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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F.

BALANE 2014A
Article 1157 fees and costs. On appeal, the IAC eliminated compensatory and exemplary damages, and reduced the award of moral
damages.
appellant corporation was unable to make good its commitment to open the disputed letter of credit.
Relevant Issue:
Arrieta endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility of reinstating the same became
apparent, she offered to substitute Thailand rice instead to the defendant NARIC, communicating at the same time that the offer  Is the petitioner liable for damages due to its failure to transmit the telegram to the USA? YES.
was "a solution which should be beneficial to the NARIC and to us at the same time." This offer for substitution, however, was
rejected by NARIC. Held:
Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty of fraud, negligence or
On the foregoing, Arrieta sent a letter to the appellant, demanding compensation for the damages caused her in the sum of delay, and those who in any manner contravene the tenor thereof, are liable for damages." Art. 2176 also provides that "whoever
$286,000.00, U.S. currency, representing unrealized profit. The demand having been rejected she instituted this case now on by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done."
appeal.
In this case, Sofia entered into a contract with petitioner, wherein the latter will undertake to transmit a telegram overseas for a
Issue/Held: fee. Despite payment by Sofia of the fee to petitioner, the latter failed to fulfill its obligation, breaching the contract and
Whether appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the contract for which it making it liable for damages.
may be held liable in damages. YES. The decision appealed from is hereby affirmed, with the sole modification that the award
should be converted into the Philippine peso at the rate of exchange prevailing at the time the obligation was incurred or on July Regarding damages, the amount of ₱31.92 is inequitable and prejudicial on the part of respondent since thirty (30) years
1, 1952 when the contract was executed. have passed since she attempted to transmit the telegram, and she incurred expenses for travelling to the Philippines.
Moreover, the gross negligence of petitioner has caused the suffering of all respondents, who were unable to be
Rationale: immediately notified of the death of Consolacion and were unable to pay their last respects as a result, hence the award
The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to name the supplier, the amount of moral damages is proper.
and the bank, is not tenable. Plaintiff stated in Court that these facts were known to defendant even before the contract was
executed because these facts were necessarily revealed to the defendant before she could qualify as a bidder. She stated too Petition denied; amount of damages modified.
that she had given the necessary data immediately after the execution of the contract to Mr. GABRIEL BELMONTE, General
Manager of the NARIC, both orally and in writing and that she also pressed for the opening of the letter of credit on these
occasions. These statements have not been controverted and defendant NARIC, notwithstanding its previous intention to do so, NPC V. CA, 161 SCRA 334
failed to present Mr. Belmonte to testify or refute this.
Facts:
What singularly delayed the opening of the stipulated letter of credit and which, in turn, caused the cancellation of the allocation Engineering Construction executed a contract with NAWASA whereby the former will construct a tunnel in Bulacan. During the
in Burma, was the inability of the appellant corporation to meet the condition importation by the Bank for granting the same. We construction of the tunnel, Typhoon Welming hit Central Luzon. Strong winds struck the project area, and heavy rains
do not think the appellant corporation can refute the fact that had it been able to put up the 50% marginal cash deposit demanded intermittently fell. Due to the heavy downpour, the water in the reservoir of the Angat Dam was rising perilously at the rate of
by the bank, then the letter of credit would have been approved, opened and released as early as August 4, 1952. sixty (60) centimeters per hour. To prevent an overflow of water from the dam, since the water level had reached the danger
height of 212 meters above sea level, the defendant corporation caused the opening of the spillway gates.
The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirements of the bank. Its
culpability arises from its willful and deliberate assumption of contractual obligations even as it was well aware of its financial Due to the opening of the spillway, an extraordinary large volume of water rushed out of the gates and caused the materials of
incapacity to undertake the prestation. We base this judgment upon the letter which accompanied the application filed by the Engineering Construction to be lost.
appellant with the bank. In the said accompanying correspondence, appellant admitted and owned that it did "not have sufficient
deposit with your institution (the PNB) with which to cover the amount required to be deposited as a condition for the opening of Issue:
letters of credit. WON the destruction and loss of the ECI's equipment and facilities were due to force majeure – NO
WON NPC is liable for damages – YES
A number of logical inferences may be drawn from the aforementioned admission. First, that the appellant knew the bank
requirements for opening letters of credit; second, that appellant also knew it could not meet those requirement. When, therefore, Ratio:
despite this awareness that was financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 NPC was undoubtedly negligent because it opened the spillway gates of the Angat Dam only at the height of typhoon "Welming"
of the contract to pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be similarly held when it knew very well that it was safer to have opened the same gradually and earlier, as it was also undeniable that NPC knew
to have bound itself to answer for all and every consequences that would result from the representation. of the coming typhoon at least four days before it actually struck. And even though the typhoon was an act of God or what we
may call force majeure, NPC cannot escape liability because its negligence was the proximate cause of the loss and damage.
Having called for bids for the importation of rice involving millions, it should have a certained its ability and capacity to comply
with the inevitably requirements in cash to pay for such importation. Having announced the bid, it must be deemed to have Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or
impliedly assured suppliers of its capacity and facility to finance the importation within the required period, especially since it had violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code, which
imposed the supplier the 90-day period within which the shipment of the rice must be brought into the Philippines. Having entered results in loss or damage, the obligor cannot escape liability.
in the contract, it should have taken steps immediately to arrange for the letter of credit for the large amount involved and inquired
into the possibility of its issuance. The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence
of nature and human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the
Under Article (1170) of the Civil Code, not only debtors guilty of fraud, negligence or default in the performance of obligations a cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active
decreed liable; in general, every debtor who fails in performance of his obligations is bound to indemnify for the losses and intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it was, and removed from the rules
damages caused thereby. The phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
the strict and faithful fulfillment of the obligation or every kind or defective performance.

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the originally contracted LEGASPI OIL V. CA, 224 SCRA 213
Burmese rice amounted to a waiver by the appellee of whatever rights she might have derived from the breach of the contract.
We disagree. Waivers are not presumed, but must be clearly and convincingly shown, either by express stipulation or acts Facts:
admitting no other reasonable explanation. In the case at bar, no such intent to waive has been established. Respondent Bernard Oseraos, acting through his authorized agents, had several transactions with Legaspi Oil Co. for the sale
of copra to the latter. The price at which Oseraos (appellant) sells the copra depends on the prevailing market price when the
contract is entered into. One of his authorized agents, Jose Llover, had previous transactions with Legaspi Oil (appellee) for the
TELEFAST V. CASTRO, 158 SCRA 445 sale and delivery of copra. The records show that he concluded 2 sales: 1) 70 tons of copra at P95.00 per 100 kilos; and 2) 30
tons of P102.00 per 100 kilos. Later on, another designated agent signed a contract in behalf of appellant for the sale of 100
Facts: tons of copra at P79.00 per 100 kilos with the delivery terms of 25 days effective December 15, 1975. At this point, it must be
Consolacion Bravo-Castro, died on 2 November 1956. Her daughter, respondent Sofia Crouch, was on vacation in the noted that the price of copra had been fluctuating (going up and down), indicating its unsteady position in the market.
Philippines, addressed a telegram announcing Consolacion’s death to the rest of the respondents (her father and her siblings)
in Indiana, USA, through petitioner’s Dagupan office, which accepted it after payment of fees or charges by Sofia. However, On February 16, 1976, appellant's agent Jose Llover signed a contract for the sale of 100 tons of copra at P82.00 per 100 kilos
only Sofia was present during Consolacion’s burial. Upon her return to the USA, Sofia discovered that the telegram has not with delivery terms of 20 days effective March 8, 1976. As compared to appellant's transaction on November 6, 1975, the current
been received by her family, prompting respondents to file an action for damages against petitioner. The latter interposed the price agreed upon is slightly higher than the last contract. In all these contracts though, the selling price had always been stated
defense that its failure to transmit the telegram is due to "technical and atmospheric factors beyond its control," without adducing as "total price" rather than per 100 kilos. However, the parties had understood the same to be per 100 kilos in their previous
any additional evidence showing that petitioner made any attempt to advise respondent Sofia about the reason why it could not transactions.
transmit the telegram. The CFI awarded compensatory, moral and exemplary damages to respondents, as well as attorney’s

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
After the period to deliver had lapsed, appellant sold only 46,334 kilos of copra thus leaving a balance of 53,666 kilos.
Accordingly, letter demands were made upon appellant to deliver the balance with a final warning that failure to deliver will mean To be able to pay the loan, the spouses applied for a loan from Philippine National Bank and was granted on July 8, 1989, on
cancellation of the contract, the balance to be purchased at open market and the price differential to be charged against the condition that the existing mortgage would be cancelled so the land could be used as security for the new loan under a new
appellant. On October 22, 1976, since there was still no compliance, Legaspi Oil exercised its option under the contract and mortgage contract.
purchased the undelivered balance from the open market at the prevailing price of P168.00 per 100 kilos, or a price differential
of P86.00 per 100 kilos, a net loss of P46,152.76 chargeable against appellant. Legaspi Oil then filed a complaint against On July 16, 1989, Manuel went to the house of MTLC’s President (Ester Servacio) and informed her that payment for the loan
Oseraos for breach of a contract and for damages. The CFI rendered a decision holding Oseraos liable for damages. Oseraos was ready at PNB. Ester then proceeded to the bank but was informed by them that Manuel had no pending loan application
appealed to respondent Court which thereafter rendered a reversal decision, ordering the dismissal of the complaint. Hence, with them.
this petition for certiorari.
On July 20, 1989, Manuel executed a Special Power of Attorney authorizing Ester to collect the proceeds of his PNB loan. This
Issue: time when Ester returned to the bank the officers told her that there was indeed a loan for P1.3 million and that the proceeds
Whether or not private respondent Oseraos is liable for damages arising from fraud or bad faith in deliberately breaching the were hers as long as she signed a deed of release/cancellation of mortgage. Outraged that the spouses Go Cinco used the
contract of sale entered into by the parties. same properties mortgaged to MTLC as collateral for the PNB loan, Ester refused to sign the deed and did not collect the P1.3
Million loan proceeds.
Held:
Yes, Oseraos is liable for breach of contract. Petition is granted. On July 24, 1989 Ester instituted foreclosure proceedings against the spouses Go Cinco while the latter filed an action for specific
performance, damages, and preliminary injuction in the RTC of Maasin.
Rationale:
Oseraos is guilty of fraud in the performance of his obligation under the sales contract whereunder he bound himself to deliver RTC ruled in favor of spouses Go Cinco finding that Ester unjusty refused to collect the amount. On appeal the CA reversed the
to petitioner 100 metric tons of copra within twenty (20) days. Within the delivery period, Oseraos delivered only 46,334 kilograms RTC. Hence, the instant petition for review on certiorari.
of copra to petitioner, leaving an undelivered balance of 53,666 kilograms. Despite the demands made by Legaspi Oil, Oseraos
was unable to comply, forcing petitioner to buy on the open market at a much higher price. Under the foregoing undisputed Issue:
circumstances, the actuality of private respondent's fraud cannot be gainsaid. W/N the loan to MTLC was extinguished through payment or performance.

In general, fraud may be defined as the voluntary execution of a wrongful act, or a wilfull omission, knowing and Held:
intending the effects which naturally and necessarily arise from such act or omission; the fraud referred to in Article YES. PETITION Granted.
1170 of the Civil Code of the Philippines is the deliberate and intentional evasion of the normal fulfillment of obligation;
it is distinguished from negligence by the presence of deliberate intent, which is lacking in the latter. The conduct of private Rationale:
respondent clearly manifests his deliberate fraudulent intent to evade his contractual obligation for the price of copra had in the While Ester’s refusal was unjustified and unreasonable, Manuel’s position that this refusal had the effect of payment that
meantime more than doubled from P82.00 to P168 per 100 kilograms. Under Article 1170 of the Civil Code of the Philippines, extinguished his obligation to MTLC is wrong because a refusal without just cause is not equivalent to payment; to have the
those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene effect of payment and the consequent extinguishment of the obligation to pay, the law requires the companion acts of tender of
the tenor thereof, are liable for damages. Pursuant to said article, private respondent is liable for damages. payment and consignation. Article 12561 is clear and unequivocal on this point.

