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511-515 DE LEON

G.R. No. L-15127 May 30, 1961

EMETERIO CUI, plaintiff-appellant, vs. ARELLANO UNIVERSITY, defendant-appellee.

FACTS:

CUI, in 1948-1949 took up preparatory law course in the defendant University. Plaintiff finished his law studies
in the defendant university up to and including the first semester of the fourth year. Francisco R. Capistrano,
brother of the mother of plaintiff, was the dean of the College of Law and legal counsel of the defendant
university. Plaintiff left the defendant's law college and enrolled for the last semester of his fourth year law in
the college of law of the Abad Santos University graduating from the college of law of the latter university.
During all the time he was studying law in defendant university was awarded scholarship grants, for scholastic
merit, so that his semestral tuition fees were returned to him after the ends of semester and when his
scholarship grants were awarded to him. The whole amount from the first semester up to and including the first
semester of his last year is in total P1,033.87. After graduating in law from Abad Santos University he applied
to take the bar examination. To secure permission to take the bar he needed the transcripts of his records in
defendant Arellano University. Plaintiff petitioned the latter to issue to him the needed transcripts. The
defendant refused until after he had paid back the P1,033 87 which defendant refunded to him as above
stated. As he could not take the bar examination without those transcripts, plaintiff paid to defendant the said
sum under protest.

Director of Private Schools issued Memorandum No. 38 reading:

1. Some schools offer full or partial scholarships to deserving students - But to stipulate the condition that such scholarships are good only if
the students concerned continue in the same school nullifies the principle of merit in the award of these scholarships.

2. full or partial scholarships, it is understood that such scholarships are merited and earned. It should not be subsequently charged to the
recipient students when they decide to quit school or to transfer to another institution.

3. Several complaints that they could not transfer to other schools since their credentials would not be released unless they would pay the fees
corresponding to the period of the scholarships. Where the Bureau believes that the right of the student to transfer is being denied on this
ground, it reserves the right to authorize such transfer.

Whether the above quoted provision of the contract between plaintiff and the defendant, whereby the former
waived his right to transfer to another school without refunding to the latter the equivalent of his scholarships in
cash, is valid or not.

We are of the opinion that the stipulation in question is contrary to public policy and, hence, null and
void. Courts of justice will not recognize or uphold a transaction which its object, operation, or tendency
is calculated to be prejudicial to the public welfare, to sound morality or to civic honesty. If Arellano
University understood clearly the real essence of scholarships and the motives which prompted this office to
issue Memorandum No. 38, s. 1949, it should have not entered into a contract of waiver with Cui on
September 10, 1951, which is a direct violation of our Memorandum and an open challenge to the authority of
the Director of Private Schools because the contract was repugnant to sound morality and civic honesty.
Scholarship are awarded in recognition of merit not to keep outstanding students in school to bolster
its prestige. In the understanding of that university scholarships award is a business scheme designed to
increase the business potential of an education institution. Thus conceived it is not only inconsistent with sound
policy but also good morals. It is good customs; those generally accepted principles of morality which have
received some kind of social and practical confirmation. The practice of awarding scholarships to attract
students and keep them in school is not good customs nor has it received some kind of social and
practical confirmation except in some private institutions as in Arellano University.

The constitution does not require the student to reimburse the school of the scholarship granted if they
choose to transfer to another school
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WHEREFORE, the decision appealed from is hereby reversed. Against defendant.

G.R. No. L-82499 October 13, 1989

CAPITOL MEDICAL CENTER, INC., and DRA. THELMA NAVARRETE CLEMENTE, petitioners,
vs.
THE COURT OF APPEALS, HON. IGNACIO SALVADOR, in his capacity as Presiding Judge of Branch 77
of the Regional Trial Court of the National Capital Region (Quezon City), MONINA REYES-
VALENZUELA, PABLO L. DAMASO, LINA M. ABLANG, MA. TERESITA ROQUE, AMBROSIO LAZOL,
DIOSDADO YAP, FLORDELIZA SINGSON, SARAH P. PELOBELLO JOEL H. GILLEGO, AGNES A. DE
VEGA, NORAIDA Y. MAGALONG, AUGENCIO PAPA, IMELDA SIMBILLO, MAXIMO CALDERON and
ROSALIE FLORIDA C. ILAGA, respondents.

GRINO-AQUINO, J.:

ISSUE: Whether a school that, after due notice to the Secretary of Education, Culture and Sports, closed at the
end of the first semester of the school year 1987-1988, because its teachers and students declared a strike,
refusing to hold classes and take examinations, may be forced to reopen by the courts at the instance of the
striking students.

FACTS: Capitol Medical Center, offered a four-year nursing course, a two-year midwifery course, and a two-
year medical secretarial course. In the first semester of the school year 1987-88, 900 students were enrolled in
various courses in the college.

Half-way through the first semester in 1987, the college faculty, led by the Dean of Nursing, demanded that
they be granted vacation and sick leave privileges similar to those enjoyed by hospital personnel. Dialogues
were held but no agreement was reached between the faculty and the school administration, Dr. Thelma
Navarette-Clemente, who was concurrently also the chairman of the CMCI Board.

Dr. Clemente reported the deteriorating relationship between the CMCC administration and the teachers,
which, from a simple disagreement, had degenerated into open hostility. She feared that the situation may give
rise to mass action by the students, because the faculty, exercising their moral influence over the students, had
enlisted the latter's sympathy and support for their cause.

