obligations under the contract. However, our disposition of the present controversy does not end here. We have to take into account the possible consequences of merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent, resulting in disruption of their service to the public; while private respondent, in consonance with the contract will return all the telephone units to petitioners, causing prejudice to its business. We shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2) private respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by the public beginning January, 1989. The peculiar circumstances of the present case, as distinguished further from the Occeña

case, necessitates exercise of our equity jurisdiction. 13 By way of emphasis, we reiterate the rationalization of respondent court that: . . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to do so in order not to disrupt the basic and essential services being rendered by both parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff . . . .

PNCC vs. CA (1997) Doctrine: This article, which enunciates the doctrine of unforeseen events, is not an absolute application of the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor. Facts: 

On 18 November 1985, petitioner Philippine National Construction Corporation (PNCC) executed a contract of lease with private respondents, stipulating to pay rent for the use of land, at the monthly rate of P 20,000.00 payable yearly in advance.



The said land is to be used by petitioner as site for a rock crushing plant. The term of lease is for five years, commencing on the date of issuance of an industrial clearance by the Ministry of Human Settlements (Ministry).



On 7 January 1986 PNCC obtained a Temporary Use Permit from the Ministry for the proposed rock crushing project. Nine days later private respondents wrote to PNCC, asking for the first annual rental, and assuring 141


that they have stopped considering proposals of other aggregates plants in favor of PNCC. 



In reply, PNCC argued that the contract must commence on the date of issuance by the Ministry of an industrial clearance in their favor. It also expressed its desire to terminate the contract it executed with respondents, due to “financial, as well as technical difficulties.”



PNCC asserts that it was not able to use and enjoy the land and is not entitled to pay damages cited by the court. However, respondents suffered damages because of its inability to use the premises. Respondents are entitled to indemnification under Art. 1659 of the Civil Code.



The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist. This theory is said to be the basis of Article 1267 of the Civil Code, which provides:

Respondents refused to accede to PNCC’s request for pre termination and on 19 May 1986, instituted an action against PNCC for Specific Performance with Damages. Trial court ruled in favor of respondents and ordered PNCC to pay rentals for two years, with legal interests plus attorney’s fees. The Court of Appeals affirmed the decision of the trial court upon appeal by PNCC; hence, this case.

Issues: Whether PNCC should be released from its contract with respondents due to unforeseen events and causes beyond its control.

o ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. 

This article, which enunciates the doctrine of unforeseen events, is not an absolute application of the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor.



In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the country after the EDSA Revolution and its poor financial condition “rendered the performance of the lease contract impractical and inimical to the corporate survival of the petitioner.

Ruling: 

PNCC cites Art. 1266, asserting that it should be released from the obligatory force of the contract because its purpose did not materialize due to unforeseen events and causes beyond its control. However, this article applies only to obligations “to do” and not “to give”, while obligation arising out of said contract is an obligation “to do”. Further, PNCC executed the contract with open eyes on the deteriorating conditions of the country and mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation. The “unforeseen events and causes beyond its control” cited by PNCC are not the legal and physical impossibilities contemplated in Art. 1266.

142


Osmena v SSS (2007) Garcia, J Re: Rebus Sic Stantibus DOCTRINE When the service has become so difficult as to be manifestly beyond the contemplation of the parties, total or partial release from a prestation and from the counterprestation is allowed. Under the theory of rebus sic stantibus, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. FACTS SSS took steps to liquefy its long term investments and diversify them into higher yielding and less volatile investments. Among its assets determined as needing to be liquefied were its shareholdings in EPCIB. Albeit there were other interested parties, only Banco de Oro Universal Bank (BDO) and its investment subsidiary, respondent BDO Capital, appeared in earnest to acquire the shares in question. In the final draft of the Share Purchase Agreement (SPA), the parties mutually agreed to the purchase by the BDO Capital and the sale by SSS of all the latter’s EPCIB shares at the closing date at the specified price of P43.50 per share or a total of P8,171,383,258.50. COA and DOJ approved the proposed SPA. The records do not show whether or not any interested group/s submitted bids. The bottom line, however, is that even before the bid envelopes, if any, could be opened, the herein petitioners

commenced the instant special civil action for certiorari, setting their sights primarily on the legality of the Swiss Challenge angle and a provision in the Instruction to Bidders under which the SSS undertakes to offer the Shares to BDO should no bidder or prospective bidder qualifies. Under the Swiss Challenge format, one of the bidders is given the option or preferential “right to match” the winning bid. SSC (Social Security Commission) issued a resolution approving the proposed sale of the entire equity stake of the SSS in Equitable PCI Bank, Inc. (EPCIB or EPCI) through the Swiss Challenge bidding procedure. Petitioners filed a petition for certiorari and prohibition of the resolution by SSC. Pending consideration of the petition, supervening events and corporate movements transpired that radically altered the factual complexion of the case. BDO made public its intent to merge with EPCIB. Under what BDO termed as “Merger of Equals”, EPCIB shareholders would get 1.6 BDO shares for every EPCIB share. Owing to the foregoing developments, the Court, on October 3, 2006, issued a Resolution requiring the ‘parties to CONFIRM news reports that price of subject shares has been agreed upon at P92; and if so, to MANIFEST whether this case has become moot.” It appears that BDO, or BDO-EPCI, Inc. to be precise, has since issued BDO common shares to respondent SSS corresponding to the number of its former EPCIB shareholdings under the ratio and exchange procedure prescribed in the Plan of Merger. In net effect, SSS, once the owner of a block of EPCIB shares, is now a large stockholder of BDO-EPCI, Inc. ISSUE Whether parties were released from the agreement due to supervening events. HELD: Yes. The petition has become moot. 143


It cannot be overemphasized, however, that the Shares, as a necessary consequence of the BDO-EPCIB merger which saw EPCIB being absorbed by the surviving BDO, have been transferred to BDO and converted into BDO common shares under the exchange ratio set forth in the BDO-EPCIB Plan of Merger. As thus converted, the subject Shares are no longer equity security issuances of the now defunct EPCIB, but those of BDO-EPCI, which, needless to stress, is a totally separate and distinct entity from what used to be EPCIB. In net effect, therefore, the 187.84 Million EPCIB common shares are now lost or inexistent. And in this regard, the Court takes judicial notice of the disappearance of EPCIB stocks from the local bourse listing. Instead, BDO-EPCI Stocks are presently listed and being traded in the PSE. Under the law on obligations and contracts, the obligation to give a determinate thing is extinguished if the object is lost without the fault of the debtor. And per Art. 1192 (2) of the Civil Code, a thing is considered lost when it perishes or disappears in such a way that it cannot be recovered. In a very real sense, the interplay of the ensuing factors: a) the BDO-EPCIB merger; and b) the cancellation of subject Shares and their replacement by totally new common shares of BDO, has rendered the erstwhile 187.84 million EPCIB shares of SSS “unrecoverable” in the contemplation of the adverted Civil Code provision.

SSS and BDO/BDO Capital as to render the fulfillment of any of the obligations that each may have agreed to undertake under either the Letter-Agreement, the SPA or the Swiss Challenge package legally impossible. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, total or partial release from a prestation and from the counter-prestation is allowed. Under the theory of rebus sic stantibus, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. Upon the facts obtaining in this case, it is abundantly clear that the conditions in which SSS and BDO Capital and/or BDO executed the Letter-Agreement upon which the pricing component – at P43.50 per share – of the Invitation to Bid was predicated, have ceased to exist. Accordingly, the implementation of the Letter- Agreement or of the challenged Res. Nos. 428 and 485 cannot plausibly push through, even if the central figures in this case are so minded.

With the above consideration, respondent SSS or SSC cannot, under any circumstance, cause the implementation of the assailed resolutions, let alone proceed with the planned disposition of the Shares, be it via the traditional competitive bidding or the challenged public bidding with a Swiss Challenge feature. At any rate, the moot-and-academic angle would still hold sway even if it were to be assumed hypothetically that the subject Shares are still existing. This is so, for the supervening BDOEPCIB merger has so effected changes in the circumstances of 144


So v Food Fest Land, Inc. Rebus sic stantibus Facts: Food Fest entered into a Contract of Lease with Daniel So. Before forging the lease contract, the parties entered into a preliminary agreement: “The lease shall not become binding upon us unless and until the government agencies concerned shall authorize, permit or license us to open and maintain our business at the proposed Lease Premises. We shall promptly make an application for permits, licenses and authority for our business and shall exercise due diligence to obtain it, provided, however, that you shall assist us by submitting such documents and papers and comply with such other requirements as the governmental agencies may impose. We shall give notice to you when the permits, license and authorities have been obtained. We shall also notify you if any of the required permits, licenses and authorities shall not be be (sic) given or granted within fifteen days (15) from your conform (sic)hereto. In such case, the agreement may be canceled and all rights and obligations hereunder shall cease.” While Food Fest was able to secure the necessary licenses and permits for 1999, it failed to commence business operations. For the 2000, Food Fest’s application for renewal of barangay business clearance was held in abeyance until further study of its kitchen facilities. As the barangay business clearance is a prerequisite to the processing of other permits, licenses and authority by the city government, Food Fest was unable to operate. Food Fest communicated its intent to terminate the lease contract to So who, however, did not accede and instead offered to help Food Fest secure authorization from the barangay. So later sent a demand letter to Food Fest for the payment of rental arrearages and reiterated his offer to help it secure

clearance from the barangay. Food Fest demurred to the offer. So again demanded payment of rentals from Food Fest. Food Fest denied any liability, however, and started to remove its fixtures and equipment from the premises. So sent Food Fest a Final Notice of Termination with demand to pay and to vacate. So filed a complaint for ejectment and damages against Food Fest before the MeTC. MeTC ruled in favor of So. RTC reversed the MeTC Decision. RTC held that Food Fest’s failure to secure the authority to commence business operations resulted in the termination of its contractual obligations to So, including the obligation to pay rent. However, CA declared that Food Fest’s obligation to pay rent was not extinguished upon its failure to secure permits to operate. Issue: Whether or not Food Fest is released from its responsibility to pay rentals when it failed to secure the authority to commence business operations, under the principle of rebus sic stantibus. Ruling: No. Article 1267, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the risks of unfavorable developments. It is only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor. Food Fest claims that its failure to secure the necessary business permits and licenses rendered the impossibility and nonmaterialization of its purpose in entering into the contract of lease, in support of which it cites the earlier-quoted portion of the preliminary agreement dated July 1, 1999 of the parties. 145


The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. A party’s motive or particular purpose in entering into a contract does not affect the validity or existence of the contract; an exception is when the realization of such motive or particular purpose has been made a condition upon which the contract is made to depend. The exception does not apply here. It is clear that the condition set forth in the preliminary agreement pertains to the initial application of Food Fest for the permits, licenses and authority to operate. It should not be construed to apply to Food Fest’s subsequent applications. Consider the following qualification in the preliminary agreement: “We shall also notify you if any of the required permits, licenses and authorities shall not be be (sic) given or granted within fifteen days (15) from your conform (sic) hereto. In such case, the agreement may be canceled and all rights and obligations hereunder shall cease.”

CONTRACTS

Food Fest was able to secure the permits, licenses and authority to operate when the lease contract was executed. Its failure to renew these permits, licenses and authority for the succeeding year, does not, however, suffice to declare the lease functus officio, nor can it be construed as an unforeseen event to warrant the application of Article 1267. Contracts, once perfected, are binding between the contracting parties. Obligations arising therefrom have the force of law and should be complied with in good faith. Food Fest cannot renege from the obligations it has freely assumed when it signed the lease contract.

146


Heirs of Intac v CA G.R. No. 17321, October 11, 2012 Topic: Contracts; General Provisions; Definition DOCTRINE: If the parties state a false cause in the contract to conceal their real agreement, the contract is only relatively simulated and the parties are still bound by their real agreement. In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. FACTS: Ireneo Mendoza (Ireneo), married to Salvacion Fermin (Salvacion), was the owner of the subject property, presently covered by TCT No. 242655. Ireneo had two children: respondents Josefina and Martina (respondents), Salvacion being their stepmother. When he was still alive, Ireneo, also took care of his niece, Angelina, since she was three years old until she got married. The property was then covered by TCT No. 106530. On October 25, 1977, Ireneo, with the consent of Salvacion, executed a deed of absolute sale of the property in favor of Angelina and her husband, Mario (Spouses Intac). Despite the sale, Ireneo and his family, including the respondents, continued staying in the premises and paying the realty taxes. After Ireneo died intestate in 1982, his widow and the respondents remained in the premises. After Salvacion died, respondents still maintained their residence there. Up to the present, they are in the premises, paying the real estate taxes thereon, leasing out portions of the property, and collecting the rentals. The controversy arose when respondents sought the cancellation of TCT No. 242655, claiming that the sale was only simulated and, therefore, void. Spouses Intac resisted, claiming that it was

a valid sale for a consideration. The complaint prayed not only for the cancellation of the title, but also for its reconveyance to them. Pending litigation, Mario died on May 20, 1995 and was substituted by his heirs, his surviving spouse, Angelina, and their children, namely, Rafael, Kristina, Ma. Tricia Margarita, Mario, and Pocholo. The heirs of Ireneo, the respondents in this case, alleged that: 1. When Ireneo was still alive, Spouses Intac borrowed the title of the property (TCT No. 106530) from him to be used as collateral for a loan from a financing institution; 2. they objected because the title would be placed in the names of said spouses and it would then appear that the couple owned the property; that Ireneo, however, tried to appease them, telling them not to worry because Angelina would not take advantage of the situation considering that he took care of her for a very long time; that during his lifetime, he informed them that the subject property would be equally divided among them after his death; and 3. that respondents were the ones paying the real estate taxes over said property. Spouses Intac countered, among others, that the subject property had been transferred to them based on a valid deed of absolute sale and for a valuable consideration; that the action to annul the deed of absolute sale had already prescribed; that the stay of respondents in the subject premises was only by tolerance during Ireneo’s lifetime because they were not yet in need of it at that time; and that despite respondents’ knowledge about the sale that took place on October 25, 1977, respondents still filed an action against them. RTC ruled in favor of the respondents saying that the sale to the spouses Intac was null and void. The CA also ruled that there was no consideration in the sale to the spouses Intac and that the contract was one for equitable mortgage.

147


ISSUE: Whether the deed of absolute sale was simulated or a valid contract. HELD: A contract, as defined in the Civil Code, is a meeting of minds, with respect to the other, to give something or to render some service. Article 1318 provides: Art. 1318. There is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established. Accordingly, for a contract to be valid, it must have three essential elements: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established. All these elements must be present to constitute a valid contract. Consent is essential to the existence of a contract; and where it is wanting, the contract is non-existent. In a contract of sale, its perfection is consummated at the moment there is a meeting of the minds upon the thing that is the object of the contract and upon the price. Consent is manifested by the meeting of the offer and the acceptance of the thing and the cause, which are to constitute the contract. In this case, the CA ruled that the deed of sale executed by Ireneo and Salvacion was absolutely simulated for lack of consideration and cause and, therefore, void, as provided by Articles 1345 and 1346 of the Civil Code.

If the parties state a false cause in the contract to conceal their real agreement, the contract is only relatively simulated and the parties are still bound by their real agreement. Hence, where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the parties and their successors in interest. In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. "The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties." "As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract." In the case at bench, the Court is one with the courts below that no valid sale of the subject property actually took place between the alleged vendors, Ireneo and Salvacion; and the alleged vendees, Spouses Intac. There was simply no consideration and no intent to sell it.



The deed of sale executed is void. It was an absolute simulation. Court made a distinction between absolute and relative simulation.



There was total lack of consideration, thus absolute simulation.



Spouses did not give proof that they paid for it.



There is a missing element in the contract: consent; lack of consideration 148


MIAA v. Avia (2012) Topic: Definition of Contracts DOCTRINE: In construing a contract, the provisions thereof should not be read in isolation, but in relation to each other and in their entirety so as to render them effective, having in mind the intention of the parties and the purpose to be achieved. In other words, the stipulations in a contract and other contract documents should be interpreted together with the end in view of giving effect to all. FACTS: In September 1990, petitioner Manila International Airport Authority (MIAA) entered into a contract of lease with herein respondent Avia Filipinas International Corporation (AFIC), wherein MIAA allowed AFIC to use specific portions of land as well as facilities within NAIA exclusively for the latter's aircraft repair station and chartering operations. The contract was for 1 year, beginning September 1, 1990 until August 31, 1991, with a monthly rental of P6,580.00. In December 1990, MIAA issued AO No. 1, Series of 1990, which revised the rates of dues, charges, fees or assessments for the use of its properties, facilities and services within the airport complex. The AO was made effective on December 1, 1990. As a consequence, the monthly rentals due from AFIC was increased to P15,996.50. Nonetheless, MIAA did not require AFIC to pay the new rental fee. Thus, it continued to pay the original fee of P6,580.00. After the expiration of the contract, AFIC continued to use and occupy the leased premises giving rise to an implied lease contract on a monthly basis. AFIC kept on paying the original rental fee without protest on the part of MIAA.

Three years after the expiration of the original contract of lease, MIAA informed AFIC, through a billing statement dated October 6, 1994, that the monthly rental over the subject premises was increased to P15,966.50 beginning September 1, 1991, which is the date immediately following the expiration of the original contract of lease. MIAA sought recovery of the difference between the increased rental rate and the original rental fee amounting to a total of P347,300.50 covering 37 months between September 1, 1991 and September 31, 1994. Beginning October 1994, AFIC paid the increased rental fee. However, it refused to pay the lump sum of P347,300.50 sought to be recovered by MIAA. For the continued refusal of AFIC to pay the said lump sum, its employees were denied access to the leased premises from July 1, 1997 until March 11, 1998. This, notwithstanding, AFIC continued paying its rentals. AFIC then filed with the RTC of Quezon City a Complaint for damages with injunction against MIAA seeking uninterrupted access to the leased premises, recovery of actual and exemplary damages, refund of its monthly rentals with interest at the time that it was denied access to the area being rented as well as attorney's fees. MIAA Contention MIAA contends that, as an administrative agency possessed of quasi-legislative and quasi-judicial powers as provided for in its charter, it is empowered to make rules and regulations and to levy fees and charges; that its issuance of AO No. 1, Series of 1990 is pursuant to the exercise of the abovementioned powers; that by signing the lease contract, respondent AFIC already agreed and gave its consent to any further increase in rental rates; as such, the provisions of the lease contract being cited by the CA which provides that “any amendment, alteration or modification [of the lease contract] shall not be valid and binding, unless and until made in writing and signed by the parties thereto” is deemed complied with 149


because respondent already consented to having any subsequent amendments to AO No. 1 automatically incorporated in the lease contract; that the above-quoted provisions should not also be interpreted as having the effect of limiting the authority of MIAA to impose new rental rates in accordance with its authority under its charter. RTC: Ruled in favor of AFIC. It found that MIAA is not entitled to apply the increase in rentals against AFIC and that MIAA is not entitled to padlock the leased premises. CA: Affirmed RTC with Modification. Issue: Whether the CA correctly interpreted the provisions of the lease contract in line with the provisions of the civil code and existing jurisprudence on contracts. HELD: YES. The contention of the petitioner lacks merit. Article 1306 of the Civil Code provides that “the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.” Moreover, Article 1374 of the Civil Code clearly provides that “the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.”

between petitioner and respondent. It is true that Article II, Paragraph 2.04 of the Contract of Lease states that “any subsequent amendment to AO No. 4, Series of 1982, which will effect a decrease or escalation of the monthly rental or impose new and additional fees and charges, including but not limited to government/MIAA circulars, rules and regulation to this effect, shall be deemed incorporated herein and shall automatically amend this Contract insofar as the monthly rental is concerned.” However, the Court agrees with the CA that such provision of the lease contract should not be read in isolation. Rather, it should be read together with the provisions of Article VIII, Paragraph 8.13, which provide that “any amendment, alteration or modification of the Contract shall not be valid and binding, unless and until made in writing and signed by the parties thereto.” It is clear from the foregoing that the intention of the parties is to subject such amendment to the conformity of both petitioner and respondent. In the instant case, there is no showing that respondent gave his acquiescence to the said amendment or modification of the contract.

Indeed, in construing a contract, the provisions thereof should not be read in isolation, but in relation to each other and in their entirety so as to render them effective, having in mind the intention of the parties and the purpose to be achieved. In other words, the stipulations in a contract and other contract documents should be interpreted together with the end in view of giving effect to all.

The situation is different with respect to the payments of the increased rental fee made by respondent beginning October 1994 because by then the amendment to the contract was made in writing through a bill sent by petitioner to respondent. The fact that respondent subsequently settled the said bill proves that he acceded to the increase in rental fee. The same may not be said with respect to the questioned rental fees sought to be recovered by petitioner between September 1991 and September 1994 because no bill was made and forwarded to respondent on the basis of which it could have given or withheld its conformity thereto.

In the present case, the Court finds nothing repugnant to law with respect to the questioned provisions of the contract of lease

It may not be amiss to point out that during such period, respondent continued to pay and petitioner kept on receiving 150


the original rental fee of P6,580.00 without any reservations or protests from the latter. Neither did petitioner indicate in the official receipts it issued that the payments made by respondent constitute only partial fulfillment of the latter's obligations. Article 1235 of the Civil Code clearly states that “when the obligee accepts the performance knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.” For failing to make any protest or objection, petitioner is already estopped from seeking recovery of the amount claimed.

Heirs of Uy v Castillo (2013) FACTS: Executed in exchange for the legal services of Atty. Zepeda and the financial assistance to be extended by Manuel, the Agreement involves respondents’ transfer of 40% of the avails of the suit, in the event of a favorable judgment in Civil Case No. 8085. While concededly subject to the same suspensive condition, a Kasunduan was concluded by respondents with Manuel alone, for the purpose of selling in favor of the latter 60% of their share in the subject parcels for the agreed price of P180,000.00 Petitioners commenced the instant suit with the filing of their complaint for specific performance and damages against the respondents and respondent. Faulting respondents with unjustified refusal to comply with their obligation under the Kasunduan, On 27 January 2005, the RTC rendered a decision finding the Kasunduan valid and binding between respondents and petitioners who had the right to demand its fulfillment as Manuel’s successors-in-interest. Respondents sought the complete reversal of the appealed decision on the ground that the Agreement and the Kasunduan were null and void. On 23 January 2007, the CA rendered the herein assailed decision, setting aside the RTC’s decision, upon the following findings and conclusions, to wit: (a) the Agreement and Kasunduan are byproducts of the partnership between Atty. Zepeda and Manuel who, as a non-lawyer, was not authorized to practice law; (b) the Agreement is void under Article 1491 (5) of the Civil Code of the Philippines which prohibits lawyers from acquiring properties which are the objects of the litigation in which they have taken part; (c) jointly designed to completely 151


deprive respondents of the subject parcels, the Agreement and the Kasunduan are invalid and unconscionable; and (d) without prejudice to his liability for violation of the Canons of Professional Responsibility, Atty. Zepeda can file an action to collect attorney’s fees based on quantum meruit. ISSUE: Whether the agreement and kasunduan is void ab inititio for beign contrary to law and public policy and for being violative of art. 1491 of the NCC and the canons of professional responsibility. RULING: Admittedly, Article 1491 (5) of the Civil Code prohibits lawyers from acquiring by purchase or assignment the property or rights involved which are the object of the litigation in which they intervene by virtue of their profession. The CA lost sight of the fact, however, that the prohibition applies only during the pendency of the suit and generally does not cover contracts for contingent fees where the transfer takes effect only after the finality of a favorable judgment. Although executed on the same day, it cannot likewise be gainsaid that the Agreement and the Kasunduan are independent contracts, with parties, objects and causes different from that of the other. Defined as a meeting of the minds between two persons whereby one binds himself, with respect to the other to give something or to render some service, a contract requires the concurrence of the following requisites: (a) consent of the contracting parties; (b) object certain which is the subject matter of the contract; and, (c) cause of the obligation which is established. Executed in exchange for the legal services of Atty. Zepeda and the financial assistance to be extended by Manuel, the Agreement concerned respondents’ transfer of 40% of the avails of the suit, in the event of a favorable judgment in Civil Case No. 8085. While concededly subject to the same suspensive condition, the Kasunduan was, in contrast, concluded by respondents with Manuel alone, for the purpose of selling in favor of the latter 60% of their share in the subject parcels for

the agreed price of P180,000.00. Given these clear distinctions, petitioners correctly argue that the CA reversibly erred in not determining the validity of the Kasunduan independent from that of the Agreement. Viewed in the light of the autonomous nature of contracts enunciated under Article 1306 of the Civil Code, on the other hand, we find that the Kasunduan was correctly found by the RTC to be a valid and binding contract between the parties. Already partially executed with respondents’ receipt of P1,000.00 from Manuel upon the execution thereof, the Kasunduan simply concerned the sale of the former’s 60% share in the subject parcel, less the 1,750-square meter portion to be retained, for the agreed consideration of P180,000.00. As a notarized document that carries the evidentiary weight conferred upon it with respect to its due execution, the Kasunduan was shown to have been signed by respondents with full knowledge of its contents, as may be gleaned from the testimonies elicited from Philip and Leovina. In the absence of any showing, however, that the parties were able to agree on new stipulations that would modify their agreement, we find that petitioners and respondents are bound by the original terms embodied in the Kasunduan. Obligations arising from contracts, after all, have the force of law between the contracting parties who are expected to abide in good faith with their contractual commitments, not weasel out of them. Moreover, when the terms of the contract are clear and leave no doubt as to the intention of the contracting parties, the rule is settled that the literal meaning of its stipulations should govern. In such cases, courts have no authority to alter a contract by construction or to make a new contract for the parties. Since their duty is confined to the interpretation of the one which the parties have made for themselves without regard to its wisdom or folly, it has been ruled that courts cannot supply material stipulations or read into the contract words it 152


does not contain. Indeed, courts will not relieve a party from the adverse effects of an unwise or unfavorable contract freely entered into

RS. Tomas v Rizal Cement (2012) Peralta, J. Re: Obligatory force of contracts DOCTRINE: For petitioner, the contract entered into may have turned out to be an unwise investment, but there is no one to blame but petitioner for plunging into an undertaking without fully studying it in its entirety. FACTS The case stemmed from an action for sum of money or damages arising from breach of contract. The contract involved in this case refers to the rewinding and conversion of one unit of transformer to be installed and energized to supply respondent’s power requirements. This project was embodied in three (3) job orders, all of which were awarded to petitioner who represented itself to be capable, competent, and duly licensed to handle the projects. As agreed upon by the parties, the projects were to be completed within 120 days from the effectivity of the contract. Petitioner, however, failed to complete the projects within the agreed period allegedly because of misrepresentation and fraud committed by respondent as to the true nature of the subject transformer. Petitioner sent three letters. The first letter requests for extension due to the availability of materials (copper sheets), which petitioner still has to import. Second letter requests for another extension for the completion of the transformer. In the third letter, petitioner raised that transformer needs more repair than expected. While petitioner wanted to complete the project, respondent expressed its desire to terminate the contract plus claimed for the refund. Respondent contracted Geostar to complete the project commenced by Petitioner. 153


The trial court found that respondent indeed failed to inform petitioner of the true condition of the transformer which amounted to fraud thereby justifying the latter’s failure to complete the projects. The CA, however, had a different conclusion and decided in favor of respondent. Petitioner tried to exempt itself from the consequences of said breach by passing the fault to respondent. It explained that its failure to complete the project was due to the misrepresentation of the respondent. It claimed that more time and money were needed, because the condition of the subject transformer was worse than the representations of respondent. ISSUE Whether petitioner’s defense of “misrepresentation” and “need for more time and money” tenable? HELD: NO. There was not only a delay but a failure to complete the projects as stated in the contract; that petitioner could not complete the projects because it did not have the materials needed; and that it is in need of financial assistance. As the Court sees it, the bid submitted by petitioner may have been sufficient to be declared the winner but it failed to anticipate all expenses necessary to complete the projects. When it incurred expenses it failed to foresee, it began requesting for price adjustment to cover the cost of high voltage bushing and difference in cost of copper sheet and rectangular wire. However, the scope of work presented by respondent specifically stated that the wires to be used shall be pure copper and that there was a need to supply new bushings for the complete rewinding and conversion of 3125 KVA to 4 MVA Transformer. In other words, petitioner was aware that there

was a need for complete replacement of windings to copper and of secondary bushings. It is, therefore, improper for petitioner to ask for additional amount to answer for the expenses that were already part and parcel of the undertaking it was bound to perform. For petitioner, the contract entered into may have turned out to be an unwise investment, but there is no one to blame but petitioner for plunging into an undertaking without fully studying it in its entirety. The Court likewise notes that petitioner repeatedly asked for extension allegedly because it needed to import the materials and that the same could not be delivered on time. Petitioner also repeatedly requested that respondent make a direct payment to the suppliers notwithstanding the fact that it contracted with respondent for the supply of labor, materials, and technical supervision. It is, therefore, expected that petitioner would be responsible in paying its suppliers because respondent is not privy to their (petitioner and its suppliers) contract. This is especially true in this case since respondent had already made advance payments to petitioner. It appears, therefore, that in offering its bid, the source and cost of materials were not seriously taken into consideration. It appears, further, that petitioner had a hard time in fulfilling its obligations under the contract that is why it asked for financial assistance from respondent. This is contrary to petitioner’s representation that it was capable, competent, and duly licensed to handle the projects. This lack of evidence, coupled with petitioner’s failure to raise the same at the earliest opportunity, belies petitioner’s claim that it could not complete the projects because the subject transformer could no longer be repaired. Assuming for the sake of argument that the subject transformer was indeed in a damaged condition even before the bidding which makes it impossible for petitioner to perform its 154


obligations under the contract, we also agree with the CA that petitioner failed to prove that respondent was guilty of bad faith, fraud, deceit or misrepresentation.

(5) that the evidence presented by petitioner were inadequate to prove that the subject transformer could no longer be repaired; and

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill will that partakes of the nature of fraud. Fraud has been defined to include an inducement through insidious machination. Insidious machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where the party, with intent to deceive, conceals or omits to state material facts and, by reason of such omission or concealment, the other party was induced to give consent that would not otherwise have been given. These are allegations of fact that demand clear and convincing proof. They are serious accusations that can be so conveniently and casually invoked, and that is why they are never presumed. In this case, the evidence presented is insufficient to prove that respondent acted in bad faith or fraudulently in dealing with petitioner.

(6) that there was no evidence to show that respondent was in bad faith, acted fraudulently, or guilty of deceit and misrepresentation in dealing with petitioner.

In sum, the evidence presented by the parties lead to the following conclusions: (1) that the projects were not completed by petitioner; (2) that petitioner was given the opportunity to inspect the subject transformer; (3) that petitioner failed to thoroughly study the entirety of the projects before it offered its bid; (4) that petitioner failed to complete the projects because of the unavailability of the required materials and that petitioner needed financial assistance;

155


PNB v Manalo Mutuality Doctrine: Any stipulation on interest unilaterally imposed and increased by Banks shall be struck down as violative of the principle of mutuality of contracts. FACTS: Respondent Spouses Enrique Manalo and Rosalinda Jacinto applied for an All-Purpose Credit Facility in the amount of P1,000,000 with PNB. After PNB granted their application, they executed a REM in favor of PNB over their property as security for the loan. The credit facility was renewed and increased several times over the years. It was agreed upon that the Spouses would make monthly payments on the interest. After the Spouses failed to settle their unpaid account despite demands, PNB foreclosed the mortgage. The Spouses Manalo instituted this action for the nullification of the foreclosure proceedings. RTC ruled in favor of PNB. It that the Spouses Manalo’s "contract of adhesion" argument was unfounded because they had still accepted the terms and conditions of their credit agreement with PNB and had exerted efforts to pay their obligation; that the Spouses Manalo were now estopped from questioning the interest rates unilaterally imposed by PNB because they had paid at those rates for three years without protest; and that their allegation about PNB violating the notice and publication requirements during the foreclosure proceedings was untenable because personal notice to the mortgagee was not required under Act No. 3135.

CA held that PNB could not unilaterally increase the rate of interest considering that the credit agreements specifically provided that prior notice was required before an increase in interest rate could be effected. It found that PNB did not adduce

proof showing that the Spouses Manalo had been notified before the increased interest rates were imposed; and that PNB’s unilateral imposition of the increased interest rate was null and void for being violative of the principle of mutuality of contracts enshrined in Article 1308. Reinforcing its "contract of adhesion" conclusion, it added that the Spouses Manalo’s being in dire need of money rendered them to be not on an equal footing with PNB. Consequently, the CA, relying on Eastern Shipping Lines v. CA, fixed the interest rate to be paid by the Spouses Manalo at 12% per annum, computed from their default. ISSUE: Whether there was mutuality of consent in the imposition of interest rates on the respondent spouses’ loan. HELD: No. The credit agreement executed succinctly stipulated that the loan would be subjected to interest at a rate "determined by the Bank to be its prime rate plus applicable spread, prevailing at the current month." This stipulation was carried over to or adopted by the subsequent renewals of the credit agreement. PNB thereby arrogated unto itself the sole prerogative to determine and increase the interest rates imposed on the Spouses Manalo. Such a unilateral determination of the interest rates contravened the principle of mutuality of contracts embodied in Article 1308. A contract where there is no mutuality between the parties partakes of the nature of a contract of adhesion, and any obscurity will be construed against the party who prepared the contract, the latter being presumed the stronger party to the agreement, and who caused the obscurity. PNB should then suffer the consequences of its failure to specifically indicate the rates of interest in the credit agreement. In Philippine Savings Bank v. Castillo: “The unilateral determination and imposition of the increased rates is violative of the principle of mutuality of contracts under Article 1308 xxx Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result, thus partaking of the nature of a 156


contract of adhesion, is void. Any stipulation regarding the validity or compliance of the contract left solely to the will of one of the parties is likewise invalid.” PNB could not also justify the increases it had effected on the interest rates by citing the fact that the Spouses Manalo had paid the interests without protest, and had renewed the loan several times. A borrower is not estopped from assailing the unilateral increase in the interest made by the lender since no one who receives a proposal to change a contract, to which he is a party, is obliged to answer the same and said party’s silence cannot be construed as an acceptance thereof. Lastly, the credit agreements had explicitly provided that prior notice would be necessary before PNB could increase the interest rates. In failing to notify the Spouses Manalo before imposing the increased rates of interest, therefore, PNB violated the stipulations of the very contract that it had prepared. Hence, the varying interest rates imposed by PNB have to be vacated and declared null and void, and in their place an interest rate of 12% per annum computed from their default is fixed pursuant to the ruling in Eastern Shipping Lines, Inc. v. CA.

Silos v PNB (2014) G.R. No. 181045, July 2, 2014 Topic: Mutuality DOCTRINE: Contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. FACTS: Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a department store and buying and selling of ready-to-wear apparel. To secure a one-year revolving credit line of P150,000.00 obtained from PNB, petitioners constituted in August 1987 a Real Estate Mortgage over a lot in Kalibo, Aklan. In July 1988, the credit line was increased to P1.8 million and the mortgage was correspondingly increased to P1.8 million. And in July 1989, a Supplement to the Existing Real Estate Mortgage was executed to cover the same credit line, which was increased to P2.5 million, and additional security was given. Petitioners issued eight Promissory Notes and signed a Credit Agreement. There are interest stipulations as follows: a. The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in the future 157


b. the Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time depending on whatever policy it may adopt in the future. The petitioners religiously paid the loans. The interest varied because of the stipulation. In August 1991, an Amendment to the Credit Agreement was executed by the parties, with the following stipulation regarding interest: c. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up to but not including the date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the date of each Availment.15 (Emphases supplied) Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory Notes. The 9th up to the 17th promissory notes provide for the payment of interest at the “rate the Bank may at any time without notice, raise within the limits allowed by law.” On the other hand, the 18th up to the 26th promissory notes – including PN 9707237, which is the 26 th promissory note – carried the following provision: d. x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to

prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest Setting Date In 1997, petitioners faltered when the interest rates soared due to the Asian financial crisis. Petitioners’ sole outstanding promissory note for P2.5 million – PN 9707237 executed in July 1997 and due 120 days later or on October 28, 1997 – became past due, and despite repeated demands, petitioners failed to make good on the note. PNB foreclosed on the mortgage because of the non-payment. More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking annulment of the foreclosure sale and an accounting of the PNB credit. Trial court dismissed the civil case. The CA modified the decision on interest rate and attorney’s fees, but the still affirmed the trial court decision. ISSUE: Whether Credit Agreement entered into by the parties is valid HELD: No, P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other’s consent. It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. Similarly, contract changes must be made with the consent of 158


the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held — x x x The unilateral action of the PNB in increasing the interest rate on the private respondent’s loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code

PNB v. Dee, Et Al. (2014) Topic: Characteristics of Contracts; Relativity DOCTRINE: The basic principle of relativity of contracts is that contracts can only bind the parties who entered into it, and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof “Where there is no privity of contract, there is likewise no obligation or liability to speak about.” FACTS: Sometime in July 1994, respondent Teresita Tan Dee bought from respondent Prime East Properties Inc. (PEPI) on an installment basis a residential lot located in Binangonan, Rizal. Subsequently, PEPI assigned its rights over its property on August 1996 to respondent AFP–RSBS, which included the property purchased by Dee. Thereafter, PEPI obtained a P205,000,000.00 loan from petitioner PNB, secured by a mortgage over several properties, including Dee’s property. The mortgage was cleared by the HLURB on September 18, 1996. After Dee’s full payment of the purchase price, a deed of sale was executed by respondents PEPI and AFP–RSBS on July 1998 in Dee’s favor. Consequently, Dee sought from the petitioner the delivery of the owner’s duplicate title over the property, to no avail. Thus, she filed with the HLURB a complaint for specific performance to compel delivery of TCT by the petitioner, PEPI and AFP–RSBS, among others. PNB’s Contention The petitioner claims that it has a valid mortgage over Dee’s property, which was part of the property mortgaged by PEPI to it to secure its loan obligation, and that Dee and PEPI are bound 159


by such mortgage. The petitioner also argues that it is not privy to the transactions between the subdivision project buyers and PEPI, and has no obligation to perform any of their respective undertakings under their contract.

payment of the purchase price. In a contract of sale, the parties’ obligations are plain and simple. The law obliges the vendor to transfer the ownership of and to deliver the thing that is the object of sale.

HLURB: Ruled in favor of Dee directing PNB to cancel/release the mortgage and surrender/release the title to Dee. Ordering also PEPI and AFB-RSBS to deliver the title of the subject lit in the name of Dee free from all liens and encumberances.