In case of fraud, bad faith, malice, or wanton attitude, the guilty party is liable for all damages which may be reasonably Nevertheless, the spouses Go Cinco duly established that they have legitimately secured a means of paying off their loan with
attributed to the non performance of the obligation. Article 1101 of the old Civil Code, later to be reproduced as Article 1170 MTLC; they were only prevented from doing so by the unjust refusal of Ester to accept the proceeds of the PNB loan through
of our present Civil Code, was the basis of our decision in an old case, Acme Films, Inc. vs. Theaters Supply Corporation, her refusal to execute the release of the mortgage on the properties mortgaged to MTLC.
wherein we held:
In the present case, Manuel sought to pay Ester by authorizing her, through an SPA, to collect the proceeds of the PNB loan –
It is not denied that the plaintiff company failed to supply the defendant with the cinematographic films which an act that would have led to payment if Ester had collected the loan proceeds as authorized. Admittedly, the delivery of the
were the subject matter of the contracts entered into on March 20, 1934, and two films under the contract of SPA was not, strictly speaking, a delivery of the sum of money due to MTLC, and Ester could not be compelled to accept it as
March 24, 1934, one of said films being a serial entitled "Whispering Shadow". Guillermo Garcia Bosque testified payment based on Article 1233. Nonetheless, the SPA stood as an authority to collect the proceeds of the already-approved
that because the plaintiff company had failed to supply said films, the defendants had to resort to the Universal PNB loan that, upon receipt by Ester, would have constituted as payment of the MTLC loan. Had Ester presented the SPA to
Pictures Corporation and ask for films to replace those which said plaintiff had failed to supply under the contract, the bank and signed the deed of release/cancellation of mortgage, the delivery of the sum of money would have been effected
having had to pay therefor five per cent more than for those films contracted with said plaintiff Acme Films, Inc., and the obligation extinguished. Since payment was available and was unjustifiably refused, justice and equity demand that the
and that the total cost thereof, including the printing of programs, posters paraded through the streets with bands spouses Go Cinco be freed from the obligation to pay interest on the outstanding amount from the time the unjust refusal took
of music to announce the showing of the films which the plaintiff company failed to supply, amount to from P400 place.
to P550. The plaintiff company did not submit evidence to rebut the testimony of said witness and the fact that
the estimate of the expenses is approximate does not make said estimate inadmissible. It was incumbent upon
the plaintiff company to submit evidence in rebuttal, or at least ascertain the amount of the different items in RCBC V. CA, 305 SCRA 449
cross-examination. There being no evidence to the contrary, it is logical to admit that the defendant company
spent at least the sum of P400. Inasmuch as the plaintiff company had failed to comply with a part of its booking DOCTRINE
contract, and as the defendant company had suffered damages as a result thereof, the former is liable to Article 1170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable for
indemnify the damages caused to the latter, in accordance with the provisions of Article 1101 of the Civil Code. damages. The delay in the performance of the obligation, however, must be either malicious or negligent. Thus, assuming that
private respondent was guilty of delay in the payment of the value of the unsigned check, private respondent cannot be held
liable for damages. There is no imputation, much less evidence, that private respondent acted with malice or negligence in failing
GO V. CA, 272 SCRA 752 to sign the check. Indeed, we agree with the Court of Appeals finding that such omission was mere inadvertence on the part of
private respondent. Toyota salesperson Jorge Geronimo testified that he even verified whether private respondent had signed
Doctrine: all the checks and in fact returned three or four unsigned checks to him for signing.
Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.—In this regard, Article 1170 of the Civil Code provides that “those who in FACTS:
the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the tenor Private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, Inc. for which he made a down payment
thereof, are liable for damages.” In the instant case, petitioners and private respondents entered into a contract whereby, for a and thus issued 24 postdated checks. To secure the balance, private respondent executed a promissory note and a contract of
fee, the former undertook to cover the latter’s wedding and deliver to them a video copy of said event. For whatever reason, chattel mortgage over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel mortgage, in paragraph 11 thereof,
petitioners failed to provide private respondents with their tape. Clearly, petitioners are guilty of contravening their obligation to provided for an acceleration clause stating that should the mortgagor default in the payment of any installment, the whole amount
s aid private respondents and are thus liable for damages. remaining unpaid shall become due. In addition, the mortgagor shall be liable for 25% of the principal due as liquidated damages.

Facts: Toyota Shaw, Inc. thereafter assigned all its rights and interests in the chattel mortgage to petitioner (RCBC).
Manuel Cinco obtained a commercial loan for P700,000.00 from Maasin Traders Lending Corp. (MTLC) evidenced by a
promissory note dated Dec. 11, 1987 and secured it by way of a real estate mortgage over his conjugal land and four storey All the checks were thereafter encashed and debited by RCBC from private respondent's account, except for RCBC Check No.
building in Maasin, Southern Leyte. The terms for payment imposed a 3%-36% per annum interest rate on the principal and was 279805 representing the payment for August 10, 1991, which was unsigned. Because of the recall, the last two checks, dated
payable within a term of 180 days or 6 months, renewable for another 180 days. As of July 16, 1989, Manuel’s outstanding February 10, 1993 and March 10, 1993, were no longer presented for payment.
obligation ammounted to P1,071, 256.66.

1
Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be
released from responsibility by the consignation of the thing or sum due.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
On the theory that respondent defaulted in his payments, the check representing the payment for August 10, 1991 being
unsigned, petitioner demanded from private respondent the payment of the balance of the debt, including liquidated Petitioner bank claimed that there are no funds on the RBPG account to pay for the checks issued. (Apparently, there is
damages. The latter refused, prompting petitioner to file an action for replevin and damages before the RTC. Private inadvertence on the part of the petitioner’s messenger to relay the advice of the Central Bank extending the P304,000 credit
respondent, in his Answer, interposed a counterclaim for damages. memo in favor of RBPG.)

The RTC dismissed the complaint for lack of cause of action which decision was affirmed by the CA thus: ISSUE:
Whether petitioner should be held liable for damages.
Plaintiff-appellant's imputation of default to defendant-appellee rested solely on the fact that the 5th check issued by appellee xxx
was recalled for lack of signature. However, the check was recalled only after the amount covered thereby had been deducted HELD:
from defendant-appellee's account, as shown by the testimony of plaintiff's own witness. The "default" was therefore not a case YES. As borne out by the records, the dishonoring of the respondent’s checks committed through negligence by the petitioner
of failure to pay, the check being sufficiently funded, and which amount was in fact already debitted [sic] from appellee's account bank on April 6, 1982 was rectified only on April 15, 1992 or nine (9) days after receipt of the credit memo. Clearly, petiti oner
by the appellant bank which subsequently re-credited the amount to defendant-appellee's account for lack of signature. bank was remiss in its duty and obligation to treat private respondents’ account with the highest degree of care, considering the
fiduciary nature of their relationship.
Clearly, appellant bank was remiss in the performance of its functions for it could have easily called the defendant's attention to
the lack of signature on the check and sent the check to, or summoned, the latter to affix his signature. The bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of
a few hundred pesos or of millions. It must bear the blame for failing to discover the mistake of its employee despite the
Here, the terms of paragraph 11 of the Chattel Mortgage Contractare clear. Said paragraph states: established procedure requiring bank papers to pass through bank personnel whose duty it is to check and countercheck them
for possible errors. Responsibility arising from negligence in the performance of every kind of obligation is demandable. While
11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest that may be due as provided in the said the bank’s negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety,
promissory note, the whole amount remaining unpaid therein shall immediately become due and payable and the mortgage on embarrassment and humiliation to private respondents for which they are entitled to recover reasonable moral damages.
the property (ies) herein-above described may be foreclosed by the MORTGAGEE, or the MORTGAGEE may take any other
legal action to enforce collection of the obligation hereby secured, and in either case the MORTGAGOR further agrees to pay There is no merit in petitioner’s argument that it should not be considered negligent, much less be held liable for damages on
the MORTGAGEE an additional sum of 25% of the principal due and unpaid, as liquidated damages, which said sum shall account of the inadvertence of its bank employee as Article 1173 of the Civil Code only requires it to exercise the diligence of a
become part thereof. The MORTGAGOR hereby waives reimbursement of the amount heretofore paid by him/it to the good pater familias.
MORTGAGEE.

Petitioner claims that private respondent's check representing the fifth installment was "not encashed,” such that the installment MITSUBISHI V. MITSUBISHI, 698 SCRA 599 [2013]
for August 1991 was not paid. By virtue of paragraph 11 above, petitioner submits that it "was justified in treating the entire DOCTRINE
balance of the obligation as due and demandable." Despite demand by petitioner, however, private respondent refused to pay As part of American personal injury law, the collateral source rule was originally applied to tort cases wherein the defendant is
the balance of the debt. Petitioner, in sum, imputes delay on the part of private respondent. prevented from benefitting from the plaintiff’s receipt of money from other sources. Under this rule, if an injured person receives
compensation for his injuries from a source wholly independent of the tortfeasor, the payment should not be deducted from the
ISSUE: damages which he would otherwise collect from the tortfeasor. In a recent Decision by the Illinois Supreme Court, the rule has
W/N RCBC is justified in treating the entire balance of the obligation as due and demandable under par.11 of the chattel been described as „an established exception to the general rule that damages in negligence actions must be compensatory.
mortgage because the 5th check was an unsigned check? The Court went on to explain that although the rule appears to allow a double recovery, the collateral source will have a lien or
subrogation right to prevent such a double recovery.
HELD: NO.
Article 1170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable In Mitchell v. Haldar, 883 A.2d 32, 37-38 (Del. 2005), the collateral source rule was rationalized by the Supreme Court of
for damages. The delay in the performance of the obligation, however, must be either malicious or negligent. Thus, Delaware: The collateral source rule is predicated on the theory that a tortfeasor has no interest in, and therefore no right to
assuming that private respondent was guilty of delay in the payment of the value of the unsigned check, private respondent benefit from monies received by the injured person from sources unconnected with the defendant. According to the collateral
cannot be held liable for damages. There is no imputation, much less evidence, that private respondent acted with malice or source rule, a tortfeasor has no right to any mitigation of damages because of payments or compensation received by the injured
negligence in failing to sign the check. Indeed, we agree with the Court of Appeals' finding that such omission was mere person from an independent source. The rationale for the collateral source rule is based upon the quasi-punitive nature of tort
"inadvertence" on the part of private respondent. law liability. It has been explained as follows: The collateral source rule is designed to strike a balance between two competing
principles of tort law: (1) a plaintiff is entitled to compensation sufficient to make him whole, but no more; and (2) a defendant is
Even when the checks, were delivered to petitioner, it did not object to the unsigned check. In view of the lack of malice or liable for all damages that proximately result from his wrong. A plaintiff who receives a double recovery for a single tort enjoys a
negligence on the part of private respondent, petitioner's blind and mechanical invocation of paragraph 11 of the windfall; a defendant who escapes, in whole or in part, liability for his wrong enjoys a windfall. Because the law must sanction
contract of chattel mortgage was unwarranted. one windfall and deny the other, it favors the victim of the wrong rather than the wrongdoer. Thus, the tortfeasor is required to
bear the cost for the full value of his or her negligent conduct even if it results in a windfall for the innocent plaintiff. (Citations
Petitioner’s conduct, in the light of the circumstances of this case, can only be described as mercenary. Petitioner had already omitted)
debited the value of the unsigned check from private respondent's account only to re-credit it much later to him. Thereafter,
petitioner encashed checks subsequently dated, then abruptly refused to encash the last two. More than a year after the date As seen, the collateral source rule applies in order to place the responsibility for losses on the party causing them. Its application
of the unsigned check, petitioner, claiming delay and invoking paragraph 11, demanded from private respondent payment of the is justified so that „the wrongdoer should not benefit from the expenditures made by the injured party or take advantage of
value of said check and. that of the last two checks, including liquidated damages. As pointed out by the trial court, this whole contracts or other relations that may exist between the injured party and third persons.‰ Thus, it finds no application to cases
controversy could have been avoided if only petitioner bothered to call up private respondent and ask him to sign the involving no-fault insurances under which the insured is indemnified for losses by insurance companies, regardless of who was
check. Good faith not only in compliance with its contractual obligations, but also in observance of the standard in human at fault in the incident generating the losses. Here, it is clear that MMPC is a no-fault insurer. Hence, it cannot be obliged to pay
relations, for every person "to act with justice, give everyone his due, and observe honesty and good faith." behooved the bank the hospitalization expenses of the dependents of its employees which had already been paid by separate health insurance
to do so. providers of said dependents.

