CHAPTER 3: DIFFERENT KINDS OF OBLIGATIONS CASES

CENTRAL PHILIPPINE UNIVERSITY v. COURT OF APPEALS

GR No. 112127. July 17, 1995
DONATION
FACTS:
(1) In 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of Trustees of the Central
Philippine College (now Central Philippine University [CPU]), executed a deed of donation in favor of the latter of
a parcel of land identified as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-
B, for which Transfer Certificate of Title No. T-3910-A was issued in the name of the donee CPU with the
following annotations copied from the deed of donation —
1. The land described shall be utilized by the CPU exclusively for the establishment and use of a medical college
with all its buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to any third party nor in any way encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college shall be under obligation to
erect a cornerstone bearing that name. Any net income from the land or any of its parks shall be put in a fund to
be known as the "RAMON LOPEZ CAMPUS FUND" to be used for improvements of said campus and erection of
a building thereon.
(2) On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action for
annulment of donation, reconveyance and damages against CPU alleging that since 1939 up to the time the
action was filed the latter had not complied with the conditions of the donation.
RTC: On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the donation and
declared it null and void.
CA: 18 June 1993 ruled that the annotations at the back of petitioner's certificate of title were resolutory
conditions breach of which should terminate the rights of the donee thus making the donation revocable.
APPLICABLE LAW/S:
• Art. 1181. 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. (1114)
• Art. 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. (1128a)
• Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

1|LINGATONG
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)
HELD:
(1) The donation was onerous. A clear perusal of the conditions set forth in the deed of donation executed by
Don Ramon Lopez, Sr., gives us no alternative but to conclude that his donation was onerous, one executed for
a valuable consideration which is considered the equivalent of the donation itself, e.g., when a donation imposes
a burden equivalent to the value of the donation. The donation had to be valid before the fulfillment of the
condition. 5 If there was no fulfillment or compliance with the condition, such as what obtains in the instant case,
the donation may now be revoked and all rights which the donee may have acquired under it shall be deemed
lost and extinguished.
(2) The action has not prescribed. It has been held that its absolute acceptance and the acknowledgment of its
obligation provided in the deed of donation were sufficient to prevent the statute of limitations from barring the
action of private respondents upon the original contract which was the deed of donation.
(3) Courts fixing a period is now moot and rescission is proper. Petitioner has slept on its obligation for an
unreasonable length of time. Hence, it is only just and equitable now to declare the subject donation already
ineffective and, for all purposes, revoked so that petitioner as donee should now return the donated property to
the heirs of the donor, private respondents herein, by means of reconveyance.

CATUNGAL v. RODRIGUEZ
March 23, 2011
LEONARDO-DE CASTRO, J.:
Agapita Catungal owned a parcel of land with an area of 65, 246 square meters in Talamban, Cebu City. She
entered into a Contract to Sell with Angel Rodriguez. Subsequently, the Contract to Sell was upgraded into a
Conditional Deed of Sale between the same parties. Rodriguez secured the necessary survey and plans that
reclassified the land from agricultural to residential and actively negotiated for the road right of way. The spouses
Catungal requested an advance of P5,000,000.00 on the purchase price. Rodriguez objected on the unwarranted
demands in view of the terms of the Conditional Deed of Sale that allowed him sufficient time to negotiate a road
right of way and exclusive right to rescind the contract. Thereafter, he received a letter from Atty. Catungal that the
contract is cancelled and terminated. Catungal filed a complaint contending that the Catungal’s unilateral rescission
of the Conditional Deed of Sale was unjustified, arbitrary and unwarranted. However, the Catungals claims that
Rodriguez does not have an exclusive right to rescind the contract it being reciprocal. The trial court ruled in favor
of Rodriguez. The Catungals appealed the decision to the Court of Appeals. In a Motion for Reconsideration, Atty.
Borromeo, a new counsel for the Catungals, argued for the first time that the paragraphs 1(b) and 5(49) of the
Conditional Deed of Sale violated the principle of mutuality under Article 1308 of the Civil Code.
Issue: Whether paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality of contracts
under Article 1308?
Ruling:
With respect to petitioners' argument that paragraph 5 of the Conditional Deed of Sale likewise rendered the said
contract void, we find no merit to this theory. Paragraph 5 provides:
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 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

2|LINGATONG
THOUSAND PESOS (P500,000.00) representing the down payment, interest free, payable but contingent upon
the event that the VENDOR shall have been able to sell the property to another party.
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.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly." The same Code further
sets down the rule that "[i]f some stipulation of any contract should admit of several meanings, it shall be understood
as bearing that import which is most adequate to render it effectual."
Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument where there are
several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all"[69] and
"for the proper construction of an instrument, the circumstances under which it was made, including the situation
of the subject thereof and of the parties to it, may be shown, so that the judge may be placed in the position of
those whose language he is to interpret."
Bearing in mind the aforementioned interpretative rules, we find that the first sentence of paragraph 5 must be
taken in relation with the rest of paragraph 5 and with the other provisions of the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguez's option to rescind the contract is not absolute as it is
subject to the requirement that there should be written notice to the vendor and the vendor shall only return
Rodriguez's downpayment of P500,000.00, without interest, when the vendor shall have been able to sell the
property to another party. That what is stipulated to be returned is oniy the downpayment of P500,000.00 in the
event that Rodriguez exercises his option to rescind is significant. To recall, paragraph 1(b) of the contract clearly
states that the installments on the balance of the purchase price shall only be paid upon successful negotiation
and procurement of a road right of way. It is clear from such provision that the existence of a road right of way is a
material consideration for Rodriguez to purchase the property. Thus, prior to him being able to procure the road
right of way, by express stipulation in the contract, he is not bound to make additional payments to the Catungals.
It was further stipulated in paragraph 1(b) that: "if however said road right of way cannot 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 [Rodriguez] shall take steps to rescind or [cancel] the herein
Conditional Deed of Sale." The intention of the parties for providing subsequently in paragraph 5 that Rodriguez
has the option to rescind the sale is undeniably only limited to the contingency that Rodriguez shall not be able to
secure the road right of way. Indeed, if the parties intended to give Rodriguez the absolute option to rescind the
sale at any time, the contract would have provided for the return of all payments made by Rodriguez and not only
the downpayment. To our mind, the reason only the downpayment was stipulated to be returned is that the
vendee's option to rescind can only be exercised in the event that no road right of way is secured and, thus, the
vendee has not made any additional payments, other than his downpayment.
In sum, Rodriguez's 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.
In any event, even if we assume for the sake of argument that the grant to Rodriguez of an option to rescind, in
the manner provided for in the contract, is tantamount to a potestative condition, not being a condition affecting the
perfection of the contract, only the said condition would be considered void and the rest of the contract will remain

3|LINGATONG
valid. In Romero, the Court observed that "where the so-called 'potestative condition' is imposed not on the birth
of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation itself."

SEBTC v. CA FERRER
G.R. No. 117009 October 11, 1995
Facts: Petitioners Security Bank and Trust Company (SBTC) and Rosito C. Manhit contracted with respondent
Ysmael C. Ferrer to construct the building of SBTC in Davao City for the price of P1,760,000.00. In the contract,
the building must be finished within 200 working days which the respondent was able to comply with. But there
was a drastic increase in expenses which cost P300,000 more than the original price agreed upon. These additional
expenses were made known to the petitioner through their Vice President Fely Sebastian and Supervising Architect
Rudy de la Rama. Respondent made this demands for payment of the increased cost as soon as possible.
Furthermore the demands were supported by receipts, invoices, payrolls and other documents proving the
additional expenses. SBTC affirmed Ferrer’s claim and was recommended to settle an additional P200,000 only.
Nevertheless, instead of paying the recommended additional amount, denied ever authorizing payment of any
amount beyond the original contract price. Ferrer then filed a complaint for breach of contract with damages. The
trial court ruled in favor for Ferrer and on appeal the Court of Appeals affirmed the trial courts decision. In the
present petition for review, Petitioner SBTC contends that the stipulated contract price will not automatically make
petitioners liable to pay for such increased cost, as any payment above the stipulated contract price has been
made subject to the condition that the "appropriate adjustment" will be made "upon mutual agreement of both
parties". It is contended that since there was no mutual agreement between the parties, petitioners' obligation to
pay amounts above the original contract price never materialized.
Issue: Whether or not, SBTC should pay the entire amount of additional cost to respondent.
Held: The decision of the Court of Appeals is affirmed. Under the Civil Code, Art 22. states that “Every person who
through an act of performance by another, or any other means, acquires or comes into possession of something
at the expense of the latter without just or legal ground, shall return the same to him.” Thus, to allow petitioner bank
to acquire the constructed building at a price far below its actual construction cost would undoubtedly constitute
unjust enrichment for the bank to the prejudice of private respondent. Such unjust enrichment is not allowed by
law.
Lastly, Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends upon the
sole will of the debtor. In the present case, the mutual agreement, the absence of which petitioner bank relies upon
to support its non-liability for the increased construction cost, is in effect a condition dependent on petitioner bank's
sole will, since private respondent would naturally and logically give consent to such an agreement which would
allow him recovery of the increased cost.