On the other hand, the principal obligation of a vendee is to pay the full purchase price at the agreed time. Based on the final contract of sale between them, the obligation of PEPI, as owners and vendors of Lot 12, Block 21–A, Village East Executive Homes, is to transfer the ownership of and to deliver Lot 12, Block 21–A to Dee, who, in turn, shall pay, and has in fact paid, the full purchase price of the property. There is nothing in the decision of the HLURB, as affirmed by the OP and the CA, which shows that the petitioner is being ordered to assume the obligation of any of the respondents. There is also nothing in the HLURB decision, which validates the petitioner’s claim that the mortgage has been nullified. The order of cancellation/release of the mortgage is simply a consequence of Dee’s full payment of the purchase price, as mandated by Section 25 of P.D. No. 957.

Board of Commissioners: AFFIRMED HLURB. Office of the President: AFFIRMED Board of Commissioners. CA: AFFIRMED Office of the President ISSUE: WON PNB is privy to the contract between respondent Dee and PEPI. HELD: NO. The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of respondent PEPI and AFP– RSBS in its transactions with Dee because it is not a privy thereto. The basic principle of relativity of contracts is that contracts can only bind the parties who entered into it, and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof. “Where there is no privity of contract, there is likewise no obligation or liability to speak about.” The petitioner, however, is not being tasked to undertake the obligations of PEPI and AFP–RSBS. In this case, there are two phases involved in the transactions between respondents PEPI and Dee – the first phase is the contract to sell, which eventually became the second phase, the absolute sale, after Dee’s full

It must be stressed that the mortgage contract between PEPI and the petitioner is merely an accessory contract to the principal three–year loan takeout from the petitioner by PEPI for its expansion project. It need not be belaboured that “a mortgage is an accessory undertaking to secure the fulfillment of a principal obligation,” and it does not affect the ownership of the property as it is nothing more than a lien thereon serving as security for a debt. Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract between respondents PEPI and Dee was still the Contract to Sell, as Dee was yet to fully pay the purchase price of the property. On this point, PEPI was acting fully well within its right when it mortgaged the property to the petitioner, for in a contract to sell, ownership is retained by the seller and is not to pass until full payment of the purchase 160


price.30 In other words, at the time of the mortgage, PEPI was still the owner of the property. Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI, the former is still bound to respect the transactions between respondents PEPI and Dee. The petitioner was well aware that the properties mortgaged by PEPI were also the subject of existing contracts to sell with other buyers. While it may be that the petitioner is protected by Act No. 3135, as amended, it cannot claim any superior right as against the installment buyers. This is because the contract between the respondents is protected by P.D. No. 957, a social justice measure enacted primarily to protect innocent lot buyers.

Malbarosa v CA (2003) G.R. No. 125761 FACTS: Here in petitioner was the president and general manager of Philtectic Corp., a subsidiary of respondent SEADC. Being an officer, he was issued a car and membership in the Architectural Center. One day he intimidated with the vicechairman of the BoD of respondent his desire to retire and he requested that his incentive compensation be paid to him as president of Philtectic. He then tendered his resignation to said VP. One of the officer met with petitioner and informed him that he will get roughly around P395k. Following his resignation, the VP sent a letter-offer to petitioner stating therein acceptance of petitioner’s resignation and advised him that he is entitled to P251k as his incentive compensation. In the same letter, the VP proposed the satisfaction of his incentive by giving him the car the company issued and the membership in the Architectural Center will be transferred to him, instead of cash. Petitioner was required by respondent through the VP to affix his signature in the letter if he was agreeable to the proposal. The letter was given to the petitioner by the officer who told him that he was supposed to get P395k.Petitioner was dismayed when he received the letteroffer and refused to sign it as required by respondent if he was agreeable to it. Two weeks later, respondent company demanded the return the car and turn over the membership in the Architectural Center. Petitioner wrote the counsel of respondent telling him that he cannot comply with the demand since he already accepted the offer fourteen (14) days after it was made. In his letter, he enclosed a Xerox of the original with his affixed signature as required.

161


With his refusal, respondent instituted an action for recovery with replevin. In his Answer to the complaint, the petitioner, as defendant therein, alleged that he had already agreed on March 28, 1990 to the March 14, 1990 Letter-offer of the respondent, the plaintiff therein, and had notified the said plaintiff of his acceptance; hence, he had the right to the possession of the car. After the trial, judgment was rendered against petitioner. The trial court opined that there existed no perfected contract between the petitioner and the respondent on the latter’s March 14, 1990 Letter-offer for failure of the petitioner to effectively notify the respondent of his acceptance of said letter-offer before the respondent withdrew the same. He appealed to the CA which affirmed the decision of the trial court. Hence, this present appeal. ISSUES:  

Whether or not there was a valid acceptance on his part of the March 14, 1990 Letter-offer of the respondent? Whether or not there was an effective withdrawal by the respondent of said letter-offer?

HELD: No. Under Article 1319 of the New Civil Code, the consent by a party is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. An offer may be reached at any time until it is accepted. An offer that is not accepted does not give rise to a consent. To produce a contract, there must be acceptance of the offer which may be express or implied but must not qualify the terms of the offer. The acceptance must be absolute, unconditional and without variance of any sort from the offer. The acceptance of an offer must be made known to the offeror. Unless the offeror knows of the acceptance, there is no meeting of the minds of the parties, no real concurrence of offer and acceptance.

The offeror may withdraw its offer and revoke the same before acceptance thereof by the offeree. The contract is perfected only from the time an acceptance of an offer is made known to the offeror. If an offeror prescribes the exclusive manner in which acceptance of his offer shall be indicated by the offeree, an acceptance of the offer in the manner prescribed will bind the offeror. On the other hand, an attempt on the part of the offeree to accept the offer in a different manner does not bind the offeror as the absence of the meeting of the minds on the altered type of acceptance. An offer made inter praesentes must be accepted immediately. If the parties intended that there should be an express acceptance, the contract will be perfected only upon knowledge by the offeror of the express acceptance by the offeree of the offer. An acceptance which is not made in the manner prescribed by the offeror is not effective but constitutes a counter-offer which the offeror may accept or reject. The contract is not perfected if the offeror revokes or withdraws its offer and the revocation or withdrawal of the offeror is the first to reach the offeree. In the case at bar, the respondent made its offer through its VP. On March 16, the officer handed over the original letter-offer to petitioner. The respondent required the petitioner to accept by affixing his signature and the date in the letter offer, thus foreclosing an implied acceptance or any other mode of acceptance. And it is for a fact that the petitioner did not accept or reject the offer for he needed time to decide whether to accept or reject. Although the petitioner claims that he had affixed his conformity to the letter-offer on March 28, 1990, the petitioner failed to transmit the said copy to the respondent. It was only on April 7, 1990 when the petitioner appended to his letter to the respondent a copy of the said March 14, 1990 Letter-offer bearing his conformity that he notified the respondent of his acceptance to said offer. But then, the respondent, through 162


Philtectic Corporation, had already withdrawn its offer and had already notified the petitioner of said withdrawal via respondent’s letter dated April 4, 1990 which was delivered to the petitioner on the same day. Indubitably, there was no contract perfected by the parties on the March 14, 1990 Letteroffer of the respondent. On the second issue. It is necessarily so because there was no need for the respondent to withdraw its offer because the petitioner had already rejected the respondent’s offer on March 16, 1990 when the petitioner received the original of the March 14, 1990 Letter-offer of the respondent without the petitioner affixing his signature on the space therefor.

Capalla v Comelec (2012) Re: Autonomy of Will Peralta, J (CJ Sereno concurs) DOCTRINE The subsequent contract in question is not an extension of the previous AES Contract, but a new one. And not being an ordinary contract but a procurement by the government, RA 9184 or the Government Procurement Reform Act applies. Section 10 of said law requires for the validity of every government procurement that competitive bidding be conducted. However, such changes must not constitute substantial or material amendments that would alter the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. FACTS: On July 10, 2009, the Comelec and Smartmatic-TIM entered into a Contract for the Provision of an Automated Election System for the May 10, 2010 Synchronized National and Local Elections,(AES Contract). The contract between the Comelec and Smartmatic-TIM was one of “lease of the AES with option to purchase (OTP) the goods listed in the contract.” In said contract, the Comelec was given until December 31, 2010 within which to exercise the option. In September 2010, the Comelec partially exercised its OTP 920 units of PCOS machines with corresponding canvassing/consolidation system (CCS) for the special elections in certain areas in the provinces of Basilan, Lanao del Sur and Bulacan. In a letter dated December 18, 2010, Smartmatic-TIM, through its Chairman Flores, proposed a temporary extension of the option period on the remaining PCOS machines until March 31, 2011, waiving the storage costs and covering the maintenance costs. The Comelec did not exercise the option within the extended period. Several 163


extensions were given for the Comelec to exercise the OTP until its final extension on March 31, 2012. On March 29, 2012, the Comelec issued a Resolution resolving to accept Smartmatic-TIM’s offer to extend the period to exercise the OTP until March 31, 2012 and to authorize Chairman Brillantes to sign for and on behalf of the Comelec the Agreement on the Extension of the OTP Under the AES Contract (Extension Agreement). Comelec again issued a Resolution resolving to approve the Deed of Sale between the Comelec and Smartmatic-TIM to purchase the latter’s PCOS machines to be used in the upcoming May 2013 elections and to authorize Chairman Brillantes to sign the Deed of Sale for and on behalf of the Comelec. The Deed of Sale was forthwith executed. Petitioners assail the constitutionality of the Comelec Resolutions on the grounds that the option period provided for in the AES contract had already lapsed; that the extension of the option period and the exercise of the option without competitive public bidding contravene the provisions of RA 9184; and that the Comelec purchased the machines in contravention of the standards laid down in RA 9369. On the other hand, respondents argue on the validity of the subject transaction based on the grounds that there is no prohibition either in the contract or provision of law for it to extend the option period; that the OTP is not an independent contract in itself, but is a provision contained in the valid and existing AES contract that had already satisfied the public bidding requirements of RA 9184; and that exercising the option was the most advantageous option of the Comelec. ISSUE: Whether the extension of OTP is an independent contract itself, thus must go through public bidding. HELD: No public bidding necessary.

Clearly, under the AES Contract, the Comelec was given until December 31, 2010 within which to exercise the OTP the subject goods listed therein including the PCOS machines. The option was, however, not exercised within said period. But the parties later entered into an extension agreement giving the Comelec until March 31, 2012 within which to exercise it. With the extension of the period, the Comelec validly exercised the option and eventually entered into a contract of sale of the subject goods. The extension of the option period, the subsequent exercise thereof, and the eventual execution of the Deed of Sale became the subjects of the petitions challenging their validity in light of the contractual stipulations of respondents and the provisions of RA 9184. In our June 13, 2012 Decision, we decided in favor of respondents and placed a stamp of validity on the assailed resolutions and transactions entered into. Based on the AES Contract, we sustained the parties’ right to amend the same by extending the option period. Considering that the performance security had not been released to Smartmatic-TIM, the contract was still effective which can still be amended by the mutual agreement of the parties, such amendment being reduced in writing. To be sure, the option contract is embodied in the AES Contract whereby the Comelec was given the right to decide whether or not to buy the subject goods listed therein under the terms and conditions also agreed upon by the parties. As we simply held in the assailed decision: While the contract indeed specifically required the Comelec to notify Smartmatic-TIM of its OTP the subject goods until December 31, 2010, a reading of the other provisions of the AES contract would show that the parties are given the right to amend the contract which may include the period within which to exercise the option. There is, likewise, no prohibition on the extension of the period, provided that the contract is still effective. 164


The Comelec still retains P50M of the amount due SmartmaticTIM as performance security, which indicates that the AES contract is still effective and not yet terminated. Consequently, pursuant to Article 19 of the contract, the provisions thereof may still be amended by mutual agreement of the parties provided said amendment is in writing and signed by the parties. Considering, however, that the AES contract is not an ordinary contract as it involves procurement by a government agency, the rights and obligations of the parties are governed not only by the Civil Code but also by RA 9184. A winning bidder is not precluded from modifying or amending certain provisions of the contract bidded upon. However, such changes must not constitute substantial or material amendments that would alter the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms.

purchase of services under the AES contract was considered part of the purchase price. For the Comelec to own the subject goods, it was required to pay only P2,130,635,048.15. If the Comelec did not exercise the option, the rentals already paid would just be one of the government expenses for the past election and would be of no use to future elections.

The conclusions held by the Court in Power Sector Assets and Liabilities Management Corporation (PSALM) v. Pozzolanic Philippines Incorporated and Agan, Jr. v. Philippine International Air Terminals Co., Inc., (PIATCO) cannot be applied in the present case. First, Smartmatic-TIM was not granted additional right that was not previously available to the other bidders. The bidders were apprised that aside from the lease of goods and purchase of services, their proposals should include an OTP the subject goods. Second, the amendment of the AES contract is not substantial. The approved budget for the contract was P11,223,618,400.00 charged against the supplemental appropriations for election modernization. Bids were, therefore, accepted provided that they did not exceed said amount. The competitive public bidding conducted for the AES contract was sufficient. A new public bidding would be a superfluity. Lastly, the amendment of the AES contract is more advantageous to the Comelec and the public because the P7,191,484,739.48 rentals paid for the lease of goods and 165


Rosenstock v Burke Essential elements of a contract FACTS: Edwin Burke owned a motor yacht which he acquired for the purpose of selling. Plaintiff H. W. Elser began negotiations with Burke for the purchase of the yacht. This yacht was mortgaged to the Asia Banking Corporation to secure the payment of a debt which was due and unpaid since a year prior thereto, contracted by Burke in favor of said bank of which Avery was then the manager. The plan of Elser was to organize a yacht club and sell it afterwards the yacht. Burke obtained from Elser an option in writing in the following terms: For the purpose of organizing a yacht club, I am confirming my verbal offer to you of the motor yacht, at P120,000. Elser proposed to Burke to make a voyage on board the yacht to the south, with prominent businessmen for the purpose of making an advantageous sale. As the yacht needed some repairs, and as Burke said that he had no funds to make said repairs, Esler paid almost all their amount. It has been stipulated that Elser was not to pay anything for the use of the yacht. Once the yacht was repaired, Elser gave receptions on board, and on March 6, 1922, made his pleasure voyage to the south, coming back on March 23. Elser never accepted the offer of Burke for the purchase of the yacht contained in the letter of option of February 12, 1922. Elser believed that it was convenient to replace the engine of the yacht with a new one which would cost P20,000. Elser had negotiated with Avery for another loan of P20,000 with which to purchase this new engine. On March 31, Elser informed Burke that after he had tried to obtain from Avery said new loan, and that he was not disposed to purchase the vessel for more than P70,000, Avery had told him that he was not in position to give one cent more. Elser suggested to Burke that he should speak with Avery. Burke, after an interview with Avery, answered Elser that he had arrived at an agreement with Avery about the sale of the yacht to Elser for P80,000, the

yacht to be mortgaged to secure payment thereof. On April 1, Elser informed Burke that he was not inclined to accept this proposition. On the morning of April 3, Burke called Elser to speak with him about the matter and as a result of the interview held between them, Elser in the presence of Burke wrote a letter addressed to the latter which is literally as follows: “xxx In connection with the yacht, I am in position and am willing to entertain the purchase of it under the following terms: xxx” Burke took this letter to the Asia Banking Corporation. Both Burke and Avery signed at the bottom of the letter of Elser. On April 5, Elser sent Burke another letter, telling him that in view of the attitude of Avery as to the loan of P20,000 in connection with the installation of a new engine in the yacht, it was impossible for him to take charge of the boat and he made delivery thereof to Burke. On April 8, Burke answered Elser that as he had accepted, with the consent of the Asia Banking, through Avery, the offer for the purchase of the yacht made by Elser in his April 3 letter, he made demand on him for the performance thereof. Elser brings this action against Burke to recover the value of the repairs made on the yacht. Burke alleges that the agreement he had with Elser about these repairs was that the latter was to pay for them for his own account in exchange of the gratuitous use of the yacht. Alleging that Elser purchased the vessel in accordance with his letter of April 3, Burke prays as a crosscomplaint that Elser be compelled to comply with the terms of this contract and to pay damages. ISSUE: Whether April 3, 1922 letter was a definite offer to purchase resulting in a perfected contract. HELD: No. This letter begins as follows: "In connection with the yacht Bronzewing, I am in position and am willing to entertain the purchase of it under the following terms . . . ." The whole question is reduced to determining what the intention of 166


the plaintiff was in using that language. To convey the idea of a resolution to purchase, a man of ordinary intelligence and common culture would use these clear and simple words, I offer to purchase, I want to purchase, I am in position to purchase. And the stronger is the reason why the plaintiff should have expressed his intention in the same way, because, according to the defendant, he was a prosperous and progressive merchant. It must be presumed that a man in his transactions in good faith uses the best means of expressing his mind that his intelligence and culture permit so as to convey and exteriorize his will faithfully and unequivocally. But the plaintiff instead of using in his letter the expression, I want to purchase, I offer to purchase, I am in position to purchase, or other similar language of easy and unequivocal meaning, used this other, I am in position and am willing to entertain the purchase of the yacht. The word "entertain" applied to an act does not mean the resolution to perform said act, but simply a position to deliberate for deciding to perform or not to perform said act. Taking into account only the literal and technical meaning of the word "entertain," it seems to us clear that the letter of the plaintiff cannot be interpreted as a definite offer to purchase the yacht, but simply a position to deliberate whether or not he would purchase the yacht. It was but a mere invitation to a proposal being made to him, which might be accepted by him or not. Furthermore there are other circumstances which show that in writing this letter it was really not the intention of the plaintiff to make a definite offer. The plaintiff never thought of acquiring the yacht for his personal use, but for the purpose of selling it to another or to acquire it for another, thereby obtaining some gain from the transaction, and it can be said that the only thing the plaintiff wanted in connection with this yacht was that the defendant should procure its sale, naturally with some profit for himself. For this reason the original idea of the plaintiff was to organize a yacht club that would afterwards acquire the yacht through him, realizing some gain from the sale. This accounts for the fact that the plaintiff was not in a position to make a

definite offer to purchase, he being sure to be able to resell the yacht to another, and this explains why he did not say in his letter of April 3 that he was in position to purchase the yacht, but only to entertain this purchase. On the other hand, the plaintiff thought it necessary to replace the engine of the yacht with a new one and has been negotiating with Avery a loan to make the replacement. When the plaintiff wrote his April 3 letter, he knew that Avery was not in position to grant this loan. According to this, the resolution of the plaintiff to acquire the yacht depended upon him being able to replace the engine, and this, in turn, depended upon the plaintiff being successful in obtaining the sum that the new engine was to cost. This accounts also for the fact that the plaintiff was not in position to make a definite offer. But above all, there is in the record positive proof that in writing this letter of April 3, the plaintiff had no intention to make thereby a definite offer. This letter was written by his stenographer in his office and in the presence of the defendant who has been there precisely for the purpose of speaking about this purchase. According to the plaintiff, when he was dictating that part wherein he said that he was in position to entertain the purchase of the yacht, the defendant interrupted him and suggested the elimination of the word entertain and the substitution therefor of a definite offer, but after a discussion between them, during which the plaintiff clearly said that he was not in position to make a definite offer, the word entertain now appearing in the letter was preserved. The stenographer and another employee of the plaintiff, who were present, corroborate this statement of the plaintiff. The lower court seems to have been impressed by the consideration that it was anomalous for the plaintiff to write that letter if his purpose was only to indicate to the defendant that he wanted the latter to make a proposal which the plaintiff might reject or accept. We see nothing anomalous in this. A 167


proposition may be acceptable in itself, but its acceptance may depend on other circumstances; thus one may say that a determinate proposition is acceptable, and yet he may not be in a position to accept the same at the moment. The letter of the plaintiff not containing a definite offer but a mere invitation to an offer being made to him, the acceptance of the defendant placed at the bottom of this letter has not other meaning than that of accepting the proposition to make this offer, as must have been understood by the plaintiff.

Sanchez v Rigos (1972) 45 SCRA 368 Topic: Elements of a Contract; Essential; Acceptance Doctrine: FACTS: In an instrument entitled "Option to Purchase," executed on April 3, 1961, defendant-appellant Severina Rigos "agreed, promised and committed ... to sell" to plaintiff-appellee Nicolas Sanchez for the sum of P1,510.00 within two (2) years from said date, a parcel of land situated in the barrios of Abar and Sibot, San Jose, Nueva Ecija. It was agreed that said option shall be deemed "terminated and elapsed," if “Sanchez shall fail to exercise his right to buy the property" within the stipulated period. On March 12, 1963, Sanchez deposited the sum of Pl,510.00 with the CFI of Nueva Ecija and filed an action for specific performance and damages against Rigos for the latter’s refusal to accept several tenders of payment that Sanchez made to purchase the subject land. Defendant Rigos contended that the contract between them was only “a unilateral promise to sell, and the same being unsupported by any valuable consideration, by force of the New Civil Code, is null and void." Plaintiff Sanchez, on the other hand, alleged in his compliant that, by virtue of the option under consideration, "defendant agreed and committed to sell" and "the plaintiff agreed and committed to buy" the land described in the option. The lower court rendered judgment in favor of Sanchez and ordered Rigos to accept the sum Sanchez judicially consigned, and to execute in his favor the requisite deed of conveyance. The Court of Appeals certified the case at bar to the Supreme Court for it involves a question purely of law. 168


ISSUE: Whether there was a contract to buy and sell between the parties or only a mere unilateral promise to sell HELD: The Court said that the plaintiff (Sanchez) is his complaint alleges that under the Annex A (copy of the contract), “the defendant agreed and committed to sell” and “the plaintiff agreed and committed to buy” said property making it reciprocally demandable pursuant to the first paragraph of Art. 1479. The Court debunked this theory by saying that the option did not impose upon the plaintiff the obligation to purchase the property. It was not a contract to buy and sell, it clearly states that there is a commitment to sell the land for P1510.00 but no indication of a consideration distinct “from the price” stipulated for the sale of the land. The Court said that the LC presumed the existence of this consideration using NCC 1354: NCC 1354: Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. (1277) However the Court said that, 1354 pertains to contracts in general, while 1479 refer to sales, or more specifically, to “an accepted unilateral promise to buy or to sell”. With 1479 controlling the case at bar In order that said unilateral promise be binding upon the promisor, Art. 1479 requires the concurrence of a condition and that the promise be “supported by a consideration distinct from the price”, which is absent in this case. Defendant has explicitly pleaded the absence of this consideration and the plaintiff (Sanchez), by joining in the

petition for the judgment of the pleadings, has impliedly admitted the truth of her defense, as held in Bauermann vs. Casas: “ One who prays for judgment on the pleadings without offering proof as to the truth of his own allegations, and without giving the opposing party an opportunity to introduce evidence, must be understood to admit the truth of all the material and relevant allegations of the opposing party, and to rest his motion for judgment on those allegations taken together with such of his own as are admitted in the pleadings.” The decision cited a case: Southwestern Sugar Molasses Co. vs. Atlantic Gulf and Pacific Co.: In this case, the appellant’s main contention is that the option granted to the appellee to sell to him/her Barge no. 10 has no legal effect bec. it is not supported by any consideration and invokes NCC 1479. On the other hand, appellee maintains and invokes NCC 1324: When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn any time before acceptance by communicating such withdrawal, except when the option is founded upon consideration as something paid or promised. Decision: SC said that while it is true that under article 1324 of the new Civil Code, the general rule regarding offer and acceptance is that, when the offerer gives to the offeree a certain period to accept, "the offer may be withdrawn at any time before acceptance" except when the option is founded upon consideration, but this general rule must be interpreted as modified by the provision of article 1479 above referred to, which applies to "a promise to buy and sell" specifically. As already stated, this rule requires that a promise to sell to be valid must be supported by a consideration distinct from the price. 169


The Court cited another case, however, which is the justification for their ruling in favour of Sanchez and said that there is no distinction between 1324 and 1479. Atkins, Kroll and Co., Inc. v. Cua Hian Tek: Decision: An option is unilateral: a promise to sell at the price fixed whenever the offeree should decide to exercise his option within the specified time. After accepting the promise and before he exercises his option, the holder of the option is not bound to buy. He is free either to buy or not to buy later. In this case, however, upon accepting herein petitioner's offer a bilateral promise to sell and to buy ensued, and the respondent ipso facto assumed the obligation of a purchaser. He did not just get the right subsequently to buy or not to buy. It was not a mere option then; it was a bilateral contract of sale. IN OTHER WORDS, since there is no valid consideration, offerer is not bound to promise and may widthraw it. However, pending notice of his withdrawal, if his offer is ACCEPTED, the contract of sale has been PERFECTED. Moreover, the decision in Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co., holding that Art. 1324 is modified by Art. 1479 of the Civil Code, in effect, considers the latter as an exception to the former, and exceptions are not favored, unless the intention to the contrary is clear, and it is not so, insofar as said two (2) articles are concerned. What is more, the reference, in both the second paragraph of Art. 1479 and Art. 1324, to an option or promise supported by or founded upon a consideration, strongly suggests that the two (2) provisions intended to enforce or implement the same principle. Decision in Southwestern is abandoned, Atkins is applied.

Capalla v. COMELEC (2012) Topic: Characteristics of Contracts; Autonomy of Will DOCTRINE: Sereno, concurring: In the construction of an instrument, the intention of the parties is to be pursued. The true agreement of the parties may be proved, as against the terms and stipulations appearing in a written contract where a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the parties, is put in issue by the pleadings, or there is an intrinsic ambiguity in the writing. When the true intent and agreement of the parties is established, it must be given effect and prevail over the bare words of the written contract.” FACTS: Pursuant to its authority to use an Automated Election System (AES), the COMELEC posted and published an invitation to apply for eligibility and to bid for the 2010 Poll Automation Project. COMELEC awarded the contract for the project to respondent Smartmatic-TIM. Thereafter, COMELEC and Smartmatic-TIM entered into a Contract for the Provision of an Automated Election System for the May 10, 2010 Synchronized National and Local Elections (AES Contract, for brevity). The contract between the COMELEC and SmartmaticTIM was one of “lease of the AES with option to purchase (OTP) the goods listed in the contract.” In said contract, the COMELEC was given until December 31, 2010 within which to exercise the option. In a letter, Smartmatic-TIM, through its Chairman Cesar Flores, proposed a temporary extension of the option period to buy the PCOS machines until March 31, 2011. The COMELEC did not exercise the option within the extended period. Several extensions were given for the COMELEC to exercise the OTP until its final extension on March 31, 2012.

170


On March 29, 2012, COMELEC issued a resolution resolving to accept Smartmatic-TIM’s offer to extend the period to exercise the OTP until March 31, 2012. Archbishop Capalla, et al. thus assailed the validity and constitutionality of the COMELEC Resolutions for the purchase of the subject PCOS machines as well as the Extension Agreement and the Deed of Sale covering said goods mainly on the ground that the option period provided for in the AES contract between the COMELEC and SmartmaticTIM had already lapsed and, thus, could no longer be extended, such extension being prohibited by the contract. ISSUE: Whether or not the unilateral extension of the option period which Smartmatic-TIM granted to COMELEC and which the latter accepted constitutes circumvention of the law on public bidding.

A winning bidder is not precluded from modifying or amending certain provisions of the contract bidded upon. However, such changes must not constitute substantial or material amendments that would alter the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. The determination of whether or not a modification or amendment of a contract bidded out constitutes a substantial amendment rests on whether the contract, when taken as a whole, would contain substantially different terms and conditions that would have the effect of altering the technical and/or financial proposals previously submitted by the other bidders. The modifications in the contract executed between the government and the winning bidder must be such as to render the executed contract to be an entirely different contract from the one bidded upon.

HELD: NO. It is a basic rule in the interpretation of contracts that an instrument must be construed so as to give effect to all the provisions of the contract. In essence, the contract must be read and taken as a whole. While the contract indeed specifically required the COMELEC to notify Smartmatic-TIM of its OTP the subject goods until December 31, 2010, a reading of the other provisions of the AES contract would show that the parties are given the right to amend the contract which may include the period within which to exercise the option. There is, likewise, no prohibition on the extension of the period, provided that the contract is still effective.

Smartmatic-TIM was not granted additional right that was not previously available to the other bidders. Admittedly, the AES contract was awarded to Smartmatic-TIM after compliance with all the requirements of a competitive public bidding. Although the AES contract was amended after the award of the contract to Smartmatic-TIM, the amendment only pertains to the period within which the COMELEC could exercise the option because of its failure to exercise the same prior to the deadline originally agreed upon by the parties.

Considering, however, that the AES contract is not an ordinary contract as it involves procurement by a government agency, the rights and obligations of the parties are governed not only by the Civil Code but also by RA 9184. In this jurisdiction, public bidding is the established procedure in the grant of government contracts. The award of public contracts, through public bidding, is a matter of public policy. The parties are, therefore, not at full liberty to amend or modify the provisions of the contract bidded upon.

The Treatment of Options, Extensions of Time for their Exercise, and their Revival Under Contract Law

Sereno, Concurring

Had the parties been both private entities, then there would have been either no legal dispute on the validity of the exercise of an option that was renewed after its expiry, or, the legal dispute would have been quite easy to resolve. This is because our law on contracts is quite straightforward on this 171


matter. It is our government procurement laws and regulations that have complicated the legal issues we need to resolve. First, the Civil Code is quite emphatic about respecting the autonomy of the wills of the parties: Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Among the stipulations that the parties can agree on is an “option” granted by one party in favor of the other (Art. 1324, Civil Code). Samples of such contractually created options can be found in some articles of the Civil Code, such as: (a) an option to buy, which is embedded in a lease of personal property (Art. 1485) and (b) sales on consignment in which the buyer has the option to return the goods or pay the price thereof (Art. 1502). Second. A contract when validly executed has the legal effect of binding the party who has undertaken to give something or to render some service (Art. 1305). By “binding,” we mean that a legally enforceable right is created in favor of the person who is to receive the “thing” or the service. This right has the force of law between the contracting parties (Art. 1159, Civil Code). Conversely, if the person who possesses the right to demand the performance of the undertaking to give or to render a service, can demand the performance thereof, he or she can also waive the same. This waiver has the effect of extinguishing the obligation. A waiver is the abandonment or voluntary forfeiture of a right. It operates in the same manner as a condonation or remission of a debt under Articles 1231(3), and 1270-1274 of the Civil Code.

Examples of valid waivers can be found in the following articles of the Civil Code: (a) a waiver evidenced by the delivery of a document evidencing a credit (Art. 1271); (b) the waiver of a right to assail a voidable contract through an act ratifying the contract (Art. 1393); (c) the waiver of a condition in a sales contract (Art. 1545). Third, if an option is conditioned on its exercise within a period, then this condition that consists in a “period” or a deadline for its exercise can itself be waived. In a contract of sale, for example, “where the obligation of either party . . . is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition. (Art. 1545, Civil Code)” Fourth, this waiver of a condition that consists in a deadline can be made by the party in whose favor the deadline was constituted. Under Article 1196 of the Civil Code, “[w]henever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances, it should appear that the period has been established in favor of one or of the other.” An option that expires on a fixed date is an obligation with a resolutory period that “take[s] effect at once, but terminate[s] upon arrival of the day certain.” An offeror can also always withdraw an option under Article 1324 of the Civil Code, with the converse implication that he or she can always extend the period for the acceptance of the offer. Thus, an option to purchase exercisable within a fixed period, embedded in a lease contract, expires after that fixed period, because the lapse thereof is a resolutory condition that extinguishes the option to purchase. Both parties can agree to waive the resolutory condition, however, in the form of an extension of the period for performance, under the very clear provisions of the Civil Code. This accounts 172


for the commonness of renewed or revived options in private commercial agreements, such as leases, sales, joint ventures, intellectual property rights contracts, etc.

and prevail over the bare words of the written contract.”

The legal disputes that will arise in these situations would be easy to resolve. Because both parties agreed to revive or renew an expired option, their agreement binds both of them; and neither can assail the agreement simply on the ground that the original option period has expired, and this extension agreement has the force of law between them. That the parties have the ability to revive dead or terminated contracts is so basic a rule that it has consistently and implicitly been understood to be so by this Court. In two injunction cases, the Court restated its understanding that a dead or terminated contract can always be revived or renewed by mutual agreement of the parties. The termination of a contract is not like the death of a natural being. It is the will and the mutual understanding of the parties, rather than the form and solemnities, that prevail in contract interpretation. Thus, a contract that on its face expires can, by the mutual contracting action of the parties, even be pronounced by the court to be continuing simply because the parties consider it to be so continuing. As the eminent scholar on contracts put it: “In the construction of an instrument, the intention of the parties is to be pursued. The true agreement of the parties may be proved, as against the terms and stipulations appearing in a written contract where a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the parties, is put in issue by the pleadings, or there is an intrinsic ambiguity in the writing. When the true intent and agreement of the parties is established, it must be given effect 173


Malbarosa v CA (2003) G.R. No. 125761 FACTS: Here in petitioner was the president and general manager of Philtectic Corp., a subsidiary of respondent SEADC. Being an officer, he was issued a car and membership in the Architectural Center. One day he intimidated with the vice-chairman of the BoD of respondent his desire to retire and he requested that his incentive compensation be paid to him as president of Philtectic. He then tendered his resignation to said VP. One of the officer met with petitioner and informed him that he will get roughly around P395k. Following his resignation, the VP sent a letter-offer to petitioner stating therein acceptance of petitioner’s resignation and advised him that he is entitled to P251k as his incentive compensation. In the same letter, the VP proposed the satisfaction of his incentive by giving him the car the company issued and the membership in the Architectural Center will be transferred to him, instead of cash. Petitioner was required by respondent through the VP to affix his signature in the letter if he was agreeable to the proposal. The letter was given to the petitioner by the officer who told him that he was supposed to get P395k.Petitioner was dismayed when he received the letteroffer and refused to sign it as required by respondent if he was agreeable to it. Two weeks later, respondent company demanded the return the car and turn over the membership in the Architectural Center. Petitioner wrote the counsel of respondent telling him that he cannot comply with the demand since he already accepted the offer fourteen (14) days after it was made. In his letter, he enclosed a Xerox of the original with his affixed signature as required.

With his refusal, respondent instituted an action for recovery with replevin. In his Answer to the complaint, the petitioner, as defendant therein, alleged that he had already agreed on March 28, 1990 to the March 14, 1990 Letter-offer of the respondent, the plaintiff therein, and had notified the said plaintiff of his acceptance; hence, he had the right to the possession of the car. After the trial, judgment was rendered against petitioner. The trial court opined that there existed no perfected contract between the petitioner and the respondent on the latter’s March 14, 1990 Letter-offer for failure of the petitioner to effectively notify the respondent of his acceptance of said letter-offer before the respondent withdrew the same. He appealed to the CA which affirmed the decision of the trial court. Hence, this present appeal. ISSUES: Whether there was a valid acceptance on his part of the March 14, 1990 Letter-offer of the respondent? Whether there was an effective withdrawal by the respondent of said letter-offer? HELD No. Under Article 1319 of the New Civil Code, the consent by a party is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. An offer may be reached at any time until it is accepted. An offer that is not accepted does not give rise to a consent. To produce a contract, there must be acceptance of the offer which may be express or implied but must not qualify the terms of the offer. The acceptance must be absolute, unconditional and without variance of any sort from the offer. The acceptance of an offer must be made known to the offeror. Unless the offeror knows of the acceptance, there is no meeting of the minds of the parties, no real concurrence of offer and acceptance. 174


The offeror may withdraw its offer and revoke the same before acceptance thereof by the offeree. The contract is perfected only from the time an acceptance of an offer is made known to the offeror. If an offeror prescribes the exclusive manner in which acceptance of his offer shall be indicated by the offeree, an acceptance of the offer in the manner prescribed will bind the offeror. On the other hand, an attempt on the part of the offeree to accept the offer in a different manner does not bind the offeror as the absence of the meeting of the minds on the altered type of acceptance. An offer made inter praesentes must be accepted immediately. If the parties intended that there should be an express acceptance, the contract will be perfected only upon knowledge by the offeror of the express acceptance by the offeree of the offer. An acceptance which is not made in the manner prescribed by the offeror is not effective but constitutes a counter-offer which the offeror may accept or reject.

Philtectic Corporation, had already withdrawn its offer and had already notified the petitioner of said withdrawal via respondent’s letter dated April 4, 1990 which was delivered to the petitioner on the same day. Indubitably, there was no contract perfected by the parties on the March 14, 1990 Letteroffer of the respondent. On the second issue. It is necessarily so because there was no need for the respondent to withdraw its offer because the petitioner had already rejected the respondent’s offer on March 16, 1990 when the petitioner received the original of the March 14, 1990 Letter-offer of the respondent without the petitioner affixing his signature on the space therefor.

