OBLICON Digests
Chapter 3-4
CHAPTER 3
Gaite vs. Fonacier
by Bernardo, Ivy
Doctrine:
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 duncertain event; so that if the suspensive
condition does not take place, the parties would stand as if the conditional
obligation had never existed.
Recit-ready:
Fonacier was the owner of mineral claims in Camarines Norte, called
Dawahan Group. He appointed Gaite as his attorney-in-fact to enter into a
contract with any individual or juridical person for the exploration and
development of his mining claims. Gaite conveyed the development and
exploitation to Larap Iron Mines, a proprietorship he owned. Soon, Fonacier
revoked the authority he gave Gaite, which Gaite accepted but on the
condition that Fonacier pay him a sum of P75,000. The 10,000 would be
paid upon the signing of the agreement, and the 65,000 to be paid upon the
first shipment or local sale of the iron ores. To ensure the payment, Fonacier
and Gaite entered into two surety bonds, the second one, called Exhibit B,
was with a surety company called Far Eastern Surety and Insurance Co,
who will shoulder the liability (in case of Fonaciers inability to fulfill the
obligation) until December 5, 1955. When December 5, 1955 came, the
surety bond expired, yet no shipment or sale of iron ore had been made, nor
has Gaite been paid the 65,000 Fonacier promised to pay. Because of this,
Gaite filed a complaint before the Court of First Instance in Manila. During
the trial, Fonacier and the other defendants argued that the payment was a
condition precedent, meaning the obligation can only be demanded upon the
shipment or sale of the first sale of the iron ores. But since neither of that
happened, Gaite cant demand for payment yet. However the lower court
ruled in favor of Gaite, arguing that the condition was one with a term and
that it should have been paid before December 5, 1955. The issue to be
resolved is whether the obligation became due and demandable on
December 5. The Court ruled that YES THE OBLIGATION IS
DEMANDABLE because it was a condition with a term, and not a
suspensive condition. A conditional obligation is predicated by the
happening of a future and uncertain event. If the condition doesnt happen,
the obligation is deemed to be nonexistent. However, in this case, Gaite was
clear and certain in his resolve to collect the payment Fonacier owed him,
the question was just when the payment is to be made, which Gaite resolved
through the execution of the surety bond. Thus, the condition in their
agreement cannot have been a suspensive condition.
Facts:
- Isabelo Fonacier was the owner of iron lode mineral claims also known as
the Dawahan Group in the province of Camarines Norte.
- Fonacier appointed Fernando Gaite as his true and lawful attorney-in-fact
to enter into a contract with any individual or juridical person for the
exploration and development of the mining claims.
- Using his powers, Gaite conveyed the development and exploitations of
those mining claims to his proprietorship, Larap Iron Mines.
- Soon, Fonacier decided to revoke the authority he gave to Gaite. Gaite
agreed to give up his rights and interests in the claims, and even allowed
Fonacier to use the business name Larap Iron Mines, its goodwill and all
the records and documents relative to the mines.
- However Gaite required certain conditions, specifically the payment of
P75,000:
o 10,000 to be paid upon the signing of their agreement
o 65,000 to be paid after the first shipment or sale of iron
ores.
- To ensure the payment, Fonacier executed two surety bonds, Exhibit A and
B. The relevant bond here is the second surety bond (Exhibit B), which was
executed by Fonacier and the other defendants to the case, with Far Eastern
Surety and Insurance Co, a surety company whose liability for the P65,000
will expire on December 8, 1955.
o A surety company is one who promises to pay the obligee
(Gaite) the money that the principal (Fonacier) owes him
if the principal fails to meet that obligation.
- December 8, 1955 came, and the bond with Far Eastern Surety and
Insurance Company expired, but there has still been no sale of the iron ore,
nor has Gaite been paid his 65,000.
- Because of this, Gaite filed a complaint with the Court of First Instance in
Manila because Fonacier hasnt paid him yet.
- DEFENDANTS: The obligation to pay Gaite is a conditional obligation,
meaning it can only be demanded after the first shipment or sale of iron ore,
 OBLICON Digests
Chapter 3-4
as stipulated in the agreement. Because the condition hasnt been fulfilled,
the obligation isnt due and demandable.
- LOWER COURT: Ruled in favor of Gaite. It argued that the obligation to
pay Gaite was one with a term, or in other words, it should be aid upon the
sale of sufficient iron ore by defendants within one year or before December
8, 1955.
Issue:
WON the obligation of Fonacier and his sureties to pay Gaite the money
became due and demandable when the defendants failed to renew Exhibit B
which expired on December 8, 1955
Held: YES
- The condition that the shipment or sale of the iron ore isnt a condition
precedent (or suspensive) to the payment of the balance of P65,000, it was
only a suspensive period of 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.
o The words of the contract express no contingency in the buyers
obligation to pay. There is no uncertainty that the payment will
have to be made sooner or later, what is undetermined is merely
the exact date at which it will be made. The existence of the
obligation to pay is recognized, only its maturity or demandability
is deferred.
o Gaite is also obviously did not desire to risk losing his right over the
ore without getting paid for it, nor did Fonacier assume that Gaito
wanted to assume that risk. Thus, there is no uncertainty or
contingency that characterized the payment of the 65,000.
o To consider that the payment of the 65,000 is a condition precedent
would be tantamount to leaving the payment at the discretion of
Fonacier. If this was the case, Fonacier would be able to postpone
the payment indefinitely.
o Article 1378 of the Civil Code: if the contract is onerous, the doubt
shall be settled in favor of the greatest reciprocity of interests.
Since the sale is onerous, the rules should be in favor of the greater
reciprocity. Clearly the greater reciprocity would be if the
buyers obligation is deemed to be actually existing, with only its
maturity (due date) postponed or deferred than if the obligation
was viewed as nonexisting or not binding until the ore was sold.
- he sale of the ore to Fonacier was a sale on credit, and not an aleatory
contract where Gaite would assume the risk of ot being paid at all.
- The previous sale or shipment of 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.
Gonzales vs. Heirs of Cruz
by Reyes, Phoebe
Doctrine:
When the consent of a party to a contract is given subject to the fulfillment
of a suspensive condition, the contract is not perfected unless that condition
is first complied with. There can be no rescission of an obligation as yet
nonexistent, because the suspensive condition has not happened.
Recit-ready: Paula Cruz and Heirs of Cruz (owner of a parcel of land)
entered into a Contract of Lease/Purchase with petitioner. The contract
stipulated that after one year of signing, respondents shall purchase the land
at 1M pesos within 2 years period with interest. The 9th clause required the
lessors to obtain a separate and distinct T.C.T of the leased land within 4
years, after which a new contract would be executed.
Petitioner did not exercise his option to purchase the property immediately
after the expiration of the one-year lease. Thus, a letter was sent to
petitioner informing him of the lessor's decision to rescind the Contract of
Lease/Purchase due to a breach committed. He was told to vacate, but he
refused. The problem was brought to the Barangay, but he did not appear.
Paula Cruz died, and the land was under extrajudicial partition. Another
letter was sent demanding petitioner to vacate, but he did not.
Matter was brought to RTC. RTC interpreted the 9th clause to mean that the
respondents had obliged themselves to obtain a TCT in the name of
petitioner and that this obligation was a condition precedent to petitioner's
purchase of the property. Since respondents had not performed their
obligation, they could not compel petitioner to buy the parcel of land. The
CA took the opposite view, holding that the property should be purchased
first before respondents may be obliged to obtain a TCT in the name of
OBLICON Digests
Chapter 3-4

petitioner-lessee-buyer. allowing the case to be brought to Court was issued.

SC held that the clear intent of the ninth paragraph was for respondents to
obtain a separate and distinct TCT in their names. Only after the title is
assured may the obligation to buy the land and to pay the sums stated in the
Contract be enforced within the period stipulated. Because the ninth clause
required respondents to obtain a separate and distinct TCT in their names
and not in the name of petitioner, it logically follows that such undertaking
was a condition precedent to the latter's obligation to purchase and pay for
the land. Put differently, petitioner's obligation to purchase the land is a
conditional one and is governed by Article 1181 of the Civil Code.
Paula Cruz died. The heirs sent another demand letter for Gonzales to
vacate, but he did not heed.
Alleging breach of the provisions of the Contract of Lease/Purchase, the
plaintiffs filed a complaint for recovery of possession of the property.
RTC ruled that the heirs cannot rescind the Contract of Purchase in view of
the fact that there is a condition precedent which the plaintiffs have not
fulfilled (paragraph 9 of the contract). It is the defendant now who has the
option to either rescind or demand the performance of the contract.

Facts: CA reversed the trial court's ruling. RTC interpreted the condition that
Paula Cruz together with the heirs of Thomas and Paula Cruz, the sole before the appellee exercises his option to purchase the property by paying
proprietor and manager of Felgon Farms, of a half portion of a parcel of the purchase price, the appellants must first transfer the title to the property
land in the Province of Rizal covered by TCT 12111 entered into a Contract in the appellees name. CA found it absurd. In the normal course of things
of Lease/Purchase with petitioner. The contract stipulated that after one year anent the sale of real properties dictates that there must first be payment of
of signing, respondents shall purchase the land at 1M pesos within 2 years the agreed purchase price before transfer of title to the vendees name can be
period with interest. They shall also pay 2,500 per hectare as annual rent. made. That was the reason for the 4 year period to transfer the title (as it
would take some time).
9. The LESSORS hereby commit themselves and shall undertake to
obtain a separate and distinct T.C.T. over the herein leased portion to Issue:
the LESSEE within a reasonable period of time which shall not in any WON the transfer of title is a condition precedent to the obligation to
case exceed four (4) years, after which a new Contract shall be executed purchase and pay for the land
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 Held/Ratio:
concerned. Basic is the rule in the interpretation of contracts that if some stipulation
therein should admit of several meanings, it shall be understood as bearing
Gonzales paid the annual rent in accordance with the contract. However, he that import most adequate to render it effectual. Considering the antecedents
did not exercise his option to purchase the property immediately after the of the ownership of the disputed lot, it appears that petitioners interpretation
expiration of the one-year lease. He remained in possession of the property renders clause nine most effectual.
without paying the purchase price provided for in the Contract and without
paying any further rentals. Thus, the clear intent of the ninth paragraph was for respondents to obtain a
separate and distinct TCT in their names. This was necessary to enable them
A letter was sent by one of the heirs to Gonzales, informing him of the to show their ownership of the stipulated portion of the land and their
lessor's decision to rescind the Contract of Lease/Purchase due to a breach concomitant right to dispose of it. Absent any title in their names, they
committed by the defendant. It also served as a demand to vacate the could not have sold the disputed parcel of land.
premise within 10 days. Gonzales refused to vacate. It was brought before
the Barangay. He refused to appear before the Barangay, thus a certification Because the property remained registered in the names of their
OBLICON Digests
Chapter 3-4

predecessors-in-interest, private respondents could validly sell only their
undivided interest in the estate of Severo Cruz, the extent of which was
however not shown in the records. There being no partition of the estate
thus far, there was no guarantee as to how much and which portion would
be adjudicated to respondents.
Doctrine: A contract to sell is different from a conditional contract of sale.
The difference between the two is that in the former, ownership is retained
until the completion of payment. The latter on the other hand is that the
condition makes the obligation demandable and that ownership is
immediately transferred.

The appellate court's literal interpretation of the first portion of paragraph Recit-ready:
nine renders the latter portion thereof ineffectual. In other words, that
portion can only mean that the respondents should first obtain a TCT in Defendant-Appellant Romulo Coronel owned a property in Quezon City
their names, after which petitioner is given time to purchase and pay for the which he agreed sold to Ramona Alcaraz for 1,240,000 pesos on the
property. condition that after the Coronels have successfully transferred the TCT from
the name of their father to their name, they would execute a deed of
In sum, we hold that the ninth provision was intended to ensure that absolute sale and Alcaraz shall immediately pay the balance of 1,190,000
respondents would have a valid title over the specific portion they were pesos. This was stipulated in a document Receipt of Down Payment
selling to petitioner. Only after the title is assured may the obligation to buy where Concepcion Alcaraz, Ramonas mother, paid the down payment. The
the land and to pay the sums stated in the Contract be enforced within the property was transferred to Ramona Alcaraz on a different date.
period stipulated. Verily, the petitioner's obligation to purchase has not yet
ripened and cannot be enforced until and unless respondents can prove their On February 18, 1985, Coronel sold the same property to another buyer,
title to the property subject of the Contract. Catalina, for the amount of 1,580,000 pesos with 300,000 pesos as down
payment. Due to this transaction, Coronel rescinded his contract with
Ninth Clause Was a Condition Precedent Alcaraz and deposited to the bank the down payment he received.
Because the ninth clause required respondents to obtain a separate and
distinct TCT in their names and not in the name of petitioner, it logically Concepcion Alcaraz filed a civil case in the RTC demanding specific
follows that such undertaking was a condition precedent to the latter's performance of the contract and caused an annotation of lis pendens for the
obligation to purchase and pay for the land. Put differently, petitioner's same property. On a different date, Coronel executed a deed of absolute sale
obligation to purchase the land is a conditional one and is governed by in favor of Catalina which made Catalina cause an adverse claim on the said
Article 1181 of the Civil Code. property.

Respondents Cannot Rescind the Contract The RTC ruled in favor of Alcaraz and ordered that 1) Coronel perform the
In the same vein, respondents cannot rescind the contract, because they obligation as stipulated, 2) that the TCT issued to Catalina be cancelled, and
have not caused the transfer of the TCT to their names, which is a condition 3) that Coronel and Catalina vacate the said property. Coronel filed an MR
precedent to petitioner's obligation. This Court has held that there can be no with the RTC but was dismissed. The CA affirmed the ruling of the RTC.
rescission (or more properly, resolution) of an obligation as yet non-
existent, because the suspensive condition has not happened. The issue is WON sale between Alcaraz and Coronel constituted a
conditional contract of sale with a suspensive condition rather than a
contract to sell.
Coronel vs. CA The Court answered yes. The Court held that the contract between Alcaraz
by Lu, Kyle and Coronel was a conditional contract of sale with a suspensive condition
because 1) Coronel did not reserve the ownership of the title until full
OBLICON Digests
Chapter 3-4
payment which can only lead to an interpretation that 2) the intent of the
contract is to immediately transfer the ownership once it was sold.
The Court said that the suspensive condition in this case happened on
February 6, 1985 when the TCT was transferred from the name of Coronels
father to his heirs. When the said condition was fulfilled, the obligations of
the party in the contract of sale became mutually demandable. As of that
point in time, reciprocal obligations of both buyer and seller arose.
Facts:
Defendant-Appellant Romulo Coronel owned a house and lot in
Quezon City with TCT No. 119627. On January 19, 1985, Concepcion
executed a document entitled Receipt of Down Payment in favor of
Ramona Patricia Alcaraz. The document indicated:
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City,
the sum of Fifty Thousand Pesos purchase price of our inherited house and
lot, covered by TCT No. 119627 of the Registry of Deeds of Quezon City,
in the total amount of P1,240,000.00. We bind ourselves to effect the
transfer in our names from our deceased father, Constancio P. Coronel, the
transfer certificate of title immediately upon receipt of the down payment
above-stated. On our presentation of the TCT already in or name, We will
immediately execute the deed of absolute sale of said property and Miss
Ramona Patricia Alcaraz shall immediately pay the balance of the
P1,190,000.00.
Concepcion Alcaraz (Ramonas mother) paid Coronel the down payment of
50,000 and the property was transferred to Alcarazs name on a different
date.
On February 18, 1985, Concepcion sold the same property to Catalina for
the amount of 1,580,000 after the has paid 300,000 pesos. This transaction
resulted with Concepcion rescinding his obligation with Alcaraz and
returning the down payment paid by Alcaraz in trust with the bank.
Concepcion Alcaraz instituted a case in the RTC demanding specific
performance of Coronels obligation with Ramona and caused an annotation
of lis pendens at the back of the TCT 327403. Afterwards, Coronel executed
the deed of absolute sale in favor of Catalina. Catalina caused an annotation
of a notice of adverse claim for the same property in the Registry of Deeds
of Quezon City.
The RTC ruled in favor of Concepcion. The decision ordered the specific
performance of Coronels specific performance and at the same time
cancelling the TCT issued to intervenor-appellant Catalina. An MR was
filed to the RTC by Coronel but was dismissed as well. The CA on the other
hand ruled in favor of the Concepcion by affirming the decision of the RTC.
Hence this case.
Issue:
Whether the sale between Alcaraz and Coronel constituted a conditional
contract of sale with a suspensive condition rather than a contract to sell.
Held/Ratio:
Yes. The Court held that the contract between Alcaraz and Coronel
constituted a conditional contract of sale with a suspensive condition.
Because the petitioners declared in the Receipt of Down Payment their
stipulation to sell the property without the reservation of title until full
payment of the entire purchase price, the natural and ordinary idea
conveyed is that they sold their property with the intention to transfer the
title immediately to the buyer (Alcaraz). Thus such, agreement cannot be
understood as a contract to sell because there was no express reservation of
ownership of the property.
By stipulating that the Coronels would sell the property once theyve
successfully transferred the TCT to their name, the Court held that the plain
reading of the contract indicates that it was a conditional contract of sale
with the suspensive condition of the Coronels successfully transferring the
TCT to their name which was fulfilled on February 6, 1985.
When the said condition was fulfilled, the obligations of the party in the
contract of sale became mutually demandable. As of that point in time,
reciprocal obligations of both buyer and seller arose.
Reyes vs. Tuparan
OBLICON Digests
Chapter 3-4
by Perez, Paolo
Doctrine: In a Contract of Conditional Sale, a sellers obligation to sell the
subject properties becomes demandable only upon the happening of the
positive suspensive condition, which is the buyers full payment of the
purchase price. Without buyers full payment, there can be no breach of
contract to speak of because seller has no obligation yet to turn over the
title.
Facts:
Petitioner Reyes owned a 1,274 sq. m. residential and commercial lot in
Valenzuela City. On that property, she had erected a 3-storey building as
well as a residential apartment building. In 1989, Respondent Tuparan
leased from petitioner a space on the ground floor of Reyes building for her
pawnshop business for a monthly rental of P4,000. A close friendship arose
between the two which led to Tuparan investing thousands of pesos in
Reyes financing/lending business from February-May 1990 with an interest
rate of 6%/month.
On June 1998, Reyes mortgaged the subject real properties to the Farmers
Saving Bank and Loan Bank, Inc. (FSL Bank) to secure a loan of P2M
payable in installments. As a gesture of friendship, Tuparan verbally offered
to conditionally buy Reyes properties for P4.2M on installment basis
without interest and to assume the bank loan.
After Reyes verbal acceptance of all the conditions, both parties worked
together to obtain FSL Banks approval for respondent to assume her
outstanding bank account, which (the approval of FSL) they later obtained.
On November 1990, the parties and FSL Bank executed the corresponding
Deed of Conditional Sale of Real Properties with Assumption of Mortgage.
Due to their closeness, both parties chose not to reduce into writing the
other terms of their agreement.
Under the deed of conditional sale, respondent was bound to pay the
petitioner a lump sum of P1.2M as part of the purchase price in 3 fixed
installments. Respondent, however, defaulted in the payment of her
obligations on their due dates. Instead of paying the amounts due in lump
sum on their respective maturity dates, respondent paid petitioner in small
amounts from time to time.
Reyes also averred that despite her success in finding a prospective buyer
for the real properties within the 3-month period agreed upon, Tuparan went
back on her promise to allow the cancellation of their conditional sale (one
of the conditions in the conditional sale was that if Reyes was able to find a
3rd party buyer within 3 months, the conditional sale between her and
Tuparan would be cancelled).
Since December 1990, Tuparan had taken possession of the subject
properties and had been continuously collecting and receiving monthly
rental income from the tenants of the buildings without sharing it with the
petitioner. Then, in 1992, Tuparan offered P751,000 to Reyes as full
payment of the purchase price of the subject real properties and demanded
the simultaneous execution of the corresponding deed of absolute sale.
Respondent countered, among others, that the tripartite agreement
erroneously designated by the petitioner as a Deed of Conditional Sale of
Real Property with Assumption of Mortgage was actually a pure and
absolute contract of sale with a term period. It could not be considered a
conditional sale because the acquisition of contractual rights and the
performance of the obligation therein did not depend upon a future and
uncertain event.
Reyes brought the matter to the RTC seeking a rescission of their contract
based on Tuparans failure to pay the purchase price which, the former
argues, is a breach of contract which warrants the remedy of rescission she
seeks.
The RTC, in 2006, handed down its decision finding that respondent failed
to pay in full the P4.2M total purchase price of the subject real properties
leaving a balance of P805,000. The checks and receipts presented by
Tuparan referred not to the payment of the property to Reyes but to the
mortgage obligation with FSL Bank. The RTC also considered the deed
OBLICON Digests
Chapter 3-4
executed by the two parties and FSL to be a contract to sell, not a contract
of sale. Finally, the RTC held that a rescission was not available to Reyes
because Tuparans non-payment in full of the purchase price may not be
considered a substantial and fundamental breach of the contract.
The CA rendered its decision affirming with modification the RTC
Decision.The CA agreed with the RTC that the contract entered into by the
parties is a contract to sell but ruled that the remedy of rescission could not
apply because the respondent's failure to pay the petitioner the balance of
the purchase was not a breach of contract, but merely an event that
prevented the seller (Reyes) from conveying title to the purchaser
(Tuparan).
Issue: W/N the CA was correct in ruling that there was no legal basis
for the rescission of the Deed of Conditional Sale with Assumption of
Mortgage.
Held/Ratio: YES. CA committed no reversible error.
Based on the provisions of the contract of the parties, the title and
ownership of the subject properties remains with the petitioner until the
respondent fully pays the balance of the purchase price and the assumed
mortgage obligation.
Therefore, the petitioner's obligation to sell the subject properties becomes
demandable only upon the happening of the positive suspensive condition,
which is the respondent's full payment of the purchase price. Without
respondent's full payment, there can be no breach of contract to speak of
because petitioner has no obligation yet to turn over the title. Respondent's
failure to pay in full the purchase price is not the breach of contract
contemplated under Article 1191 of the New Civil Code but rather just an
event that prevents the petitioner from being bound to convey title to the
respondent.
Court fully agrees with the CA when it resolved: "Considering, however,
that the Deed of Conditional Sale was not cancelled by Vendor Reyes
(petitioner) and that out of the total purchase price of the subject property in
the amount of ?4,200,000.00, the remaining unpaid balance of Tuparan
(respondent) is only ?805,000.00, a substantial amount of the purchase price
has already been paid.It is only right and just to allow Tuparan to pay the
said unpaid balance of the purchase price to Reyes."
Granting that a rescission can be permitted under Article 1191, the Court
still cannot allow it for the reason that, considering the circumstances, there
was only a slight or casual breach in the fulfillment of the obligation.
Out of the P1,200,000.00 remaining balance, respondent paid on several
dates the first and second installments of P200,000.00 each. She, however,
failed to pay the third and last installment of P800,000.00 due on December
31, 1991. Nevertheless, on August 31, 1992, respondent, through counsel,
offered to pay the amount of P751,000.00, which was rejected by petitioner
for the reason that the actual balance was P805,000.00 excluding the
interest charges.
Considering that out of the total purchase price of P4,200,000.00,
respondent has already paid the substantial amount of P3,400,000.00, more
or less, leaving an unpaid balance of only P805,000.00, it is right and just to
allow her to settle, within a reasonable period of time, the balance of the
unpaid purchase price. The Court agrees with the courts below that the
respondent showed her sincerity and willingness to comply with her
obligation when she offered to pay the petitioner the amount of
P751,000.00.
Central Philippine University vs. CA
by Fabia, Johan
Doctrine: In an onerous donation, the condition is a resolutory one
where non-fulfillment makes the donation revocable
Recit-ready: This case is about the donation of land to CPU for the
purpose of building a medical school. After 50 years, the heirs of the
donor filed a case for annulment of donation since CPU hasnt built a
medical school given that 50 years has already passed. CPU alleged that
the conditions are not resolutory ones. The court held that these
OBLICON Digests
Chapter 3-4
conditions are resolutory ones and that non fulfillment of the condition
will make the donation revocable. After 50 years, CPU has slept on its
obligation thus donation is revoked.
Facts: In 1939, Don Ramon Lopez Sr.( a director of the school) donated
a parcel of land to CPU for the use of a medical college. On May 31
1989, the heirs filed an annulment case for the said property since CPU
failed its obligation to build a medical school. CPU alleged that it has
obliged with the condition because it hasnt used the property for any
other purpose.
RTC held that they failed to comply with the obligation making the
donation null and void.
CA affirmed it and held that the conditions are resolutory ones
Issue: WON the donation is onerous and the conditions are onerous.
Held/Ratio: Donations with conditions like the one at bar are
considered onerous conditions which are resolutory. It cannot be a
suspensive condition because it would be stepping on the rights of the
donor before it could build the school thus making the condition void.
CPU slept on its obligations for 50 years thus the donation is revocable.
Quijada vs. CA
G.R. No. 126444. December 4, 1998.
by Hernandez, Justine
Doctrine:
When a person donates land to another on a condition, the condition
imposed is not a condition precedent or a suspensive condition, but a
resolutory one.
Recit-ready:
Petitioners are heirs of the late Trinidad Quijada. Trinidad inherited a 2
hectare land. April 5,1956, Trininad along with her siblings, executed a deed
of donation in favor of the Municipality of Talacogon, with condition that
the land shall be used exclusively as part of the campus of the proposed
Provincial High School in Talacogon.
Despite the donation, Trininad still has possession of the land and sold 1
hectare to Regalado. Subsequently, Trinidad sold the remaining 1 hectare to
Regalado but this time verbally, no deed of sale but it evidenced by receipts
of payment.
Regalado sold portions of the land to respondents. (Fernando Bautista,
Rodolfo Goloran, Efren Guden and Ernesto Goloran.)
The Municipality was not able to finish the school thus returning the
ownership of the property to the donors.
In the meantime, respondent Mondejar conveyed portions of the land to the
other respondents
On July 5,1988. Petitioners (heirs) filed against the respondents stating that
their late mother did sell the property. If it was true that she (Trinidad) sold
the property, it would be null and void since it was already donated to the
Municipality thus the ownership is with the Municipality.
RTC ruled in favor of the heirs, ruling that Trinidad had no capacity to sell
because the ownership of the land was already with the Municipality.
CA reversed, ruling that the sale made by Trinidad Quijada to respondent
Mondejar was valid as the former retained an inchoate interest on the lots
by virtue of the automatic reversion clause in the deed of donation.
Whether 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?
Yes. When the property was donated to the Municipality, the ownership was
transferred to them but wait theres more, there was a condition. A
resolutory condition, though it was not stated in the condition on how long
the condition was, it was evident that the Municipality had intended to build
the school. Again, tho not stated how long, the Municipality still gave back
the property to the donors thus the ownership was transferred. Making the
sale valid since ownership was returned.
Moreover, the petitioners contention that since the lots were owned by the
municipality at the time of the sale, they were outside the commerce of men
OBLICON Digests
Chapter 3-4
under Article 1409(4)(Those whose object is outside the commerce of men)
of the NCC; thus, the contract involving the same is inexistent and void
from the beginning. However, nowhere in Article 1409(4) is it provided that
the properties of a municipality, whether it be those for public use or its
patrimonial property are outside the commerce of men. The objects referred
to as outsides the commerce of man are those which cannot be appropriated,
such as the open seas and the heavenly bodies.
Facts:
Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against
private respondents for quieting of title, recovery of possession and
ownership of parcels of land with claim for attorneys fees and damages.
Plaintiffs appellees (petitioners) are the children of the late Trinidad
Corvera Vda. de Quijada.
Trinidad Quijada together with her sisters Leonila Corvera Vda. de Sequea
and Paz Corvera Cabiltes and brother Epapiadito Corvera executed a
conditional deed of donation of the two-hectare parcel of land subject of the
case in favor of the Municipality of Talacogon, the condition being that the
parcel of land shall be used solely and exclusively as part of the campus of
the proposed provincial high school in Talacogon
Apparently, Trinidad remained in possession of the parcel of land despite
the donation. On July 29, 1962, Trinidad sold one (1) hectare of the subject
parcel of land to defendant appellant Regalado Mondejar. Subsequently,
Trinidad verbally sold the remaining one (1) hectare to defendant appellant
(respondent) Regalado Mondejar without the benefit of a written deed of
sale and evidenced solely by receipts of payment.
In 1980, the heirs of Trinidad, who at that time was already dead, filed a
complaint for forcible entry against defendant appellant (respondent)
Regalado Mondejar, which complaint was, however, dismissed for failure to
prosecute.
In 1987, the proposed provincial high school having failed to materialize,
the Sangguniang Bayan of the municipality of Talacogon enacted a
resolution reverting the two (2) hectares of land donated back to the donors
In the meantime, defendant appellant (respondent) Regalado Mondejar sold
portions of the land to defendants appellants (respondents) Fernando
Bautista, Rodolfo Goloran, Efren Guden and Ernesto Goloran.
On July 5, 1988, plaintiffs appellees (petitioners) filed this action against
defendants appellants (respondents). In the complaint, plaintiffs appellees
(petitioners) alleged that their deceased mother never sold, conveyed,
transferred or disposed of the property in question to any person or entity
much less to Regalado Mondejar save the donation made to the
Municipality of Talacogon in 1956; that at the time of the alleged sale to
Regalado Mondejar by Trini dad Quijada, the land still belongs to the
Municipality of Talacogon, hence, the supposed sale is null and void.
The court a quo rendered judgment in favor of plaintiffs appellees
(petitioners): firstly because Trinidad Quijada had no legal title or right to
sell the land to defendant Mondejar in 1962, 1966, 1967 and 1968, the same
not being hers to dispose of because ownership belongs to the Municipality
of Talacogon and, secondly, that the deed of sale executed by Trinidad
Quijada in favor of Mondejar did not carry with it the conformity and
acquiescence of her children, more so that she was already 63 years old at
the time, and a widow
On appeal, the Court of Appeals reversed and set aside the judgment a quo
ruling that the sale made by Trinidad Quijada to respondent Mondejar was
valid as the former retained an inchoate interest on the lots by virtue of the
automatic reversion clause in the deed of donation.
Thereafter, petitioners filed a motion for reconsideration. When the CA
denied their motion, petitioners instituted a petition for review to this Court
arguing principally that the sale of the subject property made by Trinidad
Quijada to respondent Mondejar is void, considering that at that time,
ownership was already transferred to the Municipality of Talacogon. On the
contrary, private respondents contend that the sale was valid, that they are
buyers in good faith, and that petitioners case is barred by laches.
Issue:
OBLICON Digests
Chapter 3-4
Whether 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/Ratio:
Yes. (SC affirms) We affirm the decision of the respondent court.
The donation made on April 5, 1956 by Trinidad Quijada and her brother
and sisters was subject to the condition that the 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 Municipalitys acceptance of the donation was made known to the
donor, the former became the new owner of the donated propertydonation
being a mode of acquiring and transmitting ownershipnotwithstanding
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.
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.
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 successorsininterest 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 herein when the doneeMunicipality
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 nonfulfillment of the resolutory condition was brought to the
donors knowledge that ownership of the donated property reverted to the
donor as provided in the automatic reversion clause of the deed of donation.
Sale, being a consensual contract, is perfected by mere consent, which is
manifested the moment there is a meeting of the minds as to the offer and
acceptance thereof on three (3) elements: subject matter, price and terms of
payment of the price. Ownership by the seller on the thing sold at the time
of the perfection of the contract of sale is not an element for its perfection.
What the law requires is that the seller has the right to transfer ownership at
the time the thing sold is delivered. Perfection per se does not transfer
ownership which occurs upon the actual or constructive delivery of the
thing sold. A perfected contract of sale cannot be challenged on the ground
of nonownership on the part of the seller at the time of its perfection; hence,
the sale is still valid.
The consummation, however, of the perfected contract is another matter. It
occurs upon the constructive or actual delivery of the subject matter to the
buyer when the seller or her successorsininterest subsequently acquires
ownership thereof.
Such circumstance happened in this case when petitionerswho are
Trinidad Quijadas heirs and successorsininterestbecame the owners of
the subject property upon the reversion of the ownership of the land to
them. Consequently, ownership is transferred to respondent Mondejar and
those who claim their right from him. Article 1434 of the New Civil Code
supports the ruling that the sellers title passes by operation of law to the
buyer. This rule applies not only when the subject matter of the contract of
sale is goods, but also to other kinds of property, including real property
There is also no merit in petitioners contention that since the lots were
owned by the municipality at the time of the sale, they were outside the
commerce of men under Article 1409(4) of the NCC; thus, the contract
involving the same is inexistent and void from the beginning. However,
nowhere in Article 1409(4) is it provided that the properties of a
municipality, whether it be those for public use or its patrimonial property
are outside the commerce of men.
Besides, the lots in this case were conditionally owned by the municipality.
To rule that the donated properties are outside the commerce of men would
 OBLICON Digests
Chapter 3-4
render nugatory the unchallenged reasonableness and justness of the
condition which the donor has the right to impose as owner thereof.
Moreover, the objects referred to as outsides the commerce of man are those
which cannot be appropriated, such as the open seas and the heavenly
bodies.
Lao Lim vs. CA
by Sarte, Ross
Doctrine:
A stipulation in a contract of lease allowing the lessee to continue
occupying the premises as long as he pays rent is void because it would
leave to the lessee the sole power to determine whether the lease should
continue or not.
Recit-ready:
Pursuant to a compromise agreement, petitioner (lessee) & respondent
(lessor) entered into a contract of lease for a term of 3 years. After 2 terms
of lease, petitioner expressed that he would no longer renew the contract for
another term. However, respondent refused to leave. This prompted the
petitioner to file an ejectment suit. MTC, RTC, CA all ruled in favor of the
respondent stating that the lease contract was a continuous one the period of
which depended upon the lessees need for the premises and his ability to
pay. In arriving at the decision, the lower courts relied on a condition in the
lease contract which state that That the term of the lease shall be renewed
every three years XXX for as long as defendant needed the premises and
can meet and pay the said increases
SC ruled that the condition was void since it was a potestative condition or
one which depended solely on the will of the lessee. It essentially left the
effectivity of the leasehold rights on the sole will of the respondent.
Facts:
Private respondent entered into a contract of lease with petitioner for a
period of three (3) years, from 1976 to 1979. After respondent refused to
vacate premises following expiration of the term, petitioner filed ejectment
suit.
However, the case was terminated by a judicially approved compromise
agreement entered into by the parties wherein petitioner agreed to lease the
property to respondent for a term of 3 years, renewable for another 3.
After 2 terms of lease, petitioner informed respondent that he would not be
renewing the contract for another term but petitioner refused to leave.
Because of private respondents refusal to vacate the premises, petitioner
filed another ejectment suit with the MTC of Manila.
MTC DISMISSED petition stating that the lease contract has not expired,
being a continuous one the period whereof depended upon the lessees need
for the premises and his ability to pay the rent.
Court relied on the following condition stated in the contract:
That the term of the lease shall be renewed every three
years XXX for as long as defendant needed the
premises and can meet and pay the said increases
Both RTC and CA affirmed the decision of the MTC citing that the
aforementioned stipulation in the contract is valid, being a resolutory
condition and, therefore, beyond the ambit of Article 1308 of the Civil Code
Issue:
Whether or not the stipulation in the contract stating that "for as long as
defendant needed the premises and can meet and pay the said
increases" is valid
Held/Ratio:
No. Contrary to the ruling of respondent court, the disputed stipulation is a
purely potestative condition because it leaves the effectivity and enjoyment
of leasehold rights to the sole and exclusive will of the lessee.
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. 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.
OBLICON Digests
Chapter 3-4

