HUIBONHOA V CA

FACTS: On June 8, 1983, Florencia T. Huibonhoa (Florencia) entered into a

memorandum of agreement with siblings Rufina Gojocco Lim (Rufina), Severino
Gojocco (Severino) and Loreta Gojocco Chua (Loreta) stipulating that Florencia T.
Huibonhoa would lease from them (Gojoccos) three (3) adjacent commercial lots at
Ilaya Street, Binondo, Manila.

On June 30, 1983, pursuant to the memorandum of agreement, the parties inked a
contract of lease of the same three lots.

TERMS OF THE CONTRACT:

 Goodwill money: P900,000 (P300,000/each)

 Lesee shall pay P15,000/month to each lessor (P45,000/month)
for the leased premises, within the first 5 days of each month.
 Lessee was given an eight-month period to construct the
building; after eight months, the rent payment will accrue.
NOTE: “During the period of construction, no monthly
rental shall be collected from the Lessee.”
 Lease Period: Fifteen (15) Years (Renewable upon agreement)
 Lessee will construct a four storey building
 Lessee can sublease.
 Lessee will determine all the amount collected as rent and it will
belong to lessee.
 An increase in the rentals of the sub-lease will be the basis for
the percentage increase of monthly rental that lessee will have
to pay lessors.
 Upon the termination of the lease, the ownership and title to the
building on the lots would automatically transfer to the lessor,
even without any implementing document.
 Real estate taxes on the land → lessor, Taxes on the building →
lessee, but the lessee was authorized to advance the money
needed to meet the lessors’ obligations such as the payment of
real estate taxes on their lots. The lessors would deduct from
the monthly rental due all such advances made by the lessee.

After the execution of the contract, the Gojoccos executed a power of attorney
granting Huibonhoa the authority to obtain “credit facilities” in order that the three
lots could be mortgaged for a limited one-year period from July 1983.

On September 12, 1983, Huibonhoa obtained from China Banking Corporation “credit
facilities” not exceeding One Million (P1,000.000.00) Pesos. Simultaneously, she
mortgaged the three lots to the creditor bank.[2] Fifteen days later or on September
27, 1983, to be precise, Huibonhoa signed a contract amending the real estate
mortgage in favor of China Banking Corporation whereby the “credit facilities” were
increased to the principal sum of Three Million (P3,000,000.00) Pesos.[3]
During the construction of the building which later became known as Poulex
Merchandise Center,[4] former Senator Benigno Aquino, Jr. was assassinated. The
incident must have affected the country’s political and economic stability. The
consequent hoarding of construction materials and increase in interest rates allegedly
affected adversely the construction of the building such that Huibonhoa failed to
complete the same within the stipulated eight-month period from July 1, 1983. It
was finished seven months later

Under the contract, Huibonhoa was supposed to start paying rental in March 1984
but she failed to do so. Consequently, the Gojoccos made several verbal demands
upon Huibonhoa for the payment of rental arrearages and, for her to vacate the
leased premises.

On December 19, 1984, lessors sent lessee a final letter of demand to pay the rental
arrearages and to vacate the leased premises. The former also notified the latter of
their intention to terminate the contract of lease.

On January 3, 1985, Huibonhoa brought an action for reformation of contract alleging

that although there was a meeting of the minds between the parties on the lease
contract, their true intention as to when the monthly rental would accrue was not
therein expressed due to mistake or accident.

On January 14, 1985, the Gojoccos filed for “cancellation of lease, ejectment and
collection” against Huibonhoa.

On January 31, 1985, Rufina Gojocco Lim entered into an agreement with Huibonhoa
to put an end to the case the former filed. However, there was no record that Rufina
Gojocco Lim was dropped as a defendant, but only Loretta Gojocco Chua and the
Spouses Severino and Priscilla Gojocco filed the memorandum for the defendants in
that case.

Huibonhoa’s Case RTC Decision: No clear and convincing evidence to justify the
reformation of the lease contract.

Gojocco’s Case MTC Decision: granted Huibonhoa’s prayer that the case be excluded
from the operation of the Rule on Summary Procedure

On July 21, 1986, Severino Gojocco and Huibonhoa entered into an agreement that
altered certain terms of the lease contract in the same way that the agreement
between Huibonhoa and Rufina G. Lim “novated” the ontract.

ISSUES: Whether or not the inflation which happened during the assassination of
Benigno Aquino can justify the adjustment of the terms of the contract of lease.

RULING: Huibonhoa’s complaint for reformation of contract, is DISMISSED with the

modifications that:
 1. Loreta Gojocco Chua is adjudged entitled to legal interest of 6% per annum
from March, 1984, the time the rents became due;
2. Severino Gojocco shall receive 6% legal interest only from the time
Florencia T. Huibonhoa defaulted in the payment of her monthly rents; and
3. Legal interest of 12% per annum shall accrue from the finality of this
decision until the amount due is fully paid.

The order of ejectment by the MTC is UPHELD. However, it is rendered MOOT and
ACADEMIC.

RATIONALE:

 Article 1250: In case an extraordinary inflation or deflation of the currency

stipulated should supervene the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary.
 The Court does not find merit in Huibonhoa’s submission that the assassination
of the late Senator Benigno Aquino, Jr. was a fortuitous event that justified a
modification of the terms of the lease contract.
 In the case under scrutiny, the assassination of Senator Aquino may indeed be
considered a fortuitous event. However, the said incident per se could not
have caused the delay in the construction of the building. What might have
caused the delay was the resulting escalation of prices of commodities
including construction materials. Be that as it may, there is no merit in
Huibonhoa’s argument that the inflation borne by the Filipinos in 1983 justified
the delayed accrual of monthly rental, the reduction of its amount and the
extension of the lease by three (3) years.
 Inflation is the sharp increase of money or credit or both without a
corresponding increase in business transaction. There is inflation when
there is an increase in the volume of money and credit relative to available
goods resulting in a substantial and continuing rise in the general price level.
While it is of judicial notice that there has been a decline in the purchasing
power of the Philippine peso, this downward fall of the currency cannot be
considered unforeseeable considering that since the 1970’s we have been
experiencing inflation. It is simply a universal trend that has not spared our
country. Even a worldwide increase in prices does not constitute a
sufficient cause of action for modification of an instrument.
 It is only when an extraordinary inflation supervenes that the law
affords the parties a relief in contractual obligations.
 In Filipino Pipe and Foundry Corporation v. NAWASA, the Court explained
extraordinary inflation thus:
“Extraordinary inflation exists when ‘there is a decrease or increase in
the purchasing power of the Philippine currency which is unusual or
beyond the common fluctuation in the value of said currency, and such
decrease or increase could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the
establishment of the obligation. (Tolentino, Commentaries and
Jurisprudence on the Civil Code, Vol. IV, p. 284.)
  An extraordinary inflation cannot be assumed. Hence, for Huibonhoa to claim
exemption from liability by reason of fortuitous event under Art. 1174 of the
Civil Code, she must prove that inflation was the sole and proximate cause of
the loss or destruction of the contract or, in this case, of the delay in the
construction of the building. Having failed to do so, Huibonhoa’s contention is
untenable.
 The prevailing doctrine is that suits or actions for the annulment of sale, title
or document do not abate any ejectment action respecting the same
property. In fact, in this case, the lessee, as it was, “jumped the gun” over the
lessors in filing the action for reformation of the lease contract. That it proved
unfavorable to her does not detract from the fact that the controversy between
her and the lessors has been resolved in accordance with law albeit not in
consonance with the wishes of all the parties.

Be that as it may, the problem of ejecting Huibonhoa has been rendered

moot and academic by the expiration of the lease contract litigated upon in
June 1998. The parties might have availed of the provision of paragraph 1 of the
lease contract whereby the parties agreed to renew it “for a similar or shorter period
upon terms and conditions mutually agreeable” to them. If they opted to brush aside
that provision, with more reason, Huibonhoa’s eviction should ensue as a matter of
enforcement of the lease contract.

NIA V GAMIT

Facts: On 23 January 1985, the Plaintiff Estanislao Gamit (private respondent herein)
filed with the RTC of Roxas, Isabela, a complaint against the defendant National
Irrigation Administration for reformation of contract, recovery of possession and
damages, alleging, among others that in the contract of lease entered into, the real
agreement or intention of the parties was only for the lease of the twenty five
(25,000) thousand square meters by defendant at the rate of P0.10 centavos per
square meter, for a period of ten (10) years from date of execution with the right of
defendant to purchase the area upon the termination of the lease, on a price certain
or consideration to be negotiated and agreed upon, by and between the parties after
the lapse of the ten (10) year period; That it was not the real agreement or intention
of the parties, at least that of herein plaintiff, to have the rentals paid as forming part
of the purchase price later to be negotiated or agreed upon, much less was it their
intention at least on the part of herein plaintiff, that the price shall not exceed
P25,000.00, otherwise, there will be a gross inadequacy of the purchase price,
enough to shock the conscience of man and that of the court; that it was not also the
intention or agreement of the parties, at least that of herein plaintiff, that in case the
lease contract is not renewed after the lapse of the ten (10) year period, for failure
of the parties to make bilateral communication, the lessor or his successors or assigns
are deemed to have allowed continued use of the land in suit without any additional
compensation whatsoever (see stipulation no. 8, contract of lease) and neither was
it the true agreement or real intention of the parties, at least on the part of herein
plaintiff, that upon payment of the rental amount of P25,000.00, herein plaintiff shall
be deemed to have conveyed and ceded all his rights and interest on the subject
property, in favor of herein defendant. RTC ruled in favor of plaintiff and against
herein defendant. CA affirmed. Hence, the present petition for review.

Issue: Whether or not the court of appeals has properly interpreted the contract.

Held: NO. A perusal of the complaint at bar and the relief prayed for therein shows
that this is clearly a case for reformation of instrument

In order that an action for reformation of instrument as provided in Article

1359 of the Civil Code may prosper, the following requisites must concur: (1) there
must have been a meeting of the minds of the parties to the contract; (2) the
instrument does not express the true intention of the parties; and (3) the failure of
the instrument to express the true intention of the parties is due to mistake, fraud,
inequitable conduct or accident.
Otherwise stated, the complaint at bar alleges that the contract of lease with
right to purchase does not express the true intention and agreement of the parties
thereto due to mistake on the part of the plaintiff (private respondent) and fraud on
the part of the defendant (petitioner), i.e., by unlawfully inserting the stipulations
contained in paragraphs 4, 8 and 9 in said contract of lease. As a general rule, parol
evidence is not admissible for the purpose of varying the terms of a contract.
However, when the issue that a contract does not express the intention of the parties
and the proper foundation is laid therefor — as in the present case — the court should
hear the evidence for the purpose of ascertaining the true intention of the parties.
From the foregoing premises, we hold that the trial court erred in holding that the
issue in this case is a question of law and not a question of fact because it merely
involves the interpretation of the contract between the parties. The lower court erred
in not conducting a trial for the purpose of determining the true intention of the
parties. It failed to appreciate the distinction between interpretation and reformation
of contracts. While the aim in interpretation of contracts is to ascertain the true
intention of the parties, interpretation is not, however, equivalent to reformation of
contracts. Since the complaint in the case at bar raises the issue that the contract of
lease does not express the true intention or agreement of the parties due to mistake
on the part of the plaintiff (private respondent) and fraud on the part of the defendant
(petitioner), the court a quo should have conducted a trial and received the evidence
of the parties for the purpose of ascertaining the true intention of the parties when
they executed the instrument in question.

PAROL EVIDENCE RULE; EXCEPTION; REMEDY WHEN AGREEMENT FAILS TO

EXPRESS TRUE INTENT AND AGREEMENT OF PARTIES. — When the terms of an
agreement have been reduced to writing, it is considered as containing all the terms
agreed upon and there can be, between the parties and their successors in interest,
no evidence of such terms other than the contents of the written agreement, except
when it fails to express the true intent and agreement of the parties thereto, in which
case, one of the parties may bring an action for the reformation of the instrument to
the end that such true intention may be expressed.