The contract is not perfected if the offeror revokes or withdraws its offer and the revocation or withdrawal of the offeror is the first to reach the offeree. In the case at bar, the respondent made its offer through its VP. On March 16, the officer handed over the original letter-offer to petitioner. The respondent required the petitioner to accept by affixing his signature and the date in the letter offer, thus foreclosing an implied acceptance or any other mode of acceptance. And it is for a fact that the petitioner did not accept or reject the offer for he needed time to decide whether to accept or reject. Although the petitioner claims that he had affixed his conformity to the letter-offer on March 28, 1990, the petitioner failed to transmit the said copy to the respondent. It was only on April 7, 1990 when the petitioner appended to his letter to the respondent a copy of the said March 14, 1990 Letter-offer bearing his conformity that he notified the respondent of his acceptance to said offer. But then, the respondent, through 175


Traders Royal Bank v Cuison (2009) Brion, J. Re: Acceptance; Contracts DOCTRINE The concurrence of the offer and acceptance is vital to the birth and the perfection of a contract. The clear and neat principle is that the offer must be certain and definite with respect to the cause or consideration and object of the proposed contract, while the acceptance of this offer – express or implied – must be unmistakable, unqualified, and identical in all respects to the offer. The required concurrence, however, may not always be immediately clear and may have to be read from the attendant circumstances; in fact, a binding contract may exist between the parties whose minds have met, although they did not affix their signatures to any written document. FACTS CLCI, through its president Cuison, obtained 2 loans from Trader Royal Bank. These loans were secured with a real estate mortgage. CLCI defaulted, prompting the bank to extra judicially foreclose the property. The bank was the highest bidder. In a series of written communications between CLCI and the bank, CLCI manifested its intention to restructure its loan obligations and to repurchase the subject property. Mrs. Cuison, the widow and administratrix of the estate of Roman Cuison Sr., wrote the bank’s Officer-in-Charge, a letter indicating her offered terms of repurchase. CLCI paid the bank P50,000.00 (on August 8, 1986) and P85,000.00 (on September 3, 1986). The bank received and regarded these amounts as “earnest money” for the repurchase of the subject property. On October 20, 1986, the

bank sent Atty. Roman Cuison, Jr. (Atty. Cuison), as the president and general manager of CLCI, a letter informing CLCI of the bank’s board of directors’ resolution (TRB Repurchase Agreement), laying down the conditions for the repurchase of the subject property. CLCI failed to comply with the terms notwithstanding the extensions of time given by the bank. Nevertheless, CLCI tendered a check for P135,091.57 to cover fifty percent (50%) of the twenty percent (20%) bid price. The check was dishonored. CLCI tendered an additional P50,000.00. On May 29, 1987, the bank sent Atty. Cuison a letter informing him that the P185,000.00 CLCI paid was not a deposit, but formed part of the earnest money under the TRB Repurchase Agreement. On August 28, 1987, Atty. Cuison, by letter, requested that CLCI’s outstanding obligation of P1,221,075.61 (as of July 31, 1987) be reduced to P1 million, and the amount of P221,075.61 be condoned by the bank. To show its commitment to the request, CLCI paid the bank P100,000.00 and P200,000.00 on August 28, 1987. The bank credited both payments as earnest money. A year later, CLCI inquired about the status of its request. The bank responded that the request was still under consideration by the bank’s Manila office. On September 30, 1988, the bank informed CLCI that it would resell the subject property and gave CLCI 15 days to make a formal offer; otherwise, the bank would sell the subject property to third parties. On October 26, 1988, CLCI offered to repurchase the subject property for P1.5 million, given that it had already tendered the amount of P400,000.00 as earnest money. CLCI subsequently claimed that the bank breached the terms of repurchase, as it had wrongly considered its payments (in the amounts ofP140,485.18, P200,000.00 and P100,000.00) as earnest money, instead of applying them to the purchase price. Through its counsel, CLCI demanded that the bank rectify the 176


repurchase agreement to reflect the true consideration agreed upon for which the earnest money had been given. The bank did not act on the demand. Instead, it informed CLCI that the amounts it received were not earnest money, and that the bank was willing to return these sums, less the amounts forfeited to answer for the unremitted rentals on the subject property. CLCI and Mrs. Cuison, on February 10, 1989, filed with the RTC a complaint for breach of contract. Bank argues that the undisputed facts of the case show that there was no meeting of the minds between the parties given CLCI’s failure to give its consent and conformity to the bank’s letter of October 20, 1986, confirmed by the testimony of Atty. Cuison, no less, when he denied that CLCI consented to the agreement’s terms of implementation. ISSUE Whether there was a perfected contract of repurchase HELD: YES. The facts of the present case, although ambivalent in some respects, point on the whole to the conclusion that both parties agreed to the repurchase of the subject property. A reading of the petitioner’s letter of October 20, 1986 informing CLCI that the bank’s board of directors “passed a resolution for the repurchase of [your] property” shows that the tenor of acceptance, except for the repurchase price, was subject to conditions not identical in all respects with the CLCI’s letteroffer of July 31, 1986. In this sense, the bank’s October 20, 1986 letter was effectively a counter-offer that CLCI must be shown to have accepted absolutely and unqualifiedly in order to give birth to a perfected contract. Evidence exists showing that CLCI did not sign any document to show its conformity with the bank’s counter-offer. Testimony also exists explaining why CLCI did not sign; Atty. Cuison testified that CLCI did not agree with the

implementation of the repurchase transaction since the bank made a wrong computation.

These indicators notwithstanding, we find that CLCI accepted the terms of the TRC Repurchase Agreement and thus unqualifiedly accepted the bank’s counter-offer under the TRB Repurchase Agreement and, in fact, partially executed the agreement, We counted the following facts, too, as indicators leading to the conclusion that a perfected contract existed: CLCI did not raise any objection to the terms and conditions of the TRB Repurchase Agreement, and instead, unconditionally paid without protests or objections; CLCI’s acknowledgment of their obligations under the TRB Repurchase Agreement (as shown by Atty. Cuison’s letter of November 29, 1986); and Atty. Cuison’s admission that the TRB Repurchase Agreement was already a negotiated agreement between CLCI and the bank, Admittedly, some evidence on record may be argued to point to the absence of a meeting of the minds (more particularly, the previous offers made by CLCI to change the payment scheme of the repurchase of the subject property which was not accepted; the bank’s expressed intent to offer the subject property for sale to third persons at a higher price; and the unaccepted counteroffer by the respondents after the bank increased the purchase price). These incidents, however, were the results of CLCI’s failure to comply with its obligations to pay the amounts due on the stipulated time and were made after the parties’ minds had met on the terms of the contract. The seemingly contrary indications, therefore, do not go into and affect the perfection of the contract; they came after the contract had been perfected and, as discussed below, were indicative of the bank’s cancellation of the repurchase agreement. 177


Blas v Santos Elements of a contract: object FACTS: Simeon Blas married Marta Cruz before 1898. They had 3 children. Marta died in 1898, and the following year, Simeon married Maxima Santos. At the time of this second marriage, no liquidation of the properties required by Simeon and Marta was made. Simeon executed a last will and testament. At the time of the execution of said will, Andres Pascual a son-in-law of the testator, and Avelina Pascual and others, were present. Andres had married a descendant by the first marriage. The will was prepared by Andres, with the help of his nephew Avelino Pascual. Simeon asked Andres to prepare a document which was presented in court as Exhibit "A”. The reason why Simeon ordered the preparation of Exhibit "A" was because the properties that Simeon had acquired during his first marriage with Marta had not been liquidated and were not separated from those acquired during the second marriage. Leoncio Gervacio, son-in-law of Simeon, testified that his children were claiming from their grandfather Simeon the properties left by their grandmother Marta. The claim was not pushed through because they reached into an agreement whereby the parties agreed that Simeon and Maxima will give 1/2 of the estate of Simeon. Exhibit "A" states that the maker (Maxima) had read and knew the contents of the will of Simeon - she was evidently referring to the declaration in the will (of Simeon Blas) that his properties are conjugal properties and one-half thereof belongs to her (Maxima Santos) as her share of the conjugal assets under the law. The agreement or promise that Maxima makes in Exhibit "A" is to hold 1/2 of her said share in the conjugal assets in trust for the heirs and legatees of her husband in his will, with the obligation of conveying the same to such of his heirs or legatees 178


as she may choose in her last will and testament. Under Exhibit "A", therefore, Maxima contracted the obligation and promised to give 1/2 of the properties to the heirs and legatees of Simeon.

Certainly his wife's actual share in the conjugal properties may not be considered as future inheritance because they were actually in existence at the time Exhibit "A" was executed.

The court below held that Exhibit "A" cannot it be considered as a valid and enforceable contract for lack of consideration and because it deals with future inheritance. Plaintiffs-appellants argue before us that Exhibit "A" is both a trust agreement and a contract in the nature of a compromise to avoid litigation. ISSUE: Whether the object of the compromise is future inheritance and is therefore, void. HELD: No. Exhibit "A" is a compromise and at the same time a contract with a sufficient cause or consideration. It is also contended that it deals with future inheritance. We do not think that Exhibit "A" is a contract on future inheritance. It is an obligation or promise made by the maker to transmit ½ of her share in the conjugal properties acquired with her husband, which properties are stated or declared to be conjugal properties in the will of the husband. The conjugal properties were in existence at the time of the execution of Exhibit "A" on December 26, 1936. As a matter of fact, Maxima included these properties in her inventory of her husband's estate of June 2, 1937. The promise does not refer to any properties that the maker would inherit upon the death of her husband, because it is her share in the conjugal assets. That the kind of agreement or promise contained in Exhibit "A" is not void under Article 1271. What is prohibited to be the subject matter of a contract under Article 1271 is " future inheritance." To us future inheritance is any property or right not in existence or capable of determination at the time of the contract, that a person may in the future acquire by succession. The properties subject of the contract Exhibit "A" are well defined properties, existing at the time of the agreement, which Simeon declares in his statement as belonging to his wife as her share in the conjugal partnership. 179


Tanedo v CA (1996) 252 SCRA 80 Topic: Elements of a Contract; Essential; Object DOCTRINE: “(n)o contract may be entered into upon a future inheritance except in cases expressly authorized by law.” FACTS: Lazardo Tañedo executed a notarized deed of absolute sale in favor of his eldest brother, Ricardo Tañedo, and the latter’s wife, Teresita Barera, private respondents herein, whereby he conveyed to the latter in consideration of P1,500.00, “one hectare of whatever share I shall have over Lot No. 191, the said property being his “future inheritance” from his parents.

partition executed by the heirs of Matias, which deed included the land in litigation (Lot 191). Private respondents, however presented in evidence a “Deed of Revocation of a Deed of Sale” , wherein Lazaro revoked the sale in favor of petitioners for the reason that it was “simulated or fictitious - without any consideration whatsoever.” ISSUE: Whether sale of future inheritance is valid as an object of a contract HELD: The sale made in 1962 involving future inheritance is not really at issue here. In context, the assailed Decision conceded “it may be legally correct that a contract of sale of anticipated future inheritance is null and void.

Upon death of his father Matias, Lazaro executed an affidavit of conformity “to reaffirm, respect, acknowledge, and validate the sale I made in 1962”.

But to remove all doubts, we hereby categorically rule that, pursuant to Article 1347 of the Civil Code, “(n)o contract may be entered into upon a future inheritance except in cases expressly authorized by law.”

Lazaro executed another notarized deed of sale in favor of private respondents covering his “undivided ONE TWELVE (1/12) of a parcel of land known as Lot 191. He acknowledged therein his receipt of P 10,000.00 as consideration therefor.

Consequently, said contract made in 1962 is not valid and cannot be the source of any right nor the creator of any obligation between the parties.

Ricardo learned that Lazaro sold the same property to his children, petitioners herein. Petitioners filed a complaint for rescission (plus damages) of the deeds of sale executed by Lazaro in favor of private respondents covering the property inherited by Lazaro from his father. Petitioners claimed that their father, Lazaro, executed an “Absolute Deed of Sale” dated December 29, 1980, conveying to his ten children his allotted portion under the extrajudicial 180


Liguez v. CA (December 15, 1957) Topic: Essential Elemets of a Contract; Cause DOCTRINE: A contract to be valid must be based on a legal cause. However, the burden of proving the illegality of a cause in an apparent valid contract lies on the one assailing such validity. FACTS: Petitioner-appellant Conchita Liguez filed a complaint against the widow and heirs of the late Salvador P. Lopez to recover a parcel of land. Liguez averred to be its legal owner, pursuant to a deed of donation of said land, executed in her favor by the late owner, Salvador P. Lopez. The defense interposed was that the donation was null and void for having an illicit causa or consideration, which was the plaintiff’s entering into marital relations with Salvador P. Lopez, a married man; and that the property had been adjudicated to the appellees as heirs of Lopez by the court of First Instance. The Court of Appeals found that when the donation was made, Lopez had been living with the parents of appellant for barely a month; that the donation was made in view of the desire of Salvador P. Lopez, a man of mature years, to have sexual relations with appellant Conchita Liguez; that Lopez had confessed to his love for appellant to the instrumental witnesses, with the remark that her parents would not allow Lopez to live with her unless he first donated the land in question; that after the donation, Conchita Liguez and Salvador P. Lopez lived together in the house that was built upon the latter's orders, until Lopez was killed on July 1st, 1943, by some guerrillas who believed him to be pro-Japanese.

HELD: YES. In the present case, it is scarcely disputable that Lopez would not have conveyed the property in question had he known that appellant would refuse to cohabit with him; so that the cohabitation was an implied condition to the donation, and being unlawful, necessarily tainted the donation itself. Here the facts as found by the Court of Appeals (and which we cannot vary) demonstrate that in making the donation in question, the late Salvador P. Lopez was not moved exclusively by the desire to benefit appellant Conchita Liguez, but also to secure her cohabiting with him, so that he could gratify his sexual impulses. This is clear from the confession of Lopez to the witnesses Rodriguez and Ragay, that he was in love with appellant, but her parents would not agree unless he donated the land in question to her. Actually, therefore, the donation was but one part of an onerous transaction (at least with appellant's parents) that must be viewed in its totality. Thus considered, the conveyance was clearly predicated upon an illicit causa. The appellant seeks recovery of the disputed land on the strength of a donation regular on its face. To defeat its effect, the appellees must plead and prove that the same is illegal. But such plea on the part of the Lopez heirs is not receivable, since Lopez, himself, if living, would be barred from setting up that plea; and his heirs, as his privies and successors in interest, can have no better rights than Lopez himself.

ISSUE: WON the deed of donation is void because it was tainted with illegal cause or consideration, of which donor and donee were participants. 181


Carantes v CA, 76 SCRA 524 (1977) DOCTRINE: It is total absence of cause or consideration that renders a contract absolutely void and inexistent. FACTS: Mateo Carantes was the original owner of a certain parcel of land. When he died, he was survived by his wife and six children. Subsequently, the parcel of land was subjected for expropriation, and was later on indeed expropriated. A deed denominated as Assignment of Right of Inheritance was executed by four of Mateo’s children assigning Maximo Carantes their rights to inheritance over the lot. Maximo then sold the remaining lots to the government and also registered on Mar. 16, 1940 the deed of Assignment of Right to Inheritance. The still remaining lot was issued in the name of Maximo. A complaint was filed against Maximo alleging that the deed be annulled on the ground of fraud. The trial court rendered a decision stating that plaintiff’s right of action has prescribed. The CA reversed the decision. It also concluded that the deed of "Assignment of Right to Inheritance" is void ab initio and inexistent on the grounds that real consent was wanting and that there is no valid consideration in the said contract.

Article 1409 (2) of the new Civil Code relied upon by the respondent court provides that contracts "which are absolutely simulated or fictitious" are inexistent and void from the beginning. The basic characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties. The respondents' action may not be considered as one to declare the inexistence of a contract for lack of consideration. It is total absence of cause or consideration that renders a contract absolutely void and inexistent. In the case at bar consideration was not absent. The sum of P1.00 appears in the document as one of the considerations for the assignment of inheritance. In addition — and this of great legal import — the document recites that the decedent Mateo Carantes had, during his lifetime, expressed to the signatories to the contract that the property subject-matter thereof rightly and exclusively belonged to the petitioner Maximino Carantes. This acknowledgment by the signatories definitely constitutes valuable consideration for the contract.

ISSUE: Whether there was a valid cause in the said deed. HELD: Yes. The SC did not agree with the respondent court's legal conclusion that the deed of "Assignment of Right to Inheritance" is void ab initio and inexistent on the grounds that real consent was wanting and the consideration of P1.00 is so shocking to the conscience that there was in fact no consideration, hence, the action for the declaration of the contract's inexistence does not prescribe pursuant to article 1410 of the new Civil Code. 182


Buenaventura v CA (2003) Carpio, J Re: Cause; Contracts

c. Thirdly, the deeds of sale do not reflect and express the true intent of the parties (vendors and vendees); d. Fourthly, the purported sale of the properties in litis was the result of a deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of their legitime.

DOCTRINE: Failure to pay the consideration is different from lack of consideration. The former results in a right to demand the fulfillment or cancellation of the obligation under an existing valid contract while the latter prevents the existence of a valid contract.

Petitioners assert that their respondent siblings did not actually pay the prices stated in the Deeds of Sale to their respondent father. Thus, petitioners ask the court to declare the Deeds of Sale void.

FACTS

ISSUE

Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents of plaintiffs Consolacion, Nora, Emma and Natividad as well as of defendants Fidel, Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed JOAQUIN. Sought to be declared null and void ab initio are certain deeds of sale of real property executed by defendant parents Leonardo Joaquin and Feliciana Landrito in favor of their co-defendant children and the corresponding certificates of title issued in their names

Whether the Deeds of Sale are void for lack of consideration

Petitioners allege that the deeds of sale are null and void because a. Firstly, there was no actual valid consideration for the deeds of sale xxx over the properties in litis; b. Secondly, assuming that there was consideration in the sums reflected in the questioned deeds, the properties are more than three-fold times more valuable than the measly sums appearing therein;

Whether the Deeds of Sale are void for gross inadequacy of price HELD: THERE WAS CONSIDERATION A contract of sale is not a real contract, but a consensual contract. As a consensual contract, a contract of sale becomes a binding and valid contract upon the meeting of the minds as to price. If there is a meeting of the minds of the parties as to the price, the contract of sale is valid, despite the manner of payment, or even the breach of that manner of payment. If the real price is not stated in the contract, then the contract of sale is valid but subject to reformation. If there is no meeting of the minds of the parties as to the price, because the price stipulated in the contract is simulated, then the contract is void. Article 1471 of the Civil Code states that if the price in a contract of sale is simulated, the sale is void. It is not the act of payment of price that determines the validity of a contract of sale. Payment of the price 183


has nothing to do with the perfection of contract. Payment of the price goes into performance of the contract. Failure to pay consideration is different from lack consideration. The former results in a right demand the fulfillment or cancellation of obligation under an existing valid contract while latter prevents the existence of a valid contract.

the the the of to the the

Petitioners failed to show that the prices in the Deeds of Sale were absolutely simulated. To prove simulation, petitioners presented Emma Joaquin Valdoz’s testimony stating that their father, respondent Leonardo Joaquin, told her that he would transfer a lot to her through a deed of sale without need for her payment of the purchase price. The trial court did not find the allegation of absolute simulation of price credible. Petitioners’ failure to prove absolute simulation of price is magnified by their lack of knowledge of their respondent siblings’ financial capacity to buy the questioned lots. On the other hand, the Deeds of Sale which petitioners presented as evidence plainly showed the cost of each lot sold. Not only did respondents’ minds meet as to the purchase price, but the real price was also stated in the Deeds of Sale. As of the filing of the complaint, respondent siblings have also fully paid the price to their respondent father.

subject matter of sale. All the respondents believed that they received the commutative value of what they gave. In the instant case, the trial court found that the lots were sold for a valid consideration, and that the defendant children actually paid the purchase price stipulated in their respective Deeds of Sale. Actual payment of the purchase price by the buyer to the seller is a factual finding that is now conclusive upon us.

LOTS WERE SOLD FOR A VALID CONSIDERATION Petitioners ask that assuming that there is consideration, the same is grossly inadequate as to invalidate the Deeds of Sale. (ART 1355, 1470) Petitioners failed to prove any of the instances mentioned in Articles 1355 and 1470 of the Civil Code which would invalidate, or even affect, the Deeds of Sale. Indeed, there is no requirement that the price be equal to the exact value of the 184


Tinsay v. Yusay Classification of contracts FACTS:

the remaining 1/2 interest in favor of the children of Perpetua in equal shares, the court holding in substance that Juana not having been a party to the partition made in 1911, her interests were not affected thereby.

Juan Yusay died, leaving a widow Juana Servando and 5 children, Candido, Numeriana, Jovito, Jovita and Petra. His estate consisted of his interest in a tract of land situated in Iloilo, and which was community property of his marriage to Juana. Jovito purchased the interests of Candido and Numeriana in the land, thus acquiring a 3/5 interest in the same. Jovito died, leaving a widow, Perpetua, and 5 minor children. Perpetua, for herself and in representation of her children, entered into an agreement in writing with Jovita and Petra which purported to provide for the partition of the land and whereby Perpetua and her children were to occupy the portion to the northeast of Calle Aldeguer and Jovita and Petra were to have the portion or lot to the southwest of this street. Jovita and Petra expressly relinquished in favor of the children of Jovito any and all rights which they might have in the land.

After the death of Juana, the appellee Jose Tinsay was appointed administrator of her estate. Jovita and Petra sold lot No. 283 to Vicente Tad-Y for P20,000. Tinsay filed an amended inventory in which the P20,000 received by Jovita and Petra from the sale of lot No. 283 was included as bien colacionable. A scheme for the distribution of the estate was submitted to the court in which the P20,000 were brought into collation with the result that the total value of the estate being only P28,900, according to inventory, no further share in the estate was assigned to Jovita and Petra. The scheme of partition was opposed by Jovita and Petra. The court approved the scheme of partition and declared the proceeds of the sale of lots Nos. 283 and 744 "fictitiously collationable" and held that this being in excess of their share of the inheritance, Jovita and Petra could claim no further participation in the other property described in the inventory and in the scheme of partition.

A cadastral survey was made of a section of Iloilo in which the subject land is situated. The portion allotted to Perpetua and her children was designed as lot No. 241, with a narrow strip set aside for the widening of Calle Aldeguer and described as lot No. 713. The portion which under the partition of 1911 fell to the share of Jovita and Petra was given the lot number 283; a narrow strip of the same portion along Calle Aldeguer is numbered 744.

ISSUE:

Juana filed a petition in the cadastral case asking for the reopening of the case as to lots Nos. 241 and 713 on the ground that she was the owner of a 1/2 interest in said lots. The petition for reopening was granted. The 2 lots Nos. 241 and 713 were decreed in favor of Juana and the children of Jovito in the proportions of an undivided half interest in favor of Juana and

Whether or not the partition agreement was valid despite lack of participation on the part of Juana. HELD: No. Juana not being a party to the partition agreement, the agreement standing alone was ineffective as against her. The attempt to partition her land among her heirs, constituting a partition of a future inheritance was invalid under the second paragraph of article 1271 and for the same reason the renunciation of all interest in the land which now constitutes lots Nos. 241 and 713 made by the appellants in favor of the children of Jovito would likewise be of no binding force as to the undivided portion which belonged to Juana. But if the parties entered into the partition agreement in good faith and treated 185


all of the land as a present inheritance, and if the appellants on the strength of the agreement obtained their Torrens title to the land allotted to them therein, and if Perpetua Sian in reliance on the appellants’ renunciation of all interest claimed by her on behalf of her children in the cadastral case refrained from presenting any opposition to the appellants’ claim to the entire fee in the land assigned to them in the partition agreement and if the appellants after the death of Juana continued to enjoy the benefits of the agreement refusing to compensate the heirs of Jovito for the latters’ loss of their interest in lots Nos. 283 and 744 through the registration of the lots in the name of the appellants and the subsequent alienation of the same to innocent third parties, said appellants are now estopped from repudiating the partition agreement of 1911 and from claiming any further interest in lots Nos. 241 and 713. There is, however, no reason why they should not be allowed to share in the distribution of the other property left by Juana.

Dizon v Gaborro (1978) 83 SCRA 688 Topic: According to Name DOCTRINE: We find that the agreement between petitioner Dizon and respondent Gaborro is one of those inanimate contracts under Art.1307 of the New Civil Code whereby petitioner and respondent agreed "to give and to do" certain rights and obligations respecting the lands and the mortgage debts of petitioner which would be acceptable to the bank. but partaking of the nature of the antichresis insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned. FACTS: The antecedent facts established in the record are not disputed. Petitioner Jose P. Dizon was the owner of the three (3) parcels of land, subject matter of this litigation, situated in Mabalacat, Pampanga, as evidenced by TCT No. 15679. He constituted a first mortgage lien in favor of the Development Bank of the Philippines in order to secure a loan in the sum of P38,000.00 trial a second mortgage lien in favor of the Philippine National Bank to cure his indebtedness to said bank in the amount of P93,831.91. Petitioner Dizon having defaulted in the payment of his debt, the Development Bank of the Philippines foreclosed the mortgage extrajudicially pursuant to the provisions of Act No. 3135. Sometime prior to October 6, 1959 Alfredo G. Gaborro trial Jose P. Dizon met. Gaborro became interested in the lands of Dizon. 186


Dizon originally intended to lease to Gaborro the property which had been lying idle for some time. But as the mortgage was already foreclosed by the DPB trial the bank in fact purchased the lands at the foreclosure sale on May 26, 1959, they abandoned the projected lease. They then entered into the following contract on October 6, 1959 captioned trial quoted, to wit: DEED OF SALE WITH ASSUMPTION OF MORTGAGE

possession, the enjoyment and use of the lands until petitioner can reimburse fully the respondent the amounts paid by the latter to DBP and PNB, to accomplish the following ends: (a) payment of the bank obligations; (b) make the lands productive for the benefit of the possessor, respondent Gaborro, (c) assure the return of the land to the original owner, petitioner Dizon, thus rendering equity and fairness to all parties concerned.

The second contract executed the same day, October 6, 1959 is called Option to Purchase Real Estate.

In view of all these considerations, the law and Jurisprudence, and the facts established. We find that the agreement between petitioner Dizon and respondent Gaborro is one of those inanimate contracts under Art.1307 of the New Civil Code whereby petitioner and respondent agreed "to give and to do" certain rights and obligations respecting the lands and the mortgage debts of petitioner which would be acceptable to the bank. but partaking of the nature of the antichresis insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned.

The sum of P131,813.91 which purports to be the consideration of the sale was not actually paid by Alfredo G. Gaborro to the petitioner. The said amount represents the aggregate debts of the petitioner with the Development Bank of the Philippines trial the Philippine National Bank.After the execution of said contracts, Alfredo G. Gaborro took possession of the three parcels of land in question. Jose P. Dizon instituted a complaint in the Court of First Instance of Pampanga, Gaborro, alleging that the documents Deed of Sale With Assumption of Mortgage and the Option to Purchase Real Estate did not express the true intention and agreement bet. between the parties. ISSUE: Whether the deed was of a Deed of Sale with Assumption of Mortgage', trial Option to Purchase Real Estate or merely an equitable mortgage or conveyance thereof by way of security for reimbursement, refund or repayment by petitioner Jose P. Dizon? HELD: In the light of the foreclosure proceedings and sale of the properties, a legal point of primary importance here, as well as other relevant facts and circumstances, We agree with the findings of the trial and appellate courts that the true intention of the parties is that respondent Gaborro would assume and pay the indebtedness of petitioner Dizon to DBP and PNB, and in consideration therefor, respondent Gaborro was given the

187


Hernaez v. Delos Angeles (1969) Topic: Form of Contracts DOCTRINE: Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable.... FACTS: Marlene Dauden-Hernaez, a movie actress, filed a case against Hollywood Far East Productions its President and General Manager, Ramon Valenzuela, to recover P14,700 allegedly the balance due for her services as leading actress in two motion pictures. The complaint was dismissed by Judge De Los Angeles mainly because her claim was not supported by a written document, public or private in violation of Articles 1356 and 1358 of the Civil Code. Upon a motion for reconsideration, the respondent judged dismissed the same because the allegations were the same as the first motion. According to Judge De Los Angeles, the contract sued upon was not alleged to be in writing when Article 1358 requires it to be so because the amount involved exceeds P500. ISSUE: WON a contract for personal services involving more than P500.00 was either invalid or unenforceable under the last paragraph of Article 1358. HELD: NO. Consistent with the Spanish Civil Code in upholding spirit and intent of the parties over formalities, in general, contracts are

valid and binding from their perfection regardless of whether they are oral or written. However, as provided in the 2nd sentence of Art. 1356: ART. 1356. Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable.... Thus, the two exceptions to the general rule that the form is irrelevant to the binding effect of a contract are: (a) Solemn Contracts - contracts which the law requires to be in some particular form (writing) in order to make them valid and enforceable. Examples: 1. Donation of immovable property (Art. 749) which must be in a public instrument to be valid. In order "that the donation maybe valid", i.e., existing or binding. 2. Donation of movables worth more than P5,000 (Art. 748) which must be in writing otherwise they are void. (b) Contracts that the law requires to be proved by some writing (memorandum) of its terms, i.e. those covered by the old Statute of Frauds, now Article 1403(2) of the Civil Code. For the latter example, their existence are not provable by mere oral testimony (unless wholly or partly executed) and are required to be in writing to be enforceable by action in court. 188


However, the contract sued upon (compensation for services) does not come under either exception. While the last clause of Article 1358 provides that "all other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one." Said Article does not provide that the absence of a written form in this case will make the agreement invalid or unenforceable. On the contrary, Article 1357 clearly indicates that contracts covered by Article 1358 are binding and enforceable by action or suit despite the absence of writing.

Zamora v Miranda (2012) G.R. No. 162930, DOCTRINE: Article 1358 of the Civil Code, which requires the embodiment of certain contracts in a public instrument, is only for convenience, and registration of the instrument only adversely affects third parties. Formal requirements are, therefore, for the benefit of third parties. Non-compliance therewith does not adversely affect the validity of the contract nor the contractual rights and obligations of the parties thereunder. FACTS: Petitioner principally prays that she be declared the owner of the subject property; that respondent Beatriz Miranda be ordered to execute a deed of sale in her (petitioner's) favor; and that the sale of the subject property in favor of respondents Ang be nullified. The sole evidence relied upon by petitioner to prove her claim of ownership over the subject property is the receipt dated October 23, 1972 which states: Rec'd the amount of fifty thousand (P50,000) pesos from Lagrimas Zamora as payment for the property at Carmelite, Bajada, Davao City. Documents for Agdao property follows. (signed) Beatriz H. Miranda The trial court dismissed petitioner's complaint on the ground that the receipt dated October 23, 1972 (Exhibit "B") is a worthless piece of paper, which cannot be made the basis of petitioner’s claim of ownership over the property as Mr. Arcadio 189


Ramos, an NBI handwriting expert, established that the signature appearing on the said receipt is not the signature of respondent Beatriz Miranda. 

The Court of Appeals affirmed the trial court's dismissal of the complaint.



The Court sustains the decision of the Court of Appeals.

NBI handwriting expert, the trial court and the Court of Appeals.

ISSUE: Can the receipt dated October 23, 1972 evidencing sale of real property, being a private document, be a basis of petitioner's claim over the subject property? HELD: The general rule is in Article 1358 of the Civil Code which provides that acts and contracts which have for their object the transmission of real rights over immovable property or the sale of real property must appear in a public document. If the law requires a document or other special form, the contracting parties may compel each other to observe that form, once the contract has been perfected. In Fule v. Court of Appeals, the Court held that Article 1358 of the Civil Code, which requires the embodiment of certain contracts in a public instrument, is only for convenience, and registration of the instrument only adversely affects third parties. Formal requirements are, therefore, for the benefit of third parties. Non-compliance therewith does not adversely affect the validity of the contract nor the contractual rights and obligations of the parties thereunder. However, in this case, the trial court dismissed petitioner's complaint on the ground that the receipt dated October 23, 1972 (Exhibit "B") is not the signature of respondent Beatriz Miranda. The receipt dated October 23, 1972 cannot prove ownership over the subject property as respondent Beatriz Miranda's signature on the receipt, as vendor, has been found to be forged by the 190


Garcia v Bisaya (1955) Reyes, A, J. Re: Reformation of Contracts DOCTRINE: In Reformation of contracts, allegation of the real agreement or intention of parties is essential since the object sought in an action for reformation is to make an instrument conform to the real agreement or intention of the parties. FACTS On May 20, 1952, plaintiff filed a Complaint against the defendants in the Court of First Instance of Oriental Mindoro, alleging that on November 12, 1938, defendants executed in favor of plaintiff a deed of sale covering a parcel of land therein described; that the said land "was erroneously designated by the parties in the deed of sale as an unregistered land [not registered under Act 496, nor under the Spanish Mortgage Law] when in truth and in fact said land is a portion of a big mass of land registered under Original Certificate of Title No. 6579 in the Office of the Register of Deeds of Oriental Mindoro"; that despite persistent demand from plaintiff to have the error corrected, defendants have refused to do so. Plaintiff, therefore, prayed for judgment ordering defendants to make the aforesaid correction in the deed of sale. Answering the Complaint, defendants denied having executed the alleged deed of sale and pleaded prescription as a defense. Traversing the plea of prescription, plaintiff alleged, among other things, that he "was without knowledge of the error sought to be corrected at the time the deed of sale was executed and for many years thereafter," having discovered the said error "only recently".

Trial court dismissed the case on the basis of prescription. ISSUE: Whether petition must be dismissed because of prescription. HELD: YES, but not because action has prescribed but because there was no cause of action. Both appellant and appellees apparently regard the present action as one for the reformation of an instrument under Chapter 4, Title II, Book IV of the new Civil Code. Specifically, the object sought is the correction of an alleged mistake in a deed of sale covering a piece of land. The action being upon a written contract, it should prescribe in ten years counted from the day it could have been instituted. Obviously, appellant could not have instituted his action to correct an error in a deed until that error was discovered. There being nothing in the pleadings to show that the error was discovered more than ten years before the present action was filed on May 20, 1952, while, on the other hand, there is allegation that the error was discovered "only recently", We think the action should not have been dismissed as having already prescribed before the factual basis for prescription had been established and clarified by evidence. We note, however, that appellant's Complaint states no cause of action, for it fails to allege that the instrument to the reformed does not express the real agreement or intention of the parties. Such allegation is essential since the object sought in an action for reformation is to make an instrument conform to the real agreement or intention of the parties. [Art. 1359, new Civil Code; 23 R. C. L., par. 2]. But the Complaint does not even allege what the real agreement or intention was. How then is the Court to know that the correction sought will make the instrument conform to what was agreed or intended by the parties? It is not 191


the function of the remedy of reformation to make a new agreement, but to establish and perpetuate the true existing one. Moreover, Courts do not reform instruments merely for the sake of reforming them, but only to enable some party to assert right under them as reformed. [23 R. C. L., par. 2]. If the instrument in the present case is reformed by making it state that the land therein conveyed is already covered by a Torrens certificate of title, what right will the appellant, as vendee, be able to assert under the reformed instrument when according to himself, or his counsel states in his brief, said title is in the name of Torcuata Sandoval, obviously a person other than the vendor? Would not the sale to him then be ineffective, considering that he would be in the position of one who knowingly purchased property not belonging to the vendor? Perhaps appellant's real grievance is that he has been led to enter into the contract of sale through fraud or misrepresentation on the part of the vendor or in the mistaken belief that, as stated in the deed, the property he was buying was unregistered land. But if that be the case, Article 1359 of the new Civil Code expressly provides that "the proper remedy is not reformation of the instrument but annulment of the contract." Appellant's complaint, however, does not ask for the annulment of the deed; neither does it contain allegations essential to an action for that purpose.

Bentir v Leande Reformation of Instruments DOCTRINE: An action for reformation must be brought within the period prescribed by law, otherwise, it will be barred by the mere lapse of time. FACTS: On May 15, 1992, respondent Leyte Gulf Traders, Inc. filed a complaint for reformation of instrument, specific performance, annulment of conditional sale and damages against petitioners Yolanda Rosello-Bentir and spouses Samuel and Charito Pormida. Respondent alleged that it entered into a contract of lease of a parcel of land with Bentir for a period of 20 years starting May 5, 1968. According to respondent, the lease was extended for another 4 years or until May 31, 1992. On May 5, 1989, Bentir sold the leased premises to spouses Pormada. Respondent questioned the sale alleging that it had a right of first refusal. Rebuffed, it filed a complaint seeking the reformation of the expired contract of lease on the ground that its lawyer inadvertently omitted to incorporate in the contract of lease executed in 1968, the verbal agreement between the parties that in the event Bentir leases or sells the lot after the expiration of the lease, respondent has the right to equal the highest offer. Petitioners contended that respondent is guilty of laches for not bringing the case for reformation of the lease contract within the prescriptive period of 10 years from its execution. RTC dismissed the complaint. The cause of action to reform the contract to reflect such right of first refusal, has already prescribed after 10 years, counted from May 5, 1988 when the contract of lease incepted. Upon motion for reconsideration, RTC reversed the order of dismissal on the grounds that the action for reformation had not yet prescribed and the dismissal 192


was premature and precipitate, denying respondent of its right to procedural due process. CA affirmed.

provision, the other terms of the original contract were deemed revived in the implied new lease.

ISSUE: Whether the complaint for reformation filed by respondent Leyte Gulf Traders, Inc. has prescribed.

We do not agree. First, if, according to respondent, there was an agreement between the parties to extend the lease contract for 4 years after the original contract expired in 1988, then Art. 1670 would not apply as this provision speaks of an implied new lease (tacita reconduccion) where at the end of the contract, the lessee continues to enjoy the thing leased "with the acquiescence of the lessor", so that the duration of the lease is "not for the period of the original contract, but for the time established in Article 1682 and 1687." In other words, if the extended period of lease was expressly agreed upon by the parties, then the term should be exactly what the parties stipulated, not more, not less. Second, even if the supposed 4-year extended lease be considered as an implied new lease under Art. 1670, "the other terms of the original contract" contemplated in said provision are only those terms which are germane to the lessee’s right of continued enjoyment of the property leased. The prescriptive period of 10 years provided for in Art. 1144 applies by operation of law, not by the will of the parties. Therefore, the right of action for reformation accrued from the date of execution of the contract of lease in 1968.

RULING: Yes. The remedy of reformation of an instrument is grounded on the principle of equity where, in order to express the true intention of the contracting parties, an instrument already executed is allowed by law to be reformed. The right of reformation is necessarily an invasion or limitation of the parol evidence rule since, when a writing is reformed, the result is that an oral agreement is by court decree made legally effective. The courts, as the agencies authorized by law to exercise the power to reform an instrument, must necessarily exercise that power sparingly and with great caution and zealous care. The remedy must be subject to limitations as may be provided by law, among which is laches. It may be barred by lapse of time. The prescriptive period for actions based upon a written contract and for reformation of an instrument is 10 years under Article 1144. Prescription is intended to suppress stale and fraudulent claims arising from transactions which facts had become so obscure from the lapse of time or defective memory. Respondent had 10 years from 1968, the time when the contract of lease was executed, to file an action for reformation. It did so only on May 15, 1992 or 24 years after the cause of action accrued, hence, its cause of action has become stale, hence, time-barred. RTC held that the 10-year prescriptive period should be reckoned not from the execution of the contract of lease in 1968, but from the date of the alleged 4-year extension of the lease contract after it expired in 1988. Consequently, when the action for reformation of instrument was filed in 1992 it was within 10 years from the extended period of the lease. Respondent theorized that the extended period of lease was an "implied new lease" within the contemplation of Article 1670, under which

Even if we were to assume for the sake of argument that the instant action for reformation is not time-barred, respondent corporation’s action will still not prosper. Under Section 1, Rule 64 of the New Rules of Court, an action for the reformation of an instrument is instituted as a special civil action for declaratory relief. Since the purpose of an action for declaratory relief is to secure an authoritative statement of the rights and obligations of the parties for their guidance in the enforcement thereof, or compliance therewith, and not to settle issues arising from an alleged breach thereof, it may be entertained only before the breach or violation of the law or contract to which it refers. Here, respondent brought the present action for reformation after an alleged breach or violation of the contract was already 193


committed by Bentir. Consequently, the remedy of reformation no longer lies.