The Board resolved to authorize her, as president of the College, to close it at the end of the first semester if
the antagonism of the faculty and students toward the college administration should become uncontrollable.
The minutes of that meeting of the CMC Board disclose the following action taken by the Board:

On the scheduled dates for the examinations, the students joined their teachers in a noisy demonstration in
front of the hospital. As the demonstrations disturbed the peace and quiet of the hospital and fearful of possible
subversive action by hostile student nurses which might endanger the safety and lives of the patients in the
hospital, an emergency special meeting was held by the CMCI Board on October 17, 1987. It unanimously
resolved "to close the school effective at the end of the first semester of this school year.

Dr. Clemente informed the Department of Education, Culture & Sports (DECS) that the school would be
permanently closed at the end of the first semester.

DECS did not reply promptly. Department of Labor and Employment (DOLE) was likewise notified

Director Boquiren failed to comprehend that Dr. Clemente merely informed the DECS of the school
administration's decision to effect the "immediate and complete closure" of the school. As the DECS did not
react to her second letter, CMCCI proceeded with the closure of the college.
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The teachers, students and their parents, a representative of the DECS and the school administration,
thereafter, held a series of dialogues to persuade CMCCI to open the school for one more semester or until the
end of the school year. An agreement was prepared by the DECS but CMCCI wanted to include a written
stipulation binding the students and their parents to hold no more strikes, rallies, or demonstrations until the
end of the school year. Since the latter did not sign the agreement, the school did not reopen.

RTC: Ruled in favor of defendants CA: Affirmed

HELD: The teachers, by refusing to teach, and the students, by refusing to attend classes, made the continued
operation of the CMCC futile and untenable. The college had no reason to remain open under the situation
which the private respondents themselves brought about.

Did the private respondents have a clear legal right to reopen the school and to be readmitted therein?

The Court of Appeals answered that question affirmatively on the theory that "the initial enrollment" of the
students (meaning their enrollment in the first year of their chosen courses) created "a binding contract"
between the students and the school, by which the latter became "legally and morally bound to continue
operating the school until such enrollees shall have finished their courses.

The Court of Appeals presumably, but erroneously, relied on paragraph 137, Sec. IV of the Manual of
Regulations for Private Schools, which provides:

The meaning of this provision is that the school, after having accepted a student for enrollment in a given
course may not expel him or refuse to re-enroll him until he completes his course, except when he is
academically deficient or has violated the rules of discipline. He is presumed to be qualified to study there for
the entire period it will take to complete his course.

The contract between the college and a student who is enrolled and pays the fees for a semester, is for the
entire semester only, not for the entire course. The law does not require a school to see a student through to
the completion of his course.

We, therefore, hold that the lower court gravely abused its discretion in compelling the CMCC to reopen and
re-admit the striking students for enrollment in the second semester of their courses. Since their contracts with
the school were terminated at the end of the first semester of 1987, and as the school has already ceased to
operate, they have no "clear legal right" to re-enroll and the school has no legal obligation to reopen and
readmit them. No provision cited to support that a school is obligated to remain open until its students have
completed their courses therein. neither is there a law or rule that obligates a student who has enrolled in a
school, to remain there until he finishes his course.

But even if it can be supposed that the enrollment of a student creates an implied "binding contract". a contract
creates reciprocal rights and obligations, the obligation of the school to educate a student would imply a
corresponding obligation on the part of the student to study and obey the rules and regulations of the school.
When students breach that supposed contract by refusing to attend their classes, preferring to take to the
streets to mount a noisy demonstration against their school, the latter may cancel the contract and close its
doors. Its action would neither be arbitrary nor unfair.

It was the trial court that acted arbitrarily or with grave abuse of discretion in ordering the school to reopen and
re-admit the striking students and teachers in spite of their refusal to desist from continuing their disruptive
mass actions against the school.

WHEREFORE, the petition for review is granted. In favor of CMC

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G.R. No. L-9506 June 30, 1956

SY SUAN and PRICE INCORPORATED, petitioners, vs.PABLO L. REGALA, respondent.

FACTS: Defendant Sy Suan, who was at the time president and general manager of his co-defendant
[Price Incorporated] and owner of practically all the capital stock of said corporation, executed in favor of
plaintiff a special power of attorney authorizing the latter to prosecute the former's applications for import
licenses with the Import Control Office. At the time of the execution of the said power of attorney, defendants
had pending in the Import Control Office Pursuant to said special power of attorney, plaintiff followed up and
prosecuted the above-mentioned applications with and through the different offices and divisions of the Import
Control Office, conferring with the corresponding Import Control officials. On or about May 19, 1953, the Import
Control Office issued the following licenses.

Shortly before the execution of the special power of attorney above reffered to, plaintiff and defendant
Sy Suan agreed verbally that plaintiff's services for securing the said licenses would be paid or
compensated with ten (10%) per cent of the total value of the amounts approved on the said
applications. On May 19, 1953, upon the release of the afore-mentioned licenses, defendants paid the
plaintiff the sum of P3,000.00 on account of the latter's services.

The main issue in this appeal is the validity of the parole contract of remuneration, which petitioners assail as
contravening public policy and interest, hence null and void ab initio.

We find undeniable that the contract in question sought to be enforced by the respondent and assailed by the
petitioners as null and void for being against public policy is what is commonly known as 10% contracts which
the press decries and the public condemns as inimical to public interest. We can take judicial notice that this
kind of contract sprouted as a result of the controls imposed by the government on imports and dollar
allocations, despite the enunciated government policy that applications for imports and foreign exchange
should be considered and acted upon strictly on the basis of merit of each application and without the
intervention of intermediaries, which policy is revealed, by Sections 15 and 18 of Republic Act 650

It is a general rule that agreements against public policy are illegal and void. Under the principles relating to the
doctrine of public policy, as applied to the law of contracts, courts of justice will not recognize or uphold any
transaction which, in its object operation, or tendency, is calculated to be prejudicial to the public welfare, to
sound morality, or to civic honesty. An agreement is against public policy if it is injurious to the interests of the
public, contravenes some established interest of society, violates some public statute, is against good morals,
ends to interfere with the public welfare or society, or as it is sometimes put, if it is at war with the interests of
society and is in conflict with the morals of the time. An agreement either to do anything which, or not to do
anything the omission of which, is in any degree clearly injurious to the public and an agreement of such a
nature that it cannot be carried into execution without reaching beyond the parties and exercising an injurious
influence over the community at large are against public policy.