TAYLOR v. UY TIENG PIAO

G.R. No. L-16109. 43 Phil 83
FACTS:
On December 12, 1918, Taylor contracted his services to Tan Liuan and Co. as superintendent of an oil factory to
be established in the city. The contract was supposed to span over two years from the execution of the contract
and the salary was said to be 600php per month during the first year and 700php per month during the second
year with an additional 60php per month for residence and utilities. Additionally, the contract stipulated that if, for
any reason, the machinery for the factory, fail to arrive in the city of Manila within a period of six months, the
contract may be cancelled by Tan Liuan and Co. It was additionally stated that such cancellation were not to occur
before the expiration of the six months.
The machinery never arrived in the city of Manila within the six months after the signing of the contract. It would
appear before the courts that Tan Liuan and Co. found the oil business to no longer see large returns and cancelled

4|LINGATONG
the order of the machinery. Taylor then instituted an action to recover the amount of 13,000php as damages for
the unfulfilled contract. The lower court found Tan Liuan and Co. liable not liable for the period subsequent to the
expiration of the first six months. However, the sum of 300php was awarded to Taylor as damage for breach of
contract.
ISSUE: Whether or not the Tan Liuan and Co. may be held liable for damages for the breach of contract.
HELD:
Yes. The Supreme Court held that the lower court did not err in their rejection damages sought by Taylor for the
period subsequent to the expiration of the first six months. However, it was seen that the trial judge failed to
consider the 60php specified in the contract for residence and utilities, which Taylor is clearly entitled to recover,
in addition to the 300php awarded in the lower court. The Supreme Court ordered Tan Liuan and Co. to pay Taylor
the sum of 360php instead of 300php with interest and costs.

NAGA TELEPHONE v. CA
G.R. No. 107112 February 24, 1994 (Art. 1182)
FACTS:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance
telephone service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO
II) is a private corporation established for the purpose of operating an electric power service in the same city.
In 1977, the parties entered into a contract for the use by petitioners in the operation of its telephone service the
electric light posts of private respondent in Naga City. In consideration therefor, petitioners agreed to install, free
of charge, ten telephone connections for the use by private respondent.
After the contract had been enforced for over ten years, private respondent filed in 1989 against petitioners for
reformation of the contract with damages, on the ground that it is too one-sided in favor of NATELCO; that it is not
in conformity with the guidelines of the National Electrification Administration (NEA) which direct that the
reasonable compensation for the use of the posts is P10.00 per post, per month; that the telephone cables strung
by them have become much heavier.
As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used 319
posts in the towns outside Naga City, without any contract with it. And as to the third cause of action, private
respondent complained about the poor servicing by petitioners of the ten telephone units.
NATELCO, on the other hand, averred that the first cause of action should be dismissed because it does not state
a cause of action for reformation of contract and it is barred by prescription for having been filed more than ten
years after the execution of the contract. As to the second cause of action, petitioners claimed that private
respondent had asked for telephone lines in areas outside Naga City for which its posts were used by them. And
with respect to the third cause of action, petitioners claimed that their telephone service had been categorized as
"very high" and of "superior quality."
ISSUE:
Whether or not the continued enforcement of the contract between NATELCO and CASURECO II is
disadvantageous to the latter and too one-sided in favor of the former;
Whether or not the ruling that the prescription of the action for reformation of the contract commenced from the
time it became disadvantageous to CASURECO II;
Whether or not the contract was subject to a potestative condition in favor of the petitioners
HELD:

5|LINGATONG
While the contract appeared to be fair to both parties when it was entered into by them, it became too inequitous
or disadvantageous to CASURECO and too one-sided in favor of NATELCO.
Petitioners assert that Article 1267 of the New Civil Code is not applicable because the contract does not involve
the rendition of service or a personal prestation and it is not for future service with future unusual change. However,
Article 1267 speaks of "service" which should be understood as referring to the "performance" of the obligation. In
the present case, the obligation of CASURECO consists in allowing NATELCO to use its posts in Naga City, which
is the service contemplated in said article. Article 1267 states the doctrine of unforeseen events. It is based on the
discredited theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the
light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist.
Considering practical needs and the demands of equity and good faith, the disappearance of the basis of a contract
gives rise to a right to relief in favor of the party prejudiced.
On the issue of prescription of private respondent's action for reformation of contract, what is reformed in the
reformation of contracts is not the contract itself, but the instrument embodying the contract. It follows that whether
the contract is disadvantageous or not is irrelevant to reformation and therefore, cannot be an element in the
determination of the period for prescription of the action to reform.
Article 1144 of the New Civil Code provides that an action upon a written contract must be brought within ten years
from the time the right of action accrues. Clearly, the ten year period is to be reckoned from the time the right of
action accrues which is not necessarily the date of execution of the contract. As correctly ruled by respondent
court, private respondent's right of action arose "sometime during the latter part of 1982 or in 1983 when according
to Atty. Luis General, Jr., he was asked by CASURECO II’s Board of Directors to study said contract as it already
appeared disadvantageous to private respondent. Private respondent's cause of action to ask for reformation of
said contract should thus be considered to have arisen only in 1982 or 1983, and from 1982 to January 2, 1989
when the complaint in this case was filed, therefore, ten years had not yet elapsed."
Regarding the last issue, the prestations of either party are not purely potestative because petitioner's permission
for free use of telephones is not made to depend purely on their will, neither is private respondent's permission for
free use of its posts dependent purely on its will.
A potestative condition is a condition, the fulfillment of which depends upon the sole will of the debtor, in which
case, the conditional obligation is void. Based on this definition, respondent court's finding that the provision in the
contract which states that “That the term or period of this contract shall be as long as the party of the first part
(petitioner) has need for the electric light posts of the party of the second part (private respondent)” is a potestative
condition, is correct. However, it must have overlooked the other conditions in the same provision, particularly, “it
being understood that this contract shall terminate when for any reason whatsoever, the party of the second part
(private respondent) is forced to stop, abandoned its operation as a public service and it becomes necessary to
remove the electric light post” which are casual conditions since they depend on chance, hazard, or the will of a
third person.
In sum, the contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly
on chance, hazard or the will of a third person, which do not invalidate the aforementioned provision.

INTERNATIONAL HOTEL CORP. v. JOAQUIN

G.R. No. 158361. April 10, 2013.
Facts: On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a proposal to International Hotel
Corporation (IHC) for him to render technical assistance in securing a foreign loan for the construction of a hotel,
to be guaranteed DBP. The proposal encompassed nine phases.

6|LINGATONG
The IHC Board of Directors approved phase one to phase six of the proposal and earmarked P2,000,000.00 for
the project. Anent the financing, IHC applied with DBP for a foreign loan guaranty. DBP approved it on October
24, 1969 subject to several conditions.
On July 11, 1969, shortly after submitting the application to DBP, 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 in
relation to the hotel project that were outside the scope of the technical proposal. Joaquin intimated his
amenability to receive shares of stock instead of cash in view of IHC’s financial situation. IHC granted Joaquin’s
request.
Joaquin recommended that he commence negotiating with a prospective financier, Materials handling corp. IHC
allowed. So Joaquin started negotiating Materials Handling Corp and later on with its principal, Barnes
international. 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 DBP’s
consideration. As a result, DBP cancelled its previous guaranty.
Due to Joaquin’s 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. The latter requested a
reconsideration of the cancellation, but their request was rejected.
Consequently, Joaquin and Suarez commenced this action for specific performance, annulment, damages
against IHC and the members of its BOD. IHC lost.
Issues:
IHC maintains that Article 1186 of the Civil Code was erroneously applied; that it had no intention of preventing
Joaquin from complying with his obligations when it adopted his recommendation to negotiate with Barnes; that
Article 1234 of the Civil Code applied only if there was a merely slight deviation from the obligation, and the
omission or defect was technical and unimportant; that substantial compliance was unacceptable because the
foreign loan was material and was, in fact, the ultimate goal of its contract with Joaquin and Suarez; that because
the obligation was indivisible and subject to a suspensive condition, Article 1181 of the Civil Code27 applied,
under which a partial performance was equivalent to non-performance; and that the award of attorney’s fees
should be deleted for lack of legal and factual bases
Issue 1: Whether or not there was a “constructive fulfillment” in this case? No.
IHC’s 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, 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.
The error lies in the CA’s failure to determine IHC’s intent to pre-empt Joaquin from meeting his obligations. The
June 20, 1970 minutes of IHC’s 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 CA’s
reliance on Article 1186 of the Civil Code.