WHEREFORE, the decision of the trial court dated 20 March 1986 as well as
the decision of the Court of Appeals dated 14 November 1988 are hereby SET ASIDE
and the case should be, as it is hereby, REMANDED to the court of origin for further
proceedings in accordance with this decision. Without costs.

NAGA TELEPHONE V COURT OF APPEALS

NATURE: PETITION for a review of the decision of the CA.

FACTS: Petitioner, Naga Telephone Co., Inc. (NATELCO), is a telephone company

rendering local as well as long distance telephone service in Naga City. On November
1, 1977, it entered into a contract with Camarines Sur II Electric Cooperative, Inc.
(CASURECO II), a corporation established for the purpose of operating an electric
power service in the same city, “for the use by the petitioner in the operation of its
telephone service the electric light posts of the respondent”. In consideration of such
use, NATELCO agreed to provide the respondent with free use of ten telephone
connections. The contract between included, among others, a stipulation to the effect
that the contract shall “be as long as the party of the first part (NATELCO) has need
for the electric post of the second part (CASURECO II) it being understood that this
contract shall terminate when for any reason whatsoever, the party of the second
part is forced to stop, abandoned its operation as a public service and it becomes
necessary to remove the electric post”. After over ten years, the respondent filed on
January 2, 1989 with the RTC of Naga City action against the petitioner for
reformation of the contract on the grounds that it is too one sided in favor of the
petitioner. The action also prayed that petitioner be ordered to pay for the use of
electric posts which are not covered by the arising out of the poor servicing of the
ten telephone units which had caused it great inconvenience and damages. The trial
court found in favor of the respondents and ordered the reformation of the contract
in the interest of justice and equity. As part of the ruling, the court ordered NATELCO
to pay respondent a monthly rental of P10.00 per electric post being used from the
time of the filing of the case. On the other and, CASURECO was ordered by the same
trial court to pay NATELCO for the use and transfers of its telephone units at the
same rate that the public are paying. Appeal to the CA was made and the CA affirmed
the ruling of the trial court but this time not based on the reformation but rather on
the operation of Article 1267 of the Civil Code and on the potestative condition with
rendered the condition void. The CA held that as reformation only lie or may prosper
when the contract failed to express the true intentions of the parties due to error or
mistake, accident , or fraud and there is no allegation to this effect, the proper basis
is the aforementioned Article. The section on the continued use of the electric post
for so long as these are needed by NATELCO was considered as being purely
potestative on the part of the petitioner as it leaves the continued effectivity of the
contract to NATELCO’s sole and exclusive will. As held in previous jurisprudence,
there must be mutuality and equality in any contract. Hence the appeal.

ISSUE: WON the ruling of the CA is valid

HELD: Yes. The agreement between the parties has become too one sided in favor
of the petitioner to the great disadvantage of the respondent. Continuing with the
agreement will result in the petitioner’s unjust enrichment at the expense of the
respondent.
PRYCE CORP. V PAGCOR

FACTS: Petitioner PPC and respondent PAGCOR executed a Contract of Lease

involving the ballroom of the Pryce Plaza Hotel for a period of three (3) years starting
December 1, 1992 and until November 30, 1995 for the purpose of opening a casino
in Cagayan de Oro City. Later, they executed an addendum to the contract which
included a lease of an additional 1000 square meters of the hotel grounds. PAGCOR
started their casino operations on December 18, 1992. Starting December 1992, the
Sangguniang Panlungsod of Cagayan de Oro City passed Resolutions regarding the
matter of policy to prohibit and/or not to allow the establishment of a gambling casino
in Cagayan de Oro City and prohibiting the issuance of business permits and canceling
existing business permits to any establishment for using, or allowing to be used, its
premises or any portion thereof for the operation of a casino. The Court of Appeals
promulgated its decision declaring the ordinances unconstitutional and void and the
respondents and all other persons acting under their authority and in their behalf are
permanently enjoined from enforcing the ordinances. The Supreme Court affirmed
the decision of the Court of Appeals.

PAGCOR resumed casino operations. However, casino operations were indefinitely

suspended due to the incessant public demonstrations held. Per verbal advice from
the Office of the President of the Philippines, PAGCOR decided to stop its casino
operations in Cagayan de Oro City. PAGCOR stopped its casino operations in the hotel
prior to September, 1993. In two Statements of Account dated September 1, 1993,
PAGCOR was informed of its outstanding account for the quarter September 1 to
November 30, 1993. PPC sent PAGCOR another Letter dated September 3, 1993 as
a follow-up. PPC sent PAGCOR another Letter dated September 15, 1993 stating its
Board of Directors' decision to collect the full rentals in case of pre-termination of the
lease. PAGCOR answered through a letter dated September 20, 1993 stating that it
was not amenable to the payment of the full rentals citing as reasons unforeseen
legal and other circumstances which prevented it from complying with its obligations.
PAGCOR further stated that it had no other alternative but to pre-terminate the lease
agreement due to the relentless and vehement opposition to their casino operations.
In a letter dated October 12, 1993, PAGCOR asked PPC to refund the total of
P1,437,582.25 representing the reimbursable rental deposits and expenses for the
permanent improvement of the Hotel's parking lot. In a letter dated November 5,
1993, PAGCOR formally demanded from PPC the payment of its claim for
reimbursement. On November 15, 1993, PPC filed a case for sum of money in the
RTC of Manila On November 19, 1993, PAGCOR also filed a case for sum of money in
the RTC of Manila. In a letter dated November 25, 1993, PPC informed PAGCOR that
it was terminating the contract of lease due to PAGCOR's continuing breach of the
contract and further stated that it was exercising its rights under the contract of lease
pursuant to Article 20 (a) and (c) thereof.