Failing thus, petitioner is liable for damages caused to private respondent. Article 1173

Article 1172 Article 1173. The fault or negligence of the obligor consists in the omission of that diligence which
is required by the nature of the obligation and corresponds with the circumstances of the persons, of
Article 1172. Responsibility arising from negligence in the performance of every kind of obligation is the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201,
also demandable, but such liability may be regulated by the courts, according to the circumstances. paragraph 2, shall apply.
(1103)
If the law or contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required. (1104a)
METROBANK V. CA, 237 SCRA 761 JIMENEZ V. CITY OF MANILA, 150 SCRA 510
FACTS:
Isabel Katigbak was the president and director of the Rural Bank of Padre Garcia (RBPG), owning up to 65% of the shares FACTS
thereof. Petitioner bank received a credit memo from the Central Bank that its demand deposit account was credited with  Jimenez went to the market to buy bagoong at the time when it was flooded with ankle deep rainwater. On his way home, he
P304,000 for the account of RBPG. Katigbak issued two checks from the said account amounting to P25,000 each. When the stepped on an uncovered opening which could not be seen because of the dirty rainwater, causing a dirty and rusty four-
checks were presented for clearing, they were returned with the annotation “DAIF – TNC” (Drawn Against Insufficient Funds – inch nail, stuck inside the uncovered opening, to pierce the left leg of plaintiff-petitioner penetrating to a depth of about
Try Next Clearing), they were redeposited later on but was likewise dishonored. One of the payees (Dr. Felipe Roque) demanded one and a half inches. First aid was first administered to him but the swelling did not stop. He was then rushed to the
payment for the dishonored check, to which Antonio Katigbak, an officer of RBPG paid P50,000. Katigbak had to cut her vacation Hospital where he had to be confined for twenty (20) days due to high fever and severe pain.
short to attend to the matter, to which she received insulting replies from officers of petition bank (ex. Bakit kayo nag-issue ng
tseke na wala namang pondo, Three Hundred Thousand na.)
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
 Upon his discharge from the hospital, he had to walk around with crutches for fifteen (15) days. His injury prevented him from Article 1174
attending to the school buses he is operating. As a result, he had suffered damages.
 Petitioner sued for damages the City of Manila and the Asiatic Integrated Corporation under whose administration the Article 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
Sta. Ana Public Market had been placed by virtue of a Management and Operating Contract. stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be
 City of Manila maintains that it cannot be held liable for the injuries sustained by the petitioner because under the responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.
Management and Operating Contract, Asiatic Integrated Corporation assumed all responsibility for damages which may (1105a)
be suffered by third persons for any cause attributable to it. Manila argued that
o It cannot be held liable under RA 409 (Revised Charter of Manila) which provides: “The City shall not be liable or
held for damages or injuries to persons or property arising from the failure of the Mayor, the Municipal Board, NAKPIL & SONS V. CA, 144 SCRA 596; 160 SCRA 334
or any other City Officer, to enforce the provisions of this chapter, or any other law or ordinance, or from Facts:
negligence of said Mayor, Municipal Board, or any other officers while enforcing or attempting to enforce said (3 Consolidated Cases of Philippine Bar Association, United Construction and Juan F. Nakpil & Sons).
provisions.”
o Jimenez should not have gone to the market during a stormy weather, so he was also negligent. Philippine Bar Association decided to contract an office building, the construction of which was undertaken by United
 RTC: both Manila and Asiatic Corp solidarily liable. Construction Inc. the plans and specifications for the building were prepared by Juan F. Nakpil & Sons. The building was
 CA: Modified RTC decision. Only Asiatic Integrated Corp is solely liable for damages and attorney’s fees. City of Manila is completed in 1966.
NOT solidarily liable with it.
In 1968, an unusually strong earthquake hit Intramuros, Manila. The building sustained major damage, causing it to tilt forward
ISSUE: dangerously and collapse onto its side. As a remedial measure, the building was shored up by United Construction.
WON City of Manila should be solidarily liable with Asiatic Integrated Corp for the injuries petitioner suffered?
Philippine Bar Association filed a complaint for damages against United Construction and Juan F. Nakpil & Sons for the partial
HELD collapse of the building, arguing that the defects in the construction, failure of the contractors to follow the specifications and
YES, solidarily liable. violation of the contract caused the damage to the building.
 SC in City of Manila v. Teotico said that RA 409 only establishes a general rule regulating the liability of the City of Manila for
"damages or injury to persons or property arising from the failure of city officers" to enforce the provisions of said Act, "or The commissioner appointed by the trial court reported that the damages sustained by the building was directly caused by both
any other law or ordinance or from negligence" of the City "Mayor, Municipal Board, or other officers while enforcing or the earthquake and defects in the plans and specifications of the contractors, architects and owners. The TC decided to make
attempting to enforce said provisions." United Construction and Juan F. Nakpil & Sons liable for the damages. The CA affirmed the decision but lowered the award of
 Upon the other hand, Article 21892 of the Civil Code constitutes a particular prescription making "provinces, cities and damages. All parties appealed the decision to the SC.
municipalities ... liable for damages for the death of, or injury suffered by any person by reason" — specifically — "of the
defective condition of roads, streets, bridges, public buildings, and other public works under their control or supervision." (During the case, it was further it by 2 more earthquakes which led to its eventual demolition)
 the Charter of Manila refers to liability arising from negligence, in general, regardless of the object, thereof, while Article 2189
of the Civil Code governs liability due to "defective streets, public buildings and other public works" in particular and is Issue:
therefore decisive on this specific case. Whether or not an act of God hich caused the failure of the building, exempts from liability, parties who are otherwise liable
 under Article 2189 of the Civil Code, it is not necessary for the liability therein established to attach, that the defective public because of their negligence. (It does not exempt the parties)
works belong to the province, city or municipality from which responsibility is exacted. What said article requires is that
the province, city or municipality has either "control or supervision" over the public building in question. Rationale:
The general rule is that no person shall be responsible for events which could not be foreseen or which though foreseen, were
 In the case at bar, the Sta. Ana Public Market, despite the Management and Operating Contract between respondent City
inevitable.
and Asiatic Integrated Corporation remained under the control of the former.
o It was expressly indicated in the contract that activities for the market (eg. Reconstruction, hiring and discharge of
An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention, which
emloyees) shall be subject to prior approval of the City of Manila.
by no amount of foresight, pains or care, reasonably to have been expected, could have been prevented. There is no dispute
o In the contract, Asia Integrated Corp is also required to report on the activities and operation of the public market.
that the earthquake of August 2, 1968 is a fortuitous event or an act of God.
o This fact of supervision and control of the City over subject public market was also admitted by the Mayor
o In fact, the City of Manila employed a market master for the Sta. Ana Public Market whose primary duty is to take
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of God," the
direct supervision and control of that particular market, more specifically, to check the safety of the place for
following must concur:
the public.
(a) the cause of the breach of the obligation must be independent of the will of the debtor;
o The city charter also specified that The treasurer shall exercise direct and immediate supervision administration
(b) the event must be either unforseeable or unavoidable;
and control over public markets.
(c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and
 it is an error for the trial court to attribute the negligence to Jimenez.
(d) the debtor must be free from any participation in, or aggravation of the injury to the creditor.
 As a defense against liability on the basis of a quasi-delict, one must have exercised the diligence of a good father of a family.
(Art. 1173 of CC). Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or
 It is the duty of the City to exercise reasonable care to keep the public market reasonably safe for people going to the market. violation or contravention in any manner of the tenor of the obligation, which results in loss or damage, the obligor cannot escape
 While it may be conceded that the fulfillment of such duties is extremely difficult during storms and floods, it must however, liability.
be admitted that ordinary precautions could have been taken during good weather to minimize the dangers to life and
limb under those difficult circumstances. The negligence of the United Construction and Juan F. Nakpil & Sons was established beyond dispute both in the lower court
o Eg: drainage hole could have been placed under the stalls instead of on the passage ways, should have seen to it and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made substantial deviations
that openings were covered from the plans and specifications. and to have failed to observe the requisite workmanship in the construction as well as to
 Sadly, the evidence indicates that long before petitioner fell into the opening, it was already uncovered, and five (5) months exercise the requisite degree of supervision; while the Juan F. Nakpil & Sons were found to have inadequacies or defects in the
after the incident happened, the opening was still uncovered. Moreover, while there are findings that during floods the plans and specifications prepared by them. As correctly assessed by both courts, the defects in the construction and in the plans
vendors remove the iron grills to hasten the flow of water, there is no showing that such practice has ever been prohibited, and specifications were the proximate causes that rendered the PBA building unable to withstand the earthquake in 1968. For
much less penalized by the City of Manila. Neither was it shown that any sign had been placed thereabouts to warn this reason the defendant and third-party defendants cannot claim exemption from liability.
passersby of the impending danger.
 To recapitulate, it appears evident that the City of Manila is likewise liable for damages under Article 2189 of the Civil Code, It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and on this court unless it falls
respondent City having retained control and supervision over the Sta. Ana Public Market and as tort-feasor under Article upon one of the exemptions. It is evident that the case at bar does not fall under any of the exceptions The records show that
2176 of the Civil Code on quasi-delicts the lower court spared no effort in arriving at the correct appreciation of facts by the referral of technical issues to a Commissioner
 Petitioner had the right to assume that there were no openings in the middle of the passageways and if any, that they were chosen by the parties whose findings and conclusions remained convincingly unrebutted by the intervenors/amicus curiae who
adequately covered. Had the opening been covered, petitioner could not have fallen into it. Thus the negligence of the were allowed to intervene in the Supreme Court.
City of Manila is the proximate cause of the injury suffered, the City is therefore liable for the injury suffered by the peti- 4
petitioner. One who negligently creates a dangerous condition cannot escape liability for the natural and probable consequences thereof,
 Respondent City of Manila and Asiatic Integrated Corporation being joint tort-feasors are solidarily liable under Article 2194 although the act of a third person, or an act of God for which he is not responsible, intervenes to precipitate the loss.
of the Civil Code.

2
“Provinces, cities and municipalities shall be liable for damages for the death of, or injuries suffered by any person by
reason of defective conditions of roads, streets, bridges, public buildings and other public works under their control or
supervision.”
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
The destruction was not purely an act of God. Truth to tell hundreds of ancient buildings in the vicinity were hardly affected by
the earthquake. Only one thing spells out the fatal difference; gross negligence and evident bad faith, without which the damage
would not have occurred. BACHELOR EXPRESS V. CA, 188 SCRA 216

FACTS:
QUISUMBING V. CA, 189 SCRA 605 On August 1, 1980, Bus No. 800 owned by Bachelor Express, Inc. and driven by Cresencio Rivera was the situs of a stampede
which resulted in the death of passengers Ornominio Beter and Narcisa Rautraut.
Facts:
Norberto Quisumbing, Sr. and Gunther Loeffler were among the passengers of PAL’s Fokker ‘Friendship’ PIC-536 plane in its The evidence shows that the bus came from Davao City on its way to Cagayan de Oro City passing Butuan City; that while at
flight of 6 November 1968 which left Mactan City at about 7:30 in the evening with Manila for its destination. After the plane had Tabon-Tabon, Butuan City, the bus picked up a passenger; that about fifteen (15) minutes later, a passenger at the rear portion
taken off, Florencio O. Villarin, a Senior NBI Agent who was also a passenger of the said plane, noticed a certain ‘Zaldy,’ a suddenly stabbed a PC soldier which caused commotion and panic among the passengers; that when the bus stopped,
suspect in the killing of Judge Valdez, seated at the front seat near the door leading to the cockpit of the plane. A check by passengers Ornominio Beter and Narcisa Rautraut were found lying down the road, the former already dead as a result of head
Villarin with the passenger’s ticket in the possession of flight Stewardess Annie Bontigao, who was seated at the last seat right injuries and the latter also suffering from severe injuries which caused her death later. The passenger assailant alighted from
row revealed that ‘Zaldy’ had used the name ‘Cardente,’ one of his aliases known to Villarin. Villarin also came to know from the the bus and ran toward the bushes but was killed by the police.
stewardess that ‘Zaldy had three companions on board the plane.
Thereafter, the heirs of the deceased, private respondents herein, filed a complaint for "sum of money" against Bachelor Express,
V i l l a r i n t h e n scribbled a note addressed to the pilot of the plane requesting the latter to contact NBI duty agents in Manila for Inc. its alleged owner Samson Yasay and the driver Rivera.
the said agents to ask the Director of the NBI to send about 6 NBI agents to meet the plane because the
suspect in the killing of Judge Valdez was on board. The said note was handed by Villarin to the stewardess who in turn gave The petitioners denied liability alleging that the driver was able to transport his passengers safely to their respective places of
the same in the pilot. After receiving the note, the pilot of the plane, Capt. Luis Bonnevie, Jr., came out of the cockpit and sat destination except Ornominio Beter and Narcisa Rautraut who jumped off the bus without the knowledge and consent, much
beside Villarin at the rear portion of the plane and explained that he could not send the message because it would be heard by less, the fault of the driver and conductor and the defendants in this case; the defendant corporation had exercised due diligence
all ground air craft stations. Villarin, however, told the pilot of the danger of commission of violent acts on board the plane by the in the choice of its employees to avoid as much as possible accidents; the incident was not a traffic accident or vehicular accident;
notorious ‘Zaldy’ and his three companions. it was an incident or event very much beyond the control of the defendants; defendants were not parties to the incident
complained of as it was an act of a third party who is not in any way connected with the defendants and of which the latter have
Soon thereafter an exchange of gunshots ensued between Villarin and ‘Zaldy’ and the latter’s companions. ‘Zaldy’ announced no control and supervision; ..."
to the passengers and the pilots in the cockpit that it was hold-up and ordered the pilot not to send any SOS. The hold-uppers
divested the passengers of their belongings. Specifically, Norberto Quisumbing, Sr. and Gunther Loeffler were divested of Lower court dismissed the complaint, CA reversed finding appellees jointly and solidarily liable
valuables. As a result of the incident, Quisumbing, Sr. suffered shock, because a gun had been pointed at him by one of the
hold-uppers. Upon landing at the Manila International Airport, Zaldy and his three companions succeeded in escaping. ISSUE:
WON the deaths of the two passengers were due to a fortuitous event hence Bachelor Express should not be liable? NO.
Demands were thereafter made on PAL by Quisumbing and Loeffler “to indemnify them on their loss, but PAL refused averring
that it is not liable to them in law or in fact. Quisumbing and Loeffler brought suit against PAL in the CFI of Rizal, to recover the RATIO:
value of the property lost by them to the robbers as well as moral and exemplary damages, attorney’s fees and expenses of There is no question that Bachelor Express, Inc. is a common carrier. Hence, from the nature of its business and for reasons of
litigation. public policy Bachelor Express, Inc. is bound to carry its passengers safely as far as human care and foresight can provide using
the utmost diligence of very cautious persons, with a due regard for all the circumstances.
After trial, the CFI rendered judgment dismissing Quisumbing’s and Loeffler’s complaint withcosts against them. Quisumbing and In the case at bar, Beter and Rautraut were passengers of a bus belonging to petitioner Bachelor Express, Inc. and, while
Loeffler appealed to the Court of Appeals. The Court affirmed the trial court’s judgment. Insisting that the evidence demonstrates passengers of the bus, suffered injuries which caused their death. Consequently, pursuant to Article 1756 of the Civil Code,
negligence on the part of the PAL crew “occurring before and exposing them to hijacking,” Quisumbing and Loeffler have come petitioner Bachelor Express, Inc. is presumed to have acted negligently unless it can prove that it had observed extraordinary
up to the Supreme Court praying that the judgments of the trial Court and the Court of Appeals be reversed and another rendered diligence in accordance with Articles 1733 and 1755 of the New Civil Code.
in their favor. The Supreme Court denied the petition, and affirmed the appealed Decision of the Court of Appeals, with costs
against Quisumbing and Loeffler. Bachelor Express, Inc. denies liability for the death of Beter and Rautraut on its posture that the death of the said passengers
was caused by a third person who was beyond its control and supervision. In effect, the petitioner, in order to overcome the
1.Modern display of irresistible force by hijackers presumption of fault or negligence under the law, states that the vehicular incident resulting in the death of passengers Beter
The hijackers do not board an airplane through a blatant display of firepower and violent fury. Firearms, hand-grenades, and Rautraut was caused by force majeure or caso fortuito over which the common carrier did not have any control.
dynamite, and explosives are introduced into the airplane surreptitiously and with the utmost cunning and stealth, although there
is an occasional use of innocent hostages who will be coldly murdered unless a plane is given to the hijackers’ complete disposal. Article 1174 of the present Civil Code states:
The objective of modern-day hijackers is to display the irresistible force amounting to force majeure only when it is most effective Except in cases expressly specified by law, or when it is otherwise declared by stipulations, or when the nature of the obligation
and that is when the jetliner is winging its way at Himalayan altitudes and ill-advised heroics by either crew or passengers would requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which though
send the multi-million peso airplane and the priceless lives of all its occupants into certain death and destruction. foreseen, were inevitable.