7|LINGATONG
Note: here, they were referring to “constructive fulfillment” wherein the creditor intentionally prevents the debtor
from complying with his obligation.
Issue 2: Should Joaquin be paid for substantially performing his obligations? No.
Nor do we agree with the CA’s upholding of IHC’s liability by virtue of Joaquin and Suarez’s 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. 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.
In order that there may be substantial performance of an obligation, there must have been an attempt in good
faith to perform, without any willful or intentional departure therefrom. The deviation from the obligation must be
slight, and the omission or defect must be technical and unimportant, and must not pervade the whole or be so
material that the object which the parties intended to accomplish in a particular manner is not attained. The non-
performance of a material part of a contract will prevent the performance from amounting to a substantial
compliance.
By reason of the inconsequential nature of the breach or omission, the law deems the performance as
substantial, making it the obligee’s duty to pay. The compulsion of payment is predicated on the substantial
benefit derived by the obligee from the partial performance. Although compelled to pay, the obligee is
nonetheless entitled to an allowance for the sum required to remedy omissions or defects and to complete the
work agreed upon.
Conversely, the principle of substantial performance is inappropriate when the incomplete performance
constitutes a material breach of the contract. 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 non-performance defeated the purposes of the contract. Accordingly, for the
principle embodied in Article 1234 to apply, the failure of Joaquin and Suarez to comply with their commitment
should not defeat the ultimate purpose of the contract.
The primary objective of the parties in entering into the services agreement was to obtain a foreign loan to
finance the construction of IHC’s hotel project. All the steps that Joaquin and Suarez undertook to accomplish
had a single objective – to secure a loan to fund the construction and eventual operations of the hotel of IHC. In
that regard, Joaquin himself admitted that his assistance was specifically sought to seek financing for IHC’s hotel
project.
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 Suarez’s substantial performance that consequentially benefitted IHC. Whatever
benefits IHC gained from their services could only be minimal, and were even probably outweighed by whatever
losses IHC suffered from the delayed construction of its hotel. Consequently, Article 1234 did not apply.
Issue 3: WON there is still constructive fulfillment (on the part of the debtor)? Yes.
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.

8|LINGATONG
Considering that the agreement between the parties was not circumscribed by a definite period, its termination
was subject to a condition – the happening of a future and uncertain event. The prevailing rule in conditional
obligations is that the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall
depend upon the happening of the event that constitutes the condition.
To recall, both the RTC and the CA held that Joaquin and Suarez’s obligation was subject to the suspensive
condition of successfully securing a foreign loan guaranteed by DBP. IHC agrees with both lower courts, and
even argues that the obligation with a suspensive condition did not arise when the event or occurrence did not
happen. In that instance, partial performance of the contract subject to the suspensive condition was tantamount
to no performance at all. As such, the respondents were not entitled to any compensation.
We have to disagree with IHC’s argument.
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, or of the obligor, and
partly on chance, hazard or the will of a third person, the obligation is mixed. 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.
Note: Here naman, as compared to issue #1, the court referred to constructive fulfillment which pertains to
“fulfillment by the debtor”
Issue: How much should IHC pay Joaquin?
Quantum meruit should apply in the absence of an express agreement on the fees
It is notable that the confusion on the amounts of compensation arose from the parties’ inability to agree on the
fees that respondents should receive. 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. The measure of
recovery under the principle should relate to the reasonable value of the services performed. The principle
prevents undue enrichment based on the equitable postulate that it is unjust for a person to retain any benefit
without paying for it. Being predicated on equity, the principle should only be applied if no express contract was
entered into, and no specific statutory provision was applicable.
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.

SY v. ANDOK’S LITSON CORP.

November 21, 2012
PEREZ, J.:
FACTS: On 5 July 2005, Sy and Andok’s entered into a 5-year lease contract covering the parcel of land owned
by Sy. Monthly rental was fixed at P60,000.00, exclusive of taxes, for the first 2 years and P66,000.00 for the third,
fourth and fifth year with 10% escalation every year beginning on the fourth year. Per contract, the lessee shall,

9|LINGATONG
upon signing the contract, pay four (4) months of advance deposit amounting to P240,000.00 and a security deposit
equivalent to four (4) months of rental in the amount of P240,000.00. Accordingly, Andok’s issued a check to Sy
for P480,000.00.
Andok’s alleged that while in the process of applying for electrical connection on the improvements to be
constructed on Sy’s land, it was discovered that Sy has an unpaid Manila Electric Company (MERALCO) bill
amounting to P400,000.00. Andok’s presented a system-generated statement from MERALCO. Andok’s further
complained that construction for the improvement it intended for the leased premises could not proceed because
another tenant, Mediapool, Inc. incurred delay in the construction of a billboard structure also within the leased
premises. In its letter dated 25 August 2005, Andok’s first informed Sy about the delay in the construction of the
billboard structure on a portion of its leased property. Three more letters of the same tenor were sent to Sy but the
demands fell on deaf ears. Consequently, Andok’s suffered damages in the total amount of P627,000.00 which
comprises the advance rental and deposit, cost of money, mobilization cost for the construction of improvement
over leased premises, and unrealized income. The complaint for rescission was filed on 13 February 2008, three
years after continued inaction on the request to have the billboard construction expedited. The RTC and CA ruled
in favor of the petitioner [respondent herein]. Petitioner then filed a petition for review on certiorari before the SC
alleging that the CA faled to appreciate that the respondent itself contractually assumed the risk of delay, and thus
any delay could not be a ground for the resolution or annulment of the contract of lease.
ISSUE: Whether or not rescission is statutorily recognized in a contract of lease.
RULING:
Indeed, rescission is statutorily recognized in a contract of lease. Article 1659 of the Civil Code provides:
Art. 1659. If the lessor or the lessee should not comply with the obligations set forth in articles 1654 and 1657, the
aggrieved party may ask for the rescission of the contract and indemnification for damages, or only the latter,
allowing the contract to remain in force.
Article 1659 outlines the remedies for non-compliance with the reciprocal obligations in a lease contract, which
obligations are cited in Articles 1654 and 1657:
Article 1654. The lessor is obliged:
(1) To deliver the thing which is the object of the contract in such a conditions as to render it fit for the use intended;
(2) To make on the same during the lease all the necessary repairs in order to keep it suitable for the use to which
it has been devoted, unless there is a stipulation to the contrary;
(3) To maintain the lessee in the peaceful and adequate enjoyment of the lease for the entire duration of the
contract.
Article 1657. The lessee is obliged:
(1) To pay the price of the lease according to the terms stipulated;
(2) To use the thing leased as a diligent father of a family, devoting it to the use stipulated; and in the absence of
stipulation, to that which may be inferred from the nature of the thing leased, according to the custom of the place;
(3) To pay the expenses for the deed of lease.
The aggrieved party is given the option to the aggrieved party to ask for: (1) the rescission of the contract; (2)
rescission and indemnification for damages; or (3) only indemnification for damages, allowing the contract to
remain in force.
While Andok’s had complied with all its obligations as a lessee, the lessor failed to render the premises fit for the
use intended and to maintain the lessee in the peaceful and adequate enjoyment of the lease.

10 | L I N G A T O N G
Andok’s paid a total of P480,000.00 as advance deposit for four (4) months and security deposit equivalent to four
(4) months. However, the construction of its outlet store was hindered by two incidents — the unpaid MERALCO
bills and the unfinished construction of a billboard structure directly above the leased property.
Sy argues that per contract, Andok’s had assumed the risk of delay by allowing MediaPool, Inc. to construct a
billboard structure on a portion of the leased premises. We reproduce the pertinent provision for brevity:
10. That the LESSEE shall allow persons who will construct, inspect, maintain and repair all billboard structures to
be set up and constructed on the portion of the parcel of land excluded from this contract, only upon approval of
written request to LESSEE AND LESSOR from the billboard LESSEE to avoid disruption of business operations
of Andok’s Litson Corporation and its affiliates
True, Andok’s agreed to allow MediaPool, Inc. to construct a billboard structure but it was conditioned on Andok’s
and the lessor’s approval to avoid disruption of its business operation. Sy is thus cognizant of the fact that the said
billboard structure construction might disrupt, as it already did, the intended construction of respondent’s outlet. It
is thereby understood that the construction of a billboard should be done within a period of time that is reasonable
and sufficient so as not to disrupt the business operations of respondent. In this case, Andok’s had agreed to
several extensions for MediaPool, Inc. to finish its billboard construction. It had sent a total of four (4) letters in a
span of 8 months, all of which were merely ignored. Indeed, the indifference demonstrated by Sy leaves no doubt
that she has reneged on her obligation.
Sy’s disregard of Andok’s repeated demands for the billboard lessee to finish the construction is a violation of her
obligation to maintain the lessee in peaceful and adequate enjoyment of the lease. The delay in the construction
had obviously caused disruption in respondent’s business as it could not immediately commence its business
operations despite prompt payment of rent.
The attendant circumstances show substantial breach. The delay in the construction prevented Andok’s from using
the leased premises for its business outlet. On top of the failure of Sy to address the delay in the billboard
construction, she also failed to resolve or explain the unpaid electricity bills. Sy resorted to a blanket denial without
however producing any proof that the said bill had been settled. These incidents refer to the fundamentals of the
contract for the lease of Sy’s premises. She failed to comply with the obligations that have arisen upon Andok’s
payment of the amount equivalent to eight months of the monthly rentals.