The RTC ruled 50 percent reduction for the payment of the amount PPC was claiming
and 2 percent penalty was to be imposed from the date of the promulgation of the
Decision, not from the date stipulated in the Contract. It did not rule that the Contract
of Lease had already been terminated as early as September 21, 1993, or at the
latest, on October 14, 1993, when PPC received PAGCOR's letter dated October 12,
1993. Hence, did not find also PPC liable for the reimbursement of PAGCOR'S cash
deposits and of the value of improvements. It did not also consider that PPC was
entitled to avail itself of the provisions of Article XX only when PPC was the party
terminating the Contract. Finally, it did not find that there were valid, justifiable and
good reasons for terminating the Contract.

CA ruled that the PAGCOR'S pretermination of the Contract of Lease was unjustified.
The appellate court explained that public demonstrations and rallies could not be
considered as fortuitous events that would exempt the gaming corporation from
complying with the latter's contractual obligations. Therefore, the Contract continued
to be effective until PPC elected to terminate it on November 25, 1993. As PAGCOR
had admitted its failure to pay the rentals for September to November 1993, PPC
correctly exercised the option to terminate the lease agreement. Previously, the
Contract remained effective, and PPC could collect the accrued rentals. However,
from the time it terminated the Contract on November 25, 1993, PPC could no longer
demand payment of the remaining rentals as part of actual damages, the CA added.
Upon the other hand, future rentals cannot be claimed as compensation for the use
or enjoyment of another's property after the termination of a contract. We stress that
by abrogating the Contract in the present case, PPC released PAGCOR from the
latter's future obligations, which included the payment of rentals. To grant that right
to the former is to unjustly enrich it at the latter's expense.

ISSUE:
(1) Whether or not there was only a right to termination, and not rescission thereby
entitling PPC to future rentals or lease payments for the unexpired period of its
Contract of Lease between with PAGCOR.

(2) Whether or not public demonstrations and rallies could be considered as fortuitous
events that would exempt the PAGCOR from complying with its contractual
obligations.

RULING:
(1) YES. The actions and pleadings of PPC show that it never intended to rescind the
Lease Contract from the beginning. This fact was evident when it first sought to
collect the accrued rentals from September to November 1993 because, as previously
stated, it actually demanded the enforcement of the Lease Contract prior to
termination. Any intent to rescind was not shown, even when it abrogated the
Contract on November 25, 1993, because such abrogation was not
the rescission provided for under Article 1659.

The termination of a contract is not equivalent to its rescission. When an agreement

is terminated, it is deemed valid at inception. Prior to termination, the contract binds
the parties, who are thus obliged to observe its provisions. However, when it is
rescinded, it is deemed inexistent, and the parties are returned to their status
quo ante. Hence, there is mutual restitution of benefits received. The consequences
of termination may be anticipated and provided for by the contract. As long as the
terms of the contract are not contrary to law, morals, good customs, public order or
public policy, they shall be respected by courts. The judiciary is not authorized to
make or modify contracts; neither may it rescue parties from disadvantageous
stipulations. Courts, however, are empowered to reduce iniquitous or unconscionable
liquidated damages, indemnities and penalties agreed upon by the parties. Future
rentals cannot be claimed as compensation for the use or enjoyment of another's
property after the termination of a contract. We stress that by abrogating the
Contract in the present case, PPC released PAGCOR from the latter's future
obligations, which included the payment of rentals. To grant that right to the former
is to unjustly enrich it at the latter's expense.

(2) NO. In this case, PAGCOR's breach was occasioned by events that, although not
fortuitous in law, were in fact real and pressing. From the CA's factual findings, which
are not contested by either party, we find that PAGCOR conducted a series of
negotiations and consultations before entering into the Contract. It did so not only
with the PPC, but also with local government officials, who assured it that the
problems were surmountable. Likewise, PAGCOR took pains to contest the
ordinances before the courts, which consequently declared them unconstitutional. On
top of these developments, the gaming corporation was advised by the Office of the
President to stop the games in Cagayan de Oro City, prompting the former to cease
operations prior to September 1993.

RATIO:
(1) PPC anchors its right to collect future rentals upon the provisions of the Contract.
Likewise, it argues that termination, as defined under the Contract, is different from
the remedy of rescission prescribed under Article 1659 of the Civil Code. On the other
hand, PAGCOR contends, as the CA ruled, that Article 1659 of the Civil Code governs;
hence, PPC is allegedly no longer entitled to future rentals, because it chose
to rescind the Contract.

Article 1159 of the Civil Code provides that "obligations arising from
contracts have the force of law between the contracting parties and
should be complied with in good faith." In deference to the rights of the
parties, the law allows them to enter into stipulations, clauses, terms
and conditions they may deem convenient; that is, as long as these are
not contrary to law, morals, good customs, public order or public
policy. Likewise, it is settled that if the terms of the contract clearly
express the intention of the contracting parties, the literal meaning of
the stipulations would be controlling.

In this case, Article XX of the parties' Contract of Lease provides in part as follows:

"XX. BREACH OR DEFAULT

a) The LESSEE agrees that all the terms, conditions and/or covenants
herein contained shall be deemed essential conditions of this contract,
and in the event of default or breach of any of such terms, conditions
and/or covenants, or should the LESSEE become bankrupt, or
insolvent, or compounds with his creditors, the LESSOR shall have the
right to terminate and cancel this contract by giving them fifteen (15
 days) prior notice delivered at the leased premises or posted on the
main door thereof. Upon such termination or cancellation, the LESSOR
may forthwith lock the premises and exclude the LESSEE therefrom,
forcefully or otherwise, without incurring any civil or criminal liability.
During the fifteen (15) days notice, the LESSEE may prevent the
termination of lease by curing the events or causes of termination or
cancellation of the lease.
b). . .
c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals
corresponding to the remaining term of the lease as well as for any
and all damages, actual or consequential resulting from such default
and termination of this contract.
d). . . " (Italics supplied)

The above provisions show that the parties have covenanted 1) to give PPC the right
to terminate and cancel the Contract in the event of a default or breach by the lessee;
and 2) to make PAGCOR fully liable for rentals for the remaining term of the lease,
despite the exercise of such right to terminate.