2. Security measures may minimize hijackings but may prove ineffective against truly determined hijackers In the case of Lasam v. Smith (45 Phil. 657 [1924]), we defined "events" which cannot be foreseen and which, having been
The mandatory use of the most sophisticated electronic detection devices and magnetometers, the foreseen, are inevitable in the following manner:
imposition of severe penalties, the development of screening procedures, the compilation of hijacker behavioral profiles, the
assignment of sky marshals, and the weight of outraged world opinion may have minimized hijackings but all these ... The Spanish authorities regard the language employed as an effort to define the term 'caso fortuito' and hold that the two
have proved ineffective against truly determined hijackers. World experience shows that if a group of armed hijackers want to expressions are synonymous.
take over a plane in flight, they can elude the latest combined government and airline industry measures. As our own experience
in Zamboanga City illustrates, the use of force to overcome hijackers, results in the death and injury of innocent passengers and The antecedent to Article 1105 is found in Law II, Title 33, Partida 7, which defines caso fortuito as (An event that takes place
crew members. This does not suggest, however, that the Philippine Airlines should not do everything humanly possible to by incident and could not have been foreseen. Examples of this are destruction of houses, unexpected fire, shipwreck, violence
protect passengers from hijackers’ acts. of robbers ...)

3. Acts of airline and crew, while complying with requirements of government agencies, cannot be faulted as Escriche defines caso fortuito as an unexpected event or act of God which could neither be foreseen nor resisted, such as floods,
negligence torrents, shipwrecks, conflagrations, lightning, compulsion, insurrections, destruction of buildings by unforeseen accidents and
Where the airline has faithfully complied with the requirements of government agencies and adhered to the established other occurrences of a similar nature.
procedures and precautions of the airline industry at any particular time, its failure to take
certain steps that a passenger in hindsight believes should have been taken is not the negligence or misconduct which mingles In discussing and analyzing the term caso fortuito the Enciclopedia Juridica Española says: 'In a legal sense and, consequently,
with force majeure as an active and cooperative cause. Herein, the acts of the airline and its crew cannot be faulted as also in relation to contracts, a caso fortuito presents the following essential characteristics: (1) The cause of the unforeseen and
negligence. The hijackers had already shown their willingness to kill one passenger was in fact killed and another survived unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will. (2)
gunshot wounds. The lives of the rest of the passengers and crew were more important than their properties. Cooperation with It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to
the hijackers until they released their hostages at the runway end near the South Superhighway was dictated by the avoid. (3) The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. And
circumstances. (4) the obligor (debtor) must be free from any participation in the aggravation of the injury resulting to the creditor. (5) Enciclopedia
Juridica Española, 309)
4. Under the facts, “the highjacking-robbery was force majeure
The evidence does fail to prove any want of diligence on the part of PAL, or that, more specifically, it had failed to comply with As will be seen, these authorities agree that some extraordinary circumstance independent of the will of the obligor or of hi s
applicable regulations or universally accepted and observed procedures to preclude hijacking; and that the particular acts singled employees, is an essential element of a caso fortuito. ...
out by Quisumbing and Loeffler as supposedly demonstrative of negligence were, in the light of the circumstances of the case,
not in truth negligent acts “sufficient to overcome the force majeure nature of the armed robbery.”
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
The running amuck of the passenger was the proximate cause of the incident as it triggered off a commotion and panic among delivered to ordinary employees and policemen. As it happened, the said notices do not appear to have reached the people
the passengers such that the passengers started running to the sole exit shoving each other resulting in the falling off the bus concerned, which are the residents beside the Angat River. The plaintiffs in this case definitely did not receive any such warning.
by passengers Beter and Rautraut causing them fatal injuries. The sudden act of the passenger who stabbed another passenger Indeed, the methods by which the defendants allegedly sent the notice or warning was so ineffectual that they cannot claim, as
in the bus is within the context of force majeure. they do in their second assignment of error, that the sending of said notice has absolved them from liability.

However, in order that a common carrier may be absolved from liability in case of force majeure, it is not enough that (3) We cannot give credence to petitioners' third assignment of error that the damage caused by the opening of the dam was in
the accident was caused by force majeure. The common carrier must still prove that it was not negligent in causing the the nature of damnum absque injuria, which presupposes that although there was physical damage, there was no legal injury in
injuries resulting from such accident. view of the fortuitous events. There is no question that petitioners have the right, duty and obligation to operate, maintain and
preserve the facilities of Angat Dam, but their negligence cannot be countenanced, however noble their intention may be. The
This principle was reiterated in a more recent case, Batangas Laguna Tayabas Co. v. Intermediate Appellate Court (167 SCRA end does not justify the means, particularly because they could have done otherwise than simultaneously opening the spillways
379 [1988]), wherein we ruled: to such extent. Needless to say, petitioners are not entitled to counterclaim.

... [F]or their defense of force majeure or act of God to prosper the accident must be due to natural causes and exclusively
without human intervention. (Emphasis supplied) NPC V. CA, 223 SCRA 649 [JUNE 1993]

Therefore, the next question to be determined is whether or not the petitioner's common carrier observed extraordinary diligence In our decision in G.R. No. 96410, we ruled that the doctrine laid down in Juan F. Nakpil & Sons vs. Court of Appeals was
to safeguard the lives of its passengers. correctly applied by the appellate court. In the instant case, the respondent Court relied on our 1988 decision in National Power
Corporation vs. Court of Appeals. It must be emphasized that the latter decision applied and reiterated the ruling in the Nakpil
Considering the factual findings of the Court of Appeals-the bus driver did not immediately stop the bus at the height case.
of the commotion; the bus was speeding from a full stop; the victims fell from the bus door when it was opened or gave
way while the bus was still running; the conductor panicked and blew his whistle after people had already fallen off the As we stated in the exordium of this ponencia, petitioners have raised the same issues and defenses as in the other two decided
bus; and the bus was not properly equipped with doors in accordance with law-it is clear that the petitioners have failed cases therein mentioned. Predictably therefore, this petition must perforce be dismissed because the losses and damages
to overcome the presumption of fault and negligence found in the law governing common carriers. sustained by the private respondents had been proximately caused by the negligence of the petitioners, although the typhoon
which preceded the flooding could be considered as a force majeure.
It is the prevailing rule and settled jurisprudence that transportation companies are not insurers of their passengers. The evidence
on record does not show that defendants' personnel were negligent in their duties. The defendants' personnel have every right
to accept passengers absent any manifestation of violence or drunkenness. If and when such passengers harm other SIA V. CA, 222 SCRA 24
passengers without the knowledge of the transportation company's personnel, the latter should not be faulted.
DOCTRINE
However, the petitioners' argument that the petitioners "are not insurers of their passengers" deserves no merit in view of the One liable under a contract of special deposit cannot be exempted from liability under casa fortuito when it aggravated the injury.
failure of the petitioners to prove that the deaths of the two passengers were exclusively due to force majeure and not to the
failure of the petitioners to observe extraordinary diligence in transporting safely the passengers to their destinations as FACTS
warranted by law. CA decision affirmed. Luzan Sia (Sia) deposited his stamp collection in a rented Safety Deposit Box in Security Bank and Trust Co. (bank) Binondo
Branch, under a lease agreement. The box, which was on the lowest level of the safety deposit boxes, was reached by
floodwaters in 1985/86 thereby damaging the stamp collection.
NPC V. CA, 222 SCRA 415 [MAY 1993]
Sia tried to gain compensation from the bank, but the bank refused because (1) under the lease agreement the liability of the
DOCTRINE bank is limited to preventing a third person from opening the box, as the bank is not a depository of the contents of the safe; (2)
When the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by it was a contract of lease, and not of deposit, therefore there was no liability as the floodwaters were beyond the bank’s control,
showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of and there was no duty to notify the depositor.
God, he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned.
Sia filed an action for damages, which was granted by the RTC. The court ruled that the lease contract was a contract of adhesion
FACTS and the bank had failed to exercise the required diligence expected of a bank, and awarded Sia P20,000 in damages.
At the height of the typhoon “Kading”, a flash flood covered the towns near the Angat Dam, causing deaths and destructions to
residents and their properties. Respondents blamed the tragedy to the reckless and imprudent opening of the 3 floodgates by On appeal the CA reversed, ruling that the lease contract governed the parties, that the contract was not one of deposit, that the
petitioner, without prior warning to the residents within the vicinity of the dam. Petitioners denied the allegations and contended limitation of liability under the lease contract was valid, and that there was no evidence to show that the bank failed to exercise
that they have kept the water at a safe level, that the opening of floodgates was done gradually, that it exercises diligence in the the required diligence as the floods were fortuitous events. The CA added that the bank had not aggravated the damaged, but
selection of its employees, and that written warnings were sent to the residents. It further contended that there was no direct even offered to secure the services of an expert to save the stamps, which Sia refused, thus Sia must bear the loss under the
causal relationship between the damage and the alleged negligence on their part, that the residents assumed the risk by living principle of res perit domino.
near the dam, and that what happened was a fortuitous event and are of the nature of damnum absque injuria.
ISSUE/S
Issues: (1) Whether the obligation is one of lease or of deposit?
(2) Whether SBTC bank failed to render the required diligence?
(1) Whether the petitioner can be held liable even though the coming of the typhoon is a fortuitous event (3) Whether the flood was a fortuitous event?
(2) Whether a notice was sent to the residents
(3) Whether the damage suffered by respondents is one of damnum absque injuria HELD
The flood was a fortuitious event but the bank is still liable as it was guilty of negligence.
Held:
(1) A contract for the use of a safe deposit box is a special kind of deposit. The relation between the bank renting out
(1) The obligor cannot escape liability, if upon the happening of a fortuitous event or an act of God, a corresponding fraud, the safe deposit box and the customer is one of bailor and bailee, the bailment being for hire and mutual benefit (Sec. 72, R.A.
negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided in Article 1170 of the Civil 337). The primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds,
Code which results in loss or damage. Even if there was no contractual relation between themselves and private respondents, documents and other valuable objects for safekeeping.
they are still liable under the law on quasi-delict. Article 2176 of the Civil Code explicitly provides "whoever by act or omission
causes damage to another there being fault or negligence is obliged to pay for the damage done." Act of God or force majeure, The depositary’s responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of
by definition, are extraordinary events not foreseeable or avoidable, events that could not be foreseen, or which, though foreseen, the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence,
are inevitable. It is therefore not enough that the event should not have been foreseen or anticipated, as is commonly believed, delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree of
but it must be one impossible to foresee or to avoid. The principle embodied in the act of God doctrine strictly requires that the diligence required, that of a good father of a family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting the
act must be occasioned solely by the violence of nature. Human intervention is to be excluded from creating or entering into the depositary from any liability, arising from the loss of the thing deposited on account of fraud, negligence or delay would be void
cause of the mischief. When the effect is found to be in part the result of the participation of man, whether due to his acti ve for being contrary to law and public policy.
intervention or neglect or failure to act, the whole occurrence is then humanized and removed from the rules applicable to the
acts of God. In the case at bar, although the typhoon "Kading" was an act of God, petitioners can not escape liability because (2) YES. The limitation of liability under the lease agreement is void for being contrary to law and public policy, SBTC
their negligence was the proximate cause of the loss and damage. from any liability for damage, loss or destruction of the contents of the safety deposit box which may arise from its own or its
agents’ fraud, negligence or delay.
(2) The letter itself, addressed merely "TO ALL CONCERNED", would not strike one to be of serious importance, sufficient
enough to set alarm and cause people to take precautions for their safety's sake. The notices were not delivered, or even One may, by special contract, define their respective duties or provide for increasing or limiting the liability of the deposit
addressed to responsible officials of the municipalities concerned who could have disseminated the warning properly. They were company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of Petitioner has not been shown negligent or at fault regarding the construction and maintenance of its school building in question
the deposit company will not be enlarged or restricted by words of doubtful meaning. and that typhoon “Saling” was the proximate cause of the damage suffered by private respondents’ house.

Condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the
Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its MINDEX V. MORILLO, 379 SCRA 144
premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier,
renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Facts
Averbal agreement was entered into between Ephraim Morillo and Mindex Resources Corporation (MINDEX) for the lease of
(3) YES. However, the element of not aggravating the damage or injury under fortuitous event (Art. 1170) is absent. the former’s 6 x 6 ten-wheeler cargo truck for use in MINDEX’s mining operations in Oriental Mindoro.

SBTC’s negligence aggravated the injury or damage to the petitioner which resulted from the loss or destruction of the stamp Unknown to Morillo, the truck was burned by unidentified persons while it was parked unattended at Sitio Aras, Bigaan, San
collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where Safe Teodoro, Oriental Mindoro, due to mechanical trouble. According to the reports it was burned by still unidentified person by
Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could means of using coconut leaves so it was completely burned down excluding the engine which was partially damaged by still
have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to undetermined amount.’
exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation
of the injury or loss. Upon learning of the burning incident, Morillo offered to sell the truck to MINDEX but the latter refused. He later wrote a l etter
entrusting the truck to MINDEX in the amount of P275,000.00 which is its cost price. MINDEX responded with counter offers: a)
A caso fortuito prevents (sic)18 the following essential characteristics: (1) the cause of the unforeseen and unexpected Pay the rental of of P76,000.00. ‘b) Repair and overhaul the truck and; ‘c) Return good running condition after repair.’ Morillo did
occurrence, or of the failure of the debtor to comply with his obligation, must be independent of human will; (2) it must be not accept the offer.
impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid; (3)
the occurrence must be such as to render it impossible for one debtor to fulfill his obligation in a normal manner; and (4) the RTC found petitioner responsible for the destruction or loss of the leased 6 x 6 truck and ordered it to pay respondent
obligor must be free from any participation in the aggravation of the injury resulting to the creditor.
The CA said: MINDEX responsible. The burning of the subject truck was impossible to foresee, but not impossible to avoid.
MINDEX could have prevented the incident by immediately towing the truck to a motor shop for the needed repair or by having
SOUTHEASTERN V. CA, 292 SCRA 422 it guarded day and night. Instead, the appellant just left the vehicle where its transfer case broke down. The place was about
twelve (12) kilometers away from the camp site of the appellant corporation and was sparsely populated. It was guarded only
Facts: during daytime. It stayed in that place for two (2) weeks until it was burned on April 11, 1991 while its transfer case was being
On October 11, 1989, powerful typhoon “Saling” hit Metro Manila. Buffeted by very strong winds, the roof of Southeastern repaired elsewhere. It was only after it had been burned that the appellant had it towed to a repair shop.
College’s building was partly ripped off and blown away, landing on and destroying portions of the roofing of private respondents
Dimaano’s house. Issue:
Whether or not the CA gravely erred in finding that petitioner was negligent considering that the facts show, as admitted by the
Private respondent alleged that the damage to their house rendered the same uninhabitable, forcing them to stay temporarily in respondent, that the burning of the truck was a fortuitous event.
others’ houses.
Ruling
An ocular inspection of the destroyed building was conducted by a team of engineers headed by the city building official. The The Petition is partly meritorious; the award of attorney’s fees should be deleted.
fourth floor of subject school building was declared as a “structural hazard.”
Petitioner’s Negligence
Lower court awarded damages. CA affirmed but reduced damages. Both the RTC and the CA found petitioner negligent and thus liable for the loss or destruction of the leased truck. Contrary to its
allegations, petitioner has not adequately shown that the RTC and the CA overlooked or disregarded significant facts and
Issue: circumstances that, when considered, would alter the outcome of the disposition. Article 1667 of the Civil Code holds lessees
WON the damage of the respondent’s house resulting from the impact of the falling portions of the school building’s roof ripped responsible for the deterioration or loss of the thing leased, unless they prove that it took place without their fault.
off was due to fortuitous event and not the negligence or fault of petitioner? YES
Fortuitous Event
Held: In order for a fortuitous event to exempt one from liability, it is necessary that one has committed no negligence or
There is no question that a typhoon or storm is a fortuitous event, a natural occurrence which may be foreseen but is unavoidable misconduct that may have occasioned the loss.10 An act of God cannot be invoked to protect a person who has failed
despite any amount of foresight, diligence or care. In order to be exempt from liability arising from any adverse consequence to take steps to forestall the possible adverse consequences of such a loss. One’s negligence may have concurred
engendered thereby, there should have been no human participation amounting to a negligent act. In other words; the person with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or proximate
seeking exoneration from liability must not be guilty of negligence. Negligence, as commonly understood, is conduct which cause of the damage or injury was a fortuitous event would not exempt one from liability. When the effect is found to be
naturally or reasonably creates undue risk or harm to others. It may be the failure to observe that degree of care, precaution, partly the result of a person’s participation -- whether by active intervention, neglect or failure to act -- the whole occurrence is
and vigilance which the circumstances justify demand, or the omission to do something which a prudent and reasonable man, humanized and removed from the rules applicable to acts of God. 11
guided by considerations which ordinarily regulate the conduct of human affairs, would
do. From these premises, we proceed to determine whether petitioner was negligent, such that if it were not, the damage caused This often-invoked doctrine of "fortuitous event" or "caso fortuito" has become a convenient and easy defense to exculpate an
to private respondents' house could have been avoided? obligor from liability. To constitute a fortuitous event, the following elements must concur:

At the outset, it bears emphasizing that a person claiming damages for the negligence of another has the burden of proving the (a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be
existence of fault or negligence causative of his injury or loss. The facts constitutive of negligence must be affirmatively independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen,
established by competent evidence, not merely by presumptions and conclusions without basis in fact. Private respondents, in it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a
establishing the culpability of petitioner, merely relied on the aforementioned report submitted by a team which made an ocular normal manner; and (d) the obligor must be free from any participation in the aggravation of the injury or loss. 12
inspection of petitioner’s school building after the typhoon. As the term imparts, an ocular inspection is one by means of actual
sight or viewing. What is visual to the eye through is not always reflective of the real cause behind. Article 1174 of the Civil Code states that no person shall be responsible for a fortuitous event that could not be foreseen or,
though foreseen, was inevitable. In other words, there must be an exclusion of human intervention from the cause of injury or
Petitioners obtained a permit from the city building official before the construction of its building. Having obtained both building loss.13
permit and certificate of occupancy is prima facie evidence of the regular and proper construction of subject school building.
When part of its roof needed repairs of the damage inflicted by typhoon Saling, the city engineer gave the go-signal for such A review of the records clearly shows that petitioner failed to exercise reasonable care and caution that an ordinarily prudent
repairs without any deviation from the original design. It subsequently authorized the use of the entire fourth floor of the same person would have used in the same situation. Witness Alexander Roxas testified how petitioner fell short of ordinary diligence
building. These only prove that subject building suffers from no structural defect. in safeguarding the leased truck against the accident considering that the persons who actually burned the truck were the
dismissed employees of the Mindex Resources Development Corporation.
Petitioner presented its vice president for finance and administration who testified that an annual maintenance inspection and
repair of subject school building were regularly undertaken. Petitioner was even willing to present its maintenance supervisor to Article 1177
attest to the extent of such regular inspection but private respondents agreed to dispense with his testimony and simply stipulated
that it would be corroborative of the vice president’s narration. Besides, no complaint regarding any defect on the same structure Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims,
has ever been lodged before his office prior to the institution of the case at bench. It is a matter of judicial notice that typhoons may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are
are common occurrences in this country. If subject school building’s roofing was not firmly anchored to its trusses, obviously, it inherent in his person; they may also impugn the acts which the debtor may have done to defraud them.
could not have withstood long years and several typhoons even stronger than “Saling.” (1111)

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
SIGUAN V. LIM, 318 SCRA 725 whether or not the first alternative was fulfilled. What is undeniable is that on August 26, 1967, more than fifteen years after the
execution of the promissory note on January 30, 1952, this petition was filed. The defense interposed was prescription. Its merit
FACTS: is rather obvious. Article 1179 of the Civil Code provides: "Every obligation whose performance does not depend upon a future
A criminal case was filed against Lim with RTC-Cebu city for issuing 2 bouncing checks in the amounts of P300,000 or uncertain event, or upon a past event unknown to the parties, is demandable at once." This used to be Article 1113 of the
andP241,668, respectively to Siguan. Meanwhile, on 2 July 1991, a Deed of Donation conveying the following parcels of land Spanish Civil Code of 1889.
and purportedly executed by Lim on 10 August 1989 in favor of her children, Linde, Ingrid and Neil, was registered with the Office
of the Register of Deeds of Cebu City. New transfer certificates of title were thereafter issued in the names of the donees. On The obligation being due and demandable (payable on demand), it would appear that the filing of the suit after fifteen years
23 June 1993, petitioner filed an accion pauliana against Lim and her children before RTC-Cebu City to rescind the questioned was much too late. For again, according to the Civil Code, which is based on Section 43 of Act No.190, the prescriptive period
Deed of Donation and to declare as null andvoid the new transfer certificates of title issued for the lots covered by the questioned for a written contract is that of ten years.*N.B. This case was decided in 1974, but for some reason the SC cited the Civil Code
Deed. provision on CONTRACTS when in fact the NIL was already effective (as of June 2,1911). Nevertheless, the ruling is consistent
with Sec. 7(a) of the NIL, which states, “An instrument is payable on demand, where it is expressed to be payable on demand,
Petitioner contends that sometime in July 1991, Lim, through a Deed of Donation, fraudulently transferred all her real property or at sight, or on presentation...”
to her children in bad faith and in fraud of creditors, including her; that Lim conspired and confederated with her children in
antedating the questioned Deed of Donation, to petitioner's and other creditors' prejudice; and that Lim, at the time of the Article 1182
fraudulent conveyance, left no sufficient properties to pay her obligations.On the other hand, as regards the questioned Deed of
Donation, Lim maintained that it was not antedated but was made in good faith at a time when she had sufficient property. Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
Finally, she alleged that the Deed of Donation was registered only on 2 July 1991because she was seriously ill. obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall
take effect in conformity with the provisions of this Code. (1115)
ISSUE:
Whether the Deed of Donation executed by Rosa Lim in favor of her children be rescinded for being in fraud of petitioner Maria
Antonia Siguan? SMITH BELL V. SOTELO MATTI, 44:874