Sarming v Dy (2002) 383 SCRA 131 Topic: Reformation of Instruments DOCTRINE: An action for reformation of instrument under this provision of law may prosper only upon the concurrence of the following requisites: (1) there must have been a meeting of the minds of the parties to the contact; (2) the instrument does not express the true intention of the parties; and (3) the failure of the instrument to express the true intention of the parties is due to mistake, fraud, inequitable conduct or accident. FACTS: Petitioners are the successors-in-interest of original defendant Silveria Flores, while respondents Cresencio Dy and Ludivina Dy-Chan are the successors-in-interest of the original plaintiff Alejandra Delfino, the buyer of one of the lots subject of this case. They were joined in this petition by the successors-ininterest of Isabel, Juan, Hilario, Ruperto, Tomasa, and Luisa and Trinidad themselves, all surnamed Flores, who were also the original plaintiffs in the lower court. They are the descendants of Venancio and Jose, the brothers of the original defendant Silveria Flores. In their complaint for reformation of instrument against Silveria Flores, the original plaintiffs alleged that they, with the exception of Alejandra Delfino, are the heirs of Valentina Unto Flores, who owned, among others, Lot 5734, and Lot 4163, both located at Dumaguete City. After the death of Valentina Unto Flores, her three children, namely: Jose, Venancio, and Silveria, took possession of Lot 5734 with each occupying a one-third portion. Upon their death, their children and grandchildren took possession of their respective shares. The other parcel, Lot 4163 which is solely 194


registered under the name of Silveria, was sub-divided between Silveria and Jose. Two rows of coconut trees planted in the middle of this lot serves as boundary line. In January 1956, Luisa, Trinidad, Ruperto and Tomasa, grandchildren of Jose and now owners of one-half of Lot 4163, entered into a contract with plaintiff Alejandra Delfino, for the sale of one-half share of Lot 4163 after offering the same to their co-owner, Silveria, who declined for lack of money. Silveria did not object to the sale of said portion to Alejandra Delfino. Before preparing the document of sale, the late Atty. Deogracias Pinili, Alejandra's lawyer, called Silveria and the heirs of Venancio to a conference where Silveria declared that she owned half of the lot while the other half belonged to the vendors; and that she was selling her three coconut trees found in the half portion offered to Alejandra Delfino for P15. When Pinili asked for the title of the land, Silveria Flores, through her daughter, Cristita Corsame, delivered Original Certificate of Title No. 4918-A, covering Lot No. 5734, and not the correct title covering Lot 4163. At that time, the parties knew the location of Lot 4163 but not the OCT Number corresponding to said lot. Believing that OCT No. 4918-A was the correct title corresponding to Lot 4163, Pinili prepared a notarized Settlement of Estate and Sale signed by the parties on January 19, 1956. As a result, OCT No. 4918-A was cancelled and in lieu thereof, TCT No. 5078 was issued in the names of Silveria Flores and Alejandra Delfino, with one-half share each. Silveria Flores was present during the preparation and signing of the deed and she stated that the title presented covered Lot No. 4163. Alejandra Delfino immediately took possession and introduced improvements on the purchased lot, which was actually one-half of Lot 4163 instead of Lot 5734 as designated in the deed. Two years later, when Alejandra Delfino purchased the adjoining portion of the lot she had been occupying, she

discovered that what was designated in the deed, Lot 5734, was the wrong lot. She sought the assistance of Pinili who approached Silveria and together they inquired from the Registry of Deeds about the status of Lot 4163. They found out that OCT No. 3129-A covering Lot 4163 was still on file. Alejandra Delfino paid the necessary fees so that the title to Lot 4163 could be released to Silveria Flores, who promised to turn it over to Pinili for the reformation of the deed of sale. However, despite repeated demands, Silveria did not do so, prompting Alejandra and the vendors to file a complaint against Silveria for reformation of the deed of sale with damages before the Regional Trial Court of Negros Oriental. In her answer, Silveria Flores claimed that she was the sole owner of Lot 4163 as shown by OCT No. 3129-A and consequently, respondents had no right to sell the lot. According to her, the contract of sale clearly stated that the property being sold was Lot 5734, not Lot 4163. She also claimed that respondents illegally took possession of one-half of Lot 4163. She thus prayed that she be declared the sole owner of Lot 4163 and be immediately placed in possession thereof. She also asked for compensatory, moral, and exemplary damages and attorney's fees. The case lasted for several years in the trial court due to several substitutions of parties. The complaint was amended several times. Moreover, the records had to be reconstituted when the building where they were kept was razed by fire. But, earnest efforts for the parties to amicably settle the matters among themselves were made by the trial court to no avail Trial Court ruled in favor of respondents, CA Affirmed ISSUE: Whether reformation of the subject deed is proper by reason of mistake in designating the correct lot number. HELD: Reformation is that remedy in equity by means of which a written instrument is made or construed so as to express or 195


conform to the real intention of the parties, as provided in Article 1359 of the Civil Code. An action for reformation of instrument under this provision of law may prosper only upon the concurrence of the following requisites: (1) there must have been a meeting of the minds of the parties to the contact; (2) the instrument does not express the true intention of the parties; and (3) the failure of the instrument to express the true intention of the parties is due to mistake, fraud, inequitable conduct or accident.

conclusion of both the Court of Appeals and the trial court, based on the evidence on record, that Silveria Flores owns only one-half of Lot 4163. The other half belongs to her brother Jose, represented now by his grandchildren successors-in-interest. As such, the latter could rightfully sell the land to Alejandra Delfino.

All of these requisites, in our view, are present in this case. There was a meeting of the minds between the parties to the contract but the deed did not express the true intention of the parties due to mistake in the designation of the lot subject of the deed. There is no dispute as to the intention of the parties to sell the land to Alejandra Delfino but there was a mistake as to the designation of the lot intended to be sold as stated in the Settlement of Estate and Sale. While intentions involve a state of mind which may sometimes be difficult to decipher, subsequent and contemporaneous acts of the parties as well as the evidentiary facts as proved and admitted can be reflective of one's intention. The totality of the evidence clearly indicates that what was intended to be sold to Alejandra Delfino was Lot 4163 and not Lot 5734. As found by both courts below, there are enough bases to support such conclusion. We particularly note that one of the stipulated facts during the pre-trial is that one-half of Lot 4163 is in the possession of plaintiff Alejandra Delfino "since 1956 up to the present." Now, why would Alejandra occupy and possess onehalf of said lot if it was not the parcel of land which was the object of the sale to her? Besides, as found by the Court of Appeals, if it were true that Silveria Flores was the sole owner of Lot 4163, then she should have objected when Alejandra Delfino took possession of one-half thereof immediately after the sale. Additionally, we find no cogent reason to depart from the 196


Oria v. McMicking (1912) Topic: Rescissible Contracts DOCTRINE: FACTS: Gutierrez Hermanos brought an action against Oria Hermanos & Co. for the recovery of sums aggregating in amount nearly P160,000. Subsequent to the beginning of the above actions the members of the company of Oria Hermanos & Co. agreed to dissolved their relation and entered into liquidation. Oria Hermanos & Co. sold all of its property to Manuel Oria Gonzalez, the plaintiff in this case. Included in the sale was the steamship Serantes which is the subject of this litigation. In determining whether or not the sale in question was fraudulent as against creditors, these facts must be kept in mind:  







The plaintiff is a young man twenty-five years of age. There is no pretense whatsoever that he owned any property or had any business at the time of the sale. On the contrary it appears without contradiction that, when the sale took place, he was merely a student without assets and without gainful occupation.



Plaintiff, at the time of the sale, was fully aware of the two suits that have already been begun against the company whose assets he was purchasing and well knew that if said suits should terminate in favor of the plaintiffs therein the judgments in which they terminated would have to be paid out of the property which he was then taking over or they would not be paid at all.



Under all the circumstances the sale in question was, so far as the creditors were concerned, without consideration. To turn over a business worth P274,000 to an "impecunious and vocationless youth" who knew absolutely nothing about the business he received, and whose adaptability to the management of that business was entirely unknown, without a penny being paid down, without any security whatsoever, is a proceeding so unusual, so devoid of care and caution, and so wholly outside of the well defined lines of ordinary business transactions, as to startle any person interested in the concern.



It is certain that the members of the company of Oria Hermanos & Co. would never have made a similar contract or executed a similar instrument with a stranger.



The prohibition in the contract against the sale of certain portions of the property by the plaintiff offers no protection whatever to the creditors. Such prohibitions is

At the time of said sale the value of the assets of Oria Hermanos & Co., as stated by the partners themselves, was P274,000. That at the time of said sale actions were pending against said company by one single creditor for sums aggregating in amount nearly P160,000. The vendee of said sale was a son of Tomas Oria y Balbas and a nephew of the other two persons heretofore mentioned which said three brothers together constituted all of the members of said company. Nothing of value seems to have been delivered by the plaintiff in consideration of said sale and no security whatsoever was given for the payments therein provided for.

197


not security. The parties who made the original transfer can waive and release it at pleasure. Such restrictions is of no value to the creditors of the company. They can not utilize it for the reduction of their claims or in any other beneficial ways. ISSUE: Whether the transfers are fraudulent. HELD: YES. The following are some of the circumstances attending sales which have been dominated by the courts badges of fraud:  

The fact that the consideration of the conveyance is fictitious or is inadequate; A transfer made by a debtor after suit has been begun and while it is pending against him;



A sale upon credit by an insolvent debtor;



Evidence of large indebtedness or complete insolvency;



The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially;



The fact that the transfer is made between father and son, when there are present other of the above circumstances;



The failure of the vendee to take exclusive possession of all the property.

which it was made leaves the creditors substantially without recourse. The property of the company is gone, its income is gone, the business itself is likely to fail, the property is being dissipated, and is depreciating in value. As a result, even if the claims of the creditors should live twelve years and the creditors themselves wait that long, it more than likely that nothing would be found to satisfy their claim at the end of the long wait. Since the records shows that there was no property with which the judgment in question could be paid, the defendants were obliged to resort to and levy upon the steamer in suit. The court below was correct in finding the sale fraudulent and void as to Gutierrez Hermanos in so far as was necessary to permit the collection of its judgment. As a corollary, the court below found that the evidence failed to show that the plaintiff was the owner or entitled to the possession of the steamer in question at the time of the levy and sale complained of, or that he was damaged thereby. Defendant had the right to make the levy and test the validity of the sale in that way, without first resorting to a direct action to annul the sale. The creditor may attack the sale by ignoring it and seizing under his execution the property, or any necessary portion thereof, which is the subject of the sale.

The case at bar presents every one of the badges of fraud above enumerated. Tested by the inquiry, does the sale prejudice the rights of the creditors, the result is clear. The sale in the form in 198


Siguan v Lim Accion Pauliana Doctrine: The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. FACTS: On 25 and 26 August 1990, Rosa Lim issued 2 checks payable to cash. Upon presentment by petitioner with the drawee bank, the checks were dishonored for the reason “account closed.” Demands to make good the checks proved futile. A criminal case for violation of BP 22 was filed by petitioner against Lim. RTC convicted Lim as charged. The case is pending before this Court for review. On 31 July 1990, Lim was convicted of estafa by the RTC filed by Victoria Suarez. This decision was affirmed by the CA. However, this Court, acquitted Lim but held her civilly liable in the amount of P169,000, as actual damages, plus legal interest. On 2 July 1991, a Deed of Donation conveying several parcels of land and purportedly executed by Lim on 10 August 1989 in favor of her children, Linde, Ingrid and Neil, was registered. New TCTs were issued in the names of the donees. On 23 June 1993, petitioner filed an accion pauliana against Lim and her children before the RTC to rescind the Deed of Donation. Petitioner claimed that Lim fraudulently transferred all her real

property to her children in bad faith and in fraud of creditors, including her; that Lim conspired with her children in antedating the Deed of Donation, to petitioner’s and other creditors’ prejudice; and that Lim, at the time of the fraudulent conveyance, left no sufficient properties to pay her obligations. RTC ordered the rescission of the deed of donation. CA reversed the decision of the RTC. It held that 2 of the requisites for filing an accion pauliana were absent, namely, (1) there must be a credit existing prior to the celebration of the contract; and (2) there must be a fraud, or at least the intent to commit fraud, to the prejudice of the creditor seeking the rescission. The Deed of Donation, which was executed and acknowledged before a notary public, appears on its face to have been executed on 10 August 1989. Under Section 23 of Rule 132, the Deed, being a public document, is evidence of the fact which gave rise to its execution and of the date thereof. No antedating of the Deed of Donation was made, there being no convincing evidence on record to indicate that the notary public and the parties did antedate it. Since Lim’s indebtedness to petitioner was incurred in August 1990, or a year after the execution of the Deed of Donation, the first requirement for accion pauliana was not met. Anent petitioner’s contention that assuming that the Deed was not antedated it was nevertheless in fraud of creditors because Suarez became Lim’s creditor on 8 October 1987, CA found the same untenable, for the rule is basic that the fraud must prejudice the creditor seeking the rescission. ISSUE: Whether the questioned Deed of Donation was made in fraud of petitioner and, therefore, rescissible. RULING: No. Article 1381 enumerates the contracts which are rescissible, and among them are “those contracts undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them.” 199


The general rule is that rescission requires the existence of creditors at the time of the alleged fraudulent alienation, and this must be proved as one of the bases of the judicial pronouncement setting aside the contract. Without any prior existing debt, there can neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the credit was constituted.

“the exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission is resorted to.” It is, therefore, essential that the party asking for rescission prove that he has exhausted all other legal means to obtain satisfaction of his claim. Petitioner neither alleged nor proved that she did so. On this score, her action for the rescission of the deed is not maintainable even if the fraud charged actually did exist.”

The alleged debt of Lim in favor of petitioner was incurred in August 1990, while the deed of donation was purportedly executed on 10 August 1989. We are not convinced with the allegation of the petitioner that the deed was antedated to make it appear that it was made prior to petitioner’s credit. Notably, that deed is a public document, it having been acknowledged before a notary public. As such, it is evidence of the fact which gave rise to its execution and of its date, pursuant to Section 23, Rule 132. The fact that the Deed was registered only on 2 July 1991 is not enough to overcome the presumption as to the truthfulness of the statement of the date in the deed, which is 10 August 1989. Petitioner’s claim against Lim was constituted only in August 1990, or a year after the alienation. Thus, the first 2 requisites for the rescission of contracts are absent.

Article 1387, first paragraph, provides: “All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors when the donor did not reserve sufficient property to pay all debts contracted before the donation.” Likewise, Article 759, second paragraph, states that the donation is always presumed to be in fraud of creditors when at the time thereof the donor did not reserve sufficient property to pay his debts prior to the donation.

Even assuming arguendo that petitioner became a creditor of Lim prior to the celebration of the contract of donation, still her action for rescission would not fare well because the third requisite was not met. Under Article 1381, contracts entered into in fraud of creditors may be rescinded only when the creditors cannot in any manner collect the claims due them. Also, Article 1383 provides that the action for rescission is but a subsidiary remedy which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. The term “subsidiary remedy” has been defined as

The fourth requisite for an accion pauliana to prosper is not present either.

For this presumption of fraud to apply, it must be established that the donor did not leave adequate properties which creditors might have recourse for the collection of their credits existing before the execution of the donation. Petitioner’s alleged credit existed only a year after the deed of donation was executed. She cannot, therefore, be said to have been prejudiced or defrauded by such alienation. Besides, the evidence disclose that as of 10 August 1989, when the deed of donation was executed, Lim still had several properties. It was not sufficiently established that the properties left behind by Lim were not sufficient to cover her debts existing before the donation was made. Hence, the presumption of fraud will not come into play.

200


Nevertheless, a creditor need not depend solely upon the presumption laid down in Articles 759 and 1387. Under the third paragraph of Article 1387, the design to defraud may be proved in any other manner recognized by the law of evidence. Thus in the consideration of whether certain transfers are fraudulent, the Court has laid down specific rules by which the character of the transaction may be determined. The following have been denominated by the Court as badges of fraud: (1) The fact that the consideration of the conveyance is fictitious or is inadequate; (2) A transfer made by a debtor after suit has begun and while it is pending against him; (3) A sale upon credit by an insolvent debtor; (4) Evidence of large indebtedness or complete insolvency; (5) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially; (6) The fact that the transfer is made between father and son, when there are present other of the above circumstances; and (7) The failure of the vendee to take exclusive possession of all the property.

Petitioner brings to our attention the 31 July 1990 Decision of the RTC wherein Lim was held guilty of estafa and was ordered to pay Victoria Suarez P169,000 for the obligation Lim incurred on 8 October 1987. This decision was affirmed by the CA. Upon appeal, however, this Court acquitted Lim of estafa but held her civilly liable for P169,000 as actual damages. It should be noted that the complainant in that case, Victoria Suarez, albeit a creditor prior to the alienation, is not a party to this accion pauliana. Article 1384 provides that rescission shall only be to the extent necessary to cover the damages caused. Thus, only the creditor who brought the action for rescission can benefit from the rescission; those who are strangers to the action cannot benefit from its effects. And the revocation is only to the extent of the plaintiff creditor’s unsatisfied credit; as to the excess, the alienation is maintained. Thus, petitioner cannot invoke the credit of Suarez to justify rescission of the deed of donation.

The above enumeration is not an exclusive list. The circumstances evidencing fraud are as varied as the men who perpetrate the fraud in each case. This Court has therefore declined to define it, reserving the liberty to deal with it under whatever form it may present itself. Petitioner failed to discharge the burden of proving any of the circumstances enumerated above or any other circumstance from which fraud can be inferred. Accordingly, since the 4 requirements for the rescission of a gratuitous contract are not present in this case, petitioner’s action must fail. 201


Velarde v CA (2001) Panganiban, J. Re: Rescissible contracts DOCTRINE: A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract, entitles the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received. FACTS: David Raymundo (private respondent) is the absolute and registered owner of a parcel of land, located at 1918 Kamias St., Dasmariñas Village Makati, together with the house and other improvements, which was under lease. It was negotiated by David’s father with plaintiffs Avelina and Mariano Velarde (petitioners). A Deed of Sale with Assumption of Mortgage was executed in favor of the plaintiffs. Part of the consideration of the sale was the vendee’s assumption to pay the mortgage obligations of the property sold in the amount of P 1,800,000.00 in favor of the Bank of the Philippine Islands. And while their application for the assumption of the mortgage obligations is not yet approved by the mortgagee bank, they have agreed to pay the mortgage obligations on the property with the bank in the name of Mr. David Raymundo. It was further stated that “in the event Velardes violate any of the terms and conditions of the said Deed of Real Estate Mortgage, they agree that the downpayment P800,000.00, plus all the payments made with the BPI on the mortgage loan, shall be forfeited in Favor of Mr. Raymundo, as and by way of liquidated damages, w/out necessity of notice or any judicial declaration to that effect, and Mr. Raymundo shall resume total and complete ownership and possession of the property, and the

same shall be deemed automatically cancelled”, signed by the Velardes. Pursuant to said agreements, plaintiffs paid BPI the monthly interest loan for three months but stopped in paying the mortgage when informed that their application for the assumption of mortgage was not approved. The defendants through a counsel, wrote plaintiffs informing the latter that their non-payment to the mortgagee bank constituted nonperformance of their obligation and the cancellation and rescission of the intended sale. And after two days, the plaintiffs responded and advised the vendor that he is willing to pay provided that Mr. Raymundo: (1) delivers actual possession of the property to them not later than January 15, 1987 for their occupancy (2) causes the release of title and mortgage from the BPI and make the title available and free from any liens and encumbrances (3) executes an absolute deed of sale in their favor free from any liens and encumbrances not later than Jan. 21, 1987. The RTC of Makati dismissed the complaint of the petitioners against Mr. Raymundo for specific performance, nullity of cancellation, writ of possession and damages. However, their Motion for Reconsideration was granted and the Court instructed petitioners to pay the balance of P 1.8 million to private respondent who, in turn were ordered to execute a deed of absolute sale and to surrender possession of the disputed property to petitioners. Upon the appeal of the private respondent to the CA, the court upheld the earlier decision of the RTC regarding the validity of the rescission made by private respondents. Petitioners aver that their nonpayment of private respondents’ mortgage obligation did not constitute a breach of contract, considering that their request to assume the obligation had been disapproved by the 202


mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and, instead, it devolved upon private respondents again. Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the former had signified their willingness to pay the balance of the purchase price only a little over a month from the time they were notified of the disapproval of their application for assumption of mortgage. Petitioners also aver that the breach of the contract was not substantial as would warrant a rescission. ISSUE: Whether there was a substantial breach of contract that would entitle its rescission. HELD: YES. Article 1191 of the New Civil Code applies. Petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the purchase price. As admitted by both parties, their agreement mandated that petitioners should pay the purchase price balance of P1.8 million to private respondents in case the request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when petitioners received notice of the bank’s disapproval of their application to assume respondents’ mortgage, they should have paid the balance of the P1.8 million loan. The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. The breach contemplated in the said provision is the obligor’s failure to comply with an existing obligation. When the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the

absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission. In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondents’ right to rescind the same in accordance with law. True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due; however, this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance by private respondents of additional burdens that had not been agreed upon in the original contract. Thus, it cannot be said that the breach committed by petitioners was merely slight or casual as would preclude the exercise of the right to rescind. The breach committed did not merely consist of a slight delay in payment or an irregularity; such breach would not normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private respondents new obligations as preconditions to the performance of their own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally due and demandable under the contract of sale. Hence, private respondents were left with the legal option of seeking rescission to protect their own interest.

203


Miguel vs Montanez Rescissible contracts DOCTRINE: If the amicable settlement is repudiated by one party, either expressly or impliedly, the other party has 2 options, namely, to enforce the compromise in accordance with the LGC or Rules of Court as the case may be, or to consider it rescinded and insist upon his original demand. FACTS: On February 1, 2001, Jerry Montanez secured a loan payable in 1 year from Crisanta Alcaraz Miguel. Montanez gave as collateral therefor his house and lot. Due to Montanez’ failure to pay the loan, Miguel filed a complaint against Montanez before the Lupong Tagapamayapa. The parties entered into a Kasunduang Pag-aayos wherein Montanez agreed to pay his loan in installments, and in the event the house and lot given as collateral is sold, Montanez would settle the balance of the loan in full. However, Montanez still failed to pay, and on December 13, 2004, the Lupong Tagapamayapa issued a certification to file action in court in favor of Miguel. On April 7, 2005, Miguel filed before the MeTC a complaint for Collection of Sum of Money. MeTC ruled in favor of Miguel. RTC affirmed. However, CA reversed and set aside the RTC decision. It held that since the parties entered into a Kasunduang Pagaayos before the Lupon ng Barangay, such settlement has the force and effect of a court judgment, which may be enforced by execution within 6 months from the date of settlement by the Lupon ng Barangay, or by court action after the lapse of such time. Considering that more than 6 months had elapsed from the date of settlement, the remedy of Miguel was to file an action for the execution of the Kasunduang Pag-aayos in court and not for collection of sum of money.

Miguel contends that the CA erred in ruling that she should have followed the procedure for enforcement of the amicable settlement, instead of filing a collection case since the cause of action did not arise from the Kasunduang Pag-aayos but on Montanez’ breach of the original loan agreement. ISSUE: Whether or not a complaint for sum of money is the proper remedy for the petitioner, notwithstanding the Kasunduang Pag-aayos. HELD: Yes. Because Montanez failed to comply with the terms of the Kasunduang Pag-aayos, said agreement is deemed rescinded pursuant to Article 2041 and Miguel can insist on his original demand. The complaint for collection of sum of money is the proper remedy. Enforcement by execution of the amicable settlement is only applicable if the contracting parties have not repudiated such settlement within 10 days from the date thereof in accordance with Section 416 of the LGC. If the amicable settlement is repudiated by one party, either expressly or impliedly, the other party has 2 options, namely, to enforce the compromise in accordance with the LGC or Rules of Court as the case may be, or to consider it rescinded and insist upon his original demand. This is in accord with Article 2041, which qualifies the broad application of Article 2037: “If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand.” Leonor v. Sycip: Article 2041 does not require an action for rescission, and the aggrieved party, by the breach of compromise agreement, may just consider it already rescinded. Unlike Article 2039, which speaks of "a cause of annulment or rescission of the compromise" and provides that "the compromise may be annulled or rescinded,” thus suggesting an 204


action for annulment or rescission, Article 2041 confers upon the party concerned, not a "cause" for rescission, or the right to "demand" the rescission of a compromise, but the authority, not only to "regard it as rescinded", but, also, to "insist upon his original demand". He need not seek a judicial declaration of rescission, for he may "regard" the compromise agreement already "rescinded".

of money, Miguel obviously chose to rescind the Kasunduang Pag-aayos.

Chavez v. Court of Appeals: a party's non-compliance with the amicable settlement paved the way for the application of Article 2041 under which the other party may either enforce the compromise, following the procedure laid out in the Revised Katarungang Pambarangay Law, or consider it as rescinded and insist upon his original demand. The Revised Katarungang Pambarangay Law provides for a two-tiered mode of enforcement of an amicable settlement. The mode of enforcement does not rule out the right of rescission under Art. 2041. The availability of the right of rescission is apparent from the wording of Sec. 417 itself which provides that the amicable settlement "may" be enforced by execution by the lupon within 6 months from its date or by action in the appropriate city or municipal court, if beyond that period. The use of the word "may" clearly makes the procedure provided in the Revised Katarungang Pambarangay Law directory or merely optional in nature. Montanez did not comply with the terms and conditions of the Kasunduang Pag-aayos. Such noncompliance may be construed as repudiation because it denotes that Montanez did not intend to be bound by the terms thereof, thereby negating the very purpose for which it was executed. Perforce, Miguel has the option either to enforce the Kasunduang Pag-aayos, or to regard it as rescinded and insist upon his original demand, in accordance with the provision of Article 2041. Having instituted an action for collection of sum 205


Baylon (child of ramon from 1st marriage) and Ramon, Jr., Remo, Eric, Florentino, and Ma. Ruby (children from 2nd wife).

Ada V Baylon (2012) G .R. No. 182435, August 13, 2012 Topic: DOCTRINE: Rescission 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 it should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract. It is a remedy to make ineffective a contract, validly entered into and therefore obligatory under normal conditions, by reason of external causes resulting in a pecuniary prejudice to one of the contracting parties or their creditors. Contracts which are rescissible are valid contracts having all the essential requisites of a contract, but by reason of injury or damage caused to either of the parties therein or to third persons are considered defective and, thus, may be rescinded.The kinds of rescissible contracts, according to the reason for their susceptibility to rescission, are the following: first, those which are rescissible because of lesion or prejudice; second, those which are rescissible on account of fraud or bad faith; and third, those which, by special provisions of law, are susceptible to rescission. 

The case involved the estate of Sps. Florentino Baylon (died Nov. 7, 1961) and Maximina Baylon (died May 5, 1974). They were survived by 6 legitimate children: Rita, Victoria, Dolores, Panfila, Ramon and Lilia.



Dolores died intestate and without issue. Victoria died and was survived by daughter Luz Adanza. Ramon died intestate and was survived by respondent Florante



A complaint for partition, accounting and damages was filed by petitioners against Florante, Rita and PAnfila alleging that Sps. Baylon during their lifetime owned 43 parcels of lands in Negros Oriental. And after their death, Rita claimed all the properties and took possession of it and appropriated for herself the income of these properties. And using these incomes she purchased 2 parcels of land (lot 4709 and lot 4706) in Dumaguete City. Rita also refused to partition the properties left by sps. Baylon.



Florante, Rita and PAnfila answered saying that Rita only has 10 lands out of 43 and that the lots purchased by Rita located in Dumaguete were brought out of Rita’s money.



During the pendency of the case, Rita donated lot 4709 and half of lot 4706 to Florante. Unfortunately Rita died without any issue. Learning of the death of Rita, petitioners filed a supplemental pleading praying for the rescission of the donation pursuant to art. 1381(4) of the civil code. They also alleged that Rita was already sick and very weak at the time of donation and thus she could not ahve validly given her consent thereto.



Florante and Panfila opposed the rescission saying that 1381(4) applies only when there is already a prior judicial decree on who between the contending parties actually owned the properties under litigation.



RTC – ordered the partition of the properties and rendered rescinded the donation inter vivos made by Rita to Florante. 206




CA – reversed the RTC ruling insofar as the decision regarding the rescission. The CA actually ordered the remanding of the case to determine who owned lot 4709 and 4706. It also held that before petitioners may file an action for rescission they must first obtain a favourable judicial ruling that lot 4709 and 4706 actually belonged to the estate of sps. baylon and not to rita. Until then an action for rescission is premature.

ISSUE: Whether the Court of Appeals is correct in ruling that the donation inter vivos of lot 4709 and 4706 in favor of Florante may only be rescinded if there is already a judicial determination that the same actually belonged to the estate of sps. Baylon? HELD: YES. The case is REMANDED to the trial court for the determination of the ownership of Lot No. 4709 and half of Lot No. 4706 in accordance with this Decision. Contracts which refer to things subject of litigation is rescissible pursuant to Article 1381(4) of the Civil Code. Contracts which are rescissible due to fraud or bad faith include those which involve things under litigation, if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority. Thus, Article 1381(4) of the Civil Code provides: Art. 1381. The following contracts are rescissible: xxxx (4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority.

The rescission of a contract under Article 1381(4) of the Civil Code only requires the concurrence of the following: first, the defendant, during the pendency of the case, enters into a contract which refers to the thing subject of litigation; and second, the said contract was entered into without the knowledge and approval of the litigants or of a competent judicial authority. As long as the foregoing requisites concur, it becomes the duty of the court to order the rescission of the said contract. The reason for this is simple. Article 1381(4) seeks to remedy the presence of bad faith among the parties to a case and/or any fraudulent act which they may commit with respect to the thing subject of litigation. When a thing is the subject of a judicial controversy, it should ultimately be bound by whatever disposition the court shall render. The parties to the case are therefore expected, in deference to the court’s exercise of jurisdiction over the case, to refrain from doing acts which would dissipate or debase the thing subject of the litigation or otherwise render the impending decision therein ineffectual. There is, then, a restriction on the disposition by the parties of the thing that is the subject of the litigation. Article 1381(4) of the Civil Code requires that any contract entered into by a defendant in a case which refers to things under litigation should be with the knowledge and approval of the litigants or of a competent judicial authority. Further, any disposition of the thing subject of litigation or any act which tends to render inutile the court’s impending disposition in such case, sans the knowledge and approval of the litigants or of the court, is unmistakably and irrefutably indicative of bad faith. Such acts undermine the authority of the court to lay down the respective rights of the parties in a case 207


relative to the thing subject of litigation and bind them to such determination. It should be stressed, though, that the defendant in such a case is not absolutely proscribed from entering into a contract which refer to things under litigation. If, for instance, a defendant enters into a contract which conveys the thing under litigation during the pendency of the case, the conveyance would be valid, there being no definite disposition yet coming from the court with respect to the thing subject of litigation. After all, notwithstanding that the subject thereof is a thing under litigation, such conveyance is but merely an exercise of ownership. This is true even if the defendant effected the conveyance without the knowledge and approval of the litigants or of a competent judicial authority. The absence of such knowledge or approval would not precipitate the invalidity of an otherwise valid contract. Nevertheless, such contract, though considered valid, may be rescinded at the instance of the other litigants pursuant to Article 1381(4) of the Civil Code. Here, contrary to the CA’s disposition, the RTC aptly ordered the rescission of the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. The petitioners had sufficiently established the presence of the requisites for the rescission of a contract pursuant to Article 1381(4) of the Civil Code. It is undisputed that, at the time they were gratuitously conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are among the properties that were the subject of the partition case then pending with the RTC. It is also undisputed that Rita, then one of the defendants in the partition case with the RTC, did not inform nor sought the approval from the petitioners or of the RTC with regard to the donation inter vivos of the said parcels of land to Florante.

Although the gratuitous conveyance of the said parcels of land in favor of Florante was valid, the donation inter vivos of the same being merely an exercise of ownership, Rita’s failure to inform and seek the approval of the petitioners or the RTC regarding the conveyance gave the petitioners the right to have the said donation rescinded pursuant to Article 1381(4) of the Civil Code. Rescission under Article 1381(4) of the Civil Code is not preconditioned upon the judicial determination as to the ownership of the thing subject of litigation. In this regard, we also find the assertion that rescission may only be had after the RTC had finally determined that the parcels of land belonged to the estate of Spouses Baylon intrinsically amiss. The petitioners’ right to institute the action for rescission pursuant to Article 1381(4) of the Civil Code is not preconditioned upon the RTC’s determination as to the ownership of the said parcels of land. It bears stressing that the right to ask for the rescission of a contract under Article 1381(4) of the Civil Code is not contingent upon the final determination of the ownership of the thing subject of litigation. The primordial purpose of Article 1381(4) of the Civil Code is to secure the possible effectivity of the impending judgment by a court with respect to the thing subject of litigation. It seeks to protect the binding effect of a court’s impending adjudication vis-à-vis the thing subject of litigation regardless of which among the contending claims therein would subsequently be upheld. Accordingly, a definitive judicial determination with respect to the thing subject of litigation is not a condition sine qua non before the rescissory action contemplated under Article 1381(4) of the Civil Code may be instituted.

208


Moreover, conceding that the right to bring the rescissory action pursuant to Article 1381(4) of the Civil Code is preconditioned upon a judicial determination with regard to the thing subject litigation, this would only bring about the very predicament that the said provision of law seeks to obviate. Assuming arguendo that a rescissory action under Article 1381(4) of the Civil Code could only be instituted after the dispute with respect to the thing subject of litigation is judicially determined, there is the possibility that the same may had already been conveyed to third persons acting in good faith, rendering any judicial determination with regard to the thing subject of litigation illusory. Surely, this paradoxical eventuality is not what the law had envisioned. Even if the donation inter vivos is validly rescinded, a determination as to the ownership of the subject parcels of land is still necessary. Having established that the RTC had aptly ordered the rescission of the said donation inter vivos in favor of Florante, the issue that has to be resolved by this Court is whether there is still a need to determine the ownership of Lot No. 4709 and half of Lot No. 4706. In opting not to make a determination as to the ownership of Lot No. 4709 and half of Lot No. 4706, the RTC reasoned that the parties in the proceedings before it constitute not only the surviving heirs of Spouses Baylon but the surviving heirs of Rita as well. As intimated earlier, Rita died intestate during the pendency of the proceedings with the RTC without any issue, leaving the parties in the proceedings before the RTC as her surviving heirs. Thus, the RTC insinuated, a definitive determination as to the ownership of the said parcels of land is unnecessary since, in any case, the said parcels of land would ultimately be adjudicated to the parties in the proceedings before it.

We do not agree. Admittedly, whoever may be adjudicated as the owner of Lot No. 4709 and half of Lot No. 4706, be it Rita or Spouses Baylon, the same would ultimately be transmitted to the parties in the proceedings before the RTC as they are the only surviving heirs of both Spouses Baylon and Rita. However, the RTC failed to realize that a definitive adjudication as to the ownership of Lot No. 4709 and half of Lot No. 4706 is essential in this case as it affects the authority of the RTC to direct the partition of the said parcels of land. Simply put, the RTC cannot properly direct the partition of Lot No. 4709 and half of Lot No. 4706 until and unless it determines that the said parcels of land indeed form part of the estate of Spouses Baylon. It should be stressed that the partition proceedings before the RTC only covers the properties co-owned by the parties therein in their respective capacity as the surviving heirs of Spouses Baylon. Hence, the authority of the RTC to issue an order of partition in the proceedings before it only affects those properties which actually belonged to the estate of Spouses Baylon. In this regard, if Lot No. 4709 and half of Lot No. 4706, as unwaveringly claimed by Florante, are indeed exclusively owned by Rita, then the said parcels of land may not be partitioned simultaneously with the other properties subject of the partition case before the RTC. In such case, although the parties in the case before the RTC are still co-owners of the said parcels of land, the RTC would not have the authority to direct the partition of the said parcels of land as the proceedings before it is only concerned with the estate of Spouses Baylon.

209


Caldwallader v. Smith (1907) Topic: Voidable Contracts: Whole case: (short lang) In this action the plaintiff, as assignee of the Pacific Export Lumber Company, sues for $3,486, United States currency, the differences between the amount turned over to the company on account of a cargo of cedar piles consigned to the defendants as its agents and afterwards bought by them, and the amount actually received by them on the subsequent sale thereof. The defendant were allowed by the court below a counterclaim of $6,993.80, United States currency, from which was deducted $2,063.16 for the plaintiffs claim, leaving a balance in favor of the defendants of $4,930.64, for the equipment of which, to wit, 9,861.28 pesos, judgment was entered. The defendants have not appealed. The plaintiff took several exceptions, but on the argument its counsel stated that its contention was confined to the allowance by the trial court of the commissions of the defendant on selling the piling. In May 1902, the Pacific Export Lumber Company of Portland shipped upon the steamer Quito five hundred and eighty-one (581) piles to the defendant, Henry W. Peabody & Company, at Manila, on the sale of which before storage the consignees were to receive a commission of one half of whatever sum was obtained over $15 for each pile and 5 per cent of the price of the piles sold after storage. After the arrival of the steamer on August 2, Peabody and Company wrote the agent of the Pacific Company at Shanghai that for lack of a demand the piles would have to be sold at considerably less than $15 apiece; whereupon the company’s agent directed them to make the best possible offer for the piles, in response to which on August 5 they telegraphed him an offer of $12 apiece. It was accepted by him on August 6, in consequence of which the defendant paid the Pacific Company $6,972.

It afterwards appeared that on July 9 Peabody & Company had entered into negotiations with the Insular Purchasing Agent for the sale for the piles at $20 a piece, resulting of August 4 in the sale to the Government of two hundred and thirteen (213) piles at $19 each. More of them were afterwards sold to the Government at the same figure and the remainder to other parties at carrying prices, the whole realizing to the defendants $10,41.66, amounting to $3,445.66 above the amount paid by the defendant to the plaintiff therefor. Thus it is clear that at the time when the agents were buying from their principal these piles at $12 apiece on the strength of their representation that no better price was obtainable, they had already sold a substantial part of them at $19. In these transactions the defendant, Smith, Bell & Company, were associated with the defendants, Henry W. Peabody & Company, who conducted the negotiations, and are consequently accountable with them. It is plain that in concealing from their principal the negotiations with the Government, resulting in a sale of the piles at 19 a piece and in misrepresenting the condition of the market, the agents committed a breach of duty from which they should benefit. The contract of sale to themselves thereby induced was founded on their fraud and was subject to annulment by the aggrieved party. (Civil Code, articles 1265 and 1269.) Upon annulment the parties should be restored to their original position by mutual restitution. (Article 1303 and 1306.) Therefore the defendants are not entitled to retain their commission realized upon the piles included under the contract so annulled. In respect of the 213 piles, which at the time of the making of this contract on August 5 they had already sold under the original agency, their commission should be allowed. The court below found the net amount due from the defendants to the plaintiff for the Quito piles, after deducting the expense of landing the same and $543.10 commission, was $1,760.88, on 210


which it allowed interest at the rate of 6 per cent from March 1, 1903. This amount should be increased by the addition thereto of the amount of the commission disallowed, to wit, $331.17 giving $2,092.05. Interest computed on this sum to the date of the entry of judgment below amounts to $359.77, which added to the principal sum makes $2,241.82, the amount of plaintiff’s claim, which is to be deducted from defendants’ counterclaim of $6,993.80, leaving a balance of $4,541.98, equivalent to 9,083.96 pesos, the amount for which judgment below should have been entered in favor of the defendants.