VILLAMAR v. MANGAOIL
April 11, 2012
FACTS: The petitioner Villamar, the registered owner of the property, entered into an agreement with the
respondent Mangaoil to purchase and sale a parcel of land. The terms in their agreement includes the down
payment of P 185,000 pesos, which will be for the payment of a loan secured from the Rural Bank of Cauayan so
that it will be withdrawn and released from the bank and that a deed of absolute sale will be executed in favor of
the respondent Mangaoil which was complied by the parties.
Consequently, the respondent Mangaoil informed the petitioner that he will withdraw from the agreement for the
land was not yet free from incumbrances as there were still tenants who were not willing to vacate the land without
giving them back the amount that they mortgaged the land. Also, the petitioner failed and refused, despite repeated
demands, to hand over the Certificate of Title. Then, the respondent Mangaoil demanded the refund of the down
payment that he had secured with the petitioner and filed a complaint with the RTC to rescind the contract of sale.
In the response of the petitioner, she averred that she had already complied with the obligations and caused the
release of the mortgaged land and the delivery of the Certificate of Title will be facilitated by a certain Atty. Pedro
C. Antonio. The respondent insisted that he can rescind the contract for the petitioner had failed to deliver the
Certificate of Title.

11 | L I N G A T O N G
The RTC and the CA dismissed the complaints for upon the deed of absolute sale, there was already a valid and
constructive delivery.
ISSUE:
1) Whether or not the failure of delivery of the Certificate of Title will constitute rescission of the contract?
2) Whether or not the execution of the deed of sale of real property is equivalent to a valid and constructive delivery?
HELD:
1) No, the Court held that the failure of the petitioner to comply with the obligation to deliver to the respondent the
possession of the property and the certificate of the title.
Based on Article 1191 of the New Civil Code of the Philippines, it is clear that “the power to rescind obligations is
implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.” The
respondent cannot be deprived of his right to demand for rescission in view of the petitioner’s failure to abide with
item nos. 2 and 3 of the agreement. This remains true notwithstanding the absence of express stipulations in the
agreement indicating the consequences of breaches which the parties may commit. To hold otherwise would
render Article 1191 of the NCC as useless.
2) The execution of the deed of absolute sale does not constitute a constructive delivery for this case falls under
to the exception since a mere presumption and not conclusive delivery was created as the respondent failed to
take material possession of the subject property. A person who does not have actual possession of the thing sold
cannot transfer constructive possession by the execution and delivery of a public instrument. Thus, the respondent
can rescind the contract.
The petition was denied and the petitioner is bound return the down payment plus interest to the respondent.

JISON v. CA
August 15, 1988
FACTS:
Private respondent, Monina Jison, instituted a complaint against petitioner, Francisco Jison, for recognition as
illegitimate child of the latter. The case was filed 20 years after her mother’s death and when she was already 39
years of age.
Petitioner was married to Lilia Lopez Jison since 1940 and sometime in 1945, he impregnated Esperanza
Amolar, Monina’s mother. Monina alleged that since childhood, she had enjoyed the continuous, implied
recognition as the illegitimate child of petitioner by his acts and that of his family. It was likewise alleged that
petitioner supported her and spent for her education such that she became a CPA and eventually a Central Bank
Examiner. Monina was able to present total of 11 witnesses.
ISSUE: WON Monina should be declared as illegitimate child of Francisco Jison.
HELD:
Under Article 175 of the Family Code, illegitimate filiation may be established in the same way and on the same
evidence as that of legitimate children. Article 172 thereof provides the various forms of evidence by which
legitimate filiation is established.
“To prove open and continuous possession of the status of an illegitimate child, there must be evidence of the
manifestation of the permanent intention of the supposed father to consider the child as his, by continuous and
clear manifestations of parental affection and care, which cannot be attributed to pure charity. Such acts must be

12 | L I N G A T O N G
of such a nature that they reveal not only the conviction of paternity, but also the apparent desire to have and
treat the child as such in all relations in society and in life, not accidentally, but continuously”.
The following facts was established based on the testimonial evidences offered by Monina:
1. That Francisco was her father and she was conceived at the time when her mother was employed by the
former;
2. That Francisco recognized Monina as his child through his overt acts and conduct.
SC ruled that a certificate of live birth purportedly identifying the putative father is not competence evidence as to
the issue of paternity. Francisco’s lack of participation in the preparation of baptismal certificates and school
records render the documents showed as incompetent to prove paternity. With regard to the affidavit signed by
Monina when she was 25 years of age attesting that Francisco was not her father, SC was in the position that if
Monina were truly not Francisco’s illegitimate child, it would be unnecessary for him to have gone to such great
lengths in order that Monina denounce her filiation. Monina’s evidence hurdles the “high standard of proof
required for the success of an action to establish one’s illegitimate filiation in relying upon the provision on “open
and continuous possession”. Hence, Monina proved her filiation by more than mere preponderance of evidence.
Since the instant case involves paternity and filiation, even if illegitimate, Monina filed her action well within the
period granted her by a positive provision of law. A denial then of her action on ground of laches would clearly be
inequitable and unjust. Petition was denied.

NOLASCO v. CUERPO
December 9, 2015
The Facts
On July 22, 2008, petitioners and respondents entered into a Contract to Sell (subject contract) over a 165,775-
square meter parcel of land located in Barangay San Isidro, Rodriguez, Rizal covered by Original CertiBcate of
Title No. 152 (subject land).
The subject contract provides, inter alia, that: (a) the consideration for the sale is P33,155,000.00 payable as
follows: down payment in the amount of P11,604,250.00 inclusive of the amount of P2,000,000.00 previously
paid by respondents as earnest money/reservation fee, and the remaining balance of P21,550,750.00 payable in
36 monthly installments, each in the amount of P598,632.00 through post-dated checks; (b) in case any of the
checks is dishonored, the amounts already paid shall be forfeited in petitioners' favor, and the latter shall be
entitled to cancel the subject contract without judicial recourse in addition to other appropriate legal action; (c)
respondents are not entitled to possess the subject land until full payment of the purchase price; (d) petitioners
shall transfer the title over the subject land from a certain Edilberta N. Santos to petitioners' names, and, should
they fail to do so, respondents may cause the said transfer and charge the costs incurred against the monthly
amortizations; and (e) upon full payment of the purchase price, petitioners shall transfer title over the subject land
to respondents. However, respondents sent petitioners a letter dated November 7, 2008 seeking to rescind the
subject contract on the ground of financial difficulties in complying with the same. They also sought the return of
the amount of P12,202,882.00 they had paid to petitioners. As their letter went unheeded, respondents filed the
instant complaint for rescission before the RTC.
In their defense, petitioners countered that respondents' act is a unilateral cancellation of the subject contract as
the former did not consent to it. Moreover, the ground of financial difficulties is not among the grounds provided
by law to effect a valid rescission.
In view of petitioners' failure to file the required pre-trial brief, they were declared "as in default" and,
consequently, respondents were allowed to present their evidence ex-parte.

13 | L I N G A T O N G
ISSUE: Whether or not the CA correctly affirmed the rescission of the subject contract and the return of the
amounts already paid by respondents to petitioners, as well as the remaining post-dated checks issued by
respondent Celerino S. Cuerpo representing the remaining monthly amortizations.
RULING:
The petition is partially meritorious.
In reciprocal obligations, either party may rescind — or more appropriately, resolve — the contract upon the
other party's substantial breach of the obligation/s he had assumed thereunder. This is expressly provided for in
Article 1191 of the Civil Code which states:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This
is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance
with Articles 1385 and 1388 and the Mortgage Law.
"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 the 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.'" Note that the rescission (or resolution) 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. Ultimately, the question of whether a breach of contract is
substantial depends upon the attending circumstances. In the instant case, both the RTC and the CA held that
petitioners were in substantial breach of paragraph 7 of the subject contract as they did not cause the transfer of
the property to their names from one Edilberta N. Santos within 90 daysfrom the execution of said contract. The
courts a quo are mistaken.
Paragraph 7 of the subject contract state in full:
7. [Petitioners] shall, within ninety (90) days from the signing of [the subject contract], cause the
completion of the transfer of registration of title of the property subject of [the subject contract], from Edilberta N.
Santos to their names, at [petitioners'] own expense. Failure on the part of [petitioners] to undertake the
foregoing within the rescribed period shall automatically authorize [respondents] to undertake the same in behalf
of [petitioners] and charge the costs incidental to the monthly amortizations upon due date. (Emphasis and
underscoring supplied)
A plain reading of paragraph 7 of the subject contract reveals that while the RTC and the CA were indeed correct
in Bnding that petitioners failed to perform their obligation to effect the transfer of the title to the subject land from
one Edilberta N. Santos to their names within the prescribed period, said courts erred in concluding that such
failure constituted a substantial breach that would entitle respondents to rescind (or resolve) the subject contract.
To reiterate, for a contracting party to be entitled to rescission (or resolution) in accordance with Article 1191 of
the Civil Code, the other contracting party must be in substantial breach of the terms and conditions of their
contract. A substantial breach of a contract, unlike slight and casual breaches thereof, is a fundamental breach
that defeats the object of the parties in entering into an agreement. Here, it cannot be said that petitioners' failure
to undertake their obligation under paragraph 7 defeats the object of the parties in entering into the subject
contract, considering that the same paragraph provides respondents contractual recourse in the event of
petitioners' non-performance of the aforesaid obligation, that is, to cause such transfer themselves in behalf and
at the expense of petitioners.