Plainly, the parties have voluntarily bound themselves to require strict compliance
with the provisions of the Contract by stipulating that a default or breach, among
others, shall give the lessee the termination option, coupled with the lessor's liability
for rentals for the remaining term of the lease.

Section XX (c) was intended to be a penalty clause. That fact is manifest from a
reading of the mandatory provision under subparagraph (a) in conjunction with
subparagraph (c) of the Contract. 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." In obligations with a penal clause, the general rule is that the
penalty serves as a substitute for the indemnity for damages and the payment of
interests in case of noncompliance; that is, if there is no stipulation to the contrary,
in which case proof of actual damages is not necessary for the penalty to be
demanded. There are exceptions to the aforementioned rule, however, as
enumerated in paragraph 1 of Article 1226 of the Civil Code: 1) when there is a
stipulation to the contrary, 2) when the obligor is sued for refusal to pay the agreed
penalty, and 3) when the obligor is guilty of fraud. In these cases, the purpose of the
penalty is obviously to punish the obligor for the breach. Hence, the obligee can
recover from the former not only the penalty, but also other damages resulting from
the nonfulfillment of the principal obligation. In the present case, the first exception
applies because Article XX (c) provides that, aside from the payment of the rentals
corresponding to the remaining term of the lease, the lessee shall also be liable "for
any and all damages, actual or consequential, resulting from such default and
termination of this contract." Having entered into the Contract voluntarily and with
full knowledge of its provisions, PAGCOR must be held bound to its obligations. It
cannot evade further liability for liquidated damages.
CHINA BANKING CORP. V CA (327 SCRA 378)

FACTS: Alfonso Roxas Chua and his wife Kiang Ming Chu Chua were the owners of a
residential land in San Juan, Metro Manila, covered by Transfer Certificate of Title No.
410603. On June 19, 1985, petitioner China Bank filed with the Regional Trial Court
of Manila, Branch 29, an action for collection of sum of money against Pacific Multi
Agro-Industrial Corporation and Alfonso Chua which was docketed as Civil Case No.
85-31257. On November 7, 1985, the trial court promulgated its decision in Civil
Case No. 85-31257 in favor of China Banking Corporation.On November 21, 1988,
Alfonso Roxas Chua executed a public instrument denominated as "Assignment of
Rights to Redeem," whereby he assigned his rights to redeem the one-half undivided
portion of the property to his son, private respondent Paulino Roxas Chua. Paulino
redeemed said one-half share on the very same day. On the other hand, in connection
with Civil Case No. 85-31257, another notice of levy on execution was issued on
February 4, 1991 by the Deputy Sheriff of Manila against the right and interest of
Alfonso Roxas Chua in TCT 410603. Thereafter, a certificate of sale on execution
dated April 13, 1992 was issued by the Sheriff of Branch 39, RTC Manila in Civil Case
No. 85-31257, in favor of China Bank and inscribed at the back of TCT 410603 as
Entry No. 01896 on May 4, 1992. On May 20, 1993, Paulino Roxas Chua and Kiang
Ming Chu Chua instituted Civil Case No. 63199 before the RTC of Pasig, Metro Manila
against China Bank, averring that Paulino has a prior and better right over the rights,
title, interest and participation of China Banking Corporation in TCT 410603. The trial
court rendered a decision on July 15, 1994 in favor of private respondent Paulino
Roxas Chua.:On appeal, the Court of Appeals affirmed the ruling of the trial court.

ISSUE: Whether or not the assignment of the right of redemption made by Alfonso
Roxas Chua in favor of private respondent Paulino was done to defraud his creditors
and may be rescinded under Article 1387 of the Civil Code.

RULING: Existence of fraud or intent to defraud creditors may either be presumed

in accordance with Article 1387 of the Civil Code or duly proved as the case may
be.After his conjugal share in TCT 410603 was foreclosed by Metrobank, the only
property that Alfonso Roxas Chua had was his right to redeem the same, it forming
part of his patrimony. "Property" under civil law comprehends every species of title,
inchoate or complete, legal or equitable. In the case at bar, the presumption that the
conveyance is fraudulent has not been overcome. At the time a judgment was
rendered in favor of China Bank against Alfonso and the corporation, Paulino was still
living with his parents in the subject property. Paulino himself admitted that he knew
his father was heavily indebted and could not afford to pay his debts. The transfer
was undoubtedly made between father and son at a time when the father was
insolvent and had no other property to pay off his creditors. Hence, it is of no
consequence whether or not Paulino had given valuable consideration for the
conveyance. Petition is granted.

COASTAL PACIFIC TRADING V SOUTHERN ROLLING

FACTS: Southern Rolling Mills was renamed into Visayan Integrated Steel Corp
(VISCO). On Dec. 11, 1961-VISCO obtained a loan from DBP amounting to P836,000.
It was secured by a Real Estate Mortgage covering VISCO's 3 parcels of land including
the machinery and equipments therein. Second Loan: VISCO entered a Loan
Agreement with respondent banks ( referred as "Consortium") to finance its
importation for various raw materials. VISCO executed a second mortgage over the
previous properties mentioned, however they were unrecorded VISCO was unable to
pay its second mortgage with the consortium, which resulted in the latter acquiring
90% of the equity of VISCO giving the Consortium the control and management of
VISCO. Despite the acquisition, VISCO still remained indebted to the Consortium.

Transaction to Coastal: Between 1964 to 1965, VISCO entered a processing

agreement with Coastal wherein Coastal delivered 3,000 metric tons of hot rolled
steel coils which VISCO would process into block iron sheets. However, VISCO was
only able to return 1,600 metric tons of those sheets.

On the loan to DBP: To pay its first mortgage with DBP, VISCO sold 2 of its generators
to FILMAG Phils, Inc. DBP executed a Deed of Assignment of the mortgage in favor
of the consortium. The Consortium foreclosed the mortgage and was the highest
bidder in an auction sale of VISCO's properties. The Consortium later sold the
properties in favor of National Steel Corporation.