PNB v. Phil. Vegetable Oil (1927) Topic: Unenforceable Contract DOCTRINE: It must be repeated that the mortgage was executed while a receiver was in charge of the Vegetable Oil Company. A mortgage accomplished at such a time by the corporation under receivership and a creditor would be a nullity. FACTS: In 1920, the Vegetable Oil Co found itself in financial straits. It was in debt of approximately P30M. PNB was the largest creditor, owing the bank P17M. PNB was secured principally by a real and chattel mortgage for P3.5M. The Vegetable Oil Co executed another chattel mortgage in favour of the bank on its vessels Tankerville and HS Everette to guarantee the payment of sums not to exceed P4M. Mr. Phil C. Whitaker, the General Manager of the Vegetable Oil Co., made his first offer to pledge certain private properties to secure the creditors of the Oil Company. At the instance of Mr. Whitaker but inspired to action by the PNB, a receiver for the Oil Company was appointed by the CFI Manila. During the period when a receiver was in control of the Oil Company, Creditors transferred to Mr. Whitaker a part of their claims against the Oil Company via an agreement. PNB was not a direct party to the agreement although its officials had full knowledge of its accomplishment and its general manager placed his OK at the end of the final draft. PNB obtained a new mortgage from the Oil Company. Shortly thereafter, the receivership for the Oil Company was terminated (Feb 28, 1922), the bank suspended the operations of the Company, and definitely closed its plant.

211


The Oil Company interposed with a counterclaim for P6M and Whitaker presented a complaint in intervention. Trial court found for PNB, ordering the Company to pay P15,787,454,54, with legal interest, attorney’s fees, and costs, and the usual order to foreclose the mortgage. Counterclaim and intervention were dismissed. ISSUE: WON the Feb 20,1922 mortgage between PNB and the Company is valid. HELD: NO. At the outset, the appellee challenges the right of Phil. C. Whitaker as intervenor to ask that the mortgage contract executed by the Vegetable Oil Company be declared null and void. Appellee is right as to the premises. The Vegetable Oil Company is the defendant. The corporation has not appealed. At the same time, it is evident that Phil. C. Whitaker was one of the largest individual stockholders of the Vegetable Oil Company, and was until the inauguration of the receivership, exercising control over and dictating the policy of that company. Out of twenty-eight thousand shares of the Vegetable Oil Company, Mr. Whitaker was the owner of 5,893 fully paid shares of the par value of P100 each. He it was who asked for the appointment of the receiver. He it was who was the leading figure in the negotiations between the Vegetable Oil Company, the Philippine National Bank, and the other creditors. He it was who pledged his own property to the extent of over P4,000,000 in an endeavor to assist in the rehabilitation of the Vegetable Oil Company. He is injuriously affected by the mortgage. In truth, Mr. Whitaker is more vitally interested in the outcome of this case than is the Vegetable Oil Company. Conceivably if the mortgage had been the free act of the Vegetable Oil Company, it could not be heard to allege its own fraud, and only a creditor could take advantage of the fraud to intervene to avoid the conveyance.

It has been said that the mortgage was executed on February 20, 1922. That is undeniable. The allegation of the plaintiff's complaint is "That the defendant, on the 20th day of February, 1922, duly executed to the plaintiff a mortgage." The mortgage in question recites: "This mortgage, executed at the City of Manila, Philippine Islands, this twentieth day of February, nineteen hundred and twenty-two." However, the mortgage was not ratified before a notary public until March 8, 1922, and was not recorded in the registry of property until March 21, 1922. To add one more date, it will be recalled that the receivership ended on February 28, 1922. In other words, as partially interpretative of the situation, the mortgage was executed by the Philippine National Bank, through its General Manager, and another corporation before the termination of the receivership of the said corporation, but was not acknowledged or recorded until after the termination of the receivership. In the complaint of Phil. C. Whitaker filed in the Court of First Instance of Manila in which it was prayed that a receiver be appointed to take charge of the Philippine Vegetable Oil Co., Inc., it was alleged "that the largest individual creditor of said corporation is the Philippine National Bank, the indebtedness to which amounts to approximately P16,000,000, a portion of which indebtedness is secured by mortgage on the major part of the assets of the corporation." The order of the court appointing a receiver contained a similar recital. The Philippine National Bank held the mortgage mentioned, and possibly two others not mentioned, when the receivership proceedings were initiated. It must be evident to all that the Philippine National Bank could legally secure no new mortgage by the accomplishment of documents between its officials and the officials of the Vegetable Oil Company while the property of the latter company was in custodia legis. The Vegetable Oil Company was then inhibited absolutely from giving a mortgage on its property. The receiver was not a party to the mortgage. The court had not authorized 212


the receiver to consent to the execution of a new mortgage. Whether the court could have done so is doubtful, but that it would have thus consented is hardly debatable, considering that it would desire to protect the rights of all the creditors and not the rights of one particular creditor. The legal conclusion is axiomatic. To all this the appellee as well as the trial court have answered that while it is true that the document was executed on February 20, 1922, at a time when the properties of the mortgagor were under receivership, the mortgage was not acknowledged before a notary public until March 8, 1922, after the court had determined that the necessity for a receiver no longer existed. But the additional fact remains that while the mortgage could not have been executed without the dissolution of the receivership, such dissolution was apparently secured through representations made to the court by counsel for the bank that the bank would continue to finance the operations of the Vegetable Oil Company. Instead of so doing, the bank within less than two months after the mortgage was recorded, withdrew its support from the Vegetable Oil Company, and in effect closed its establishment. Also it must not be forgotten that the hands of other creditors were tied pursuant to the creditors' agreement of June 27, 1921.

unconscionable to allow the bank, after the hands of the other creditors were tied, virtually to appropriate to itself all the property of the Vegetable Oil Company. Whether we consider the action taken as not expressing the free will of the Vegetable Oil Company, or as disclosing undue influence on the part of the Philippine National Bank in procuring the mortgage, or as constituting deceit under the civil law, or whether we go still further and classify the facts as constructive fraud, the result is the same. The mortgage is clearly voidable. The setting aside of the mortgage of February 20, 1922, will not necessarily result in the Philippine National Bank being left without security. It is our understanding that before the receivership was thought of, the bank was the holder of three mortgages on the property of the Vegetable Oil Company, the first dated April 11, 1919, for an uncertain amount; the second, dated November 18, 1920, for P3,500,000; and the third, dated January 10, 1921, for P4,000,000. These mortgages remain in effect and may be foreclosed. We rule therefore that the Philippine National Bank-Philippine Vegetable Co., Inc., mortgage of February 20, 1922, has not been legally executed by the Philippine Vegetable Oil Co., Inc.

To place emphasis on the outstanding facts, it must be repeated that the mortgage was executed while a receiver was in charge of the Vegetable Oil Company. A mortgage accomplished at such a time by the corporation under receivership and a creditor would be a nullity. The mortgage was definitely perfected subsequent to the lifting of the receivership pursuant to implied promises that the bank would continue to operate the Vegetable Oil Company. It was then accomplished when the Philippine National Bank was a dominating influence in the affairs of the Vegetable Oil Company. On the one hand was the Philippine National Bank in person. On the other hand was the Philippine National Bank by proxy. Under such circumstances, it would be 213


Singsong v. Isabela Sawmill (1979) Fernandez, J. Re: Voidable contracts DOCTRINE: As a rule, a contract cannot be assailed by one who is not a party thereto. However, when a contract prejudices the rights of a third person, he may file an action to annul the contract. This Court has held that a person, who is not a party obliged principally or subsidiarily under a contract, may exercised an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention. FACTS In 1951, defendants Saldajeno, Garibay and Timoteo entered into a contract of partnership under the firm name “Isabela Sawmill”. In 1956 the Oppen, Esteban, Inc. sold to the partnership a motor truck and two tractors. The partnership was not able to pay their whole balance even after demand was made. One of the partners withdrew from the partnership (Saldajeno). Garibay and Timoteo entered into a memorandum agreement and assignment of rights and chattel mortgage in favor of Saldajeno. This contract was a subject of a separate case. Instead of terminating the said partnership it was continued by the two remaining partners under the same firm name.

Plaintiffs, as creditors of Isabela Sawmill, seeked the annulment of the assignment of right with chattel mortgage entered into by the withdrawing partner and the remaining partners. The appellants contend that the chattel mortgage may no longer be nullified because it had been judicially approved and said chattel mortgage had been judicially foreclosed. ISSUE Whether creditors of Isabela Sawmill may assail the contract between the withdrawing partner and the remaining partners despite not being a party to it. HELD: YES. It is true that the dissolution of a partnership is caused by any partner ceasing to be associated in the carrying on of the business. However, on dissolution, the partnershop is not terminated but continuous until the winding up to the business. The remaining partners did not terminate the business of the partnership "Isabela Sawmill". Instead of winding up the business of the partnership, they continued the business still in the name of said partnership. It is expressly stipulated in the memorandum-agreement that the remaining partners had constituted themselves as the partnership entity, the "Isabela Sawmill". There was no liquidation of the assets of the partnership. The remaining partners, Leon Garibay and Timoteo Tubungbanua, continued doing the business of the partnership in the name of "Isabela Sawmill". They used the properties of said partnership. The properties mortgaged to Margarita G. Saldajeno by the remaining partners, Leon Garibay and Timoteo Tubungbanua, belonged to the partnership "Isabela Sawmill." The appellant, Margarita G. Saldajeno, was correctly held liable by the trial 214


court because she purchased at public auction the properties of the partnership which were mortgaged to her. It does not appear that the withdrawal of Margarita G. Saldajeno from the partnership was published in the newspapers. The appellees and the public in general had a right to expect that whatever, credit they extended to Leon Garibay and Timoteo Tubungbanua doing the business in the name of the partnership "Isabela Sawmill" could be enforced against the proeprties of said partnership. The judicial foreclosure of the chattel mortgage executed in favor of Margarita G. Saldajeno did not relieve her from liability to the creditors of the partnership. The appellant, margrita G. Saldajeno, cannot complain. She is partly to blame for not insisting on the liquidaiton of the assets of the partnership. She even agreed to let Leon Garibay and Timoteo Tubungbanua continue doing the business of the partnership "Isabela Sawmill" by entering into the memorandum-agreement with them. Although it may be presumed that Margarita G. Saldajeno had action in good faith, the appellees aslo acted in good faith in extending credit to the partnership. Where one of two innocent persons must suffer, that person who gave occasion for the damages to be caused must bear the consequences. Had Margarita G. Saldajeno not entered into the memorandumagreement allowing Leon Garibay and Timoteo Tubungbanua to continue doing the business of the aprtnership, the applees would not have been misled into thinking that they were still dealing with the partnership "Isabela Sawmill". Under the facts, it is of no moment that technically speaking the partnership "Isabela Sawmill" was dissolved by the withdrawal therefrom of Margarita G. Saldajeno. The partnership was not terminated and it continued doping business through the two remaining partners.

The contention of the appellant that the appleees cannot bring an action to annul the chattel mortgage of the propertiesof the partnership executed by Leon Garibay and Timoteo Tubungbanua in favor of Margarita G. Saldajeno has no merit. As a rule, a contract cannot be assailed by one who is not a party thereto. However, when a contract prejudices the rights of a third person, he may file an action to annul the contract. This Court has held that a person, who is not a party obliged principally or subsidiarily under a contract, may exercised an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention. The plaintiffs-appellees were prejudiced in their rights by the execution of the chattel mortgage over the properties of the partnership "Isabela Sawmill" in favopr of Margarita G. Saldajeno by the remaining partners, Leon Garibay and Timoteo Tubungbanua. Hence, said appelees have a right to file the action to nullify the chattel mortgage in question.

215


Metropolitan Fabrics, Incorporated (MFI) v. Prosperity Voidable contracts FACTS: In July 1984, MFI sought from PCRI a loan. PCRI was represented by Domingo Ang, its president, and his son Caleb, vice–president. The parties knew each other because they belonged to the same family association. Caleb recommended the approval of the P3.44 million with an interest ranging from 24% to 26% per annum and a term of between 5-10 years. It sufficed for Caleb that Enrique was a well–respected Chinese businessman, that he was the president of their Chinese family association, and that he had other businesses aside from MFI. On August 3, 1984, even before the signing of the mortgage and loan documents, PCRI released the loan to MFI. It found that the blank loan forms, consisting of the real estate mortgage contract, promissory note, comprehensive surety agreement and disclosure statement, which Domingo himself handed to Enrique, “had no entries specifying the rate of interest and schedules of amortization.” To reciprocate the gesture of PCRI, Enrique, together with his wife Natividad Africa, vice–president, and son Edmundo signed the blank forms at their office. The signing was allegedly witnessed by Vicky, Ellen and Alice, all surnamed Ang, without any PCRI representative present. Immediately thereafter, Enrique and Vicky proceeded to the PCRI office. It was in order to return the trust of Domingo and Caleb and their gesture of the early release of the loan that Enrique and Vicky entrusted to them their 7 titles of land. She testified that they left it to defendants to choose from among the 7 titles those which would be sufficient to secure the loan. It was agreed that once PCRI had chosen the lots to be covered by the mortgage,

the defendants would return the remaining titles to the plaintiffs. The plaintiffs delivered to PCRI 24 checks, bearing no dates and amounts, to cover the amortization payments, all signed in blank by Enrique and Natividad. In September 1984, the first amortization check bounced for insufficient fund due to MFI’s continuing business losses. It was then that the appellees allegedly learned that PCRI had filled up the 24 blank checks with dates and amounts that reflected a 35% interest rate per annum, instead of just 24%, and a 2–year repayment period, instead of 10 years. Plaintiffs repeatedly asked the defendants to return the rest of the titles in excess of the required collateral to which defendants allegedly routinely responded that their committee was still studying the matter. Caleb assured Vicky that PCRI would also lower the rate of interest to conform to prevailing commercial rate. Talks were held between Domingo and Enrique as well as between Vicky and Caleb concerning the possible offsetting of the loan by ceding some of their properties to PCRI. Domingo and Caleb tried to appease the plaintiffs by assuring them that they would return the rest of the titles anytime they would need them, and that they could use them to secure another loan from them or from another financing company. They would also reconsider the 35% interest rate, but when the discussion shifted to the offsetting of the properties to pay the loan, the defendants’ standard answer was that they were still awaiting the feedback of their committee. On September 4, 1986, Enrique received a Notice of Sheriff’s Sale, announcing the auction of the 7 lots due to unpaid indebtedness of P10.5 million. Vicky insisted that prior to the auction notice, they never received any statement or demand letter from the defendants to pay P10.5 million, nor did the defendants inform them of the intended foreclosure. The last 216


statement they received was dated February 12, 1986, and showed amount due of only P4,167,472.71. Vicky recalled that from June 1, 1986 to July 1986, they held several meetings to discuss the options available to them to repay their loan, such as the offsetting of their rent collectibles and properties to cover the amortizations and the loan balance. MFI protested the foreclosure, and the auction was reset after they assured PCRI that they had found a serious buyer for 3 of the lots. In the meeting held at defendants’ office, the buyer, Winston Wang of Asia Cotton was present. It was agreed to release the mortgage upon payment of P3.5 million. Wang would pay to MFI P500,000.00 as down–payment, which MFI would in turn pay to PCRI as partial settlement of the P3.5 million loan. Winston Wang was given 15 days to pay the P500,000.00. On January 19, 1987, Wang confronted Vicky about their sale agreement and PCRI’s refusal to accept their P3 million payment, because according to Caleb, the 3 lots had been foreclosed. Vicky was shocked, because the agreed period to pay the P3 million was to lapse on January 13, 1987 yet. At the auction sale on October 27, 1986, PCRI was the sole bidder for P6.5 million. Discussions continued on the agreement to release 3 lots for P3.5 million. The reduction of interest rate and charges and the condonation of the attorney’s fees for the foreclosure proceedings were also sought. Petitioners insist that respondents committed fraud when the officers of Metropolitan were made to sign the deed of real estate mortgage in blank. ISSUE: Whether the mortgage was void or merely voidable. HELD: Voidable. The original stance of petitioners was that the deed of real estate mortgage was voidable. In their complaint, they averred that the deed, albeit in printed form,

was incomplete in essential details, and that Metropolitan, through Enrique Ang as its president, signed it in good faith and in absolute confidence. They confirmed their original stance in their pre–trial brief. Yet, petitioners now claim that the CA committed a reversible error in not holding that the absence of consent made the deed of real estate mortgage void, not merely voidable. In effect, they are now advancing that their consent was not merely vitiated by means of fraud, but that there was complete absence of consent. Although they should be estopped from raising this issue for the first time on appeal, the Court nonetheless opts to consider it because its resolution is necessary to arrive at a just and complete resolution of the case. As the records show, petitioners really agreed to mortgage their properties as security for their loan, and signed the deed of mortgage for the purpose. Thereafter, they delivered the TCTs of the properties subject of the mortgage to respondents. Consequently, petitioners’ contention of absence of consent had no firm moorings. It remained unproved. To begin with, they neither alleged nor established that they had been forced or coerced to enter into the mortgage. Also, they had freely and voluntarily applied for the loan, executed the mortgage contract and turned over the TCTs of their properties. And, lastly, contrary to their modified defense of absence of consent, Vicky Ang’s testimony tended at best to prove the vitiation of their consent through insidious words, machinations or misrepresentations amounting to fraud, which showed that the contract was voidable. Where the consent was given through fraud, the contract was voidable, not void ab initio. This is because a voidable or annullable contract is existent, valid and binding, although it can be annulled due to want of capacity or because of the vitiated consent of one of the parties.

217


With the contract being voidable, petitioners’ action to annul the real estate mortgage already prescribed. Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was obtained through fraud, the contract is considered voidable and may be annulled within four years from the time of the discovery of the fraud. The discovery of fraud is reckoned from the time the document was registered in the Register of Deeds in view of the rule that registration was notice to the whole world. Thus, because the mortgage involving the seven lots was registered on September 5, 1984, they had until September 5, 1988 within which to assail the validity of the mortgage. But their complaint was instituted in the RTC only on October 10, 1991. Hence, the action, being by then already prescribed, should be dismissed.

Uy Soo Lim v Tan Unchuan (1918) 38 Phil 552 Topic: DOCTRINE: FACTS: This is an appeal by plaintiff upon the law and the facts, from a judgment of the Court of First Instance of Cebu, dismissing on the merits his action for the annulment of a contract by the terms of which he sold to the defendant Francisca Pastrano all his interest in the estate of the late Santiago Pastrano Uy Toco. In 1891, Santiago Pastrano, who had resided continuously in the Philippines since he came to the Islands . On a visit to China , where he stayed for less than a year, he entered into illicit relations with a Chinese woman, Chan Quieg. He never saw Chan Quieg again, but received letters from her informing him that she had borne him a son, Uy Soo Lim, the present plaintiff. Under the belief that he was his only son, and it was in this belief that he dictated the provisions of his will. On March 6, 1901, Santiago Pastrano died in Cebu , leaving a large estate. The persons who survived him and laid claim to an interest in the estate, were his wife, Candida Vivares, his daughters, Francisca Pastrano, and Concepcion Pastrano, Chan Quieg, and the plaintiff Uy Soo Lim (USL), a minor at the time. The Pastranos and Quieg filed proceedings impeaching USL’s interest in the will, so USL went to Manila to defend his rights, He employed as his agent and adviser one Choa Tek Hee (CTH) and executed a power of atty. He also secured the services of two attorneys, Major Bishop to represent him in Manila and Levering, of Cebu, to represent him in Cebu . 218


Based on an agreement between the USL and the Pastanos with the advise of their respective counsels under an the informal arbitration of 3 designated of “friendly advisers” (respectable Chinese merchants), USL executed a deed by which he relinquished and sold to Francisca Pastrano all his rights, title, and interest in the estate of the deceased Santiago Pastrano in consideration of P82,500, of which sum P10,000 was received in cash and the balance was represented by six promissory notes payable to Choa Tek Hee as attorney in fact for Uy Soo Lim, the first for P22,500 and the remaining five for P10,000 each. Of these notes the first three, were paid to CTH as they fell due. It appears, however, that he failed to account to the satisfaction of USL. On March 1913, USL filed a case to revoke the power of atty and for the accounting of the money received by CTH. On October 8, 1913, USL turned 21 reaching age of majority. He continued collecting the payments of the last 3 promissory deposited in the clerk of courts.

HELD: No. There was no fraud and undue influence. CFI judgment affirmed. USL had secured and disposed of the P82,500 awarded to him before and after he reached the age of majority. He should have immediately assailed the contract when he came of age instead of collecting the payments and spending them. The privilege granted minors of disaffirming their contracts upon reaching majority is subject to prompt election in the matter. Jurisprudence state that "In every other case of a right to disaffirm, the party holding it is required, out of regard to the rights of those who may be affected by its exercise, to act upon it within a reasonable time.” Not only should plaintiff have refunded all moneys in his possession upon filing his action to rescind, but, by insisting upon receiving and spending such consideration after reaching majority, knowing the rights conferred upon him by law, he must be held to have forfeited any right to bring such action.

On, August 24, 1914, USL assailed the deed claiming that it was voidable on the grounds that his consent was obtained through undue influence and fraud CFI dismissed the case stating that USL had not been induced by deceit, or undue influence to enter into the contract, but did so deliberately, with full knowledge of the facts, after mature deliberation and upon the advice of capable counsel. And although the plaintiff was a minor at the time of the execution of the contract in question, he not only failed to repudiate the contract promptly upon reaching his majority but tacitly ratified it by disposing of the greater part of the proceeds after he became of age and after he had full knowledge of the facts upon which he now seeks to disaffirm the agreement. ISSUE: WON the deed executed by USL is VOIDABLE on the grounds of fraud and undue influence. 219


Viloria v. CAI (2012) Topic: Ratification DOCTRINE: Implied ratification may take diverse forms, such as by silence or acquiescence. FACTS: On or about July 21, 1997 and while in the United States, Fernando purchased for himself and his wife, Lourdes, two (2) round trip airline tickets from San Diego, California to Newark, New Jersey on board Continental Airlines. Fernando purchased the tickets at US$400.00 each from a travel agency called “Holiday Travel” and was attended to by a certain Margaret Mager (Mager). According to Spouses Viloria, Fernando agreed to buy the said tickets after Mager informed them that there were no available seats at Amtrak, an intercity passenger train service provider in the United States. Subsequently, Fernando requested Mager to reschedule their flight to Newark to an earlier date or August 6, 1997. Mager informed him that flights to Newark via Continental Airlines were already fully booked and offered the alternative of a round trip flight via Frontier Air. As he was having second thoughts on traveling via Frontier Air, Fernando went to the Greyhound Station where he saw an Amtrak station nearby. Fernando made inquiries and was told that there are seats available and he can travel on Amtrak anytime and any day he pleased. Fernando then purchased two (2) tickets for Washington, D.C. From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak tickets, telling her that she had misled them into buying the Continental Airlines tickets by misrepresenting that Amtrak was already fully booked. Fernando reiterated his demand for a refund but Mager was firm in her position that the subject tickets are non-refundable. Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998, demanding a

refund and alleging that Mager had deluded them into purchasing the subject tickets. In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets as he no longer wished to have them replaced. In addition to the dubious circumstances under which the subject tickets were issued, Fernando claimed that CAI’s act of charging him with US$1,867.40 for a round trip ticket to Los Angeles, which other airlines priced at US$856.00, and refusal to allow him to use Lourdes’ ticket, breached its undertaking under its March 24, 1998 letter. Respondent’s contention: AI claimed that Spouses Viloria’s allegation of bad faith is negated by its willingness to issue new tickets to them and to credit the value of the subject tickets against the value of the new ticket Fernando requested. CAI argued that Spouses Viloria’s sole basis to claim that the price at which CAI was willing to issue the new tickets is unconscionable is a piece of hearsay evidence – an advertisement appearing on a newspaper stating that airfares from Manila to Los Angeles or San Francisco cost US$818.00.15 Also, the advertisement pertains to airfares in September 2000 and not to airfares prevailing in June 1999, the time when Fernando asked CAI to apply the value of the subject tickets for the purchase of a new one. 16 CAI likewise argued that it did not undertake to protect Spouses Viloria from any changes or fluctuations in the prices of airline tickets and its only obligation was to apply the value of the subject tickets to the purchase of the newly issued tickets. ISSUE: Whether spouses Viloria ratified the contract they decided to exercise their right to use the subject tickets for the purchase of new ones. DOCTRINE AND HELD: YES. Even assuming that Mager’s representation is causal fraud, the subject contracts have been impliedly ratified when Spouses Viloria decided to exercise their 220


right to use the subject tickets for the purchase of new ones. Under Article 1392 of the Civil Code, “ratification extinguishes the action to annul a voidable contract.” Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows: Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.

However, annulment under Article 1390 of the Civil Code and rescission under Article 1191 are two (2) inconsistent remedies. In resolution, all the elements to make the contract valid are present; in annulment, one of the essential elements to a formation of a contract, which is consent, is absent. In resolution, the defect is in the consummation stage of the contract when the parties are in the process of performing their respective obligations; in annulment, the defect is already present at the time of the negotiation and perfection stages of the contract. Accordingly, by pursuing the remedy of rescission under Article 1191, the Vilorias had impliedly admitted the validity of the subject contracts, forfeiting their right to demand their annulment. A party cannot rely on the contract and claim rights or obligations under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined from taking inconsistent positions.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. Simultaneous with their demand for a refund on the ground of Fernando’s vitiated consent, Spouses Viloria likewise asked for a refund based on CAI’s supposed bad faith in reneging on its undertaking to replace the subject tickets with a round trip ticket from Manila to Los Angeles. In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts based on contractual breach. Resolution, the action referred to in Article 1191, is based on the defendant’s breach of faith, a violation of the reciprocity between the parties37 and in Solar Harvest, Inc. v. Davao Corrugated Carton Corporation,38 this Court ruled that a claim for a reimbursement in view of the other party’s failure to comply with his obligations under the contract is one for rescission or resolution.

221


ECE Realty and Development Inc. v Rachel Mandap Voidable contracts: Fraud FACTS: In 1995, petitioner started the construction of a condominium project called Central Park Condominium Building located in Pasay City. However, printed advertisements were made indicating therein that the said project was to be built in Makati City. In December 1995, respondent agreed to buy a unit from the project by paying a reservation fee and, thereafter, downpayment and monthly installments. On June 18, 1996, respondent and the representatives of petitioner executed a Contract to Sell. In the said Contract, it was indicated that the condominium project is located in Pasay City. More than 2 years after the execution of the Contract to Sell, respondent demanded the return of the payments she made, on the ground that she subsequently discovered that the condominium project was being built in Pasay City and not in Makati City. Instead of answering the letter, petitioner sent her a written communication informing her that her unit is ready for inspection and occupancy should she decide to move in. Treating the letter as a form of denial of her demand for the return of the sum she had paid to petitioner, respondent filed a complaint with the Expanded National Capital Region Field Office (ENCRFO) of the HLURB seeking the annulment of her contract with petitioner, the return of her payments, and damages. ENCRFO dismissed the complaint, not finding any fraud. HLURB and OP affirmed. CA reversed the decision, holding that petitioner employed fraud and machinations to induce respondent to enter into a contract with it. ISSUE: Whether petitioner was guilty of fraud and if so, whether such fraud is sufficient ground to nullify its contract with respondent.

RULING: No. Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts, it must fulfill 2 conditions. First, the fraud must be dolo causante or it must be fraud in obtaining the consent of the party. This is referred to as causal fraud. The deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive a prudent person cannot be a ground for nullity. The circumstances of each case should be considered, taking into account the personal conditions of the victim. Second, the fraud must be proven by clear and convincing evidence and not merely by a preponderance thereof. Petitioner is guilty of false representation of a fact. This is evidenced by its printed advertisements indicating that its subject condominium project is located in Makati when, in fact, it is in Pasay. The Court condemns petitioner's deplorable act of making misrepresentations in its advertisements and in issuing a stern warning that a repetition of this act shall be dealt with more severely. However, the misrepresentation made by petitioner in its advertisements does not constitute causal fraud which would have been a valid basis in annulling the Contract to Sell between petitioner and respondent. Respondent failed to prove that the location of the said project was the causal consideration or the principal inducement which led her into buying her unit in the said condominium project. Respondent proceeded to sign the Contract to Sell despite information contained therein that the condominium is located in Pasay. This only means that she still agreed to buy the property regardless of the fact that it is located in a place different from what she was originally informed. If she had a problem with the property's location, she should not have signed the Contract to Sell and, instead, immediately raised this issue with petitioner. It took respondent more than 2 years from the execution of the Contract to Sell to demand the return of the amount she paid on the ground that she was misled into 222


believing that the property is located in Makati. In the meantime, she continued to make payments. In any case, even assuming that petitioner’s misrepresentation consists of fraud which could be a ground for annulling their Contract to Sell, respondent's act of affixing her signature to the said Contract, after having acquired knowledge of the property's actual location, can be construed as an implied ratification thereof. Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. Under Article 1392 of the Civil Code, “ratification extinguishes the action to annul a voidable contract.” In addition, Article 1396 of the same Code provides that “[r]atification cleanses the contract from all its defects from the moment it was constituted.”

The Roman Catholic Church vs. Regino Pante (2012) Brion, J. Re: contracts: mistake; voidable contract DOCTRINE: Not every mistake renders a contract voidable. For mistake as to the qualification of one of the parties to vitiate consent, two requisites must concur: 1. 2.

the mistake must be either with regard to the identity or with regard to the qualification of one of the contracting parties; and the identity or qualification must have been the principal consideration for the celebration of the contract.

FACTS The Roman Catholic Church, represented by the Archbishop of Caceres sold a 32-square meter lot to the respondent Regino Pante, who in the belief of the Church as an actual occupant of the lot. Terms fixed at a purchase price of P 11,200, a down payment P 1,120 and a balance payable in three years. Subsequently, the Church sold a lot to the spouses Rubi, which included the lot that was previously sold to the respondent Pante. Then, the spouses Rubi erected a fence along the lot, including the lot of Pante, which blocked the access of Pante from their family home to the municipal road. Pante instituted an action before the RTC to annul the sale between the Church and spouses Rubi. The Church contended that Pante misrepresented that they were the actual occupant of the said lot. Also, the sale was a mistake that would constitute a voidable contract because Pante made them believe that he was a qualified occupant and Pante was aware that they sell lots only to those occupants and residents. 223


Pante averred that they were using it as passageway from his family home to the road, which signifies that he is really using the actual lot. The RTC ruled in favor to the Church, for it was a misrepresentation of Pante and he delayed in the payment of the lot for he only consigned the balance with the RTC after the church refused to accept the payments. Then, the respondent Pante appealed to the appellate court, which reversed the decision of the RTC and granted the annulment of the sale. Thus, a petition by the Church was brought before the certiorari. ISSUE: Whether the sale was a voidable contract (by mistake)? HELD: No, the Supreme Court ruled that there were no misrepresentation made that would vitiate the consent and render the contract as voidable. As consent as one of the essential requisites of a valid contract and such consent should be free, voluntary, willful and a reasonable understanding of the various obligations that the parties have assumed for themselves. However if consent is given through mistake, violence, intimidation, undue influence and fraud, it would render a contract voidable. On Article 1331 of the Civil Code, mistake could only render a contract voidable if the following requisites concur: 1. the mistake must be either with regard to the identity or with regard to the qualification of one of the contracting parties; and 2. the identity or qualification must have been the principal consideration for the celebration of the contract.

respondent Pante, thus it is considered as his “RIGHT OF WAY.” Also, records show that the Parish Priest was aware that Parte was not an actual occupant and still he allowed the sale to Pante. So, the Church cannot by any means contend that the Church was misled by the act of Pante, that there was vitiation of consent on the said sale. In Article 1390 of the Civil Code declares that voidable contracts are binding, unless annulled by a proper court action. From the time the sale to Pante was made and up until it sold the subject property to the spouses Rubi, the Church made no move to reject the contract with Pante; it did not even return the down payment he paid. The Church’s bad faith in selling the lot to Rubi without annulling its contract with Pante negates its claim for damages. There was no vitiation of consent; therefore, the contract between the Church and Pante stands valid and existing. The delay of Pante in paying the full price could not nullify the contract, since it was a contract of sale (as correctly observed by the CA). In the terms of the contract, it did not stipulate that the Church will retain ownership until full payment of the price. The right to repurchase given to the Church if ever Pante fails to pay within the grace period provided would have been unnecessary had ownership not already passed to Pante.

In this case, there is no mistake as to the qualifications as to the policy of the Church on selling only for those who are occupants and residents, for neither Pante nor spouses Rubi would qualify as residents of the said 32-square meter lot, as none of them had occupied or resided on the lot. The lot is a passageway for the 224


ECE Realty and Development Inc. v Rachel Mandap Voidable contracts: Fraud FACTS: In 1995, petitioner started the construction of a condominium project called Central Park Condominium Building located in Pasay City. However, printed advertisements were made indicating therein that the said project was to be built in Makati City. In December 1995, respondent agreed to buy a unit from the project by paying a reservation fee and, thereafter, downpayment and monthly installments. On June 18, 1996, respondent and the representatives of petitioner executed a Contract to Sell. In the said Contract, it was indicated that the condominium project is located in Pasay City. More than 2 years after the execution of the Contract to Sell, respondent demanded the return of the payments she made, on the ground that she subsequently discovered that the condominium project was being built in Pasay City and not in Makati City. Instead of answering the letter, petitioner sent her a written communication informing her that her unit is ready for inspection and occupancy should she decide to move in. Treating the letter as a form of denial of her demand for the return of the sum she had paid to petitioner, respondent filed a complaint with the Expanded National Capital Region Field Office (ENCRFO) of the HLURB seeking the annulment of her contract with petitioner, the return of her payments, and damages. ENCRFO dismissed the complaint, not finding any fraud. HLURB and OP affirmed. CA reversed the decision, holding that petitioner employed fraud and machinations to induce respondent to enter into a contract with it. ISSUE: Whether petitioner was guilty of fraud and if so, whether such fraud is sufficient ground to nullify its contract with respondent.

HELD: No. Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts, it must fulfill 2 conditions. First, the fraud must be dolo causante or it must be fraud in obtaining the consent of the party. This is referred to as causal fraud. The deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive a prudent person cannot be a ground for nullity. The circumstances of each case should be considered, taking into account the personal conditions of the victim. Second, the fraud must be proven by clear and convincing evidence and not merely by a preponderance thereof. Petitioner is guilty of false representation of a fact. This is evidenced by its printed advertisements indicating that its subject condominium project is located in Makati when, in fact, it is in Pasay. The Court condemns petitioner's deplorable act of making misrepresentations in its advertisements and in issuing a stern warning that a repetition of this act shall be dealt with more severely. However, the misrepresentation made by petitioner in its advertisements does not constitute causal fraud which would have been a valid basis in annulling the Contract to Sell between petitioner and respondent. Respondent failed to prove that the location of the said project was the causal consideration or the principal inducement which led her into buying her unit in the said condominium project. Respondent proceeded to sign the Contract to Sell despite information contained therein that the condominium is located in Pasay. This only means that she still agreed to buy the property regardless of the fact that it is located in a place different from what she was originally informed. If she had a problem with the property's location, she should not have signed the Contract to Sell and, instead, immediately raised this issue with petitioner. It took respondent more than 2 years from the execution of the Contract to Sell to demand the return of the amount she paid on the ground that she was misled into 225


believing that the property is located in Makati. In the meantime, she continued to make payments. In any case, even assuming that petitioner’s misrepresentation consists of fraud which could be a ground for annulling their Contract to Sell, respondent's act of affixing her signature to the said Contract, after having acquired knowledge of the property's actual location, can be construed as an implied ratification thereof. Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. Under Article 1392 of the Civil Code, “ratification extinguishes the action to annul a voidable contract.” In addition, Article 1396 of the same Code provides that “[r]atification cleanses the contract from all its defects from the moment it was constituted.”

Metropolitan v Prosperity (2014) G.R. No. 154390, March 17, 2014 Topic: Doctrine: FACTS: Metropolitan Fabrics, Incorporated, a family corporation, owned a 5.8 hectare industrial compound. Pursuant to a P2 million, 10–year 14% per annum loan agreement with Manphil Investment Corporation (Manphil) dated April 6, 1983, the said lot was subdivided into 11 lots, with Manphil retaining four lots as mortgage security. The other seven lots were released to MFI. In July 1984, MFI sought from PCRI a loan in the amount of P3,443,330.52, the balance of the cost of its boiler machine, to prevent its repossession. PCRI, also a family–owned corporation licensed since 1980 to engage in money lending, was represented by Domingo Ang (“Domingo”) its president, and his son Caleb, vice–president. The parties knew each other because they belonged to the same family association, the Lioc Kui Tong Fraternity. The decision noted that on the basis only of his interview with Enrique, feedback from the stockholders and the Chinese community, as well as information given by his own father Domingo, and without further checking on the background of Enrique and his business and requiring him to submit a company profile and a feasibility study of MFI, Caleb recommended the approval of the P3.44 million with an interest ranging from 24% to 26% per annum and a term of between five and ten years. According to the court, it sufficed for Caleb that Enrique was a well–respected Chinese businessman, that he was the president of their Chinese family association, and that he 226


had other personal businesses aside from MFI, such as the Africa Trading.

bearing no dates and amounts, to cover the amortization payments, all signed in blank by Enrique and Natividad.

The court gave credence testimony of Enrique’s daughter Vicky that on August 3, 1984, even before the signing of the mortgage and loan documents, PCRI released the P3.5 million loan to MFI. It found that the blank loan forms which Domingo himself handed to Enrique, “had no entries specifying the rate of interest and schedules of amortization.” On the same day, to reciprocate the gesture of PCRI, Enrique, together with his wife Natividad Africa, vice–president, and son Edmundo signed the blank forms “at their office at Tandang Sora Avenue, Novaliches, Quezon City.” The signing was allegedly witnessed by Vicky, Ellen and Alice, all surnamed Ang, without any PCRI representative present. Immediately thereafter, Enrique and Vicky proceeded to the PCRI office.

In September 1984, the first amortization check bounced for insufficient fund due to MFI’s continuing business losses. It was then that the appellees allegedly learned that PCRI had filled up the 24 blank checks with dates and amounts that reflected a 35% interest rate per annum, instead of just 24%, and a two–year repayment period, instead of 10 years. Vicky avers that her strong protest caused PCRI to desist from depositing the other 23 checks, and that it was about this time that PCRI finally furnished MFI with its copy of the promissory note and the disclosure statement.