14 | L I N G A T O N G
Indubitably, there is no substantial breach of paragraph 7 on the part of petitioners that would necessitate a
rescission (or resolution) of the subject contract.
As such, a reversal of the rulings of the RTC and the CA is in order.
The foregoing notwithstanding, the Court cannot grant petitioners' prayer in the instant petition to order the
cancellation of the subject contract and the forfeiture of the amounts already paid by respondents on account of
the latter's failure to pay its monthly amortizations, simply because in their Answer with Compulsory
Counterclaim and Motion for Summary Judgment filed before the RTC, petitioners neither prayed for this specific
relief nor argued that they were entitled to the same. Worse, petitioners were declared "as in default" for failure to
file the required pre-trial brief and, thus, failed to present any evidence in support of their defense. It is settled
that "[w]hen a party deliberately adopts a certain theory and the case is decided upon that theory in the court
below, he will not be permitted to change the same on appeal, because to permit him to do so would be unfair to
the adverse party." The Court's pronouncement in Peña v. Spouses Tolentino 34 is instructive on this matter, to
wit:
Indeed, the settled rule in this jurisdiction, according to Mon v. Court of Appeals, is that a party cannot change
his theory of the case or his cause of action on appeal. This rule affirms that "courts of justice have no jurisdiction
or power to decide a question not in issue." Thus, a judgment that goes beyond the issues and purports to
adjudicate something on which the court did not hear the parties is not only irregular but also extrajudicial and
invalid. The legal theory under which the controversy was heard and decided in the trial court should be the
same theory under which the review on appeal is conducted. Otherwise, prejudice will result to the adverse party.
We stress that points of law, theories issues, and arguments not adequately brought to the attention of the lower
court will not be ordinarily considered by a reviewing court, inasmuch as they cannot be raised for the first time
on appeal. This would be offensive to the basic rules of fair play, justice, and due process. (Emphasis and
underscoring supplied)
WHEREFORE, the petition is PARTIALLY GRANTED. Accordingly, the Decision dated June 17, 2013 and the
Resolution dated November 19, 2013 of the Court of Appeals in CA-G.R. CV No. 95353 are hereby REVERSED
and SET ASIDE. The Contract to Sell executed by the parties on July 22, 2008 remains VALID and
SUBSISTING.

FIL ESTATE PROPERTIES v. RONQUILLO

G.R. No. 185798. January 13, 2014
PONENTE: Perez
FACTS:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower while co-
petitioner Fil-Estate Network, Inc. is its authorized marketing agent. Respondent Spouses Conrado and Maria
Victoria Ronquillo purchased from petitioners an 82-square meter condominium unit for a pre-selling contract
price of P5,174,000.00. On 29 August 1997, respondents executed and signed a Reservation Application
Agreement wherein they deposited P200,000.00 as reservation fee. As agreed upon, respondents paid the full
downpayment of P1,552,200.00 and had been paying the P63,363.33 monthly amortizations until September
1998.
Upon learning that construction works had stopped, respondents likewise stopped paying their monthly
amortization. Claiming to have paid a total of P2,198,949.96 to petitioners, respondents through two (2)
successive letters, demanded a full refund of their payment with interest. When their demands went unheeded,
respondents were constrained to file a Complaint for Refund and Damages before the Housing and Land Use
Regulatory Board (HLURB). Respondents prayed for reimbursement/refund of P2,198,949.96 representing the

15 | L I N G A T O N G
total amortization payments, P200,000.00 as and by way of moral damages, attorney’s fees and other litigation
expenses.
On 13 June 2002, the HLURB in favor of herein respondents. The Arbiter considered petitioners’ failure to
develop the condominium project as a substantial breach of their obligation which entitles respondents to seek
for rescission with payment of damages. The Arbiter also stated that mere economic hardship is not an excuse
for contractual and legal delay.
ISSUES:
Whether or not the Asian financial crisis constitute a fortuitous event which would justify delay by petitioners in
the performance of their contractual obligation;
Assuming that petitioners are liable, whether or not 12% interest was correctly imposed on the judgment award
HELD:
FIRST ISSUE: NO
The Supreme Court held that the Asian financial crisis is not a fortuitous event that would excuse petitioners from
performing their contractual obligation.
The Court ruled that “we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond
the control of a business corporation. It is unfortunate that petitioner apparently met with considerable difficulty
e.g. increase cost of materials and labor, even before the scheduled commencement of its real estate project as
early as 1995. However, a real estate enterprise engaged in the pre-selling of condominium units is concededly a
master in projections on commodities and currency movements and business risks. The fluctuating movement of
the Philippine peso in the foreign exchange market is an everyday occurrence, and fluctuations in currency
exchange rates happen everyday, thus, not an instance of caso fortuito.”
SECOND ISSUE: NO
The Court held that 6% is the proper legal interest rate.
The resulting modification of the award of legal interest is, also, in line with our recent ruling in Nacar v. Gallery
Frames, embodying the amendment introduced by the Bangko Sentral ng Pilipinas Monetary Board in BSP-MB
Circular No. 799 which pegged the interest rate at 6% regardless of the source of obligation.
FALLO:
WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the
time of respondents’ demand for refund on 8 October 1998.

MAGLASANG v. NORTHWESTERN UNIVERSITY

March 20, 2013
FACTS:
In compliance with the CHED’s requirement before a school could offer maritime transportation programs, on
June 10, 2004, Northwestern University (Northwestern), respondent, engaged the services of GL enterprises,
petitioner, to install a new Integrated Bridge System or IBS. The parties executed two contracts. Two months
after the execution of the contracts, GL Enterprises started delivering materials.
However, when they were installing the components, Northwestern halted the operations. GL enterprises
requested for an explanation. Northwestern explained that the stoppage was because the materials and

16 | L I N G A T O N G
equipment were substandard. It explained that the components (1) were old; (2) did not have manual and
warranty certificates; (3) contained indications of being reconditioned machines; (4) did not meet with CHED and
IMO standards.
GL enterprises file a complaint for breach of contract. The RTC rendered a decision that both parties are at fault.
However, the CA, found that GL enterprises was the only at fault, for delivering defective equipment that
materially and substantially breached the contracts. Applying Article 1191 of the Civil Code, the CA declared the
rescission of the contracts.
Issue: Whether the CA gravely erred in (1) finding substantial breach on the part of GL enterprises.
Held: The Supreme Court said that, the CA correctly applied Article 1191, which provides thus:
The power to rescind obligations is implied in reciprocal ones, in case of the obligors should
not comply with what is incumbent upon him. The injured party may choose between the fulfillment and
the rescission of the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the rescission becomes impossible. The court shall
decree the rescission, unless there be just cause authorizing the fixing of a period.
The Supreme Court said that the two contracts require substantial breach. Then, it went also to cite the
definition, in the case of Cannu v. Galang, that substantial breach are fundamental breaches that defeat the
object of the parties entering into an agreement, since the law is not concerned with trifles.
In the case at hand, it was incumbent upon GL enterprises to supply components that would create an IBS that
would effectively facilitate the learning of the students. However, it miserably failed it meetings its responsibility. It
supplied substandard equipment when it delivered components (1) were old; (2) did not have manual and
warranty certificates; (3) contained indications of being reconditioned machines; (4) did not meet with CHED and
IMO standards. Also, GL enterprises did not also refute that it delivered defective equipment.
Evidently, the materials were not likely to pass the CHED and IMO standards.