months, to arrive in the city of Manila within a period of six months from date hereof
Respondent ordered to vacate premises. the contract may be cancelled by the party at its option. Such cancellation not to occur
before the expiration of 6 months
* Note: Court held that this was a suspensive condition since the renewal of Machinery did not arrive in Manila within 6 months,
the lease depended on such condition. Was alleged to be because of the will of MD Taylor, the machinery and equipment did
manila
MD Taylor vs. Uy Tieng o Saw that oil business might not have large returns anymore
by Dy, Ramon o Cancelled the contract through their own will
o Utilized the clause in the contract that if the machinery did not arrive
Doctrine: A stipulation in the contract which gives one of the parties the = cancellation of contract
right to cancel the contract due to a condition is valid. Even though the o INTENTIONALLY CANCELLED THE CONTRACT
reason for the condition is due to the independent will of the party Interpretation of creditor: Were assailing that the cancellation of
the contract was because of the own will of the debtor. They said that
Recit-ready: it should be interpreted as the condition was because of causes not
Taylor contracted with Uy Tieng to establish an oil factory relative to the will of the debtor
Established a contract which contained a clause, that if the machinery did not arrive in
manila, Uy Tieng had the right to cancel the contract
The machinery did not arrive. Due to the alleged intentional will of Taylor because he W/N The right to cancellation of the contract by only one of the
Issue:
foresaw that the oil business might not have large returns anymore parties was just or not JUSTIFIED
Uy Tieng cancelled the contract.
Valid? YES Held/Ratio:
They had the right to exercise the clause in the contract.
The reason for the condition can be for ANY REASON intentional will is valid Defendants had the right to cancel the
The cancellation of the contract will be dependent on the will of one of the partiesContract in the contingency that occurred.
due to a condition. But this circumstance does not make the stipulation illegal. The language used in the stipulation should be
Interpretation of the court should not be restrictive cancellation of the contract given
due effect in its ordinary sense, without
to ANY CAUSE technicality or circumvention; and in this sense
it is believed that the parties to the contract
To impose this interpretation upon those words would in our opinion must have understood it.
constitute an unjustifiable invasion of the power of the parties to
establish the terms which they deem advisable
Article 1256 of the Civil Code in our opinion creates no impediment to the
insertion in a contract for personal service of a resolutory condition
Facts:
permitting the cancellation of the contract by one of the parties.
December 12 1918 Taylor contracted his services to Tan Liuan & Co a superintendent of oil
factory the cancellation of a contract in accordance with conditions agreed upon
The contract lasted 2 years 600 salary for 1st year. 700 salary for 2nd beforehand is fulfilment
bills The cancellation of the contract will be dependent on the will of one of the
Time of agreement, no machinery yet for the factory Stipulation in the contract.
parties due to a condition. But this circumstance does not make the
Should the machinery to be installed in factory fail for any reason, within periodstipulation
of 6 illegal.
OBLICON Digests
Chapter 3-4
Interpretation of the court should not be restrictive cancellation of the
contract due to ANY CAUSE
To impose this interpretation upon those words would in our opinion
constitute an unjustifiable invasion of the power of the parties to establish
the terms which they deem advisable
Catungal vs. Rodriguez
by Geraldez, Nico
Doctrine: Paragraph 1(b) of the Conditional DOS, stating that respondent
shall pay the balance of the purchase price when he has successfully
negotiated and secured a road right of way, is not a condition on the
perfection of the contract nor on the validity of the entire contract or its
compliance as contemplated in Article 1308. It is a condition imposed
only on respondents obligation to pay the remainder of the purchase
price. In our view and applying Article 1182, such a condition is not purely
potestative as petitioners contend. It is not dependent on the sole will of the
debtor but also on the will of third persons who own the adjacent land and
from whom the road right of way shall be negotiated. This type of mixed
condition is expressly allowed under Article 1182 of the Civil Code.
Recit-ready: Catungal and Rodriguez entered into a deed of sale wherein
the Catungals will be selling Rodriguez land in Talamban, Cebu City with
an area of 65,246 sqm. The DOS stipulated that the sale of the property
would be dependent on the creation of a road right of way cutting across the
national road toward the property. Rodriguez attempted to secure the road
right ofway but to no avail as he was having a hard time purchasing the
properties around the road.
Catungals decided to cancel the contract because Rodriguez was taking too
long.
Rodriguez filed a case with the RTC to enjoin Catungals from cancelling
the contract. CA affirmed.
Catungal is now assessing the contract for being void ab initio because they
allege that the DOS is potestative and that only Rodriguez has the option to
rescind the contract.
Rodriguezs option to rescind the contract is not purely potestative but
rather also subject to the same mixed condition as his obligation to pay the
balance of the purchase price i.e., the negotiation of a road right of way. In
the event the condition is fulfilled (or the negotiation is successful),
Rodriguez must pay the balance of the purchase price. In the event the
condition is not fulfilled (or the negotiation fails), Rodriguez has the choice
either (a) to not proceed with the sale and demand return of his
downpayment or (b) considering that the condition was imposed for his
benefit, to waive the condition and still pay the purchase price despite the
lack of road access. This is the most just interpretation of the parties
contract that gives effect to all its provisions.
Facts:
Agapita T. Catungal (Agapita) owned a parcel of land with an area of
65,246 square meters, in her name situated in the Barrio of Talamban, Cebu
City.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered
into a Contract to sell with respondent Rodriguez. Subsequently, the
Contract to Sell was purportedly upgraded into a Conditional Deed of Sale
dated July 26, 1990 between the same parties
The provisions of the Conditional Deed of Sale pertinent to the present
dispute are quoted below:
1. Vendor to sell property for total 25,000,000
a. 500,000 downpayment upon signing of this deed of sale
b. The balance of 24,500,000 shall be payable in five separate checks, first
(4.5m), remaining four (5m) each payable:
After the vendee successfully negotiates, secures and provides a
road right of way in cutting across lot 10884 up to the national road. Either
by widening the existing road right of way or by securing a new road right
of way. If however said Road Right of Way could not be negotiated, the
VENDEE shall give notice to the VENDOR for them to reassess and solve
the problem by taking other options and should the situation ultimately
prove futile, he shall take steps to rescind or cancel the herein Conditional
Deed of Sale.
5. That the VENDEE has the option to rescind the sale. In the event the
VENDEE exercises his option to rescind the herein Conditional Deed of
OBLICON Digests
Chapter 3-4
Sale, the VENDEE shall notify the VENDOR by way of a written notice
relinquishing his rights over the property. The VENDEE shall then be
reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND
PESOS (P500,000.00) representing the downpayment, interest free, payable
but contingent upon the event that the VENDOR shall have been able to sell
the property to another party.[8]
Rodriguez purportedly secured the necessary surveys and plans.
Catungal requested an advance of P5,000,000.00. Rodriquez refused on the
ground that the amount was substantial and was not due under the terms of
their agreement. Shortly after, he learned that Catungals were offering
property to 3rd party.
November 15, 1990 Rodriguez received a letter from Catungal saying that
the contract has been cancelled.
Rodriquez made a complaint to enjoin Catungals.
Catungal claims that they had the right to rescind the contract in view of (1)
Rodriguezs failure to negotiate the road right of way despite the lapse of
several months since the signing of the contract, and (2) his refusal to pay
the additional amount of P5,000,000.00 asked by the Catungals. The
Catungals contended that Rodriguez did not have an exclusive right to
rescind the contract and that the contract, being reciprocal, meant both
parties had the right to rescind.[23] The spouses Catungal further claimed that
it was Rodriguez who was in breach of their agreement and guilty of bad
faith which justified their rescission of the contract
Rodriguez eventually found out that the Catungals were hindering him
from securing a road right of way by talking to the owners of the properties
in the road right of way as they were currently in talks with third party
interested buyers.
RTC ruled in favor of Rodriguez, finding that: (a) under the contract it was
complainant (Rodriguez) that had the option to rescind the sale; (b)
Rodriguezs obligation to pay the balance of the purchase price arises only
upon successful negotiation of the road right of way; (c) he proved his
diligent efforts to negotiate the road right of way; (d) the spouses Catungal
were guilty of misrepresentation which defeated Rodriguezs efforts to
acquire the road right of way; and (e) the Catungals rescission of the
contract had no basis and was in bad faith.
CA affirmed the decision of the RTC
In MOR counsel for Catungal argued for the first time that paragraphs 1(b)
and 5[49] of the Conditional Deed of Sale, whether taken separately or
jointly, violated the principle of mutuality of contracts under Article 1308 of
the Civil Code and thus, said contract was void ab initio.
Catungal spouses died.
Heirs of Catungal Spouses brought issue to the SC which essentially argued
that the Court of Appeals erred in not finding that paragraphs 1(b) and/or 5
of the Conditional Deed of Sale, violated the principle of mutuality of
contracts under Article 1308 of the Civil Code. Thus, said contract was
supposedly void ab initio and the Catungals rescission thereof was
superfluous.
Issue: WON Paragraphs 1(b) and 5 of the Conditional Deed of Sale is void
for violating the principle of mutuality of contracts under Article 1308 of
the Civil Code?
Held/Ratio: NO
It is elementary that in conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition.
In the past, this Court has distinguished between a condition imposed on the
perfection of a contract and a condition imposed merely on the performance
of an obligation. While failure to comply with the first condition results in
the failure of a contract, failure to comply with the second merely gives the
other party the option to either refuse to proceed with the sale or to waive
the condition.
Art. 1545. Where the obligation of either party to a contract of sale 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 x x
x.
Paragraph 1(b) of the Conditional DOS, stating that respondent shall pay
the balance of the purchase price when he has successfully negotiated and
secured a road right of way, is not a condition on the perfection of the
OBLICON Digests
Chapter 3-4
contract nor on the validity of the entire contract or its compliance as
contemplated in Article 1308. It is a condition imposed only on
respondents obligation to pay the remainder of the purchase price. In
our view and applying Article 1182, such a condition is not purely
potestative as petitioners contend. It is not dependent on the sole will of the
debtor but also on the will of third persons who own the adjacent land and
from whom the road right of way shall be negotiated
This type of mixed condition is expressly allowed under Article 1182 of
the Civil Code.
The Catungals interpretation of the foregoing stipulation was that
Rodriguezs obligation to negotiate and secure a road right of way was one
with a period and that period, i.e., enough time to negotiate, had already
lapsed by the time they demanded the payment of P5,000,000.00 from
respondent. Even assuming arguendo that the Catungals were correct that
the respondents obligation to negotiate a road right of way was one with an
uncertain period, their rescission of the Conditional Deed of Sale would still
be unwarranted.
Also, Catungals demand of the initial 5m was premature as Rodriguez was
allotted significant time to secure and negotitate for a road right of way
Petitioners posited that the above stipulation was the deadliest provision in
the Conditional Deed of Sale for violating the principle of mutuality of
contracts since it purportedly rendered the contract subject to the will of
respondent.
We do not agree.
In sum, Rodriguezs option to rescind the contract is not purely potestative
but rather also subject to the same mixed condition as his obligation to pay
the balance of the purchase price i.e., the negotiation of a road right of way.
In the event the condition is fulfilled (or the negotiation is successful),
Rodriguez must pay the balance of the purchase price. In the event the
condition is not fulfilled (or the negotiation fails), Rodriguez has the choice
either (a) to not proceed with the sale and demand return of his
downpayment or (b) considering that the condition was imposed for his
benefit, to waive the condition and still pay the purchase price despite the
lack of road access. This is the most just interpretation of the parties
contract that gives effect to all its provisions.
International Hotel Corp. Vs. Joaquin
by Bautista, Paolo
Doctrine:
In constructive fulfillment under Art. 1186, two requisites need to be
satisfied, (1) intent of the obligor to prevent the fulfillment of the obligation
and (2) actual prevention of the fulfillment
Recit-ready:
Joaquin offered to help IHC obtain a foreign loan which was to be
guaranteed by DBP. Joaquin and IHC tried to obtain a loan from Barnes
International. However, Barnes failed to deliver the needed loan. Joaquin
and IHC then negotiated a loan with Weston which DBP refused to be a
guarantor of. Due to Joaquins failure to secure the loan, IHC cancelled the
17,000 shares of stock previously issued to Joaquin as payment for their
services. Joaquin then filed a case sought to obtain compensation for his
services. He alleged that IHCs actions in negotiating with Barnes caused
him to fail in the fulfillment of his obligation. Lower courts ruled that
Joaquin constructively fulfilled his obligation when he was prevented by
IHC from doing so.
SC held that there was no constructive fulfillment under Art. 1186. This is
because there is an absence of the requisite of intent on the part of the
obligor to prevent the fulfillment of the obligation. There was also no
substantial performance under Art. 1234 because the failure to perform in
this case was not to be considered a slight breach. However, IHC is
nonetheless liable to pay because of constructive fulfillment of a mixed
conditional obligation. This is an obligation with a condition dependent
partly on the will of one of the parties and partly on the will of a 3 rd party or
by chance. The existing rule in a mixed conditional obligation is that when
the condition was not fulfilled but the obligor did all in his power to comply
with the obligation, the condition should be deemed satisfied. Considering
that the respondents were able to secure an agreement with Weston, and
subsequently tried to reverse the prior cancellation of the guaranty by DBP,
we rule that they thereby constructively fulfilled their obligation.
Facts:
OBLICON Digests
Chapter 3-4
Francisco B. Joaquin, Jr. submitted a proposal to the Board of Directors of
the International Hotel Corporation (IHC) for him to render technical
assistance in securing a foreign loan for the construction of a hotel, to be
guaranteed by the Development Bank of the Philippines (DBP)
On July 11, 1969, shortly after submitting the application to DBP, Joaquin
wrote to IHC to request the payment of his fees for his services. Joaquin
intimated his amenability to receive shares of stock instead of cash in view
of IHCs financial situation. IHC granted their request for payment.
Negotiations with Materials Handling Corporation and, later on, with its
principal, Barnes International (Barnes), ensued. While the negotiations
with Barnes were ongoing, Joaquin and Jose Valero, the Executive Director
of IHC, met with another financier, the Weston International Corporation
(Weston), to explore possible financing.11 When Barnes failed to deliver the
needed loan, IHC informed DBP that it would submit Weston for DBPs
consideration.12As a result, DBP cancelled its previous guaranty
On December 13, 1971, IHC entered into an agreement with Weston, and
communicated this development to DBP on June 26, 1972. However, DBP
denied the application for guaranty for failure to comply with the conditions
contained in its November 12, 1971 letter.14
Due to Joaquins failure to secure the needed loan, IHC, through its
President Bautista, canceled the 17,000 shares of stock previously issued to
Joaquin and Suarez as payment for their services.
Consequently, Joaquin and Suarez commenced this action for specific
performance, annulment, damages and injunction.
the complaint alleged that the cancellation of the shares had been illegal,
and had deprived them of their right to participate in the meetings and
elections held by IHC; that Barnes had been recommended by IHC
President Bautista, not by Joaquin; that they had failed to meet their
obligation because President Bautista and his son had intervened and
negotiated with Barnes instead of Weston; that DBP had canceled the
guaranty because Barnes had failed to release the loan; and that IHC had
agreed to compensate their services with 17,000 shares of the common
stock plus cash of P1,000,000.00.16
IHC, filed an answer claiming that the shares issued to Joaquin and Suarez
as compensation for their "past and future services" had been issued in
violation of Section 16 of the Corporation Code; that Joaquin and Suarez
had not provided a foreign financier acceptable to DBP; and that they had
already received P96,350.00 as payment for their services.
Under its decision rendered on August 26, 1993, the RTC held IHC liable
pursuant to the second paragraph of Article 1284 of the Civil Code. The
RTC found that Joaquin and Suarez had failed to meet their obligations
when IHC had chosen to negotiate with Barnes rather than with Weston, the
financier that Joaquin had recommended; RTC ordered that Joaquin be paid
200,000 and Suarez 50,000
CA concurred with the RTC, upholding IHCs liability under Article 1186 of
the Civil Code. It ruled that in the context of Article 1234 of the Civil Code,
Joaquin had substantially performed his obligations and had become
entitled to be paid for his services; and that the issuance of the shares of
stock was ultra vires for having been issued as consideration for future
services. Instead of shares of stock, defendant-appellant IHC is ordered to
pay plaintiff-appellant Joaquin a total of P700,000.00 and plaintiff-appellant
Suarez P200,000.00, both to be paid in cash.
Issue:
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN
AWARDING COMPENSATION AND EVEN MODIFYING THE
PAYMENT TO HEREIN RESPONDENTS DESPITE NON-
FULFILLMENT OF THEIR OBLIGATION TO HEREIN PETITIONER
Held/Ratio:
Article 1186 and Article 1234 of the Civil Code cannot be the source of
IHCs obligation to pay respondents IHC argues that it should not be held
liable because: (a) it was Joaquin who had recommended Barnes; and (b)
IHCs negotiation with Barnes had been neither intentional nor willfully
intended to prevent Joaquin from complying with his obligations.
IHCs argument is meritorious.
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a suspensive
condition,32 whose application calls for two requisites, namely: (a) the intent
of the obligor to prevent the fulfillment of the condition, and (b) the actual
prevention of the fulfillment. Mere intention of the debtor to prevent the
happening of the condition, or to place ineffective obstacles to its
compliance, without actually preventing the fulfillment, is insufficient.33
OBLICON Digests
Chapter 3-4
The error lies in the CAs failure to determine IHCs intent to pre-empt
Joaquin from meeting his obligations. The June 20, 1970 minutes of IHCs
special board meeting discloses that Joaquin impressed upon the members
of the Board that Materials Handling was offering more favorable terms for
IHC.
Evidently, IHC only relied on the opinion of its consultant in deciding to
transact with Materials Handling and, later on, with Barnes. In negotiating
with Barnes, IHC had no intention, willful or otherwise, to prevent Joaquin
and Suarez from meeting their undertaking. Such absence of any intention
negated the basis for the CAs reliance on Article 1186 of the Civil Code.
Nor do we agree with the CAs upholding of IHCs liability by virtue of
Joaquin and Suarezs substantial performance. In so ruling, the CA applied
Article 1234 of the Civil Code, which states:
Article 1234. If the obligation has been substantially performed in good
faith, the obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee.
It is well to note that Article 1234 applies only when an obligor admits
breaching the contract after honestly and faithfully performing all the
material elements thereof except for some technical aspects that cause no
serious harm to the obligee.36 IHC correctly submits that the provision refers
to an omission or deviation that is slight, or technical and unimportant, and
does not affect the real purpose of the contract.
Needless to say, finding the foreign financier that DBP would guarantee was
the essence of the parties contract, so that the failure to completely satisfy
such obligation could not be characterized as slight and unimportant as to
have resulted in Joaquin and Suarezs substantial performance that
consequentially benefitted IHC. Consequently, Article 1234 did not apply.
IHC is nonetheless liable to pay under the rule on constructive
fulfillment of a mixed conditional obligation
Notwithstanding the inapplicability of Article 1186 and Article 1234 of the
Civil Code, IHC was liable based on the nature of the obligation.
To secure a DBP-guaranteed foreign loan did not solely depend on the
diligence or the sole will of the respondents because it required the action
and discretion of third persons an able and willing foreign financial
institution to provide the needed funds, and the DBP Board of Governors to
guarantee the loan. Such third persons could not be legally compelled to act
in a manner favorable to IHC. There is no question that when the fulfillment
of a condition is dependent partly on the will of one of the contracting
parties,44 or of the obligor, and partly on chance, hazard or the will of a third
person, the obligation is mixed.45 The existing rule in a mixed conditional
obligation is that when the condition was not fulfilled but the obligor did all
in his power to comply with the obligation, the condition should be deemed
satisfied.46
Considering that the respondents were able to secure an agreement with
Weston, and subsequently tried to reverse the prior cancellation of the
guaranty by DBP, we rule that they thereby constructively fulfilled their
obligation.
Considering the absence of an agreement, and in view of respondents
constructive fulfillment of their obligation, the Court has to apply the
principle of quantum meruit in determining how much was still due and
owing to respondents. Under the principle of quantum meruit, a contractor
is allowed to recover the reasonable value of the services rendered despite
the lack of a written contract
Under the established circumstances, we deem the total amount of
P200,000.00 to be reasonable compensation for respondents services under
the principle of quantum meruit.
ACCORDINGLY, the Court DENIES the petition for review on certiorari;
and AFFIRMS the decision of the Court of Appeals promulgated on
November 8, 2002 in C.A.-G.R. No. 47094 subject to the
MODIFICATIONS that: (a) International Hotel Corporation is ordered to.
pay Francisco G. Joaquin, Jr. and Rafael Suarez P100,000.00 each as
compensation for their services, and (b) the award of P20,000.00 as
attorney's fees is deleted.
Golden Valley vs. Pinkian Mining
By Santiago, Monch
Doctrine: Article 1191, Rescission (Resolution) of reciprocal obligations.
Right to rescind an obligation must be invoked judicially, except when
contract itself provides for extra-judicial rescission; Power to rescind is
implied in reciprocal obligations; Extra-judicial rescission.
Facts: (PMC) is the owner of 81 mining claims, 15 of which were covered
by Mining Lease Contract (MLC) No. MRD-56, while the remaining 66 had
pending applications for lease.PMC entered into an Operating Agreement
(OA) with petitioner Golden Valley Exploration (GVEI),granting the latter
"full, exclusive and irrevocable possession, use, occupancy, and control
over the[mining claims], and every matter pertaining to the examination,
OBLICON Digests
Chapter 3-4
exploration, development and mining of the [mining claims] for a period
of 25 years.
PMC extra-judicially rescinded the Operating Agreement in a letter to
GVEI upon the latters violations thereof. GVEI contested the rescission,
averring that its obligation to pay royalties to PMC arises only when the
mining claims are placed in commercial production which condition has not
yet taken place. It also reminded PMC of its prior payment of the amount of
P185,000.00 as future royalties in exchange for PMCs express waiver of
any breach or default on the part of GVEI.
PMC no longer responded to GVEI. Instead, it entered into a Memorandum
of Agreement (MOA) with Copper Valley, Inc. (CVI), whereby the latter
was granted the right to "enter, possess, occupy and control the mining
claims" and "to explore and develop the mining claims, mine or extract the
ores, mill, process and beneficiate and/or dispose the mineral products in
any method or process," among others, for a period of 25 years.
GVEI filed a Complaint for Specific Performance, Annulment of Contract
and Damages against PMC and CVI. The RTC ruled in its favor, holding
that since the mining claims have not been placed in commercial
production, there is no demandable obligation yet for GVEI to pay royalties
to PMC. It further declared that no fault or negligence may be attributed to
GVEI for the delay in the commercial production of the mining claims
because the non-issuance of the requisite Mineral Production Sharing
Agreement (MPSA)and other government permits, licenses, and consent
were all affected by factors beyond GVEIs control.
The CA reversed the RTC ruling, finding that while the OA gives PMC the
right to rescind only on the ground of (GVEIs) failure to pay the stipulated
royalties, Article 1191 of the Civil Code allows PMC the right to rescind the
agreement based on a breach of any of its provisions. It further held that the
inaction of GVEI for a period of more than seven (7) years to operate the
areas that were already covered by a perfected mining lease contract and to
acquire the necessary permits and licenses amounted to a substantial breach
of the OA, the very purpose of which was the mining and commercial
distribution of derivative products that may be recovered from the mining
property
Issue: The central issue for the Courts resolution is whether or not there
was a valid rescission of the OA
Held/Ratio: In reciprocal obligations, either party may rescind the contract
upon the others substantial breach of the obligation/s he had assumed
thereunder.
More accurately referred to as resolution, the right of rescission under
Article 1191 is predicated on a breach of faith that violates the reciprocity
between parties to the contract. This retaliatory remedy is given to the
contracting party who suffers the injurious breach on the premise that it is
"unjust that a party be held bound to fulfill his promises when the other
violates his.
As a general rule, the power to rescind an obligation must be invoked
judicially and cannot be exercised solely on a partys own judgment that the
other has committed a breach of the obligation. This is so because rescission
of a contract will not be permitted for a slight or casual breach, but only for
such substantial and fundamental violations as would defeat the very object
of the parties in making the agreement. As a well-established exception,
however, an injured party need not resort to court action in order to rescind
a contract when the contract itself provides that it may be revoked or
cancelled upon violation of its terms and conditions
the Court therefore affirms the correctness of the CAs Decision upholding
PMCs unilateral rescission of the OA due to GVEIs non-payment of
royalties considering the parties express stipulation in the OA that said
agreement may be cancelled on such ground. By expressly stipulating in the
OA that GVEIs non-payment of royalties would give PMC sufficient cause
to cancel or rescind the OA, the parties clearly had considered such
violation to be a substantial breach of their agreement. Thus PMCs extra-
judicial rescission of the OA based on the said ground was valid.
While it remains apparent that PMC had not judicially invoked the other
grounds to rescind in this case, the only recognizable effect, however, is
with respect to the reckoning point as to when the contract would be
formally regarded as rescinded. Where parties agree to a stipulation
allowing extra-judicial rescission, no judicial decree is necessary for
rescission to take place; the extra-judicial rescission immediately releases
the party from its obligation under the contract, subject only to court
 OBLICON Digests
Chapter 3-4
reversal if found improper.1wphi1 On the other hand, without a stipulation
allowing extra-judicial rescission, it is the judicial decree that rescinds, and
not the will of the rescinding party.
An extra-judicial rescission based on grounds not specified in the contract
would not preclude a party to treat the same as rescinded. The rescinding
party, however, by such course of action, subjects himself to the risk of
being held liable for damages when the extra-judicial rescission is
questioned by the opposing party in court.
The Court has determined that the other grounds raised by PMC in its Letter
dated June 8, 1999 to GVEI (the existence of which had not been
convincingly disputed herein) amounts to the latter's substantial breach of
the OA. To the Court's mind, said infractions, when taken together,
ultimately resulted in GVEI's failure to faithfully perform its primordial
obligation under the OA to explore and develop PMC's mining claims as
well as to put the same into commercial operation. Accordingly, PMC's
rescission of the OA on the foregoing grounds, in addition to the ground of
non-payment of royalties, is equally valid.
UP vs. De Los Angeles
by Mordeno, Gia
Doctrine:
The party that deems itself to be injured may rescind a contract without the
need of judicial action. In doing so, they must make the rescission known to
the other party. The other party may seek judicial action if it the rescission
denies them of due process. Should there be a judicial action, the final
judgment of the court shall determine the awarding of damages.
Recit-ready:
Facts
UP entered into a logging agreement with ALUMCO to cut, collect, and
remove timber from the Land Grant in consideration of payment to UP.
ALUMCO began its operations and failed to pay its payments. They
received notice that UP will rescind the contract. It then executed an
instrument stating that the creditor, UP, shall have the right to rescind the
agreement without the necessity of judicial suit and shall be awarded
damages.
ALUMCO resumed operations and again failed to pay its payments. UP
finally rescinded the contract and it was no longer in effect.
UP conducted a bid for the next concessionaire and awarded it to Sta. Clara
Logging Inc. ALUMCO filed a petition to enjoin UP from conducting the
bid but the contract has been already concluded.
ALUMCO declared UP in contempt and directed Sta. Clara from
conducting its operations. ALUMCO claims that their nonpayment was the
fault of its former manager and they could not sell the logs because of their
rotten state. They also claimed that the rescission was invalid because there
was no court order declaring so.
Issue
Whether or not a UP can treat the contract rescinded may disregard the
same before and judicial pronouncement to that effect.
Held
The Court ruled that the rescission was valid. The parties have previously
agreed in the instrument executed by ALUMCO that the creditor may
rescind the contract in case of nonpayment. 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 even without court intervention.
Facts:
UP operated and developed a timber concession or Land Grant for
additional income for its support. On November 2, 1960, UP and ALUMCO
entered into a logging agreement which granted exclusive authority, for a
period starting from the date of agreement to December 31, 1965 and
extendible for 5 years by mutual agreement, to cut, collect and remove
timber from the Land Grant, in consideration of payment to UP of royalties,
forest fees, etc.
ALUMCO cut and removed timber as of December 8, 1964 and incurred
P219 362.94 but had failed to pay despite the demand of UP. It later
received notice that UP would rescind or terminate the logging agreement.
ALUMCO executed an instrument stating that in case the debtor fails to
comply with the promises in the agreement, the creditor shall have the right
to rescind the agreement without the necessity of judicial suit and the
creditor shall be entitled to P50, 000 for liquidate damages. ALUMCO
continued its logging operation and again incurred an unpaid account from
its operations from December 9, 1965 to July 15, 1965. On July 19, 1965,
UP informed ALUMCO that it had rescinded the contract and it was no
longer in effect. They also filed a complaint against ALUMCO for the
collection of the payment and prayed for and obtained an order for
preliminary attachment and preliminary injunction restraining ALUMCO
from continuing its logging operations.
 OBLICON Digests
Chapter 3-4
Before the issuance of the preliminary injunction, UP conducted a bidding
for the next concessionaire. It was awarded to Sta. Clara Lumber Company.
The logging contract was signed on February 16, 1966.
On November 12, 1965 ALUMCO filed a petition to enjoin UP from
conducting the bidding and issued such order on February 25, 1965. UP
received the order on the same date after it had concluded its contract with
Sta. Clara.
ALUMCO declared UP in contempt and directed Sta. Clara from
conducting logging operations. UP moved for reconsideration but was
denied. ALUMCO did not deny any the allegations in the petition.
However, in its defense, it blamed its former general manager Cesar Guy
for its inability to pay the sum of money. They also reasoned the failure to
pursue the manner of payments because the logs were rotten and could not
be sold to Sta. Clara. They claimed that the rescission made by UP was
invalid because there was no court order.
Issue:
Whether or not a UP can treat the contract rescinded may disregard the
same before and judicial pronouncement to that effect.
Held/Ratio:
Yes.
Respondent contend that it is only after a final court decree declaring the
contract rescinded for UP to disregard ALUMCOs right under the contract
and treat the agreement as breached and of no force or effect.
UP and ALUMCO had expressly stipulated that upon the default by the
debtor, the creditor has the right and power to consider the agreement as
rescinded without the necessity of any judicial suit.
The Court has stated that 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 even without court intervention.
The party that cancelled the contract must make known to the other
contracting party that the contract has been cancelled. The cancellation of
the contract is provisional and is subject to the scrutiny y and review by the
proper court. If the other party denies that the rescission is justified, it may
resort to judicial action. After judicial action, the decision rendered by the
court will determine if the responsible parties will sentenced to damages. It
is through the final judgment of the court that will settle whether the action
was correct in law. It does not require that the party injured must first file
suit and wait for a judgment before rescinding the contract.
In light of the foregoing principles, UP proved that there was a breach of
contract and defaults in payment by ALUMCO to the extent that the court
issued a writ of preliminary injunction stopping ALUMCO operations and
the denial of its motions to lift injunctions. ALUMCOs excuse that the
misconduct of its former manager and the rotten logs are not sufficient
excuses for non-payment.
Maglasang vs. Northwestern
by Yarra, Johan
Doctrine (Substantial breach and casual breach): Substantial breach is
defined as that breach that defeats the object of the parties in entering into
an agreement (a ground for rescission). A slight or casual breach is defined
as the breach that does not fundamentally defeat the object of the parties in
entering into an agreement. There must be a failure, without legal excuse, to
perform any promise which forms the whole or part of the contract.
Recit-ready: Northwestern entered into a contract with herein petitioner for
the construction of a modern IBS to get accreditation from CHED. Two
contracts were executed for the project at the cost of PhP2.97M. It is
essentially agreed upon that the installation must be compliant to the
standards of CHED and IMO. To execute the contract, Northwestern paid
1M as down payment. But months after, it would halt the ongoing project
because the materials delivered for the IBS were substandard (old, no
instruction manuals, and warranty certificates, reconditioned machines, did
not satisfy the standards of CHED and IMO). Because of the stoppage of
work, the petitioner filed a complaint before the RTC praying that the
respondent pay the remaining balance. RTC held both parties at fault and
ordered for mutual restitution. CA affirmed but declared that there was a
rescission of contract because GL Enterprises committed substantial breach
for supplying defective materials for the project. Hence, this petition.
The pertinent issue to be resolved is whether the CA erred in finding
substantial breach on the part of GL Enterprises.
The SC agrees with the CA that there was rescission of the contract due to
substantial breach. Substantial breach is defined as that breach that defeats
OBLICON Digests
Chapter 3-4
the object of the parties in entering into an agreement. It is an essential
requisite of the contract that the project must meet the standards of the
CHED and the IMO, so that Northwestern can get accredited to offer
maritime-related courses as well as effectively facilitate the learning of its
students.This object is defeated by the fact that the materials delivered and
used to build the IBS were plainly substandard and defective (refer to the
specific examples in the ruling). As SC stated, by no stretch of the
imagination could these form part of the most modern IBS compliant with
the IMO and CHED standards.To complete the discussion, the SC disagrees
with the courts a quo holding that Northwestern committed slight or casual
breach for stopping the work (contract called for the completion of IBS). To
be held liable for committing such, there must be a failure without legal
excuse to perform any promise (that is not fundamental) which forms the
whole or part of the contract. In the case at bar, Northwestern was justified
for terminating the job, as it just prudently avoided unnecessary expenses
and the highly possible rejection of the IBS.
Petition denied and the decision of CA is hereby affirmed.
Facts: Northwestern University, Inc. (herein respondent) is an educational
institution offering maritime-related courses. It engaged the services of
herein petitioner GL Enterprises for the installation of a new Integrated
Bridge System (IBS) in Laoag City. The reason is that the IBS will be the
students training laboratory and is required by CHED before a school could
offer maritime transportation programs. The intention is to supply and
install specific components in order to build the most modern IBS which
would be compliant to the standards of International Maritime Organization
(IMO) and to CHED.
Two contracts were executed for the said purpose. The first contract partly
reads: That in consideration of the payment herein mentioned to be made by
the First Party (defendant), the Second Party agrees to furnish, supply,
install, and integrate the most modern IBS located at Northwestern
University followed by further specifications as to what shall be supplied
and installed composing the IBS. The project cost as computed in this
contract equaled to PhP2.7M. The second contract was essentially the same,
but it only stated additional requirements to be built to compose the IBS.
The cost was PhP270,000. Common to both contracts are the ff. provisions:
(1) the IBS and its components must be compliant with the IMO and CHED
standard and with manuals for simulators/major equipment; (2) the
contracts may be terminated if one party commits a substantial breach of its
undertaking, (3) any dispute under the agreement shall first be settled
mutually between the parties, but if not obtained, resort shall be sought in
the courts of law.
Subsequently, Northwestern paid 1M as down payment. Two months after
the execution of contract, GL Enterprises delivered materials to the project
site, but upon starting installation, Northwestern halted the operations
primarily because the materials delivered were substandard (old, no
instruction manuals and warranty certificates, contained, indicative of being
reconditioned machines, did not meet IMO and CHED standards).And so
Northwestern demanded compliance and suggested an amicable settlement.
However, GL Enterprises filed a complaint for breach of contract and
prayed that they be paid PhP1.97M (remaining balance), moral, exemplary,
attorneys fees, and litigation expenses, cost of suit. They contend that the
breach of contract arose from the order of work stoppage preventing the
installation of materials for IBS. In its defense, Northwestern asserted since
the equipment delivered were not in accordance with the specifications in
the contract, all succeeding works would be futile and would entail
unnecessary expenses.
The RTC held both parties at fault. It found that Northwestern unduly halted
the operations, even if the contracts called for a completed project to be
evaluated by the CHED. In turn, the breach committed by GL Enterprises
consisted of the delivery of substandard equipment that were not compliant
with IMO and CHED standards. And so it ordered mutual restitution, which
would thereby restore the parties to their original positions.
Both parties appealed to the CA, but the latter held that the one guilty of
substantial breach and liable for attorneys fees is GL Enterprises. The
essence of the contract was to install an IBS compliant with the CHED and
IMO standards. The delivery of defective equipment which was considered
as a substantial breach as it defeated the object of the contract. Applying
Art. 1191 of the Civil Code, the CA declared the rescission of the contracts
and affirmed the RTCs order of mutual restitution but added the grant of
P50,000 by way of attorneys fees.
Issue: Hence this petition to the SC. The pertinent issue to be resolved is
whether the CA erred in (1) finding substantial breach on the part of GL
OBLICON Digests
Chapter 3-4
Enterprises; (2) refusing petitioners claims for damages, and (3) awarding
attorneys fees to Northwestern
Held/Ratio: No. The SC agrees with the CA that the correct provision to
apply is Article 1191. The former emphasizes that in rescission of contracts,
there must be substantial breach. In Cannu v. Galang, substantial breaches,
unlike slight or casual, are defined as fundamental breaches that defeat the
object of the parties in entering into an agreement. But this is still dependent
on the attending circumstances. In its discussion, the SC expounded on why
there was a substantial breach. It stressed that it is clear from the provisions
of the contract that the materials to be delivered must be compliant with the
CHED and IMO standards and must be complete with manuals (refer back
to the contracts), with the goal of obtaining CHED accreditation for
Northwesterns maritime-related courses. Pursuant to CHED Memorandum
Order No. 10, Series of 1999, as amended by CMO No. 13, Series of 2005,
generally the standard was to build an IBS which would effectively
facilitate the learning of the students. In this regard, GL Enterprises failed in
meeting these responsibilities. The testimonial evidence of the respondent
quoted by the CA specifies on why the materials delivered were defective
and substandard. E.g. (1) the gyrocompass has no marker, no model, no
serial number, no gimbal, no gyroscope and a bulb to work it properly to
point the true North (it is important that the students know how to locate the
true North, (2) the steering was that of an ordinary automobile, etc. As
pointed out by the SC, by no stretch of the imagination could these form
part of the most modern IBS compliant with the IMO and CHED standards.
The SC also rejects the petitioners assertion that Northwestern should have
waited for the completion of the IBS. As a response, SC quotes and agrees
with the CA that the respondent could not just sit still and wait for such day
that its accreditation may not be granted by CHED due to the apparent
substandard equipment installed in the bridge system.
As related to the doctrine involved in this case, SC also discussed regarding
slight or casual breach. It was defined as a breach that does not
fundamentally defeat the object of the parties in entering into an agreement.
There must be a failure, without legal excuse, to perform any promise
which forms the whole or part of the contract. And that in contrast to the
ruling of the appellate court, the SC argued that Northwestern is not liable
for a casual breach (note that the contract called for a completion of the IBS
to be evaluated by CHED) since its order of stoppage was justified. It
constituted a legal excuse to prevent the highly possible rejection of the
IBS. As to the damages, the Supreme Court concurred with the CA in
disallowing GL Enterprises to claim actual awards for unrealized profits,
moral, exemplary damages. It also ordered the petitioner to pay the
attorneys fees of Northwestern. The assailed decision of CA is hereby
affirmed.
CJ Yulo vs. Roman Catholic BIshop
by Dalumpines, Mikey
Doctrine: Casual breaches of contract do not automatically render said
contract recissible
Recit-ready: Petitioner C-J Yulo & Sons, Inc. donated land to respondent
Roman Catholic Bishop of San Pablo, Inc. for the purpose of establishing a
home for the less fortunate aged and other elderly of Laguna.
Petitioner made the donation under the conditions that the land was to be
used specifically for the above purpose, but the donees may utilize parts of
the land not needed for the home as agricultural land or to be leased out to
meet expenses and develop the home BUT only with the express written
consent of petitioner. Otherwise, the donation would be revoked and the
land taken back by the petitioner.
After the land had been donated, respondents leased out part of the land in 3
different instances, all of which were without the express written consent of
petitioner.
Hence, the petitioner filed a case against respondents in the Calamba RTC
for revocation and return of the donation due to noncompliance with the
conditions. The RTC judged in favor of petitioner.
After which, respondent elevated the case to the Court of Appeals, who
reversed the RTC decision and judged in favor of the respondent, upholding
the donation on the grounds that such onerous donation was covered by the
law on obligations and contracts, and that the lack of written consent only
equates to a casual breach which does warrant revocation of donation as
opposed to substantial breach which defeats the purpose of the contract
which was perfected, according to article 1191.
 OBLICON Digests
Chapter 3-4
Petitioner then assailed the CA decision by bringing the present case up to
the SC. The SC upheld the CA decision, agreeing that the CA was correct in
applying oblicon law and classifying the matter as an onerous donation,
wherein said lack of written consent secured by respondents only amounted
to a casual breach of contract which does not warrant rescission because it
did not detract from the purpose of the donation and was not substantial
enough of a breach.
Wherefore, the petition is DENIED and the CA decision is AFFIRMED.
Facts: - Petitioner C-J Yulo & Sons, Inc. owned a parcel of land in
Canlubang, Calamba, Laguna (TCT T-82803).
- Petitioner donated said land to respondent Roman Catholic Bishop of
San Pablo, Inc, a religious corporation (associated with the Church and
actual bishop).
- Donation was made with conditions, essentially specifically designating
the land for a home for the underprivileged elderly and infirm of the
local community, with any unused portion of the land allowed to be
used as agricultural land for the institutions use or to be leased out for
the purpose of defraying expenses.
- Such usage could only be done with the EXPRESS WRITTEN
CONSENT of petitioner. Otherwise, donation would be revoked and
the land taken back.
- After the donation, respondents leased out the land thrice (once as a
sugarcane plantation, 2nd as a ranch, 3rd as a cattle fattening facility)
none of which had the express written consent stated above.
- Petitioner filed a case against respondents in the Calamba RTC for
revocation of donation due to breach/noncompliance of their donation
conditions (no consent, still no facility for the elderly, currently being
leased out).
- RTC judged in favor of petitioners.
- Respondents assailed RTC decision with the CA.
- CA judged in favor of respondents, reversing RTC decision.
- Petitioner assailed CA decision with the SC.
- SC judged in favor of respondents, denying petition and upholding CA
decision.
- SC agreed with CAs finding that the donation was onerous and that it
would be under oblicon law. Under Art. 1191, only a substantial breach
of contract which detracts from the purpose of the perfected contract
will be grounds for rescission. In this case, it is only a casual breach,
and evidence suggests that the respondents were being prudent and
looking for ways to fulfill their charitable purpose.
- Wherefore, petition is DENIED and CA decision is UPHELD.
Issue: WON the lack of written consent in this case is a grounds for
rescission of the donation (substantial vs. casual breach)
Held/Ratio: NO. Said breach is only a casual breach of contract which
did not detract from the purpose of the onerous donation, and is
therefore not a grounds for revocation of donation.
Velarde vs. CA
by Reyes, Phoebe
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.
Recit-ready:
Private respondent executed a Deed of Sale with Assumption of Mortgage
as vendor, in favor of petitioner, as vendee. The conditions were that the
vendee would pay 800K Pesos to the vendor, and assume mortgage
obligation on the property in the amount of 1.8M Pesos in favor of BPI in
the name of the vendor. While waiting for the assumption of the mortgage
obligations on the property purchased to be approved by BPI, vendee shall
continue to pay the said loan in the name of private respondent.
Respondents paid mortgage obligations to BPI for 3 months. However, they
were informed that the Application for Assumption of Mortgage with BPI
was not approved, and they stopped making any further payment. Private
respondent sent petitioners a notice of cancellation/rescission of the
intended sale of the subject property allegedly due to the latters failure to
comply with the terms and conditions of the Deed of Sale.
Petitioners filed a complaint for specific performance, nullity of
cancellation, writ of possession and damages. RTC dismissed the complaint.
Petitioner filed for MR. MR was granted. Judge ordered parties to proceed
with the sale.
OBLICON Digests
Chapter 3-4
Private respondents appealed to CA. CA dismissed petitioner's complaint.
The agreement of the parties involved a reciprocal obligation, the non-
fulfillment of which entitles the other party to rescind the contract. Thus, the
non-payment of the mortgage obligation by petitioner would create a right
to demand payment or to rescind the contract, or to criminal prosecution.
Petitioner appealed to SC. SC ruled that there was a breach of contract, that
petitioners did not perform their correlative obligation of paying the
contract price in the manner agreed upon. Thus, private respondents validly
exercised their right to rescind the contract. Considering that the rescission
of the contract is based on Article 1191 of the Civil Code, mutual restitution
is required to bring back the parties to their original situation prior to the
inception of the contract. Rescission creates the obligation to return the
object of the contract. To rescind is to declare a contract void at its inception
and to put an end to it as though it never was. It is not merely to terminate it
and release the parties from further obligations to each other, but to abrogate
it from the beginning and restore the parties to their relative positions as if
no contract has been made.
Facts:
David Raymundo [private respondent] is the absolute and registered owner
of a parcel of land, together with the house and other improvements
thereon. Defendant George Raymundo [private respondent] is David's father
who negotiated with petitioners for the sale of said property, which was,
however, under lease.
On August 8, 1986, a Deed of Sale with Assumption of Mortgage was
executed by defendant David Raymundo, as vendor, in favor of plaintiff
Avelina Velarde, as vendee. The conditions were that the vendee would pay
800K Pesos to the vendor, and assume mortgage obligation on the property
in the amount of 1.8M Pesos in favor of BPI in the name of the vendor.
While waiting for the assumption of the mortgage obligations on the
property purchased to be approved by BPI, vendee shall continue to pay the
said loan in the name of David Raymundo. In the event that vendee violates
any of the terms and conditions of the said Deed of Real Estate Mortgage,
the 800k and payments made with BPI, shall be forfeited in favor of David
Raymundo without necessity of notice or any judicial declaration to that
effect, and that Raymundo resumes the ownership.
Petitioners paid BPI for 3 months. They were advised that the Application
for Assumption of Mortgage with BPI was not approved, and they stopped
making any further payment. Private respondent informed petitioners that
their non-payment to the mortgage bank constituted non-performance of
their obligation.
They sent petitioners a notarial notice of cancellation/rescission of the
intended sale of the subject property allegedly due to the latter's failure to
comply with the terms and conditions of the Deed of Sale with Assumption
of Mortgage and the Undertaking.
Petitioners filed a complaint for specific performance, nullity of
cancellation, writ of possession and damages. RTC dismissed the complaint.
Petitioner filed for MR. MR was granted. Judge ordered parties to proceed
with the sale.
Private respondents appealed to CA. CA dismissed petitioner's complaint.
CA ruled that part of the consideration of the sale was the assumption by
Velarde of the mortgage obligation of Raymundo in the amount of P1.8
million. BPI's approval would mean that payment of mortgage
obligation will now be in the name of Velarde. And in the event said
application is disapproved, Velarde had to pay in full. The disapproval
by BPI of the application for assumption of mortgage cannot be used as an
excuse for Velardes non-payment of the balance of the purchase price. The
agreement of the parties involved a reciprocal obligation wherein the
obligation of one is a resolutory condition of the obligation of the other, the
non-fulfillment of which entitles the other party to rescind the contract.
Thus, the non-payment of the mortgage obligation by petitioner would
create a right to demand payment or to rescind the contract, or to criminal
prosecution.
Petitioner appealed to SC.
Issue:
WON CA erred in holding that the rescission (resolution) of the contract by
private respondents was justified.
Held/Ratio:
OBLICON Digests
Chapter 3-4