Coastal files a civil action for Annulment or Rescission of Sale, Damages with
Preliminary Injunction. Coastal imputes bad faith on the action of the Consortium,
the latter being able to sell the properties of VISCO despite the attachment of the
properties, placing them beyond the reach of VISCO's other creditors.

The lower court ruled in favor of VISCO, declaring the sale valid and legal. The CA
affirmed this.

ISSUE:
1.) Whether the consortium disposed VISCO's assets in fraud of creditors?
2.) Whether petitioner is entitled to moral damages?

RULING:
1) Yes. What the consortium did was to pay to them the proceeds from the sale
of the generator sets which in turn they used to pay DBP. Due to the Deed of
Assignment issued by DBP, the respondent banks recovered what they
remitted to DBP & it allowed the Consortium to acquire DBP's primary lien on
the mortgaged properties. Allowing them as unsecured creditors ( as the
mortgage was unrecorded) to foreclose on the assets of the corporation
without regard to inferior claims.

2) No. As a rule, a corporation is not entitled to moral damages because, not

being a natural person, it cannot experience physical suffering or sentiments
like wounded feelings, serious anxiety, mental anguish and moral shock. The
only exception to this rule is when the corporation has a good reputation that
is debased, resulting in its humiliation in the business realm. In the present
case, the records do not show any evidence that the name or reputation of
 petitioner has been sullied as a result of the Consortium's fraudulent acts.
Accordingly, moral damages are not warranted.

Petitioner was able to recover exemplary damages.

CALTEX PHIL. V PNOC SHIPPING

FACTS: On 6 July 1979, PSTC and Luzon Stevedoring Corporation (“LUSTEVECO”)

entered into an Agreement of Assumption of Obligations (“Agreement”). The
Agreement provides that PSTC shall assume all the obligations of LUSTEVECO with
respect to the claims enumerated in Annexes “A” and “B” (“Annexes”) of the
Agreement. The Agreement also provides that PSTC shall control the conduct of any
litigation pending or which may be filed with respect to the claims in the Annexes.
The Agreement further provides that LUSTEVECO shall deliver to PSTC all papers and
records of the claims in the Annexes. Finally, the Agreement provides that
LUSTEVECO appoints and constitutes PSTC as its attorney-in-fact to demand and
receive any claim out of the countersuits and counterclaims arising from the claims
in the Annexes. Among the actions enumerated in the Annexes is Caltex (Phils.), Inc.
v. Luzon Stevedoring Corporation docketed as AC-G.R. CV No. 62613 which at that
time was pending before the then Intermediate Appellate Court (IAC). The case was
an appeal from the Decision by the then Court of First Instance of Manila (CFI)
directing LUSTEVECO to pay Caltex P103,659.44 with legal interest from the filing of
the action until full payment. In its 12 November 1985 Decision,[5] the IAC affirmed
with modification the Decision of the CFI. The dispositive portion of the Decision
reads: WHEREFORE, the decision appealed from is hereby MODIFIED and judgment
is rendered ordering the defendant [LUSTEVECO] to pay plaintiff [Caltex]: (a)
P126,771.22 under the first cause of action, with legal interest until fully paid; (b)
P103,659.44 under the second cause of action with legal interest until fully paid; (c)
10% of the sums due as and for attorney’s fees; (d) costs of the suit. SO ORDERED.
The Decision of the IAC became final and executory. The Regional Trial Court of
Manila, Branch 12, issued a writ of execution in favor of Caltex. However, the
judgment was not satisfied because of the prior foreclosure of LUSTEVECO’s
properties. The Manila Bank Intramuros Branch and the Traders Royal Bank Aduana
Branch did not respond to the notices of garnishment. Caltex subsequently learned
of the Agreement between PSTC and LUSTEVECO. Caltex sent successive demands
to PSTC asking for the satisfaction of the judgment rendered by the CFI. PSTC
requested for the copy of the records of AC-G.R. CV No. 62613. Later, PSTC informed
Caltex that it was not a party to AC-G.R. CV No. 62613 and thus, PSTC would not
pay LUSTEVECO’s judgment debt. PSTC advised Caltex to demand satisfaction of the
judgment directly from LUSTEVECO. Caltex continued to send several demand letters
to PSTC. On 5 February 1992, Caltex filed a complaint for sum of money against
PSTC. The case was docketed as Civil Case No. 91-59512. On 1 June 1994, the trial
court rendered its Decision, the dispositive portion of which reads: WHEREFORE, in
view of the foregoing, judgment is hereby rendered in favor of the plaintiff, ordering
defendant to pay plaintiff the sums due the latter in the decision rendered by the
Court of Appeals in CA-G.R. No. 62613, CALTEX vs. LUSTEVECO, or to pay plaintiff
(Exhibit “C”): (a) P126,771.22 under the first cause of action, with legal interest from
the date of the promulgation of the decision on November 12, 1985until fully paid;
(b) P103,659.44 under the second cause of action with legal interest from the date
of the promulgation of the decision onNovember 12, 1985 until fully paid; (c) 10%
of the sums due as and for attorney’s fees; and (d) Costs of suit. SO ORDERED. PSTC
appealed the trial court’s Decision.

In its 31 May 2001 Decision, the Court of Appeals found the appeal meritorious. The
Court of Appeals ruled that Caltex has no personality to sue PSTC. The Court of
Appeals held that non-compliance with the Agreement could only be questioned by
the signatories to the contract, namely, LUSTEVECO and PSTC. The Court of Appeals
stated that LUSTEVECO and PSTC are the only parties who can file an action to
enforce the Agreement. The Court of Appeals considered fatal the omission of
LUSTEVECO, the real party in interest, as a party defendant in the case. The Court
of Appeals further ruled that Caltex is not a beneficiary of a stipulation pour autrui
because there is no stipulation in the Agreement which clearly and deliberately favors
Caltex. The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, premises considered, the appealed Decision dated June 1, 1994,
rendered by the Regional Trial Court of Manila, Branch 51, is hereby REVERSED and
SET ASIDE and a new one entered DISMISSING the complaint filed by appellee
[Caltex], against appellant [PSTC], for want of cause of action. SO ORDERED. Caltex
filed a motion for reconsideration of the 31 May 2001 Decision. In a Resolution
promulgated on 9 November 2001, the Court of Appeals denied the motion for lack
of merit. Hence, this petition before this Court.