VICELET LALICON v. NHA

G.R. No. 185440. July 13, 2011
FACTS: In 1980 National Housing Authority (NHA) executed a Deed of Sale with Mortgage over a Quezon City lot
in favor of the spouses Alfaro. In due time, the Quezon City Registry of Deeds issued a title in the name of the
Alfaros. The deed of sale provided, among others, that the Alfaros could sell the land within 5 years from the date
of its release from mortgage even without NHA’s prior written consent. The mortgage and the restriction on sale
were annotated on the Alfaros’ title.
About nine years later or on November 30, 1990 while the mortgage on the land subsisted, the Alfaros sold the
same to their son, Victor Alfaro, who had taken in a common-law wife, Cecilia, with whom he had two daughters,
petitioners Vicelet and Vicelen Lalicon. Cecilia, who had the means, had a house built on the property and paid for
the amortizations. After full payment of the loan the NHA released the mortgage. Six days later Victor transferred
ownership of the land to his illegitimate daughters.
About four and a half years after the release of the mortgage, Victor registered the November 30, 1990 sale of the
land in his favor, resulting in the cancellation of his parents’ title. The register of deeds issued a title in Victor’s
name. 2 months later Victor mortgaged the land to Chua, Sy, Ong, and See. Subsequently, in 1997 Victor sold the
property to Chua, one of the mortgagees, resulting in the cancellation of his title and the issuance of title in Chua’s
name. A year later the NHA instituted a case before the Quezon City RTC for the annulment of the NHA’s 1980
sale of the land to the Alfaros, the latter’s 1990 sale of the land to their son Victor, and the subsequent sale of the
same to Chua, made in violation of NHA rules and regulations.

17 | L I N G A T O N G
RTC ruled that, although the Alfaros clearly violated the five-year prohibition, the NHA could no longer rescind its
sale to them since its right to do so had already prescribed, applying Article 1389 of the New Civil Code. CA
reversed the RTC decision and found the NHA entitled to rescission.
ISSUES:
1. Whether or not the Alfaros violated their contract with the NHA;
2. Whether or not the NHA’s right to rescind has prescribed; and
HELD: On the first issue, the contract between the NHA and the Alfaros forbade the latter from selling the land
within five years from the date of the release of the mortgage in their favor. But the Alfaros sold the property to
Victor on November 30, 1990 even before the NHA could release the mortgage in their favor on March 21, 1991.
Clearly, the Alfaros violated the five-year restriction, thus entitling the NHA to rescind the contract.
On the 2nd issue, petitioners claim that under Article 1389 of the Civil Code the “action to claim rescission must
be commenced within four years” from the time of the commission of the cause for it. But an action for rescission
can proceed from either Article 1191 or Article 1381. It has been held that Article 1191 speaks of rescission in
reciprocal obligations within the context of Article 1124 of the Old Civil Code which uses the term “resolution.”
Resolution applies only to reciprocal obligations such that a breach on the part of one party constitutes an implied
resolutory condition which entitles the other party to rescission. Resolution grants the injured party the option to
pursue, as principal actions, either a rescission or specific performance of the obligation, with payment of damages
in either case. Rescission under Article 1381, on the other hand, was taken from Article 1291 of the Old Civil Code,
which is a subsidiary action, not based on a party’s breach of obligation. The four-year prescriptive period provided
in Article 1389 applies to rescissions under Article 1381. Here, the NHA sought annulment of the Alfaros’ sale to
Victor because they violated the five-year restriction against such sale provided in their contract. Thus, the CA
correctly ruled that such violation comes under Article 1191 where the applicable prescriptive period is that provided
in Article 1144 which is 10 years from the time the right of action accrues. The NHA’s right of action accrued on
February 18, 1992 when it learned of the Alfaros’ forbidden sale of the property to Victor. Since the NHA filed its
action for annulment of sale on April 10, 1998, it did so well within the 10-year prescriptive period.

REYES v. ROSSI
G.R. No. 159823. February 18, 2013
Facts: Teodoro Reyes contracted a deed of conditional sale with Advanced Foundation Construction System
Corporation represented by Ettore Rossi for the purchase of a certain dredging pump. The pump was sold at
P10,000,000 with the scheme of 30% down payment and 70% to be paid with postdated checks. Following the
restructuring of the agreement, Rossi agreed to accept nine (9) postdated checks from Reyes in compliance with
the remaining balance. However, when Rossi deposited 3 of the 9 checks, the checks were denied ostensibly
upon Reyes’ instruction to stop payment and by lack of sufficient funds. This prompted Rossi to charge Reyes
with several counts of estafa and violation of Batas Pambansa Blg. 22.
Reyes, on the other hand, filed a petition in court for the rescission of his contract with Rossi and claim
for damages. Reyes alleged that Advanced Foundation misrepresented the quality of the pump that he bought.
Upon ignoring his complaints, Reyes caused the order to stop payment of the three checks.
Issue: Whether or not the action for rescission was proper.
Ratio: Article 1191 of the Civil Code recognizes an implied or tacit resolutory condition in reciprocal
obligations. The condition is imposed by law, and applies even if there is no corresponding agreement thereon
between the parties. The explanation for this is that in reciprocal obligations a party incurs in delay once the
other party has performed his part of the contract; hence, the party who has performed or is ready and willing to
perform may rescind the obligation if the other does not perform, or is not ready and willing to perform.19

18 | L I N G A T O N G
It is true that the rescission of a contract results in the extinguishment of the obligatory relation as if it was never
created, the extinguishment having a retroactive effect. The rescission is equivalent to invalidating and unmaking
the juridical tie, leaving things in their status before the celebration of the contract.20 However, until the contract
is rescinded, the juridical tie and the concomitant obligations subsist.
The issue in the civil action for rescission is whether or not the breach in the fulfilment of Advanced Foundation’s
obligation warranted the rescission of the conditional sale. If, after trial on the merits in the civil action, Advanced
Foundation would be found to have committed material breach as to warrant the rescission of the contract, such
result would not necessarily mean that Reyes would be absolved of the criminal responsibility for issuing the
dishonored checks because, as the aforementioned elements show, he already committed the violations upon
the dishonor of the checks that he had issued at a time when the conditional sale was still fully binding upon the
parties. His obligation to fund the checks or to make arrangements for them with the drawee bank should not be
tied up to the future event of extinguishment of the obligation under the contract of sale through rescission.

SPS. FELIPE & LETCIA CORNER v. SPS. GALANG

G.R. No. 139523. May 26, 2005
FACTS:
In order to buy a house and lot with an area of 150 square meters in Pulanglupa, Las Pinas City, Gil and Fernandina
Galang (herein respondents) loaned from Fortune Savings and Loan Association (FSLA) the amount of Php
173,800.00. In order to pay it, they mortgaged the property in favour of the Fortune Savings and Loan Association
and the National Home Mortgage Finance Corporation (NHMFC) bought the lot from FSLA. Leticia Cannu, one of
the petitioners in this case, agreed to purchase the mortgaged property for Php 120,000.00 and to assume the
balance of the mortgage obligations with the NHMFC and the developer of the property. Several payments were
made and there was a remaining balance of Php 45,000.00. A deed of sale & assumption of mortgage was
executed between the Galang and Cannu spouses and the petitioners immediately took possession and occupied
the house and lot. Although there have been requests by Adelina Timbang (the attorney-in-fact) and Fernandina
Galang for the payment of the balance, else the Cannu spouses would be forced to vacate the property, the Cannus
refused to do so. On May 21, 1993, Fernandina Galang paid Php 233, 957.64 as the full payment of the remaining
balance in the mortgage loan with the NHMFC. The Cannus opposed the release of Transfer Certificate Title
Number T-8505 in favour of the Galangs insisting that the subject property had already been sold to them. A
Complaint for Specific Performance and Damages was filed praying that the Cannu spouses be declared as owners
of the house and lot involved subject to reimbursements of the amount made by the Galang spouses in
preterminating the mortgage loan with NHMFC.
ISSUES:
Whether or not the petitioners’ breach of obligation was substantial;
Whether or not there was no substantial compliance with the obligation to pay the monthly amortization with the
NHMFC;
Whether or not the action for rescission was subsidiary
HELD:
The failure of the Cannus to pay the Php 45,000.00 is a substantial breach of obligation. Under Article 1191 of the
Civil Code of the Philippines, the resolution of a party to pay an obligation is founded on a breach of faith by the
other party which violates the reciprocal obligation. The petitioners had ample amount of time to pay the amount,
but despite the demands to pay such, they did not comply with their obligation. Rescission may only occur on
breaches which are substantial in order to defeat the object of the parties in making the agreement. Furthermore,
Felipe and Leticia Cannu committed another breach in obligation on the Deed of Sale with Assumption of Mortgage.
The mortgage obligation with the NHMFC was not formally assumed on account of the Cannus’ failure to submit
the requirements in order to be considered as successors-in-interest of the involved house and lot in Pulanglupa.

19 | L I N G A T O N G
Article 1191, not Article 1381, is the applicable provision in the case at bar since it is a retaliatory provision in a
sense that the action is not substantive and because it is the duty of the court to require the parties involved to
surrender whatever they may have received from the other in the resolution of the Deed of Sale with Assumption
of Mortgage. It is unjust that a party is bound to fulfil his part of the obligation when the other does not do his part.