There was a breach of contract. In a contract of sale, the seller obligates

itself to transfer the ownership of and deliver a determinate thing, and the
buyer to pay therefor a price certain in money or its equivalent. Private Gotesco Properties
respondent already performed their obligation through the execution of the by Lu, Kyle
Deed of Sale, which effectively transferred ownership of the property to
petitioner through constructive delivery. Petitioners, on the other hand, did Gotesco Properties v. Fajardo (Rescission, Article 1191)
not perform their correlative obligation of paying the contract price in the GR 201167
manner agreed upon. February 27, 2013

In the present case, private respondents validly exercised their right to Doctrine: The effects of rescission under Article 1385 of the Code are
rescind the contract, because of the failure of petitioners to comply with equally applicable to cases under Article 1191.
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 Recit Ready Digest
violation that consequently gave rise to private respondents right to rescind
the same in accordance with law.
Spouses Fajardo entered into a contract to sell with Gotesco Properties Inc.
to purchase a lot where Sps. Fajardo pays the petitioner 126,000 pesos for
As discussed earlier, the breach committed by petitioners was the
10 years including a 9% interest per annum while Gotesco Properties Inc.
nonperformance of a reciprocal obligation, not a violation of the terms and
shall execute a final deed of sale upon full payment. The Fajardos
conditions of the mortgage contract. Therefore, the automatic rescission and
completed their payment but despite subsequent demands, GPI failed to
forfeiture of payment clauses stipulated in the contract does not apply.
comply with its obligations to execute the deed, deliver the title, and
Instead, Civil Code provisions shall govern and regulate the resolution of
provide for the physical possession of the lot. This led them to file an action
this controversy.
for rescission of contract with damages. In its defense, GPI contends that its
failure to comply with the obligations was due to the pending litigation for
Considering that the rescission of the contract is based on Article 1191 of
inscription of the lots. The HLURB, HLURB Board of Commissioners, the
the Civil Code, mutual restitution is required to bring back the parties
Office of the President, and the Court of Appeals all ruled in favor of the
to their original situation prior to the inception of the contract.
Fajardo with the CA modifying the ruling that the refunded amount be
Accordingly, the initial payment of P800,000 and the corresponding
equivalent to the prevailing market value of the land following Solid
mortgage payments for 3 months advanced by petitioners should be
Homes. Hence this petition.
returned by private respondents, lest the latter unjustly enrich themselves at
the expense of the former.
The issue is Whether Spouses Fajardo have the right to rescind the contract
considering that GPIs non-compliance was due to an event beyond their
Rescission creates the obligation to return the object of the contract. It
control. Yes.
can be carried out only when the one who demands rescission can
return whatever he may be obliged to restore. To rescind is to declare a
contract void at its inception and to put an end to it as though it never The Court held that there was a substantial breach of contract due to GPIs
was. It is not merely to terminate it and release the parties from further long delay in the performance of the obligation which was unreasonable and
obligations to each other, but to abrogate it from the beginning and unjustifiable for GPI only acted on Fajardos demands when it was brought
restore the parties to their relative positions as if no contract has been in court. Hence Fajardo can avail of the remedy of rescission.
made.
OBLICON Digests
Chapter 3-4
In rescinding the contract, it is not enough that the parties be free from their
respective obligations. Rescission aims to put the parties back to where they
were before entering in the obligation
With respect to the rescission, the Court held that it is noteworthy to point
out that rescission does not merely terminate the contract and release the
parties from further obligations to each other, but abrogates the contract
from its inception and restores the parties to their original positions as if no
contract has been made. Consequently, mutual restitution, which entails the
return of the benefits that each party may have received as a result of the
contract, is thus required.
[S]ince Article 1385 of the Civil Code expressly and clearly states that
rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest, the
Court finds no justification to sustain petitioners position that said Article
1385 does not apply to rescission under Article 1191.
Facts
On January 24, 1995, Spouses Fajardo entered into a contract to sell
with Gotesco Properties Inc. (GPI) for the purchase of a 100 sq. meter lot in
Evergreen Executive Village located at Novaliches, Quezon City. The said
subject lot is a portion of a bigger lot with the mother title TCT 244250.
In the contract, the parties stipulated that Spouses Fajardo promised to
pay 126,000 pesos for 10 years including a 9% interest per annum. On the
other hand, GPI promised to execute a final deed of sale in favor of the
spouses upon full payment of the stipulated consideration.
However, when the spouses Fajardo were able to pay the full amount
on January 17, 2000, GPI failed to execute 1) the deed and 2) to deliver the
title and 3) the physical possession of the lot despite the spouses
subsequent demands. This led the Fajardos to file a case with the House and
Land Use Regulatory Board NCR (HLURB-NCR) for specific
performance of the contract or rescission of contract with damages against
GPI on the ground that GPI violated Section 20 of PD 957 or The
Condominium and Subdivision Buyers Protective Decree for failing to
provide the utilities in the subdivision and boundary marks.
GPI on its part contended that the failure to deliver the title to the
Fajardos was beyond GPIs control for the title was subject to litigation.
Hence, Fajardos prayer for rescission remained inapplicable for GPI is
willing to comply with the obligation but was only prevented by
circumstances beyond their control.
The HLURB ruled in favor of Spouses Fajardo reasoning that the
obligation between the parties became demandable when the Fajardos
completed their payment. GPIs failure to meet the obligation constituted a
substantial breach in obligation making rescission applicable.
The HLURB Board of Commissioners, the Office of the President, and
the Court of Appeals ruled in affirmed the ruling of the HLURB that the
Fajardos should be refunded the amount paid. The CA modified the ruling
that the refund should amount to the prevailing market value following the
ruling in Solid Homes v. Tan. Hence this petition.
Issue
Whether Spouses Fajardo have the right to rescind the contract
considering that GPIs non-compliance was due to an event beyond their
control. Yes.
Ruling
The Court held that there was a substantial breach in contract between
petitioner GPI and respondents Fajardo because the long delay in GPIs
performance of the obligation was unreasonable and unjustified. A perusal
of the records would show that GPI only filed for the petition when spouses
Go filed for an action to rescind the contract and refund the amount they
paid with legal interests.
With respect to the rescission, the Court held that it is noteworthy to
point out that rescission does not merely terminate the contract and release
the parties from further obligations to each other, but abrogates the contract
from its inception and restores the parties to their original positions as if no
contract has been made. Consequently, mutual restitution, which entails the
return of the benefits that each party may have received as a result of the
contract, is thus required.
[S]ince Article 1385 of the Civil Code expressly and clearly states that
rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest, the
Court finds no justification to sustain petitioners position that said Article
1385 does not apply to rescission under Article 1191.
Iringan vs. CA
by Perez, Paolo
Doctrine:
OBLICON Digests
Chapter 3-4
Even if the right to rescind is available to the injured party, the obligation is
not ipso facto erased by the failure of the other party to comply with his
obligation. Party entitled to rescind should apply to the court for a decree of
rescission. The operative act which produces the resolution of the contract is
the decree of the court.
Recit-ready:
Iringan and Palao entered into a Contract of Sale. Iringan breached the
contract which led Palao to send the former a letter informing him that
Palao has considered the contract rescinded. After Iringans refusal to vacate
premises, Palao brought the matter to court praying for, among others,
Judicial Confirmation of Rescission of Contract. RTC granted, CA affirmed.
SC agreed with the decisions of the lower courts. SC deemed the
requirement of the law that a judicial or notarial act is required for a valid
rescission was complied with when Palao asked for judicial confirmation
in the RTC.
Facts:
In March 1985, private respondent Antonio Palao sold to petitioner Iringan
an undivided portion of a lot in Tuguegarao. Parties executed a Deed of Sale
with the purchase price of P295,000, payable as follows:
a .P10K upon execution, with vendor to acknowledge receipt
b. P140K on or before April 1985
c. P145K on or before December 1985
When the 2nd payment was due, Iringan paid only P40K which caused
Palao to send a letter to the former stating that Palao considered the contract
rescinded and that he would not accept any further payment considering that
Iringan failed to comply with his obligation to pay the full amount of the
second installment.
In August 1985, Iringan replied that he was not opposing the revocation of
the Deed of Sale but asked for reimbursement (payment for the lot, atty
fees, interest, geodetic engg fees). Palao declined to reimburse.
In February 1989, Iringan proposed that the P50K he had already paid for
the land be reimbursed or that he be sold an equivalent portion of the land.
Palao replied that Iringans standing obligation had reached P61.6K
representing arrears for rentals from Oct. 1985 Mar. 1989.
In 1991, Palao filed for Judicial Confirmation of Rescission of Contract and
Damages against Iringan and his wife. Iringan replied that since the contract
of sale had been consummated, Palaos remedy was that of collection of
balance and not rescission. Iringan further alleged that he had always been
ready and willing to comply with his obligations in the contract.
RTC Affirmed rescission of Contract of Sale, ordered Iringan to vacate lot
CA Affirmed RTC decision
Issue: W/N Contract of Sale was Properly Rescinded
Held/Ratio: Yes. Rescission was valid.
Iringan contended that no rescission was validly effected simply by virtue
of the letter sent by Palao stating that he was rescinding the contract of sale.
He further contends that a judicial or notarial act is necessary before one
party can unilaterally effect a rescission.
Palao argued that the right to rescind is vested by law on the obligee and
since the petitioner did not oppose the intent to rescind the contract, Iringan
in effect agreed to it and had the legal effect of a mutually agreed rescission.
Under Art. 1191, the right to resolve reciprocal obligations is deemed
implied in case one of the obligors shall fail to comply with what is
incumbent upon him. But that right must be invoked judicially.
Consequently, even if the right to rescind is available to the injured party,
the obligation is not ipso facto erased by the failure of the other party to
comply with his obligation. Party entitled to rescind should apply to the
court for a decree of rescission. The operative act which produces the
resolution of the contract is the decree of the court.
OBLICON Digests
Chapter 3-4
Since a judicial or notarial act is required for a valid rescission, the letter
written by Palao declaring his intention to rescind did not operate to validly
rescind the contract. However, when he brought the matter to RTC for
Judicial Confirmation of Rescission and Damages, he complied with the
requirement of the law for judicial decree of rescission.
The complaint categorically stated that the purpose was 1) to compel
appellants to formalize in a public document, their mutual agreement of
revocation and rescission; and/or 2) to have a judicial confirmation of the
said revocation/rescission xxx.
Jurisprudence dictates that even a crossclaim found in the Answer could
constitute a judicial demand for rescission that satisfies the requirement of
law.
(may discussion pa tungkol sa moral damages and prescription ng action to
rescind pero di ko na sinama. Check niyo na lang yung case kung gusto
niyo malaman, page 49 nung escra)
Chua vs. Victorio
by Fabia, Johan
Doctrine: The right to extrajudicial rescission is inherent in filing
ejectment cases or unlawful detainer against the lessees.
Recit-ready: This is a case involving three ejectment suits where the
issue is about the raising of prices. The first one was resolved by
agreeing to a 100% increase in their rent and an option to increase rent
by 25% every 4 years after a survey of Panganiban street. After 4 years,
the lessor imposed a 25% increase in the rates which the lessees refuse
to pay. Another ejectment suit was filed where the lessees agreed to pay
the 25% increase. After 4 years from the previous increase, another
increase was made which is more than double the rate amounting to
15000. Lessees argue that it is more than the increase allowed by the
compromise agreement. SC held that the previous contract was already
rescinded by filing the ejectment case. Since the pay was monthly and
they have not fixed a period, it is considered to be a monthly contract.
Lessor has the right to increase the price.
Facts: The issue is about 3 units
1990- Compromise agreement: 100% increase and 25% increase every
4 years after survey
1994- Ejectment case filed and granted
1996- Lessor accepted payments from Lessees
1998- Increase by more than twice or to 15000
Petitioners assail that this increase is too much than that of the
compromise agreement.
Issue:WON the compromise agreement is still valid
Held/Ratio: In ejectment cases or unlawful detainer, it is inherent that
the lessor has the right to extrajudicially rescind the contract since it is
one of the rights to defend the lessor. The compromise agreement is
already rescinded the lessor has the right to increase the prices. They
also didnt fix a period so it became a monthly contract which is
renewed every payment which makes their 4 years lease contention
invalid.
Sancho vs. Lizzaraga
No. 33580. February 6, 1931
by Hernandez, Justine
Doctrine:
Right to demand rescission of the partnership contract: casual breach does
not give action for rescission.
Recit-ready:
Sancho and Lizarraga entered into a contract of partnership. Sancho
thereafter brought an action for the rescission of the partnership and prayed
for the reimbursement of the 50 000 investment he contributed with interest
at 12% per annum against Lizarraga.
Lizarraga denied allegations and asked for the dissolution of their
partnership and payment to him as manager and administrator of the
OBLICON Digests
Chapter 3-4
partnership of P500 monthly from October 15, 1920 [the day the contract
was entered into] until final dissolution.
CFI Manila proceedings proved Lizarraga had not contributed all the capital
he bound himself to invest and that Sancho demanded Lizarraga to liquidate
partnership. CFI declared partnership dissolved on account of the expiration
period for which it was constituted and ordered liquidation of the
partnership.
The plaintiff appealed from said decision praying for the rescission of the
partnership contract between him and the defendant in accordance with Art.
1124.
The Supreme Court ruled that plaintiff has not acquired the right to demand
rescission of the partnership contract according to Article 1124 of the Civil
Code. The Court rationalized that owing to the defendants failure to pay to
the partnership the whole amount which he bound himself to, he became
indebted to the partnership for the remainder, with interest and any damages
occasioned thereby, but the plaintiff did not thereby acquire the right to
demand rescission of the partnership contract according to article 1124 of
the Code. Article 1124 cannot be applied to the case in question, because it
refers to the resolution of obligations in general, whereas articles 1681 and
1682 [of Old Civil Code] specifically refer to the contract of partnership in
particular. And it is a well known principle that special provisions prevail
over general provisions. Hence, SC dismissed the appeal left the decision
appealed from in full force.
Facts:
The plaintiff brought an action for the rescission of a partnership contract
between himself and the defendant, entered into on October 15, 1920, the
reimbursement by the latter of his 50,000 peso investment therein, with
interest at 12 per cent per annum from October 15, 1920, with costs, and
any other just and equitable remedy against said defendant.
The defendant denies generally and specifically all the allegations of the
complaint which are incompatible with his special defenses, cross -
complaint and counterclaim, setting up the latter and asking for the
dissolution of the partnership, and the payment to him as its manager and
administrator of P500 monthly from October 15, 1920, until the final
dissolution, with interest, one half of said amount to be charged to the
plaintiff. He also prays for any other just and equitable remedy.
The Court of First Instance of Manila, having heard the cause, and finding it
duly proved that the defendant had not contributed all the capital he had
bound himself to invest, and that the plaintiff had demanded that the
defendant liquidate the partnership, declared it dissolved on account of the
expiration of the period for which it was constituted, and ordered the
defendant, as managing partner, to proceed without delay to liquidate it,
submitting to the court the result of the liquidation together with the
accounts and vouchers within the period of thirty days from receipt of
notice of said judgment, without costs.
In the brief filed by counsel for the appellee, a preliminary question is
raised purporting to show that this appeal is premature and therefore will
not lie. The point is based on the contention that inasmuch as the liquidation
ordered by the trial court, and the consequent accounts, have not been made
and submitted, the case cannot be deemed terminated in said court and its
ruling is not yet appealable.
Issue:
Whether or not the plaintiff acquired the right to demand rescission of the
partnership contract according to article 1124 of the Civil Code?
Held/Ratio:
No. Owing to the defendant's failure to pay to the partnership the whole
amount which he bound himself to pay, he became indebted to it for the
remainder, with interest and any damages occasioned thereby, but the
plaintiff did not thereby acquire the right to demand rescission of the
partnership contract according to article 1124 of the Code. This article
cannot be applied to the case in question, because it refers to the resolution
of obligations in general, whereas articles 1681 and 1682 specifically refer
to the contract of partnership in particular. And it is a well known principle
that special provisions prevail over general provisions.
Buce vs. CA
by Sarte, Ross
 OBLICON Digests
Chapter 3-4
Doctrine:
Absent any language indicating otherwise, a period indicated in an
obligation is deemed to be for the benefit of both parties.
Recit-ready:
Respondent and petitioner entered into a contract of lease for a period of 15
years renewable for another 10. Upon the expiration of the lease period,
respondent through his counsel, informed the petitioner that the rent had
increased to P1,576.58 pursuant to the provisions of the rent control law.
However, petitioner only furnished checks for P400.00 which respondent
refused to accept. Petitioner thereafter filed petition for specific
performance with prayer for consignation. Petitioner claimed that the phrase
in the lease agreement which stated that the lease would be renewable for
another 10 years signified an automatic renewal upon expiration of initial
15 year lease period. SC held that the phrase DOES NOT signify automatic
renewal. SC applied Article 1196 and the doctrine in Fernandez ruling
which essentially states that in a reciprocal contract like a lease, the period
must be deemed to have been agreed upon for the benefit of both parties,
absent language showing that the term was deliberately set for the benefit of
the lessee or lessor alone. Therefore renewal of the contract was not deemed
to be automatic but subject to a mutual agreement of both parties.
Facts:
Petitioner leased a parcel of land located at Quirino Avenue, Pandacan,
Manila. The lease contract was for a period of fifteen years to commence on
1 June 1979 and to end on 1 June 1994 subject to renewal for another
ten (10) years, under the same terms and conditions.
During her stay, petitioner was allowed to make improvements on the
property
Private respondents counsel wrote petitioner informing her of the increase
in the rent to P1,576.58 effective January 1992 pursuant to the provisions of
the Rent Control Law. Petitioner, however, tendered checks for only P400
each, payable to Jose Tiongco as administrator. Respondents refused to
accept.
Petitioner filed with the RTC of Manila a complaint for specific
performance with prayer for consignation. She prayed that private
respondents be ordered to accept the rentals in accordance with the lease
contract and to respect the lease of fifteen years, which was renewable for
another ten years, at the rate of P200 a month.
Respondents claimed that they were justified in refusing the checks since
they were not in accordance with the Rent Control Law and that the phrase
in the lease contract authorizing renewal for another ten years does not
mean automatic renewal; rather, it contemplates a mutual agreement
between the parties
RTC declared the lease contract automatically renewed for ten years and
considered as evidence thereof (a) the stipulations in the contract giving the
lessee the right to construct buildings and improvements and (b) the filing
by petitioner of the complaint almost one year before the expiration of the
initial term of fifteen years
CA reversed the decision of the RTC, and ordered petitioner to immediately
vacate the leased premises on the ground that the contract expired on 1 June
1994 without being renewed.
According to the CA, the phrase this lease shall be for a period of fifteen
(15) years effective June 1, 1979, subject to renewal for another ten (10)
years, under the same terms and conditions is unclear as to who may
exercise the option to renew.
It applied the ruling in Fernandez v. CA that without a stipulation that the
option to renew the lease is solely for the benefit of one party any renewal
of a lease contract must be upon the agreement of the parties. And in the
absence of such agreement, contract cannot be renewed. Hence current
petition.
Issue:
1.) WON the phrase "subject to renewal for another (10) years signifies an
automatic renewal or a mere option to renew.
2.) If it is a mere option, who may exercise the same or for whose benefit
was it stipulated?
Held/Ratio:
1.) The phrase does not provide an automatic renewal.There is nothing
in the stipulations in the contract and the parties actuation that shows that
the parties intended an automatic renewal or extension of the term of the
contract.
OBLICON Digests
Chapter 3-4
Neither the filing of the complaint a year before the expiration of the 15-
year term nor private respondents acceptance of the increased rentals nor
the stipulation of the contract allowing improvements on the property has
any bearing on the intention of the parties regarding renewal.
2.) In a reciprocal contract like a lease, the period must be deemed to have
been agreed upon for the benefit of both parties, absent language showing
that the term was deliberately set for the benefit of the lessee or lessor
alone. We are not aware of any presumption in law that the term was
deliberately set for the benefit of the lessee alone
In the case at bar, it was not specifically indicated who may exercise the
option to renew, neither was it stated that the option was given for the
benefit of herein petitioner. Thus, pursuant to the Fernandez ruling and
Article 1196 of the Civil Code, the period of the lease contract is deemed to
have been set for the benefit of both parties. Renewal of the contract may be
had only upon their mutual agreement or at the will of both of them. Since
the private respondents were not amenable to a renewal, they cannot be
compelled to execute a new contract when the old contract terminated.
Gregorio Araneta vs. Phil. Sugar
by Dy, Ramon
Doctrine:
Recit-ready: Tuason owns a parcel of land in QC. Sells part of it to Phil
Sugar through Araneta. Stipulation in the contract of sale, to build Sto
Domingo church, as well as construct streets beside the church
Phil sugar was not able to finish building the streets due to informal
settlers. Phil sugar filed complaint in RTC for araneta to comply w/
obligation. Lower court fixed a period of 2 years for Phil Araneta to
comply with obligation.
Lower court had no basis to fix the period of 2 years. Courts must have
legal basis in fixing the period of obligations
Facts:
JM Tuason owns land in QC (Sta Mesa Heights)
Sold part of it to Philippine Sugar through Araneta
Contract of purchase stipulations
Build Sto Domingo church and convent
Construct streets on the NE and NW and SW sides of the land
Philippine Sugar finished construction of the church
- Araneta was not able to finish the streets due to informal settlers
Phil Sugar filed complaint against Araneta to comply with their obligation.
- Defense of Araneta
o action was premature since its obligation to construct the streets in question was with
period which needs to be fixed first by the court in a proper suit
Plaintiff prayed that court fix a period for defendants to comply the obligation
Lower court: "the proven facts precisely warrants the fixing of such a period",
- 2 years period was given\
Issue: w/n the court was correct in fixing the period for the obligation
NO
Held/Ratio:
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.
last paragraph of Article 1197"the courts shall determine such
period as may under the circumstance have been
probably contemplated by the parties."
statement manifestly insufficient to explain how the two-year period given
to petitioner herein was arrived at.
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"
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.
OBLICON Digests
Chapter 3-4
Macasaet vs. Macasaet
by Geraldez, Nico
Doctrine: In the absence of a stipulation on this point, Article 1197 of the
Civil Code allows the courts to fix the duration or the period. Article 1197 -
If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts may
fix the duration thereof. The courts shall also fix the duration of the period
when it depends upon the will of the debtor. In every case the courts shall
determine such period as may under the circumstances have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be
changed by them. Article 1197, however, applies to a situation in which the
parties intended a period. Such qualification cannot be inferred from the
facts of the present case.
Recit-ready:
Petitioners - Ismael and Teresita Macasaet (Son and wife)
Respondents - Vicente and Rosario Macasaet (Parents)
Respondents filed with the MTCC of Lipa an ejectment suit against their
son and his wife alleging that they were the owners of 2 parcels of land in
Lipa City. In 1992 by way of verbal lease agreement petitioners were living
in said properties and despite the agreement of a rental fee, petitioners failed
to pay the monthly rate of P500. Petitioners deny the existence of the verbal
agreement and insist that this should be part of their inheritance. MTC ruled
in favor of respondents and ordered petitioners to vacate the property stating
that petitioners were not occupying the lots by virtue of verbal agreement
but by tolerance by respondents as parents. It also stated that successional
rights were inchoate. RTC affirmed MTC decision but said that petitioners
hsould be reimbursed for the improvements. CA sustained ruling of 2 lower
courts saying that they were here by tolerance of respondents and that their
stay there became illegal the moment they received letter demanding them
to leave. ISSUE: WON there are valid grounds for the ejectment of the
children and WON the court can fix a fixed period if it is not mentioned in
the contract HELD: Petitioners had the right to occupy the property but the
duration and the period is unknown. In the absence of a stipulation on this
point, Article 1197 of the Civil Code allows the courts to fix the duration or
the period. Article 1197 - If the obligation does not fix a period, but from its
nature and the circumstances it can be inferred that a period was intended,
the courts may fix the duration thereof. The courts shall also fix the duration
of the period when it depends upon the will of the debtor. In every case the
courts shall determine such period as may under the circumstances have
been probably contemplated by the parties. Once fixed by the courts, the
period cannot be changed by them. Article 1197, however, applies to a
situation in which the parties intended a period. Such qualification cannot
be inferred from the facts of the present case. No period was intended by the
parties. Their mere failure to fix the duration of their agreement does not
necessarily justify or authorize the courts to do so. Thus, there was no
longer any reason for petitioners to be living in the property.
Facts:
Petitioners Ismael and Teresita Macasaet and Respondents Vicente and
Rosario Macasaet are first-degree relatives. Ismael is the son of
respondents, and Teresita is his wife
On December 10, 1997, the parents filed MTCC of Lipa City an ejectment
suit against the children allegeging that they were the owners of two (2)
parcels of land situated at Banay-banay, Lipa City; that by way of a verbal
lease agreement, Ismael and Teresita occupied these lots in March 1992 and
used them as their residence and the situs of their construction business; and
that despite repeated demands, petitioners failed to pay the agreed rental of
P500 per week.
Petitioners denied the existence of any verbal lease agreement. They added
that it was the policy of respondents to allot the land they owned as an
advance grant of inheritance in favor of their children. Thus, they contended
that the one of lots had been allotted to Ismael as advance inheritance. On
the other hand, the other lot was allegedly given to petitioners as payment
for construction materials used in the renovation of respondents house.
The MTC ruled in favor of respondents and ordered petitioners to vacate the
premises. It opined that Ismael and Teresita had occupied the lots, not by
virtue of a verbal lease agreement, but by tolerance of Vicente and Rosario
As their stay was by mere tolerance, petitioners were necessarily bound by
an implied promise to vacate the lots upon demand. The MTCC dismissed
their contention that one lot had been allotted as an advance inheritance, on
the ground that successional rights were inchoate. Moreover, it disbelieved
petitioners allegation that the other parcel had been given as payment for
construction materials.
On appeal, the regional trial court (RTC) upheld the findings of the MTCC.
However, the RTC allowed respondents to appropriate the building and
other improvements introduced by petitioners, after payment of the
indemnity provided for by Article 448 in relation to Articles 546 and 548 of
OBLICON Digests
Chapter 3-4
the Civil Code. It added that respondents could oblige petitioners to
purchase the land, unless its value was considerably more than the building.
In the latter situation, petitioners should pay rent if respondents would not
choose to appropriate the building.
Upon denial of their individual Motions for Reconsideration, the parties
filed with the CA separate Petitions for Review, which were later
consolidated.
The CA sustained the finding of the two lower courts that Ismael and
Teresita had been occupying the subject lots only by the tolerance of
Vicente and Rosario. Thus, possession of the subject lots by petitioners
became illegal upon their receipt of respondents letter to vacate it
Issue:
WON there are valid grounds for the ejectment of the children
WON the court can fix a fixed period if it is not mentioned in the contract
Held/Ratio:
Right to Use the Lots Terminated
That Ismael and Teresita had a right to occupy the lots is therefore clear.
The issue is the duration of possession. In the absence of a stipulation on
this point, Article 1197 of the Civil Code allows the courts to fix the
duration or the period.
Article 1197. If the obligation does not fix a period, but from its nature and
the circumstances it can be inferred that a period was intended, the courts
may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the
will of the debtor.
In every case the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once
fixed by the courts, the period cannot be changed by them.
Article 1197, however, applies to a situation in which the parties
intended a period. Such qualification cannot be inferred from the facts
of the present case.
To repeat, when Vicente and Rosario invited their children to use the lots,
they did so out of parental love and a desire for solidarity expected from
Filipino parents. No period was intended by the parties. Their mere failure
to fix the duration of their agreement does not necessarily justify or
authorize the courts to do so.
Based on respondents reasons for gratuitously allowing petitioners to use
the lots, it can be safely concluded that the agreement subsisted as long as
the parents and the children mutually benefited from the arrangement.
Effectively, there is a resolutory condition in such an agreement. Thus,
when a change in the condition existing between the parties occurs -- like a
change of ownership, necessity, death of either party or unresolved conflict
or animosity -- the agreement may be deemed terminated. Having been
based on parental love, the agreement would end upon the dissipation of the
affection.
When persistent conflict and animosity overtook the love and solidarity
between the parents and the children, the purpose of the agreement ceased.
Thus, petitioners no longer had any cause for continued possession of the
lots. Their right to use the properties became untenable. It ceased upon their
receipt of the notice to vacate. And because they refused to heed the
demand, ejectment was the proper remedy against them. Their possession,
which was originally lawful, became unlawful when the reason therefor --
love and solidarity -- ceased to exist between them.
Alipio vs. CA
by Bautista, Paolo
Doctrine:
If from the law or the nature or the wording of the obligation the contrary
does not appear, an obligation is presumed to be only joint.
Recit-ready:
The spouses Alipio and the spouses Manuel subleased a fishpond from
Jaring. The rent of 485,600 was payable in two installments of 300,000 and
185,600. The spouses were unable to fully pay the second installment.
Jaring then sued the spouses Alipio and Manuel for the unpaid amount.
Purita Alipio moved to dismiss the case against her on the ground that her
husband had passed away. The RTC and CA dismissed her appeal saying
that she can still be held liable as a party to the contract despite the death of
her husband. The CA also added that her liability is solidary.
OBLICON Digests
Chapter 3-4
SC held that the obligation entered into by spouses Alipio is chargeable
against their conjugal partnership. When the spouses are sued for the
enforcement of an obligation entered into by them, they are being
impleaded in their capacity as representatives of the conjugal partnership
and not as independent debtors such that the concept of joint or solidary
liability, as between them, does not apply. But even assuming the contrary
to be true, the nature of the obligation involved in this case, as will be
discussed later, is not solidary but rather merely joint.
If from the law or the nature or the wording of the obligation the contrary
does not appear, an obligation is presumed to be only joint
Art. 1207 of the Civil Code provides:
The concurrence of two or more creditors or of two or more debtors in one
and the same obligation does not imply that each one of the former has a
right to demand, or that each one of the latter is bound to render, entire
compliance with the prestations. There is a solidary liability only when the
obligation expressly so estates, or when the law or the nature of the
obligation requires solidarity.
Facts:
Respondent Romeo Jaring[1] was the lessee of a 14.5 hectare fishpond
in Barito, Mabuco, Hermosa, Bataan. The lease was for a period of five
years ending on September 12, 1990. On June 19, 1987, he subleased the
fishpond, for the remaining period of his lease, to the spouses Placido and
Purita Alipio and the spouses Bienvenido and Remedios Manuel. The
stipulated amount of rent was P485,600.00, payable in two installments of
P300,000.00 and P185,600.00, with the second installment falling due on
June 30, 1989.Each of the four sublessees signed the contract.
The first installment was duly paid, but of the second installment, the
sublessees only satisfied a portion thereof, leaving an unpaid balance of
P50,600.00. Despite due demand, the sublessees failed to comply with their
obligation, so that, on October 13, 1989, private respondent sued the Alipio
and Manuel spouses for the collection of the said amount
Petitioner Purita Alipio moved to dismiss the case on the ground that her
husband, Placido Alipio, had passed away. The trial court denied petitioner's
motion on the ground that since petitioner was herself a party to the
sublease contract, she could be independently impleaded in the suit together
with the Manuel spouses and that the death of her husband merely resulted
in his exclusion from the case
The CA dismissed her appeal saying that their obligation is solidary and the
surviving defendants cannot avoid action by claiming that the death of one
of the parties to the contract has totally extinguished their obligation.
Issue:
Can Jaring claim payment from Alipio despite the death of her husband?
What is the nature of the obligation? (joint/solidary)
Held/Ratio:
We hold that a creditor cannot sue the surviving spouse of a decedent
in an ordinary proceeding for the collection of a sum of money chargeable
against the conjugal partnership and that the proper remedy is for him to file
a claim in the settlement of estate of the decedent.
The cases relied upon by the Court of Appeals in support of its ruling,
namely, Climaco v. Siy Uy[15] and Imperial Insurance, Inc. v. David,[16] are
based on different sets of facts. In Climaco, the defendants, Carlos Siy Uy
and Manuel Co, were sued for damages for malicious prosecution. Thus,
apart from the fact the claim was not against any conjugal partnership, it
was one which does not survive the death of defendant Uy, which merely
resulted in the dismissal of the case as to him but not as to the remaining
defendant Manuel Co.
With regard to the case of Imperial, the spouses therein jointly and
severally executed an indemnity agreement which became the basis of a
collection suit filed against the wife after her husband had died. For this
reason, the Court ruled that since the spouses' liability was solidary, the
surviving spouse could be independently sued in an ordinary action for the
enforcement of the entire obligation.
It must be noted that for marriages governed by the rules of conjugal
partnership of gains, an obligation entered into by the husband and wife is
chargeable against their conjugal partnership and it is the partnership which
is primarily bound for its repayment. [17] Thus, when the spouses are sued for
the enforcement of an obligation entered into by them, they are being
OBLICON Digests
Chapter 3-4
impleaded in their capacity as representatives of the conjugal partnership
and not as independent debtors such that the concept of joint or solidary
liability, as between them, does not apply. But even assuming the contrary
to be true, the nature of the obligation involved in this case, as will be
discussed later, is not solidary but rather merely joint, making Imperial still
inapplicable to this case.
The trial court ordered petitioner and the Manuel spouses to pay
private respondent the unpaid balance of the agreed rent in the amount of
P50,600.00 without specifying whether the amount is to be paid by them
jointly or solidarily. In connection with this, Art. 1207 of the Civil Code
provides:
The concurrence of two or more creditors or of two or more debtors in one
and the same obligation does not imply that each one of the former has a
right to demand, or that each one of the latter is bound to render, entire
compliance with the prestations. There is a solidary liability only when the
obligation expressly so estates, or when the law or the nature of the
obligation requires solidarity.
Indeed, if from the law or the nature or the wording of the obligation the
contrary does not appear, an obligation is presumed to be only joint, i.e., the
debt is divided into as many equal shares as there are debtors, each debt
being considered distinct from one another.
Clearly, the liability of the sublessees is merely joint. Since the
obligation of the Manuel and Alipio spouses is chargeable against their
respective conjugal partnerships, the unpaid balance of P50,600.00 should
be divided into two so that each couple is liable to pay the amount of
P25,300.00.
WHEREFORE, the petition is GRANTED. Bienvenido Manuel and
Remedios Manuel are ordered to pay the amount of P25,300.00, the
attorney's fees in the amount of P10,000.00 and the costs of the suit. The
complaint against petitioner is dismissed without prejudice to the filing of a
claim by private respondent in the proceedings for the settlement of estate
of Placido Alipio for the collection of the share of the Alipio spouses in the
unpaid balance of the rent in the amount of P25,300.00.
Inchausti & Co. vs Yulo
By Santiago, Monch
Doctrine: Article 1148 of the Civil Code. "The solidary debtor may
utilize against the claims of the creditor of the defenses arising from the
nature of the obligation and those which are personal to him. Those
personally pertaining to the others may be employed by him only with
regard to the share of the debt for which the latter may be liable."
Recit-ready: This suit is brought for the recovery of a certain sum of
money, the balance of a current account opened by the firm of Inchausti &
Company with Teodor Yulo and after his death continued by Gregorio Yulo
as principal representative of his children. On Aug.12, 1909, Gregorio Yulo,
in representation of his 3 siblings, executed a notarial instrument, ratifying
all the contents of the prior document of Jan.26, 1908, severally and joint
acknowledged their indebtedness for P253,445.42, 10 % per annum, 5
installments. Plaintiff brought an action againsta Gregorio for the payment
of the said balance due. But on May 12, 1911, 3 siblings executed another
instrument in recognition of the debt, reduced to P225,000, interest reduced
to 6% per annum, installments increased to 8.
Held:
The contract of May 12, 1911 does not constitute a novation of the former
one of Aug.12, 1909, with respect to the other debtors who executed this
contract. First, in order that an obligation may be extinguished by another
which substitutes it, it is necessary that it should be so expressly declared or
that the old and the new be incompatible in all points(art. 1292). It is always
necessary to state that it is the intentionof the contracting parties to
extinguish the former obligation by the new one. The obligation to pay a
sum of money is not novated in a new instrument wherein the old is ratified,
by changing only the term of payment and adding other obligations not
incompatible with the old one.
The obligation being solidary, the remission of any part of the debt made by
a creditor in favor of one or more of the solidary debtors necessarily
benefits the others, and therefore there can be no doubt that, in accordance
with the provision of Art. 1215, 1222, the defendant has the right to enjoy
the benefits of the partial remission. At present judgment can be rendered
only as to P112,500.
OBLICON Digests
Chapter 3-4

Facts: the reduction of balance to P253,445.42.