The court a quo also accepted Vicky’s account that it was in order to return the trust of Domingo and Caleb and their gesture of the early release of the loan that Enrique and Vicky entrusted to them their seven (7) titles, with an aggregate area of 3.3665 hectares. She testified that they left it to defendants to choose from among the 7 titles those which would be sufficient to secure the P3.5 million. She also admitted, however, that they had an appraisal report dated June, 1984 of the said properties made by the Integrated Appraisal Corporation which put the value of four (4) of the said properties at P6.8 million, now the subject of the action for reconveyance, while the aggregate value of all seven lots was P11 million. Vicky further stated that it was agreed that once PCRI had chosen the lots to be covered by the mortgage, the defendants would return the remaining titles to the plaintiffs. Plaintiffs also secured an additional loan of about P199,000.00 to pay for real estate taxes and other expenses. Significantly, Vicky testified that the plaintiffs delivered to PCRI twenty–four (24) checks,

Vicky asserted that plaintiffs–appellees found the terms reflected in the loan documents to be prohibitive, burdensome and unconscionable, and that had they known them when they took out the loan on August 3, 1984, they could either have (1) negotiated/bargained or (2) rejected the terms of the loan and withdrawn the loan application. Plaintiffs thereafter repeatedly asked the defendants to return the rest of the titles in excess of the required collateral to which defendants allegedly routinely responded that their committee was still studying the matter. Vicky even added that Caleb assured Vicky that PCRI would also lower the rate of interest to conform to prevailing commercial rate. Meanwhile, due to losses plaintiffs’ business operations stopped. Vicky also testified that talks were held in earnest in 1985 between Domingo and Enrique as well as between Vicky and Caleb concerning the possible offsetting of the loan by ceding some of their properties to PCRI. On February 28, 1986, Vicky wrote to defendants, referring to a meeting held on February 11, 1986 and reiterating her request for the offsetting. The letter stated that since August, 1985, she had been asking for the offsetting of their properties against the loan. Caleb had sought a report on the fair market value of the seven lots. Also, he 227


sought the assignment to PCRI of the rentals payable of plaintiffs’ tenant, Bethlehem Knitting Company up to 1987. Vicky admitted that plaintiffs furnished Caleb on March 11, 1986 a copy of the 1984 Appraisal Report prepared by the Integrated Appraisal Corporation for the offsetting agreement. PCRI’s account statement dated February 12, 1986 showed that MFI’s total loan obligation amounted to P4,167,472.71 (Exh. “G”). The March 25, 1986 statement from PCRI, however, showed that all seven (7) titles were placed as collateral for their P3.5 million loan. MFI maintained that per their appraisal report, four of the properties were already worth P6.5 million while the three other lots were valued around P4.6 million. Vicky also claimed that Domingo and Caleb tried to appease the plaintiffs by assuring them that they would return the rest of the titles anytime they would need them, and that they could use them to secure another loan from them or from another financing company. They would also reconsider the 35% interest rate, but when the discussion shifted to the offsetting of the properties to pay the loan, the defendants’ standard answer was that they were still awaiting the feedback of their committee. On September 4, 1986, Enrique received a Notice of Sheriff’s Sale dated August 29, 1986, announcing the auction of the seven lots on September 24, 1986 due to unpaid indebtedness of P10.5 million. After Vicky explained to her father Enrique in Chinese that the defendants were auctioning all their seven lots, he became frantic, was unable to take his lunch, and remained silent the whole afternoon. Later that night he fell ill and became delirious. His blood pressure shot up to 200/100 and he was rushed to the Metropolitan Hospital where he fell into a coma and stayed in the intensive care unit for four (4) days. Vicky claimed that during moments of consciousness, her father would mutter the names of Domingo and Caleb and that they

were unprofessional and dishonest people. He was discharged after 6 days. Vicky insisted that prior to the auction notice, they never received any statement or demand letter from the defendants to pay P10.5 million, nor did the defendants inform them of the intended foreclosure. The last statement they received was dated February 12, 1986, and showed amount due of only P4,167,472.71. Vicky recalled that from June 1, 1986 to July 1986, they held several meetings to discuss the options available to them to repay their loan, such as the offsetting of their rent collectibles and properties to cover the amortizations and the loan balance. MFI protested the foreclosure, and the auction was reset to October 6, 1986, then to October 16, 1986, and finally October 27, 1986 after they assured PCRI that they had found a serious buyer for three of the lots. In the meeting held on October 15, 1986 at defendants’ office, the buyer, Winston Wang of Asia Cotton and his lawyer, Atty. Ismael Andres were present. It was agreed to release the mortgage over TCT Nos. 317705, 317706, and 317707 upon payment of P3.5 million. Winston Wang would pay to MFI P500,000.00 as down–payment, which MFI would in turn pay to PCRI as partial settlement of the P3.5 million loan. Winston Wang was given 15 days from October 16, 1986 to pay the P500,000.00. Vicky claims that these agreements were made verbally, although she kept notes and scribbles of them. On January 19, 1987, Winston Wang confronted Vicky about their sale agreement and PCRI’s refusal to accept their P3 million payment, because according to Caleb, the three lots had been foreclosed. Vicky was shocked, because the agreed 60–day period to pay the P3 million was to lapse on January 13, 1987 yet. Caleb himself put the particulars of the P500,000.00 payment in the cash voucher as partial settlement of the loan. 228


At the auction sale on October 27, 1986, PCRI was the sole bidder for P6.5 million. Vicky however also admitted that discussions continued on the agreement to release three lots for P3.5 million. The reduction of interest rate and charges and the condonation of the attorney’s fees of P300,000.00 for the foreclosure proceedings were also sought. Present in these conferences were Enrique and Vicky, Domingo and Caleb, Winston Wang and his lawyer, Atty. Ismael Andres. Upon defendants’ continued failure to honor their agreement, Atty. Ismael Andres threatened to sue PCRI in a letter dated February 17, 1987 if they would not accept the P3 million payment of his client. Atty. Andres also sent them similar letters dated May 15, August 5 and 7, 1987, and after several more discussions, the defendants finally agreed to accept the P3 million from Winston Wang, but under these conditions: a) MFI must pay the P300,000.00 attorney’s fees paid for the foreclosure proceedings and the P190,000.00 for real estate taxes; b) PCRI shall issue the certificate of redemption over the three lots; c) plaintiffs shall execute a Memorandum of Undertaking concerning their right of way over the other properties, the lots being redeemed being situated along Tandang Sora Street. Vicky also testified that although Wang would pay directly to Caleb, the plaintiffs pursued the transaction because of PCRI’s promised to release the four (4) other remaining properties after the payment of P3.5 million loan principal as well as the interest in arrears computed at P3 million, or a total of P6.5). MFI paid to PCRI P490,000.00 as agreed, and likewise complied with the required documentation. Winston Wang also paid the balance of P3 million for the three lots he was buying. The discussion then turned to how the plaintiffs’ P3 million interest arrearages would be settled, which they agreed to be payable over a period of one year, from October 26, 1987 to October 26, 1988.

In October, 1988, however, plaintiffs were able to raise only P2 million. After a meeting at defendants’ office, the period to pay was extended to October 26, 1989, but subject to 18% interest per annum, which Caleb however allegedly refused to put in writing. Plaintiffs were later able to raise P3 million plus P540,000.00 representing the 18% interest per annum. On October 26, 1989, Vicky and Enrique tendered the same to Caleb at his office. Caleb however became furious, and now insisted that the interest due since 1984 was already P7 million computed at 35% per annum. On January 16, 1990 and again on March 5, 1990, PCRI sent the plaintiffs a letter demanding that they vacate the four remaining lots. Caleb was also now asking for P10.5 million. On March 19, 1990, Caleb executed an affidavit of non–redemption of TCT Nos. 317699, 317702, 317703 and 317704. On June 7, 1990, S.G. del Rosario, PCRI’s vice–president, wrote Vicky reiterating their demand to vacate the premises and remove pieces of machinery, equipment and persons therein, which MFI eventually heeded. Vicky also testified that the news of plaintiffs’ predicament spread around the Chinese community and brought the family great humiliation. Enrique’s health deteriorated rapidly and he was hospitalized. On October 9, 1991, they filed the case below. Meanwhile, Enrique died on November 15, 1993 after one year and one month at the Metropolitan Hospital. The family spent P300,000 – P400,000 for his funeral and burial expenses. Plaintiffs now insist that P1 million in moral damages was not enough for the humiliation they suffered before the Chinese community, considering that Enrique was then the president of the Lioc Kui Tong Fraternity while Domingo and Caleb were members thereof. Plaintiffs were also deprived of the rental income of P10,000.00 per month and the 10% rental increases from 1987 to present of their said properties.

229


In arguing that the 35% interest rate imposed by PCRI was exorbitant and without their consent, the plaintiffs cited the promissory note and amortization schedule in their loan agreement with Manphil dated April 6, 1983 and with IBAA on April 21, 1983 which both showed a rate of interest of only 14% and a ten–year term with two years grace period. ISSUE: WON there is Fraud HELD: No, according to Article 1338 of the Civil Code, there is fraud when one of the contracting parties, through insidious words or machinations, induces the other to enter into the contract that, without the inducement, he would not have agreed to. Yet, fraud, to vitiate consent, must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract. InSamson v. Court of Appeals, causal fraud is defined as “a deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the other.”

regularity. Hence, it was admissible in evidence without further proof of its authenticity, and was entitled to full faith and credit upon its face. To rebut its authenticity and genuineness, the contrary evidence must be clear, convincing and more than merely preponderant; otherwise, the deed should be upheld. Petitioners undeniably failed to adduce clear and convincing evidence against the genuineness and authenticity of the deed. Instead, their actuations even demonstrated that their transaction with respondents had been regular and at arms– length, thereby belying the intervention of fraud.

Fraud cannot be presumed but must be proved by clear and convincing evidence. Whoever alleges fraud affecting a transaction must substantiate his allegation, because a person is always presumed to take ordinary care of his concerns, and private transactions are similarly presumed to have been fair and regular. To be remembered is that mere allegation is definitely not evidence; hence, it must be proved by sufficient evidence. Did petitioners clearly and convincingly establish their allegation of fraud in the execution of the deed of real estate mortgage? The contested deed of real estate mortgage was a public document by virtue of its being acknowledged before notary public Atty. Noemi Ferrer. As a notarized document, the deed carried the evidentiary weight conferred upon it with respect to its due execution, and had in its favor the presumption of 230


PNB v. Phil. Vegetable Oil (1927) Topic: Unenforceable Contract DOCTRINE: It must be repeated that the mortgage was executed while a receiver was in charge of the Vegetable Oil Company. A mortgage accomplished at such a time by the corporation under receivership and a creditor would be a nullity. FACTS: In 1920, the Vegetable Oil Co found itself in financial straits. It was in debt of approximately P30M. PNB was the largest creditor, owing the bank P17M. PNB was secured principally by a real and chattel mortgage for P3.5M. The Vegetable Oil Co executed another chattel mortgage in favour of the bank on its vessels Tankerville and HS Everette to guarantee the payment of sums not to exceed P4M. Mr. Phil C. Whitaker, the General Manager of the Vegetable Oil Co., made his first offer to pledge certain private properties to secure the creditors of the Oil Company. At the instance of Mr. Whitaker but inspired to action by the PNB, a receiver for the Oil Company was appointed by the CFI Manila. During the period when a receiver was in control of the Oil Company, Creditors transferred to Mr. Whitaker a part of their claims against the Oil Company via an agreement. PNB was not a direct party to the agreement although its officials had full knowledge of its accomplishment and its general manager placed his OK at the end of the final draft. PNB obtained a new mortgage from the Oil Company. Shortly thereafter, the receivership for the Oil Company was terminated (Feb 28, 1922), the bank suspended the operations of the Company, and definitely closed its plant.

The Oil Company interposed with a counterclaim for P6M and Whitaker presented a complaint in intervention. Trial court found for PNB, ordering the Company to pay P15,787,454,54, with legal interest, attorney’s fees, and costs, and the usual order to foreclose the mortgage. Counterclaim and intervention were dismissed. ISSUE: WON the Feb 20,1922 mortgage between PNB and the Company is valid. HELD: NO. At the outset, the appellee challenges the right of Phil. C. Whitaker as intervenor to ask that the mortgage contract executed by the Vegetable Oil Company be declared null and void. Appellee is right as to the premises. The Vegetable Oil Company is the defendant. The corporation has not appealed. At the same time, it is evident that Phil. C. Whitaker was one of the largest individual stockholders of the Vegetable Oil Company, and was until the inauguration of the receivership, exercising control over and dictating the policy of that company. Out of twenty-eight thousand shares of the Vegetable Oil Company, Mr. Whitaker was the owner of 5,893 fully paid shares of the par value of P100 each. He it was who asked for the appointment of the receiver. He it was who was the leading figure in the negotiations between the Vegetable Oil Company, the Philippine National Bank, and the other creditors. He it was who pledged his own property to the extent of over P4,000,000 in an endeavor to assist in the rehabilitation of the Vegetable Oil Company. He is injuriously affected by the mortgage. In truth, Mr. Whitaker is more vitally interested in the outcome of this case than is the Vegetable Oil Company. Conceivably if the mortgage had been the free act of the Vegetable Oil Company, it could not be heard to allege its own fraud, and only a creditor could take advantage of the fraud to intervene to avoid the conveyance. 231


It has been said that the mortgage was executed on February 20, 1922. That is undeniable. The allegation of the plaintiff's complaint is "That the defendant, on the 20th day of February, 1922, duly executed to the plaintiff a mortgage." The mortgage in question recites: "This mortgage, executed at the City of Manila, Philippine Islands, this twentieth day of February, nineteen hundred and twenty-two." However, the mortgage was not ratified before a notary public until March 8, 1922, and was not recorded in the registry of property until March 21, 1922. To add one more date, it will be recalled that the receivership ended on February 28, 1922. In other words, as partially interpretative of the situation, the mortgage was executed by the Philippine National Bank, through its General Manager, and another corporation before the termination of the receivership of the said corporation, but was not acknowledged or recorded until after the termination of the receivership. In the complaint of Phil. C. Whitaker filed in the Court of First Instance of Manila in which it was prayed that a receiver be appointed to take charge of the Philippine Vegetable Oil Co., Inc., it was alleged "that the largest individual creditor of said corporation is the Philippine National Bank, the indebtedness to which amounts to approximately P16,000,000, a portion of which indebtedness is secured by mortgage on the major part of the assets of the corporation." The order of the court appointing a receiver contained a similar recital. The Philippine National Bank held the mortgage mentioned, and possibly two others not mentioned, when the receivership proceedings were initiated. It must be evident to all that the Philippine National Bank could legally secure no new mortgage by the accomplishment of documents between its officials and the officials of the Vegetable Oil Company while the property of the latter company was in custodia legis. The Vegetable Oil Company was then inhibited absolutely from giving a mortgage on its property. The receiver was not a party to the mortgage. The court had not authorized

the receiver to consent to the execution of a new mortgage. Whether the court could have done so is doubtful, but that it would have thus consented is hardly debatable, considering that it would desire to protect the rights of all the creditors and not the rights of one particular creditor. The legal conclusion is axiomatic. To all this the appellee as well as the trial court have answered that while it is true that the document was executed on February 20, 1922, at a time when the properties of the mortgagor were under receivership, the mortgage was not acknowledged before a notary public until March 8, 1922, after the court had determined that the necessity for a receiver no longer existed. But the additional fact remains that while the mortgage could not have been executed without the dissolution of the receivership, such dissolution was apparently secured through representations made to the court by counsel for the bank that the bank would continue to finance the operations of the Vegetable Oil Company. Instead of so doing, the bank within less than two months after the mortgage was recorded, withdrew its support from the Vegetable Oil Company, and in effect closed its establishment. Also it must not be forgotten that the hands of other creditors were tied pursuant to the creditors' agreement of June 27, 1921. To place emphasis on the outstanding facts, it must be repeated that the mortgage was executed while a receiver was in charge of the Vegetable Oil Company. A mortgage accomplished at such a time by the corporation under receivership and a creditor would be a nullity. The mortgage was definitely perfected subsequent to the lifting of the receivership pursuant to implied promises that the bank would continue to operate the Vegetable Oil Company. It was then accomplished when the Philippine National Bank was a dominating influence in the affairs of the Vegetable Oil Company. On the one hand was the Philippine National Bank in person. On the other hand was the Philippine National Bank by proxy. Under such circumstances, it would be 232


unconscionable to allow the bank, after the hands of the other creditors were tied, virtually to appropriate to itself all the property of the Vegetable Oil Company. Whether we consider the action taken as not expressing the free will of the Vegetable Oil Company, or as disclosing undue influence on the part of the Philippine National Bank in procuring the mortgage, or as constituting deceit under the civil law, or whether we go still further and classify the facts as constructive fraud, the result is the same. The mortgage is clearly voidable. The setting aside of the mortgage of February 20, 1922, will not necessarily result in the Philippine National Bank being left without security. It is our understanding that before the receivership was thought of, the bank was the holder of three mortgages on the property of the Vegetable Oil Company, the first dated April 11, 1919, for an uncertain amount; the second, dated November 18, 1920, for P3,500,000; and the third, dated January 10, 1921, for P4,000,000. These mortgages remain in effect and may be foreclosed. We rule therefore that the Philippine National Bank-Philippine Vegetable Co., Inc., mortgage of February 20, 1922, has not been legally executed by the Philippine Vegetable Oil Co., Inc.

Carbonnel v Poncio, 103 Phil 655 (1958) DOCTRINE: It is well settled in this jurisdiction that the Statute of Frauds is applicable only to executory contracts, not to contracts that are totally or partially performed. FACTS: Plaintiff Rosario Carbonnel alleges that she purchased from defendant Jose Poncio, at P9.50 a square meter, a parcel of land excluding the improvements thereon; that plaintiff paid P247.26 on account of the price and assumed Poncio's obligation with the Republic Savings Bank amounting to P1,177.48, with the understanding that the balance would be payable upon execution of the corresponding deed of conveyance; One of the conditions of the sale was that Poncio would continue staying in said land for one year, as stated in a document signed by him. However, Poncio refuses to execute the corresponding deed of sale, despite repeated demand; Thereafter, Poncio conveyed the same property to defendants Ramon R. Infante and Emma L. Infante, who knew, of the first sale to plaintiff Plaintiff prayed, therefore, that she be declared owner of the land in question; that the sale to the Infantes be annulled; that Poncio be required to execute the corresponding deed of conveyance in plaintiff's favor; that the Register of Deeds of Rizal be directed to issue the corresponding title in plaintiff's name; and that defendants be sentenced to pay damages Defendants moved to dismiss said complaint upon the ground that plaintiff's claim is unenforceable under the Statute of Frauds Poncio alleged that he had consistently turned down several offers, made by plaintiff, to buy the land in question, at P15 a 233


square meter, for he believes that it is worth not less than P20 a square meter; that Mrs. Infante, likewise, tried to buy the land at P15 a square meter; that, on or about January 27, 1955, Poncio was advised by plaintiff that should she decide to buy the property at P20 a square meter, she would allow him to remain in the property for one year; that plaintiff then induced Poncio to sign a document, copy of which is probable, the one appended to the second amended complaint; that Poncio signed it "relying upon the statement of the plaintiff that the document was a permit for him to remain in the premises in the event that defendant decided to sell the property to the plaintiff at P20 a square meter"; that on January 30, 1955, Mrs. Infante improved her offer and he agreed to sell the land and its improvements to her for P3,535; that Poncio has not lost "his mind," to sell his property, worth at least P4,000, for the paltry sum of P1,177.48, the amount of his obligation to the Republic Savings Bank; and that plaintiff's action is barred by the Statute of Frauds. ISSUE: Whether the plaintiff's claim is unenforceable under the Statute of Frauds RULING: It is well settled in this jurisdiction that the Statute of Frauds is applicable only to executory contracts, not to contracts that are totally or partially performed. In the words of former Chief Justice Moran: "The reason is simple. In executory contracts there is a wide field for fraud because unless they be in writing there is no palpable evidence of the intention of the contracting parties. The statute has precisely been enacted to prevent fraud." However, if a contract has been totally or partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits already denied by him from the transaction in litigation, and, at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby.

For obvious reasons, it is not enough for a party to allege partial performance in order to hold that there has been such performance and to render a decision declaring that the Statute of Frauds is inapplicable. But neither is such party required to establish such partial performance by documentary proof before he could have the opportunity to introduce oral testimony on the transaction. Indeed, such oral testimony would usually be unnecessary if there were documents proving partial performance. Thus, the rejection of any and all testimonial evidence on partial performance, would nullify the rule that the Statute of Frauds is inapplicable to contracts which have been partly executed, and lead to the very evils that the statute seeks to prevent. The true basis of the doctrine of part performance according to the overwhelming weight of authority, is that it would be a fraud upon the plaintiff if the defendant were permitted to escape performance of his part of the oral agreement after he has permitted the plaintiff to perform in reliance upon the agreement. The oral contract is enforced in harmony with the principle that courts of equity will not allow the statute of frauds to be used as an instrument of fraud. In other words, the doctrine of part performance was established for the same purpose for which, the statute of frauds itself was enacted, namely, for the prevention of fraud, and arose from the necessity of preventing the statute from becoming an agent of fraud for it could not have been the intention of the statue to enable any party to commit a fraud with impunity. When the party concerned has pleaded partial performance, such party is entitled to a reasonable chance to; establish by parol evidence the truth of this allegation, as well as the contract itself. "The recognition of the exceptional effect of part performance in taking an oral contract out of the statute of frauds involves the principle that oral evidence is admissible in such cases to prove both the contract and the part performance of the contract" 234


Exhibit A states that Poncio would stay in the land sold by him to plaintiff for one year, from January 27, 1955, free of charge, and that, if he cannot find a place where to transfer his house thereon, he may remain in said lot under such terms as may be agreed upon. Incidentally, the allegation in Poncio's answer to the effect that he signed Exhibit A under the belief that it "was a permit for him to remain in the premises in the event" that "he decided to sell the property" to the plaintiff at P20 a sq. m." is, on its face, somewhat difficult to believe. Indeed, if he had not decided as yet to sell the land to plaintiff, who, had never increased her offer of P15 a square meter, there was no reason for Poncio to get said, Permit from her. Upon the other hand, if plaintiff intended to mislead Poncio, she would have caused Exhibit A to be drafted, probably in English, instead of taking the trouble of seeing to it that it was written precisely in his native dialect, the Batanes. Moreover, Poncio's signature on Exhibit A suggests that he is neither illiterate nor so ignorant as to sign a document without reading its contents, apart from the fact that Meonada had read Exhibit A to him and given him a copy thereof, before he signed thereon, according to Meonada's uncontradicted testimony.

Limketkai v CA (1996) Melo, J. Re: Unenforceable Contracts DOCTRINE: The Statute of Frauds, embodied in Article 1403 of the Civil Code of the Philippines, does not require that the contract itself be written. The plain test of Article 1403, Paragraph (2) is clear that a written note or memorandum, embodying the essentials of the contract and signed by the party charged, or his agent suffices to make the verbal agreement enforceable, taking it out of the operation of the statute. FACTS: Phil.Remnants Co. constituted BPI to manage, administer and sell its real property located in Pasig, Metro Manila. BPI gave authority to real estate broker Pedro Revilla Jr. to sell the lot for P1000 per square meter. Revilla contacted Alfonso Lim of petitioner company who agreed to buy the land and thereafter was allowed to view the land. Lim and Alfonso Limketkai went to BPI to confirm the sale and both finally agreed that the land would be sold for P1000 per square meter. Notwithstanding the agreement, Alfonso asked BPI if it was possible to pay in terms provided that in case the term is disapproved, the price shall be paid in cash. Two or three days later, petitioner learned that its offer to pay on terms had been frozen. Alfonso Lim went to BPI on July 18, 1988 and tendered the full payment of P33,056,000.00 to Albano. The payment was refused because Albano stated that the authority to sell that particular piece of property in Pasig had been withdrawn from his unit. An action for specific performance with damages was thereupon filed on August 25, 1988 by petitioner against BPI. In the course 235


of the trial, BPI informed the trial court that it had sold the property under litigation to NBS ISSUE: Whether the contract was unenforceable under the statute of frauds HELD: Contract was enforceable. There was already a perfected contract of sale because both parties already agreed to the sale of P1000/sq.m. Even if Lim tried to negotiate for a payment in terms, it is clear that if it be disapproved, the payment will be made in cash. The perfection of the contract took place when Aromin and Albano, acting for BPI, agreed to sell and Alfonso Lim with Albino Limketkai, acting for petitioner Limketkai, agreed to buy the disputed lot at P1,000.00 per square meter. Aside from this there was the earlier agreement between petitioner and the authorized broker. There was a concurrence of offer and acceptance, on the object, and on the cause thereof. Regarding the admissibility and competence of the evidence adduced by petitioner, respondent Court of Appeals ruled that because the sale involved real property, the statute of frauds is applicable. In the instant case, counsel for respondents cross-examined petitioner's witnesses at length on the contract itself, the purchase price, the tender of cash payment, the authority of Aromin and Revilla, and other details of the litigated contract. Under the Abrenica rule (reiterated in a number of cases, among them Talosig vs. Vda. de Nieba 43 SCRA 472 [1972]), even assuming that parol evidence was initially inadmissible, the same became competent and admissible because of the cross-examination, which elicited evidence proving the evidence of a perfected contract. The cross-examination on the contract is

deemed a waiver of the defense of the Statute of Frauds (Vitug, Compendium of Civil Law and Jurisprudence, 1993 Revised Edition, supra, p. 563). Moreover, under Article 1403 of the Civil Code, an exception to the unenforceability of contracts pursuant to the Statute of Frauds is the existence of a written note or memorandum evidencing the contract. The memorandum may be found in several writings, not necessarily in one document. The memorandum or memoranda is/are written evidence that such a contract was entered into. The Statute of Frauds, embodied in Article 1403 of the Civil Code of the Philippines, does not require that the contract itself be written. The plain test of Article 1403, Paragraph (2) is clear that a written note or memorandum, embodying the essentials of the contract and signed by the party charged, or his agent suffices to make the verbal agreement enforceable, taking it out of the operation of the statute. In the case at bar, the complaint in its paragraph 3 pleads that the deal had been closed by letter and telegram (Record on Appeal, p. 2), and the letter referred to was evidently the one copy of which was appended as Exhibit A to plaintiffs opposition to the motion to dismiss. The letter, transcribed above in part, together with the one marked as Appendix B, constitute an adequate memorandum of the transaction. They are signed by the defendant-appellant; refer to the property sold as a Lot in Puerto Princesa, Palawan, covered by T.C.T. No. 62, give its area as 1,825 square meters and the purchase price of four (P4.00) pesos per square meter payable in cash. We have in them, therefore, all the essential terms of the contract and they satisfy the requirements of the Statute of Frauds.

236


Swedish Match, AB (SMAB) v CA Unenforceable contract FACTS: SMAB had 3 subsidiary corporations in the Philippines: Phimco Industries, Inc., Provident Tree Farms, Inc., and OTT/Louie (Phils.), Inc. STORA, the then parent company of SMAB, decided to sell SMAB of Sweden and SMAB’s worldwide products operation to Swedish Match NV of Netherlands, (SMNV). SMNV initiated steps to sell the businesses. SMNV adopted a two-pronged strategy, the first being to sell its shares in Phimco Industries, Inc. and a match company in Brazil. The other move was to sell at once or in one package all the SMNV companies worldwide which were engaged in match and lighter operations thru a global deal. Ed Enriquez, VP of Swedish Match Sociedad Anonimas (SMSA) —the management company of the Swedish Match group—was commissioned and granted full powers to negotiate by SMNV. Enriquez was held under strict instructions that the sale of Phimco shares should be executed on or before 30 June 1990, in view of the tight loan covenants of SMNV. Enriquez came to the Philippines in November 1989 and informed the Philippine financial and business circles that the Phimco shares were for sale. Several interested parties tendered offers to acquire the Phimco shares, among whom were the AFP Retirement and Separation Benefits System, respondent ALS Management & Development Corp and respondent Antonio Litonjua, the president and general manager of ALS. Litonjua submitted to SMAB a firm offer to buy all of the latter’s shares in Phimco and all of Phimco’s shares in Provident Tree Farm, Inc. and OTT/Louie (Phils.), Inc. for P750,000,000. Through its CEO, Massimo Rossi, SMAB, informed respondents that their price offer was below their expectations but urged

them to undertake a comprehensive review and analysis of the value and profit potentials of the Phimco shares, with the assurance that respondents would enjoy a certain priority although several parties had indicated their interest to buy the shares. An exchange of correspondence ensued between petitioners and respondents regarding the projected sale of the Phimco shares. Litonjua offered to buy the disputed shares, excluding the lighter division for US$36 million. Litonjua stressed that the bid amount could be adjusted subject to availability of additional information and audit verification of the company finances. Rossi sent his letter dated 11 June 1990, informing Litonjua that ALS should undertake a due diligence process or pre-acquisition audit and review of the draft contract for the Match and Forestry activities of Phimco at ALS’ convenience. However, Rossi made it clear that at the completion of the due diligence process, ALS should submit its final offer in US dollar terms not later than 30 June 1990, for the shares of SMAB corresponding to 96% of the Match and Forestry activities of Phimco. Rossi added that in case the “global deal” presently under negotiation for the Swedish Match Lights Group would materialize, SMAB would reimburse up to US$20,000.00 of ALS’ costs related to the due diligence process. Litonjua expressed disappointment at the apparent change in SMAB’s approach to the bidding process. He pointed out that he was earlier advised that one final bidder would be selected from among the 4 contending groups as of that date and that the decision would be made by 6 June 1990. He criticized SMAB’s decision to accept a new bidder. He informed Rossi that it may not be possible for them to submit their final bid on 30 June 1990, citing the advice to him of the auditing firm that the financial statements would not be completed until the end of July. Litonjua added that he would indicate in their final offer 237


more specific details of the payment mechanics and consider the possibility of signing a conditional sale at that time. Enriquez sent notice to Litonjua that they would be constrained to entertain bids from other parties in view of Litonjua’s failure to make a firm commitment for the shares of Swedish Match in Phimco by 30 June 1990. Rossi informed Litonjua that they signed a conditional contract with a local group for the disposal of Phimco. He told Litonjua that his bid would no longer be considered unless the local group would fail to consummate the transaction on or before 15 September 1990. Litonjua asserted that the US$36 million bid which he submitted on 21 May 1990 was their final bid based on the financial statements for the year 1989. He pointed out that they submitted the best bid and they were already finalizing the terms of the sale. He stressed that they were firmly committed to their bid of US$36 million and if ever there would be adjustments in the bid amount, the adjustments were brought about by SMAB’s subsequent disclosures and validated accounts, such as the aspect that only 96% of Phimco shares was actually being sold and not 100%. Enriquez advised Litonjua that the proposed sale of SMAB’s shares in Phimco with local buyers did not materialize. Enriquez then invited Litonjua to resume negotiations with SMAB for the sale of Phimco shares. He indicated that SMAB would be prepared to negotiate with ALS on an exclusive basis for a period of 15 days from 26 September 1990 subject to the terms contained in the letter. If the sale would not be completed at the end of the 15-day period, SMAB would enter into negotiations with other buyers. Litonjua expressed his objections to the totally new set of terms and conditions for the sale of the Phimco shares. The new offer constituted an attempt to reopen the already perfected contract of sale of the shares in his favor. Respondents, as plaintiffs, filed

before the RTC a complaint for specific performance against defendants, now petitioners. Petitioners averred that respondents’ cause of action, if any, was barred by the Statute of Frauds since there was no written instrument or document evidencing the alleged sale of the Phimco shares to respondents. RTC dismissed respondents’ complaint, ruling that there was no perfected contract of sale between petitioners and respondents. The letter dated 11 June 1990, relied upon by respondents, showed that petitioners did not accept the bid offer of respondents as the letter was a mere invitation for respondents to conduct a due diligence process or pre-acquisition audit of Phimco’s match and forestry operations to enable them to submit their final offer on 30 June 1990. Assuming that respondent’s bid was favored by an oral acceptance made in private by officers of SMAB, such acceptance was merely preparatory to a formal acceptance by the SMAB—the acceptance that would eventually lead to the execution and signing of the contract of sale. CA reversed the RTC’s decision. It ruled that the series of written communications between petitioners and respondents collectively constitute a sufficient memorandum of their agreement under Article 1403; thus, respondents’ complaint should not have been dismissed on the ground that it was unenforceable under the Statute of Frauds. Any document or writing, whether formal or informal, written either for the purpose of furnishing evidence of the contract or for another purpose which satisfies all the Statute’s requirements as to contents and signature would be sufficient; and, that two or more writings properly connected could be considered together. The letters exchanged by and between the parties, taken together, were sufficient to establish that an agreement to sell the disputed shares to respondents was reached.

238


ISSUE: Whether the exchange of correspondence between the parties constitutes the note or memorandum within the context of Article 1403.

Ruling: No. The Statute of Frauds requires certain contracts to be evidenced by some note or memorandum in order to be enforceable. The Statute does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable. Evidence of the agreement cannot be received without the writing or a secondary evidence of its contents. The Statute, however, simply provides the method by which the contracts may be proved but does not declare them invalid because they are not reduced to writing. The effect of noncompliance with the requirement of the Statute is simply that no action can be enforced unless the requirement is complied with. Clearly, the form required is for evidentiary purposes only. Hence, if the parties permit a contract to be proved, without any objection, it is then just as binding as if the Statute has been complied with. The purpose of the Statute is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses, by requiring certain contracts and transactions to be evidenced by a writing signed by the party to be charged. However, for a note or memorandum to satisfy the Statute, it must be complete in itself and cannot rest partly in writing and partly in parol. The note or memorandum must contain the names of the parties, the terms and conditions of the contract, and a description of the property sufficient to render it capable of identification. Such note or memorandum must contain the essential elements of the contract expressed with certainty that may be ascertained from the note or memorandum itself, or

some other writing to which it refers or within which it is connected, without resorting to parol evidence.

Rossi’s letter dated 11 June 1990, heavily relied upon by respondents, is not complete in itself. First, it does not indicate at what price the shares were being sold. Respondents were supposed to submit their final offer in U.S. dollar terms, at that after the completion of the due diligence process. The paragraph undoubtedly proves that there was as yet no definite agreement as to the price. Second, the letter does not state the mode of payment of the price. In fact, Litonjua was supposed to indicate in his final offer how and where payment for the shares was planned to be made. The acquisition audit and submission of a comfort letter, even if considered together, failed to prove the perfection of the contract. They indicated that the sale was far from concluded. Respondents conducted the audit as part of the due diligence process to help them arrive at and make their final offer. On the other hand, the submission of the comfort letter was merely a guarantee that respondents had the financial capacity to pay the price in the event that their bid was accepted by petitioners. The Statute of Frauds is applicable only to contracts which are executory and not to those which have been consummated either totally or partially. If a contract has been totally or partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits already derived by him from the transaction in litigation, and at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby. This rule, however, is predicated on the fact of ratification of the contract within the meaning of Article 1405 either (1) by failure to object to the presentation of oral evidence to prove the same, or (2) by the acceptance of benefits under 239


them. In the instant case, respondents failed to prove that there was partial performance of the contract within the purview of the Statute.

Neri v Heirs of Uy (2012) G.R. No. 194366, October 2012 Topic: Doctrine: FACTS: Anunciacion Neri had seven children: first marriage with Gonzalo Illut, namely: Eutropia and Victoria and second marriage with Enrique Neri, namely: Napoleon, Alicia, Visminda, Douglas and Rosa. Throughout the marriage of spouses Enrique and Anunciacion, they acquired several homestead properties located in Samal, Davao del Norte. In 1977, Anunciacion died intestate. Enrique, in his personal capacity and as natural guardian of his minor children Rosa and Douglas, with Napoleon, Alicia, and Visminda executed an Extra-Judicial Settlement of the Estate with Absolute Deed of Sale on 7/7/1979, adjudicating among themselves the said homestead properties and thereafter, conveying them to the late spouses Uy for a consideration of P 80,000.00. In June 1996, the children of Enrique filed a complaint for annulment of sale of the homestead properties against spouses Uy before the RTC, assailing the validity of the sale for having been sold within the prohibited period. The complaint was later amended to include Eutropia and Victoria additional plaintiffs for having been excluded and deprived of their legitimes as children of Anunciacion from her first marriage.

RTC RULING: Rendered the sale void because Eutropia and Victoria were deprived of their hereditary rights and that Enrique had no judicial authority to sell the shares of his minor children, Rosa and Douglas. CA RULING: Reversed the RTC ruling and declared the extrajudicial settlement and sale valid. While recognizing Rosa and Douglas to be minors at that time, they were deemed to have ratified the sale when they failed to question it upon reaching the age of majority. It also found laches to have set in because of their inaction for a long period of time. ISSUE: WON the father or mother, as the natural guardian of the minor under parental authority, has the power to dispose or encumber the property of the minor? HELD: All the petitioners are legitimate children of Anunciacion from her first and second marriages and consequently, they are entitled to inherit from her in equal shares, pursuant to Articles 979 and 980 of the Civil Code. In the execution of the ExtraJudicial Settlement of the Estate with Absolute Deed of Sale in favor of spouses Uy, all the heirs of Anunciacion should have participated. Considering that Eutropia and Victoria were admittedly excluded and that then minors Rosa and Douglas were not properly represented therein, the settlement was not valid and binding upon them. While the settlement of the estate is null and void, the subsequent sale of the properties made by Enrique and his children, Napoleon, Alicia and Visminda, in favor of the spouses is valid but only with respect to their proportionate shares. With respect to Rosa and Douglas who were minors at the time of the execution of the settlement and sale, their natural guardian and father, Enrique, represented them in the transaction. 240


However, on the basis of the laws prevailing at that time, Enrique was merely clothed with powers of administration and bereft of any authority to dispose of their 2/16 shares in the estate of their mother. Administration includes all acts for the preservation of the property and the receipt of fruits according to the natural purpose of the thing. Any act of disposition or alienation, or any reduction in the substance of the patrimony of child, exceeds the limits of administration. Thus, A Father or Mother, as the natural guardian of the minor under parental authority, does not have the power to dispose or encumber the property of the latter. Such power is granted by law only to a judicial guardian of the ward’s property and even then only with courts’ prior approval secured in accordance with the proceedings set forth by the Rules of Court. Consequently, the disputed sale entered into by Enrique in behalf of his minor children without the proper judicial authority, unless ratified by them upon reaching the age of majority, is unenforceable in accordance with Articles1317 and 1403(1) of the Civil Code. However, records show that Napoleon and Rosa had ratified the extrajudicial settlement of the estate with absolute deed of sale. In their Joint-Affidavit and Manifestation before the RTC, “they both confirmed, respect and acknowledge the validity of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale in 1979.” The ratification thus purged all the defects existing at the time of its execution and legitimizing the conveyance of Rosa’s 1/16 share in the estate of Anunciacion to spouses Uy. The same, however, is not true with respect to Douglas for lack of evidence showing ratification.