ASB REALTY CORP. v. ORTIGAS CO, LTD.

G.R. No. 202947. December 9, 2015
Civil Law; Contract; Rescission of contracts. Rescission is proper if one of the parties to the contract commits a
substantial breach of its provisions. It abrogates the contract from its inception and requires the mutual restitution
of the benefits received; hence, it can be carried out only when the party who demands rescission can return
whatever he may be obliged to restore.
Same; Same; Effect of assignment of contract.The mere assignment of a bilateral executory contract does not
automatically result to the assignee’s assumption of the assignor’s duties, so as to have the effect of creating a
new liability on the part of the assignee to the other party to the contract assigned. The assignee of the vendee is
under no personal engagement to the vendor where there is no privity between them.
BERSAMIN, J.:

FACTS: Ortigas & Company Limited Partnership (Ortigas), entered into a Deed of Sale with Amethyst Pearl
Corporation (Amethyst) on June 29, 1994. This involved the parcel of land with an area of 1,012 square meters
situated in Barrio Oranbo, Pasig City and registered under TCT No. 65118 of the Register of Deeds of Rizal for the
consideration of Php 2,024,000.00. Consequently, the Register of Deeds of Rizal cancelled TCT No. 65118 and
issued TCT No. PT-94175 in the name of Amethyst. And the conditions contained in the Deed of Sale were also
annotated on TCT No. PT-94175 as encumbrances.
Thereafter, Amethyst, on December 28, 1996, assigned the subject property to its sole stockholder, petitioner ASB
Realty Corporation, under a so-called Deed of Assignment in Liquidation in consideration of 10,000 shares of the
petitioner's outstanding capital stock. Thus, the property was transferred to the petitioner free from any liens or
encumbrances except those duly annotated on TCT No. PT-94175. The Register of Deeds of Rizal cancelled TCT
No. PT-94175 and issued TCT No. PT-105797 in the name of the petitioner with the same encumbrances
annotated on TCT No. PT-94175.
Due to alleged violation of the terms of the Deed of Absolute Sale, citing among others the constructions on the
property which are commercial in nature, Ortigas filed a complaint for specific performance against the petitioner
before the RTC in Pasig City. It argued that the violations committed by the petitioner empowers it to unilaterally
cancel the Deed of Absolute Sale. It prayed for the reconveyance of the property or alternatively, for the demolition
of the structures and improvements thereon.
The RTC rendered its decision and dismissed the complaint. Ortigas appealed to the CA, which initially affirmed
the RTC decision. Upon Ortigas’ Motion for Reconsideration, the CA reversed its previous decision and favored
Ortigas.
The petitioner appealed to the CA but denied the petitioner's Motion for Reconsideration for being filed out of time.
Hence, this petition.
ISSUE: Whether or not Ortigas validly rescinded the Deed of Sale due to the failure of Amethyst and its assignee,
the petitioner, to fulfill the covenants under the Deed of Sale.

HELD: NEGATIVE. The court granted the petition. Rescission under Article 1191 of the Civil Code is proper if one
of the parties to the contract commits a substantial breach of its provisions. It abrogates the contract from its
inception and requires the mutual restitution of the benefits received; hence, it can be carried out only when the
party who demands rescission can return whatever he may be obliged to restore.

20 | L I N G A T O N G
Ortigas did not have a cause of action against the petitioner for the rescission of the Deed of Sale. The essential
elements of a cause of action are: (1) a right in favor of the plaintiff by whatever means and under whatever law it
arises or is created; (2) an obligation on the part of the defendant not to violate such right; and (3) an act or omission
on the part of the defendant in violation of the right of the plaintiff or constituting a breach of the obligation of the
defendant to the plaintiff for which the latter may maintain an action for recovery of damages or other relief.
In the case at bar, the second and third elements were absent. The petitioner was not privy to the Deed of Sale
because it was not the party obliged thereon. Its failure to comply with the covenants in the Deed of Sale did not
constitute a breach of contract that gave rise to Ortigas' right of rescission. It was rather Amethyst that defaulted
on the covenants under the Deed of Sale. The mere assignment of a bilateral executory contract does not
automatically result to the assignee’s assumption of the assignor’s duties, so as to have the effect of creating a
new liability on the part of the assignee to the other party to the contract assigned. Consequently, the burden to
perform the covenants under the Deed of Sale remained with Amethyst; hence, the action to enforce the
provisions of the contract or to rescind the contract should be against Amethyst.

AYALA LIFE INSURANCE v. ROY BURTON DEVT. CORP.

January 23, 2006
Facts: The petitioners Victorias Planters Association, Inc. and North Negros Planters Association, Inc. are non-
stock corporations and are composed of sugar cane planters having been established as the representative entities
of the numerous sugar cane planters in the districts of Victorias, Manapla and Cadiz. The sugar cane productions
were milled by the respondent corporation. Petitioners are the ones in charge of taking up with the respondent
corporation problems which may come up. At various dates, the sugarcane planters executed identical milling
contracts setting forth the terms and conditions which the sugar central “North Negros Sugar Co. Inc.” would mill
the sugar produced by the sugar cane planters. Because of the Japanese occupation, the North Negros Sugar
Co., Inc. did not reconstruct its destroyed central and it had made arrangements with the respondent Victorias
Milling Co., Inc. for said respondent corporation to mill the sugarcane produced by the planters of Manapla and
Cadiz holding milling contracts with it. When the planters-members of the North Negros Planters Association, Inc.
considered that the stipulated 30-year period of their milling contracts had already expired and terminated and the
planters-members of the Victorias Planters Association, Inc. likewise considered the stipulated30-year period of
their milling contracts as having likewise expired and terminated. Respondent has refused to accept the fact that
the 30-year period has expired. They contend that the 30 years stipulated in the contracts referred to 30 years of
milling – not 30 years in time. They contend that as there was no milling during 4 years of the recent war and 2
years of reconstruction, 6 years of service still has to be rendered by petitioners.
Issue: Whether or not respondent is correct.
Held: The trial court rendered judgment, which the Supreme Court affirmed.“Wherefore, the Court renders
judgment in favor of the petitioners and against the respondent and declares that the milling contracts executed
between the sugar cane planters of Victorias,Manapla and Cadiz, Negros Occidental, and the respondent
corporation or its predecessors-in-interest, the North Negros Sugar Co., Inc., expired and terminated upon the
lapse of the therein stipulated 30-year period, and that respondent corporation is not entitled to claim any
extension.”
The reason the planters failed to deliver the sugar cane wasthe war or a fortuitious event. The appellant ceased to
run its mill dueto the same cause.Fortuitious event relieves the obligor from fulfilling acontractual obligation. The
fact that the contracts make reference to"first milling" does not make the period of thirty years one of thirtymilling
years.The seventh paragraph of Annex "C", not found in the earlier contracts (Annexes "A", "B", and "B-1"), quoted
by the appellant in itsbrief, where the parties stipulated that in the event of flood, typhoon,earthquake, or other
force majeure, war, insurrection, civil commotion,organized strike, etc., the contract shall be deemed suspended
duringsaid period, does not mean that the happening of any of those eventsstops the running of the period agreed
upon. It only relieves theparties from the fulfillment of their respective obligations during thattime.To require the
planters to deliver the sugar cane which theyfailed to deliver during the four years of the Japanese occupation

21 | L I N G A T O N G
andthe two years after liberation when the mill was being rebuilt is todemand from the obligors the fulfillment of an
obligation which wasimpossible of performance at the time it became due.