HELD: FACTS:
The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following In August 1918, petitioner and defendant entered into contracts of sale under the following terms, which petitioner delivered on
requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation,[12] although demandable the following dates:
later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no
other legal remedy to satisfy his claim; [13] (4) the act being impugned is fraudulent;(5) the third person who received the property Item Price Delivery as in the Contract Arrival/Delivery
conveyed, if it is by onerous title, has been an accomplice in the fraud. 2 steel tanks P21,000 (total) “within three or four months” April 27, 1919 (defendant
claims non-delivery)
The general rule is that rescission requires the existence of creditors at the time of the alleged fraudulent alienation, and this 2 expellers P25,000 each To be shipped from San October 26, 1918
must be proved as one of the bases of the judicial pronouncement setting aside the contract. Without any prior existing debt, Francisco in September
there can neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior 1918, or as soon as possible
to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the 2 electric motors P2,000 each “Approximate delivery within February 27, 1919
alienation, it is merely declaratory, with retroactive effect to the date when the credit was constituted. 90 days. – This is not
guaranteed.”
Even assuming arguendo that petitioner became a creditor of Lim prior to the celebration of the contract of donation, still her
action for rescission would not fare well because the third requisite was not met. Under Article 1381 of the Civil Code, contracts
(In all these contracts, there is a final clause as follows: "The sellers are not responsible for delays caused by fires, riots on land
entered into in fraud of creditors may be rescinded only when the creditors cannot in any manner collect the claims due them.
or on the sea, strikes or other cause known as ’Force Majeure’ entirely beyond the control of the sellers or their representatives.")
Also, Article1383 of the same Code provides that the action for rescission is but a subsidiary remedy which cannot be instituted
except when the party suffering damage has no other legal means to obtain reparation for the same. The term "subsidiary
Petitioner notified defendant of the arrival of these goods but the latter refused to receive them and pay the prices as stipulated.
remedy" has been defined as "the exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission
is resorted to." It is, therefore, "essential that the party asking for rescission prove that he has exhausted all other legal means
The plaintiff sued defendant, alleging, that it immediately notified the defendant of the arrival of the goods, and asked instructions
to obtain satisfaction of his claim. Petitioner neither alleged nor proved that she did so. On this score, her action for the rescission
from him as to the delivery thereof, and that the defendant refused to receive any of them and to pay their price. The pl aintiff,
of the questioned deed is not maintainable even if the fraud charged actually did exist.
further, alleged that the expellers and the motors were in good condition.
Article 1179
Defendant and intervenor, the Manila Oil Refining and By-Products Co., Inc., denied the plaintiff’s allegations and alleged as
special defense that Mr. Sotelo had made the contracts in question as manager of the intervenor. They are also claiming for
Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon damages as a counterclaim or setoff due to plaintiff’s delay in making delivery of the goods, which the intervenor intended to use
a past event unknown to the parties, is demandable at once. in the manufacture of coconut oil, and for damages it suffered for the nondelivery of the tanks and on account of the expellers
and the motors not having arrived in due time.
Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the
effects of the happening of the event. (1113) The lower court ruled in favor of defendant in so far as the tanks and the motors are concerned but ordered it to receive the
expellers and pay for their price with interest. Both parties appealed.
PAY V. PALANCA, 57 SCRA 618 - AKI ISSUE:
WON plaintiff has fulfilled its obligation in brining the goods to Manila in due time. (Otherwise, plaintiff is liable for delay.)
FACTS:
George Pay, petitioner, is the creditor of the late Justo Palanca who died in 1963. The latter and his wife, respondent Rosa HELD:
Gonzalez vda. de Palanca, issued a promissory note in 1952, in the amount of P26,900 with interest of 12% per annum. The Yes. To solve the question, it is necessary to determine what period was fixed for the delivery of the goods. Under these
PN contained the following: For value received from time to time since 1947, we [jointly and severally promise to] pay to Mr. stipulations, it cannot be said that any definite date was fixed for the delivery of the goods.
[George Pay] at his office at the China Banking Corporation the sum of [Twenty Six Thousand Nine Hundred Pesos]
(P26,900.00),with interest thereon at the rate of 12% per annum upon receipt by either of the undersigned of cash paymen tfrom It appears that these contracts were executed at the time of the world war when there existed rigid restrictions on the export
the Estate of the late Don Carlos Palanca or u p o n d e m a n d . from the United States of articles like the machinery in question. At the time of the execution of the contracts, the parties were
not unmindful of the contingency of the United States Government not allowing the export of the goods, nor of the fact that the
ISSUE: other foreseen circumstances therein stated might prevent it.
W/N a creditor is barred by prescription in his attempt to collect on a promissory note executed more than fifteen years earlier
with the debtor sued promising to pay either upon receipt by him of his share from a certain estate or upon demand The term which the parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, those articles
could be brought to Manila or not—the obligation must be regarded as conditional. And as the export of the machinery in
HELD: question was as stated in the contract, contingent upon the sellers obtaining certificate of priority and permission of the United
YES, the creditor is barred from collecting. The SC ruling is based on Article 1179 of the Civil Code, which provides: "Every States Government, subject to the rules and regulations, as well as to railroad embargoes, then the delivery was subject to a
obligation, whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but upon the will of third
is demandable at once." persons who could in no way be compelled to fulfill the condition. In cases like this, which are not expressly provided for,
but impliedly covered, by the Civil Code, the obligor will be deemed to have sufficiently performed his part of the obligation,
From the manner in which the promissory note was executed, it would appear that petitioner was hopeful that the satisfaction of if he has done all that was in his power, even if the condition has not been fulfilled in reality.
his credit could he realized either through the debtor sued receiving cash payment from the estate of the late Carlos Palanca
presumptively as one of the heirs, or, as expressed therein, "upon demand." There is nothing in the record that would indicate
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
In an obligation to deliver, time is regarded unessential when the time of delivery is not fixed in the contract. In such case, the title from acquiring an obligatory force. If the condition is imposed on an obligation of a party which is not complied with, the other
delivery must be made within a reasonable time. party may either refuse to proceed or waive said condition. Where, of course, the condition is imposed upon the perfection of
the contract itself, the failure of such condition would prevent the juridical relation itself from coming into existence.
The record shows that the plaintiff did all within its power to have the machinery arrive at Manila as soon as possible, and
immediately upon its arrival it notified the purchaser of the fact and offered to deliver it to him. Taking these circumstances into In determining the real character of the contract, the title given to it by the parties is not as much significant as its substance. For
account, the said machinery was brought to Manila by the plaintiff within a reasonable time. Therefore, the plaintiff has not been example, a deed of sale, although denominated as a deed of conditional sale, may be treated as absolute in nature, if title to the
guilty of any delay in the fulfillment of its obligation, and, consequently, it could not have incurred any of the liabilities mentioned property sold is not reserved in the vendor or if the vendor is not granted the right to unilaterally rescind the contract predicated
by the intervenor in its counterclaim or set-off. on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. The term "condition" in the context of a
perfected contract of sale pertains, in reality, to the compliance by one party of an undertaking the fulfillment of which would
*As to the issue of agency, the court held that the Mr. Sotelo’s acts were binding upon its principal. beckon, in turn, the demandability of the reciprocal prestation of the other party. The reciprocal obligations referred to would
normally be, in the case of vendee, the payment of the agreed purchase price and, in the case of the vendor, the fulfillment of
certain express warranties (which, in the case at bench is the timely eviction of the squatters on the property).
SECURITY BANK V. CA, 249 SCRA 206
It would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale is at once perfected
FACTS when a person (the seller) obligates himself, for a price certain, to deliver and to transfer ownership of a specified thing or right
Ysmael C. Ferrer was contracted by herein petitioners Security Bank and Trust Company (SBTC) and Rosito C. Manhit to to another (the buyer) over which the latter agrees. From the moment the contract is perfected, the parties are bound not onl y
construct the building of SBTC in Davao City for the price of P1,760,000.00. The contract dated 4 February 1980 provided that to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be
Ferrer would finish the construction in two hundred (200) working days. Respondent Ferrer was able to complete the construction in keeping with good faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on the
of the building on 15 August 1980 (within the contracted period) but he was compelled by a drastic increase in the cost of property. Private respondent's failure "to remove the squatters from the property" within the stipulated period gives petitioner the
construction materials to incur expenses of about P300,000.00 on top of the original cost. The additional expenses were made right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the Civil Code.
known to petitioner SBTC thru its Vice-President Fely Sebastian and Supervising Architect Rudy de la Rama as early as March This option clearly belongs to petitioner and not to private respondent.
1980. Respondent Ferrer made timely demands for payment of the increased cost. Said demands were supported by receipts,
invoices, payrolls and other documents proving the additional expenses. In contracts of sale particularly, Article 1545 of the Civil Code allows the obligee to choose between proceeding with the
agreement or waiving the performance of the condition. Here, evidently, petitioner has waived the performance of the condition
In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative of an architectural firm consulted by imposed on private respondent to free the property from squatters.
SBTC, verified Ferrer's claims for additional cost. A recommendation was then made to settle Ferrer's claim but only for The right of resolution of a party to an obligation is predicated on a breach of faith by the other party that violates the reciprocity
P200,000.00. SBTC, instead of paying the recommended additional amount, denied ever authorizing payment of any amount between them. It is private respondent who has failed in her obligation under the contract. Petitioner did not breach the
beyond the original contract price. SBTC likewise denied any liability for the additional cost based on Article IX of the building agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in the ejectment case and to make
contract which states: arrangements with the sheriff to effect such execution.

If at any time prior to the completion of the work to be performed hereunder, increase in prices of construction materials and/or Article 1186
labor shall supervene through no fault on the part of the contractor whatsoever or any act of the government and its
instrumentalities which directly or indirectly affects the increase of the cost of the project, OWNER shall equitably make the Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
appropriate adjustment on mutual agreement of both parties. (1119)

Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial court ruled for Ferrer and ordered
defendants SBTC and Rosito C. Manhit to pay. On appeal, the Court of Appeals affirmed the trial court decision. TAYAG V. CA, 219 SCRA 480

ISSUE/S Facts:
Whether SBTC is liable. Siblings Juan Galicia Sr. and Celerina Labuguin entered into a contract to sell a parcel of land in Nueva Ecija to a certain
Albrigido Leyva:
HELD
Petitioners’ arguments to support absence of liability for the cost of construction beyond the original contract price are not o 3K upon agreement
persuasive. o 10K ten days after the agreement
o 10K representing vendor’s indebtedness to Phil Veterans Bank
Under the previously quoted Article IX of the construction contract, petitioners would make the appropriate adjustment to the o 27K payable within one year from execution of contract.
contract price in case the cost of the project increases through no fault of the contractor (private respondent). Private respondent
informed petitioners of the drastic increase in construction cost as early as March 1980. Leyva only paid parts of the obligation.

Petitioners in turn had the increased cost evaluated and audited. When private respondent demanded payment of P259,417.23, But even after the grace period for payment made in the contract and while litigation of such case, the petitioners still allowed
petitioner bank's Vice-President Rosito C. Manhit and the bank's architectural consultant were directed by the bank to verify and Leyva to make payments.
compute private respondent's claims of increased cost. A recommendation was then made to settle private respondent's claim
for P200,000.00. Despite this recommendation and several demands from private respondent, SBTC failed to make payment. It With regards to the obligation payable to the Phil Veterans bank by the vendee, as they deemed that it was not paid in full, such
denied authorizing anyone to make a settlement of private respondent's claim and likewise denied any liability, contending that obligation they completed by adding extra amount to fulfill such obligation. This was fatal in their case as this is Leyva’s argument
the absence of a mutual agreement made private respondent's demand premature and baseless. that they constructively fulfilled the obligation which is rightfully due to him. (Trivia: It was Celerina, Juan’s sister, that paid the
bank to complete such obligation).
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 Petitioners claim that they are only “OBLIGEES” with regards to the contract, so the principle of constructive fulfillment cannot
increased construction cost, is in effect a condition dependent on petitioner bank's sole will, since private respondent would be invoked against them.
naturally and logically give consent to such an agreement which would allow him recovery of the increased cost.
ROMERO V. CA, 250 SCRA 223 Petitioners, being both creditor and debtor to private respondent, in accepting piecemeal payment even after the grace period,
are barred to take action through estoppel.
FACTS:
Private respondent entered into a “Conditional Deed of Sale” with petitioner over a parcel of land in Paranaque, the latter Issue:
advancing P50,000 for the eviction of squatters therein. An ejectment suit was then filed by the private respondent against the 1. WON there was constructive fulfillment in the part of the petitioners that shall make rise the obligation to deliver to Leyva the
squatters. Although successful, private respondent sought the return of the downpayment she received because “she could not deed of sale? YES
get rid of the squatters”. 2. WON they are still entitled to rescind the contract? NO, barred by estoppel.

ISSUE: Held:
May the vendor demand the rescission of a contract for the sale of a parcel of land for a cause traceable to his own failure to 1. In a contract of purchase, both parties are mutually obligors and also obligees, and any of the contracting parties may, upon
have the squatters on the subject property evicted within the contractually-stipulated period? non-fulfillment by the other privy of his part of the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code).