Iglesia v. Heirs of Bernardino Taeza (2014) Topic: Unenforceable Contracts DOCTRINE: A contract entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers are unenforceable unless ratified. FACTS: The plaintiff-appellee Iglesia Filipina Independiente (IFI, for brevity), a duly registered religious corporation, was the owner of a parcel of land situated in Tuguegarao. The said lot is subdivided as follows: Lot Nos. 3653-A, 3653-B, 3653-C, and 3653-D. Between 1973 and 1974, the plaintiff-appellee, through its then Supreme Bishop Rev. Macario Ga, sold Lot 3653-D, with an area of 15,000 square meters, to one Bienvenido de Guzman. On February 5, 1976, the other 2 lots were likewise sold by Rev. Macario Ga, in his capacity as the Supreme Bishop to the defendant Bernardino Taeza, for the amount of P100,000.00, through installment, with mortgage to secure the payment of the balance. Subsequently, the defendant allegedly completed the payments. In 1977, a complaint for the annulment of the February 5, 1976 Deed of Sale with Mortgage was filed by the Parish Council of Tuguegarao, Cagayan, represented by Froilan Calagui and Dante Santos, the President and the Secretary, respectively, of the Laymen's Committee against their Supreme Bishop Macario Ga and the defendant Bernardino Taeza. But said case was later dismissed. Meanwhile, the defendant Bernardino Taeza registered the subject parcels of land. Consequently, TCTs were issued in his name. The defendant then occupied a portion of the land. The 241


plaintiff-appellee allegedly demanded the defendant to vacate the said land which he failed to do. On November 6, 2001, the court a quo rendered judgment in favor of the plaintiff-appellee. It held that the deed of sale executed by and between Rev. Ga and the defendant-appellant is null and void. Petitioner’s contention Petitioner maintains that there was no consent to the contract of sale as Supreme Bishop Rev. Ga had no authority to give such consent. It emphasized that Article IV (a) of their Canons provides that "All real properties of the Church located or situated in such parish can be disposed of only with the approval and conformity of the laymen's committee, the parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and finally with the approval of the Supreme Bishop, as administrator of all the temporalities of the Church." It is alleged that the sale of the property in question was done without the required approval and conformity of the entities mentioned in the Canons; hence, petitioner argues that the sale was null and void. In the alternative, petitioner contends that if the contract is not declared null and void, it should nevertheless be found unenforceable, as the approval and conformity of the other entities in their church was not obtained, as required by their Canons. ISSUE: WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING THE FEBRUARY 5, 1976 DEED OF SALE WITH MORTGAGE AS NULL AND VOID; B.) ASSUMING FOR THE SAKE OF ARGUMENT THAT IT IS NOT VOID, WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING THE FEBRUARY 5, 1976 DEED OF SALE WITH MORTGAGE AS UNENFORCEABLE,

HELD: Contract Unenforceable. The first two issues boil down to the question of whether then Supreme Bishop Rev. Ga is authorized to enter into a contract of sale in behalf of petitioner. Petitioner provided in Article IV (a) of its Constitution and Canons of the Philippine Independent Church, that "all real properties of the Church located or situated in such parish can be disposed of only with the approval and conformity of the laymen's committee, the parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and finally with the approval of the Supreme Bishop, as administrator of all the temporalities of the Church." Evidently, under petitioner's Canons, any sale of real property requires not just the consent of the Supreme Bishop but also the concurrence of the laymen's committee, the parish priest, and the Diocesan Bishop, as sanctioned by the Supreme Council. However, petitioner's Canons do not specify in what form the conformity of the other church entities should be made known. Thus, as petitioner's witness stated, in practice, such consent or approval may be assumed as a matter of fact, unless some opposition is expressed. Here, the trial court found that the laymen's committee indeed made its objection to the sale known to the Supreme Bishop. The Canons require that ALL the church entities listed in Article IV (a) thereof should give its approval to the transaction. Thus, when the Supreme Bishop executed the contract of sale of petitioner's lot despite the opposition made by the laymen's committee, he acted beyond his powers. This case clearly falls under the category of unenforceable contracts mentioned in Article 1403, paragraph (1) of the Civil Code, which provides, thus: 242


Art. 1403. The following contracts are unenforceable, unless they are ratified:

implied trust for the benefit of the person from whom the property comes."

(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; In Mercado v. Allied Banking Corporation, the Court explained that: x x x Unenforceable contracts are those which cannot be enforced by a proper action in court, unless they are ratified, because either they are entered into without or in excess of authority or they do not comply with the statute of frauds or both of the contracting parties do not possess the required legal capacity. x x x. Closely analogous cases of unenforceable contracts are those where a person signs a deed of extrajudicial partition in behalf of co-heirs without the latter's authority; where a mother as judicial guardian of her minor children, executes a deed of extrajudicial partition wherein she favors one child by giving him more than his share of the estate to the prejudice of her other children; and where a person, holding a special power of attorney, sells a property of his principal that is not included in said special power of attorney. In the present case, however, respondents' predecessor-ininterest, Bernardino Taeza, had already obtained a transfer certificate of title in his name over the property in question. Since the person supposedly transferring ownership was not authorized to do so, the property had evidently been acquired by mistake. In Vda. de Esconde v. Court of Appeals, the Court affirmed the trial court's ruling that the applicable provision of law in such cases is Article 1456 of the Civil Code which states that "[i]f property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an 243


Heirs of Policronio M. Ureta v Heirs of Liberato M. Ureta Doctrine: Partition among heirs is not legally deemed a conveyance of real property resulting in change of ownership. It is not a transfer of property from one to the other, but rather, it is a confirmation or ratification of title or right of property that an heir is renouncing in favor of another heir who accepts and receives the inheritance. It is merely a designation and segregation of that part which belongs to each heir. FACTS: Alfonso was financially well-off during his lifetime. He has 14 children. He owned several fishpens, a fishpond, a sari-sari store, a passenger jeep, and was engaged in the buying and selling of copra. In order to reduce inheritance tax Alfonso made it appear that he sold some of his lands to his children. Accordingly, Alfonso executed four (4) Deeds of Sale covering several parcels of land in favor of Policronio, Liberato, Prudencia, and his common-law wife, Valeriana Dela Cruz. The Deed of Sale executed on October 25, 1969, in favor of Policronio, covered six parcels of land, which are the properties in dispute in this case. Since the sales were only made for taxation purposes and no monetary consideration was given, Alfonso continued to own, possess and enjoy the lands and their produce. On April 19, 1989, Alfonso's heirs executed a Deed of ExtraJudicial Partition, which included all the lands that were covered by the four (4) deeds of sale that were previously executed by Alfonso for taxation purposes. Conrado, Policronio's

eldest son, representing the Heirs of Policronio, signed the Deed of Extra-Judicial Partition in behalf of his co-heirs. After their father's death, the Heirs of Policronio found tax declarations in his name covering the six parcels of land. On June 15, 1995, they obtained a copy of the Deed of Sale executed on October 25, 1969 by Alfonso in favor of Policronio. Believing that the six parcels of land belonged to their late father, and as such, excluded from the Deed of Extra-Judicial Partition, the Heirs of Policronio sought to amicably settle the matter with the Heirs of Alfonso. Earnest efforts proving futile, the Heirs of Policronio filed a Complaint for Declaration of Ownership, Recovery of Possession, Annulment of Documents, Partition, and Damages against the Heirs of Alfonso before the RTC on November 17, 1995 ISSUE: Whether the Deed of Sale was valid; 2. Whether or not the Deed of Extra-Judicial Partition was valid HELD: The Deed of Sale was void because it is simulated as the parties did not intend to be legally bound by it. As such, it produced no legal effects and did not alter the juridical situation of the parties. It is only made to avoid tax purposes. The CA also noted that Alfonso continued to exercise all the rights of an owner even after the execution of the Deed of Sale, as it was undisputed that he remained in possession of the subject parcels of land and enjoyed their produce until his death. Two veritable legal presumptions bear on the validity of the Deed of Sale: (1) that there was sufficient consideration for the contract; and (2) that it was the result of a fair and regular private transaction. If shown to hold, these presumptions infer prima facie the transaction's validity, except that it must yield to the evidence adduced. 244


It has been held in several cases that partition among heirs is not legally deemed a conveyance of real property resulting in change of ownership. It is not a transfer of property from one to the other, but rather, it is a confirmation or ratification of title or right of property that an heir is renouncing in favor of another heir who accepts and receives the inheritance. It is merely a designation and segregation of that part which belongs to each heir. The Deed of Extra-Judicial Partition cannot, therefore, be considered as an act of strict dominion. Hence, a special power of attorney is not necessary. In fact, as between the parties, even an oral partition by the heirs is valid if no creditors are affected. The requirement of a written memorandum under the statute of frauds does not apply to partitions effected by the heirs where no creditors are involved considering that such transaction is not a conveyance of property resulting in change of ownership but merely a designation and segregation of that part which belongs to each heir.

Formaran v Ong Perez, J. Re: Void Contracts DOCTRINE: The amplitude of foregoing undisputed facts and circumstances clearly shows that the sale of the land in question was purely simulated. It is void from the very beginning (Article 1346, New Civil Code). If the sale was legitimate, defendant Glenda should have immediately taken possession of the land, declared in her name for taxation purposes, registered the sale, paid realty taxes, introduced improvements therein and should not have allowed plaintiff to mortgage the land. These omissions properly militated against defendant Glenda’s submission that the sale was legitimate and the consideration was paid. FACTS According to plaintiff (Petitioner Formaran)'s complaint, she owns the afore-described parcel of land which was donated to her intervivos by her uncle and aunt, spouses Melquiades Barraca and Praxedes Casidsid on June 25, 1967. On August 12, 1967 upon the proddings and representation of defendant (Respondent Ong) Glenda, that she badly needed a collateral for a loan which she was applying from a bank to equip her dental clinic, plaintiff made it appear that she sold one-half of the afore-described parcel of land to the defendant Glenda. Formaran signed on August 12, 1967 a prepared Deed of Absolute Sale which Ong brought along with them. The sale was totally without any consideration and fictitious. Ong did not pursue with the loan and when Formaran inquired about the deed of absolute sale, he replied the crampled and threw it away.

245


Contrary to plaintiff’s agreement with defendant Glenda for the latter to return the land, defendant Glenda filed a case for unlawful detainer against the Formaran. Glenda never demanded actual possession of the land, except she filed an unlawful detainer case against Formaran. In an answer filed on December 22, 1997, defendant Glenda insisted on her ownership over the land in question on account of a Deed of Absolute Sale executed by the plaintiff in her favor; and that plaintiff’s claim of ownership therefore was virtually rejected by the Municipal Circuit Trial Court of Ibaja-Nabas, Ibajay, Aklan, when it decided in her favor the unlawful detainer case she filed against the plaintiff, docketed therein as Civil Case No. 183. Defendants are also claiming moral damages and attorney’s fees in view of the filing of the present case against them.

The Court is in accord with the observation and findings of the (RTC, Kalibo, Aklan) thus: “The amplitude of foregoing undisputed facts and circumstances clearly shows that the sale of the land in question was purely simulated. It is void from the very beginning (Article 1346, New Civil Code). If the sale was legitimate, defendant Glenda should have immediately taken possession of the land, declared in her name for taxation purposes, registered the sale, paid realty taxes, introduced improvements therein and should not have allowed plaintiff to mortgage the land. These omissions properly militated against defendant Glenda’s submission that the sale was legitimate and the consideration was paid.”

ISSUE: Whether the deed of absolute sale was simulated. HELD: Yes, deed was simulated, hence void. The Court believes and so holds that the subject Deed of Sale is indeed simulated, as it is: (1) totally devoid of consideration; (2) it was executed on August 12, 1967, less than two months from the time the subject land was donated to petitioner on June 25, 1967 by no less than the parents of respondent Glenda Ong; (3) on May 18, 1978, petitioner mortgaged the land to the Aklan Development Bank for a P23,000.00 loan; (4) from the time of the alleged sale, petitioner has been in actual possession of the subject land; (5) the alleged sale was registered on May 25, 1991 or about twenty four (24) years after execution; (6) respondent Glenda Ong never introduced any improvement on the subject land; and (7) petitioner’s house stood on a part of the subject land. These are facts and circumstances which may be considered badges of bad faith that tip the balance in favor of petitioner. 246


Constantino v Heirs of Constantino Void contracts FACTS: Pedro Constantino, Sr. is the ancestor of the petitioners and respondents. Pedro, Sr. was survived by his 6 children: 1) Pedro Jr., the grandfather of the respondents; xxx 4) Bruno, survived by his 6 children including petitioner Casimira ConstantinoMaturingan; xx and 6) Santiago, survived by his 5 children which includes petitioner Oscar Constantino. Respondents alleged that petitioners asserted their claim of ownership over the whole parcel of land owned by the late Pedro Sr., to the exclusion of respondents who are occupying a portion thereof. Respondents learned that a Tax Declaration in the name of Oscar and Maxima was unlawfully issued, which in effect canceled the Tax Declaration in the name of Pedro Sr. The issuance of the new tax declaration was allegedly due to the execution of a simulated, fabricated and fictitious document denominated as "Pagmamana sa Labas ng Hukuman," wherein the petitioners misrepresented themselves as the sole and only heirs of Pedro Sr. Subsequently, the land was divided equally between Oscar and Maxima. The share of Maxima was eventually conveyed to her sister, Casimira. Thus, respondents sought to annul the "Pagmamana sa Labas ng Hukuman" as well as the Tax Declarations. Petitioners alleged that the respondents have no cause of action against them considering that the respondents’ lawful share over the estate of Pedro Sr., had already been transferred to them as evidenced by the Deed of Extrajudicial Settlement with Waiver, executed by Angelo, Maria (mother of respondent Asuncion), Arcadio and Mercedes, all heirs of Pedro Jr. In the said deed, respondents adjudicated unto themselves to the exclusion of other heirs, a parcel of land with an area of 192 sqm by

misrepresenting that they were the only legitimate heirs of Pedro Sr. Thus, petitioners claimed that in the manner similar to the "Pagmamana sa Labas ng Hukuman," they asserted their rights and ownership over the subject 240 sqm lot without damage to the respondents. Petitioners position was that the Deed of Extrajudicial Settlement with Waiver was acquiesced in by the other heirs of Pedro Sr., including the petitioners, on the understanding that the respondents would no longer share and participate in the settlement and partition of the remaining lot covered by the "Pagmamana sa Labas ng Hukuman." RTC ruled in favor of the respondents. It held that they are in pari delicto. CA ruled in favor of the respondents, declaring that the "Extrajudicial Settlement with Waiver" they executed covering the 192 sqm lot actually belongs to Pedro Jr., hence, not part of the estate of Pedro Sr. The respondents did not adjudicate the 192 sqm lot unto themselves to the exclusion of all the other heirs of Pedro Sr. Rather, the adjudication in the document entitled Extrajudicial Settlement with Waiver pertains to a different property and is valid absent any evidence to the contrary. Hence, it is erroneous for the RTC to declare the parties in pari delicto. ISSUE: Whether the doctrine of in pari delicto is applicable. HELD: No. Latin for "in equal fault," in pari delicto connotes that two or more people are at fault or are guilty of a crime. Neither courts of law nor equity will interpose to grant relief to the parties, when an illegal agreement has been made, and both parties stand in pari delicto. The petition at bench does not speak of an illegal cause of contract constituting a criminal offense under Article 1411. Neither can it be said that Article 1412 finds application although such provision which is part of Title II, Book IV of the Civil Code speaks of contracts in general, as well as contracts 247


which are null and void ab initio pursuant to Article 1409 of the Civil Code – such as the subject contracts, which as claimed, are violative of the mandatory provision of the law on legitimes. Finding the inapplicability of the in pari delicto doctrine, Article 1412 that breathes life to the doctrine speaks of the rights and obligations of the parties to the contract with an illegal cause or object which does not constitute a criminal offense. It applies to contracts which are void for illegality of subject matter and not to contracts rendered void for being simulated, or those in which the parties do not really intend to be bound thereby. Specifically, in pari delicto situations involve the parties in one contract who are both at fault, such that neither can recover nor have any action against each other. There are 2 Deeds of extrajudicial assignments unto the signatories of the portions of the estate of an ancestor common to them and another set of signatories likewise assigning unto themselves portions of the same estate. The separate Deeds came into being out of an identical intention of the signatories in both to exclude their co-heirs of their rightful share in the entire estate of Pedro Sr. It was, in reality, an assignment of specific portions of the estate of Pedro Sr., without resorting to a lawful partition of estate as both sets of heirs intended to exclude the other heirs. Clearly, the principle of in pari delicto cannot be applied. The inapplicability is dictated not only by the fact that 2 deeds, not one contract, are involved, but because of the more important reason that such an application would result in the validation of both deeds instead of their nullification as necessitated by their illegality. It must be emphasized that the underlying agreement resulting in the execution of the deeds is nothing but a void agreement. Corollarily, given the character and nature of the deeds as being void and in existent, it has, as a consequence, of no force and effect from the beginning, as if it had never been entered into and which cannot be validated either by time or ratification.

CPG of the SP. Cadavedo v Lacaya (2014) G.R. No. 173188, January 15, 2014 Topic:

DOCTRINE:

FACTS: Spouses Vicente Cadavedo and Benita Arcoy-Cadavedo acquired a homestead grant over a 230,765-square meter parcel of land known as Lot 5415 located in Zamboanga del Norte. They were issued Homestead Patent No. V-15414 on March 13, 1953 and Original Certificate of Title No. P-376 on July 2, 1953.On April30, 1955, the spouses Cadavedo sold the subject lot to the spouses Vicente Ames and Martha Fernandez (the spouses Ames) Transfer Certificate of Title (TCT) No. T-4792 was subsequently issued in the name of the spouses Ames. Spouses Cadavedo filed an action for sum of money and/or voiding of contract of sale of homestead against Sps Ames after the latter failed to pay the balance of the purchase price. The spouses Cadavedo initially engaged the services of Atty. Rosendo Bandal who, for health reasons, later withdrew from the case; he was substituted by Atty. Lacaya. The complaint was amended to assert the nullity of the sale and the issuance of TCT in the names of the spouses Ames as gross violation of the public land law. It also stated that Lacaya was hired on a contingency basis: “10. That due to the above circumstances, the plaintiffs were forced to hire a lawyer on contingent basis and if they become the prevailing parties in the case at bar, they will pay the sum of P2,000.00 for attorney’s fees.” 248


RTC upheld the sale to the Sps Ames. While the case was on appeal, Sps Ames sold the lot to their children and the former also mortgaged the lot to Development Bank of the Philippines in the names of their children. CA reversed RTC and declared the deed of sale, transfer of rights and interest null and void ab initio. Cadavedos must return the initial payment and revert the title back to them. Meanwhile, spouses Ames defaulted in their obligation with the DBP. So DBP published a notice of foreclosure sale (bearing the title of Ames’ children). Atty. Lacaya immediately informed the spouses Cadavedo of the foreclosure sale and filed an Affidavit of Third Party Claim. Lacaya also filed a motion for the issuance of writ of execution with the RTC since the civil case already attained finality. Pending resolution on the writ of execution, sps Ames filed a complaint for Quiting of Title or Enforcement of Civil Rights due Planters in Good Faith. Lacaya filed a motion to dismiss on the ground of res judicata and to cancel title under the name of Ames’ children. RTC granted the writ of execution the property was placed in possession of Sps Cadavedo. Lacaya asked for ½ of the property as attorney’s fees. He caused the subdivision of the subject lot into two equal portions, based on area, and selected the more valuable and productive half for himself; and assigned the other half to the spouses Cadavedo. Unsatisfied with the division, Vicente and his sons-in-law entered the portion assigned to Lacaya and ejected them (they filed for an ejectment case). The latter responded by filing a counter-suit for forcible entry. This incident occurred while the case for Quieting of Title is still pending. Vicente andAtty. Lacaya entered into a compromise agreement in the ejectment case, re-adjusting the area and portion

obtained by each. Atty. Lacaya acquired 10.5383 hectares pursuant to the agreement. MTC approved the compromise This compromise was later assailed by Sps. Cadavedo praying for ejectment, render an accounting of the produce of this onehalf portion from time of occupation, and to fix the attorney’s fees on a quantum meruit basis, with due consideration of the expenses that Atty. Lacaya incurred while handling the civil cases. Cadavedos executed a Deed of Patition of Estate in favor of their 8 children and not the TCT is under the children’s names. In the present petition, the petitioners essentially argue that the CA erred in: (1) granting the attorney’s fee consisting of one-half or 10.5383 hectares of the subject lot to Atty. Lacaya, instead of confirming the agreed contingent attorney’s fees of ₱2,000.00; (2) not holding the respondents accountable for the produce, harvests and income of the 10.5383-hectare portion (that they obtained from the spouses Cadavedo) from 1988 up to the present; and (3) upholding the validity of the purported oral contract (between the spouses Cadavedo and Atty. Lacaya when it was champertous and dealt with property then still subject of action for sum of money. Petitioners argue that stipulations on a lawyer’s compensation for professional services, especially those contained in the pleadings filed in courts, control the amount of the attorney’s fees to which the lawyer shall be entitled and should prevail over oral agreements. In this case, they agreed that the contingent attorney’s fee was P2,000.00 in cash, not one-half of the subject lot. This agreement was clearly stipulated in the amended complaint. Thus, Atty. Lacaya is bound by the expressly stipulated fee and cannot insist on unilaterally changing its terms without violating their contract. One-half portion of the subject lot as contingent attorney’s fee is excessive and unreasonable. The issues involved in the action 249


for sum of money, pursuant to which the alleged contingent fee of one-half of the subject lot was agreed by the parties, were not novel and did not involve difficult questions of law; neither did the case require much of Atty. Lacaya’s time, skill and effort in research. They point out that the two subsequent civil cases should not be considered in determining the reasonable contingent fee to which Atty. Lacaya should be entitled for his services in Civil Case No. 1721,as those cases had not yet been instituted at that time. Thus, these cases should not be considered in fixing the attorney’s fees. The petitioners also claim that the spouses Cadavedo concluded separate agreements on the expenses and costs for each of these subsequent cases, and that Atty. Lacaya did not even record any attorney’s lien in the spouses Cadavedo’s TCT covering the subject lot.

on a contingency basis; the Spouses Cadavedo undertook to pay their lawyer P2,000.00 as attorney’s fees should the case be decided in their favor. Contrary to the respondents’ contention, this stipulation is not in the nature of a penalty that the court would award the winning party, to be paid by the losing party. The stipulation is a representation to the court concerning the agreement between the spouses Cadavedo and Atty. Lacaya, on the latter’s compensation for his services in the case; it is not the attorney’s fees in the nature of damages which the former prays from the court as an incident to the main action. 

Atty. Lacaya,in taking over the case from Atty. Bandal, agreed to defray all of the litigation expenses in exchange for one-half of the subject lot should they win the case. They insist that this agreement is a champertous contract that is contrary to public policy, prohibited by law for violation of the fiduciary relationship between a lawyer and a client. The compromise agreement in ejectment case did not novate their original stipulated agreement on the attorney’s fees. ISSUE: Whether the attorney’s fee consisting of one-half of the subject lot is valid and reasonable, and binds the petitioners. HELD: NO. The compromise granting ½ of the property to Lacaya is void. A. Amended Complaint (2,000 as contingent fee) prevails 

The spouses Cadavedo and Atty. Lacaya agreed on a contingent fee of P2,000.00 and not, as asserted by the latter, one-half of the subject lot. The stipulation contained in the amended complaint filed by Atty. Lacaya clearly stated that the spouses Cadavedo hired the former

At this point, we highlight that as observed by both the RTC and the CA and agreed as well by both parties, the alleged contingent fee agreement consisting of one-half of the subject lot was not reduced to writing prior to or, at most, at the start of Atty. Lacaya’s engagement as the spouses Cadavedo’s counsel in Civil Case No. 1721.An agreement between the lawyer and his client, providing for the former’s compensation, is subject to the ordinary rules governing contracts in general. As the rules stand, controversies involving written and oral agreements on attorney’s fees shall be resolved in favor of the former. Hence, the contingency fee of P2,000.00 stipulated in the amended complaint prevails over the alleged oral contingency fee agreement of one-half of the subject lot.

B. Champertous compromise agreement 

Respondents insist that Atty. Lacaya assumed the litigation expenses, without providing for reimbursement, in exchange for a contingency fee consisting of one-half of the subject lot. This agreement is champertous and is contrary to public policy. Champerty is characterized by "the receipt of a share of the proceeds of the litigation by the intermeddler." Some common law 250


court decisions, however, add a second factor in determining champertous contracts, namely, that the lawyer must also, "at his own expense maintain, and take all the risks of, the litigation." The rule of the profession that forbids a lawyer from contracting with his client for part of the thing in litigation in exchange for conducting the case at the lawyer’s expense is designed to prevent the lawyer from acquiring an interest between him and his client. To permit these arrangements is to enable the lawyer to "acquire additional stake in the outcome of the action which might lead him to consider his own recovery rather than that of his client or to accept a settlement which might take care of his interest in the verdict to the sacrifice of that of his client in violation of his duty of undivided fidelity to his client’s cause."



Article 1491 (5) of the Civil Code forbids lawyers from acquiring, by purchase or assignment, the property that has been the subject of litigation in which they have taken part by virtue of their profession. The subject lot was still in litigation when Atty. Lacaya acquired the disputed onehalf portion. We note in this regard the following established facts:(1)on September 21, 1981, Atty. Lacaya filed a motion for the issuance of a writ of execution in Civil Case No. 1721; (2) on September 23, 1981, the spouses Ames filed Civil Case No. 3352 against the spouses Cadavedo; (3)on October 16, 1981, the RTC granted the motion filed for the issuance of a writ of execution in Civil Case No. 1721 and the spouses Cadavedo took possession of the subject lot on October 24, 1981; (4) soon after, the subject lot was surveyed and subdivided into two equal portions, and Atty. Lacaya took possession of one of the subdivided portions; and (5) on May 13, 1982, Vicente and Atty. Lacaya executed the compromise agreement. From these timelines, whether by virtue of the alleged oral contingent fee agreement or an agreement subsequently entered into, Atty. Lacaya acquired the disputed one-half portion (which was after October 24, 1981) while Action for Quieting of Title and the motion for the issuance of a writ of execution were already pending before the lower courts. Similarly, the compromise agreement, including the subsequent judicial approval, was effected during the pendency of Quieting. In all of these, the relationship of a lawyer and a client still existed between Atty. Lacaya and the spouses Cadavedo.



Notably, Atty. Lacaya, in undertaking the spouses Cadavedo’s cause pursuant to the terms of the alleged oral contingent fee agreement, in effect, became a coproprietor having an equal, if not more, stake as the spouses Cadavedo. Again, this is void by reason of public

C. Excessive and unconscionable 

The contingent fee of one-half of the subject lot was allegedly agreed to secure the services of Atty. Lacaya in the action for sum of money. It was intended for only one action as the two other civil cases had not yet been instituted at that time. While the 1st civil case took twelve years to be finally resolved, that period of time, as matters then stood, was not a sufficient reason to justify a large fee in the absence of any showing that special skills and additional work had been involved. The issue involved in that case was simple and did not require extensive skill, effort and research. The issue simply dealt with the prohibition against the sale of a homestead lot within five years from its acquisition. As regards subsequent civil cases, the spouses Cadavedo made separate arrangements for the costs and expenses for each of these two cases. Thus, the expenses for the two subsequent cases had been considered and taken care of.

D. Contravenes 1491(5) NCC

251


policy; it undermines the fiduciary relationship between him and his clients. E. Compromise could not validate or supersede the void oral contingent fee agreement 

The compromise agreement was intended to ratify and confirm Atty. Lacaya’s acquisition and possession of the disputed one-half portion which were made in violation of Article 1491 (5) of the Civil Code. As earlier discussed, such acquisition is void; the compromise agreement, which had for its object a void transaction, should be void. A contract whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy is in existent and void from the beginning. It can never be ratified nor the action or defense for the declaration of the in existence of the contract prescribe;45 and any contract directly resulting from such illegal contract is likewise void and in existent.

But Atty. Lacaya is entitled to atty. fees based on quantum meruit basis: 2 hectares of land or 1/10 portion.

Liguez v. CA (1957) Topic: Void contracts DOCTRINE: A contract to be valid must be based on a legal cause. However, the burden of proving the illegality of a cause in an apparent valid contract lies on the one assailing such validity. FACTS: Petitioner-appellant Conchita Liguez filed a complaint against the widow and heirs of the late Salvador P. Lopez to recover a parcel of land. Liguez averred to be its legal owner, pursuant to a deed of donation of said land, executed in her favor by the late owner, Salvador P. Lopez. The defense interposed was that the donation was null and void for having an illicit causa or consideration, which was the plaintiff’s entering into marital relations with Salvador P. Lopez, a married man; and that the property had been adjudicated to the appellees as heirs of Lopez by the court of First Instance. The Court of Appeals found that when the donation was made, Lopez had been living with the parents of appellant for barely a month; that the donation was made in view of the desire of Salvador P. Lopez, a man of mature years, to have sexual relations with appellant Conchita Liguez; that Lopez had confessed to his love for appellant to the instrumental witnesses, with the remark that her parents would not allow Lopez to live with her unless he first donated the land in question; that after the donation, Conchita Liguez and Salvador P. Lopez lived together in the house that was built upon the latter's orders, until Lopez was killed on July 1st, 1943, by some guerrillas who believed him to be pro-Japanese. ISSUE: WON the deed of donation is void because it was tainted with illegal cause or consideration, of which donor and donee were participants. 252


HELD: YES. In the present case, it is scarcely disputable that Lopez would not have conveyed the property in question had he known that appellant would refuse to cohabit with him; so that the cohabitation was an implied condition to the donation, and being unlawful, necessarily tainted the donation itself. Here the facts as found by the Court of Appeals (and which we cannot vary) demonstrate that in making the donation in question, the late Salvador P. Lopez was not moved exclusively by the desire to benefit appellant Conchita Liguez, but also to secure her cohabiting with him, so that he could gratify his sexual impulses. This is clear from the confession of Lopez to the witnesses Rodriguez and Ragay, that he was in love with appellant, but her parents would not agree unless he donated the land in question to her. Actually, therefore, the donation was but one part of an onerous transaction (at least with appellant's parents) that must be viewed in its totality. Thus considered, the conveyance was clearly predicated upon an illicit causa. The appellant seeks recovery of the disputed land on the strength of a donation regular on its face. To defeat its effect, the appellees must plead and prove that the same is illegal. But such plea on the part of the Lopez heirs is not receivable, since Lopez, himself, if living, would be barred from setting up that plea; and his heirs, as his privies and successors in interest, can have no better rights than Lopez himself.

Rellosa v Gaw Cheen Hum, (1953) Doctrine: A party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out. The law will not aid either party to an illegal agreement; it leaves the parties where it finds them. FACTS: Dionisio Rellosa sold to Gaw Chee Hun a parcel of land, together with the house erected thereon.The vendor remained in possession of the property under a contract of lease entered into on the same date between the same parties. Alleging that the sale was executed subject to the condition that the vendee, being a Chinese citizen, would obtain the approval of the Japanese Military Administration in accordance with (seirei) No. 6 issued on April 2, 1943, by the Japanese authorities The said approval has not been obtained, and that, even if said requirement were met, the sale would at all events be void under article XIII, section 5, of our Constitution Thereafter, the vendor instituted the present action in the Court of First Instance of Manila seeking the annulment of the sale as well as the lease covering the land and the house above mentioned, and praying that, once the sale and the lease are declared null and void, the vendee be ordered to return to vendor the duplicate of the title covering the property, and be restrained from in any way dispossessing the latter of said property. Defendant answered the complaint setting up as special defense that the sale referred to in the complaint was absolute and unconditional and was in every respect valid and binding between the parties, it being not contrary to law, morals and public order, and that plaintiff is guilty of estoppel in that, by 253


having executed a deed of lease over the property, he thereby recognized the title of defendant to that property. ISSUE: Whether the petitioner can recover the land sold. HELD: Petitioner contends that the sale in question cannot have any validity under the above military directive in view of the failure of respondent to obtain the requisite approval and it was error for the Court of Appeals to declare said directive without any binding effect because the occupation government could not have issued it under article 43 of the Hague Regulations which command that laws that are municipal in character of an occupied territory should be respected and cannot be ignored unless prevented by military necessity. However, the court do not believe it necessary to consider now the question relative to the validity of Seirei No. 6 of the Japanese Military Administration for the simple reason that in our opinion the law that should govern the particular transaction is not the above directive but the Constitution adopted by the then Republic of the Philippines on September 4, 1943, it appearing that the aforesaid transaction was executed on February 2, 1944. The sale in question having been entered into in violation of the Constitution, the next question to be determined is, can petitioner have the sale declared null and void and recover the property considering the effect of the law governing rescission of contracts? Our answer must of necessity be in the negative following the doctrine laid down in the case of Trinidad Gonzaga de Cabauatan, et al. vs. Uy Hoo, et al., 88 Phil. 103, wherein we made the following pronouncement: "We can, therefore, say that even if the plaintiffs can still invoke the Constitution, or the doctrine in the Krivenko Case, to set aside the sale in question, they are now prevented from doing so if their purpose is to recover the lands that they have voluntarily parted with, because of their

guilty knowledge that what they were doing was in violation of the Constitution. They cannot escape this conclusion because they are presumed to know the law. As this court well said: 'A party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out. The law will not aid either party to an illegal agreement; it leaves the parties where it finds them.' The rule is expressed in the maxims: 'Ex dolo malo non oritur actio,' and 'In pari delicto potior est conditio defendentis.' The doctrine above adverted to is the one known as In Pari Delicto. This is well known not only in this jurisdiction but also in the United States where common law prevails. In the latter jurisdiction, the doctrine is stated thus: "The proposition is universal that no action arises, in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed to be sold or delivered, or the money agreed to be paid, or damages for its violation. The rule has sometimes been laid down as though it were equally universal, that where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other." It is true that this doctrine is subject to one important limitation, namely, "whenever public policy is considered as advanced by allowing either party to sue for relief against the transaction" (idem, p. 733). But not all contracts which are illegal because opposed to public policy come under this limitation. The cases in which this limitation may apply only "include the class of contracts which are intrinsically contrary to public policy, contracts in which the illegality itself consists in their opposition to public policy, and any other species of illegal contracts in which, from their particular circumstances, incidental and collateral motives of public policy require relief." Examples of this class of contracts are usurious contracts, marriage-brokerage contracts and gambling contracts. 254


The contract in question does not come under this exception because it is not intrinsically contrary to public policy, nor one where the illegality itself consists in its opposition to public policy. It is illegal not because it is against public policy but because it is against the Constitution. Nor may it be contended that to apply the doctrine of pari delicto would be tantamount to contravening the fundamental policy embodied in the constitutional prohibition in that it would allow an alien to remain in the illegal possession of the land, because in this case the remedy is lodged elsewhere. To adopt the contrary view would be merely to benefit petitioner and not to enhance public interest.

Frenzal v Catito (2003) Callejo, Sr. J. Re: Void Contracts DOCTRINE: A contract that violates the Constitution and the law, is null and void and vests no rights and creates no obligations. It produces no legal effect at all. The petitioner, being a party to an illegal contract, cannot come into a court of law and ask to have his illegal objective carried out. One who loses his money or property by knowingly engaging in a contract or transaction which involves his own moral turpitude may not maintain an action for his losses. To him who moves in deliberation and premeditation, the law is unyielding. The law will not aid either party to an illegal contract or agreement; it leaves the parties where it finds them. FACTS Alfred, An Australian citizen of German descent, was a pilot of New Guinea Airlines. He resided in the Philippines starting 1974 and met and wedded a Filipina, Teresita Santos. They separated in 1981 without Alfred obtaining a divorce. In 1983, he returned to Australia for a vacation. While in Australia, he went to King’s Cross, a night spot offering massages with extra service. There he met Ederlina Catito, a Filipina masseuse. They enjoyed each other company so much that Ederlina ended up staying with Alfred at his hotel for 3 days. Alfred gave Ederlina sums of money for her extra services. Alfred was so enamored with Ederlina that he proposed to her that they settle in the Philippines and start a business which he will finance. Ederlina readily accepted. Alfred confessed that he 255


was still married but that he will divorce his wife and marry Ederlina. Alfred bought the following properties for Ederlina since he naively thought they would be getting married and live happily ever after: 1) a building in Ermita for Ederlina’s beauty parlor; and 2) a house and lot in Quezon City. Since Alfred knew that as foreigner he was disqualified from owning lands in the Philippines, he agreed that only Ederlina’s name would appear as the buyer of the property and in the title. After all, he was planning to marry Ederlina. Alfred decided to stay in the Philippines for good and live with Ederlina. He returned to Australia and sold his boat and his television and video business in Papua New Guinea. When Alfred and Ederlina were in Hong Kong, they opened an account with HSBC, Kowloon in the name of Ederlina. Alfred naively also deposited his money to Ederlina’s account. In 1984, Alfred received a letter from a Klaus Muller from Berlin, Germany. Klaus informed Alfred that he and Ederlina were married in 1978 and had a blissful married life until Alfred intruded. Klaus said he knew of Alfred and Ederlina’s amorous relationship and begged Alfred to leave Ederlina alone and to return her to him. When Alfred confronted Ederlina, she admitted that she and Klaus were married but assured Alfred that she would divorce Klaus. Alfred was naively appeased. He agreed to continue the amorous relationship and wait for the outcome of Ederlina’s petition for divorce. He hired a lawyer in Germany to help Ederlina divorce Klaus. In the meantime, Alfred decided to purchase 3 more properties in Davao City (which included a beach resort) and put them in the name of Ederlina.