HEIRS OF GEORGE POE v. MALAYAN INSURANCE

April 7, 2009
Facts: On 26 January 1996, George Y. Poe while waiting for a ride to work in Taytay, Rizal, was run over by a ten-
wheeler hauler truck owned by Rhoda Santos, and then being driven by Willie Labrador. The said truck was
insuredwith respondent MALAYAN INSURANCE COMPANY, INC. (MICI). To seek redress for George's untimely
death, his heirs and herein petitioners, namely, his widow Emercelinda, and their children Flerida and Fernando,
filed with the RTC a Complaint for damages against Rhoda and respondent MICI, the insurer of Rhoda Santos
under a valid and existing insurance policy over the subject vehicle owned by Rhoda Santos. Under said insurance
policy, MICI binds itself, among others, to be liable for damages as well as any bodily injury to third persons which
may be caused by the operation of the insured vehicle. And prayed that: Judgment issue in favor of petitioners
ordering Rhoda and respondent MICI jointly and solidarily to pay the petitioners the following:
1. Actual damages in the total amount of THIRTY SIX THOUSAND (P36,000.00) PESOS for funeral and burial
expenses;
2. Actual damages in the amount of EIGHT HUNDRED FIVE THOUSAND NINE HUNDRED EIGHTY FOUR
(P805,984.00) PESOS as loss of earnings and financial support given by the deceased by reason of his income
and employment;
3. Moral damages in the amount of FIFTY THOUSAND (P50,000.00) PESOS;
4. Exemplary damages in the amount of FIFTY THOUSAND (P50,000.00) PESOS;
5. Attorney's fees in the amount of FIFTY THOUSAND (P50,000.00) PESOS and litigation expense in the amount
of ONE THOUSAND FIVE HUNDRED (P1,500.00) PESOS for each court appearance;
6. The costs of suit.
Other reliefs just and equitable in the premises are likewise prayed for.
On 22 March 2000, respondent MICI and Rhoda filed a Motion for Reconsideration of said Decision, averring
therein that the RTC erred in ruling that the obligation of Rhoda and respondent MICI to petitioners was solidary
or joint and several; in computing George's loss of earning capacity not in accord with established jurisprudence;
and in awarding moral damages although it was not buttressed by evidence. The RTC held that: After a careful
evaluation of the issues at hand, the contention of the respondent MICI as far as the solidary liability of the
insurance company with the other defendant Rhoda is meritorious. However, the assailed Decision can be modified
or amended to correct the same honest inadvertence without necessarily reversing it and set aside to conform with
the evidence on hand.
The RTC also re-computed George's loss of earning capacity, as follows:
The computation of actual damages for loss of earning capacity was determined. Moral damages is awarded in
accordance with Article 2206 of the New Civil Code of the Philippines. While death indemnity in the amount of
P50,000.00 is automatically awarded in cases where the victim had died.
As regards the award of actual damages, Article 2199 of the Civil Code provides that "except as provided by law
or by stipulation one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he
has duly proved . . . ." The RTC awarded P36,000.00 for burial expenses. The award of P36,000.00 for burial
expenses is duly
supported by receipts evidencing that petitioners did incur this expense. The petitioners held a wake for two days
at their residence and another two days at the Loyola Memorial Park. The amount covered the expenses by
petitioners for the wake, funeral and burial of George. As to compensation for loss of earning capacity, the RTC

22 | L I N G A T O N G
initially awarded P805,984.00 in its 28 February 2000 Decision, which it later reduced to P102,106.00 on 24
January 2001. Article 2206
of the Civil Code provides that in addition to the indemnity for death caused by a crime or quasidelict, the "defendant
shall be liable for the loss of the earning capacity of the deceased, and the indemnity shall be paid to the heirs of
the latter, . . . ." Compensation of this nature is awarded not for loss of earnings but for loss of capacity to earn
money.
The RTC awarded moral damages in the amount of P100,000.00. With respect to moral damages, the same are
awarded under the following circumstances:
The award of moral damages is aimed at a restoration, within the limits of the possible, of the spiritual status quo
ante. Moral damages are designed to compensate and alleviate in some way the physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury unjustly caused a person. Although incapable of pecuniary computation, they must be proportionate
to the suffering inflicted.
The amount of the award bears no relation whatsoever with the wealth or means of the offender.
In the instant case, petitioners' testimonies reveal the intense suffering which they continue to experience as a
result of George's death. It is not difficult to comprehend that the sudden and unexpected loss of a husband and
father would cause mental anguish and serious anxiety in the wife and children he left behind. Moral damages in
the amount of P100,000.00 are proper for George's death.
The RTC also awarded P50,000.00 as death indemnity which the Court shall not disturb. Finally, the RTC awarded
attorney's fees to petitioners. Petitioners are entitled to attorney's fees. Under Article 2008 of the Civil Code,
attorney's fees may be granted when a party is compelled to litigate or incur expenses to protect his interest by
reason of an unjustified act of the other party.
Issue: Whether or not Rhoda Santos and MALAYAN INSURANCE COMPANY, INC. (MICI) should solidarily pay
the petitioners.
Held: The Court ruled that Rhoda Santos and respondent Malayan Insurance Company, Inc. are hereby ordered
to pay jointly and severally the petitioners Heirs of George Y. Poe the following:
(1) Funeral expenses P36,000.00;
(2) Actual damages for loss of earning capacity P611,386.92;
(3) Moral damages amounting to P100,000.00;
(4) Death indemnity P50,000.00; and
(5) Attorney's fees P50,000.00 plus P1,500.00 per court appearance.
No costs.

FILINVEST LAND, INC. v. CA & PEP CORP

September 20, 2005
FACTS: Petition for review on certiorari CA decision affirming dismissal by RTC of the complaint for damages filed
by Filinvest Land, Inc. against Pacific Equipment Corporation (Pecorp) and Philippine American General Insurance
Company.
On 26 April 1978, Filinvest Land, Inc. awarded to defendant Pacific Equipment Corporation (Pacific) the
development of its residential subdivisions consisting of two (2) parcels of land located at Payatas, Quezon City,
the terms and conditions of which are contained in an “Agreement” and to guarantee its faithful compliance and

23 | L I N G A T O N G
pursuant to the agreement, defendant Pacific posted two (2) Surety Bonds in favor of plaintiff which were issued
by defendant Philippine American General Insurance (Philmagen).
Notwithstanding three extensions granted by plaintiff to defendant Pacific, the latter failed to finish the contracted
works. Plaintiff wrote defendant Pacific advising the latter of its intention to takeover the project and to hold said
defendant liable for all damages which it had incurred and will incur to finish the project. Filinvest submitted its
claim against PHILAMGEN but PHILAMGEN refused because its principal, Pacific refused to acknowledge
responsibility.
Pacific claims that its failure was due to inclement weather and the refusal of Filinvest to pat its progressing bills
estops it from demanding fulfillment of what is incumbent upon Pacific. The granting of three extensions for the
work to be completed is a waiver of Filinvest’s rights to claim any damages. The unilateral and voluntary action of
Filinvest to prevent Pacific from completing the work has extinguished the obligation.
PHILAMGEN claims that the amendments made to the principal contract without its written consent have released
it from any or all liability.
The parties agreed to appoint a commission to assist the court in resolving the issue. Architect Antonio Dimalanta
was appointed as Court Commissioner to conduct an ocular inspection to determine the amount of work
accomplished by Pacific and the amount of work done by Filinvest to complete to project. Based on his report, the
work accomplished by Pacific amounted to P11,788,282.40, except the last billing which Filinvest refused to pay
amounting to P681,717.58. The alleged repairs made by Filinvest for construction deficiencies had no basis. Pacific
has additional work done amounting to P477,000.00. Filinvest owes Pacific P1,881,867.66.
The trial court however took note that Pacific was in delay since April 1979. The third extension agreement of
September 1979 was clear and they should complete all unfinished work by October 15, 1979 otherwise Pacific
will be liable to pay the penalty up to the time all contracted works shall have been actually finished in addition to
other damages. Pacific became liable for delay when it did not finish the project on October 15, 1979. The court
finds the penalty of 3,990,000 excessive and held that a forfeiture of the amount due to Pacific from Filinvest is a
reasonable penalty considering the amount of work already performed by Pacific. Court of Appeals affirmed this
decision.

ISSUE: W/N the liquidated damages agreed upon should be reduced

HELD: YES! Article 1226 if taken and read together with Article 1229 which states how the Court may reduce
such penalty. A penal clause is an accessory undertaking to assume greater liability in case of breach.
Although the penalty of 15,000 per day was mutually agreed upon by both parties, and is sanctioned by law, the
Court ruled that the penalty charged was excessive and reduced the same amount that Filinvest owed Pacific,
considering the amount if work already finished and the fact that Filinvest consented to 3 extensions. The project
was already 94.53% complete and the penalty was unconscionable because the project was not far from
completion.
However, Filinvest cites the case of Laureano vs. Kilayco, wherein the courts were cautioned to distinguish
between two kinds of penalty clause to better apply their authority in reducing the amount recoverable: FIRST, is
where an indemnity is provided as a mere penalty having for its principal object the enforcement of compliance
with the contract while the SECOND is where the purpose of the indemnification if to provide for the payment of
actual anticipated and liquidated damages rather than penalization of a breach of contract.
Filinvest claims that the penalty clause in their agreement falls under the second type and argues that had Pacific
completed the project on time, they could have sold the lots sooner and earned its projected income that would
have been used its other projects. This doctrine, however, should be applicable to cases where there has been
neither partial nor irregular compliance. IN CASES WHERE THERE HAS BEEN PARTIAL OR IRREGULAR
COMPLIANCE, AS IN THIS CASE, THERE WILL BE NO DIFFERENCE BETWEEN A PENALTY AND
LIQUIDATED DAMAGES.

24 | L I N G A T O N G
The Court, in Litugan vs. CA, pointed out that the question of penalty is reasonable or iniquitous can be partly
subjective and partly objective. In this case, Pacific complied with their obligation in GOOD FAITH which makes
the full force of the penalty unconscionable. Pacific’s delay was not due to negligence or bad faith. Filinvest was
also not free from blame because they did not pay Pacific for the work performed. Decision of CA affirmed.

25 | L I N G A T O N G