HELD: In short, it is puerile for petitioners to say that they are the only obligees under the contract since they are also bound as obligors
A perfected contract of sale may either be absolute or conditional depending on whether the agreement is devoid of, or subject to respect the stipulation in permitting private respondent to assume the loan with the Philippine Veterans Bank which petitioners
to, any condition imposed on the passing of title of the thing to be conveyed or on the obligation of a party thereto. When impeded when they paid the balance of said loan. As vendors, they are supposed to execute the final deed of sale upon full
ownership is retained until the fulfillment of a positive condition the breach of the condition will simply prevent the duty to convey payment of the balance as determined hereafter.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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cause, the tender of payment will discharge the debtor of the obligation to pay but only after a valid consignation of the sum due
2. Petitioners accepted Leyva’s delayed payments not only beyond the grace periods but also during the pendency of the case shall have been made with the proper court." "To have the effect of payment and the consequent extinguishment of the obligation
for specific performance. Indeed, the right to rescind is not absolute and will not be granted where there has been substantial to pay, the law requires the companion acts of tender of payment and consignation."
compliance by partial payments. By and large, petitioners’ actuation is susceptible of but one construction — that they are now
estopped from reneging from their commitment on account of acceptance of benefits arising from overdue accounts of private On the amortizations
respondent. The spouses Bonrostro want to be relieved from paying interest on the amount of P214,492.62 which the spouses Luna paid to
Bliss as amortizations, by asserting that they were prevented by the latter from fulfilling such obligation. They invoke Art. 1186
of the Civil Code which provides that "the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment."
SPS. BONROSTRO V. SPS. LUNA, GR 172346, 24 JULY 2013
However, Art. 1186 speaks of a situation where it is the obligor who voluntarily prevents fulfillment of the condition, not the
DOCTRINE obligee. Moreover, the mere intention to prevent the happening of the condition or the mere placing of ineffective obstacles to
Art. 1186 speaks of a situation where it is the obligor who voluntarily prevents fulfillment of the condition, not the obligee. its compliance, without actually preventing fulfillment is not sufficient for the application of Art. 1186. Two requisites must concur
Moreover, the mere intention to prevent the happening of the condition or the mere placing of ineffective obstacles to its for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual prevention of compliance.
compliance, without actually preventing fulfillment is not sufficient for the application of Art. 1186. Two requisites must concur
for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual prevention of compliance. Here, Sps. Luna is not the obligor but the obligee, and their actions were only sought to ensure and not defeat the fulfillment of
the contract. Their payment (1) avoided the cancellation of both the contract of sale, and consequently, the contract to sell; and
FACTS (2) avoid the penalty for unpaid amortizations equivalent to 1/10th of 1% per day of delay shall be imposed for all payments
Constancia Luna (Luna) bought a piece of land from Bliss Development Corporation in Diliman, Quezon City in 1992. Less than made after due date (3% monthly or 36% per annum rate of interest).
a year later Luna executed a contract to sell3 the lot to Lourdes Bonrostro. The contract contained a stipulation that should the
vendee fails to pay the amount of P630,000.00 by July 31, 1993 the contract to sell shall be deemed cancelled and 5% of the Under the circumstances and considering that the spouses Bonrostro are obviously in delay in complying with their obligation to
contract price is forfeited in favor of the vendor. After payment of the initial down payment and taking possession of the lot the pay the amortizations due from February 1993 to January 1995 for which the spouses Luna paid P214,492.62,45 the CA correctly
Sps Bonrostro failed to pay the subsequent installments. ordered the reimbursement to the latter of the said amount with interest. "Delay in the performance of an obligation is looked
upon with disfavor because, when a party to a contract incurs delay, the other party who performs his part of the contract suffers
Sps. Luna filed an action for recission of the contract and damages, delivery of possession of property, and payment of unpaid damages thereby." As discussed, the spouses Luna obviously suffered damages brought about by the failure of the spouses
obligations against the Sps. Bonrostro in 1994. In their answer, the Sps. Bonrostro alleged they are willing to pay and sought a Bonrostro to comply with their obligation on time. "And, sans elaboration of the matter at hand, damages take the form of interest
60-day extension to pay the price, and the Sps. They failed to show on the date of payment. A letter later sent by the Sps. x x x."
Bonrostro to the Sps. Luna’s lawyer expressing their willingness to pay was left unanswered. The Sps. Bonrosto prayed the
court to set the period within which they should settle their obligation.
LIM V. DBP, GR 177050, 1 JULY 2013
Sps. Bonrostro also alleged that the Sps. Luna sent a letter to BLISS instructing the company to refuse acceptance of
amortizations of the lot from anyone other them, also paying the amortization, thereby preventing the Sps. Bonrostro from FACTS:
complying with the contract.. Petitioners Carlos, Lim, obtained 2 loans from DBP and executed separate promissory notes for each to finance their cattle
raising business. To secure the loans, petitioners executed a Mortgage in favor of DBP over real properties in the Province of
RTC ruled that the delay could not be considered a substantial breach considering that Lourdes (1) requested for an extension South Cotabato. Due to violent confrontations between government troops and Muslim rebels in Mindanao petitioners were
within which to pay; (2) was willing and ready to pay as early as the last week of October 1993 and even wrote Atty. Carbon forced to abandon their cattle ranch. As a result, their business collapsed and they failed to pay the loan amortizations.
about this on November 24, 1993; (3) gave Constancia a down payment of P200,000.00; and, (4) made payment to Bliss. Interest
was imposed on the sums of P300,000.00 plus interest of 2% per month from April 1993 to November 1993 and P330,000.00 Petitioners made a partial payment, leaving an outstanding loan balance of P610,498.30, inclusive of charges and unpaid
plus interest of 2% per month from July 1993 to November 1993. interest. Petitioners requested from DBP Statements of Account for both accounts which they complied but Lim requested that
it be amended to reflect his partial payment.
On appeal, the CA affirmed and ruled that the rescission done was not the proper remedy, but instead should have followed the
form and procedure under Sec. 4, RA 6552 (Maceda Law). Under the Maceda law there is a valid cancellation when after the Lim received a Notice of Foreclosure scheduled the following day. To stop the foreclosure, he was advised to pay an interest
failure to pay the installment the buyer again fails to pay within the 60-day grace period and the seller sends a notarized notice covering a 60-days period or the amount of P60,000.00 to postpone the foreclosure for 60 days. Lim proposed the settlement of
to the buyer of the cancellation of the contract. The court additionally imposed the contractual 2% interest upon failure to pay the accounts through dacion en pago, with the balance to be paid in equal quarterly payments over five years.
the installments, per installment price and period - 2% interest on the P300,000.00 from May 1, 1993 until fully paid and by
imposing interest at the legal rate on the P330,000.00 reckoned from August 1, 1993 until fully paid – and on the amortizations. DBP rejected the proposal and informed Lim that unless the accounts are fully settled as soon as possible, the bank will pursue
foreclosure proceedings. DBP informed Lim of the bank’s new guidelines for the settlement of outstanding loan accounts and
Sps. Bonrostro assails the imposition of the interest on petition for review on certiorari to the SC. that the bank would immediately prepare the Restructuring Agreement upon receipt of the downpayment and that the conditions
for the settlement have been "pre-cleared" with the bank’s Regional Credit Committee.
ISSUE/S
(1) Whether the spouses Bonrostro’s were in delay in their payment of the installments constitutes a substantial breach of their Lim agreed, however, he received a letter from DBP informing him that the Regional Credit Committee rejected the proposed
obligation under the contract warranting rescission. Restructuring Agreement; that it required downpayment of 50% of the total obligation; that the remaining balance should be paid
(2) Whether the imposition of the interest rate on the installments and amortizations was correct. within one year; that the interest rate should be non prime or 18.5%, whichever is higher; and that the proposal is effective only
for 90 days.
HELD
DBP informed Edmundo that the previous Restructuring Agreement was reconsidered and approved by the Regional Credit
(1) NO. In a contract to sell, payment of the price is a positive suspensive condition, failure of which is not a breach of contract Committee subject to additional conditions. No compliance was made by Edmundo. DBP informed Edmundo that the bank
warranting rescission under Article 119129 of the Civil Code but rather just an event that prevents the supposed seller from cancelled the Restructuring Agreement due to his failure to comply with the conditions within a reasonable time. DBP sent
being bound to convey title to the supposed buyer. Article 1191 cannot be applied to sales of real property on installment Edmundo a Final Demand Letter asking that he pay the outstanding amount of P6,404,412.92, exclusive of interest and penalty
since they are governed by the Maceda Law. There being no breach to speak of, the RTC’s factual finding that Lourdes was charges.
willing and able to pay her obligation loses significance and cannot be used as an excuse for failure to pay their obligation on
November 24, 1993 and the interest beyond the said date. The Office of the Clerk of Court and Ex-Officio Provincial Sheriff of the RTC of General Santos City issued a Notice resetting the
public auction sale of the mortgaged properties and was published for three consecutive weeks in a newspaper of general
(2) YES. circulation in General Santos City.

On the installments The auction sale was conducted and DBP was the highest bidder. They notified Lim of the date the right of redemption ends.
The letter expressing willingness to pay without accompanying payment, or consignation of the payment in court produces no
effect and did not suspend the running of interest. Petitioners filed before the RTC of General Santos City, a Complaint against DBP for Annulment of Foreclosure and Damages
with Prayer for Issuance of a Writ of Preliminary Injunction and/or Temporary Restraining Order. Petitioners alleged that DBP’s
Tender of payment "is the manifestation by the debtor of a desire to comply with or pay an obligation. If refused without just

3
1. The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following manner: time, this CONTRACT TO SELL shall likewise be deemed cancelled and rescinded and x x x 5% of the total contract price of
(a) P200,000.00 upon signing x x x the Contract To Sell,
 (b) P300,000.00 payable on or before April 30, 1993,
 (c) P330,000.00 P1,250,000.00 shall be deemed forfeited in favor of the VENDOR. Unpaid monthly amortization shall likewise be deducted from
payable on or before July 31, 1993,
 (d) P417,000.00 payable to the New Capitol Estate, for 15 years at P6,867.12 a month, the initial down payment in favor of the VENDOR.
2. x x x In the event the VENDEE fails to pay the second installment on time, the VENDEE will pay starting May 1, 1993 a 2%
interest on the P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay the amount of P630,000.00 on the stipulated
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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acts and omissions prevented them from fulfilling their obligation; thus, they prayed that they be discharged from their obligation This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
and that the foreclosure of the mortgaged properties be declared void. accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)

On same date, the RTC issued a Temporary Restraining Order directing DBP to cease and desist from consolidating the titles
over petitioners’ foreclosed properties and from disposing the same.The RTC granted the Writ of Preliminary Injunction and UNIVERSAL FOOD CORP V. CA, 33 SCRA 1 – NB, CONCURRING OPINION OF JBL REYES
directed petitioners to post a bond in the amount of P3,000,000.00.
FACTS:
ISSUE: In 1938, Private Respondent Magdalo Francisco, Sr. invented a formula for the manufacture of a food seasoning sauce derived
WON DBP’s acts and omissions in discharging its reciprocal obligations to petitioners effectively prevented the petitioners from from banana fruits popularly known as Mafran. Magdalo later registered his trademark over the product as owner and inventor
paying their loan obligations in a proper and suitable manner hence the obligation should be deemed fully complied with and and commenced the commercial manufacture of the Mafran. In 1960, due to lack of sufficient capital to finance the expansion
extinguished in accordance with the principle of constructive fulfillment. NO. of the business, Magdalo secured the financial assistance of Tirso Reyes who, after a series of negotiations, formed with other
people, the Petitioner Universal Food Corporation (UFC). Later, UFC and Magdalo executed a Bill of Assignment, wherein
RATIO: Magdalo was appointed chief chemist of UFC while Private Respondent Victoriano Francisco was appointed auditor and
1. The obligation was not extinguished or discharged. superintendent. Since the start of UFC’s operations, Magdalo, whenever preparing the secret materials never allowed anyone
to enter the laboratory in order to keep the formula secret to himself. However, Magdalo expressed a willingness to give the
The Promissory Notes subject of the instant case became due and demandable early on and the only reason the mortgaged formula to UFC provided that the same should be kept inside a safe to be opened only when he is already incapacitated to
properties were not foreclosed was because of the restraining order from the court. Petitioners made a partial payment of perform his duties as chief chemist, but UFC never acquired a safe for that purpose. Later, UFC’s president and general Manager
P902,800.00 but no subsequent payments were made. Although DBP could have foreclosed the mortgaged properties, it instead Tirso Reyes wrote Magdalo, requesting him to permit one or two members of his family to observe the preparation of Mafran,
agreed to restructure the loan. In fact, DBP gave several extensions for petitioners to settle their loans, but they never did, thus, but the request was denied. In spite of this, Tirso did not compel or force Magdalo to accede to said request.
prompting DBP to cancel the Restructuring Agreement.
Subsequently, due to the alleged scarcity and high prices of raw materials, the UFC’s secretary-treasurer issued a memorandum,
Petitioners, however, insist that DBP’s cancellation of the Restructuring Agreement justifies the extinguishment of their loan duly approved by Tirso that only supervisor Ricardo Francisco should be retained in the factory and that the salary of Magdalo
obligation under the Principle of Constructive Fulfillment found in Article 1186 of the Civil Code. should be stopped for the time being until the corporation should resume its operation. However, 5 days later, Tirso issued a
We do not agree. memorandum to Victoriano ordering him to report to the factory and produce Mafran Sauce at the rate of not less than 100 cases
a day and with instructions to take only the necessary daily employees without employing permanent employees. Several
As aptly pointed out by the CA, Article 1186 of the Civil Code, which states that "the condition shall be deemed fulfilled when the memoranda were later on issued by Tirso in connection with the full swing production of Mafran and the hiring of additional
obligor voluntarily prevents its fulfillment," does not apply in this case, viz: employees for the purpose. Due to these successive memoranda without Magdalo being recalled back to work, he filed against
UFC an action for the rescission of the Bill of Assignment and prayed that UFC be adjudged to be without any right to use the
Article 1186 enunciates the doctrine of constructive fulfillment of suspensive conditions, which applies when the Mafran trademark and formula. Tirso subsequently requested Magdalo to report for duty, but the latter declined because of the
following three (3) requisites concur, viz: (1) The condition is suspensive; (2) The obligor actually prevents the pending action.
fulfillment of the condition; and (3) He acts voluntarily. Suspensive condition is one the happening of which gives rise
to the obligation. It will be irrational for any Bank to provide a suspensive condition in the Promissory Note or the UFC contended that the Private Respondents are not entitled to rescission because it was Magdalo who had been remiss in the
Restructuring Agreement that will allow the debtor-promissor to be freed from the duty to pay the loan without paying compliance of his contractual obligation to cede and transfer to UFC the formula for Mafran sauce. UFC argued that the right to
it. rescind a reciprocal obligation is not absolute and can be demanded only if one is ready, willing and able to comply with his own
obligation and the other is not. UFC contends that a suit for rescission is primary, and can only be resorted to when there is no
Besides, petitioners have no one to blame but themselves for the cancellation of the Restructuring Agreement. It is significant to other remedy, which is not the case here.
point out that when the Regional Credit Committee reconsidered petitioners’ proposal to restructure the loan, it imposed
additional conditions which petitioners failed to do. DBP therefore had reason to cancel the Restructuring Agreement. ISSUE:
(1) Whether Magdalo is entitled to rescind the Bill of Assignment.
Moreover, since the Restructuring Agreement was cancelled, it could not have novated or extinguished petitioners’ loan (2) Whether the remedy of rescission is primary or subsidiary.
obligation. And in the absence of a perfected Restructuring Agreement, there was no impediment for DBP to exercise its right to
foreclose the mortgaged properties. HELD:
(1) Yes. UFC violated the Bill of Assignment by terminating the services of Magdalo without lawful and justifiable cause. The
2. The foreclosure sale is not valid. general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and
fundamental breach as would defeat the very object of the parties in making the agreement. The question of whether a breach
But while DBP had a right to foreclose the mortgage, we are constrained to nullify the foreclosure sale due to the bank’s failure of a contract is substantial depends upon the attendant circumstances. In this case the dismissal of Magdalo as the permanent
to send a notice of foreclosure to petitioners. chief chemist of the corporation is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without
any fault or negligence on his part. Thus, apart from the legal principle that the option to demand performance or ask for
We have consistently held that unless the parties stipulate, "personal notice to the mortgagor in extrajudicial foreclosure rescission of a contract belongs to the injured party, the fact remains that the Private Respondents had no alternative but to file
proceedings is not necessary" because Section 3 of Act 3135 only requires the posting of the notice of sale in three public places the action for rescission and damages.
and the publication of that notice in a newspaper of general circulation.
Magdalo would not have agreed to the other terms of the Bill of Assignment were it not for the basic commitment of UFC to
Paragraph 11 of the Mortgage contract requires this appoint him as its second vice-president and chief chemist on a permanent basis; that in the manufacture of Mafran sauce and
other food products he would have "absolute control and supervision over the laboratory assistants and personnel and in the
However, no notice of the extrajudicial foreclosure was sent by DBP to petitioners about the foreclosure sale. The letters advising purchase and safeguarding of said products;" and that only by all these measures could Magdalo preserve effectively the secrecy
petitioners to immediately pay their obligation to avoid the impending foreclosure of their mortgaged properties are not the notices of the formula, prevent its proliferation, enjoy its monopoly, and, in the process afford and secure for himself a lifetime job and
required in paragraph 11 of the Mortgage. The failure of DBP to comply with their contractual agreement with petitioners, i.e., to steady income.
send notice, is a breach sufficient to invalidate the foreclosure sale.
The salient provisions of the Bill of Assignment, namely: the transfer to the corporation of only the use of the formula; the
Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which petitioner might take on the appointment of Magdalo as second vice-president and chief chemist on a permanent status, the obligation of Magdalo to continue
subject property, thus according him the opportunity to safeguard his rights. When petitioner failed to send the notice of research on the patent to improve the quality of the products of the corporation, and the need of absolute control and supervision
foreclosure sale to respondent, he committed a contractual breach sufficient to render the foreclosure sale on November 23, over the laboratory assistants and personnel and in the purchase and safekeeping of the chemicals and other mixtures used in
1981 null and void. (Emphasis supplied) the preparation of said product are so interdependent that violation of one would result in virtual nullification of the rest.