On the other hand, Articles 1306 and 1409 of the new Civil Code provide:

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.

ART. 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or
public policy.
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Wherefore, the decision of the Court of Appeals is hereby reversed, without costs.
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G.R. No. L-11980 February 14, 1959

MATHEW S. TEE, plaintiff-appellant,

vs.
TACLOBAN ELECTRIC AND ICE PLANT CO., INC., CHAN BUN CHIT and VICTORIANO CHAN, defendants-

CONCEPTION, J.:

2. On or about August, 1955, defendant Tacloban Electric and Ice Plant Co., Inc., acting through
defendants Chan Bun Chit and Victoriano Chan, approached plaintiff and, informing him that they
needed foreign exchange allocation for the purchase of machineries and other supplies for the
expansion of the Tacloban Electric and Ice Plant Co., Inc., they requested plaintiff to prepare, file and
work for the approval of the application for the said foreign exchange, knowing plaintiff had much
experience therein, and promising to pat plaintiff the usual fee for his work, to which plaintiff agreed.

3. In compliance with the said agreement, plaintiff worked for a period of six (6) months, more or less,
accomplishing papers, filing them and following up the papers in the different government offices to
which they were referred in order to obtain the necessary foreign exchange allocation, as a result of
which the Central Bank granted an allocation of ($243,500.00) TWO HUNDRED FORTY-THREE
THOUSAND FIVE HUNDRED DOLLARS;

4. The usual, standard fee for the services performed by plaintiff is (10%) of the value of the allocation
obtained, which in this case amounts to (P48,700.00) FORTY-EIGHT THOUSAND SEVEN HUNDRED
PESOS;

5. Plaintiff has demanded payment from defendants, but the latter have failed and refused, without
justifiable cause, to comply with plaintiff's demands.

Hence, this appeal by plaintiff

The main issue in this case is the validity of the contract relied in the complaint.

We are fully in agreement with this view. According to plaintiff's complaint, he agreed "to prepare, file and work
for, the approval of the application" for foreign exchange "in compliance" with said agreement, he "worked for",
and secured the corresponding allocation, "accomplishing the papers, filing them, and following up the papers
in the different government offices to which they were referred."

Pursuant to this circular, all applications for foreign exchange shall be made through authorized agent banks,
which are the only parties authorized to deal with the Central Bank or the Bankers Committee in connection
therewith. the circular declares that, "under no circumstances should any applicant, his agent,
and representatives follow up an application with the Central Bank." he claims to have performed in pursuance
of this contract, "following up the papers in the different government offices to which they were referred" one
of which is the Central Bank are inconsistent with the law creating the Central Bank upon the issued
and, hence, contrary to the public policy thus adopted. In short, said contract is "inexistent and void from the
beginning." (Article 1409 (1), Civil Code of the Philippines).

Besides, the agreement under consideration is contrary to good customs and public order, for public interest
demands that applications for foreign exchange be considered, acted upon and disposed of strictly on the
basis of the merits and demerits of each case. In other words, the exigencies of public welfare require that the
proceedings for the determination of said application be conducted in the most impersonal and impartial
manner to forestall favoritism or the commission of other irregularities in relation thereto, or, at least, to
minimize the opportunities therefor or the possibility thereof which is evidently, the purpose of the
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aforementioned circular, requiring that all applications for foreign exchange be filed with agents banks and that
all representations relative thereto be made, not by the "applicant, his agent or other representative", but
through said agent banks.

SEC. 167. Generally. It is a general rule that agreements against public policy are illegal and void.
Under the principles relating to the doctrine of public policy, as applied to the law of contracts, courts of
justice will not recognize or uphold any transaction which, in its object, operation, or tendency, is
calculated to be prejudicial to the public welfare, to sound morality, or to civic honesty. The test is
whether the parties have stipulated for something inhibited by the law or inimical to, or inconsistent
with, the public welfare. An agreement is against public policy if it is injurious to the interest of the
public, contravenes some established interest of society, violates some public statute, is against good
morals, tends to interfere with the public welfare or safety, or as it is sometimes put, if it is a war with
the interests of society and is in conflict with the morals of the time. An agreement either to do anything
which, or not to do anything the omission of which, is in any degree, clearly injurious to the public and
an agreement of such nature that it cannot be carried into execution without reaching beyond the
parties and exercising an injurious influence over the community at large are against public policy.

The foregoing conclusion renders a determination of the other issues raise in the appeal unnecessary.

Wherefore, the resolution appealed from is hereby affirmed, with costs against plaintiff-appellant. Let the
Solicitor General be furnished a certified copy of this decision for such action, if any, as may be appropriate
under pertinent laws. It is so ordered.
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G.R. No. L-20175 October 30, 1967

MARIA A. GARCIA, ET AL., petitioners, vs. RITA LEGARDA, INC., respondent.

DIZON, J.:

Appeal taken by the spouses Maria A. Garcia and Marcelino A. Timbang

On May 20, 1953 the petitioners instituted the civil case mentioned above against the respondent to have
certain contracts numbered 322, 324, and 965 declared as existing and subsisting; to compel the respondent
to accept payments tendered by them; and to recover moral and exemplary damages and attorney's fees in
the amounts of P6,000.00 and P1,500.00, respectively.