Suit is for recovery balance of a current account opened Inchausti & 1. HIJOS T. YULO expressed its conformity by means of a letter, proving
Company with Teodoro Yulo and after his death continued with his widow that mortgage credit was formalized.
and children, whose principal representative is Gregorio Yulo.
TEODORO YULO: property owner of Iloilo, for exploitation of haciendas 1909, GREGORIO YULO, FOR HIMSELF AND REPRESENTING
in Occidental Negros, had been borrowing money from Inchausti & MANUEL and PEDRO, FRANCISCO, CARMEN AND CONCEPCION in
Company under specific conditions. their OWN BEHALF (now of legal age) executed affidavit ratifying their
Died and appointed widow and SONS as administrators including admission on their indebtedness to INCHAUSTI:
GREGORIO YULO. i. P253,445.42 with 10% interest per annum
i. Held conjugal property in common ii. To be paid in 5 installments at the rate of
ii. At the death of widow, Gregoria Regalado, P50,000, except last being P53,445.42
children preserved the same relations under the name of HIJOS DE T. iii. Payment beginning June 30, 1910,
YULO continuing successively on the 30th of each June until the last payment on
1. Continued current account with Inchausti & Company until balance June 30, 1914.
amounted to P200,000. In for the payment of the disbursements of money iv. Among other clauses, they expressly
which until that time it had been making in favor of its debtors, the Yulos. stipulated the following:
Children are: Pedro, Francisco, Teodoro, Manuel, Gregorio, Mariano, 1. Default in payment of any of the installments or the noncompliance of
Carmen, Concepcion, and Jose Yulo y Regalado. any of the other obligations will result in the maturity of all the said
i. Concepcion and Jose were minors installments
ii. Teodoro was mentally incompetent. 2. INCHAUSTI may exercise at once all the rights and actions to obtain
1908, GREGORIO YULO (representing his brothers Pedro, Manuel and the immediate and total payment of debt, in same manner that they would
Carme, executed notarial document whereby all admitted their indebtedness have so done at the maturity of the said installments.
to Inchausti & Company in the sum of P203,221.27. 3. All the obligations will be understood as having been contradicted in
i. To secure with 10% interest per annum, solidum by all of us, the Yulos, brothers and sisters.
they mortgaged an undivided 6/9th of their 38 rural properties, remaining 4. Agreed that this instrument shall be confirmed and ratified in all its
urban properties, lorchas, and family credits which were listed parts, within the present week, by our brother Don Mariano Yulo y
1. Obligated themselves to make a formal inventory and to describe all Regalado who resides in Bacolod, otherwise it will not be binding on
properties, and to cure all defects which might prevent the inscription of the INCHAUSTI who can make use of their rights to demand and obtain
said contract in the registry of property and to extend by the necessary immediate payment of their credit without any further extension or delay, in
formalities the aforesaid mortgage over the remaining 3/9th of all the accordance with what we have agreed.
property and rights belonging to their other brothers, the incompetent 5. This instrument was neither ratified nor confirmed by Mariano Yulo.
Teodoro, and the minors Concepcion and Jose.
YULOS did not pay the first installment of the obligation.
1909, GREGPRIO YULO, REPRESENTING HIJOS DE YULO INCHAUSTI brought an ordinary action against Gregorio Yulo for the
ANSWERED LETTER OF INCHAUSTI IN THESE TERMS: payment of P253,445.42 with 10% interest per annum on that date
i. "With your favor of the 2d inst. we have aggregating P42,944.76.
received an abstract of our current account with your important firm, closed 1911, FRANCISCO, MANUEL, and CARMEN Yulo executed another
on the 31st of last December, with which we desire to express our entire affidavit in recognition of the debt and obligation of payment in the
conformity as also with the balance in your favor of P271,863.12. following terms:
ii. INCHAUSTI informed Hijos de T. Yulo of Debt is reduce for them to P225,000
OBLICON Digests
Chapter 3-4

Interest is reduced 6% per annum from March 15, 1911 COURT DECIDED IN FAVOR OF GREGORIO/MARIANO YULO.
Installments are increase to eight, 1st of P20,000, beginning on June 30, INCHAUSTI pay with costs.
1911, and the rest of P30,000 each on the same date of each successive year
until the total obligation shall be finally and satisfactorily paid on June 30, Issue:WON INCHAUSTI can sue Gregorio alone, here being other
1919 obligors
If any of the partial payments specified in the foregoing clause be not paid
at its maturity, the amount of the said partial payment together with its Held/Ratio:GREGORIO YULO TO PAY INCHAUSTI P112, 500 WITH
interest shall bear 15% interest per annum from the date of said maturity, INTEREST STIPULATD IN MAY 12 1911 AFFIDAVIT, FROM MARCH
without the necessity of demand until its complete payment 15 1911 AND THE LEGL INTEREST ON THIS INTEREST DUE,
If during 2 consecutive years the partial payments agreed upon be not made, JUDGMENT APPEALED FROM IS REVERSED. NO SPECIAL
they shall lose the right to make use of the period granted to them for the FINDING AS TO COST.
payment of the debt or the part thereof which remains unpaid, and WON INCHAUSTI CAN SUE GREGORIO ALONE? YES.
INCHAUSTI may consider the total obligation due and demandable, and Debtors having obligated themselves in solidum, creditor can bring action
proceed to collect the same together with the interest for the delay above to any one of them.
stipulated through all legal means. i. When the obligation is constituted as a
ADDITION STIPULATION: Inchausti & Co. should include in their suit conjoint and solidary obligation, each one of debtors is bound to perform in
brought in the CFI of Iloilo against Gregorio Yulo, his brother and joint co- full the undertaking which is the subject matter of the obligation.
obligee, Pedro Yulo:
i. FRANCISCO, MANUEL AND CARMEN Lafarge Cement vs. CCC
will procure by all legal means and in the least time possible a judgment in By Mordeno, Gia
their favor against the said Don Gregorio and Don Pedro, sentencing the
later to pay the total amount of the obligation acknowledged by them in Doctrine:
August 12, 1909 affidavit
ii. If they should deem it convenient for their Obligations are generally considered joint except when otherwise expressly
interests, Don Francisco, Don Manuel, and Doa Carmen Yulo may appoint stated or when the law or the nature of the obligation requires solidarity.
an attorney to cooperate with the lawyers of Inchausti & Company in the Obligations arising from tort are always solidary.
proceedings of the said case.
Article 1222 of the Civil Code: A solidary debtor may, in actions filed by
GREGORIO YULO ASNWERED THE COMPLAINT: the creditor, avail itself of all defenses which are derived from the nature of
An accumulation of interest had taken place and that compound interest was the obligation and of those which are personal to him, or pertain to his own
asked for the Philippine currency at par with Mexican share. With respect to those which personally belong to the others, he may
IN August 21, 1909 affidavit, 2 conditions were agreed (one approved by avail himself thereof only as regards that part of the debt for which the latter
Court of First Instance) and the other ratified and confirmed by the other are responsible.
brother Mariano Yulo, neither of which was complied with
With regard to the same debt claims were presented before the Recit-ready:
commissioners in the special proceedings over the inheritances of Teodoro Facts
Yulo and Gregoria Regalado, though later they were dismissed, pending the A letter of intent was executed by both parties. Petitioners agreed to
present suit purchase the cement business of respondent. They entered into a Sales and
August 12, 1909 affidavit, was novated by that of May 12, 1911, executed Purchase Agreement.
by Manuel, Francisco and Carmen Yulo.
 OBLICON Digests
Chapter 3-4
CCC had a pending case with SC entitled Asset Privatization Trust (APT) v.
Court of Appeals and Continental Cement Corporation. In case the
judgment of such case would be against CCC, parties to the SPA agreed to
retain from the purchase price a portion of the contract price. Petitioners
refused to apply the sum to the payment to APT case.
CCC filed a complaint before the RTC fearing the nonpayment to APT case
would result to the foreclosure of its properties including that of the SPA.
Petitioners filed their answers and counterclaims against CCC, its president
and corporate secretary.
RTC dismissed petitioners counterclaims.
Issue
Whether or not the RTC gravely erred in refusing to rule that CCC has no
personality to move to dismiss petitioners compulsory counterclaims on
Lim and Marianos behalf
Held
CCC, Lim, and Mariano have solidary liability.
Obligations may be joint or solidary. As a general rule, obligations are joint
except when expressly stated or the nature of the obligation requires
solidarity. Obligations arising from tort are always solidary.
The liability sought against CCC and that of individual repsondents does
not negate the solidary nature of their liability.
The act of CCC as a solidary debtor of filing a motion to dismiss the
counterclaim on grounds that pertain only to its individual co-debtors is
allowed. However, it cannot file the same Motion on the behalf for the
simple reason that it lacks the requisite authority to do so. A corporation has
legal personality entirely separate and distinct from that of its officers and
cannot act for and on their behalf without being so authorized.
Facts:
A Letter of Intent was executed by both parties. Petitioners Lafarge Cement
Philippines, Inc. agreed to purchase the cement business of Respondent
Continental Cement Corporation. They entered into a Sales and Purchase
Agreement.
Petitioners also knew that at that time, CCC had a pending case with the
Supreme Court entitled Asset Privatization Trust (APT) v. Court of Appeals
and Continental Cement Corporation. In anticipation of a judgment against
CCC, the parties of the SPA agreed to retain from the purchase price a
portion of the contract price. This will be deposited in an interest-bearing
account in the First National City Bank of New York for payment to APT,
the petitioner in the pending SC case of CCC. Petitioners refused to apply
the sum to the payment to ATP.
CCC filed a complaint before the RTC fearing that the nonpayment to APT
would result in the foreclosure of the properties covered by the SPA with
Lafarge and other properties. Petitioners moved to dismiss the Complaint as
it violated the prohibition on forum shopping.
Petitioners filed their answer and compulsory counterclaims ad cautelam. In
their answer, they denied the allegations in the Complaint. They prayed, by
way of counterclaims against CCC, its majority stockholder and president
Gregory Lim, and corporate secretary Anthony Mariano for damages.
The RTC dismissed petitioners counterclaims for the following reasons: (a)
the counterclaims against Lim and Mariano were not compulsory, (b) the
ruling in Sapugay is not applicable, (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 that
(1) petitioners counterclaims are not compulsory
(2) Sapugay v. Court of Appeals is inapplicable here
(3) petitioners violated the rule on joinder of causes of action
Whether or not the RTC gravely erred in refusing to rule that CCC has no
personality to move to dismiss petitioners compulsory counterclaims on
Lim and Marianos behalf
Held/Ratio:
Whether or not the RTC gravely erred in ruling that (1) petitioners
counterclaims are not compulsory. YES
Counterclaims are claims, which a defending part may have against an
opposing party. They are allowed in order to avoid a multiplicity of suits
and to facilitate the disposition of the whole controversy in a single action.
The only limitations to such are (1) that the court should have jurisdiction
over the subject matter of the counterclaim, and (2) that it could acquire
jurisdiction over third parties whose presence is essential for its
adjudication.
Counterclaims may either be permissive or compulsory
Permissive it does not arise out of or is not necessarily connected with the
opposing partys claim. It may be filed separately in another case.
 OBLICON Digests
Chapter 3-4
Compulsory it arises out of or is necessarily connected with opposing
partys claim and does not require for its adjudication the presence of third
parties of whom the court cannot acquire jurisdiction. It should be filed
together with the case.
Test to determine if the counterclaim is compulsory or not
Are issues of fact and law raised by the same claim and by the counterclaim
largely the same?
Would res judicata bar a subsequent suit on defendants claim, absent the
compulsory counterclaim rulel?
Will substantially the same evidence support or refute plaintiffs claim as
well as defendants counterclaim?
Is there any logical relation between the claim and the counterclaim?
A positive answer to all four questions would indicate that the counterclaim
is compulsory. In this case, the petitioners counterclaim answer positively
to all questions.
Petitioners base their counterclaim on the actions of Mariano and Lim of
filing the Complaint and securing the Writ of Attachment in bad faith. The
recovery of petitioners counterclaims is contingent upon the case filed by
the respondents. The counterclaim is compulsory.
Whether or not the RTC gravely erred in ruling that (2) Sapugay v.
Court of Appeals is inapplicable here. YES
In Sapugay v. CA, the court ruled that counterclaims can bring into action
any claim against persons other than the plaintiff when the presence of such
persons are required in the granting of complete relief in the determination
of a counterclaim or cross claim if jurisdiction can be obtained over them.
Respondents claim that new parties cannot be included in the counterclaim.
Lim and Mariano are not necessary to obtain complete relief from CCC.
CCC as a corporation with a separate legal personality has the juridical
capacity to indemnify petitioners even without Lim and Mariano.
Inclusion of corporate officers is not based on the assumption that
corporation does not have financial ability to answer for damages. Rather it
rests on the allegations of fraud and bad faith on the part of the corporate
officer or stockholder.
Whether or not the RTC gravely erred in ruling that (3) petitioners
violated the rule on joinder of causes of action. NO.
Rules on permissive joinder of causes of action or parties are not applicable
in this case. Respondents Lim and Mariano are real parties in interest to the
counterclaim. In joining the compulsory counterclaim, petitioners are
consistent with the solidary nature of the liability.
Sec. 6 of Rule 3 fo the Rules of Civil Procedure provide that
All persons in whom or against whom any right to relief in respect to or
arising out of the same transaction or series of transactions is alleged to
exist whether jointly, severally, or in the alternative, may, except as
otherwise provided in these Rules, join as plaintiffs or be joined as
defendants in one complaint, where any question of law or fact common to
all such plaintiffs or to all such defendants may arise in the action; but the
court may make such orders as may be just to prevent any plaintiff or
defendant from being embarrassed or put to expense in connection with any
proceedings in which he may have no interest.
Whether or not the RTC gravely erred in refusing to rule that CCC has
no personality to move to dismiss petitioners compulsory
counterclaims on Lim and Marianos behalf. YES.
Respondents liability is solidary, contrary to what petitioners claim that is
solidary and joint.
Obligations are generally considered joint except when otherwise expressly
stated or when the law or the nature of the obligation requires solidarity.
Obligations arising from tort are always solidary.
The liability sought against the CCC is for specific performance and tort,
while that sought against the individual respondents is based on tort. Such
does not negate the solidary nature of their liability for tortious acts alleged
in the counterclaims.
A solidary debtor may invoke defenses arising from the nature of the
obligation, from circumstance personal to it, or even from those personal to
its co-debtors. Article 1222 of the Civil Code provides that 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 CCC as a solidary debtor of filing a motion to dismiss the
counterclaim on grounds that pertain only to its individual co-debtors is
allowed. However, it cannot file the same Motion on the behalf for the
simple reason that it lacks the requisite authority to do so. A corporation has
legal personality entirely separate and distinct from that of its officers and
cannot act for and on their behalf without being so authorized.
OBLICON Digests
Chapter 3-4
Inciong vs. CA
By Yarra, Johan
Doctrine (Solidary or Joint and Several Obligation): A solidary or
JOINT and SEVERAL obligation is one in which each debtor is liable for
the entire obligation, and each creditor is entitled to demand the whole
obligation.
Recit-ready: Petitioner, Pantanosa and Naybe were solidary obligors on a
promissory note (50K loan) they signed in favor of Philippine Bank of
Communications. The expiration of the loan has passed without them
having paid the sum of money despite repeated demands from the bank,
until the latter filed a complaint for collection of sum of 50K. The loan was
for the support operation of a logs business venture. The summons was only
served to herein petitioner because the respondent bank itself dismissed the
case against Pantonasas while Naybe had gone to Saudi Arabia. The
petitioner alleged that his consent to sign the promissory note was induced
by fraud (hence null and void) or misrepresentation by Campos (the person
who induced him to be part of the logs business). He indicated that he
affixed his signature with the understanding that he would only be a co-
maker for the loan of P5,000. He failed to convince the trial court, as well
as the CA and the Supreme Court because of the lack of clear and
convincing evidence to support his allegations.
The issue related to the topic is whether or not he should be held liable for
the unpaid obligation even though he claims that he must be released from
such due to the dismissal of the case against Naybe (principal debtor) and
Pantonasas (co-maker in the obligation).
The petition is unavailing since the nature of petitioners liability is that of a
solidary debtor/obligor/co-maker. His contention that he as well must be
released from obligation only applies to guarantors pursuant to Article 2080
of the Civil Code, but NOT to solidary debtors.What applies to solidary
debtors are the rights bestowed upon them in Sec. 4, Chap. 3, Title 1, Book
IV of the Civil Code which states the law on JOINT and SEVERAL
obligations. Under Article 1207 thereof, when there are two or more
debtors in one and the same obligation, there is solidary liability only when
the obligation expressly so states, when the law so provides or when the
nature of the obligation requires. Otherwise, the presumption is joint (each
of the debtors is liable only for a proportionate part of the debt).In the case
at bar, because the promissory note expressly states that the three
signatories therein are JOINTLY and SEVERALLY (it is SOLIDARY)
liable, any one, some or all of them may be proceeded against for the entire
obligation. The choice to determine against whom to enforce collection is
left to the solidary creditor. Hence, the dismissal of the case against
Pantonasas may not be deemed as having discharged petitioner from
liability as well. As for Naybe, suffice it to say that the court never acquired
jurisdiction over him. Petition denied CA affirmed.
Facts: The petitioner, along with Pantanosa and Naybe, signed a
promissory note for a loan of 50K to Philippine Bank of Communications
(herein respondent bank) due on May 1983. Said due date expired without
the promisors having paid their obligation despite repeated demands from
the bank, until the latter filed a complaint for collection of sum of 50K
against the obligors.
Since Naybe had gone to Saudi Arabia and that the private respondent bank
dismissed the case against Pantanosas, the summons was served only to
herein petitioner. In his answer, he alleged that the signing of the
promissory note started when he was approached by his friend Campos (a
partner of Pio Tio, branch manager of herein respondent bank) to have
business talks regarding a potential venture in the falcata logs operation
business with them (Campos and Pio Tio). Petitioner acceded but with the
understanding that he would only be a co-maker for the loan of P5,000. He
alleged that he affixed his signature to a copy of the promissory note his
supposed obligation in the amount of 5,000. He claims that it was by
trickery, fraud and misrepresentation caused by Campos that he was made
liable for the amount of P50,000.
His testimony did not convince the trial court as it ruled in favor of the
respondent bank (dispositive portion is not provided in the case). The lower
court noted that the typewritten figure 50,000 clearly appears directly
below the admitted signature of the petitioner in the promissory note, and
that it was also rather odd for petitioner to have indicated in a copy and
not in the original, of the promissory note, his supposed obligation of 5k
only. He appealed the decision to the CA but the latter affirmed the assailed
decision (no discussion here).
OBLICON Digests
Chapter 3-4
Issue: Hence this petition to the Supreme Court. The issue: (related to the
syllabus) whether or not petitioner should be held liable for the unpaid
promissory note. What is the nature of his liability?
Held/Ratio: Since he is a solidary co-maker or debtor, he is bound to pay
for the unpaid loan.
According to the petitioner the CA should have declared the promissory
note null and void. He annexed in his petition an affidavit by Pantonasas (a
co-maker in the promissory note) which supports his contention that they
were induced to sign the promissory note on the belief that it was only for
5K. However the SC reminded the petitioner that it is not a trier of facts.
Having lost the chance to fully ventilate his factual claims below, he may no
longer be accorded the same opportunity in the absence of grave abuse of
discretion on the part of the court below. In the end, petitioner failed to
prove fraud as it is required that such act must be established by clear and
convincing evidence, mere preponderance of evidence not being adequate.
The attempt to prove fraud failed as it was only evidenced by the
petitioners own uncorroborated and self-serving testimony.
Lastly (the only related part), petitioner argues that the dismissal complaint
against Naybe, the principal debtor, and against Pantonasas (co-maker)
constituted a release of his obligation, especially because the dismissal of
the case against Pantonasas was upon the motion of private respondent bank
itself. His basis was Article 2080 of the Civil Code (The guarantors, even
though they be solidary, are released from their obligation whenever by
some act of the creditor, they cannot be subrogated to the rights, mortgages
and preferences of the latter.). However, this provision does not apply to
the petitioner since he signed the petitioner as a solidary co-maker and NOT
as a guarantor. This is clearly seen from the first sentence of the note (
I/we JOINTLY and SEVERAL promise to pay). A solidary or JOINT
and SEVERAL obligation is one in which each debtor is liable for the entire
obligation, and each creditor is entitled to demand the whole obligation.
It was also discussed that there are certain rights, actions and benefits (like
the one mentioned in the two preceding paragraphs) for guarantors which
do not apply to solidary co-makers. The latter has no other rights than those
bestowed upon him in Sec. 4, Chap. 3, Title 1, Book IV of the Civil Code
which states the law on joint and several obligations. Under Article 1207
thereof, when there are two or more debtors in one and the same obligation,
the presumption is that the obligation is joint so that each of the debtors is
liable only for a proportionate part of the debt. There is solidary liability
only when the obligation expressly so states, when the law so provides or
when the nature of the obligation requires.
Because the promissory note in this case expressly states that the three
signatories therein are JOINTLY and SEVERALLY liable, any one, some or
all of them may be proceeded against for the entire obligation. The choice to
determine against whom to enforce collection is left to the solidary creditor.
Hence, the dismissal of the case against Pantonasas may not be deemed as
having discharged petitioner from liability as well. As for Naybe, suffice it
to say that the court never acquired jurisdiction over him. Petitioner,
therefore, may only have recourse against his co-makers, as provided by
law. Petition denied and CA decision affirmed.
Quiombing vs. CA
By Dalumpines, Mikey
Doctrine: One solidary creditor may act alone without the other
creditors; other creditor not indispensable party in filing a case, and
therefore not a grounds for dismissal
Recit-ready: - Petitioner Nicencio Quiombing and his partner Dante
Biscocho agreed to build a house for respondents sps. Francisco and
Manuelita Saligo for ~138k.
- The house was completed and was to be paid in the manner described
in a 2nd agreement between Quiombing and Manuelita only, and later
on a promissory note was issued for their remaining payment balance
of ~125k payable in Dec. 1984 to Quiombing (ONLY).
- They failed to pay, so Quiombing filed for recovery against the spouses
with the trial court.
- However, respondents moved t o dismiss the claim, citing Biscocho was
an indispensable party to a recovery claim. Trial Court ruled in favor
of the spouses.
- Instead of amending the recovery claim, Quiombing appealed to the
CA, arguing that he could act by himself as a solidary creditor and
that the recovery could be payable solely to him as specified in the most
recent agreement. CA ruled against him, stating that not only were they
solidary creditors, they were also solidary debtors, so in case of breach
of agreement, the case could not move forward without Biscocho as his
 OBLICON Digests
Chapter 3-4
rights would be affected. Furthermore, they ruled that the current
agreement is just an extension of the original (so the recovery being
payable only to him is irrelevant/incorrect).
- Petitioner raised matter to SC. SC ruled that who would sue for
recovery is a personal matter between the solidary creditors as either
way, payment to one or the either would extinguish the entire
obligation. Biscocho was therefore not an indispensable party.
According to Art. 1212, any of the solidary creditors may act or do
whatever is useful to the others, but not do anything prejudicial to the
others. There was nothing prejudicial in petitioner claiming the
recovery and demanding payment alone. Biscocho could always just
demand his share from him; a matter outside the involvement of the
respondents. SC agreed with CA that the current agreement is just an
extension of the original, but it doesnt matter because the rule on
solidary creditors still stands. Wherefore, petition is GRANTED.
Facts: - Petitioner Nicencio Quiombing and his partner Dante Biscocho
entered into a Construction and Service Agreement with respondents
sps. Francisco and Manuelita Saligo for the construction of the latters
house for Php 137,940.00 in Aug. 1983.
- On Oct. 1984, petitioner and Manuelita entered into a 2nd agreement in
which the house was acknowledged completed and that payment was to
be done. A promissory note was issued for their remaining payment
balance of Php125,360.50 payable in Dec. 1984 to Quiombing.
- They failed to pay, so Quiombing filed for recovery against the spouses
with the trial court in 1986.
- However, respondents moved to dismiss the claim in 1987, citing
Biscocho was an indispensable party to a recovery claim. Trial Court
ruled in favor of the spouses, without prejudice to petitioner filing an
amended claim including Biscocho as a co-plaintiff.
- Instead of amending the recovery claim, Quiombing appealed to the
CA, arguing that he could act by himself as a solidary creditor and
that the recovery could be payable solely to him as specified in the most
recent agreement. CA ruled against him, stating that not only were they
solidary creditors, they were also solidary debtors, so in case of breach
of agreement, the case could not move forward without Biscocho as his
rights would be affected. Furthermore, they ruled that the current
agreement is just an extension of the original (so the recovery being
payable only to him is irrelevant/incorrect).
- Petitioner raised matter to SC. SC ruled that who would sue for
recovery is a personal matter between the solidary creditors as either
way, payment to one or the either would extinguish the entire
obligation. Biscocho was therefore not an indispensable party.
According to Art. 1212, any of the solidary creditors may act or do
whatever is useful to the others, but not do anything prejudicial to the
others. There was nothing prejudicial in petitioner claiming the
recovery and demanding payment alone. Biscocho could always just
demand his share from him; a matter outside the involvement of the
respondents. SC agreed with CA that the current agreement is just an
extension of the original, but it doesnt matter because the rule on
solidary creditors still stands. Wherefore, petition is GRANTED.
Issue: WON Quiombing as only 1 of 2 solidary creditors may file for
recovery; WON Biscocho as the other creditor is an indispensable party
whose non-joinder is grounds for dismissal of the recovery
Held/Ratio: YES, Quiombing as just one of the creditors may file for
recovery due to nature/definition of solidary obligations in Art. 1212
(paying only him in full will extinguish obligation to Biscocho
regardless). NO, Biscocho is not an indispensable party. In solidary
obligations, its a matter between the creditors who files for recovery;
even if recovery is paid to just 1 of them, the other can claim his share
in a separate action.
JAPRL Dev. Corp vs. Security Bank
By Rosales, Andrew
Doctrine: Creditor may demand payment from any of the debtors who are
solidarily liable including sureties even if undergoing corporate
rehabilitation
Recit-ready:
JAPRL is a local company engaged in steel fabrication who applied for a
credit facility worth Php 50 Million for Security Bank. Petitioners financial
adviser convened its outstanding creditors for loan restructuring. Financial
statements were given to the creditors wherein SBC found inconsistencies
which lead them to conclude that JAPRL committed misrepresentation.
Stated in the contract that any misrepresentation shall constitute as a default
 OBLICON Digests
Chapter 3-4
and subsequently they sent a formal demand for the outstanding Php 43
Million to JAPRL and its sureties. Petitioner were unable to comply hence
the recourse in the RTC of Makati for a sum of money. Petitioner's counsel
manifested a Stay Order from the RTC of QC wherein it had a pending
petition for Corporate Rehabilitation.
WON sureties can be held solidarily liable to a company undergoing
corporate rehabilitation
YES. SC held that Interim Rules on Corporate Rehabilitation do not apply
to sureties who are solidarily liable with the debtor. It was documented in
the contract that sureties were SOLIDARILY liable hence Art. 1216 was
applicable wherein the creditor may demand from any of debtors who are
solidarily liable. In this case the sureties were solidarily liable hence the
creditor may demand payment even if the company was undergoing
corporate rehabilitation.
Facts:
JAPRL is a local company engaged in steel fabrication and manufacturing
applied for a credit facility to the sum of Php 50 million from Security Bank
Corporation
JAPRLs financial adviser MRM Management convened with their clients
creditors for a restructuring of outstanding loan obligations.
Copies of JAPRLs financial statements from 1998 to 2001 were given for
the creditors to study.
SBC discovered inconsistencies in the final statements which lead them to
conclude that JAPRL made misrepresentations
Par. 10 (c) of the contract stated that any misrepresentations will constitute
as a default upon JAPRL and its sureties.
SBC sent a formal demand to JAPRL and its sureties Limson and Arollado
for the outstanding Php 43 million.
Petitioners failed to comply hence the complaint for sum of money to the
RTC of Makati
Petitioner's counsel manifested a stay order from the RTC of Quezon City
wherein it had a pending petition for corporate rehabilitation
Issue:
WON sureties can be held solidarily liable to a company undergoing
corporate rehabilitation
Held/Ratio:
YES. Supreme Court held that Interim Rules on Corporate Rehabilitation
do not apply to sureties who are solidarily liable with the debtor.
In Limson and Arollados case, their solidary liability with JAPRL is
documented in the contract
Liability of the Surety - The liability of the surety is solidary
Limson and Arrolado as sureties who are solidarily liable cannot claim
protection from the rehabilitation court.
ART. 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against
any one of them shall not be an obstacle to those which may subsequently
be directed against the others, so long as the debt has not been fully
collected.
Petition DENIED
Makati Dev. vs. Empire Insurance
By Santos, Patrick
Doctrine: Courts may mitigate the sanctions of contracts by virtue of
Article 1229, as the penalties provided by penal clauses are substitutes to
damages when it comes to breaches of contract, the courts may mitigate
them all the same.
Recit-ready:
FACTS
Petitioner sold a lot in Urdaneta Village, Makati, Rizal to Rodolfo Andal.
The Contract had a special condition which stated that the buyer should
construct a house and complete at least 50% within two years from the date
of purchase. If the buyer failed to do so, the seller shall have a claim of
around 12k.
Andal did not build the house but instead sold it to Juan Carlos and by the 2
year mark, the house still was not built. Makati Dev took the matter to court
asking for the money.
In the end of the trial, the court ordered Andals insurance company to give
Makati Dev P1,500 plus 12% interest and the same to Andal with regard to
his insurance company.
Makati Dev filed the matter to the Supreme Court stating that the SC had no
power to mitigate the P12,000 agreed upon.
 OBLICON Digests
Chapter 3-4
ISSUE
Can the court mitigate the penal clause or the special condition?
RULING: YES
Article 1229 of the Civil code provides that The judge shall equitably
reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
In this case, the court noticed that the new buyer already made significant
preparations to constructing the house the day the 2 year period finished.
Another thing is that roughly a month after the 2 month period, more than
50% was already done with the house.
In view of the facts, the court, by virtue of Article 1229, mitigated the
damages as the intent of the contract, to encourage home building among
the lot owners was already partially and substantially complied with.
Facts:
On March 31, 1959, petitioner Makati Dev. sold to Rodolfo Andal a lot with
an area of 1,589 square meters in Urdaneta Village, Makati, Rizal for
P55,615.
This contract had a special condition which provided that the buyer shall
construct a house and complete at least 50% of it within two years from the
date of purchase.
If the buyer was to fail to do so, a bond is given to the seller in the sum of
P11,123
The problem was Andal did not build a house, and even sold the lot to Juan
Carlos on January 18, 1960.
Since the two did not build a house on the lot, petitioner sent a claim on
Andal by virtue of the penal clause in the contract.
Makati Dev took the case to court and filed a complaint to the CFI.
Andals insurance company, the respondent in this case filed a cross-claim
saying that if petitioner was to win the case, respondent will have a claim
for reimbursement from Andal as they will be the ones paying for him in the
meantime.
Andal filed his answer saying that the penal clause in the deed of sale was
contrary to law, morals and public policy
and Juan Carlos, the person he sold the lot to, was already beginning
construction of his house.
The CFI of Rizal held that respondent should pay petitioner P1,500 plus
interest of 12% from the time of the filing of the complaint and that Andal
should also pay the same to respondent by virtue of respondents cross-
claim.
Petitioner in this case appealed to the SC as the lower court mitigated the
damage from P12,000 as stated in the penal clause, to a measly P1,500 plus
interest.
Issue:
ISSUE: Whether or not the trial court made a mistake in reducing the
amount in damages already stated in the penal clause?
Held/Ratio:
No.
In the court decision, it stated that even though the house was still not
finished, much less constructed after the 2 year period, it does not matter.
The court took notice of the fact that the lot was already fenced off and
that there are building materials surrounding the lot
This meant to the court that there was a clear indication that the owner
wanted to construct the house in the least possible delay.
By the end of April 1961, he had already finished more that 50% of the
house.
On petitioners allegation that the courts have no power to reduce penal
clauses in contracts, the court answered that a penal sanction is in reality
also an obligation.
 OBLICON Digests
Chapter 3-4
It was made to secure the performance of the obligation - in a way it is a
substitute for the damages.
Article 1229 of the Civil Code provides that The judge shall equitably
reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
By April 1961, Juan Carlos had already finished more than 50% of the
house, there was already partial performance of the obligation within
the meaning and intent of Article 1229.
The court took notice of what the intent of the contract was.
Which was to encourage home building among lot owners in the village.
The court further stated that the penal clause in this case was inserted not to
indemnify the Makati Dev but to compel performance of the special
condition which was to construct a house.
(Read the orig, this is a tricky case)
Tan vs. CA
By Serpa Juan, Dustine
Doctrine:
In obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of non-compliance, if there
is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of
the obligation. The penalty may be enforced only when it is demandable in
accordance with the provisions of Art. 1226, 1229.
Recit-ready:
Antonio Tan obtained 2 loans from CCP, each in the principal amount of 2
Million Oesis or in the total principal amount of 4 million pesos, evidenced
by 2 promissory notes with maturity dates on May 14, 1979 and July 6,
1979. Tan defaulted but after few partial payments he had loans restructured
by CCP. Tan failed to pay any installment on the said restructured loan .In a
letter, Tan requested and proposed to respondent CCP a mode of paying the
restructured loan. Tan requested for a moratorium on his loan obligation
until the following year allegedly due to a substantial deduction in the
volume of his business and on account of the peso devaluation. CCP did not
agree and filed a complaint for the collection of money against Tan. Tan in
his defense said that he obtained the loan from CCP to help his friend,
Wilson Lucmen. However, he has not been able to locate Lucmen. While
the case is in the RTC, Tan filed a Manifestation wherein he proposed to
settle his indebtedness to CCP by downpayment of P140,000.00 and to
issue 12 checks every beginning of the year to cover installment payments
for one year, and every year thereafter until the balance is fully paid.
However, CCP did not agree with his proposal.
The Trial Court ordered Tan to pay CCP with the corresponding stipulated
interest and charges thereof, until fully paid, plus attorneys fees in an
amount equivalent to 25% of said outstanding account, plus P50,000.00, as
exemplary damages, plus costs. The petitioner appealed this decision and
asked for the reduction of the penalties and charges for his loan obligations.
The CA affirmed the decision of the RTC however, it deleted the award for
exemplary damages and reduced the amount of awarded attorneys fees to
5%
Petitioner claims that there is no basis in law for the charging of interest on
the surcharges for the reason that the New Civil Code is devoid of any
provision allowing the imposition of interest on surcharges.
The issue here is W/N there are contractual and legal bases for the
imposition of penalty interest on the penalty and attorneys fees
The Court held YES Art. 1226 of the Civil Code provides: In obligations
with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of non-compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of
the obligation. The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code. In this case, the promissory
note expressly provides for the imposition of both interest and penalties in
case of default on the part of the plaintiff in the payment of the subject
restructured loan/
Facts:
Antonio Tan obtained 2 loans from CCP, each in the principal amount of 2
Million Oesis or in the total principal amount of 4 million pesos, evidenced
by 2 promissory notes with maturity dates on May 14, 1979 and July 6,
1979. Tan defaulted but after few partial payments he had loans restructured
by CCP. Tan failed to pay any installment on the said restructured loan.
In a letter, Tan requested and proposed to respondent CCP a mode of paying
the restructured loan
 OBLICON Digests
Chapter 3-4
20% of the principal amount of the loan upon the respondent giving its
conformity to his proposal
Balance on the principal obligation payable 36 monthly installments until
fully paid.
Tan requested for a moratorium on his loan obligation until the following
year allegedly due to a substantial deduction in the volume of his business
and on account of the peso devaluation.
No favorable response was made to said letters.
CCP demanded full payment, within ten (10) days from receipt of said letter
P6,088,735.03.
CCP filed complaint for the collection of a sum of money. Tan interposed
the defense that he accommodated a friend, Wilson Lucmen, who asked for
help to obtain a loan from CCP. However, he claimed that he cannot find the
friend.
While the case was in the RTC, Tan filed a Manifestation wherein he
proposed to settle his indebtedness to CCP by downpayment of P140,000.00
and to issue 12 checks every beginning of the year to cover installment
payments for one year, and every year thereafter until the balance is fully
paid.
However, CCP did not agree to the petitioners proposals and so the trial of
the case ensued.
The Trial Court ordered Tan to pay CCP 7,996,314.67, representing
defendants outstanding account as of August 28, 1986, with the
corresponding stipulated interest and charges thereof, until fully paid, plus
attorneys fees in an amount equivalent to 25% of said outstanding account,
plus P50,000.00, as exemplary damages, plus costs.
Reason of loan for accommodation of friend was not credible.
Assuming, arguendo, that the Tan did not personally benefit from loan, he
should have filed a 3rd-party complaint against Wilson Lucmen
3 times the petitioner offered to settle his loan obligation with CCP.
Tan may not avoid his liability to pay his obligation under the promissory
note which he must comply with in good faith.
Tan appealed to the CA, asking for the reduction of the penalties and
charges on his loan obligation. Judgment appealed from is hereby Affirmed.
No alleged partial or irregular performance.
However, the appellate court modified the decision of the trial court by
deleting exemplary damages because not proportionate to actual damage
caused by the non-performance of the contract
Petitioner claims that there is no basis in law for the charging of interest on
the surcharges for the reason that the New Civil Code is devoid of any
provision allowing the imposition of interest on surcharges.
Issue: Whether there are contractual and legal bases for the imposition
of penalty interest on the penalty and attorneys fees - YES
Held/Ratio:
Yes. Art. 1226 of the Civil Code provides: In obligations with a penal
clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor refuses to
pay the penalty or is guilty of fraud in the fulfillment of the obligation. The
penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
In this case, the promissory note expressly provides for the imposition of
both interest and penalties in case of default on the part of the plaintiff in
the payment of the subject restructured loan. The stipulated 14% per annum
interest charge until full payment of the loan constitutes the monetary
interest on the note and is allowed under Article 1956 of the New Civil
Code.
On the other hand, the stipulated 2% per month penalty is in the form of
penalty charge which is separate and distinct from the monetary interest on
the principal of the loan.
Second, there appears to be a justification for a reduction of the penalty
charge but not necessarily to ten percent (10%) of the unpaid balance of the
loan as suggested by petitioner. In as much as petitioner has made partial
payments which showed his good faith, a reduction of the penalty charge
from 2% on the total amount due, compounded monthly, until paid can
indeed be justified under the said provision of Article 1229 of the New Civil
Code.
The continued monthly accrual of the 2% penalty charge on the total
amount due to be unconscionable in as much as the same appeared to have
been compounded monthly. Considering petitioners several partial
payments and the fact he is liable under the note for the 2% penalty charge
per month on the total amount due, compounded monthly, for 21years since
his default in 1980, we find it fair and equitable to reduce the penalty charge
 OBLICON Digests
Chapter 3-4
to a straight 12% per annum on the total amount due starting August 28,
1986, the date of the last Statement of Account.
We also took into consideration the offers of the petitioner to enter into a
compromise for the settlement of his debt by presenting proposed payment
schemes to respondent CCP. The said offers at compromise also showed his
good faith despite difficulty in complying with his loan obligation due to his
financial problems. However, we are not unmindful of the respondents long
overdue deprivation of the use of its money collectible from the petitioner.
Country Bankers Vs. CA
By Fellone, Mich
Doctrine: As a general rule, in obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the payment of interests in
case of non-compliance
A penal clause is an accessory obligation which the parties attach to a
principal obligation for the purpose of insuring the performance thereof by
imposing on the debtor a special prestation (generally consisting in the
payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled.
Recit-ready:
Facts:
Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the
petitioner Enrique F. Sy, as lessee, entered into a (6 years) lease agreement
over the Avenue, Broadway and Capitol Theaters and the land on which
they are situated in Cabanatuan City, including their air-conditioning
systems, projectors and accessories needed for showing the films or motion
pictures. After more than two (2) years of operation, the lessor OVEC made
demands for the repossession of the said leased properties in view of the
Sy's arrears in monthly rentals and non-payment of amusement taxes.
By reason of Sy's request for reconsideration of OVECs demand for
repossession of the three (3) theaters, the former was allowed to continue
operating the leased premises upon his conformity to certain conditions
imposed by the latter in a supplemental agreement dated August 13, 1979.
In pursuance of their latter agreement, Sy's arrears in rental was reduced.
However, the accrued amusement tax liability of the three (3) theaters to the
City Government of Cabanatuan City had accumulated to P84,000.00
despite the fact that Sy had been deducting the amount of P4,000.00 from
his monthly rental with the obligation to remit the said deductions to the
city government.
Hence, letters of demand dated January 7, 1980 and February 3, 1980 were
sent to Sy demanding payment of the arrears in rentals and amusement tax
delinquency.
SY failed to pay the abovementioned amounts in full Consequently, OVEC
padlocked the gates of the three theaters under lease and took possession
thereof in the morning of February 11, 1980.
Sy, filed the present action for reformation of the lease agreement, damages
and injunction and by virtue of a restraining order dated February 12, 1980
followed by an order directing the issuance of a writ of preliminary
injunction issued in said case, Sy regained possession and operation of the
Avenue, Broadway and Capital theaters.
The trial court arrived at the conclusions that Sy is not entitled to the
reformation of the lease agreement; that the repossession of the leased
premises by OVEC after the cancellation and termination of the lease was
in accordance with the stipulation of the parties in the said agreement and
the law applicable thereto and that the consequent forfeiture of Sy's cash
deposit in favor of OVEC was clearly agreed upon by them in the lease
agreement. The trial court further concluded that Sy was not entitled to the
writ of preliminary injunction issued in his favor after the commencement
of the action and that the injunction bond filed by Sy is liable for whatever
damages OVEC may have suffered by reason of the injunction.
RTC RULING: Sy and (CBISCO) appealed the decision in toto while
OVEC appealed insofar as the decision failed to hold the injunction bond
liable for damages awarded by the trial court.
COURT OF APPEALS RULING: held that the cancellation or termination
of the agreement prior to its expiration period is justified as it was brought
about by Sy's own default in his compliance with the terms of the agreement
and not "motivated by fraud or greed." It also affirmed the award to OVEC
of the amount of P100,000.00 chargeable against the injunction bond posted
by CBISCO which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS appeal and held
that the trial court did not err in not charging and holding the injunction
bond posted by Sy liable for all the awards as the undertaking of CBISCO
 OBLICON Digests
Chapter 3-4