Ederlina had not been able to secure a divorce from Klaus and their relationship started going downhill. Alfred decided to live separately from Ederlina and cut off all contacts with her. On the other hand, Ederlina complained that Alfred had ruined her life. The last straw for Alfred came on September 2, 1985 when someone smashed the front and rear windshields of his car and he suspects Ederlina had a hand in it. Alfred filed cases against Ederlina to recover the various properties in her name, which he funded. ISSUE: Whether the rule on RULE OF IN PARI DELICTO is applicable. HELD: YES. Section 14, Article XIV of the 1973 Constitution provides: Save in cases of hereditary succession, no private land shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands in the public domain. Lands of the public domain, which include private lands, may be transferred or conveyed only to individuals or entities qualified to acquire or hold private lands or lands of the public domain. Aliens, whether individuals or corporations, have been disqualified from acquiring lands of the public domain. Hence, they have also been disqualified from acquiring private lands. Even if, as claimed by the petitioner, the sales in question were entered into by him as the real vendee, the said transactions are in violation of the Constitution; hence, are null and void ab initio. A contract that violates the Constitution and the law, is null and void and vests no rights and creates no obligations. It produces no legal effect at all. The petitioner, being a party to an illegal contract, cannot come into a court of law and ask to have his illegal objective carried out. One who loses his money or property by knowingly engaging in a contract or transaction which involves his own moral turpitude may not maintain an action for his losses. To him who moves in deliberation and 256


premeditation, the law is unyielding. The law will not aid either party to an illegal contract or agreement; it leaves the parties where it finds them. Under Article 1412 of the New Civil Code, the petitioner cannot have the subject properties deeded to him or allow him to recover the money he had spent for the purchase thereof. Equity as a rule will follow the law and will not permit that to be done indirectly which, because of public policy, cannot be done directly. Where the wrong of one party equals that of the other, the defendant is in the stronger position … it signifies that in such a situation, neither a court of equity nor a court of law will administer a remedy. The rule is expressed in the maxims: EX DOLO MALO NON ORITUR ACTIO and IN PARI DELICTO POTIOR EST CONDITIO DEFENDENTIS. The provision is expressed in the maxim: “MEMO CUM ALTERIUS DETER DETREMENTO PROTEST” (No person should unjustly enrich himself at the expense of another). An action for recovery of what has been paid without just cause has been designated as anaccion in rem verso. This provision does not apply if, as in this case, the action is proscribed by the Constitution or by the application of the pari delicto doctrine. It may be unfair and unjust to bar the petitioner from filing an accion in rem verso over the subject properties, or from recovering the money he paid for the said properties, but, as Lord Mansfield stated in the early case of Holman vs. Johnson: “The objection that a contract is immoral or illegal as between the plaintiff and the defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff.”

Gonzalo v Tarnate, Jr. Void Contracts DOCTRINE: The doctrine of in pari delicto which stipulates that the guilty parties to an illegal contract are not entitled to any relief, cannot prevent a recovery if doing so violates the public policy against unjust enrichment. FACTS: After the DPWH had awarded a construction contract to his company, Gonzalo Construction, Domingo Gonzalo subcontracted to John Tarnate, Jr. the supply of materials and labor for the project. Gonzalo executed a deed of assignment whereby he, as the contractor, was assigning to Tarnate an amount equivalent to 10% of the total collection from the DPWH for the project. This 10% retention fee was the rent for Tarnate’s equipment that had been utilized in the project. Gonzalo further authorized Tarnate to use the official receipt of Gonzalo Construction in the processing of the documents relative to the collection of the 10% retention fee and in encashing the check to be issued by the DPWH for that purpose. The deed of assignment was submitted to the DPWH. During the processing of the documents for the retention fee, however, Tarnate learned that Gonzalo had unilaterally rescinded the deed of assignment by means of an affidavit of cancellation of deed of assignment; and that the disbursement voucher for the 10% retention fee had then been issued in the name of Gonzalo, and the retention fee released to him. Tarnate brought this suit against Gonzalo for breach of contract. Gonzalo claimed that Tarnate, having been fully aware of the illegality and ineffectuality of the deed of assignment from the time of its execution, could not go to court with unclean hands to invoke any right based on the invalid deed of assignment or on the product of such deed of assignment. RTC ruled judgment in favor of Tarnate. CA affirmed the RTC. CA did not apply the 257


doctrine of in pari delicto, explaining that the doctrine applied only if the fault of one party was more or less equivalent to the fault of the other party. It found Gonzalo to be more guilty than Tarnate, whose guilt had been limited to the execution of the 2 illegal contracts while Gonzalo had gone to the extent of violating the deed of assignment.

holds that no action arises, in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed to be sold or delivered, or the money agreed to be paid, or damages for its violation; and where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other.

ISSUE: Whether relief may be accorded despite the fact that the parties who entered into the void contract are equally guilty.

Nonetheless, the application of the doctrine of in pari delicto is not always rigid. An accepted exception arises when its application contravenes well-established public policy. The prevention of unjust enrichment is a recognized public policy of the State under for Article 22. Tarnate provided the equipment, labor and materials for the project in compliance with his obligations under the subcontract and the deed of assignment. Gonzalo as the contractor who received the payment for his contract with the DPWH as well as the 10% retention fee that should have been paid to Tarnate pursuant to the deed of assignment. Considering that Gonzalo refused despite demands to deliver to Tarnate the 10% retention fee that would have compensated the latter, Gonzalo would be unjustly enriched at the expense of Tarnate if the latter was to be barred from recovering because of the rigid application of the doctrine of in pari delicto. The prevention of unjust enrichment called for the exception to apply in Tarnate’s favor.

HELD: Yes. Every contractor is prohibited from subcontracting with or assigning to another person any contract or project that he has with the DPWH unless the DPWH Secretary has approved the subcontracting or assignment. Under Article 1409(1), a contract whose cause, object or purpose is contrary to law is a void or inexistent contract. As such, a void contract cannot produce a valid one. To the same effect is Article 1422, which declares that "a contract, which is the direct result of a previous illegal contract, is also void and inexistent." We do not concur with the CA’s finding that the guilt of Tarnate for violation of Section 6 of PD 1594 was lesser than that of Gonzalo, for Tarnate had voluntarily entered into the agreements with Gonzalo. Tarnate also admitted that he did not participate in the bidding for the project because he knew that he was not authorized to contract with the DPWH. Given that Tarnate was a businessman who had represented himself in the subcontract as "being financially and organizationally sound and established, with the necessary personnel and equipment for the performance of the project," he justifiably presumed to be aware of the illegality of his agreements with Gonzalo. For these reasons, Tarnate was not less guilty than Gonzalo. According to Article 1412(1), the guilty parties to an illegal contract cannot recover from one another and are not entitled to an affirmative relief because they are in pari delicto or in equal fault. The doctrine of in pari delicto is a universal doctrine that

258


PILTEL v Tecosn (2004) May 7, 2004 Topic: DOCTRINE: , the contract herein involved is a contract of adhesion. But such an agreement is not per se inefficacious. The rule instead is that, should there be ambiguities in a contract of adhesion, such ambiguities are to be construed against the party that prepared it. If, however, the stipulations are not obscure, but are clear and leave no doubt on the intention of the parties, the literal meaning of its stipulations must be held controlling. FACTS: On various dates in 1996, Delfino C. Tecson applied for six (6) cellular phone subscriptions with petitioner Pilipino Telephone Corporation (PILTEL) On 05 April 2001, respondent filed with the RTC of Iligan City, Lanao Del Norte, a complaint against petitioner for a "Sum of Money and Damages." Petitioner moved for the dismissal of the complaint on the ground of improper venue, citing a common provision in the mobiline service agreements to the effect that –

o

"Venue of all suits arising from this Agreement or any other suit directly or indirectly arising from the relationship between PILTEL and subscriber shall be in the proper courts of Makati, Metro Manila. Subscriber hereby expressly waives any other venues."1

RTC denied motion to dismiss. MR denied. CA saw no merit in the petition and affirmed the assailed orders of the trial court. MR denied. ISSUE: WON the provision in the mobiline service agreements fixing the venue of all suits arising from the contract is clear and binding and that the venue of the complaint was improperly laid. HELD: Yes, Indeed, the contract herein involved is a contract of adhesion. But such an agreement is not per se inefficacious. The rule instead is that, should there be ambiguities in a contract of adhesion, such ambiguities are to be construed against the party that prepared it. If, however, the stipulations are not obscure, but are clear and leave no doubt on the intention of the parties, the literal meaning of its stipulations must be held controlling.4 A contract of adhesion is just as binding as ordinary contracts. It is true that this Court has, on occasion, struck down such contracts as being assailable when the weaker party is left with no choice by the dominant bargaining party and is thus completely deprived of an opportunity to bargain effectively. Nevertheless, contracts of adhesion are not prohibited even as the courts remain careful in scrutinizing the factual circumstances underlying each case to determine the respective claims of contending parties on their efficacy. In the case at bar, respondent secured six (6) subscription contracts for cellular phones on various dates. It would be difficult to assume that, during each of those times, respondent had no sufficient opportunity to read and go over the terms and conditions embodied in the agreements. Respondent continued, in fact, to acquire in the pursuit of his business subsequent 259


subscriptions and remained a subscriber of petitioner for quite sometime. In Development Bank of the Philippines vs. National Merchandising Corporation,5 the contracting parties, being of age and businessmen of experience, were presumed to have acted with due care and to have signed the assailed documents with full knowledge of their import. The situation would be no less true than that which obtains in the instant suit. The circumstances in Sweet Lines, Inc. vs. Teves,6 wherein this Court invalidated the venue stipulation contained in the passage ticket, would appear to be rather peculiar to that case. There, the Court took note of an acute shortage in inter-island vessels that left passengers literally scrambling to secure accommodations and tickets from crowded and congested counters. Hardly, therefore, were the passengers accorded a real opportunity to examine the fine prints contained in the tickets, let alone reject them. A contract duly executed is the law between the parties, and they are obliged to comply fully and not selectively with its terms. A contract of adhesion is no exception.

Alpha Insurance v. Castor (2013) Topic: Contract of Adhesion DOCTRINE: A contract of insurance is a contract of adhesion. So, when the terms of the insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from noncompliance with his obligation. FACTS: Arsenia Sonia Castor (Castor) obtained a Motor Car Policy for her Toyota Revo DLX DSL with Alpha Insurance and Surety Co (Alpha). The contract of insurance obligates the petitioner to pay the respondent the amount of P630,000 in case of loss or damage to said vehicle during the period covered. On April 16, 2007, respondent instructed her driver, Jose Joel Salazar Lanuza to bring the vehicle to nearby auto-shop for a tune up. However, Lanuza no longer returned the motor vehicle and despite diligent efforts to locate the same, said efforts proved futile. Resultantly, respondent promptly reported the incident to the police and concomitantly notified petitioner of the said loss and demanded payment of the insurance proceeds. Alpha, however, denied the demand of Castor claiming that they are not liable since the culprit who stole the vehicle is employed with Castor. Under the Exceptions to Section III of the Policy, the Company shall not be liable for (4) any malicious damage caused by the insured, any member of his family or by “A PERSON IN THE INSURED’S SERVICE”. Castor filed a Complaint for Sum of Money with Damages against Alpha before the Regional Trial Court of Quezon City. The trial court rendered its decision in favor of Castor which decision is affirmed in toto by the Court of Appeals. Hence, this Petition for Review on Certiorari. 260


ISSUE: WON the contract of insurance is a contract of adhesion.

Table of Contents

HELD: YES.

OBLIGATIONS

A contract of insurance is a contract of adhesion. So, when the terms of the insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. Thus, in Eternal Gardens Memorial Park Corporation vs. Philippine American Life Insurance Company, this Court ruled that it must be remembered that an insurance contract is a contract of adhesion which must be construed liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s interest.

MetroBank v. Rosales 1 Doctrine: The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of the sources of obligation enumerated in Article 1157 of the Civil Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict 1

The loss of the respondent’s vehicle is also not excluded under the insurance policy. The words “loss” and “damage” mean different things in common ordinary usage. The word “loss” refers to the act or fact of losing, or failure to keep possession, while the word “damage” means deterioration or injury to property. Therefore, petitioner cannot exclude the loss of Castor’s vehicle under the insurance policy under paragraph 4 of “Exceptions to Section III”, since the same refers only to “malicious damage”, or more specifically, “injury” to the motor vehicle caused by a person under the insured’s service. Paragraph 4 clearly does not contemplate “loss of property”.

1

PSBA v CA (1992) 3 In other words, a contractual relation is a condition sine qua non to the school's liability. The negligence of the school cannot exist independently of the contract, unless the negligence occurs under the circumstances set out in Article 21 of the Civil Code. 3 This Court is not unmindful of the attendant difficulties posed by the obligation of schools, above-mentioned, for conceptually a school, like a common carrier, cannot be an insurer of its students against all risks. 3 Cruz v Gruspe

4

ACE Foods, Inc. v. Micro Pacific 6 Doctrine: A contract is what the law defines it to be, taking into consideration its essential elements, and not what the contracting parties call it. The real nature of a contract may be determined from the express terms of the written agreement and from the contemporaneous and subsequent acts of the contracting parties. However, in the construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued. The denomination or title given by the parties in their contract is not conclusive of the nature of its contents. 6 Locsin II v. Mekeni Food Corporation 8 Doctrine: Article 2142 of the Civil Code clarifies that there are certain lawful, voluntary and unilateral acts which give rise to the juridical relation of quasi-contract, to the end that no one shall be unjustly enriched or benefited at the expense of another. In the 261


absence of specific terms and conditions governing the car plan arrangement between the petitioner and Mekeni, a quasicontractual relation was created between them. 8 Barredo v Garcia 10 Doctrine: A quasi-delict is “a separate legal institution under the Civil Code, with a substantivity of its own, and individuality that is entirely apart and independent from a delict or crime 10 Llana v Biong 12 Doctrine: Under Art. 2176, the elements necessary to establish a quasi-delict case are: (1) damages to the plaintiff; (2) negligence, by act or omission, of the defendant or by some person for whose acts the defendant must respond, was guilty; and (3) the connection of cause and effect between such negligence and the damages. These elements show that the source of obligation in a quasi-delict case is the breach or omission of mutual duties that civilized society imposes upon its members, or which arise from non-contractual relations of certain members of society to others. 12 Chavez v Gonzales 14 Doctrine: Where the defendant virtually admitted nonperformance of the contract by returning the typewriter that he was obliged to repair in a non-working condition, with essential parts missing, Article 1197 of the Civil Code of the Philippines cannot be invoked. The fixing of a period would thus be a mere formality and would serve no purpose than to delay. 14 Tanguilig v. CA 15 Doctrine: If an obligation is not part of the contract then there is no legal nor factual basis by which the Court can impose an obligation to a party who did not expressly assume nor ratify the same. 15 Woodhouse v Halili 16 Doctrine: The incidental fraud does not render the contract null and void but only such as to hold the plaintiff liable for damages. 16 Metropolitan Fabrics, Inc. (MFI) v. Prosperity

18

Doctrine: Fraud cannot be presumed but must be proved by clear and convincing evidence. Whoever alleges fraud affecting a transaction must substantiate his allegation, because a person is always presumed to take ordinary care of his concerns, and private transactions are similarly presumed to have been fair and regular. To be remembered is that mere allegation is definitely not evidence; hence, it must be proved by sufficient evidence. 18 Surviving Heirs v Lindo Et Al. 21 Doctrine: Having fully participated in all stages of the case, and even invoking the RTC’s authority by asking for affirmative reliefs, respondents can no longer assail the jurisdiction of the said trial court. Simply put, considering the extent of their participation in the case, they are, as they should be, considered estopped from raising lack of jurisdiction as a ground for the dismissal of the action. 21 Boysaw v. Interphil Promotions 23 Doctrine: Where one party did not perform the undertaking which he was bound by the terms of the agreement to perform, he is not entitled to insist upon the performance of the contract by the other party, or recover damages by reason of his own breach. 23 U.P. v De los Angeles 24 Doctrine: There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract. 24 Vda de Mistica v Naguiat (2003) 25 In a contract of sale, the remedy of an unpaid seller is either specific performance or rescission. Under Article 1191 of the Civil Code, the right to rescind an obligation is predicated on the violation of the reciprocity between parties, brought about by a breach of faith by one of them. Rescission, however, is allowed only where the breach is substantial and fundamental to the fulfillment of the obligation. 25 Fil-Estate Golf and Development, Inc. (FEGDI) v Vertex Sales and Trading, Inc.

26 262


Doctrine: FEGDI failed to deliver to Vertex the stock certificates within a reasonable time from the point the shares should have been delivered. This was a substantial breach of their contract that entitles Vertex the right to rescind the sale. It is not entirely correct to say that a sale had already been consummated as Vertex already enjoyed the rights a shareholder can exercise. The enjoyment of these rights cannot suffice where the law, by its express terms, requires a specific form to transfer ownership. 26 Gutierrez v Gutierrez (1931)

28

Vasquez v. Borja (1944) 29 Doctrine: The fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence in the fulfillment of the contract did not make Vazquez principally or even subsidiarily liable for such negligence. Since it was the corporation’s contract, its non-fulfillment, whether due to negligence or fault or to any other cause, made the corporation and not its agent liable. 29

there will be no cause for delay, unless such circumstance will fall under the exceptions provided under 1169. 35 Agner v BPI (2013) 37 Doctrine: The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time the obligor demands the fulfillment of the obligation from the obligee. However, the law expressly provides that demand is not necessary under certain circumstances, and one of these circumstances is when the parties expressly waive demand. Hence, since the co-signors expressly waived demand in the promissory notes, demand was unnecessary for them to be in default. 37

30

Tengco v CA 39 Doctrine: The ownership of the property had been transferred to the private respondent and the person to whom payment was offered had no authority to accept payment. The petitioner should have tendered payment of the rentals to the private respondent and if that was not possible, she should have consigned such rentals in court. 39

SSS vs. Moonwalk Development and Housing Corporation (1993) 31 DOCTRINE: Default begins from the moment the creditor demands the performance of the obligation. 31

Central Bank v CA (1985) 40 Doctrine: The mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him. 40

Abella v Gonzaga 32 Doctrine: Although there was a delay in the performance of the plaintiff’s obligation to pay the installments, he is still considered to have complied with his obligation since the defendant accepted the former’s late payments. 32

Nakpil v. CA (1986) 42 Doctrine: To be exempt from liability due to an act of God, the engineer/architect/contractor must not have been negligent in the construction of the building. 42

Federal Builders v Foundation Specialists

Foundation v Santos (2004) 33 Doctrine: The two-year period must be counted from the date of execution of the compromise agreement, and not on the judicial approval of the compromise agreement. 33 Vasquez v. Ayala Corp. (2004) 35 Doctrine: Obligations for whose fulfillment a day certain has been fixed shall be demandable only when that day comes. Thus without a certain date on when the obligation must be fulfilled

Fil-Estate v Ronquillo (2014) 44 Doctrine: the Asian financial crisis is not a fortuitous event that would excuse petitioners from performing their contractual obligation 44 Khe Hong Cheng v CA (2001) 45 DOCTRINE: When the law is silent as to when the prescriptive shall commence, general rule must apply that it will commence when the moment the action accrues. An action for rescission must be the last resort of the creditors and can only be availed after the creditor had exhausted all the properties. 45 263


Siguan v Lim 46 Doctrine: The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. 46 Gaite v Fonacier

49

Gonzales v. Heirs of Thomas (1999) 51 Doctrine: A condition is every future and uncertain event upon which an obligation or provision is made to depend or 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 such property. 51 Coronel v CA (1996) 52 DOCTRINE: The case is a contract of sale subject to a suspensive condition in which consummation is subject only to the successful transfer of the certificate of title from the name of petitioners' father, to their names. Thus, the contract of sale became obligatory. 52 Parks v Prov of Tarlac 53 Doctrine: The characteristic of a condition precedent is that the acquisition of the right is not effected while said condition is not complied with or is not deemed complied with. Meanwhile nothing is acquired and there is only an expectancy of right. Consequently, when a condition is imposed, the compliance of which cannot be effected except when the right is deemed acquired, such condition cannot be a condition precedent. 53 Central Philippines v CA (2995) 54 Doctrine: Thus, when a person donates land to another on the condition that the latter would build upon the land a school is

such a resolutory one. The donation had to be valid before the fulfillment of the condition. 54 Quijada v. CA (1998) 56 Doctrine: It has been ruled that when a person donates land to another on the condition that the latter would build upon the land a school, the condition imposed is not a condition precedent or a suspensive condition but a resolutory one. 56 Lim v CA (1990) 57 Doctrine: The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter. 57 Silos v PNB (2014) 59 DOCTRINE: Any modification in the contract, such as the interest rates, must be made with the consent of the contracting parties. In the case of loan agreements, the rate of interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect 59 Naga Telephone Co., Inc. (NATELCO) v CA 61 Doctrine: The contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance, hazard or the will of a third person, which do not invalidate the subject provision. 61 Osmena v Rama (1909)

63

Smith, Bell & Co. v Sotelo Matti (1992) 65 Doctrine: When the time of delivery is not fixed in the contract, time is regarded unessential. In such cases, the delivery must be made within a reasonable time. 65 Rustan Pulp v IAC (1992) 66 Doctrine: 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. 66 264


Romero v CA (1995) 68 DOCTRINE: Mixed condition is dependent not on the will of the vendor alone but also of third persons like the squatters and government agencies and personnel concerned. 68 Roman Catholic Archbishop v CA 69 Doctrine: The prohibition in the deed of donation against the alienation of the property for 100 years, being an unreasonable emasculation and denial of an integral attribute of ownership, should be declared as an illegal or impossible condition within the contemplation of Article 727. Thus, as stated in said statutory provision, such condition shall be considered as not imposed. 69 Araneta v Phil. Sugar Estates Development Co. (1967) 71 Doctrine: Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial court's amended decision nowhere declared any such fact) still, the complaint not having sought that the Court should set a period, the court could not proceed to do so unless the complaint included it as first amended 71 Central Philippines v. CA (1995) 72 Doctrine: Exception to the general rule that the court may fix the period: There is no need to fix a period when such procedure would be a mere technicality & formality & would serve no purpose than to delay or load to unnecessary and expensive multiplication of suits 72 Lafarge Cement v Continental Cement (2004) 73 Doctrine: A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. 73 Rivelisa Realty v First Sta. Clara (2014) 76 DOCTRINE: Quantum meruit means that, in an action for work and labor, payment shall be made in such amount as the plaintiff reasonably deserves 76

Metro Concast Steel Corp., et al. v. Allied Bank Corporation 81 Absent any showing that the terms and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the MoA, said contracts should be treated separately and distinctly from each other, such that the existence, performance or breach of one would not depend on the existence, performance or breach of the other. 82 ARCO Pulp v Lim (2014) Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may be implied only if the old and new contracts are incompatible on every point.

83

83

PNB v Dee 85 Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. It is a mode of extinguishing an existing obligation and partakes the nature of sale as the creditor is really buying the thing or property of the debtor, the payment for which is to be charged against the debtor’s debt. Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement – express or implied, or by their silence – consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. 86 Magbanua v Uy (2005) 87 Doctrine: Rights may be waived through a compromise agreement, notwithstanding a final judgment that has already settledthe rights of the contracting parties. To be binding, the compromise must be shown to have been voluntarily,freely and intelligently executed by the parties, who had full knowledge of the judgment. Furthermore, it must not be contrary to law, morals, good customs and public policy. 87 Phil. Charter v. Petroleum (2012) Doctrine: Novation of a contract is never presumed. In the absence of an express agreement, novation takes place only

89

265


when the old and the new obligations are incompatible on every point. 89

has to be applied first to the debt which is most onerous to the debtor. 103

ACE Foods, Inc. v. Micro Pacific (2013) 91 Doctrine: Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken 91

Sps. Cacyurin v AFPMB (2013) 109 Doctrine: Besides, as earlier stated, Article 1256 authorizes consignation alone, without need of prior tender of payment, where the ground for consignation is that the creditor is unknown, or does not appear at the place of payment; or is incapacitated to receive the payment at the time it is due; or when, without just cause, he refuses to give a receipt; or when two or more persons claim the same right to collect; or when the title of the obligation has been lost. 109

ARCO Pulp v Lim (2014) Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may be implied only if the old and new contracts are incompatible on every point.

94

94

Philippine Commercial International Bank (PCIB) v Franco 96 Filinvest v Philippine Acetylene

97

Tan Shuy v. Sps. Maulawin (F2012) 99 Doctrine: Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement – express or implied, or by their silence – consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. 99 Reparations Commission v Universal Deep Sea Fishing (1978) 102 Doctrine: The rules contained in Articles 1252 to 1254 of judgment, Civil Code apply to a person owing several debts of judgment, same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular, which in this case is the full and faithful compliance with the terms of the contract of conditional purchase and sale of reparations goods. 102 Paculdo v Regalado (2000) 103 Under the law, if the debtor did not declare at the time he made the payment to which of his debts with the creditor the payment is to be applied, the law provided the guideline; i.e. no payment is to be applied to a debt which is not yet due and the payment

Spouses Nameal and Lourdes Bonrostro v. Spouses Juan and Constancia Luna (2013) 111 Doctrine: For a tender of payment to take effect it must be accompanied by the means of payment and debtor must take immediate step to make a consignation. 111 Del Carmen v Sabordo (2014) 112 Doctrine: It is settled that compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly with any of the requisites will render the consignation void. One of these requisites is a valid prior tender of payment. 112 Yam v CA (1999) 113 Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of donation. Art. 748, par. 3 provides that the donation and acceptance of a movable, the value of which exceeds P5,000.00, must be made in writing, otherwise the same shall be void. In this connection, under Art. 417, par. 1, obligations, actually referring to credits, are considered movable property. 113 Gan Tion v CA

115

Mirasol v Ca (2001) 116 Doctrine: compensation cannot take place where one claim, as in the instant case, is still the subject of litigation, as the same cannot be deemed liquidated. 116 Jesus M. Montemayor v Vicente D. Millora (2011)

118 266


Doctrine: A debt is liquidated when its existence and amount are determined. It is not necessary that it be admitted by the debtor. Nor is it necessary that the credit appear in a final judgment in order that it can be considered as liquidated; it is enough that its exact amount is known. And a debt is considered liquidated, not only when it is expressed already in definite figures which do not require verification, but also when the determination of the exact amount depends only on a simple arithmetical operation 118 Union Bank v DBP (2014) 119 Doctrine: The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby two persons in their capacity as principals are mutual debtors and creditors of each other with respect to equally liquidated and demandable obligations to which no retention or controversy has been timely commenced and communicated by third parties 119 First United Constructors Corp v Bayanihan Automotive (2014) 125 A debt is liquidated when its existence and amount are determined. 125 Legal compensation takes place when the requirements set forth in Article 1278 and Article 1279 of the Civil Code. Article 1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 of the Civil Code are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount. 125 Starbright Sales Enterprises, Inc. (SSE) v Philippine Realty Corporation 126 S.C. Megaworld Construction vs. Engr. Luis U. Parada (2013) 128 Doctrine: Novation is never presumed but must be clearly and unequivocally shown. 128 Magbanua v Uy (2005) 130 Doctrine: Novation, a mode of extinguishing an obligation, is done by changing the object or principal condition of an obligation, substituting the person of the debtor, or surrogating a third person in the exercise of the rights of the creditor. For an obligation to be extinguished by another, the law requires either

of these two conditions: (1) the substitution is unequivocally declared, or (2) the old and the new obligations are incompatible on every point. A compromise of a final judgment operates as a novation of the judgment obligation, upon compliance with either requisite. In the present case, the incompatibility of the final judgment with the compromise agreement is evident, because the latter was precisely entered into to supersede the former. 130 Phil. Charter v Petroleum (2012) 132 Doctrine: In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and new obligation be in every point incompatible with each other. Novation of a contract is never presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. 132 Arco Pulp and Paper Company, Inc. v Lim

134

Saura v DBP (1972) 136 Doctrine: Mutual Desistance is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. 136 NATELCO VS. CA (1994) 138 Doctrine: Article 1267 states in our law the doctrine of unforseen events. This is said to be based on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist. 138 PNCC vs. CA (1997) 140 Doctrine: This article, which enunciates the doctrine of unforeseen events, is not an absolute application of the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance for the debtor. 140 267


Osmena v SSS (2007) 141 When the service has become so difficult as to be manifestly beyond the contemplation of the parties, total or partial release from a prestation and from the counter-prestation is allowed. 141 Under the theory of rebus sic stantibus, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. 141

CONTRACTS

145

Heirs of Intac v CA 145 DOCTRINE: If the parties state a false cause in the contract to conceal their real agreement, the contract is only relatively simulated and the parties are still bound by their real agreement. In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. 145 MIAA v. Avia (2012) 147 DOCTRINE: In construing a contract, the provisions thereof should not be read in isolation, but in relation to each other and in their entirety so as to render them effective, having in mind the intention of the parties and the purpose to be achieved. In other words, the stipulations in a contract and other contract documents should be interpreted together with the end in view of giving effect to all. 147 Heirs of Uy v Castillo (2013)

150

RS. Tomas v Rizal Cement (2012) 152 DOCTRINE: For petitioner, the contract entered into may have turned out to be an unwise investment, but there is no one to blame but petitioner for plunging into an undertaking without fully studying it in its entirety. 152 PNB v Manalo 154 Doctrine: Any stipulation on interest unilaterally imposed and increased by Banks shall be struck down as violative of the principle of mutuality of contracts. 154 Silos v PNB (2014) 156 DOCTRINE: Contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as

to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. 156 PNB v. Dee, Et Al. (2014) 158 DOCTRINE: The basic principle of relativity of contracts is that contracts can only bind the parties who entered into it, and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof “Where there is no privity of contract, there is likewise no obligation or liability to speak about.” 158 Malbarosa v CA (2003)

160

Capalla v Comelec (2012) 162 DOCTRINE The subsequent contract in question is not an extension of the previous AES Contract, but a new one. And not being an ordinary contract but a procurement by the government, RA 9184 or the Government Procurement Reform Act applies. Section 10 of said law requires for the validity of every government procurement that competitive bidding be conducted. However, such changes must not constitute substantial or material amendments that would alter the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. 162 Rosenstock v Burke

164

Sanchez v Rigos (1972)

167

Capalla v. COMELEC (2012) 169 DOCTRINE: Sereno, concurring: In the construction of an instrument, the intention of the parties is to be pursued. The true agreement of the parties may be proved, as against the terms and stipulations appearing in a written contract where a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the parties, is put in issue by the pleadings, or there is an intrinsic ambiguity in the writing. When the true intent and agreement of the parties is established, it 268


must be given effect and prevail over the bare words of the written contract.” Malbarosa v CA (2003)

169 172

Traders Royal Bank v Cuison (2009) 174 DOCTRINE The concurrence of the offer and acceptance is vital to the birth and the perfection of a contract. The clear and neat principle is that the offer must be certain and definite with respect to the cause or consideration and object of the proposed contract, while the acceptance of this offer – express or implied – must be unmistakable, unqualified, and identical in all respects to the offer. The required concurrence, however, may not always be immediately clear and may have to be read from the attendant circumstances; in fact, a binding contract may exist between the parties whose minds have met, although they did not affix their signatures to any written document. 174 Blas v Santos

176

Tanedo v CA (1996) 177 DOCTRINE: “(n)o contract may be entered into upon a future inheritance except in cases expressly authorized by law.” 177 Liguez v. CA (December 15, 1957) 178 DOCTRINE: A contract to be valid must be based on a legal cause. However, the burden of proving the illegality of a cause in an apparent valid contract lies on the one assailing such validity. 178

DOCTRINE: We find that the agreement between petitioner Dizon and respondent Gaborro is one of those inanimate contracts under Art.1307 of the New Civil Code whereby petitioner and respondent agreed "to give and to do" certain rights and obligations respecting the lands and the mortgage debts of petitioner which would be acceptable to the bank. but partaking of the nature of the antichresis insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned. 184 Hernaez v. Delos Angeles (1969) 185 DOCTRINE: Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable.... 185 Zamora v Miranda (2012) 187 DOCTRINE: Article 1358 of the Civil Code, which requires the embodiment of certain contracts in a public instrument, is only for convenience, and registration of the instrument only adversely affects third parties. Formal requirements are, therefore, for the benefit of third parties. Non-compliance therewith does not adversely affect the validity of the contract nor the contractual rights and obligations of the parties thereunder. 187

Carantes v CA, 76 SCRA 524 (1977) 179 DOCTRINE: It is total absence of cause or consideration that renders a contract absolutely void and inexistent. 179

Garcia v Bisaya (1955) 188 DOCTRINE: In Reformation of contracts, allegation of the real agreement or intention of parties is essential since the object sought in an action for reformation is to make an instrument conform to the real agreement or intention of the parties. 188

Buenaventura v CA (2003) 180 DOCTRINE: Failure to pay the consideration is different from lack of consideration. The former results in a right to demand the fulfillment or cancellation of the obligation under an existing valid contract while the latter prevents the existence of a valid contract. 180

Bentir v Leande 190 DOCTRINE: An action for reformation must be brought within the period prescribed by law, otherwise, it will be barred by the mere lapse of time. 190

Dizon v Gaborro (1978)

Sarming v Dy (2002)

192

184 269


DOCTRINE: An action for reformation of instrument under this provision of law may prosper only upon the concurrence of the following requisites: (1) there must have been a meeting of the minds of the parties to the contact; (2) the instrument does not express the true intention of the parties; and (3) the failure of the instrument to express the true intention of the parties is due to mistake, fraud, inequitable conduct or accident. 192 Oria v. McMicking (1912)

194

Siguan v Lim 196 Doctrine: The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. 196 Velarde v CA (2001) 199 DOCTRINE: A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract, entitles the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received. 199 Miguel vs Montanez 201 DOCTRINE: If the amicable settlement is repudiated by one party, either expressly or impliedly, the other party has 2 options, namely, to enforce the compromise in accordance with the LGC or Rules of Court as the case may be, or to consider it rescinded and insist upon his original demand. 201 Ada V Baylon (2012) 203 DOCTRINE: Rescission 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 it should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said

contract. It is a remedy to make ineffective a contract, validly entered into and therefore obligatory under normal conditions, by reason of external causes resulting in a pecuniary prejudice to one of the contracting parties or their creditors. Contracts which are rescissible are valid contracts having all the essential requisites of a contract, but by reason of injury or damage caused to either of the parties therein or to third persons are considered defective and, thus, may be rescinded.The kinds of rescissible contracts, according to the reason for their susceptibility to rescission, are the following: first, those which are rescissible because of lesion or prejudice; second, those which are rescissible on account of fraud or bad faith; and third, those which, by special provisions of law, are susceptible to rescission. 203 Caldwallader v. Smith (1907)

207

PNB v. Phil. Vegetable Oil (1927) 209 DOCTRINE: It must be repeated that the mortgage was executed while a receiver was in charge of the Vegetable Oil Company. A mortgage accomplished at such a time by the corporation under receivership and a creditor would be a nullity. 209 Singsong v. Isabela Sawmill (1979) 211 DOCTRINE: As a rule, a contract cannot be assailed by one who is not a party thereto. However, when a contract prejudices the rights of a third person, he may file an action to annul the contract. 211 This Court has held that a person, who is not a party obliged principally or subsidiarily under a contract, may exercised an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention. 211 Metropolitan Fabrics, Incorporated (MFI) v. Prosperity

213

Uy Soo Lim v Tan Unchuan (1918)

216

Viloria v. CAI (2012) 217 DOCTRINE: Implied ratification may take diverse forms, such as by silence or acquiescence. 217 270


ECE Realty and Development Inc. v Rachel Mandap

219

The Roman Catholic Church vs. Regino Pante (2012) 221 DOCTRINE: Not every mistake renders a contract voidable. For mistake as to the qualification of one of the parties to vitiate consent, two requisites must concur: 221 1. the mistake must be either with regard to the identity or with regard to the qualification of one of the contracting parties; and 221 2. the identity or qualification must have been the principal consideration for the celebration of the contract. 221 ECE Realty and Development Inc. v Rachel Mandap

222

Metropolitan v Prosperity (2014)

224

PNB v. Phil. Vegetable Oil (1927) 228 DOCTRINE: It must be repeated that the mortgage was executed while a receiver was in charge of the Vegetable Oil Company. A mortgage accomplished at such a time by the corporation under receivership and a creditor would be a nullity. 228 Carbonnel v Poncio, 103 Phil 655 (1958) 231 DOCTRINE: It is well settled in this jurisdiction that the Statute of Frauds is applicable only to executory contracts, not to contracts that are totally or partially performed. 231 Limketkai v CA (1996) 233 DOCTRINE: The Statute of Frauds, embodied in Article 1403 of the Civil Code of the Philippines, does not require that the contract itself be written. The plain test of Article 1403, Paragraph (2) is clear that a written note or memorandum, embodying the essentials of the contract and signed by the party charged, or his agent suffices to make the verbal agreement enforceable, taking it out of the operation of the statute. 233 Swedish Match, AB (SMAB) v CA

234

Neri v Heirs of Uy (2012)

237

Iglesia v. Heirs of Bernardino Taeza (2014)

239

DOCTRINE: A contract entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers are unenforceable unless ratified.

239

Heirs of Policronio M. Ureta v Heirs of Liberato M. Ureta 241 Doctrine: Partition among heirs is not legally deemed a conveyance of real property resulting in change of ownership. It is not a transfer of property from one to the other, but rather, it is a confirmation or ratification of title or right of property that an heir is renouncing in favor of another heir who accepts and receives the inheritance. It is merely a designation and segregation of that part which belongs to each heir. 241 Formaran v Ong 243 DOCTRINE: The amplitude of foregoing undisputed facts and circumstances clearly shows that the sale of the land in question was purely simulated. It is void from the very beginning (Article 1346, New Civil Code). If the sale was legitimate, defendant Glenda should have immediately taken possession of the land, declared in her name for taxation purposes, registered the sale, paid realty taxes, introduced improvements therein and should not have allowed plaintiff to mortgage the land. These omissions properly militated against defendant Glenda’s submission that the sale was legitimate and the consideration was paid. 243 Constantino v Heirs of Constantino

244

CPG of the SP. Cadavedo v Lacaya (2014)

246

Liguez v. CA (1957) 250 DOCTRINE: A contract to be valid must be based on a legal cause. However, the burden of proving the illegality of a cause in an apparent valid contract lies on the one assailing such validity. 250 Rellosa v Gaw Cheen Hum, (1953) 251 Doctrine: A party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out. The law will not aid either party to an illegal agreement; it leaves the parties where it finds them. 251 271


Frenzal v Catito (2003) 253 DOCTRINE: A contract that violates the Constitution and the law, is null and void and vests no rights and creates no obligations. It produces no legal effect at all. The petitioner, being a party to an illegal contract, cannot come into a court of law and ask to have his illegal objective carried out. One who loses his money or property by knowingly engaging in a contract or transaction which involves his own moral turpitude may not maintain an action for his losses. To him who moves in deliberation and premeditation, the law is unyielding. The law will not aid either party to an illegal contract or agreement; it leaves the parties where it finds them. 253 Gonzalo v Tarnate, Jr. 255 DOCTRINE: The doctrine of in pari delicto which stipulates that the guilty parties to an illegal contract are not entitled to any relief, cannot prevent a recovery if doing so violates the public policy against unjust enrichment. 255 PILTEL v Tecosn (2004) 256 DOCTRINE: , the contract herein involved is a contract of adhesion. But such an agreement is not per se inefficacious. The rule instead is that, should there be ambiguities in a contract of adhesion, such ambiguities are to be construed against the party that prepared it. If, however, the stipulations are not obscure, but are clear and leave no doubt on the intention of the parties, the literal meaning of its stipulations must be held controlling. 256 Alpha Insurance v. Castor (2013) 258 DOCTRINE: A contract of insurance is a contract of adhesion. So, when the terms of the insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. 258

272

CIVREV Digest Compilation

Recommend Documents