The three causes of action alleged in their complaint involved the three parcels of land subject matter of the
contracts aforesaid. Each had an area of about 150 square meters, and formed part of the Rita Legarda Estate
situated in Manila, and subdivided into lots sold on installment basis.

(1) Contract to Sell No. 322 was executed by the respondent in favor of Emiliano Orellana, the latter
transferred all his rights, and interest thereunder to Encarnacion Vito who, in turn, made a similar transfer of
rights in favor of Delfin Bacho. Finally, Bacho also transferred all his rights and interest to the petitioners.

(2) On March 1, 1947, Contract to Sell No. 324 was executed by respondent in favor of Jesusa Felix. Felix,
with the written consent of the respondent, sold her rights and interest to petitioners.

(3) Contract to Sell No. 965 was executed by the respondent in favor of Angela Alvarez Solomon. With the
written consent of the former, Solomon also sold her rights and interest to the petitioners.

In its answer to the complaint, the respondent averred that in relation to the Contracts to Sell Nos. 822, 965
and 324, petitioners paid the 53rd, 43rd and 53rd installments, respectively, corresponding to the installments
for the month of July, 1951; that the petitioners had failed to pay the stipulated monthly installments for
Contracts Nos. 322 and 324 corresponding to the period from August, 1951 through June, 1952, and in the
case of Contract No. 965, from August, 1951 through May, 1952; that despite several demands for payment of
arrears made between December, 1951 and June, 1952 by the respondent, the petitioners had failed to pay
the amounts due; and that upon the expiration of the 90-day grace period on June 11, 1952 stipulated in the
sixth paragraph of the contracts, the respondent had cancelled them. The answer also prayed for an award of
damages and attorney's fees in the sum of P2,000.00.

On April 20, 1954 the petitioners filed a reply denying that they were in arrears as to their obligations under the
three contracts and, further averred as affirmative defense that the cancellation thereof was unlawful and
arbitrary.

After trial the Court rendered judgment declaring Contracts Nos. 322, 324 and 965 as existing and subsisting;
the respondent appealed to the Court of Appeals from whose decision reversing that of the lower court
the instant appeal was taken.

Petitioners now urge Us, in turn, to reverse the decision of the Court of Appeals, claiming that the latter had
committed the following errors:

Article 1308 of the New Civil Code reads as follows:

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The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them.

The above legal provision is a virtual reproduction of Article 1256 of the old Civil Code but it was so phrased as
to emphasize the principle that the contract must bind both parties. This, of course, is based firstly, on the
principle that obligations arising from contracts have the force of law between the contracting parties and
secondly, that there must be mutuality between the parties based on their essential equality to which is
repugnant to have one party bound by the contract leaving the other free therefrom (8 Manresa 556). Its
ultimate purpose is to render void a contract containing a condition, which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties.

Paragraph 6 of the contracts in question which is the one claimed to be violative of the legal provision above
quoted reads as follows:

The above stipulation, to our mind, merely gives the vendor "the right to declare this contract cancelled and of
no effect" upon fulfillment of the conditions therein set forth. It does not leave the validity or compliance of the
contract entirely "to the will of one of the contracting parties"; the stipulation or agreement simply says that in
case of default in the payment of installments by the vendee, he shall have (1) "a month of grace", and that (2)
should said month of grace expire without the vendee paying his arrears, he shall have another "period of 90
days" to pay "all the amounts he should have paid", etc., then the vendor "has the right to declare this contract
cancelled and of no effect." We have heretofore upheld the validity of similar stipulations. Indeed, the power
thus granted can not be said to be immoral, much less unlawful, for it could be exercised not arbitrarily
but only upon the other contracting party committing the breach of contract of non-payment of the installments
agreed upon. Obviously, all that said party had to do to prevent the other from exercising the power to cancel
the contract was for him to comply with his part of the contract. And in this case, after the maturity of any
particular installment and its non-payment, the contract gave him not only a month grace but an
additional period of 90 days.

whether or not by having previously accepted payments of overdue installments the respondent had waived its
right to declare the contracts cancelled and of no effect.

The contracts under consideration are not of absolute sale but mere contracts to sell on installment. They
give the respondent's (vendor) the right to declare the contracts cancelled and of no effect as in fact it did
upon fulfillment of certain conditions. All said conditions so the record shows have been fulfilled.
Consequently, respondent's (vendor) right to cancel the contracts cannot be doubted.

That prior to the cancellation it had in fact accepted payment of installments in arrears was but another act of
forbearance on its part to give the petitioners an additional opportunity to keep the contracts alive. Rather than
give rise to the presumption that by such act of humanity it waived its right to cancel the contracts, it
strengthens its right to do so, considering that even after such act of accommodation beneficial to the
petitioners, the latter subsequently defaulted again and again in the fulfillment of their obligation.

WHEREFORE, the appealed judgment being in accordance with law and the facts of the case. CA affirmed
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[G.R. No. 124290. January 16, 1998]

ALLIED BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, HON. JOSE C. DE GUZMAN,
OSCAR D. TANQUECO, LUCIA D. TANQUECO-MATIAS, RUBEN D. TANQUECO and NESTOR D.
TANQUECO, respondents

DECISION

BELLOSILLO, J .:

ISSUE: Whether a stipulation in a contract of lease to the effect that the contract "may be renewed for a like
term at the option of the lessee" is void for being potestative or violative of the principle of mutuality of
contracts under Art. 1308 of the Civil Code and, corollarily, what is the meaning of the clause "may be renewed
for a like term at the option of the lessee;"

Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot in their
name. They leased the property to petitioner Allied Banking Corporation (ALLIED) for a monthly rental
of P1,000.00 for the first three (3) years, adjustable by 25% every three (3) years thereafter. [1] The lease
contract specifically states in its Provision No. 1 that "the term of this lease shall be fourteen (14) years
commencing from April 1, 1978 and may be renewed for a like term at the option of the lessee."

Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting of a
concrete building with a floor area of 340-square meters which it used as a branch office. As stipulated, the
ownership of the building would be transferred to the lessors upon the expiration of the original term of the
lease.

Spouses executed a deed of donation over the subject property in favor of their four (4) children, who
accepted the donation in the same public instrument.

A year before the expiration of the contract of lease, the Tanquecos notified petitioner ALLIED that they
were no longer interested in renewing the lease. [2] ALLIED replied that it was exercising its option to renew
their lease under the same terms with additional proposals. [3] Respondent Ruben D. Tanqueco, acting in behalf
of all the donee-lessors, made a counter-proposal. [4] ALLIED however rejected the counter-proposal and
insisted on Provision No. 1 of their lease contract.

When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the
premises. But the latter asserted its sole option to renew the lease and enclosed in its reply letter a cashiers
check in the amount of P68,400.00 representing the advance rental payments for six (6) months taking into
account the escalation clause. Private respondents however returned the check to ALLIED, prompting the
latter to consign the amount in court.

An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After trial, the
MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being violative of Art. 1308 of the Civil
Code thus -

On appeal: Regional Trial Court, and Court of Appeals affirmed.[5]

ALLIED vacated the leased premises by reason of the controversy.[6]

ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon hence valid
and binding on both parties, and the exercise by petitioner of its option to renew the contract was part of their
agreement and in pursuance thereof.
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We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as the principle of
mutuality of contracts. It provides that "the contract must bind both the contracting parties; its validity or
compliance cannot be left to the will of one of them." This binding effect of a contract on both parties is based
on the principle that the obligations arising from contracts have the force of law between the contracting
parties, and there must be mutuality between them based essentially on their equality under which it is
repugnant to have one party bound by the contract while leaving the other free therefrom. The ultimate
purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon
the uncontrolled will of one of the contracting parties.

The fact that such option is binding only on the lessor and can be exercised only by the lessee does not
render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And
while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to
continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights
and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the
duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter
escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a
contract and equality exists between the lessor and the lessee since they remain with the same faculties in
respect to fulfillment.[7]

The subject contract simply provides that "the term of this lease shall be fourteen (14) years and may be
renewed for a like term at the option of the lessee." As we see it, the only term on which there has been a clear
agreement is the period of the new contract, i.e., fourteen (14) years, which is evident from the clause "may be
renewed for a like term at the option of the lessee," the phrase "for a like term" referring to the period. It is
silent as to what the specific terms and conditions of the renewed lease shall be. Shall it be the same terms
and conditions as in the original contract, or shall it be under the terms and conditions as may be mutually
agreed upon by the parties after the expiration of the existing lease?

In the lease contract under consideration, there is no provision to indicate that the renewal will be subject to
new terms and conditions that the parties may yet agree upon. It is to renewal provisions of lease contracts of
the kind presently considered that the principles stated above squarely apply. We do not agree with the
contention of the appellants that if it was intended by the parties to renew the contract under the same
terms and conditions stipulated in the contract of lease, such should have expressly so stated in the contract
itself. The same argument could easily be interposed by the appellee who could likewise contend that if
the intention was to renew the contract of lease under such new terms and conditions that the parties may
agree upon, the contract should have so specified. Between the two assertions, there is more logic in the latter.

The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to a
contract of lease, the tenant is the one favored and not the landlord. 'As a general rule, in
construing provisions relating to renewals or extensions, where there is any uncertainty, the tenant is favored,
and not the landlord, because the latter, having the power of stipulating in his own favor, has neglected to
do so; and also upon the principle that every man's grant is to be taken most strongly against himself (50 Am
Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).'

Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating its
abandonment of whatever rights it had under the renewal clause. Consequently, what remains to be done is for
ALLIED to pay rentals for the continued use of the premises until it vacated the same, computed from
the expiration of the original term of the contract on 31 March 1992 to the time it actually left the premises on
20 February 1993, deducting therefrom the amount of P68,400.00 consigned in court by ALLIED and any other
amount which it may have deposited or advanced in conection with the lease. Since the old lease contract was
deemed renewed under the same terms and conditions upon the exercise by ALLIED of its option, the basis of
the computation of rentals should be the rental rate provided for in the existing contract.

WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering that
petitioner ALLIED BANKING CORPORATION already vacated the leased premises as of 20 February 1993,
FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON

the renewed lease contract is deemed terminated as of that date. However, petitioner is required to pay rentals
to respondent lessors at the rate provided in their existing contract, subject to computation in view of the
consignment in court of P68,400.00 by petitioner, and of such other amounts it may have deposited or
advanced in connection with the lease.

SO ORDERED.

G.R. No. L-264 October 4, 1946

VICENTE SINGSON ENCARNACION, plaintiff-appellee,

vs.
JACINTA BALDOMAR, ET AL., defendants-appellants.

Bausa and Ampil for appellants.

Tolentino and Aguas for appellee.