under the bond referred only to damages, which OVEC may suffer as a against the P290,000.00 remaining cash deposit. This supposed damage
result of the injunction. Hence, the present petition suffered by OVEC was the alleged P10,000.00 a month increase in rental
from P50,000.00 to P60,000,00), which OVEC failed to realize for ten
ISSUE months from February to November, 1980 in the total sum of P100,000.00
This opportunity cost which was duly proven before the trial court, was
W/N the Court of Appeals erred in holding CBISCOs bond liable correctly made chargeable by the said court against the injunction bond
posted by CBISCO.
There is likewise no merit to the claim of petitioners that respondent Court
HELD/RATIO committed serious error of law and grave abuse of discretion in not
dismissing private respondent's counterclaim for failure to pay the necessary
No. docket fee, which is an issue raised for the first time in this petition. Thus,
A provision which calls for the forfeiture of the remaining deposit still in We allowed the amendment of the complaint by specifying the amount of
the possession of the lessor, without prejudice to any other obligation still damages within a nonextendible period of five (5) days from notice and the
owing, in the event of the termination or cancellation of the agreement by reassessment of the filing fees.
reason of the lessee's violation of any of the terms and conditions of the
agreement is a penal clause that may be validly entered into. ACCORDINGLY, finding no merit in the grounds relied upon by
A penal clause is an accessory obligation, which the parties attach to a petitioners in their petition, the same is hereby DENIED and the
principal obligation for the purpose of insuring the performance thereof by decision dated June 15, 1988 and the resolution dated September 21,
imposing on the debtor a special presentation (generally consisting in the 1988, both of the respondent Court of Appeals are AFFIRMED.
payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled
As a general rule, in obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case of
non-compliance. In such case, proof of actual damages suffered by the
creditor is not necessary in order that the penalty may be demanded (Article
1228, New Civil Code).
However, there are exceptions to the rule that the penalty shall substitute
the indemnity for damages and the payment of interests in case of non-
compliance with the principal obligation. They are first, when there is a
stipulation to the contrary; second, when the obligor is sued for refusal to
pay the agreed penalty; and third, when the obligor is guilty of fraud
(Article 1226, par. 1, New Civil Code)
It is evident that in all said cases, the purpose of the penalty is to punish the
obligor. Therefore, the obligee can recover from the obligor not only the
penalty but also the damages resulting from the non-fulfillment or defective
performance of the principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the
deposit shall be deemed forfeited, without prejudice to any other obligation
still owing by the lessee to the lessor, the penalty cannot substitute for the
P100,000.00 supposed damage resulting from the issuance of the injunction
OBLICON Digests
Chapter 3-4

by Erbon, Roni

Doctrine: IHC has no intention of preventing Joaquin from fulfilling its

obligation of securing a foreign loan for the construction of a hotel therefore
it is not liable under Article 1187.

Recit-ready: Respondent Fransisco Joaquin submitted a proposal to the

board of IHC to render technical assistance in securing a foreign loan for
the construction of a hotel. Board approved the proposal and earmarked
P2M for the project. IHC also acquired a foreign loan guaranty with the
DBP subject to several conditions. Joaquin presented two potential foreign
financier: Roger Dunn & Company and Materials Handling Corporation.
He recommended Materials Handling Corporation based on beneficial
terms it had offered. Negotiations between MHC and, later on, with its
principal, Barnes International, ensued. Joaquin and Jose Valero entertained
another financier which is the Weston Financial Corporation. When Barnes
failed to deliver the needed loan, IHC informed DBP that it would submit
Weston for DBPs consideration. As a result, DBP cancelled its previous
guaranty through a letter. IHC entered into an agreement with Weston, and
communicated this development to DBP. However, DBP denied the
application for guaranty for failure to comply with the conditions set before.
Due to Joaquins failure to secure the needed loan, IHC, through its
President Bautista, canceled the 17,000 shares of stock previously issued to
Joaquin and Suarez as payment for their services. Joaquin and Suarez
commenced this action for specific performance, annulment, damages and
injunction by a complaint with the RTC Manila

W/N IHC is liable to pay Joaquin and Suarez damages

No. , IHC only relied on the opinion of its consultant in deciding to transact
with Materials Handling and, later on, with Barnes. In negotiating with
Barnes, IHC had no intention, willful or otherwise, to prevent Joaquin and
Suarez from meeting their undertaking. Such absence of any intention
negated the basis for the CAs reliance on Article 1186 of the Civil Code.