ISSUE:
1. Whether PSTC is bound by the Agreement when it assumed all the obligations
of LUSTEVECO.

2. Whether Caltex is a real party in interest to file an action to recover from PSTC
the judgment debt against LUSTEVECO.

RULING: The petition is meritorious. Caltex may recover the judgment debt from
PSTC not because of a stipulation in Caltex’s favor but because the Agreement
provides that PSTC shall assume all the obligations of LUSTEVECO.

In this case, LUSTEVECO transferred, conveyed and assigned to PSTC all of

LUSTEVECO’s business, properties and assets pertaining to its tanker and bulk
business “together with all the obligations relating to the said business, properties
and assets.” The Agreement, reproduced here in full, provides:

AGREEMENT OF ASSUMPTION OF OBLIGATIONS

KNOW ALL MEN BY THESE PRESENTS:

This Agreement of Assumption of Obligations made and executed this 6 th day

of July 1979, in the City of Manila, by and between:

LUZON STEVEDORING CORPORATION, a corporation duly organized and

existing under and by virtue of Philippine Laws, with offices at Tacoma and Second
Streets, Port Area, Manila, represented by GERONIMO Z. VELASCO, in his capacity
as Chairman of the Board, hereinafter referred to as ASSIGNOR,

- and -

PNOC SHIPPING AND TRANSPORT CORPORATION, a corporation duly

organized and existing under and by virtue of Philippine Laws, with offices at Makati
Avenue, Makati, Metro Manila, represented by MARIO V. TIAOQUI, in his capacity as
Vice-President, hereinafter referred to as ASSIGNEE,

WITNESSETH : T h a t –

WHEREAS, on April 1, 1979, ASSIGNOR, for valuable consideration, executed

an Agreement of Transfer with ASSIGNEE whereby ASSIGNOR transferred, conveyed
and assigned unto ASSIGNEE all of ASSIGNOR’s business, properties and assets
appertaining to its tanker and bulk all (sic) departments, together with all the
obligations relating to said business, properties and assets;

WHEREAS, relative to the conduct, operation and management of the business,

properties and assets transferred, conveyed and assigned by ASSIGNOR to
ASSIGNEE certain actions and claims particularly described in Annex “A” consisting
of four (4) pages and Annex “B”, consisting of one (1) page, attached hereto and
made integral parts hereof, have been filed, either with ASSIGNOR or with
appropriate courts and administrative tribunals.

WHEREAS, under the terms and conditions hereinafter mentioned, ASSIGNEE

agree[s] to assume the obligations incident and relative to the actions and claims
enumerated and described in Annexes “A” and “B” hereof.

NOW, THEREFORE, for and in consideration of the foregoing premises, the

parties hereto have agreed as follows:

1. ASSIGNEE shall assume, as it hereby assumes all the obligations of

ASSIGNOR in respect to the actions and claims and described in Annexes “A”
and “B”;

2. ASSIGNEE shall have complete control in the conduct of any and all
litigations now pending or may be filed with respect to the actions and claims
enumerated and described in Annexes “A” and “B”;

3. ASSIGNOR shall deliver and convey unto ASSIGNEE all papers, documents,
files and any other records appertaining to the actions and claims
enumerated and described in Annexes “A” and “B”;

4. ASSIGNOR hereby constitutes and appoints ASSIGNEE, its successors

and assigns, the true and lawful attorney of ASSIGNOR, with full power of
substitution, for it and in its name, place and stead or otherwise, but on
behalf and for the benefit of ASSIGNEE, its successors and assigns, to
 demand and receive any and all claim[s] out of countersuits or counterclaims
arising from the actions and claims enumerated and described in Annexes
“A” and “B”.[9] (Emphasis supplied)

When PSTC assumed all the properties, business and assets of LUSTEVECO pertaining
to LUSTEVECO’s tanker and bulk business, PSTC also assumed all of LUSTEVECO’s
obligations pertaining to such business. The assumption of obligations was stipulated
not only in the Agreement of Assumption of Obligations but also in the Agreement of
Transfer. The Agreement specifically mentions the case between LUSTEVECO and
Caltex, docketed as AC-G.R. CV No. 62613, then pending before the IAC. The
Agreement provides that PSTC may demand and receive any claim out of counter-
suits or counterclaims arising from the actions enumerated in the Annexes.

PSTC is bound by the Agreement. PSTC cannot accept the benefits without assuming
the obligations under the same Agreement. PSTC cannot repudiate its commitment
to assume the obligations after taking over the assets for that will amount to
defrauding the creditors of LUSTEVECO. It will also result in failure of consideration
since the assumption of obligations is part of the consideration for the transfer of the
assets from LUSTEVECO to PSTC. Failure of consideration will revert the assets to
LUSTEVECO for the benefit of the creditors of LUSTEVECO. Thus, PSTC cannot escape
from its undertaking to assume the obligations of LUSTEVECO as stated in the
Agreement.

Disposition of Assets should not Prejudice Creditors

Even without the Agreement, PSTC is still liable to Caltex.