HILADO, J.:

Vicente Singson Encarnacion, owner of the house numbered 589 Legarda Street, Manila, some six years ago
leased said house to Jacinto Baldomar and her son, Lefrado Fernando, upon a month-to-month basis for the
monthly rental of P35. After Manila was liberated in the last war, specifically on March 16, 1945, and on April 7,
of the same year, plaintiff Singson Encarnacion notified defendants, the said mother and son, to vacate the
house above-mentioned on or before April 15, 1945, because plaintiff needed it for his offices as a result of the
destruction of the building where said plaintiff had said offices before. Despite this demand, defendants
insisted on continuing their occupancy. When the original action was lodged with the Municipal Court of Manila
on April 20, 1945, defendants were in arrears in the payment of the rental corresponding to said month, the
agrees rental being payable within the first five days of each month. That rental was paid prior to the hearing of
the case in the municipal court, as a consequence of which said court entered judgment for restitution and
payment of rentals at the rate of P35 a month from May 1, 1945, until defendants completely vacate the
premises. Although plaintiff included in said original complaint a claim for P500 damages per month, that claim
was waived by him before the hearing in the municipal court, on account of which nothing was said regarding
said damages in the municipal court's decision.

Court of First Instance of Manila upon appeal, defendants filed therein a motion to dismiss That motion to
dismiss was denied

The Court of First Instance gave more credit to plaintiff's witness, Vicente Singson Encarnacion, jr., who
testified that the lease had always and since the beginning been upon a month-to-month basis. The court
added in its decision that this defense which was put up by defendant's answer, for which reason the Court
considered it as indicative of an eleventh-hour theory. We think that the Court of First Instance was right in so
declaring. Furthermore, carried to its logical conclusion, the defense thus set up by defendant Lefrado
Fernando would leave to the sole and exclusive will of one of the contracting parties (defendants in this case)
the validity and fulfillment of the contract of lease, within the meaning of article 1256 of the Civil Code, since
the continuance and fulfillment of the contract would then depend solely and exclusively upon their free and
uncontrolled choice between continuing paying the rentals or not, completely depriving the owner of all say in
the matter. If this defense were to be allowed, so long as defendants elected to continue the lease by
continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although
the owner should desire the lease to continue, the lessees could effectively thwart his purpose if they should
prefer to terminate the contract by the simple expedient of stopping payment of the rentals. This, of course, is
prohibited by the aforesaid article of the Civil Code.
FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON

During the pendency of the appeal in the Court of First Instance and before the judgment appealed from was
rendered on October 31, 1945, the rentals in areas were those pertaining to the month of August, 1945, to the
date of said judgment at the rate of P35 a month. During the pendency of the appeal in that court, certain
deposits were made by defendants on account of rentals with the clerk of said court, and in said judgment it is
disposed that the amounts thus deposited should be delivered to plaintiff.

Upon the whole, we are clearly of opinion that the judgment appealed from should be, as it is hereby, affirmed,
with the costs of the three instances to appellants (BALDOMAR). So ordered.

G.R. No. L-13463 November 9, 1918

H. C. LIEBENOW, plaintiff-appellant, vs.THE PHILIPPINE VEGETABLE OIL COMPANY, defendant-appellee.

STREET, J.:

This action was instituted by the plaintiff, H. C.

The contract under which the plaintiff rendered the service to which reference has been made is expressed in
a letter of March 17, 1914, written by the president of the Philippine Vegetable Oil Company to Liebenow

In conformity with this agreement, the plaintiff entered upon the discharge of his duties as superintendent of
the factory aforesaid on April 1, 1914, and continued to render service in this capacity not only for the period of
one year specified in the contract, but for an additional period of four months, or until August 1, 1916, when his
services terminated. At some time during the course of this employment, the exact date of which does not
appear, the monthly salary of P500 was raised to P750, but the contract was not otherwise changed. After the
employment ceased the defendant company continued to deliver to the plaintiff each month a check for P750,
the equivalent of the salary he had been receiving. These payments were continued until the total sum of
P4,500 had been thus paid.

The plaintiff alleges in his complaint that by reason of his skill and ability the defendant's plant was made much
more productive and its profits thereby enormously increased. It is not denied that the service rendered was
satisfactory to the company, and the court found that during the time the plaintiff was employed as
superintendent the output of the plant had increased and the cost of operation had diminished, with
consequent profit to the defendant company.

It is the plaintiff's contention that the stipulation contained in the letter of March 17, 1914, to the effect that the
plaintiff should receive such further amount in the way of bonus, over and above salary, as the board of
directors might see fit to grant has not been satisfied. The P4,500, which he received in the form of a monthly
check of P750 for six successive months after the termination of his services, seems to be considered by the
plaintiff purely in the light of a free gift, and it is insisted that this money was not paid to him in satisfaction, in
whole or in part, of the stipulated bonus. We cannot concur in this suggestion. It is true that the directors did
not by anticipation declare that these payments should be considered in the light of a "bonus;" and a resolution
to this effect was not adopted by them until after the trial in the Court of First Instance had commenced. This
circumstance we consider unimportant. The money thus paid was in addition to salary; and it came from the
same source and was paid by the same authority as any bonus that might have been awarded to him. The fact
that the money was not so labelled is immaterial.

The plaintiff, however, contends that he is entitled to a bonus to be fixed by the court as a reasonable
participation in the increased profits of the factory under his care, taking into consideration his technical skill
and the greater output resulting therefrom. He believes that the increased profits of the enterprise due directly
to this efficiency amounted to at least P100,000; and he suggests, as the lowest proper minimum that he
FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON

should be awarded an amount sufficient to raise his salary for the whole period to the sum of P12,000 per
annum, the amount supposedly paid to his predecessor. This last suggestion is based on the circumstance
that, upon a certain occasion, he talked to the company's manager about the amount of the bonus which he
would expect to receive and informed the manager that he would not be satisfied with less than his
predecessor had been accustomed to receive. The manager, so the plaintiff says, expressed his conformity
with this idea.

The solution of the case makes it necessary to consider the legal effect of the stipulation inserted in the
contract in question to the effect that the plaintiff should be entitled to such further amount in the way of bonus
as the board of directors might see fit to grant.