Facts: respondent Francisco B. Joaquin, Jr. submitted a proposal to the

CHAPTER 4 Board of Directors of the International Hotel Corporation (IHC) for him to
render technical assistance in securing a foreign loan for the construction of
International Hotel Corp. Vs. Joaquin a hotel, to be guaranteed by the Development Bank of the Philippines.
OBLICON Digests
Chapter 3-4
IHC Board of Directors approved phase one to phase six of the proposal and
earmarked P2 000 000 for the project. Anent the financing, IHC applied
with DBP for a foreign loan guaranty. DBP processed the application and
approved it subject to several conditions.
Joaquin wrote to IHC to request the payment of his fees in the amount of
P500,000.00 for the services that he had provided and would be providing
to IHC. Stockholders of IHC granted Joaquins request.
Joaquin presented to the IHC Board of Directors the results of his
negotiations with potential foreign financiers. He narrowed the financiers to
Roger Dunn & Company and Materials Handling Corporation. He
recommended that the Board of Directors consider Materials Handling
Corporation based on the more beneficial terms it had offered. His
recommendation was then accepted.
Negotiations with Materials Handling Corporation and, later on, with its
principal, Barnes International (Barnes), ensued. While the negotiations
with Barnes were ongoing, Joaquin and Jose Valero, the Executive Director
of IHC, met with another financier, the Weston International Corporation
(Weston), to explore possible financing. When Barnes failed to deliver the
needed loan, IHC informed DBP that it would submit Weston for DBPs
consideration. As a result, DBP cancelled its previous guaranty through a
letter
IHC entered into an agreement with Weston, and communicated this
development to DBP. However, DBP denied the application for guaranty for
failure to comply with the conditions set before.
Due to Joaquins failure to secure the needed loan, IHC, through its
President Bautista, canceled the 17,000 shares of stock previously issued to
Joaquin and Suarez as payment for their services
Joaquin and Suarez commenced this action for specific performance,
annulment, damages and injunction by a complaint with the RTC Manila
RTC ordered IHC to pay Joaquin 200 000 and Suarez 50 000 and for
attorneys fees of 20 000
CA affirmed RTC holding IHC liable to pay 700 000 to Joaquin and 200
000 to Suarez and for attorneys fees of 20 000 under Article 1186 of the
Civil Code.
Issue: W/N IHC is liable to pay damages to Joaquin and Suarez under
Article 1186 of the Civil Code
Held/Ratio: Article 1186. The condition shall be deemed fulfilled when the
obligor voluntarily prevents its fulfillment.
Article 1234 applies only when an obligor admits breaching the contract
after honestly and faithfully performing all the material elements thereof
except for some technical aspects that cause no serious harm to the obligee.
The provision refers to an omission or deviation that is slight, or technical
and unimportant, and does not affect the real purpose of the contract. The
party claiming substantial performance must show that he has attempted in
good faith to perform his contract, but has through oversight,
misunderstanding or any excusable neglect failed to completely perform in
certain negligible respects, for which the other party may be adequately
indemnified by an allowance and deduction from the contract price or by an
award of damages. By reason of the inconsequential nature of the breach or
omission, the law deems the performance as substantial, making it the
obligees duty to pay. The compulsion of payment is predicated on the
substantial benefit derived by the obligee from the partial performance.
A contractual breach is material if it will adversely affect the nature of the
obligation that the obligor promised to deliver, the benefits that the obligee
expects to receive after full compliance, and the extent that the
nonperformance defeated the purposes of the contract.
The failure to completely satisfy the obligation could not be characterized
as slight and unimportant as to have resulted in Joaquin and Suarezs
substantial performance that consequentially benefitted IHC. Article 1234 is
inapplicable.
Filinvest vs. Philippine
by Ignacio, Quina
OBLICON Digests
Chapter 3-4
Doctrine: There is no dacion en pago when the object is merely
returned/delivered without the express or implied intention of the parties. 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 (Art 1245). In such cases, common consent is essential, be
it sale or innovation, in order to extinguish the obligation.
Recit-ready:
PETITIONER- Filinvest
RESPONDENT- Philippine Acetylene Co
Philippine Acetylene Co. bought a Chevrolet vehicle from one Alexander
Lim, to be paid by 34 monthly installment, all stipulated in a promissory
note. PCo executed a chattel mortgage over the same vehicle in favor of
Lim, while Lim assigned all his rights, title and interests in the promissory
note to Filinvest. PCo defaulted in nine consecutive payments, to which
Filinvest demanded full payment plus interest or return the mortgaged
vehicle. PCo then opted to return the vehicle, along with the document
Voluntary Surrender with Special Power of Attorney to Sell, which was
received and verified by Filinvests vice-president. Filinvest was unable to
sell the vehicle for it had unpaid taxes of 70k, and asked that PCo to update
its account by paying the installments in arrears and accruing interest of 4k;
this went unnoticed and so Filinvest offered to return the car, however PCo
refused to accept it, causing Filinvest to file for collection of sum of money
with damages. PCo asserts that its obligation had ended when it returned the
vehicle, and surmised further that assuming otherwise, Filinvest is not
entitled to recover due to the breach of warranty committed by Lim.
ISSUE: W/N The voluntary surrender of the vehicle extinguished the
obligation of PCo to Filinvest -- NO, Filinvest never consented/accepted
it as an equivalent payment. The mere return of the vehicle does not
constitute the dacion en pago, in the absence of the express or implied
true intention of both parties. In fact, it only constitutes a transfer in
possession, not ownership. It also appears from the Voluntary
Surrender document that PCo had merely intended to transfer
possession not ownership, so that it could be sold by Filinvest on its
behalf, and use the proceeds from the sale to pay off the debt.
** Baka lang itanong, eto pa. With regard to the question of who shall
shoulder the payment of taxes-- since ownership did not transfer, PCo
has to shoulder it. It was also stipulated in the Deed of Sale that such
sale is free from encumbrances and liens. Also Filinvest was merely
assigned rights, title and interest.
Facts:
- Oct 30 1971: Purchase of Chevrolet 1969 model for PHP 55,247.80 by
Philippine Acetylene Co. from Alexander Lim. Vehicle sold for 55k-- 20k
downpayment, 35k payable thru installments of 1k per month. 12% per
annum interest -- THIS IS ALL IN THE PROMISSORY NOTE
- To secure the payment for the promissory note, Philippine Acetylene Co.
executed chattel mortgage on the vehicle in favor of Lim.
- Lim assigned rights, title and interest to Filinvest of the promissory note and
the chattel mortgage by virtue of a Deed of Assignment
- Philippine Acetylene Co. defaulted in nine consecutive payments
- Filinvest demanded full payment and interest, or return of the mortgaged
vehicle
- March 1973: PCo returned said mortgaged vehicle with document
Voluntary Surrender with Special Power of Attorney to Sell
- Filinvest was unable to sell because of unpaid taxes on the vehicle
amounting to PHP 70,122.00. Filinvest requested that PCo update its
account by paying installments in arrears and accruing interest of PHP
4,232.21
Issue: W/N the voluntary surrender of the property extinguishes the
obligation
Held/Ratio: No, it must be shown that it was accepted as an equivalent
payment in order for the obligation to be extinguished.
The mere return of the mortgaged motor vehicle by the mortgagor to the
mortgagee 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
OBLICON Digests
Chapter 3-4
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 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.
Spouses Pen vs. Spouses Julian (January 11, 2016)
by Panaligan, Celina
Doctrine: Dacion en pago (Dation in payment, Art. 1245), which is a
special mode of payment where the debtor offers another thing to the
creditor, who accepts it as an equivalent of the payment of an outstanding
debt, is legal and completely different from pactum commissorium, wherein
the creditor automatically appropriates the things given by way of pledge or
mortgage, or disposes of them, which is void and contrary to law.
Recit-ready: Petitioners Pen are assailing before the SC the RTC and CA
rulings invalidating the Deed of Sale of land between them and respondents
Spouses Julian for being void and nonexistent due to lack of prior
agreement and for being pactum commissorium, respectively. The land in
question had been mortgaged by respondents to secure a debt in favor of
petitioners. Upon default, petitioners commenced foreclosure proceedings,
but respondents offered the land as payment in kind instead, hence the Deed
of Sale. After some time, they offered to repurchase it, but unbeknownst to
respondents, said Deed of Sale had been unwittingly used by petitioners to
transfer the title of the land to petitioners name. Before such discovery,
respondents had already made several payments in an attempt to repurchase
their land. The Supreme Court found the sale to be prohibited pactum
commissorium which is contrary to law and hence, invalid.
Facts: Petitioner spouses Roberto and Adelaida Pen are assailing before the
SC the RTC and CA rulings that rendered the Deed of Sale of land between
them and respondents Spouses Santos and Linda Julian void and
nonexistent for being pactum commissorium.
The land in question had been recently mortgaged by respondents Julian as
a pledge for an outstanding debt they owed the petitioners in April 1986 in
the amount of 60,000. In May of the same year, they contracted two more
loans in the amount of 50,000 and 10,000 with corresponding interests.
Thereafter respondents Julian issued 2 promissory notes to evidence the
foregoing loans, and for security, executed a Real Estate Mortgage of their
property (TCT No. 327733) registered under Santos Julian.
When the debts became due and demandable, spouses Julian were unable to
pay, prompting petitioner Adelaida Pen to commence foreclosure
proceedings of the mortgaged property. However, respondent Linda Julian
convinced her not to push through with it and instead offered their
mortgaged property as payment in kind. After an ocular and determination
of the propertys value at 70,000, Linda Julian executed a Deed of Sale
signed by her.
In July 1989, petitioners Pen alleged that respondents Julian offered to
repurchase their property at purchase price of 436,115. After several
attempts, respondents failed to repurchase. However, the payment of
100,000 later on paid by respondents was deemed deducted from their
outstanding debt which now only amounted to 319,065.
Respondents Julian allege on the other hand that petitioner Adelaida Pen
made them sign an Absolute Deed of Sale when the mortgage was being
executed on their property, which was undated, unfilled, and unnotarized.
Simultaneously, respondents were making payments in the amount of
115,400 to satisfy their debt and repurchase their property. Another
payment of 150,000 was being made by respondents but petitioners refused
OBLICON Digests
Chapter 3-4
this time, demanding 250,000 from them. In return respondents demanded
they be shown the land title they had recently conveyed to petitioners,
which petitioners refused. Only then did respondents discover that their
mortgaged property in question had already been registered in petitioner
Adelaidas name under TCT No. 364880. Due to their discovery
respondents filed a suit for Cancellation of Sale, Cancellation of Title issued
to the appellants, Recovery of Possession, and Damages with Prayer for
Preliminary Injunction before the RTC, alleging among others that
petitioner Adelaida in bad faith, maliciously typed and unilaterally filled up
the Deed of Sale earlier signed by Julian.
The RTC ruled in favor of respondents, declaring the Deed of Sale void and
inexistent for lacking the essential requisites of a valid contract and that no
prior agreement had been made with regard to the consideration for the sale
at the time they had signed said Deed of Sale. Upon appeal to the CA, the
CA also ruled in favor of respondents, but this time ruling that the sale had
been a prohibited pactum commissorium (see doctrine)
Issue: W/N the Deed of Sale was invalid and if it was, on what grounds
Held/Ratio: The Deed of Sale was invalid for being pactum commissorium.
All the elements of pactum commissorium were found present in this case:
a) that there should be a pledge or mortgage wherein property is pledged or
mortgaged by way of security for the payment of the principal obligation
b) that there should be a stipulation for an automatic appropriation by the
creditor of the thing pledged or mortgaged in the event of nonpayment of
the principal obligation within the stipulated period
The authorization for Adelaida to appropriate the property subject of the
mortgage upon Lindas default was implied from Lindas having signed the
blank deed of sale simultaneously with her signing of the real estate
mortgage.
Furthermore, had the transaction been a dacion en pago (see doctrine) the
sale would have been valid. What differentiates a dacion en pago from a
pactum commissorium is that in the former, the property is alienated in
favor of the creditor in satisfaction of a debt in money. In this case, the
Deed of Sale was executed not in satisfaction of respondents debt since at
the time they signed said Deed of Sale, they were also simultaneously
paying petitioners money in order to prevent the foreclosure of their
property.
Papa vs. AU Valencia
by Alejandro, Ritz
Doctrine: Delivery of a check produces the effect of payment only when it
is cashed, pursuant to Art. 1249 of the Civil Code, but the rule is otherwise
if the debtor is prejudiced by the creditors unreasonable delay in
presentment.
Recit-ready: Myron Papa, administrator of the estate of Angela Butte, sold a
portion of said estate to Felix Pearroyo through A.U. Valencia and Co.,
Inc. Pearroyo gave Papa P5,000.00 plus a check worth P40,000.00. Papa
never delivered the certificate of title to Pearroyo. A case was filed 10
years after demanding specific performance. Papa argued that the sale
between him and Pearroyo was never consummated because he did not
encash the P40,000.00 check and that the P5,000.00 cash was merely
earnest money.
The issue is W/N the sale was indeed consummated.
The court held that it was consummated because after more than ten (10)
years from the payment in part by cash and in part by check, the
presumption is that the check had been encashed. Granting that Papa had
never encashed the check, his failure to do so for more than ten (10) years
undoubtedly resulted in the impairment of the check through his
unreasonable and unexplained delay. While it is true that the delivery of a
check produces the effect of payment only when it is cashed, pursuant to
Article 1249 of the Civil Code, the rule is otherwise if the debtor
(Pearroyo) is prejudiced by the creditors (Papas) unreasonable delay in
presentment. The acceptance of a check implies an undertaking of due
diligence in presenting it for payment, and if he from whom it is received
sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given.
 OBLICON Digests
Chapter 3-4
Facts:
In June 1982, a complaint for specific performance was filed by Valencia
and Pearroyo in RTC against Papa, in his capacity as administrator of the
Testate Estate of Butte.
Complaint alleged the ff:
1. June 15, 1973 - Papa, acting as attorney-in-fact of Butte,
sold to Pearroyo, through Valencia a parcel of land covered by TCT
No. 28993 located at corner Retiro and Cadiz Streets, La Loma,
Quezon City.
2. Pearroyo gave Papa P5,000.00 plus a check worth
P40,000.00.
3. Prior to this sale, the said property, together with several
other parcels of land owned by Butte had been mortgaged by her to the
Associated Banking Corporation.
4. Before the title was released, Butte died. :(
5. The bank refused to release the property unless and until
all the mortgaged properties of Butte were all redeemed.
6. 4 years after the sale, respondents discovered that the
mortgage rights of the bank had been assigned to one Tomas L. Parpana
(now deceased), as special administrator of the Estate of Ramon Papa,
Jr. Petitioner had been collecting rentals (P800/month) from the tenants,
despite the property being sold since June 1973.
7. Prays that Papa be ordered : 1) to deliver the title 2) to
turn over to the latter the sum of P72,000.00 as accrued rentals as of
April 1982 and the monthly rental of P800.00 until the property is
delivered 3) to pay respondents the sum of P20,000.00 as attorneys
fees; and to pay the costs of the suit.
Papas Response
1. admitted that the lot had been mortgaged to the Associated Banking
Corporation
2. contended that the complaint did not state a cause of action because the real
property in interest was the Testate Estate of Angela M. Butte, which should
have been joined as a party defendant
3. claimed that:
he could not recall in detail the transaction which allegedly occurred in
1973
he did not have TCT No. 28993 in his possession
Motion to intervene: Repondent/Intervenor Delfin Jao was allowed to
intervene in the case, having a common cause with the respondents because
he alleges that the lot sold was in turn sold to him in Aug. 1973 thus, he
prayed for judgment in favor of the respondents and that after deliver of
title, it would be ordered to execute in his favor the deed of conveyance and
turn over the rentals to him.
Papa filed a 3rd party complaint against spouses Arsenio B. Reyes and
Amanda Santos
due to non-payment of real estate taxes by Butte on the
said properties, she sold them at the public auction by the City
Treasurer of QC to respondent Reyes spouses on Jan 21, 1980 for
P14,000
one-year period of redemption had expired
petitioner was willing to reimburse respondent Reyes
spouses whatever amount they might have paid for taxes and other
charges, since the subject property was still registered in the name of
the late Angela M. Butte
prays that the sale be canceled, the property be restored to
him upon payment of P14,000 and ordering Valencia and Pearroyo to
pay him at least P55,000.00 plus everything they might have to pay the
Reyes spouses in recovering the property.
Reyes defense: prescription of right to redeem property
Trial Court Decision:
1. Allowed Papa to redeem from Reyes and ordering the
latter to allow such redemption of property by paying the sum of
P14,000 plus legal interest of 12% thereon from January 21, 1980
2. Ordered Papa to execute a Deed of Absolute Sale in Favor
of Pearroyo covering the property in question and to deliver peaceful
possession and enjoyment of the said property. If not possible Papas
ordered to pay to plaintiff Felix Pearroyo the sum of P45,000.00 plus
legal interest of 12% from June 15, 1973
3. Ordering Pearroyo to execute and deliver to intervenor a
deed of absolute sale over the same property, upon the latters payment
to the former of the balance of the purchase price of P71,500.00. If not
possible, Pearroyo is ordered to pay intervenor the sum of P5,000.00
plus legal interest of 12% from August 23, 1973; and
 OBLICON Digests
Chapter 3-4
Papas Appeal
Sale was never consummated as he did not encash the check (in the
amount of P40,000.00) given by respondents Valencia and Pearroyo in
payment of the full purchase price of the subject lot. He maintained that
what said respondents had actually paid was only the amount of P5,000.00
(in cash) as earnest money.
CA Decision
- 2nd paragraph modified by ordering the Papa to deliver to Pearroyo, the
owners duplicate of TCT No. 28993 of Butte and the peaceful possession
and enjoyment of the lot in question or, if the owners duplicate certificate
cannot be produced, to authorize the Register of Deeds to cancel it and issue
a certificate of title in the name of Felix Pearroyo.
there was no evidence at all that petitioner did not, in fact, encash said
check
Respondent Pearroyo testified in court that petitioner Papa had received
the amount of P45,000.00 and issued receipts therefor.
presumption is that the check was encashed, especially since the payment
by check was not denied by defendant-appellant (herein petitioner) who, in
his Answer, merely alleged that he can no longer recall the transaction
which is supposed to have happened 10 years ago.
Papas argument:
Court of Appeals erred in concluding that the alleged sale
of the subject property had been consummated.
He contends that such a conclusion is based on the
erroneous presumption that the check (in the amount of P40,000.00)
had been cashed, citing Art. 1249 of the Civil Code, which provides, in
part, that:
Payment by checks shall produce the effect of payment only when
they have been cashed or when through the fault of the creditor they have
been impaired.
insists that he never cashed said check; and, such being
the case, its delivery never produced the effect of payment
while admitting that he had issued receipts for the
payments, asserts that said receipts, particularly the receipt of PCIB
Check No. 761025 in the amount of P40,000.00, do not prove payment.
avers that there must be a showing that said check had
been encashed.
finally avers that, in fact, the consideration for the sale
was still in the hands of respondents Valencia and Pearroyo, as
evidenced by a letter addressed to him Please be informed that I had
been authorized by Dr. Ramon Papa, Jr., heir of Mrs. Angela M. Butte
to pay you the aforementioned amount of P75,000.00 for the release
and cancellation of subject propertys mortgage. The money is with me
and if it is alright with you, I would like to tender the payment as soon
as possible.
Papa filed a motion for reconsideration > denied > Hence, this petition
Issue: W/N the sale was really consummated.
Held/Ratio:Yes. Court finds no merit in the petition.
Undisputed facts: Valencia and Pearroyo gave the following amounts:
Five Thousand Pesos (P5,000.00) in cash on 24 May
1973
Forty Thousand Pesos (P40,000.00) in check on 15 June
1973
Papa admits having received said amounts and issuing receipts therefor.
Petitioners assertion that he never encashed the aforesaid check is not
substantiated and is at odds with his statement in his answer that he can no
longer recall the transaction which is supposed to have happened 10 years
ago.After more than ten (10) years from the payment in part by cash and in
part by check, the presumption is that the check had been encashed.
Granting that petitioner had never encashed the check, his failure to do so
for more than ten (10) years undoubtedly resulted in the impairment of the
check through his unreasonable and unexplained delay.
Delivery of a check produces the effect of payment only when it is cashed,
pursuant to Art. 1249 of the Civil Code, but the rule is otherwise if the
debtor is prejudiced by the creditors unreasonable delay in presentment.
The acceptance of a check implies an undertaking of due diligence in
presenting it for payment, and if he from whom it is received sustains loss
by want of such diligence, it will be held to operate as actual payment of the
debt or obligation for which it was given.
 OBLICON Digests
Chapter 3-4
If no presentment is made at all, the drawer cannot be held liable
irrespective of loss or injury unless presentment is otherwise excused.
This is in harmony with Article 1249 of the Civil Code under which
payment by way of check or other negotiable instrument is conditioned on
its being cashed, except when through the fault of the creditor, the
instrument is impaired
In this case, Valencia and Penarroyo delivered payment, thus, they have the
right to compel petitioner to deliver to them the owners duplicate of TCT
and peaceful possession and enjoyment of questioned lot.
WHEREFORE, the petition for review is hereby DENIED and the Decision
of the Court of Appeals, dated 27 January 1992 is AFFIRMED.
PAL vs. CA
by Hermoso, JJ
Doctrine: The courts encourage the practice of payments by check as a
protective measure provided there are adequate controls. If big amounts are
involved, escrow arrangements with a bank and carefully supervised by the
court would be the safer procedure. However, it is out of the ordinary that
checks intended for a particular payee are made out in the name of another.
Recit-ready: Amelia Tan filed a writ of execution on a favorable judgment
against PAL. However, when the execution remained unsatisfied, she filed
for an alias writ of execution. It was found out that the executing sheriff of
the previous writ had absconded or disappeared.
The Court ruled that under the circumstances, PAL is liable as its payment
to the sheriff did not satisfy the judgment because it issued checks in the
sheriffs name. Its actions made possible the misappropriation of funds.
Issue: W/N the payment to the sheriff who disappeared satisfied the
judgment?
Facts:
Amelia Tan filed a complaint for damages against the Philippine Airlines
in the Court of First Instance.
The CFI rendered its judgment in favor of Tan which was affirmed with
modifications by the Court of Appeals. The subsequent motion for
reconsideration by Tan however was denied.
The case was remanded to the trial court for execution. Tan filed for a writ
of execution of the CA judgment. It was granted and the court referred
the writ to Deputy Sheriff Emilio Reyes for the execution.
However, four months later, Tan filed for an alias writ of execution as the
judgment remained unsatisfied. PAL opposed the motion maintaining that it
has paid its full obligation through sheriff Reyes using as evidence cash
vouchers signed by the latter. The CA denied such motion for being
premature and ordering Reyes to appear and explain. However, it was found
that Reyes had absconded or disappeared.
When Tan again filed for an alias writ of execution, it was granted. PAL
filed a motion to quash it as no return of the previous writ of execution has
yet been made by the prior executing sheriff, Reyes, who had absconded or
disappeared.
Rosario, the sheriff for the new writ, served a notice of garnishment in
PALs depository bank, Far East Bank. Hence, PAL filed for a certiorari.
Issue: W/N the payment made to the absconding sheriff by check in his
name operate to satisfy the judgment debt?
Held/Ratio:
The plaintiff who has won her case should not be adjudged as having sued
in vain. Almost 22 years later, Tan has not seen a centavo of what the courts
have solemnly declared as rightfully hers through absolutely no fault of her
own and all because PAL did not issue the checks intended for her, in her
name.
Under the circumstances, the payment to the sheriff did not operate as
a satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge an
obligation, must be made to the proper person.
Payment must be made to the obligee himself or to an agent having
authority, express or implied, to receive the particular payment.The receipt
of money due on a judgment by an officer authorized by law to accept it
will, therefore, satisfy the debt.
There are circumstances in this case, however, which compel a different
conclusion.
The payment made by the PAL to the absconding sheriff was not in cash or
legal tender but in checks.
 OBLICON Digests
Chapter 3-4
The checks were not payable to Amelia Tan or Able Printing Press but to the
absconding sheriff.
Article 1249 provides that payment in money shall be made in currency
stipulated, or of the legal tender of the Philippines, unless the parties agreed
another.
Unless the parties so agree, a debtor has no rights, except at his own peril,
to substitute something in lieu of cash as medium of payment of his debt.
Consequently, unless authorized to do so by law or by consent of the
obligee, a public officer has no authority to accept anything other than
money in payment of an obligation under a judgment being executed.
Strictly speaking, the case here does not, per se, operate as a discharge of
the judgment debt.
As protective measure, the courts encourage the practice of payments
by check provided adequate controls are instituted to prevent wrongful
payment and illegal withdrawal or disbursement of funds.
Payment in money or cash to the implementing officer may be deemed
absolute payment but the Court has never suggested that they should
settle their obligations by turning over huge amounts of cash to sheriffs
and other executing officers. Payment in cash would result in damage or
interminable litigations each time a sheriff with huge amounts of cash in his
hands decides to abscond.
If particularly big amounts are involved, escrow arrangements with a
bank and carefully supervised by the court would be the safer
procedure. Transfer of funds takes place inside bank premises which is
safe. These practices are perfectly legal.
It is however out of the ordinary that checks intended for a particular
payee are made out in the name of another. Making the checks payable to
Tan would have prevented the encashment or the taking of undue advantage
by the sheriff, or any person into whose hands the checks may have fallen,
whether wrongfully or in behalf of the creditor.
The issuance of the checks in the name of the sheriff clearly made possible
the misappropriation of the funds that were withdrawn. The correct and
prudent thing was to have issued the checks in the intended payees name
Execution cannot be equated with satisfaction of judgment.
Execution carries into effect the judgment, while satisfaction of judgment is
the payment of the amount equal to the due. Moreover, execution is for the
sheriff to accomplish while satisfaction is for the creditor to achieve. Thus,
implementation by the sheriff does not stop but continues until the delivery
of the payment to the creditor.
Here, because of the circumstances caused by PAL, it is liable for the lost
cheques and interests.
Tibajia vs. CA
by Cabochan, Jonas
Doctrine: A check is not legal tender and a creditor may validly refuse
payment by such.
Recit-ready: Eden Tan filed a suit for collection against the Tibajia
spouses, wherein judgment was granted in her favor. Upon motion for
execution, the petitioners delivered 135,733.70 in cash and 262,750.00 in
Cashiers Check. Eden Tan refused such payment and insisted that the
garnished funds in the RTC be withdrawn to satisfy judgment, since
cashiers checks are not legal tender. The issue is whether or not a cashiers
check can be considered legal tender. No it is not. Article 1249 of the Civil
Code provides: The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault of the
creditor they have been impaired. Judgment obligation has yet to be
satisfied.
Facts: Eden Tan (Defendant) filed a suit for collection of a sum of money
against the Tibajia spouses. RTC of Kalookan awarded P442,750.00, but on
appeal, the CA reduced it to excess of 300K, reducing moral and exemplary
damages.
After the decision became final, Eden filed for a motion for
execution and the garnished funds, which by then were on deposit with the
cashier of the Regional Trial Court of Pasig, Metro Manila, were levied
upon.
The Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima:
262,750.00 (Cashiers Check) and
135,733.70 in Cash
For a total of 398,483.70.
Eden Tan refused and insisted the garnished funds in the RTC be withdrawn
to satisfy judgment obligation. Petitioners filed motion to lift the writ of
execution since the judgment debt had been paid, but was denied by the TC
since payment in cashiers check is NOT LEGAL TENDER as required in
RA529.
OBLICON Digests
Chapter 3-4
Issue: WON a Cashiers Check can be considered Legal Tender?
Held/Ratio: NO.
Art. 1249 of the Civil Code provides: "The payment of debts in money shall
be made in the currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of payment
only when they have been cashed, or when through the fault of the creditor
they have been impaired.
In the meantime, the action derived from the original obligation
shall be held in abeyance."
Section 1 of RA529: Every provision contained in, or made with
respect to, any obligation which purports to give the obligee the right to
require payment in gold or in any particular kind of coin or currency other
than Philippine currency or in an amount of money of the Philippines
measured thereby, shall be as it is hereby declared against public policy null
and void.
Section 63 of RA265: Checks representing deposit money do not
have legal tender power and their acceptance in the payment of debts, both
public and private, is at the option of the creditor.
Clearly the petition must fail, that a check is not legal tender and
that a creditor may validly refuse payment by check, whether it be a
manager's, cashier's, or personal check. As such, judgment obligation has
not been satisfied yet.
WHEREFORE, the petition is DENIED. The appealed decision is hereby
AFFIRMED, with costs against the petitioners.
Reparations Comm. vs. Universal Deep-Sea
By Domasig, Rein
Doctrine: Application of Payments
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.
Recit-ready:
The reparations Commission awarded 6 trawl boats to the universal deep
see fishing corporation which were delivered two at a time, each delivery
being covered by a contract of conditional purchase and sale providing
identical schedules of payments, the first instalment representing 10% of the
total cost that must be paid 24 months after delivery and the balance to be
paid in 10 equal yearly installments, the 1st of which is due 1 yr after the 1st
installment.
When the reparations commission sued Universal and its surety to recover
amounts of money due under the contracts, they claimed that the amounts
were not yet due and demandable. Universal alleged that there was
obscurity in the terms of the contracts. Amounts and due dates of the first
instalments should have first been fixed before the creditor could demand
its payment from the debtor.
The principal issue is whether or not the first instalments under the 3
contracts of conditional purchase is due and demandable. Yes, they are.
Tehe terms of the contract is clear and left no doubt as to the intent of the
parties that the first instalment due 24 months after delivery was different
from the 1st ten equal yearly installments of the balance of the purchase
price.
Facts:
Appeal of defendant Universal Deep-Sea Fishing Corporation from the
decision of CFI. (asking it to pay Reparations)
It is not disputed that the Universal Deep-Sea Fishing Corporation, referred
to as UNIVERSAL, was awarded six (6) trawl boats by the. Reparations
Commission as end-user of reparations goods. M/S UNIFISH 1-6 were
delivered to universal 2 at a time, F.O.B. japanese port.
note: fob means that seller pays for the transpo of goods
NOV. 20, 1958 = M/S UNIFISH 1 &2 with a purchase price of P536k were
delivered to UNIVERSAL. 1st installment representing 10% (P53k) shall
be paid within 24 months from the date of complete delivery. 3% per
annum, 10 yearly installments
To guarantee the faithful compliance with the obligations under said
contract, a performance bond in the amount of P53k with UNIVERSAL as
principal and the Manila Surety & Fidelity Co., Inc., as surety, was executed
in favor of the Reparations Commission. A Corresponding indemnity
agreement was executed to indemnify the surety company for any damage,
 OBLICON Digests
Chapter 3-4
loss charges, etc., which it may sustain or incur as a consequence of having
become a surety upon the performance bond.
APRIL 20, 1959= M/S UNIFISH 3 & 4 with a purchase price of P687k
were delivered to UNIVERSAL. 1st installment representing 10% (P68k)
shall be paid within 24 months from the date of complete delivery (same
terms with M/S 1&2). Manila surety also issued a performance bond.
FEB. 12, 1960= M/S UNIFISH 5 & 6 (10% = P54k) Performance bond was
also issued by Manila Surety
AUG. 10, 1962= Reparations Commission instituted present action against
UNIVERSAL and surety company to recover various amounts of money
due under these contracts. In answer, UNIVERSAL claimed that judgment,
amounts of money sought to be collected are not yet due and demandable.
The surety company also contended that action is premature.
Issue:
W/N first installments under judgment, three (3) contracts of conditional
purchase and sale of reparations goods were already due and demandable
when judgment, complaint was filed. (YES)
W/N Universal is liable for payment of premium in bonds executed by
manila surety (YES)
W/N the P10k downpayment made to Reparations can be applied to the 1st
installments of the balance of purchase price (NO)
Held/Ratio:
UNIVERSAL contends that there is an obscurity in judgment, terms of
judgment, contracts in question which were caused by the plaintiff as to
judgment, amounts and due dates of judgment, first installments which
should have been first fixed before a creditor can demand its payment from
judgment, debtor. first installment on judgment M/S UNIFISH 1 and M/S
UNIFISH 2 of judgment, amount of P53,642.84 was due on May 8, 1961
First installments on judgment, M/S UNIFISH 3 and M/S UNIFISH 4, and
judgment, M/S UNIFISH 5 and M/S UNIFISH 6 in judgment, amounts of
P68,777.77 and P54,500.00 were due on July 31, 1961 and October 17,
1961, respectively.
Obligation of UNIVERSAL to pay judgment, first installments on the
purchase price of judgment, six (6) reparations vessels was already due and
demandable when the present action was commenced on August 10, 1962.
The claim of judgment, surety company to the effect that the trial court
erred in not awarding it the amount of P7,251.42, as premium is the
performance bonds, is well taken. The payment of premiums on the bonds
to the surety company had been expressly undertaken by UNIVERSAL in
the indemnity agreements executed by it in favor of judgment, surety
company.
The major premise in appellants' process of reasoning is that the first
installments due on April 25, 1963, and May 26, 1963, are first installments.
although they are not so designated in judgment, schedule appended to each
of judgment, contracts between judgment, parties. There is a list of ten (10)
equal yearly installments, it is clear that the latter do not include the one
designated as 'first' installment. (separate yung 1st installment sa 10 yearly
installments)
The terms of the contracts for the purchase and sale of the reparations
vessels, however, are very clear and leave no doubt as to the intent of the
contracting parties. Thus, in the contract concerning the M/S UNIFISH 1
and M/S UNIFISH 2, the parties expressly agreed that the first installment
representing 10% of the purchase price or P53,642.84 shall be paid within
24 months from the date of complete delivery of the vessel or on May 8,
1961, and the balance to be paid in ten (10) equal yearly installments.
Finally, We find no merit in judgment, claim of judgment, third-party
defendant Pablo S. Sarmiento that he is not personally liable having merely
executed judgment, indemnity agreements in his capacity as acting general
manager of UNIVERSAL. Pablo S. Sarmiento appears to have signed the
indemnity agreement twice. The first, in this capacity as acting general
manager of UNIVERSAL, and the second, in his individual capacity.
Paculdo vs. Regalado
by Consolacion, Ray
Doctrine:
Right to specify which among his various obligations to the same
creditor is to be satisfied first rests with the debtor.
No payment is to be made to a debt that is not yet due and the payment
should be applied first to the debt most onerous to the debtor
Recit-ready:
Paculdo and Bonifacio entered into a contract of lease over a parcel of land
in Quezon City. Petitioner Paculdo also leased from respondent Bonifacio
11 other properties along Fairview Compound. Petitioner then was said to
fail to pay the rentals for the months of June and July In the case filed
before the SC, petitioner argues that the respondent made an erroneous
application of his payment which was supposed to be for the leased
 OBLICON Digests
Chapter 3-4
properties and not on the heavy equipments. Respondent countered that he
sent a letter informing petitioner that the his payments would be applied
also to the leased heavy equipment, petitioners failure to reply to the letter
was considered a consent to the application of the payments. The issue was
whether the petitioners failure to reply to the letter was a consent to the
application of the payments. The SC ruled that the NO, the power to decide
the application of the payments is vested with the debtor and that in this
case petitioners wish as to the application of the payment is crucial because
it should be noted that if his earlier payment was applied to his lease over
the property then no foreclosure proceedings would have been instituted
against him.
Facts:
Nereo Paculdo (Petitioner) and Bonifacio entered in a contract of lease
over a 16,478 square meter 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 31,
2015. For the first five (5) years of the contract beginning December 27,
1990, Nereo would pay a monthly rental of P450,000.00, payable within the
first five (5) days of each month at Bonifacios office, with a 2% penalty for
every month of late payment.
Petitioner also leased 11 other properties from respondent, 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 P1,020,000.00
Because of petitioners failure to pay P361,895.55 (rental for May 1992)
and monthly rental of P450,000 for months of June and July 1992.
Respondent sent a demand letter asking for payment of the back rentals and
should there be no reply within 15 days from receipt of letter, the lease
contract would be cancelled. Another demand letter was sent on July 17,
1992
Petitioner filed with the RTC an action for injunction and damages seeking
to stop respondent from disturbing his possession of the property subject of
the lease contract. On the same day, respondent filed with the Metropolitan
Trial Court an ejectment suit against petitioner but was later withdrawn for
some minor computation.
Metropolitan Trial Court rendered a decision in favor of respondent,
plaintiff is ordered to vacate the premises.
The petitioner Nereo appealed to the RTC but the court still ruled in favor of
respondent
Petitioner filed a petition for review with the Court of Appeals. He argued
that he paid the amount of P11,478,121.85 for security deposit and rentals
on the wet market building, but respondent, without his consent, applied
portions of the payment to his other obligations. The vouchers and receipts
indicated that the payments made were for rentals. Thus, at the time of
payment petitioner had declared as to which obligation the payment must be
applied.
Court of Appeals held that petitioner impliedly consented to respondents
application of payment to his other obligations and, thus, dismissed the
petition for lack of merit.
If the payment which respondent applied to petitioners other obligations is
set aside, and that the amount petitioner paid be applied purely to the
rentals on the Fairview wet market building, there would be an excess
payment of P1,049,447.18 as of July 2, 1992.
In an earlier letter, dated July 15, 1991, respondent informed petitioner that
the payment was to be applied not only to petitioners accounts under both
the subject land and the Quirino lot but also to heavy equipment bought by
the latter from respondent. Petitioner claimed that the amount applied as
payment for the heavy equipment was critical because it was equivalent to
 OBLICON Digests
Chapter 3-4
more than two (2) months rental of the subject property, which was the basis
for the ejectment case in the Metropolitan Trial Court.
The controversy stemmed from the fact that unlike the November 19, 1991
letter, which bore a conformity portion with petitioners signature, the July
15, 1991 letter did not contain the signature of petitioner.
Issue:
Whether petitioners failure to object to the letter of July 15, 1991 and
its proposed application of payments amount to consent to such
application?
Held/Ratio:
NO, the right to specify which among his various obligations to the same
creditor is to be satisfied first rests with the debtor by virtue of Art. 1252.
When petitioner made the payments, he made it clear to respondent that
they are rental payments on the Fairview wet market property. Though he
entered into various contracts and obligations with respondent, including a
lease contract over eleven (11) property in Quezon City and sale of eight (8)
heavy equipment, all the payments made, about P11, 000,000.00, were to be
applied to rental and security deposit on the Fairview wet market property.
There was no clear assent by petitioner as to the change in the manner of
application of payment. Petitioners silence as regards the application of
payment by respondent cannot mean that he consented thereto. No meeting
of the minds.
However, assuming that petitioner did not choose the obligation to be
satisfied first. Respondent may exercise the the right to apply the payments
to the other obligations of petitioner but subject to the condition that
petitioner must give his consent (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--no
payment is to be made to a debt that is not yet due and the payment has to
be applied first to the debt most onerous to the debtor).
In the instant case, the purchase price of the 8 heavy equipment was not
yet due at the time payment was made, there was no date set for such
payment. Neither was there a demand by the creditor to make the
obligation to pay the purchase price due and demandable. Hence, the
application made by respondent is contrary to the provisions of the law.
The lease over the Fairview wet market property is the most onerous
among all the obligations of petitioner to respondent. It was established
that the wet market is a going-concern and that petitioner has invested
about P35,000,000.00, in the form of improvements, on the property.
Hence, petitioner would stand to lose more if the lease would be
rescinded, than if the contract of sale of heavy equipment would not
proceed
Soco Vs. Militante
by Anonas, Aiyla
Doctrine:
Recit-ready:
The plaintiff-appellee-Soco (lessor) and the defendant-appellant-Francisco
(lessee) entered into a contract of lease on for commercial building and lot
for a monthly rental of P800.00 for a period of 10 years renewable for
another 10 years at the option of the lessee. One time, Francisco noticed that
Soco did not anymore send her collector for the payment of rentals and at
times there were payments made but no receipts were issued. Soon after
Soco learned that Francisco sub-leased a portion of the building to
NACIDA, at a monthly rental of more than P3,000.00 which is definitely
very much higher than what Francisco was paying to Soco under the
Contract of Lease, the latter felt that she was on the losing end of the lease
agreement so she tried to look for ways and means to terminate the contract.
Taking into account the factual background setting of this case, the Court
holds that there was in fact a tender of payment of the rentals made by
Francisco to Soco through Comtrust and since these payments were not
accepted by Soco evidently because of her intention to evict Francisco, by
all means, Francisco was impelled to deposit the rentals with the Clerk of
Court of the City Court of Cebu, Soco was notified of this deposit. She was
further notified of these payments by consignation. The City Court declared
the payments of rentals valid and effective.
ISSUE: Whether or not the consignation was valid and effective.
HELD: In order that consignation may be effective, the debtor must first
comply with certain requirements prescribed by law. The debtor must show
 OBLICON Digests
Chapter 3-4
(1) that there was a debt due; (2) that the consignation of the obligation had
been made because the creditor to whom tender payment was made refused
to accept it, or because he was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount due (Art. 1176, Civil
Code); (3) that previous notice of the consignation had been given to the
person interested in the performance of the obligation (Art. 1177, Civil
Code); (4) that the amount due was placed at the disposal of the court (Art.
1178, Civil Code); and (5) that after the consignation had been made the
person interested was notified thereof (Art. 1178, Civil Code). Failure in
any of these requirements is enough ground to render a consignation
ineffective. SC ruled that the essential requisites of a valid consignation
must be complied with fully and strictly in accordance with the law.
Substantial compliance is not enough for that would render only a directory
construction to the law.
Facts:
Soco leased her commercial building and lot situated at Manalili Street,
Cebu City, to Francisco for a monthly rental of P800.00 for a period of 10
years renewable for another 10 years at the option of the lessee.
Sometime before Soco this instant case of Illegal Detainer Francisco
noticed that Soco did not anymore send her collector for the payment of
rentals and at times there were payments made but no receipts were issued.
This situation prompted Francisco to write Soco the letter which the latter
received. After writing this letter, Francisco sent his payment for rentals by
checks issued by the Commercial Bank and Trust Company.
The factual background setting of this case clearly indicates that soon after
Soco learned that Francisco subleased a portion of the building to
NACIDA, at a monthly rental of more than P3,000.00 which is definitely
very much higher than what Francisco was paying to Soco under the
Contract of Lease, the latter felt that she was on the losing end of the lease
agreement so she tried to look for ways and means to terminate the contract
In view of this alleged nonpayment of rental of the leased premises
beginning May, 1977, Soco through her lawyer sent a letter to Francisco
serving notice to the latter to vacate the premises leased.
In answer to this letter, Francisco through his lawyer informed Soco and her
lawyer that all payments of rental due her were in fact paid by Commercial
Bank and Trust Company through the Clerk of Court of the City Court of
Cebu.
Despite this explanation, Soco filed this instant case of Illegal Detainer
filled in the City Court of Cebu
Francisco was impelled to deposit the rentals with the Clerk of Court of
the City Court of Cebu.
City Court of Cebu: holds that there was in fact a tender of payment of the
rentals made by Francisco to Soco through Comtrust and since these
payments were not accepted by Soco evidently because of her intention to
evict Francisco, by all means, culminating in the filing of Civil Case R-
16261,
Court of First Instance:
a. there was substantial compliance with the requisites of consignation and so
ruled in favor of private respondent, Regino Francisco, Jr., lessee of the
building owned by petitioner lessor.
b. Soledad Soco, in the case for illegal detainer originally filed in the City
Court of Cebu City, declaring the payments of the rentals valid and
effective, dismissed the complaint and ordered the lessor to pay the lessee
moral and exemplary damages in the amount of P10,000.00 and the further
sum of P3,000.00 as attorneys fees.
c. Soco was notified of this deposit by virtue of the letter of Atty. Pampio
Abarientos and the letter of Atty. Pampio Abarientos as well as in the
answer of Francisco in Civil Case R16261
d. She was further notified of these payments by consignation in the letter of
Atty. Menchavez
e. There was therefore substantial compliance of the requisites of
consignation, hence his payments were valid and effective. Consequently,
Francisco cannot be ejected from the leased premises for nonpayment of
rentals.
Issue: WON the substantial compliance of Francisco of the essential
requisites of a valid consignation is a valid consignation?
Held/Ratio: NO
Essential requisites of a valid consignation must be complied with fully and
strictly in accordance with the law, Articles 1256 to 1261, New Civil Code.
That these Articles must be accorded a mandatory construction is clearly
evident and plain from the very language of the codal provisions themselves
which require absolute compliance with the essential requisites therein
provided.
 OBLICON Digests
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Substantial compliance is not enough for that would render only a directory
construction to the law. The use of the words shall and must which are
imperative, operating to impose a duty which may be enforced, positively
indicate that all the essential requisites of a valid consignation must be
complied with. The Civil Code Articles expressly and explicitly direct what
must be essentially done in order that consignation shall be valid and
effectual.
Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept
payment and it generally requires a prior tender of payment
In order that consignation may be effective, the debtor must first comply
with certain requirements prescribed by law. The debtor must show
1. that there was a debt due;
2. that the consignation of the obligation had been made because the
creditor to whom tender of payment was made refused to accept it, or
because he was absent or incapacitated, or because several persons claimed
to be entitled to receive the amount due (Art. 1176, Civil Code);
3. that previous notice of the consignation had been given to the
person interested in the performance of the obligation (Art. 1177, Civil
Code);
4. that the amount due was placed at the disposal of the court (Art.
1178, Civil Code); and
5. that after the consignation had been made the person interested was
notified thereof (Art. 1178, Civil Code).
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
There was only substantial compliance of the REQUISITES FOR VALID
CONSIGNATION:
1st: The lessee must make a tender of payment of every monthly rented.
tender of payment of the monthly rentals to the lessor except that
indicated in the June 9, 1977 the original records of the case, We note that
the certification of Filemon Soon, messenger of the FAR Corporation,
certifying that the letter for Soledad Soco sent last May 10 by Commercial
Bank and Trust Co. was marked RTS (return to sender) for the reason that
the addressee refused to receive it, was rejected by the court for being
immaterial, irrelevant and impertinent per its Order dated November 20,
1980
2nd: the lessee must give prior notice of consignation for each monthly
rental respondent lessee also failed to prove the first notice to the lessor
prior to. In this connection, the purpose of the notice is in order to give the
creditor an opportunity to reconsider his unjustified refusal and to accept
payment thereby avoiding consignation and the subsequent litigation. This
previous notice is essential to the validity of the consignation and its lack
invalidates the same
lower court erred in finding that the lessee tendered his monthly rentals thru
the bank there being no proof that the lessee sent someone to collect the
current check monthly.There is no factual basis for the lower courts
finding that the lessee had tendered payment of the monthly rentals, thru his
bank, citing the lessees letter requesting the bank to issue checks in favor
of Soco in the amount of P840.00 every 10th of each month and to deduct
the full amount and service fee from his current account, as well letter of
the Vice President agreeing with the request. But scrutinizing carefully
Exhibit 4, this is what the lessee also wrote: Please immediately notify us
everytime you have the check ready so we may send somebody over to get
it. And this is exactly what the bank agreed: Please be advised that we are
in conformity to the above arrangement with the understanding that you
shall send somebody over to pick up the cashiers check from us.
Evidently, from this arrangement, it was the lessees duty to send someone
to get the cashier s check from the bank and logically, the lessee has the
obligation to make and tender the check to the lessor. This the lessee failed
to do, which is fatal to his defense.
3rd The lessee should give a notice of consignation of
each deposit made in court of every monthly rental.
respondent lessee likewise failed to prove the second
notice, that is after consignation has been made, to the
lessor
a. There is no clear proof that the bank sent notice
to the landlord that the checks will be deposited in court
there being no instruction given by the lessee.
Recapitulating the above testimony of the Bank
Comptroller, it is clear that the bank did not send notice to
Soco that the checks will be deposited in consignation
OBLICON Digests
Chapter 3-4
with the Clerk of Court (the first notice) and also, the
bank did not send notice to Soco that the checks were in
fact deposited (the second notice) because no instructions
were given by its depositor, the lessee, to this effect, and
this lack of notices started from September, 1977 to the
time of the trial, that is, June 3, 1980.
4th There is no proof of actual deposit of rentals in
court. not a single copy of the official receipts issued
by the Clerk of Court was presented at the trial of the case
to prove the actual deposit or consignation. The tenant
deposited the rentals due in court only after the lapse of
two years and after the complaint for ejectment had been
filed
Meat Packing vs. SB
by Carlos, Von
Doctrine: 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. Before the deposit to the courts, a prior
tender of payment to the creditor must be made. Consignation
produces the effect of payment and extinguishes the obligation.
Recit-ready: On 1975, GSIS-MPCP leased its properties (3 parcels of
land and the meat processing and meat packing plant) to PIMECO.
Under the agreement, the agreement will be cancelled if the default
amounted to a cumulative sum of 3 annual installments. The
cancellation would be automatic and no judicial intervention shall be
required. On January 1986, the management and properties of
PIMECO was sequestered by the PCGG. PIMECO was worried that
the PCGG management team might not make proper payments for the
lease, making them in default. So, they filed for declaratory relief. In
the meantime, the PCGG gave 5M in check to MCPC. However, the
MCPC declined the payment because the arrears in payment
cumulated to more than the sum of 3 annual installments. The PCGG
consigned with the Sandiganbayan the 5M. The Sandiganbayan
rejected the motion for reconsideration filed by the MCPC. The issue of
this case is the validity of the consignment. The MCPC assails the
consignment because it is in its view that the contract was automatically
cancelled due to the arrears in payment. The Sandiganbayan found
that the arrears did not amount to that specified by the agreement,
therefore, the agreement still subsist. This finding was upheld by the
Supreme Court. Consignation is the act of depositing the actual
payment to the court or judicial authorities if the creditor refused to
accept the tender of payment. In the case at hand, there was a prior
tender of payment by the PCGG to the MCPC. The MCPC refused
such payment. Then it was deposited to the Sandiganbayan. Since the
elements are present, it is a proper consignation.
Facts: (Supplementary)
Characters: Philippine Integrated Meat Corporation (PIMECO),
Government Service Insurance System (GSIS), Meat Packing
Corporation of the Philippines (MPCP), Presidential Commission on
Good Governance (PCGG)
MCPC is owned by GSIS
Annual rate for lease P1,375,563.92 for 28 years = P38,515,798.87
Lease: November 3, 1975
Sequestration by PCGG: Jan 1986
MCPC alleged that the contract was rescinded as early November
19, 1986
Issue: WN the consignation was proper. YES
Held/Ratio:
The lease-payment agreement subsists because it was not proven
that the arrears exceeded that of the limit
From January 29, 1986 to January 30, 1990, A sum of
P15,921,205.83 was paid by PIMECO to the GSIS-MCPC, which means
that the agreement subsists because the GSIS/MCPC still accepted
payment
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
OBLICON Digests
Chapter 3-4
PCGG gave 5M in checks to GSIS/MCPC (Prior payment),
GSIS/MCPC did not accept because the agreement was allegedly
rescinded (refusal), PCGG deposited the checks to the Sandiganbayan
(deposit to a judicial authority)
Pabugais vs. Dave P. Sahijwani
by Damasco Ty,
Don
Doctrine:
In general, a managers check [or an ordinary check] is not legal
tender, the creditor has the option of refusing or accepting it. Payment in
check by the debtor may be acceptable as valid, if no prompt objection to
said payment is made
A creditor who indicated in his prayer that the amount consigned
be awarded to him is equivalent to an acceptance of the consignation.
Recit-ready:
Pabugais agreed to sell to Sahjiwani a lot in Forbes Park in the
amount of P 15.5m. Sahjiwani paid the reservation fee of 600,000. Pabugais
failed to deliver the required documents and was bound to return the
reservation fee with interest pursuant to their agreement.
Sahjiwani refused to accept the payment, in the form of managers
check, because he claims that the computation for the payment was
insufficient.
Instead of paying directly to Sahjiwani, Pabugais consigned the
amount to the RTC of Makati. It held that the consignation was invalid
because there was no proof that Sahjiwani refused the payment.
Pabugais and his counsel wanted to withdraw the consigned money
but the CA, on a motion for reconsideration, held that it was in fact, a valid
consignation and therefore, can no longer be withdrawn pursuant to Art
1260.
Issue: W/N consignation was valid?
The SC held that it was a valid consignation. Generally, checks are
not legal tender but it can be considered as valid if the creditor does not
object to it. In the case at bar, Sahjiwani refused to accept payment because
of insufficiency of amount, and not because it was in the form of check.
Therefore, there was a valid legal tender and thus, a valid consignation.
Issue: W/N the consigned amount can be withdrawn?
The SC held that the amount can no longer be withdrawn. Art 1260
provides that before the creditor accepts the consignation, the debtor may
withdraw the thing or sum deposited. The SC considered that the creditor
has already accepted the payment since it was indicated in the creditor-
respondents (Sahjiwani) prayer that the amount be awarded to him.
Therefore, The debtor can no longer withdraw the amount since there is an
acceptance on the part of the creditor.
Facts:
Teddy Pabugais (Petitioner) and Dave Sahijwani (respondent) entered into
an agreement to sell a lot located in Forbes Park, Makati for P 15,487,500.
Respondent paid P 600,000 as reservation fee. The remaining balance shall
be paid 60 days from the execution of the contract.
The contract stipulates that if respondent (buyer) fails to pay remaining
balance, the P 600,000 reservation fee shall be forfeited; and if petitioner
(seller) fails to deliver the documents, he shall return the P600,000 with
interest at 18% per annum.
Petitioner failed to deliver the required documents and returned the
reservation fee using a Far East Bank & Trust Company Check. This check
was dishonored.
Petitioner claims that he has already tried to pay P 672,900 (with interest
already) in the form of a letter attached with a Managers Check but was
refused twice (first via messenger; second via DHL). Because of this, he
wrote a letter to respondent saying that he is consigning the amount with the
RTC of Makati, and accordingly filed a complaint for consignation.
Respondent claims that they received the letter but that there was no check.
Respondent also claims that the amount to be tendered is insufficient
because there was also a verbal agreement to pay 3% monthly interest and
25% attorneys fees on top of the 18% per annum.
 OBLICON Digests
Chapter 3-4
RTC declared the consignation to be invalid because there there was no
proof to show that petitioner tendered payment to respondent and that the
respondent refused to receive the same. It also held that a managers check
is not legal tender, hence, no valid tender of payment.
Petitioner appealed to the CA. Meanwhile, petitioners counsel died, and
substituted by Atty De Guzman who was promised part of the consigned
amount as attorneys fees.
Petitioner filed an Ex Parte Motion to Withdraw Consigned Money. This
motion and their appeal were denied by the CA.
On a motion for reconsideration, the CA held that the consignation was
valid after all and thus extinguished petitioners obligation. Hence,
petitioner can no longer withdraw the consigned money.
Issue:
W/N there was a valid consignation? - Yes
W/N petitioner can withdraw the consigned money? - No
Held/Ratio:
First issue: In order that consignation may be effective, the debtor must
show that:
there was a debt due;
the creditor to whom tender of payment was made refused to accept it; or he
was absent or incapacitated; or because several persons claimed to be
entitled to receive the amount due; or because the title to the obligation has
been lost;
previous notice of the consignation had been given to the person interested
in the performance of the obligation;
the amount due was placed at the disposal of the court;
after the consignation had been made the person interested was notified
thereof.
In general, a manager's check is not legal tender, but the creditor has the
option of refusing or accepting it. Payment in check by the debtor may be
acceptable as valid, if no prompt objection to said payment is made.
Respondents reason for not accepting the check was not because the
petitioner was paying in check; rather, it was because respondent claims that
there was no check appended to the letter and the amount to be paid was
insufficient.
Hence, there is actually no prompt objection to the payment in check.
Therefore, tender of payment in the form of managers check is valid.
Regarding the sufficiency of payment, the Agreement and Undertaking only
specified the 18% per annum interest. Thus, P 672,900 is sufficient
payment. There being a valid tender of payment in an amount sufficient to
extinguish the obligation, the consignation is valid.
Second Issue: Art. 1260. Once the consignation has been duly made, the
debtor may ask the judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial
confirmation that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain
in force.
The amount consigned with the trial court can no longer be withdrawn by
petitioner because respondents prayer in his answer that the amount
consigned be awarded to him is equivalent to an acceptance of the
consignation, which has the effect of extinguishing petitioners obligation.
Spouses Poon vs. Prime Savings Bank
by Fulache, Dece
Doctrine:
Requisites for the application of Article 1267:
1. The event or change in circumstance could not have been foreseen at
the time of the execution of the contract
2. It makes the performance of the contract extremely difficult but not
impossible.
3. It must not be due to the act of any of the parties
4. The contract is for a future prestation
Recit-ready:
Spouses Poon and PSB entered into a 10-year lease contract for the latters
use as its branch office. They have agreed to pay P 60,000 monthly with an
advance payment of the rentals for the first 100 months amounting to P 6M.
Howev PSB was placed under the receivership of the Philippine Deposit
Insurance Corporation. It vacated the place and issued a demand letter for
the return of the unused advance rental on the ground that the lease
agreement had become inoperative, as the closure was a force majeure. It
also invoked the principle of res sibus stantibus as alternative legal basis.
However, the Court ruled that the closure of the business was not a
fortuitous event. Also, the principle of res sibus stantibus cannot be invoked
as there were lacking requisites. The requirements for the said principle to
apply are: (1) The event or change in circumstance could not have been
OBLICON Digests
Chapter 3-4
foreseen at the time of the execution of the contract; (2) It makes the
performance of the contract extremely difficult but not impossible; (3) It
must not be due to the act of any of the parties; and (4) The contract is for a
future prestation. The 2nd and 4th requisites are present. However, the 1 st
and 3rd requisites are lacking. The parties had actually considered the
possibility of deterioration or loss of PSBs business within the 10-year
contract period (based on the cross examination). Also, PSB was partly
accountable for the closure of its banking business. Hence, it cannot be said
that the closure of the business was independent of its will.
Facts:
Petitioner: Jaime and Matilde Poon
Respondent: Prime Savings Bank (PSB)
- Spouses poon owned a commercial building in Naga City, which they
used for their bakery business.
- On Nov. 3, 2006, Matilde and PSB executed a 10-year Lease Contract
for the latters use as its branch office.
- Agreement: To fix a monthly rental of P 60,000 with an advance
payment of the rentals for the first 100 months amounting to P6M.
The advance payment was to be applied immediately while the
remaining balance will be paid on a monthly basis.
Paragraph 24 of the Contract provides:
Should the lease[d] premises be closed, deserted or vacated by the
LESSEE, the LESSOR shall have the right to terminate the lease without
the necessity of serving a court order and to immediately repossess the
leased premises. Thereafter the LESSOR shall open and enter the leased
premises in the presence of a representative of the LESSEE (or of the
proper authorities) for the purpose of taking a complete inventory of all
furniture, fixtures, equipment and/or other materials or property found
within the leased premises.
The LESSOR shall thereupon have the right to enter into a new contract
with another party. All advanced rentals shall be forfeited in favor of the
LESSOR.
- Three years later, BSP placed PSB under the receivership of the
Philippine Deposit Insurance Corporation.
- On May 2000, PSB vacated the leased building and surrendered them
to Poon. After, the PDIC issued Poon a demand letter for the return
of the unused advance rental (P 3,480,000) on the ground that the
lease agreement had become inoperative, as the closure was a force
majeure. PDIC also invoked the principle of rebus sic stantibus as
alternative legal basis for demanding the refund.
RTC Ruling
- Partial rescission of the lease agreement
- Second clause in paragraph 24 was penal in nature; clause was a valid
contractual agreement.
- Limited the forfeiture to of the amount to answer for the unpaid utility
bills and E-VAT
CA Ruling
- Affirmed the decision of RTC
- Different rationale Closure of PSB was not a fortuitous event
- PSB was found to have committed fraudulent acts and transactions
Issue:
W/N PSB may be released from its contractual obligations to petitioners on
grounds of fortuitous event under Article 1174 of the Civil Code and
unforeseen event under Article 1267 of the Civil Code.
Held/Ratio:
The closure of respondents business was neither a fortuitous nor an
unforeseen event that rendered the lease agreement functus officio.
Respondent posits that it should be released from its contract with
petitioners, because the closure of its business upon the BSPs order
constituted a fortuitous event as the Court held in Provident Saving Bank
(cited case).
The period during which the bank cannot do business due to insolvency is
not a fortuitous event, unless it is shown that the government's action to
 OBLICON Digests
Chapter 3-4
place a bank under receivership or liquidation proceedings is tainted with
arbitrariness, or that the regulatory body has acted without jurisdiction.
As an alternative justification for its premature termination of the Contract,
respondent lessee invokes the doctrine of unforeseen event under Article
1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor
may also be released therefrom, in whole or in part.
The theory of rebus sic stantibus in public international law is often cited as
the basis of the above article. Under this theory, the parties stipulate in light
of certain prevailing conditions, and the theory can be made to apply when
these conditions cease to exist. The Court, however, has once cautioned
that Article 1267 is not an absolute application of the principle of rebus
sic stantibus, otherwise, it would endanger the security of contractual
relations. After all, parties to a contract are presumed to have assumed the
risks of unfavorable developments. It is only in absolutely exceptional
changes of circumstance, therefore, that equity demands assistance for the
debtor.
Requisites for the application of Article 1267:
1. The event or change in circumstance could not have been foreseen at the
time of the execution of the contract
2. It makes the performance of the contract extremely difficult but not
impossible.
3. It must not be due to the act of any of the parties
4. The contract is for a future prestation
The difficulty of performance should be such that the party seeking to be
released from a contractual obligation would be placed at a disadvantage by
the unforeseen event. Mere inconvenience, unexpected impediments,
increased expenses, or even pecuniary inability to fulfil an engagement, will
not relieve the obligor from an undertaking that it has knowingly and freely
contracted.
The law speaks of service (obligation to do). Present case is a reciprocal
contract, one obligation was to pay the agreed rents for the whole contract
period. It is hard to complete the lease term since it was already out of the
business only three and a half years into the 10-year contract period. Hence,
the 2nd and 4th requisites mentioned above are present in this case.
The 1st and 3rd requisites are lacking. The parties had actually considered the
possibility of deterioration or loss of PSBs business within the 10-year
contract period (based on the cross examination). Also, PSB was partly
accountable for the closure of its banking business. Hence, it cannot be said
that the closure of the business was independent of its will.
Ocecena vs. Jabson
by Chung, Lyn
Doctrine:
a positive right is created in favor of the obligor to be released from the
performance of an obligation in full or in part when its performance 'has
become so difficult as to be manifestly beyond the contemplation of the
parties.
Recit-ready:
Tropical Homes Inc. agreed to develop a subdivision on the land owned by
Jesus and Efigenia Occea, wherein Tropical Homes would be paid only
40% of the sale of the subdivision lots. Tropical Homes seeks revision of
the contract on the Basis of Art 1267 of the Civil Code (CC). They are
asking for modification of the terms and conditions of the subdivision
contract, due to increase in costs. Art. 1267 CC: 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.
Issue:
Is the obligation deemed extinguished because he service has become so
difficult as to be manifestly beyond the contemplation of the parties? Is the
court allowed to change the terms and conditions of the contract using Art
1267 of the Civil Code?
Held:
The CC authorizes the release of an obligor when the service has become so
difficult as to be manifestly beyond the contemplation of the parties but
does not authorize the Courts to modify or revise the subdivision contract
between the parties or to fix a different sharing ratio from that contractually
OBLICON Digests
Chapter 3-4
stipulated with the force of law. Tropical Homes complaint for modification
of the contract has no basis in law and must be dismissed.
Facts:
Tropical Homes Inc. agreed to develop a subdivision on the land owned
by Jesus and Efigenia Occea, wherein Tropical Homes would be paid only
40% of the sale of the subdivision lots.
Tropical Homes seeks revision of the contract on the Basis of Art 1267
of the Civil Code (CC).
WHY??? That further performance by the plaintiff under the contract
will result in situation where defendants would be unjustly enriched at the
expense of the plaintiff; will cause an iniquitous distribution of proceeds
from the sales of subdivided lots in manifest actually result in the unjust and
intolerable exposure of plaintiff to implacable losses, all such situations
resulting in an unconscionable, unjust and immoral situation contrary to and
in violation of the primordial concepts of good faith, fairness and equity
which should pervade all human relations
o That due to the increase in price of oil and its derivatives and the
concomitant worldwide spiraling of prices, which are not within the control
of plaintiff, of all commodities including basis raw materials required for
such development work, the cost of development has risen to levels which
are unanticipated, unimagined and not within the remotest contemplation of
the parties at the time said agreement was entered into and to such a degree
that the conditions and factors which formed the original basis of said
contract, have been totally changed; 'That further performance by the
plaintiff under the contract.
Issue:
Is the obligation deemed extinguished because he service has become so
difficult as to be manifestly beyond the contemplation of the parties? Is the
court allowed to change the terms and conditions of the contract using Art
1267 of the Civil Code?
Held/Ratio:
yes, the obligation is extinguished.
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.
... a positive right is created in favor of the obligor to be released from the
performance of an obligation in full or in part when its performance 'has
become so difficult as to be manifestly beyond the contemplation of the
parties.
The cited article does not grant the courts this authority to remake, modify
or revise the contract or to fix the division of shares between the parties as
contractually stipulated with the force of law between the parties, so as to
substitute its own terms for those covenanted by the parties themselves.
Naga Telephone vs. CA
by Tolentino, Hazel
Doctrine:
Art. 1267 - doctrine of unforeseen events. 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.
Essentially, contracts are created in light of certain conditions. If these
conditions no longer exist, then the contract shall also cease to exist.
Recit-ready:
NATELCO entered a contract with CASURECO which stipulated that the
former may install 10 telephone lines on the latters light posts in Naga City
free of charge. Ten years later, CASURECO filed for reformation of the
contract on the ground that NATELCO was unjustly enriched. This is
because NATELCOs subscribers grew in number, which led it to install
more telephone lines still at no cost.
The Court held that the contract cannot be reformed but instead cancelled
on the basis of Art. 1267 of the Civil Code. The provision states that if the
conditions that initially brought about a contract no longer exist, then the
contract must also cease to exist. This is applicable to the case at bar. The
conditions which brought about the contract between NATELCO and
CASURECO no longer exist because while NATELCOs subscribers
OBLICON Digests
Chapter 3-4
increased, the number of poles CASURECO has did not change. Hence, the
contract must cease to exist.
Facts:
NATELCO may install 10 telephone connections on CASURECOs electric
light posts in Naga City free of charge if in exchange CASURECO can use
the telephone service. The contract shall be in effect as long as NATELCO
needs the light posts and shall only be terminated if CASURECO is forced
to stop its operation or if the light posts need to be removed.
On 1989. CASURECO filed for reformation of the contract with damages
on the ground that NATELCO was unjustly enriched from it. Due to
NATELCOs increasing number of subscribers, they set up more telephone
lines inside and outside Naga City free of charge. This burdened and
damaged the light posts greatly.
RTC held that while the contract initially appeared fair, it became
disadvantageous for CASURECO since NATELCOs subscribers steadily
increased while the number of their electric light posts did not (and
NATELCO still didnt need to pay). It further said that reformation of the
contract should be allowed and NATELCO should be charged rent for its
continued use of the light posts.
CA affirmed RTCs decision but based on different grounds. Instead, it held
that according to Art. 1267 of the New Civil Code which states that
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.
the contract should cease to exist because the conditions that brought it
about no longer existed.
Hence, NATELCOs petition to SC.
Issue:
WON Art. 1267 is applicable to the case at bar.
Held/Ratio:
Yes, Art. 1267 is applicable.
The term service, as used in the article, should be understood as
referring to the performance of an obligation. In this case, the
obligation of CASURECO was to allow NATELCO to use its light posts.
Since it has been difficult for CASURECO to perform its obligation due to
the rise of NATELCOs subscribers, the court held that the condition which
allowed for the contract (and consequently, the obligation) to arise was no
longer present. Hence, the contract should cease to exist.
Yam & Yek Sun Lent vs. CA
by De Jesus, Mark
Doctrine: Condonation must conform with the forms of donation
Recit-ready: Petitioners entered into a Loan Agreement with
Assumption of Solidary Liability. One with P500,000 loan, and the 2nd
IGLF being a P300,000 loan. The first IGLF was paid in full in APR 2,
1985. Petitioners made a partial payment of P50,000 for the 2nd loan.
Afterwards, petitioners wrote a letter to the private respondents
proposing to settle their obligations, which the private respondents
counter-offered that it would reduce the penalty charges upto P140,000
provided that the petitioners pay their obligatins on or before July 30,
1986. Petitioners sent a check amounting only to P410,854.47 with a
notation at the back stating full payment of IGLF Loan. Private
respondents sent demand letters seeking payment of the balance of
P266,146.88.
Petitioners defense that sometime after receiving the counter-offer, they
met with Carlos Sobrepenas, president of the Private respondents
corporation, whom they agreed with to waive the penalties and other
charges.
The Court held that there was no valid condonation as any condonation
of movable properties amounting more than P5,000 shall comply with
the form of donation, which means in writing. Sobrepenas, even as the
president of the Private Respondents corporation, has no authority to
 OBLICON Digests
Chapter 3-4
condone any debt when the company was under receivership by the
Central Bank.
Facts: - May 10, 1979: The parties (petitioner and private
respondent) entered into a Loan Agreement with Assumption of
Solidary Liabilitythe first Industrial Guarantee and Loan Fund
(IGLF) between the two.
o P500,000.00 loan
o 12% annual interest
o 2% monthly penalty
o 1 % monthly service charge
o 10% attorneys fees
o Secured by a chattel mortgage on the printing
machinery in petitioners establishment.
- Second IGLF (basically the same as the first one, except):
o P300,000.00 loan
o 14% annual interest
o 1% per annum service charge
- April 2, 1985: petitioners had paid their first loan (P500,000.00)
- November 4, 1985: PR was placed under receivership by the Central
Bank:
o Ricardo Lirioreceiver
o Cristina Destajoin-house examiner
- May 17, 1986: Pet made a partial payment of P50,000.00 on the
second loan.
- June 18, 1986: Pet wrote a letter to PR proposing to settle their
obligations, which was answered by the PR on July 2 with a counter-
offer that it would reduce the penalty charges (up to P140,000.00)
provided petitioners pay their obligations on or before July 30, 1986.
- July 31, 1986: Pet total liability amounted to P727,001.35.
o However, Pet sent a check to PR amounting only to
P410,854.47 (Pilipinas Bank Check), with a notation at
the back stating full payment of IGLF Loan
o P410,854.47 = principal + (interest-P50,000.00 partial
payment)
- Because of this, PR sent demand letters seeking payment of the
balance of P266,146.88.
o Pet did not answer, so PR then filed a case in the RTC
Manila for the collection of the sum plus interests,
penalties and service charges or, in the alternative, the
foreclosure of the machineries.
- Pet defense: sometime after receiving the counter-offer letter,
Petitioner Yam (and wife ) met with Carlos Sobrepenas, president of the
PR corporation.
o The latter allegedly agreed to waive the penalties and
service charges provided pet paid the principal and
interest (less the P50,000.00 partial payment). This
was then the reason why there was such notation at
the back of the check.
- April 30, 1990: RTC decision: in favor of PRpet ordered to pay the
loan balance of P266,146.88 plus other charges, failing in which the said
machineries shall be foreclosed.
- Court of Appeals: affirmed in toto the decision of the Lower Court.
Issue: WON there was condonation on the penalties of the petitioner's
loan
Held/Ratio: Negative. Art. 1270, par.2 of the Civil COde provides that
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, must be made in writing, otherwise the same
shall be void. In this connection, under Art. 417, par. 1, referring to
credits are considered movable property. In the case at bar, it is
undisputed that the alleged agreement to condone P266, 146.88 of the
second IGLF loan was not reduced in writing.
Petitioners contention that the notation at the back is an evidence of
the oral agreement is untenable. The notation merely states the
petitioners intention in making the payment, in no way it binding upon
the private respondents. However, had the private respondents issued a
receipt, the same would have been an admission against interest.
Petitioners should have asked for a certificate of full payment from the
private respondents, as what they did on the first IGLF.
Destajos countersign is not a compelling evidence either. Such
countersigning only signifies acknowledgement of receipt of the
payment. In November 4, 1985, private respondents was placed under
receivership by the Central bank, appointment of receiver operates to
OBLICON Digests
Chapter 3-4
suspend the authority of a corporation over its property and effects.
Thus Sobrepenas had no authority to condone the debt.
BPI vs. CA
by Olivarez, Shannin
Doctrine:
Principle of Legal Compensation
Recit-ready:
The case revolves around the issue of the joint account between Reyes and
his grandmother, and his grandmothers pension. When Reyes created a
joint account with his grandmother, he made sure that his grandmothers
pension shall be deposited under the said account. When Reyes
grandmother died, Reyes still kept the pension under their joint account.
However, after a couple of months, Reyes decided to close that joint
account and transferred the money to the savings account that he had with
his wife. When the next pension came, it was dishonoured because the U.S.
Treasury Department suddenly had knowledge about the death of Reyes
grandmother. The Treasury Department then asked for a refund, and that
was the first time that BPI knew of his grandmothers death. Reyes along
with his lawyer then went to the BPI branch and filed a case against BPI
because he was not able to withdraw money, causing him to be under debt.
The ruling in this case is that BPI does have the legal right to apply the
deposit of respondent Reyes to his outstanding obligation to BPI
brought about by the return of the U.S. Treasury warrant he earlier
deposited under the principle of legal compensation.
Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. Article 1290 of the Civil Code provides
that when all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts
to the concurrent amount, even though the creditors and debtors are not
aware of the compensation. Legal compensation operates even against the
will of the interested parties and even without the consent of them. Since
this compensation takes place ipso jure, its effects arise on the very day on
which all its requisites concur. When used as a defense, it retroacts to the
date when its requisites are fulfilled.
Article 1279 states that in order that compensation may be proper, it is
necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
The elements of legal compensation are all present in the case at bar. The
obligors bound principally are at the same time creditors of each other.
Petitioner bank stands as a debtor of the private respondent, a depositor. At
the same time, said bank is the creditor of the private respondent with
respect to the dishonored U.S. Treasury Warrant which the latter illegally
transferred to his joint account. The debts involved consist of a sum of
money. They are due, liquidated, and demandable. They are not claimed by
a third person.
Facts:
September 25, 1985, respondent Edvin F. Reyes opened Savings Account at
petitioner BPI Cubao, Shopping Center Branch. It was a joint account with
his wife, Sonia S. Reyes.
Edvin Reyes also held a joint account with his grandmother, Emeteria M.
Fernandez, which he opened on February 11, 1986 at the same BPI branch.
Reyes regularly deposited in this account the U.S. Treasury Warrants
payable to the order of Emeteria M. Fernandez as her monthly pension.
Fernandez died on December 28, 1989, without the knowledge of the U.S.
Treasury Department. She was still sent a U.S. Treasury Warrant that was
dated January 1, 1990 in the amount of $377.
OBLICON Digests
Chapter 3-4
On January 4, 1990, Reyes deposited the said U.S. treasury check of
Fernandez in their joint savings account.
Two months after or on March 8, 1990, Reyes closed the savings account
between him and his grandmother, and transferred its funds amount to P13,
112.91 to the joint savings account that he had with his wife.
On January 16, 1991, a U.S. Treasury Warrant was dishonoured as it was
discovered that Fernandez died three (3) days prior to its issuance. The U.S.
Department of Treasury then requested BPI for a refund. For the first time
BPI came to know the death of Fernandez.
On February 19, 1991, Reyes with his lawyer visited BPI and the refund
documents were shown to them. Surprisingly, Reyes demanded from BPI
bank restitution of the debited amount. He claimed that because of the debit,
he failed to withdraw his money when he needed them. Reyes then filed a
suit for Damages against BPI before the RTC of Quezon City, Branch 79.
BPI contested the complaint and counter-claimed for moral and exemplary
damages. By way of Special and Affirmative Defense, they averred that
Reyes gave them his express verbal authorization to debit the questioned
amount. They also claimed that Reyes later refused to execute a written
authority.
In the RTC decision dated January 20, 1993, it dismissed the complaint of
Reyes for lack of cause of action.
Reyes appealed to the Court of Appeals. On August 16, 1994, the 16 th
Division CA reversed the decision.
Hence this petition.
Issue:
Whether or not Respondent Court of Appeals gravely erred in not holding
that petitioner bank has legal right to apply the deposit of respondent Reyes
to his outstanding obligation to BPI brought about by the return of the U.S.
Treasury warrant he earlier deposited under the principle of legal
compensation
Held/Ratio:
Yes. The Court of Appeals erred when it failed to rule that legal
compensation is proper.
Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. Article 1290 of the Civil Code provides
that when all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts
to the concurrent amount, even though the creditors and debtors are not
aware of the compensation. Legal compensation operates even against the
will of the interested parties and even without the consent of them. Since
this compensation takes place ipso jure, its effects arise on the very day on
which all its requisites concur. When used as a defense, it retroacts to the
date when its requisites are fulfilled.
Article 1279 states that in order that compensation may be proper, it is
necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
The elements of legal compensation are all present in the case at bar. The
obligors bound principally are at the same time creditors of each other.
Petitioner bank stands as a debtor of the private respondent, a depositor. At
the same time, said bank is the creditor of the private respondent with
respect to the dishonored U.S. Treasury Warrant which the latter illegally
transferred to his joint account. The debts involved consist of a sum of
OBLICON Digests
Chapter 3-4
money. They are due, liquidated, and demandable. They are not claimed by
a third person.
Dispositive:
IN VIEW HEREOF, the Decision of respondent Court of Appeals in CA-
G.R. CV No. 41543 dated August 16,1994 is ANNULLED and SET ASIDE
and the Decision of the trial court in Civil Case No. Q-91-8451 dated
January 20, 1993 is REINSTATED. Costs against private respondent.
PNB vs. CA
by Bundalian, Albert
Doctrine:
Recit-ready: Ramon Lapez was a debtor-client of the Philippine
National Bank (PNB) and the issue arises from PNBs interception of
funds being coursed through it by Ramon Lapez coming from a foreign
bank in Jeddah, Saudi Arabia amounting to approximately $2,600.00.
According to PNB, its action was justified by the existence of the
obligation of Mr. Lapez to return amount approximately Php.30,000 to
Php. 50,000.00 that was miscredited by PNB, in years 1980-1981, to Mr.
Lapezs account.
PNB demanded the return of such amounts but to no avail.
Subsequently, being a client-depositor of PNB, Mr. Lapez transacted
via PNB a fund transfer from a foreign bank in Jeddah, Saudi Arabia.
The dollar amount was sent to PNB where Mr. Lapez used to facilitate
the foreign fund transfer but was barred by from withdrawing the said
amount. PNB alleges that this dollar amount would serve to
compensate the obligation of Mr. Lapez to PNB.
Trial Court and CA struck down the action made by PNB for being
non-compliant with the requisites laid down constituting a valid
compensation. RTC highlighted the fact that PNB and Mr. Lapez are
not principally bound as debtors and principally acting as creditors at
the same time of the other when PNB intercepted the dollar fund. A
contract between a foreign bank and local bank asking the latter to pay
an amount to a beneficiary is a stipulation pour autrui. A stipulation
pour autrui is a stipulation in favor of a third person
Thus between the defendant bank (as the local correspondent of the
National Commercial Bank of Jeddah) and the plaintiff as beneficiary,
there is created an implied trust pursuant to Art. 1453 of the Civil
Code, quoted as follows:
When the property is conveyed to a person in reliance upon his
declared intention to hold it for, or transfer it to another or the grantor,
there is an implied trust in favor of the person whose benefit is
comtemplated (
SC affirmed the decisions of RTC and CA by saying that what the
petitioner bank is effectively saying is that since the respondent Court
of Appeals ruled that petitioner bank could not do a shortcut and simply
intercept funds being coursed through it, for transmittal to another
bank, and eventually to be deposited to the account of an individual
who happens to owe some amount of money to the petitioner, and
because respondent Court ordered petitioner bank to return the
intercepted amount to said individual, who in turn was found by the
appellate Court to be indebted to petitioner bank, THEREFORE, there
must now be legal compensation of the amounts each owes the other,
and hence, there is no need for petitioner bank to actually return the
amount, and finally, that petitioner bank ends up in exactly the same
position as when it first took the improper and unwarranted shortcut by
intercepting the said money transfer, notwithstanding the assailed
Decision saying that this could not be done!
Facts:
Ramon Lapez = client of PNB; debtor of PNB with respect to miscredited
amounts by PNB to his account in PNB
PNB = interceptor of the $2,600.00 amount coming from NCB Jeddah
Saudi Arabia
NCB Jeddah = Saudi Arabian bank sending $2,600 to Lapez via PNB
Issue: WON Philippine National Bank (PNB) can intercept funds being
coursed through by a foreign bank to PNBs client?
 OBLICON Digests
Chapter 3-4