The disposition of all or substantially all of the assets of a corporation is allowed under
Section 40 of Batas Pambansa Blg. 68, otherwise known as The Corporation Code of
the Philippines (“Corporation Code”). Section 40 provides:

SEC. 40. Sale or other disposition of assets. ─ Subject to the provisions of

existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors, or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its property and assets,
including its goodwill, upon such terms and conditions and for such consideration,
which may be money, stocks, bonds or other instruments for the payment of money
or other property or consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock; or in case of non-stock corporation, by
the vote of at least two-thirds (2/3) of the members, in a stockholders’ or members’
meeting duly called for the purpose. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided,
That any dissenting stockholder may exercise his appraisal right under the conditions
provided in this Code.
 A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets, if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purposes for which it was
incorporated.

xxx

While the Corporation Code allows the transfer of all or substantially all the properties
and assets of a corporation, the transfer should not prejudice the creditors of the
assignor. The only way the transfer can proceed without prejudice to the creditors is
to hold the assignee liable for the obligations of the assignor. The acquisition by the
assignee of all or substantially all of the assets of the assignor necessarily includes
the assumption of the assignor’s liabilities, unless the creditors who did not consent
to the transfer choose to rescind the transfer on the ground of fraud. To allow an
assignor to transfer all its business, properties and assets without the consent of its
creditors and without requiring the assignee to assume the assignor’s obligations will
defraud the creditors. The assignment will place the assignor’s assets beyond the
reach of its creditors.

Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of
execution could not be satisfied because LUSTEVECO’s remaining properties had been
foreclosed by lienholders. In addition, all of LUSTEVECO’s business, properties and
assets pertaining to its tanker and bulk business had been assigned to PSTC without
the knowledge of its creditors. Caltex now has no other means of enforcing the
judgment debt except against PSTC.

If PSTC refuses to honor its written commitment to assume the obligations of

LUSTEVECO, there will be fraud on the creditors of LUSTEVECO. PSTC agreed to take
over, and in fact took over, all the assets of LUSTEVECO upon its express written
commitment to pay all obligations of LUSTEVECO pertaining to those assets, including
specifically the claim of Caltex. LUSTEVECO no longer informed its creditors of the
transfer of all of its assets presumably because PSTC committed to pay all such
creditors. Such transfer, leaving the claims of creditors unenforceable against the
debtor, is fraudulent and rescissible. To allow PSTC now to welsh on its commitment
is to sanction a fraud on LUSTEVECO’s creditors.

In Oria v. McMicking, the Court enumerated the badges of fraud as follows:

1. The fact that the consideration of the conveyance is fictitious or is

inadequate.
2. A transfer made by a debtor after suit has been begun and while it is pending
against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when
he is insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are
present other of the above circumstances.
 7. The failure of the vendee to take exclusive possession of all the property.

In Pepsi-Cola Bottling Co. v. NLRC, which involved the illegal dismissal of the
employees of Pepsi-Cola Distributors of the Philippines (PCD), the Court has ruled
that Pepsi Cola Products Philippines, Inc. (PCPPI) which acquired the franchise of PCD
is liable for the reinstatement of PCD’s employees. The Court rejected PCPPI’s
argument that it is a company separate and distinct from PCD. The Court ruled that
the complaint was filed when PCD was still in existence. Further, there was no
evidence that PCPPI, as the new entity or purchasing company, was free from any
liabilities incurred by PCD.

In this case, PSTC was aware of the pendency of the case between Caltex and
LUSTEVECO. PSTC assumed LUSTEVECO’s obligations, including specifically any
obligation that might arise from Caltex’s suit against LUSTEVECO. The Agreement
transferred the unencumbered assets of LUSTEVECO to PSTC, making any money
judgment in favor of Caltex unenforceable against LUSTEVECO. To allow PSTC to
renege on its obligation under the Agreement will allow PSTC to defraud Caltex. This
militates against the statutory policy of protecting creditors from fraudulent
contracts.

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

If PSTC does not assume the obligations of LUSTEVECO as PSTC had committed under
the Agreement, the creditors of LUSTEVECO could no longer collect the debts of
LUSTEVECO. The assignment becomes a fraud on the part of PSTC, because PSTC
would then have inveigled LUSTEVECO to transfer the assets on the promise to pay
LUSTEVECO’s creditors. However, after taking over the assets, PSTC would now turn
around and renege on its promise.

The Agreement, under Article 1291 of the Civil Code, is also a novation of
LUSTEVECO’s obligations by substituting the person of the debtor. Under Article 1293
of the Civil Code, a novation which consists in substituting a new debtor in place of
the original debtor cannot be made without the consent of the creditor. Here, since
the Agreement novated the debt without the knowledge and consent of Caltex, the
Agreement cannot prejudice Caltex. Thus, the assets that LUSTEVECO transferred to
PSTC in consideration, among others, of the novation, or the value of such assets,
remain even in the hands of PSTC subject to execution to satisfy the judgment claim
of Caltex.

Caltex is a Real Party in Interest

Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides:

SEC. 2. Parties in interest. ─ A real party in interest is the party who stands to
be benefited or injured by the judgment in the suit, or the party entitled to the avails
of the suit. Unless otherwise authorized by law or these Rules, every action must be
prosecuted or defended in the name of the real party in interest.

Ordinarily, one who is not a privy to a contract may not bring an action to enforce it.
However, this case falls under the exception. In Oco v. Limbaring, we ruled:

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

As an exception, parties who have not taken part in a contract may show that
they have a real interest affected by its performance or annulment. In other words,
those who are not principally or subsidiarily obligated in a contract, in which they had
no intervention, may show their detriment that could result from it. x x x

Caltex may enforce its cause of action against PSTC because PSTC expressly assumed
all the obligations of LUSVETECO pertaining to its tanker and bulk business and
specifically, those relating to AC-G.R. CV No. 62613. While Caltex is not a party to
the Agreement, it has a real interest in the performance of PSTC’s obligations under
the Agreement because the nonperformance of PSTC’s obligations will defraud Caltex.

Even if PSTC did not expressly assume to pay the creditors of LUSTEVECO, PSTC
would still be liable to Caltex up to the value of the assets transferred. The transfer
of all or substantially all of the unencumbered assets of LUSTEVECO to PSTC cannot
work to defraud the creditors of LUSTEVECO. A creditor has a real interest to go after
any person to whom the debtor fraudulently transferred its assets.

WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001 Decision and 9
November 2001 Resolution of the Court of Appeals in CA-G.R. CV No. 46097. We
AFFIRM the 1 June 1994 Decision of the Regional Trial Court of Manila, Branch 51, in
Civil Case No. 91- 59512. Costs against respondent.