We see no reason to doubt that a promise of this character creates a legal obligation binding upon the
promisor, although in its actual results it may not infrequently prove to be illusory. Such a promise is not, in our
opinion, nugatory, under article 1115 of the Civil Code, as embodying a condition dependent exclusively upon
the will of the obligor. Nor can it be held invalid under article 1256 of the same Code, which declares that the
validity and performance of a contract cannot be left to the will of one of the contracting parties. The
uncertainty of the amount to be paid by way of bonus is also no obstacle to the validity of the contract (article
1273, Civil Code); since the contract itself specifies the manner in which the amount payable is to be
determined, namely, by the exercise of the judgment and discretion of the employer.

The validity of the promise being conceded, the question which arises next is: What is necessary to satisfy it?
Upon this point it must be obvious that the obligation can only be satisfied when something has been paid as a
bonus by or with the approval of the boar of directors. In the case before us the promise to pay a bonus is
absolute and unconditional. The payment is not conditioned upon satisfactory service, nor upon the duration of
the service, nor upon the profits which may accrue to the employer from the efficiency of the employee. All
these elements might and naturally would operate upon the minds and discretion of the directors in fixing the
amount of the bonus, but they are wholly unconnected with the legal right of the plaintiff to receive something
as a bonus.itc@a1f

The amount of the bonus, it will be observed, is left by the contract to the discretion of the board of directors.
The parties stipulate that the discretion to be exercised was the discretion of the directors; and there would be
a very manifest infringement of the contract, if we were to substitute in place of the discretion of the directors
the discretion of any other person or body whomsoever.

Practical considerations point to the same conclusion. An employer, in determining what amount to award as a
bonus, naturally and properly considers many things a court could not well take into account, as for instance,
the personal peculiarities which make one man more acceptable or more serviceable in the employment than
another. In the complex enterprises of modern industry, especially, would it be difficult for a court to undertake
to say just what any particular employee might be entitled to. The best course, we think, in such a case as this,
is to recognize that the contracting parties have placed the discretion to determine the amount of the bonus in
the hands of the employer, and to hold them bound by than.

But it is suggested that where a contract of service provides for a salary in a fixed sum and an additional sum
to be paid by way of bonus, the whole contract is to be taken together, and it is to be considered as having
about the same effect as if the parties, recognizing the inadequacy of the amount fixed as salary, had agreed
that a further bonus should be paid sufficient to raise the amount to what should be considered adequate upon
the basis of a quantum meruit.

If, as supposed, the contracting parties are really bound by the stipulation which leaves the determination of
the amount of the bonus to the employer, two consequences necessarily follow. The first is that where
something or other is paid by way of a bonus upon such a contract, even though only a nominal amount, the
obligation is satisfied. The other is that, if nothing at all is paid, the employee can recover in a legal action only
nominal damages. Such a contract contains nothing which could serve as the basis of a title to special
damages and affords no measure by which the amount of such damages could be ascertained.
FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON

It therefore becomes a matter of little or no practical importance whether the sum of P4,500, which was paid to
the plaintiff after he quit work for the defendant, was paid as a bonus or not; for even if it were not so paid, the
plaintiff could in this action recover no more than mere nominal damages.

The judgment is affirmed, with costs. So ordered.

G.R. No. 107569 November 8, 1994

PHILIPPINE NATIONAL BANK, petitioner,

vs.
COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents.

PUNO, J.:

(private respondents) as owners of a NACIDA-registered enterprise, obtained a loan under the Cottage
Industry Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in the amount of Fifty
Thousand (P50,000.00) Pesos, as evidenced by a Credit Agreement. Under the Promissory Note covering the
loan, the loan was to be amortized over a period of three (3) years to end on March 29, 1985, at twelve (12%)
percent interest annually.

To secure the loan, (private respondents) executed a Real Estate Mortgage over a 1.5542-hectare parcel of
unregistered agricultural land located at Cambang-ug, Toledo City, which was appraised by the PNB at
P1,062.52 and given a loan value of P531.26 by the Bank. In addition, (private respondents) executed a
Chattel Mortgage over a thermo plastic-forming machine, which had an appraisal value of P8,800 and a loan
value of P4,400.00.

On February 17, 1983, (private respondents) were granted an additional NACIDA loan of Fifty Thousand
(P50,000.00) Pesos by the PNB, for which (private respondents) executed another Promissory Note, which
was to mature on April 1, 1985. Other than the date of maturity, the second promissory note contained the
same terms and stipulations as the previous note. The parties likewise executed a new Credit Agreement,
changing the amount of the loan from P50,000.00 to P100,000.00, but otherwise preserving the stipulations
contained in the original agreement.

As additional security for the loan, (private respondents) constituted another real estate mortgage over 2
parcels of registered land, with a combined area of 311 square meters, located at Guadalupe, Cebu City. The
land, upon which several buildings are standing, was appraised by the PNB to have a value of P40,000.00 and
a loan value of P28,000.00.

the Court of Appeals reversed the dismissal with respect to petitioner bank, and disallowed the increases in
interest rates.

In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in
their credit agreement which provides, as follows:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in the future and provided, that, the interest rate
on this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in maximum interest rate.
FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON

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. 6

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right
to 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

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them.

Private respondents are not also estopped from assailing the unilateral increases in interest rate made by
petitioner bank. No one receiving a proposal to change a contract to which he is a party, is obliged to answer
the proposal, and his silence per se cannot be construed as an acceptance. 7 In the case at bench, the
circumstances do not show that private respondents implicitly agreed to the proposed increases in interest rate
which by any standard were too sudden and too stiff.

IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in
CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.