(4) That they be liquidated and demandable;

Held/Ratio: No. Mere existence of a loan by PNBs client does not
entitle it to do compensation by intercepting funds from transactions (5) That over neither of them there be any retention or
that are completely different from the existing liability between PNB controversy, commenced by third persons and
and its client-debtor. communicated in due time to the debtor.

Requisites of compensation, according to Article 1279, are the Recit-ready: The Mirasols are sugar landowners and planters. PNB
following: financed their sugar production through a crop loan-financing scheme. The
Article 1279 of the Civil Code provides: PNB, through a mortgage, was able to sell the Mirasols crops and used the
In order that compensation may prosper, it is necessary: proceeds as payment for the obligation. Then President Marcos issued PD
579, authorizing PNB to finance Philexs purchases foreign sales profits
a) That each one of the obligors be bound principally, and that he be at to be directed to the national governments special fund. PNB demanded the
the same time a principal creditor of the other; Mirasols to settle their obligation; however, they werent able to pay which
resulted in the foreclosure of the mortgaged properties, leaving a P12M
b) That both debts consists in a sum of money, or if the things due are deficiency. The Mirasols claim that by virtue of legal compensation the
consumable, they be of the same kind, and also of the same quality if loans are fully paid since the debt was offset by the unliquidated amounts
the latter has been stated; owed to them by PNB. Court held that there is no legal compensation since
the parties are not mutually creditors and debtors of each other. The
c) That the two debts be due; proceeds of the crops PNB sold were remitted to the government; thus, PNB
wasnt able to retain said proceeds. Also, there is no legal compensation
d) That they be liquidated and demandable; when a claim is still in litigation, since it is not yet considered liquidated.

e) That over neither of them there be any retention or controversy, Facts:

commenced by third persons and communicated in due time to the
debtor.
Mirasol vs. CA
by Angeles, Hannah
Doctrine: Requisites of Legal Compensation:
(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;
The Mirasols are sugarland owners and planters. Private respondent,
Philippine National Bank (PNB), financed the Mirasols sugar production
venture for crop years, 1973-1974, and 1974-1975 under a crop loan-
financing scheme.
o Crop loan-financing scheme Mirasols signed Credit
Agreements, a Chattel Mortgage on Standing Crops, and a
Real Estate Mortgage in favor of PNB.
o Chattel Mortgage on Standing Crops empowered PNB as
the petitioners attorney-in-fact to negotiaite and to sell
the latters sugar in both domestic and export markets and
to apply the proceeds to the payment of their obligations
to it.
During Martial Law, former president Ferdinand Marcos issued Presidential
Decree No. 579[2] in November 1974. The said decree authorized:
o Philippine Exchange Co., Inc. (PHILEX) to purchase sugar
allocated for export to the United States and to other
foreign markets
 OBLICON Digests
Chapter 3-4
o PNB to finance PHILEXs purchases
o PHILEX profit from sales of sugar abroad was to be
remitted to a special fund to the national government,
after commissions, overheard expenses, and liabilities had
been deducted.
PNB continued to finance the sugar production of the Mirasols for crop
years 1975-1976. And 1976-1977. Said crop loands and similar obligations
were secured by real estate mortgages over several properties of the
Mirasols and chattel mortgages over standing crops
PNB ignored the Mirasols request for accounting proceeds since the
petitioners believe that the proceeds of their sugar sales to PNB were more
than enough to pay for their obligations if properly accounted for.
The Mirasols continued to avail of other loans from PNB and make
unfunded withdrawals from their current accounts with the said bank
PNB demanded that the petitioners should settle their accounts.
August 4, 1977 as a result of these demands for payment, petitioners
conveyed to PNB real properties valued at P1,410,466.00 by way of dacion
en pago, leaving an unpaid overdrawn account of P1,513,347.78.
o Dacion en pago giving back of the property mortgaged to
the lender in exchange for the discharge of a mortgaged
debt
On August 10, 1982, the balance of outstanding sugar crop and other loans
owed by petitioners to PNB stood at P15,964,252.93. Despite demands, the
Mirasols failed to settle said due and demandable accounts. PNB then
proceeded to extrajudicially foreclose the mortgaged properties. After
applying the proceeds of the auction sale of the mortgaged realties, PNB
still had a deficiency claim of P12,551,252.93.
Petitioners continued to ask PNB to account for the proceeds of the sale of
their export sugar for crop years 1973-1974 and 1974-1975, insisting that
said proceeds, if properly liquidated, could offset their outstanding
obligations with the bank.
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 and were subject to the
disposition of the President of the Philippines for public purposes.
Issue: Whether the petitioners debts are offset by virtue of the legal
compensation
Held/Ratio: NO. The Mirasols claim has no legal basis.
The Mirasols argument has no legal basis since legal compensation will
only take place if the requirements set forth in Articles 1278 and 1279 of the
New Civil Code have been complied with.
o Art. 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors of
each other.
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 are 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.
In the present case, set-off or compensation cannot take place between the
parties because:
o First, neither of the parties are mutually creditors and
debtors of each other.:
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.
OBLICON Digests
Chapter 3-4
Thus, as correctly found by the Court of Appeals,
"there was nothing with which PNB was supposed to
have off-set Mirasols' admitted indebtedness."
o 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.
Montemayor vs. Millora
by Reyes, Megan
JESUS M. MONTEMAYOR vs. VICENTE D. MILLORA
G.R. No. 168251
Date: July 27, 2011
Doctrine:
Legal compensation takes place between 2 parties wherein they are
both creditors and debtors of each other. Their debts with each other are
being set off which then results to both parties being even terms such that
there is actually nothing left to execute and satisfy in favor of either party.
A debt is liquidated when its existence and amount are determined.
Also, when the determination of the exact amount depends only on a simple
arithmetical operation. 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.
Article 1278 and Article 1279 (See: Ratio)
Recit Ready Digest:
Facts: Atty. Vicente D. Millora obtained a loan of P400, 000.00 from Dr.
Jesus M. Montemayor as evidenced by a promissory note. The parties
executed a loan contract wherein it was provided that Vicente had already
paid the amount of P100, 000.00 as well as the P8, 000.00 interest.
Subsequently, the interest rate was increased to P10, 500.00 a month.
Vicente was supposed to pay P42, 000.00 for 4 mos. Interest but was able to
pay only P24, 000.00. Jesus made several demands for Vicente to settle his
obligation but to no avail which resulted to the filing of complaint against
the latter. Vicente filed his answer interposing a counterclaim for attorneys
fees of not less than P500, 000.00. 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. Jesus contends that
offsetting cannot be made because the judgment of the RTC failed to
specify the amount of attorneys fees. He maintains that for offsetting to
apply, the two debts must be liquidated or ascertainable. However, the trial
court merely awarded to Vicente attorneys fees based on quantum meruit
without specifying the exact amount thereof.
Issue: Whether or not the absence of a specific amount in the decision
representing respondents counterclaim could be validly offset against the
specific amount of award mentioned in the decision in favor of the
petitioner.
Held: No. The petition lacks merit. The amount of attorneys fees is
ascertainable from the RTC Decision. Thus, compensation is possible. In
the instant case, both obligations are liquidated. Vicente has the obligation
to pay his debt due to Jesus. For all the legal services rendered, Vicente
deserves to be compensated at least on a quantum meruit basis.
Facts:
On July 24, 1990, respondent Atty. Vicente D. Millora (Vicente)
obtained a loan of P400, 000.00 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, 000.00 as well as the P8,
000.00 representing the interest for the period July 24 to August 23, 1990.
Subsequently and with Vicentes consent, the interest rate was
increased to3.5% or P10,500.00 a month.
From March 24, 1991 to July 23, 1991, or for a period of four
months, Vicente was supposed to pay P42, 000.00 as interest but was able to
pay only P24,000.00. 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 attorneys fees of not less than P500, 000.00. Vicente
claimed that he handled several cases for Jesus but he was summarily
OBLICON Digests
Chapter 3-4
dismissed from handling them when the instant complaint for sum of money
was filed.
Issue:
Can compensation take place in the absence of a specific amount in the
decision which represents the respondents (Atty Millora) counterclaim
against the specific amount of award mentioned in the decision in favor of
the petitioner (Dr. Montemayor).
Held:
Yes.
Ratio:
For legal compensation to take place, the requirements set forth in
Articles 1278 and 1279 of the Civil Code 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.
"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 x xx."
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 plaintiffs 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 P300,000.00 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 attorneys fees which the
RTC had already determined to be equivalent to whatever amount
recoverable from Vicente. The said attorneys 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.
Notes:
Counterclaim - In civil procedure, a party's claim is a counterclaim if
the defending party has previously (in the present action) made a claim
against the claiming party.
Quantum meruit means "what one has earned." In the context of
contract law, it means something along the lines of "reasonable value of
services."
Garcia vs. Llamas
by Bernas, Claud
Doctrine: Novation is never presumed. There must be an express
declaration from the parties.
Recit-ready:
Garcia, together with de Jesus, borrowed P400,000 from Llamas. They were
unable to pay so Llamas filed against them. Garcia contends that he was
only an accommodation party in the promissory note. He further insists that
he has no liability since a novation of obligation took place through the acts
of de Jesus. Court ruled that there was no novation of obligation and that de
Jesus and Garcia are still solidarily liable.
Facts:
 OBLICON Digests
Chapter 3-4
- On December 23, 1996 Eduardo Garcia (petitioner) and
Eduardo de Jesus borrowed P400,000 from Dionisio Llamas
(respondent)
- They made a promissory note and bound themselves
jointly and severally to pay the loan
- Terms: 5% interest per month to be paid before January
23, 1997
- They were not able to pay the loan and so Llamas filed a
case against them. Garcia contends that he has no liability anymore
since he signed the promissory note merely as an accommodation party
- Furthermore, he contends that novation took place
through the acts of de Jesus and thus relieves him from liability, these
acts specifically being:
1. Issuance by de Jesus of a check in payment of the full amount of the loan of
P400,000.00 in favor of Respondent Llamas, although the check
subsequently bounced
2. Acceptance of the check by the respondent which resulted in the
substitution by de Jesus or the superseding of the promissory note;
3. de Jesus having paid interests on the loan in the total amount of
P120,000.00;
4. The fact that Respondent Llamas agreed to the proposal of de Jesus that due
to financial difficulties, he be given an extension of time to pay his loan
obligation and that his retirement benefits from the Philippine National
Police will answer for said obligation.
Issue:
Whether or not there was novation of obligation thus relieving Garcia
from his liability in the loan
Held/Ratio:
NO
Petitioner seeks to extricate himself from his obligation as joint and solidary
debtor by insisting that novation took place, either through the substitution
of De Jesus as sole debtor or the replacement of the promissory note by the
check. Alternatively, the former argues that the original obligation was
extinguished when the latter, who was his co-obligor, paid the loan with the
check. The fallacy of the second (alternative) argument is all too apparent.
The check could not have extinguished the obligation, because it bounced
upon presentment. By law, the delivery of a check produces the effect of
payment only when it is encashed.
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
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 persons assumption of the
obligation. As such, it logically requires the consent of the third person and
the creditor. In delegacion, the debtor offers, and the creditor accepts, a
third person who consents to the substitution and assumes the obligation;
thus, the consent of these three persons are necessary. Both modes of
substitution by the debtor require the consent of the creditor.
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.
OBLICON Digests
Chapter 3-4
Applying the foregoing to the instant case, we hold that no novation took
place.
The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the
check would take the place of the note. There is no incompatibility between
the promissory note and the check. As the CA correctly observed, the check
had been issued precisely to answer for the obligation. On the one hand, the
note evidences the loan obligation; and on the other, the check answers for
it. Verily, the two can stand together.
Also unmeritorious is petitioners argument that the obligation was novated
by the substitution of debtors. In order to change the person of the debtor,
the old one must be expressly released from the obligation, and the third
person or new debtor must assume the formers place in the relation. Well
settled is the rule that novation is never presumed
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in his
place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus.
Moreover, it must be noted that for novation to be valid and legal, the
law requires that the creditor expressly consent to the substitution of a
new debtor. Since novation implies a waiver of the right the creditor had
before the novation, such waiver must be express. It cannot be supposed,
without clear proof, that the present respondent has done away with his
right to exact fulfillment from either of the solidary debtors.
More important, De Jesus was not a third person to the obligation. From the
beginning, he was a joint and solidary obligor of the P400,000 loan; thus, he
can be released from it only upon its extinguishment. Respondents
acceptance of his check did not change the person of the debtor, because a
joint and solidary obligor is required to pay the entirety of the obligation.
Quinto vs. People
by Galang, Maan
Doctrine:
In expromision and delegacion the consent of the creditor is an
indispensable requirement. It is thus easy to see why Cariagas acceptance
of Ramos and Camachos payment on installment basis cannot be construed
as a case of either expromision or delegacion sufficient to justify the
attendance of extinctive novation.
Recit-ready:
Aurelia Cariaga gave Leonida Quinto pieces of jewelry worth P36,000 to
show prospective buyers under the condition that if the latter could not sell
it within 5 days, it would be returned to the former. Quinto did not return
the jewelry so Cariaga filed a case for estafa. Quinto, in her defense, alleged
that she was engaged in the buying and selling of jewelry and in the course
of her business, she sold jewelry to Mrs. Camacho and Mrs. Ramos. When
both her clients were unable to exact payment, she presented such clients to
Cariaga who allowed them to pay in installment. The issue to be resolved is
whether there was an effective novation between Quinto and Cariaga. The
Court held that there was no effective novation because in cases of
expromision or delegacion, consent of the creditor is an indispensable
requirement. Mere acceptance of payment in installment is not sufficient to
justify the attendance of novation.
Facts:
According to the prosecution, Leonida Quinto asked
Aurelia Cariaga to allow her to have some pieces of jewelry that she
could show to prospective buyers. Cariaga accepted and handed
P36,000 worth of jewelries, as evidenced by a receipt.
Quinto requested for additional time to vend the
items when the 5-day period given to her lapsed. She failed to
conclude any sale and 6 months later, Cariaga asked Quinto to
return the jewelry through demand letters.
Quinto failed to return the jewelries which
prompted Cariaga to file a case for estafa against her.
The defense, in its version of the story, sought to prove
that Quinto was engaged in the buying and selling of jewelry:
Quinto and Cariaga started to transact business
which included a solo ring worth P40,000 sold to Mrs. Camacho
who paid P20,000 in check and P20,000 in installment later paid
directly to Cariaga
Quinto again transacted with Mrs. Camacho
selling a marques worth P16,000 and a ring worth P4,000.
OBLICON Digests
Chapter 3-4
Mrs. Camacho was unable to pay the amount in full and had a
balance of P13,000. Quinto brought Mrs. Camacho to Cariaga
who agreed to allow Mrs. Camacho to pay the balance in
installments
Quinto also sold a ring worth P17,000 to Mrs.
Ramos who was unable to pay the whole amount. She brought
Mrs. Ramos to Cariaga and talked about the terms of payment.
Mrs. Ramos gave Quinto a ring valued at P3000; the next
payment the former gave the latter P5000. Lastly, Leonida
herself paid P2000.
RTC found Quinto guilty beyond reasonable doubt of the
crime of estafa.
Quinto appealed to the CA but the RTC judgment was
affirmed.
Issue:
Whether or not the agreement between Quinto and Cariaga was effectively
novated when the latter consented to receive the payment on installments
directly from Mrs. Camacho and Mrs Ramos
Held/Ratio:
No. The petition is bereft of merit.
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.
The extinguishment of the old obligation by the new one
is a necessary element of novation which may be effected either
expressly or impliedly.
There are two ways which could indicate, in fine, the
presence of novation and thereby produce the effect of extinguishing
an obligation by another which substitutes the same.
The first is when novation has been explicitly
stated and declared in unequivocal terms.
The second is when the old and the new
obligations are incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation novates the
first.
The changes alluded to by petitioner consists only in the
manner of payment. There was really no substitution of debtors since
private complainant merely acquiesced to the payment but did not
give her consent to enter into a new contract.
There are two forms of novation by substituting the
person of the debtor, depending on whose initiative it comes from, to
wit: expromision and delegacion.
In expromision, the initiative or the change does
not come from the debtor and may even be made without his
knowledge. Since a third person would substitute for the original
debtor and assume the obligation, his consent and that of the
creditor would be required.
In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and
assumes the obligation, thereby releasing the original debtor
from the obligation; here, the intervention and the consent of all
parties thereto would perforce be necessary.
In either of these two modes of substitution, the
consent of the creditor, such as can be seen, is an indispensable
requirement.
It is thus easy to see why Cariagas acceptance of Ramos
and Camachos payment on installment basis cannot be construed as a
case of either expromision or delegacion sufficient to justify the
attendance of extinctive novation.
Not too uncommon is when a stranger to a contract agrees
to assume an obligation; and while this may have the effect of adding
to the number of persons liable, it does not necessarily imply the
extinguishment of the liability of the first debtor. Neither would the
fact alone that the creditor receives guaranty or accepts payments
from a third person who has agreed to assume the obligation,
constitute an extinctive novation absent an agreement that the first
debtor shall be released from responsibility.
Cochingyan vs R&B Surety
by Sebastian, Lui
OBLICON Digests
Chapter 3-4
Doctrine:
If the old debtor is not released, no novation occurs and the third person
who has assumed the debtors obligation becomes merely a co-
debtor/surety/co-surety.
Recit-ready:
PAGRICO and R&B Surety were jointly and severally bound to comply
with the terms and conditions of a Surety Bond. Identical agreements were
also entered into by R&B Surety with CCM, PAGRICO and PACOCO
which made the latter three jointly and severally bound to R&B Surety until
the Surety Bond is cancelled or discharged. R&B Surety demanded
reimbursement from the parties for having paid PNB due to PAGRICOs
failure to comply with the Principal Obligation. The said parties failed to
heed its demands so R&B Surety resorted to court action; they argued that
the obligation was extinguished by novation from the change of debtor. The
Court ruled that the Surety Bond was not novated by the Trust Agreement.
The Trust Agreement merely furnished to PNB another party obligor to the
Principal Obligation.
Facts:
Pacific Agricultural Suppliers, Inc. (PAGRICO; principal obligor)
was granted an increase in its line of credit from P400K-P800K (Principal
Obligation) with PNB by giving a P400K bond. The bond represented the
said increment, to secure compliance with the terms& conditions.
To comply with this requirement, PAGRICO submitted Surety Bond
No. 4765 issued by R&B Surety. PAGRICO and R&B Surety were jointly
and severally bound to comply with the terms and conditions. The latters
liability includes accrued interest, etc. aside from the principal obligation.
2 identical indemnity agreements were entered into with R&B Surety:
(a) agreement executed by Catholic Church Mart (CCM) and by petitioner
Cochingyan, Jr.; (b) agreement by PAGRICO & its Manager Villanueva and
PACOCO & its Pres. Liu Tua Beh.
They are jointly and severally bound to R&B Surety to pay an annual
premium and for the faithful compliance of the Surety Bonds T&Cs until
the same is CANCELLED and/or DISCHARGED.
Upon PAGRICOs failure to comply with its Principal Obligation, the
bank demanded payment from R&B Surety. R&B Surety paid a total of
70k; in turn, it sent formal demand letters to Cochingyan, Jr. and Villanueva
for reimbursement.
It filed a suit against the petitioners when the latter failed to heed its
demands.
The CFI of Manila rendered a decision in favor of R&B Surety. It
ordered defendants to pay the P400K+interest (6% per annum) and unpaid
premiums for Surety Bond No. 4765 with legal interest. The CA certified
the case to the SC.
Issue:
WON the Trust Agreement had extinguished, by novation, the obligation of
R&B Surety to the PNB under the Surety Bond which also extinguished the
petitioners obligations under the Indemnity Agreements
Held/Ratio: NO
The Surety Bond has not been cancelled/fully discharged by payment
of the Principal Obligation. Unless extinguished by other means, the Surety
Bond and the Indemnity Agreements must still subsist. They were not
extinguished by novation due to the subsequent execution of the Trust
Agreement.
Novation - extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which terminates it, either by
changing its object or principal conditions, or by substituting a new debtor
in place of the old one, or by subrogating a third person to the rights of the
creditor.
- Objective (or real) novation through a change of the object or principal
conditions of an existing obligation
- Subjective (or personal) novation the change of either the person of the
debtor or of the creditor
- Both objective & subjective at the same time mixed
In both objective and subjective novation, a dual purpose is achieved
an obligation is extinguished and a new one is created.
Novation is never presumed: it must be established either by the
discharge of the old debt by the express terms of the new agreement, or by
the acts of the parties whose intention to dissolve the old obligation as a
consideration of the emergence of the new one must be clearly discernible.
For subjective novation to occur, its not enough that the juridical
relation bet. the parties to the original contract is extended to a third person.
The old debtor must be released from the obligation and be replaced
by the 3rd person/new debtor. Otherwise, the 3rd person becomes merely a
codebtor/surety/co-surety.
The Trust Agreement does not expressly terminate R&B Suretys
obligation under the Surety Bond. It expressly provides for the continuing
OBLICON Digests
Chapter 3-4
subsistence of that obligation by stipulating that it shall not in any manner
release R & B Surety from its obligation under the Surety Bond.
There can be no implied novation absent an unequivocal declaration
of extinguishment of a preexisting obligation.
What the trust agreement did was merely to bring in other persons
(the Trustor) to assume the same obligation that R&B Surety was bound to
perform. The precise legal effect is the increase of the number of persons
liable to the obligee, not the extinguishment of the first debtors liability.
The Trustor (CCM) was already previously bound to R&B Surety
under its Indemnity Agreement; it became directly liable to the PNB. Under
the Trust Agreement, there would now be three obligors directly and
solidarily bound in favor of the PNB: PAGRICO, R&B Surety and the
Trustor.
PNB never intended to release, and never did release, R&B Surety.
Thus, R&B Surety, which was not a party to the Trust Agreement, could not
have intended to release any of its own indemnitors simply because the
Trustor became also directly liable to the PNB.
Doctrine:
Recit-ready:
Facts:
Issue:
Held/Ratio:
Magdalena Estates vs. Rodriguez
by Castigador, Niqui
Doctrine:
The mere fact that the creditor receives a guaranty or accepts
payments from a third person who has agreed to assume the obligation,
when there is no agreement that the first debtor shall be released from
responsibility does not constitute a novation.
Recit-ready:
Defendants bought a parcel of land from the petitioners and
executed a promissory note stating that they will pay the unpaid balance of
5,000 with interest. They executed a surety bond with Luzon Surety Co, Inc
for said payment of the principal obligation of 5,000. Later, Luzon Surety
paid to the petitioners the unpaid balance. Petitioners demanded that
defendants pay the accumulated interest due of 655.89 but defendants
refused claiming that when petitioners accepted the 5,000 from Luzon
Surety without reservations, or without applying the interests due, it shows
that they already waived or condoned said interests.
The Court does not agree. The liability of Luzon Surety to pay the
5,000 cannot be extended beyond its contract. It is for the same reason that
the principal obligation of 5,000 cannot be applied to the payment of due
interests. Since petitioners accepted payment from Luzon Surety, a third
party, but there was no agreement that the defendants, or the original
debtors, shall be released from responsibility arising from their promissory
note, the petitioners can still enforce obligation against the original debtors.
Facts:
Defendants bought from petitioner a parcel of land in Quezon City.
Defendants executed in a promissory note that they will pay petitioners the
unpaid balance of 5,000 with interest.
Defendants and Luzon Surety Co, Inc also executed a surety bond for the
payment of the balance. When the obligation became due and demandable,
Luzon Surety Co Inc paid to the petitioners the amount of 5,000
Petitioners demanded from the defendants the payment of P655.89
corresponding to the accumulated interests on the principal obligation but
defendants refused. Petitioners filed a case in the MTC where the court
ruled in favor of the petitioners enforcing the collection of the unpaid
interests
Defendants claim that there was no demand made by the defendants for
the payment of accrued interest. They claim that when the petitioners
accepted the principal obligation of 5,000 from Luzon Surety Co, Inc
without applying a portion of the 655.89 to the principal payment, they have
already waived or condoned the interests due.
Issue: WON the petitioners waived or condoned the said interests when
they accepted the payment of the principal obligation from Luzon Surety
Co, Inc.
Held/Ratio: NO
In the promissory note the principal obligation is the balance of the
purchase price as compared to the contract with Luzon Surety Inc, Co
OBLICON Digests
Chapter 3-4
stating the amount of 5,000. Petitioners did not protest when it accepted
the payment of 5,000 from Luzon Surety because it knew that that was the
complete amount appearing in the contract. The liability of a surety cannot
be extended by implication.
It is for the same reason that the petitioners cannot apply a part of the
5,000 as payment for the accrued interest. Inasmuch as the petitioners
cannot protest for nonpayment of the interest when it accepted the amount
of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that
amount as payment for the interest, we cannot now say that there was a
waiver or condonation on the interest due.
Novation of the obligation by presumption is never favored. To be
sustained, it needs to be established that the old and new contracts are
incompatible or the will to novate was expressly agreed upon by the parties
The mere fact that the creditor receives a guaranty or accepts payments
from a third person who has agreed to assume the obligation, when there is
no agreement that the first debtor shall be released from responsibility does
not constitute a novation, and the creditor can still enforce the obligation
against the original debtor.
Reyes vs. CA
by Cassi Polinar
Doctrine: There must be an express intention to novate - animus novandi.
Novation is never presumed. Article 1300 of the Civil Code provides inter
alia that conventional subrogation must be clearly established in order that
it may take effect. The absence of a new contract extinguishing the old one
destroys any possibility of novation by conventional subrogation.
Recit-ready: There were two resolutions involved in this case.
The first one involves Reyes (president of Eurotrust), Eleazar, and Bermic.
Elsa Reyes alleges that Eurotrust and Bermic entered into a loan
agreement. Eurotrust extended to Bermic the payment for construction, as a
loan. Bermic issued 21 post dated checks as payments. However, the
payments were dishonored by the bank. It was found that the checks issued
by the Eurotrust were the amounts paid by AFP-MBAI (another party na
wag maguluhan) to Erotrust. Upon knowing that the funds belonged to
AFP-MBAI, Bermic and Eurotrust agreed that Bermic would settle its
obligation directly to AFP-MBAI. However, Eleazar learned that Reyes
continued to collect the post dated checks (traydor).
The second resolution involves Reyes and AFP-MBAI
AFP-MBAI were buying govt securities (including treasury notes)
from Eurotrust. However, the Eurotrust borrowed all the treasury notes for
their verification with the Central Bank
However, despite demands made by the AFP-MBAI, Eurotrust failed to
return the treasury notes. So they filed a separate complaint for estafa and
violation of BP 22. She claims that it is already the responsibility of Eleazar
to pay for the obligation.
ISSUE: Whether or not there was a novation in the 1st and 2nd Resolution
RULING: NO
REQUSITES OF NOVATION:
1. there must be a previous valid obligation,
2. there must be an agreement of the parties concerned to a new contract,
3. there must be the extinguishment of the old contract, and
4. there must be the validity of the new contract.
The last 3 essential requisites of novation are wanting in the instant
case. No new agreement for substitution of creditor was forged among the
parties concerned which would take the place of the preceding contract. The
absence of a new contract extinguishing the old one destroys any possibility
of novation by conventional subrogation.
Nowhere in the letters agreed between Eleazar and BERMIC that
would evince that AFP-MBAI agreed to substitute for the petitioner as the
new creditor of Eleazar in the contract of loan.
For the 2nd resolution:
A thorough examination of the records shows that no hard
evidence was presented which would expressly and unequivocably
demonstrate the intention of respondent AFP-MBAI to release petitioner
from her obligation to pay under the contract of sale of securities.
Novation which consists in substituting a new debtor in the place of the
original one, may be made even without or against the will of the latter, but
not without the consent of the creditor.
Facts:
Elsa Reyes is the president of Eurotrust Capital Corporation
(EUROTRUST), a domestic corporation engaged in credit financing.
OBLICON Digests
Chapter 3-4
Graciela Eleazar, private respondent, is the president of B.E. Ritz
Mansion International Corporation (BERMIC), a domestic enterprise
engaged in real estate development.
The other respondent, Armed Forces of the Philippines Mutual
Benefit Asso., Inc. (AFP-MBAI), is a corporation duly organized primarily
to perform welfare services for the Armed Forces of the Philippines.
1st Resolution (Jan. 1992):
Elsa Reyes alleges that Eurotrust and Bermic entered into a loan
agreement.
o Eurotrust extended to Bermic P216,053,126.80 to finance the
construction of the latters Ritz Condominium and Gold Business Park.
o The loan was without collateral but with higher interest rates than those
allowed by the banks.
o Bermic issued 21 postdated checks to cover payments of the loan
packages.
o However, when those checks were presented for payment, the same
were dishonored by the drawee bank, Rizal Commercial Banking
Corporation (RCBC), due to stop payment order made by Graciela Eleazar.
o Despite Eurotrusts notices and repeated demands to pay, Eleazar failed to
make good the dishonored checks, prompting Reyes to file against her
several criminal complaints for violation of B.P. 22 and estafa under Article
315, 4th paragraph, No. 2 (d) of the Revised Penal Code.
Elsa Reyes was investigated by the Senate Blue Ribbon Committee.
o She was involved in a large scale scam amounting to millions of pesos
belonging to Instructional Material Corporation (IMC), an agency under the
Department of Education, Culture and Sports.
o respondent AFP-MBAI which invested its funds with Eurotrust,
conducted its own investigation and found that after Eurotrust delivered to
AFP-MBAI the securities it purchased, the former borrowed the same
securities but failed to return them to AFP-MBAI;
o that the amounts paid by AFP-MBAI to Eurotrust for those securities
were in turn lent by Elsa Reyes to Bermic and others.
Upon knowing that the funds loaned were belonged to AFP-MBAI,
the Bermic and Eurotrust agreed that Bermic would directly settle its
obligations with the real owners of the fund (AFP-MBAI and DECS-IMC).
o Bermic made paymets to AFP-MBAI and DECS-IMC
However, Eleazar later learned that Reyes continued to collect on the
post-dated checks issued by her contrary to their agreement.
o Upon her counsels advise, Eleazar had the payment stopped. Hence, her
checks issued in favor of Eurotrust were dishonored.
Office of the Provincial Prosecutor: dismissed the complaints filed by Reyes
against Eleazar
Secretary of Justice: dismissed the petition holding that the novation of the
loan agreement prevents the rise of any incipient criminal liability since the
novation had the effect of canceling the checks and rendering without effect
the subsequent dishonor of the already cancelled checks.
Regarding the 2nd Resolution (Jan. 1993):
The AFP-MBAI filed a separate complaint for estafa and a violation
of BP 22 against Elsa Reyes
Based on the investigation, it was found that the Eurotrust offered to
sell to AFP-MBAI various marketable securities, including govt securities,
such as treasury notes, treasury bills, Land Bank of the Philippines Bonds,
etc.
o Eurotrust delivered to AFP-MBAI the treasury notes.
However, Eurotrust fraudulently borrowed all those treasury notes
for the purposes of verification with the Central Bank. Despite the
demands of AFP-MBAI, Eurotrust failed to return the said treasury
notes. Instead it delivered 21 postdated checks in favour of AFP-
MBAI which were dishonoured upon payment.
o Because of this, AFP-MBAI filed with the Office of
the City Prosecutor a complaint for violation of BP 22 and estafa
against Elsa Reyes.
Reyes defended that there was a novation.
Issue: Whether or not there was a novation in the 1st and 2nd Resolution
Held/Ratio:
January 1992 Resolution
The principle of novation by substitution of creditor was erroneously
applied in the 1st questioned resolution involving contract of loan between
Reyes and Eleazar
REQUSITES OF NOVATION:
1. there must be a previous valid obligation,
2. there must be an agreement of the parties concerned to a new contract,
3. there must be the extinguishment of the old contract, and
OBLICON Digests
Chapter 3-4
4. there must be the validity of the new contract.
The last 3 essential requisites of novation are wanting in the instant case.
No new agreement for substitution of creditor was forged among the parties
concerned which would take the place of the preceding contract. The
absence of a new contract extinguishing the old one destroys any possibility
of novation by conventional subrogation.
Thnowhere in the letters agreed between Eleazar and BERMIC that would
evince that AFP-MBAI agreed to substitute for the petitioner as the new
creditor of Eleazat in the contract of loan.
The letters only shown that Eleazar was given the authority to directly settle
the obligation to AFP-MBAI and DECS-IMC. It is essentially an agreement
between petitioner and respondent Eleazar only.
Well settled is the rule that novation by substitution of creditor requires an
agreement among the three parties concerned - the original creditor, the
debtor and the new creditor. It is a new contractual relation based on the
mutual agreement among all the necessary parties. Hence, there is no
novation if no new contract was executed by the parties
Conventional subrogation of a third person requires the consent of the
original parties and of the third person.
There must be an express intention to novate - animus novandi.
Novation is never presumed. Article 1300 of the Civil Code provides inter
alia that conventional subrogation must be clearly established in order that
it may take effect.
January 1993 Resolution
A thorough examination of the records shows that no hard evidence
was presented which would expressly and unequivocably demonstrate the
intention of respondent AFP-MBAI to release petitioner from her obligation
to pay under the contract of sale of securities
It is a rule that novation by substitution of debtor must always be
made with the consent of the creditor
Novation which consists in substituting a new debtor in the place of
the original one, may be made even without or against the will of the latter,
but not without the consent of the creditor.
In the same vein, to effect a subjective novation by a change in the
person of the debtor, it is necessary that the old debtor be released expressly
from the obligation, and the third person or new debtor assumes his place in
the relation.
Novation is never presumed.
Broadway Centrum vs. Tropical Hut
by Aragon, Jyn
Doctrine:
Novation is never presumed; it must be established either by the discharge
of the old debt by precise terms of the new agreement or by the acts of the
parties whose intention to dissolve the old obligation as a consideration of
the emergence of the new one must be clearly manifested.
Recit-ready:
Petitioner and respondent Tropical executed a contract of lease.
*Tropical insistently requested petitioner to lower the rental cost
*Reason: Low sales were caused by the temporary closure of Doa Juana
Rodriguez Avenue, the street where the store was facing.
Broadway granted Tropicals requests by lowering the rental costs and
stating that this agreement shall not be an amendment of the original lease
contract
Reopening of the street:
o Broadway informed Tropical that it will gradually return the rental costs
to the prices stipulated in the lease contract
o Tropical resisted, still contending that their sales have not improved, and
that they will not pay the original costs and still insists to be given lower
costs until sales have picked up.
o Broadway informed that they will nonetheless impose the original costs,
and it will no longer be negotiable.
o Tropical filed suit against petitioner, contending that the subsequent
letter-agreement novated the lease contract. The lower court decided in
favor of Tropical, the appellate court affirmed the decision, hence this
petition for review on certiorari.
Issue: Whether or not the letter-agreement novated the contract of lease.
Held: There is no novation of contract
The letter-agreement did not extinguish or alter the obligations of
respondent Tropical and the rights of petitioner Broadway under their lease
contract
OBLICON Digests
Chapter 3-4
The letter agreement is a " provisional and temporary agreement to a
reduction of [Tropical's] monthly rental.
The agreement was not to be construed as alteration or waiver of any;
of the terms of the Lease Contract itself
The letter-agreement was not to persist, for the rest of the life of the
Contract of Lease
Novation is never presumed. It must be expressed in the terms of the
new agreement.
Facts:
Petitioner Broadway Centrum Condominium Corporation (Broadway)
and private respondent Tropical Hut Food Market, Inc (Tropical)
executed last 28 November 1980 a contract of lease.
Broadway agreed to lease 3,042.19 square meter of the Broadway
Commercial Complex for 10 years (Feb 1981 to Feb 1991).
Stipulated in the contract of lease:
o Basic monthly rental: Php 120,000/month during the first three years
(Feb 1, 1981 to Feb 1, 1984)
o Basic rental increase: 140,000/month for the next three years thereafter
(Feb 1, 1984 to Feb 1, 1987)
o Final increase: 165,000/month during the last four years (Feb 1, 1987 to
Feb 1, 1991)
During the 1st year of the contract: no problem.
February 5, 1982: Proposed that the monthly rental be reduced to Php
50,000 or 2.0% of their monthly sales, whichever is higher up to the end of
3rd year, after which it shall be again subject to negotiations. Reasons for
this are the following:
Rental is 7.31% of Tropicals Actual Sales
Tropicals Gross profit is only 10%
Tropicals sales projection: Php 120,000/day
Tropical sales projection for 1982: only 23,000,000 (rental rate of
6.08%)
March 4, 1982: Broadway offered 6 suggestions, which if implemented
should result in increased sales by 15%
Counter-proposal of broadway conditional reduction of rental by Php
20,000 for a limited period of 4 months, qualifying that, any reduction in
rental extended is merely a temporary suspension of the original rate of
rental stipulated in our contract of lease and not an amendment thereto.
April 20, 1982: Due to temporary closure of Doa Juana Rodriguez Avenue,
which caused low sales for Tropical, Broadway formalized the provisional
and temporary agreement, by making an even more generous offer: Php
60,000 or 2% of gross receipt, with a qualification, Provisional
arrangement should not be interpreted as amendment to the lease contract
entered into between us.
The Doa Juana Rodriguez road was completed. Broadway increased the
rental from Php 60,000 per month to Php 100,000, gradually.
Php 80,000 effective January 1983
Php 100,000 effective April 1983
While the rental rate above fixed by Broadway was higher than that set out
in the provisional and temporary agreement of the parties of 20 April 1982,
the rates so fixed were nonetheless lower than that stipulated in their
contract of 28 November 1980.
Tropical refused after pleading several times, Tropical's present rentals of
P60,000.00 monthly or 2% of gross receipts, whichever is higher, "would at
least stay until we have somehow recovered," to which Tropical proposed,
however, to add 20% of its income from concessionaires.
Broadway refused also, saying that they have already incurred a loss of Php
620,000 by reducing the rental of Tropical to Php 60,000/month. Tropical
refused again by saying that, Our position is that you cannot arbitrarily
and unilaterally increase the rentals. This is a matter which should be
mutually agreed upon by us and as stated, we are not in a financial position
to agree to such an increase.
Broadway then implemented the original contract and demanded Php
100,000 back accounts, exclusive of penalty charges.
Tropical filed for a restraining order to prevent Broadway from
invoking Section 5 of their Lease of Contract and and asking the court to
decree that the, rental provided for in the letter-agreement of 20 April 1982
"should subsist while the low volume of sales [of Tropical] still continues."
Trial court granted the preliminary injunction upon filing of Tropical of a
Php 100,000 bond.
OBLICON Digests
Chapter 3-4
While trial before RTC, Broadway increased the rental to Php
140,000/month from Feb 1, 1984 to Feb 1, 1987 (Par. 3 of the original lease
of contract)
Tropical reacted by filing a supplemental complaint with the trial court
raising for the first time the issue of whether or not the letter-agreement
dated 20 April 1982 had novated the Lease Contract of 28 November 1980.
Broadway denied the novation
March 4, 1985, RTC ruled in favor of Tropical
o Writ of preliminary injuction became permanent
o Mode of payment:
Feb 1 1981 to Feb 1 1984 Php 101,609.00
Feb 1, 1984 to Feb 1, 1987 Php 118,530.00
Feb 1, 1987 to Feb 1991 Php 139, 702
o Court of Appeals affirmed the decision with slight modification to the
amounts.
Issue:
Whether or not there was novation of Contract of Lease of November 28,
1980.
Held/Ratio:
There was no novation of contract.
Novation is the extinguishment of an obligation by the substitution
of that obligation with a subsequent one, which terminates it, either by
changing its object or principal conditions or by substituting a now debtor
in place of the old one, or by subrogating a third person to the rights of the
creditor.
Novation is never presumed; it must be established either by the
discharge of use old debt by the express terms of the new agreement, or by
the acts of the parties whose intention to dissolve the old obligation as a
consideration of the emergence of the new one must be clearly manifested.
The letter-agreement of 20 April 1982 was, by its own terms, a "
provisional and temporary agreement to a reduction of [Tropical's] monthly
rental ." The letter-agreement, as noted earlier, also contained the
following sentence: This provisional agreement should not be interpreted as
amendment to the contract entered into by us. T
o The course of negotiations between Broadway and Tropical before the
execution of their letter-agreement of 20 April 1982, quite clearly indicated
that what they were negotiating was a temporary and provisional reduction
of rentals.
California Bus vs. State Investment
By
Doctrine: Incompatibility of obligations constitute novation. If it cannot
stand on their respective character, they are incompatible and therefore
constitutes novation. Mere renegotiation or modification of schedule
and/or manner of payments does not constitute novation.
Recit-ready:
California Bus Lines Incorporated (CBLI) procured 30+ bus units from
Delta Motors Corporation, a dealer of MAN buses. by issuing 16
promissory notes in favor of DMC. CBLI president Mr. Llamas made the 16
promissory notes secured by making the newly-procured diesel bus units as
chattel mortgage. Sometime in 1979, Delta Motors CorporationM.A.N.
Division (Delta) applied for financial assistance from respondent State
Investment House, Inc. (hereafter SIHI), a domestic corporation engaged in
the business of quasi-banking. SIHI agreed to extend a credit line to Delta
for P25,000,000.00 in three separate credit agreements dated May 11, June
19, and August 22, 1979.[3] On several occasions, Delta availed of the credit
line by discounting with SIHI some of its receivables, which evidence
actual sales of Deltas vehicles. Delta eventually became indebted to SIHI to
the tune of P24,010,269.32
Sometime in 1979, Delta Motors Corporation M.A.N. Division (Delta)
applied for financial assistance from respondent State Investment House,
Inc. (hereafter SIHI), a domestic corporation engaged in the business of
quasi-banking. SIHI agreed to extend a credit line to Delta for
P25,000,000.00 in three separate credit agreements dated May 11, June 19,
and August 22, 1979.[3] On several occasions, Delta availed of the credit line
by discounting with SIHI some of its receivables, which evidence actual
sales of Deltas vehicles. Delta eventually became indebted to SIHI to the
OBLICON Digests
Chapter 3-4
tune of P24,010,269.32
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta
executed a Deed of Sale[12] assigning to SIHI five (5) of the sixteen (16)
promissory notes[13] from California Bus Lines, Inc. At the time of
assignment, these five promissory notes, identified and numbered as 80-53,
80-54, 80-55, 80-56, and 80-57, had a total value of P16,152,819.80
inclusive of interest at 14% per annum.
Meanwhile, CBLI continuously experienced financial difficulties in
servicing its obligation to DMC prompting the latter to threaten and
eventually take-over of the operations/management of the bus company.
SIHI subsequently sent a demand letter dated December 13, 1983,to CBLI
requiring CBLI to remit the payments due on the five promissory notes
directly to it. CBLI replied informing SIHI of Civil Case No. 0023-P and of
the fact that Delta had taken over its management and operations.
Facts:
Issue:
Held/Ratio:
Sime Darby Philippines vs. Good Year Philippines
by Reyes, Phoebe
Doctrine:
In an assignment of a lease, there is a novation by the substitution of the
person of one of the parties the lessee. The personality of the lessee, who
dissociates from the lease, disappears. Thereafter, a new juridical relation
arises between the two persons who remain the lessor and the assignee
who is converted into the new lessee. The objective of the law in prohibiting
the assignment of the lease without the lessors consent is to protect the
owner or lessor of the leased property.
Recit-ready:
Sime Darby leased a billboard in Magallanes from Macgraphics. Sime
Darby executed a Memorandum of Agreement with Goodyear, whereby it
agreed to sell its tire manufacturing plants and other assets, and a Deed of
Assignment where it assigned its billboard advertising in Makati.
Macgraphics refused to give consent to the transfer/assignment. Goodyear
instituted a case for partial rescission and for refund. RTC ruled in favor of
Goodyear, which the CA and SC affirmed. In an assignment of a lease, there
is a novation by the substitution of the person of one of the parties the
lessee. The Court, however noted that that the requisites of valid novation
are lacking, there being no stipulation that Sime Darby could assign the
lease without the consent of Macgraphics. Moreover, contrary to the
assertions of Sime Darby, the records are bereft of any evidence that clearly
shows that Macgraphics consented to the assignment of the lease.
Facts:
Sime Darby leased a billboard in Magallanes from Macgraphics with a term
of 4 years to expire on March 30, 1998.
In 1996, Sime Darby executed a Memorandum of Agreement with
Goodyear, whereby it agreed to sell its tire manufacturing plants and other
assets to the latter for a total of P1.5B. Goodyear improved the offer to
1.65B in consideration of the assignment by Sime Darby of the receivables
in connection with its billboard advertising in Makati City and Pulilan,
Bulacan. They executed a Deed of Assignment where Sime Darby assigned
its leasehold rights and deposits made to Macgraphics pursuant to its lease
contract over the Magallanes billboard.
Sime Darby then notified Macgraphics of the assignment of the Magallanes
billboard in favor of Goodyear through a letter-notice. After submitting a
new design for the Magallanes billboard to feature its name and logo,
Goodyear requested that Macgraphics submit its proposed quotation for the
production costs of the new design. In a letter Macgraphics informed
Goodyear that the monthly rental of the Magallanes billboard is
P250,000.00 (which increased from the previous 120k) and explained that
the increase in rental was in consideration of the provisions and technical
aspects of the submitted design. Goodyear replied that it it intended to
honor the P120,000.00 monthly rental rate given by Macgraphics to Sime
Darby.
Macgraphics then sent a letter to Sime Darby, informing the latter that it
could not give its consent to the assignment of lease to Goodyear, because it
OBLICON Digests
Chapter 3-4
would necessitate drastic changes to the design and the structure of the neon
display of the Magallanes billboard and would entail the commitment of
manpower and resources that it did not foresee at the inception of the lease.
Thus, Goodyear sent a letter to Sime Darby demanding partial rescission
and the refund of P1,239,000.00, the pro-rata value of Sime Darbys
leasehold rights over the Magallanes billboard. Sime Darby refused to
accede to the demand. Goodyear filed a complaint in the RTC. RTC ruled in
Goodyear's favor.
The trial court was of the considered view that Sime Darby should have
secured the consent of Macgraphics to the assignment of the lease before it
could be effective against the latter. The trial court noted that the contract of
lease between Sime Darby and Macgraphics made no mention of any clause
that would grant Sime Darby the right to unilaterally assign the lease. Thus,
following Article 1649 of the New Civil Code, the trial court ruled that
absent any stipulation to the contrary, the assignment of the lease without
the consent of Macgraphics was not valid. The RTC also stated that as far as
Macgraphics was concerned, its relationship with Goodyear was that of a
new client.
Both Sime Darby and Goodyear sought partial reconsideration of the CA
decision, but their motions were denied.
Issue: WON partial rescission of the Deed of Assignment is proper
Held/Ratio:
Yes.
Art. 1649. The lessee cannot assign the lease without the consent of the
lessor, unless there is a stipulation to the contrary.
In an assignment of a lease, there is a novation by the substitution of the
person of one of the parties the lessee. The personality of the lessee, who
dissociates from the lease, disappears. Thereafter, a new juridical relation
arises between the two persons who remain the lessor and the assignee
who is converted into the new lessee. The objective of the law in prohibiting
the assignment of the lease without the lessors consent is to protect the
owner or lessor of the leased property.
Broadly, a novation may either be extinctive or modificatory. It is extinctive
when an old obligation is terminated by the creation of a new obligation that
takes the place of the former; it is merely modificatory when the old
obligation subsists to the extent it remains compatible with the amendatory
agreement. An extinctive novation results either by changing the object or
principal conditions (objective or real), or by substituting the person of the
debtor or subrogating a third person in the rights of the creditor (subjective
or personal). Under this mode, novation would have dual functionsone to
extinguish an existing obligation, the other to substitute a new one in its
place. This requires a conflux of four essential requisites: (1) a previous
valid obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation.
The requisites of a valid novation are lacking. A review of the lease contract
between Sime Darby and Macgraphics discloses no stipulation that Sime
Darby could assign the lease without the consent of Macgraphics.
Moreover, contrary to the assertions of Sime Darby, the records are bereft of
any evidence that clearly shows that Macgraphics consented to the
assignment of the lease.
Sime Darby argues that Macgraphics impliedly consented to the questioned
assignment when it negotiated with Goodyear for the redesigning of
Magallanes billboard. However, in a letter sent to Sime Darby from
Macgraphics, the latter made formal its refusal to give consent to the
transfer/assignment.
Licaros vs. Gatmaitan
by Lu, Kyle
Licaros v. Gatmaitan (Subrogation of the Person of the Creditor, Article
1300)
GR 142838
August 9, 2001
Doctrine: Conventional Subrogation requires an agreement between the
three parties concerned the original creditor, the debtor, and the new
OBLICON Digests
Chapter 3-4
creditor. It is a new contractual relation based on the mutual agreement
among all the necessary parties.
Recit Ready Digest:
The Anglo-Asean Bank and Trust Limited is a private bank registered and
organized to do business under the laws of the Republic of Vanatu but not of
the Philippines. Their business is receiving fund placement from investors
and invest the money in money market funds in HK, Europe, and the US.
Attracted by the prospective business, Filipino Businessman Abelardo
Licaros made a fund placement with Anglo-Asean. However, because of the
difficulty in collecting his investment, Licaros entered into a deal with
investment banker Antonio Gatmaitan who offered to pay Anglo-Aseans
indebtedness to Licaros subject certain conditions.
In a Memorandum of Agreement, Gatmaitan undertakes to pay Licaros
150,000 dollars on or before July 15, 1993 while Licaros executes a non
negotiable promissory note. When Licaros executed the promissory note in
favor of Gatmaitan, Gatmaitan indicated in the agreement to pay assign,
cede, and transfer 70% of Gatmaitans cash dividends as a registered stock
owner of Prudential Life.
Gatmaitan was not able to collect the money claims he had against Anglo-
Asean leading him not to fulfill his obligation with Licaros. However,
Licaros pursued the enforcement of the obligation but despite repeated
demands, Licaros did not accede to the obligation. Due to this, Licaros filed
a civil case against Gatmaitan demanding for the principal obligation of 3.5
M pesos with legal interest and attorneys fees.
The RTC ruled in favor of Licaros making Gatmaitan liable in paying the
former 3.150 M pesos plus 12% interest per annum and attorneys fees of
200 k pesos. It reasoned that the MOA was an assignment of credit. The CA
reversed the RTCs ruling by holding that Gatmaitan was never at any point
liable in paying the amount in the promissory note because the agreement is
a conventional subrogation requiring the consent of all parties. Hence this
petition.
The issue is whether the Memorandum of Agreement between petitioner
and respondent is one of assignment of credit or one of conventional
subrogation. Conventional Subrogation.
The Court held that the MOA between the parties is a conventional
subrogation based on 1) the whereas clauses of the parties and 2) the type-
written words in the signature portion with the conforme where Anglo-
Asean Bank and Limited Trust was written. Absent the consent of Anglo-
Asean Bank and Limited Trust, the MOA which is a conventional
subrogation cannot be deemed to have existed. Hence, Gatmaitan was never
at any point liable in paying the promissory note.
Facts
The Anglo-Asean Bank and Trust Limited is a private bank registered
and organized to do business under the laws of the Republic of Vanatu but
not of the Philippines. Their business is receiving fund placement from
investors and invest the money in money market funds in HK, Europe, and
the US.
Attracted by the prospective business, Filipino Businessman Abelardo
Licaros made a fund placement with Anglo-Asean. However, because of the
difficulty in collecting his investment, Licaros entered into a deal with
investment banker Antonio Gatmaitan who offered to pay Anglo-Aseans
indebtedness to Licaros subject certain conditions.
In a Memorandum of Agreement, Gatmaitan undertakes to pay Licaros
150,000 dollars on or before July 15, 1993 while Licaros executes a non
negotiable promissory note. When Licaros executed the promissory note in
favor of Gatmaitan, Gatmaitan indicated in the agreement to pay assign,
cede, and transfer 70% of Gatmaitans cash dividends as a registered stock
owner of Prudential Life.
Gatmaitan was not able to collect the money claims he had against
Anglo-Asean leading him not to fulfill his obligation with Licaros.
However, Licaros pursued the enforcement of the obligation but despite
repeated demands, Licaros did not accede to the obligation. Due to this,
Licaros filed a civil case against Gatmaitan demanding for the principal
obligation of 3.5 M pesos with legal interest and attorneys fees.
The RTC ruled in favor of Licaros making Gatmaitan liable in paying
the former 3.150 M pesos plus 12% interest per annum and attorneys fees
of 200 k pesos. It reasoned that the MOA was an assignment of credit. The
CA reversed the RTCs ruling by holding that Gatmaitan was never at any
point liable in paying the amount in the promissory note because the
OBLICON Digests
Chapter 3-4
agreement is a conventional subrogation requiring the consent of all parties.
Hence this petition.
Issue
Whether the Memorandum of Agreement between petitioner and
respondent is one of assignment of credit or one of conventional
subrogation. Conventional Subrogation.
Ruling
The Court held that the MOA between the parties is a conventional
subrogation based on 1) the whereas clauses of the parties and 2) the type-
written words in the signature portion with the conforme where Anglo-
Asean Bank and Limited Trust was written. Absent the consent of Anglo-
Asean Bank and Limited Trust, the MOA which is a conventional
subrogation cannot be deemed to have existed. Hence, Gatmaitan was never
at any point liable in paying the promissory note.
An assignment of credit has been defined as the process of transferring
the right of the assignor to the assignee who would then have the right to
proceed against the debtor. The assignment may be done gratuitously or
onerously, in which case, the assignment has an effect similar to that of a
sale. On the other hand, subrogation has been defined as the transfer of all
the rights of the creditor to a third person, who substitutes him in all his
rights. It may either be legal or conventional. Legal subrogation is that
which takes place without agreement but by operation of law because of
certain acts. Conventional subrogation is that which takes place by
agreement of parties.
For our purposes, the crucial distinction deals with the necessity of the
consent of the debtor in the original transaction. In an assignment of credit,
the consent of the debtor is not necessary in order that the assignment may
fully produce legal effects. What the law requires in an assignment of credit
is not the consent of the debtor but merely notice to him as the assignment
takes effect only from the time he has knowledge thereof. A creditor may,
therefore, validly assign his credit and its accessories without the debtors
consent. On the other hand, conventional subrogation requires an agreement
among the three parties concernedthe original creditor, the debtor, and the
new creditor. It is a new contractual relation based on the mutual agreement
among all the necessary parties. Thus, Article 1301 of the Civil Code
explicitly states that (C)onventional subrogation of a third person requires
the consent of the original parties and of the third person.
Astro Electronics vs. Phil. Export by
Perez, Paolo
Doctrine: Subrogation is the transfer of all the rights of the creditor to a
third person, who substitutes him in all his rights. It may either be legal or
conventional. Legal subrogation is that which takes place without
agreement but by operation of law because of certain acts. Instances of legal
subrogation are those provided in Article 1302 of the Civil Code.
Conventional subrogation, on the other hand, is that which takes place by
agreement of the parties.
Facts:
Astro was granted several loans by the Philippine Trust Company (Philtrust)
amounting to P3M with interest and secured by three promissory notes. In
each of the promissory notes, Roxas signed twice: as President of Astro and
in his personal capacity. Roxas also signed a Continuing Suretyship
Agreement in favor of Philtrust Bank, as President of Astro and as surety.
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of
Philtrust the payment of 70% of Astros loan, subject to the condition that
upon payment by Philguarantee of said amount, it shall be proportionally
subrogated to the rights of Philtrust against Astro. As a result of Astros
failure to pay its loan obligations, despite demands, Philguarantee paid 70%
of the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against
Astro and Roxas a complaint for sum of money with the RTC of Makati.
Roxas disclaims any liability on the instruments, alleging, inter alia, that he
merely signed the same in blank and the phrases in his personal capacity
and in his official capacity were fraudulently inserted without his
knowledge.
The trial court ruled in favor of Philguarantee, observing that if Roxas really
intended to sign the instruments merely in his capacity as President of
Astro, then he should have signed only once in the promissory note.
This was appealed to the CA but the CA affirmed the RTC decision
Issue: Whether or not Roxas should be jointly and severally liable
(solidary) with Astro for the sum awarded by the RTC.
OBLICON Digests
Chapter 3-4
Held: YES. Assailed decision is AFFIRMED in toto.
Astros loan with Philtrust Bank is secured by three promissory notes. These
promissory notes are valid and binding against Astro and Roxas. As it
appears on the notes, Roxas signed twice: first, as president of Astro and
second, in his personal capacity. In signing his name aside from being the
President of Astro, Roxas became a co maker of the promissory notes and
cannot escape any liability arising from it.
Under the Negotiable Instruments Law, persons who write their names on
the face of promissory notes are makers, promising that they will pay to the
order of the payee or any holder according to its tenor. Thus, even without
the phrase personal capacity, Roxas will still be primarily liable as a joint
and several debtor under the notes considering that his intention to be liable
as such is manifested by the fact that he affixed his signature on each of the
promissory notes twice which necessarily would imply that he is
undertaking the obligation in two different capacities, official and personal.
The three promissory notes uniformly provide: FOR VALUE RECEIVED,
I/We jointly, severally and solidarily, promise to pay to PHILTRUST BANK
or order . . . An instrument which begins with I, We, or Either of us thereof to all the rights which the creditor had against the debtor.
promise to pay, when signed by two or more persons, makes them solidarily
liable.
Having signed under such terms, Roxas assumed the solidary liability of a
debtor and Philtrust Bank may choose to enforce the notes against him
alone or jointly with Astro.
Roxas claim that the phrases in his personal capacity and in his official
capacity were inserted on the notes without his knowledge was correctly
disregarded by the RTC and the Court of Appeals. It is not disputed that
Roxas does not deny that he signed the notes twice. Roxas did not offer any
explanation why he did so. It devolves upon him to overcome the
presumptions that private transactions are presumed to be fair and regular
and that a person takes ordinary care of his concerns.
Philguarantee has all the right to proceed against petitioner. It is subrogated
to the rights of Philtrust to demand for and collect payment from both
Roxas and Astro since it already paid the value of 70% of Roxas and Astro
Electronics Corp.s loan obligation, in compliance with its contract of
Guarantee in favor of Philtrust. Subrogation is the transfer of all the rights
of the creditor to a third person, who substitutes him in all his rights.
Roxas acquiescence is not necessary for subrogation to take place because
the instant case is one of legal subrogation that occurs by operation of law,
and without need of the debtors knowledge. Further, Philguarantee, as
guarantor, became the transferee of all the rights of Philtrust as against
Roxas and Astro because the guarantor who pays is subrogated by virtue