SO ORDERED.
FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON

G.R. No. 187678 April 10, 2013

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners, vs.CHINA BANKING

CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

The factual antecedents:

Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation
(respondent) as evidenced by two Promissory Notes for the sums of 6,216,000 and P4, 139,000,
respectively. The loan was secured by a Real Estate Mortgage over petitioners property.

The amount due on the two promissory notes totaled P19,201,776.63 representing the principal, interests,
penalties and attorneys fees. On the same day, the mortgaged property was sold at public auction, with
respondent as highest bidder for the amount of P10,300,000.

On May 8, 2001, petitioners received8 a demand letter9 dated from respondent for the payment
of P8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to the
mortgage debt. As its demand remained unheeded, respondent filed a collection suit in the trial court.

In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special and
affirmative defense, that the complaint states no cause of action considering that the principal of the loan
was already paid when the mortgaged property was extrajudicially foreclosed and sold for P10,300,000.
Petitioners contended that should they be held liable for any deficiency, it should be only for P55,000
representing the difference between the total outstanding obligation of P10,355,000 and the bid price
of P10,300,000.

Petitioners thereafter received a demand letter 14 dated May 2, 2001 from respondents counsel for the
deficiency amount of P8,901,776.63.

Ms. Yu reiterated that the interest rate changes every month based on the prevailing market rate and she
notified petitioners of the prevailing rate by calling them monthly before their account becomes past due.
that petitioners signed a promissory note indicating that they agreed to pay interest at the prevailing rate.17

Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank
promissory note and was informed that the interest rate on the loan will be based on prevailing market
rates.

In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:

When the case was elevated to the CA, the latter affirmed the trial courts decision.

Petitioners are now before this Court raising the sole issue of whether the interest rates imposed upon
them by respondent are valid. They insist that the interest rates were unilaterally imposed by the bank and
thus violate the principle of mutuality of contracts. They argue that the escalation clause in the promissory
notes does not give respondent the unbridled authority to increase the interest rate unilaterally. Any
change must be mutually agreed upon.
FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON

The appeal is partly meritorious.

The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall be due unless
it has been expressly stipulated in writing."

The binding effect of any agreement between parties to a contract is premised on two settled principles:
(1) that any obligation arising from contract has the force of law between the parties; and (2) that there
must be mutuality between the parties based on their essential equality. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any
stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.21

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the
contracting parties. This Court has long recognized that there is nothing inherently wrong with escalation
clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the
value of money in long term contracts.22 Hence, such stipulations are not void per se. 23

Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an important
modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of
contracts.24

Escalation clauses are not basically wrong or legally objectionable as long as they are not solely
potestative but based on reasonable and valid grounds. Obviously, the fluctuation in the market rates is
beyond the control of private respondent.42 (Emphasis supplied.)

Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate of
interest on the basis of a law or regulation issued by the Central Bank of the Philippines, should be read
together with the statement after the first paragraph where no rate of interest was fixed as it would be
based on prevailing market rates. While the latter is not strictly an escalation clause, its clear import was
that interest rates would vary as determined by prevailing market rates. Evidently, the parties intended the
interest on petitioners loan, including any upward or downward adjustment, to be determined by the
prevailing market rates and not dictated by respondents policy.

There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the
promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply business,
admitted having understood his obligations before signing them. At no time did petitioners protest the new
rates imposed on their loan even when their property was foreclosed by respondent.

This notwithstanding, we hold that the escalation clause is still void because it grants respondent the
power to impose an increased rate of interest without a written notice to petitioners and their written
consent. Respondents monthly telephone calls to petitioners advising them of the prevailing interest rates
would not suffice. An appropriate form must also be signed by the petitioners to indicate their conformity to
the new rates. Compliance with these requisites is essential to preserve the mutuality of contracts.
Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an
agreement between the parties. Unless such important change in the contract terms is mutually agreed
upon, it has no binding effect.46 In the absence of consent on the part of the petitioners to the modifications
FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON

in the interest rates, the adjusted rates cannot bind them. Hence, we consider as invalid the interest rates
in excess of 15%, the rate charged for the first year.

Note that the original amount of principal loan almost doubled in only 16 months. The Court also finds the
penalty charges imposed excessive and arbitrary, hence the same is hereby reduced to 1% per month or
12% per annum.

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. Resolution of the Court of
Appeals MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby ORDERED to pay
jointly and severally respondent China Banking Corporation P4, 7 61 ,865. 79 representing the amount of
deficiency inclusive of interest, penalty charge and attorney's fees. Said amount shall bear interest at 12%
per annum, reckoned from the time of the filing of the complaint until its full satisfaction.

No pronouncement as to costs.
FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON

ART. 1308 THE CONRACTS MUST BIND BOTH CONTRACTING PARTIES; VALIDITY OR COMPLIANCE
CANNOT BE LEFT TO THE WILL OF ONE OF THEM.

PRINCIPLE: MUTUALITY OF CONTRACT - Purpose is to nullify a contract containing a condition that

makes its fulfillment or pre-termination dependent exclusively upon the uncontrolled will of one
of the contracting parties.

PROOF OF ALLEGED DEFECT IN CONTRACT If after a perfect and binding contract has been
executed between the parties it occurs to one of them to allege defect as a reason for annulling
it, defect must be conclusively proved sicne the validity and fulfillment of contracts cannot
be left to the will of one of the contracting parties

RELEASE OF OBLIGOR FROM COMPLIANCE Mere fact that a party to a contract has made a bad
bargain, may not be a ground for setting aside the agreement. The debtor, however, may be
release when the prestation becomes legally or physically impossible without the fault of the
obligor

VOID: Contract contains condition that makes its fulfillment or extinguishment depend
exclusively upon the uncontrolled will of one of them.

RULE: No party can renounce or violate the law of the contract unilaterally or without the consent
of the other.