Article 1191 (2) The SC majority impliedly said the remedy of rescission is subsidiary to the existence of any other remedy or recourse in law.
They stated, however, as no other remedy was available to Magdalo, he can resort to rescission.
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. JBL Reyes, concurring:
I would like to add that the argument of petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco,
The injured party may choose between the fulfillment and the rescission of the obligation, with the should be denied because under Article 1383 of the Civil Code of the Philippines rescission can not be demanded except when
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, the party suffering damage has no other legal means to obtain reparation, is predicated on a failure to distinguish between a
if the latter should become impossible. rescission for breach of contract [faith] under Article 1191 of the Civil Code and a rescission by reason of lesion or economic
prejudice, under Article 1381, et seq. The rescission on account of breach of stipulations is not predicated on injury to economic
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is
period. not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder
is subordinated to anything other than the culpable breach of his obligations by the defendant. This rescission is in principal
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As “Acknowledgment of Debt and Proposed Manner of Payments. It was approved by the president of UP, which stipulated the
expressed in the old Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the reparation of damages for the following:
breach is purely secondary.
3. In the event that the payments called for are not sufficient to liquidate the foregoing indebtedness, the balance
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence outstanding after the said payments have been applied shall be paid by the debtor in full no later than June 30,
of that prejudice, because it is the raison d'etre as well as the measure of the right to rescind. Hence, where the defendant makes 1965.
good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But 5. In the event that the debtor fails to comply with any of its promises, the Debtor agrees without reservation that
the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of Creditor shall have the right to consider the Logging Agreement rescinded, without the necessity of any judicial
the suit…ALUMCO continued its logging operations, but again incurred an unpaid account.
Philippines, and does not apply to cases under Article 1191.
On July 19,1965, UP informed ALUMCO that it had, as of that date, considered rescinded and of no further legal effect the
It is probable that the petitioner's confusion arose from the defective technique of the new Code that terms both instances as logging agreement, and that UP had already taken steps to have another concessionaire take over the logging operation.
rescission without distinctions between them; unlike the previous Spanish Civil Code of 1889, that differentiated "resolution" for
breach of stipulations from "rescission" by reason of lesion or damage. But the terminological vagueness does not justify ALUMCO filed a petition to enjoin UP from conducting the bidding. The lower court ruled in favor of ALUMCO, hence, this appeal.
confusing one case with the other, considering the patent difference in causes and results of either action.
ISSUE:
BALANE CASE NOTE/SUMMARY Can petitioner UP treat its contract with ALUMCO rescinded, and may disregard the same before any judicial pronouncement to
Whether the suit for rescission under Art. 1191 primary or subsidiary. that effect?

UFC contends that a suit for rescission is primary, can only be resorted to when he has no other remedy. Magdalo here has no RULING:
other remedy. Yes. In the first place, UP and ALUMCO had expressly stipulated that upon default by the debtor, UP has the right and the power
to consider the Logging Agreement of December 2, 1960 as rescinded without the necessity of any judicial suit. As to such
SC Majority: there is no other remedy for Magdalo, so he can file for rescission. A suit for rescission under Art. 1191 is subsidiary, special stipulation and in connection with Article 1191 of the Civil Code, the Supreme Court, stated in Froilan vs. Pan Oriental
available only when there is no other remedy. Suit is proper. Shipping. Co:

JBL Concurring: SC majority is confused, the remedy of rescission is a primary remedy. Rescission here means resolution. 1191 “There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would
– breach of faith vs 1383 – lesion or economic damages. cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to
resort to court for rescission of the contract.”

CANU V. GALANG, 459 SCRA 80 The party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous
court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will
Remedy of rescission in 1191 is not subsidiary, it is primary. therefore the plaintiff does not have to prove that there is no other conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not
recourse. require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial
steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages
MAGDALENA ESTATE V. MYRICK, 71:344 accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article 2203).
FACTS:
Magdalena Estate, Inc. sold to Louis Myrick lots No. 28 and 29 of Block 1, Parcel 9 of the San Juan Subdivision, San Juan, In fact, even without express provision conferring the power of cancellation upon one contracting party, the Supreme Court of
Rizal. Their contract of sale provides that the Price of P7,953 shall be payable in 120 equal monthly installments of P96.39 each Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of our own Civil; Code is practically
on the second day of every month beginning the date of execution of the agreement. a reproduction), has repeatedly held that, a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless
successfully impugned in court.
In pursuance of said agreement, the vendee made several payments amounting to P2,596.08, the last being due and unpaid
was that of May 2, 1930. By reason of this, the vendor, through its president, notified the vendee that, in view of his inability to BALANE CASE NOTE
comply with the terms of their contract, said agreement had been cancelled, relieving him of any further obligation thereunder, Can a party unilaterally rescind a contract extrajudicially?
and that all amounts paid by him had been forfeited in favor of the vendor. To this communication, the vendee did not reply, and YES, but this extrajudicial rescission is done at the party’s own risk, as the rescission is always subject to judicial review at the
it appears likewise that the vendor thereafter did not require him to make any further disbursements on account of the purchase instance of the other party.
price.
The court can rule either of two ways:
ISSUE: Court rules rescission is proper, court will rule that it retroacts to the date of rescission
Was the petitioner authorized to forfeit the purchase price paid? Court rules rescission is improper, court will declare that there was no rescission in the first place.

RULING: See also: LUZON BROKERAGE V MARITIME, 43 SCRA 93


No. The contract of sale contains no provision authorizing the vendor, in the event of failure of the vendee to continue in the
payment of the stipulated monthly installments, to retain the amounts paid to him on account of the purchase price. The claim Later decisions have ruled otherwise, saying there is need for a judicial decree and it is the judicial decree that is the operative
therefore, of the petitioner that it has the right to forfeit said sums in its favor is untenable. Under Article 1124 of the Civil Code, act of rescission. (See below EDS MANUFACTURING V. HEALTH CHECK).
however, he may choose between demanding the fulfillment of the contract or its resolution. These remedies are
alternative and not cumulative, and the petitioner in this case, having elected to cancel the contract cannot avail himself of the
other remedy of exacting performance. As a consequence of the resolution, the parties should be restored, as far as DEL CASTILLO V. SPOUSES MATIAS, 419 SCRA [?]
practicable, to their original situation which can be approximated only be ordering the return of the things which were Under damages.
the object of the contract, with their fruits and of the price, with its interest, computed from the date of institution of the
action.
ZULUETA V. MARIANO, 111 SCRA 206
CASE NOTE
Illustrates the duty of mutual restitution. DOCTRINE
See also GRACE PARK CASE A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex
proprio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and'
determination. While a violation by a party of any of the stipulations of a contract on agreement to sell real property would entitle
UP V. DE LOS ANGELES, 35 SCRA 102 the other party to resolved or rescind it, proof of violation of a contract is a condition precedent to resolution or rescission. It is
only when the violation has been established that the contract can be declared resolved or rescinded.
FACTS:
On November 2, 1960, UP and ALUMCO entered into a logging agreement whereby the latter was granted exclusive authority When the contract between the parties provided for extrajudicial rescission, this takes legal effect only when the other party does
to cut, collect and remove timber from the Land Grant for a period starting from the date of agreement to December 31, 1965, not oppose it. Where it is objected to, a judicial determination of the issue is still necessary.

extendible for a period of 5 years by mutual agreement.
FACTS
On December 8, 1964, ALUMCO incurred an unpaid account of P219,362.94. Despite repeated demands, ALUMCO still failed
to pay, so UP sent a notice to rescind the logging agreement. On the other hand, ALUMCO executed an instrument entitled
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
Jose Zulueta (Owner) and Lamberto Avellana (Buyer) entered into a contract to sell 4 Zulueta’s house and lot in Pasig, Rizal. The 3. Respondent filed a letter complaint with the National Housing Authority (NHA) questioning the validity of the rescission.
contract allowed the Owner to extrajudicially recover possession of the house, lot and improvements in case the Buyer failed to The NHA held that the rescission is void in the absence of either judicial or notarial demand. Palay, Inc. and Onstott in his
meet the conditions of the contract, and the forfeiture of money obligations with the installments already paid considered as capacity as President of the corporation, jointly and severally, was ordered to refund Dumpit the amount paid plus 12% interest
rentals. The parties agreed on a purchase price of P75,000.00 payable in twenty years with respondent buyer assuming to pay from the filing of the complaint. Petitioners' MR was denied by the NHA. Respondent Presidential Executive Assistant, on May
a down payment of P5,000.00 and a monthly installment of P630.00 payable in advance before the 5th day of the corresponding 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the
month, starting with December, 1964. present petition.

Avellana failed to pay and Zulueta filed an ejectment case in the MTC. Avellana averred that the MTC did not have jurisdiction Issue:
over the case as it involved the interpretation and/or rescission of a contract; and that prior to the execution of the contract to W/N demand is necessary to rescind a contract
sell, Zulueta owed him P31,269 (the cost of two movies used in his Congressional campaign in 1964) and such amount was
understood to be the down payment of the property. The court rejected the defense, ruling that it was a matter better suited for Ruling:
a separate claim. As held in previous jurisprudence, the judicial action for the rescission of a contract is not necessary where the contract provides
that it may be revoked and cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was
On appeal to the CFI, the court dismissed the petition, there being no showing that before filing the case in the lower court, the at least a written notice sent to the defaulter informing him of the rescission. A written notice is indispensable to inform the
plaintiff has exercised or has pursued his right pursuant to the contract which should be the basis of the action in the lower court. defaulter of the rescission. Hence, the resolution by petitioners of the contract was ineffective and inoperative against private
On MR, the court took notice of the case as an original action before it. respondent for lack of notice of resolution (as held in the U.P. vs. Angeles case). The act of a party in treating a contract as
cancelled should be made known to the other.
Later, RA 6551 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Instalment Payments,” emphasized the
ISSUE/S indispensability of notice of cancellation to the buyer when it specifically provided:
Was the action before the Municipal Court one for unlawful detainer within its exclusive original jurisdiction or one for rescission Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of
or annulment of a contract, which should be litigated before a Court of First Instance? cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to
the buyer. (Emphasis supplied).
HELD
YES, the Municipal Court had no jurisdiction over the case as it was one for rescission or annulment of a contract. When the Moreover, there was no waiver on the part of the private respondent of his right to be notified under paragraph 6 of the contract
contract between the parties provided for extrajudicial rescission, this takes legal effect only when the other party does not since it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate.
oppose it. Where it is objected to, a judicial determination of the issue is still necessary.
 Finally, it is a matter of public policy to protect buyers of real estate on instalment payments against onerous and oppressive
conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on instalment payments.
In his Complaint, petitioner had alleged violation by respondent Avellana of the stipulations of their agreement to sell and thus
unilaterally considered the contract rescinded. Respondent Avellana denied any breach on his part and argued that the principal As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should
issue was one of interpretation and/or rescission of the contract as well as of set-off. be replaced by another acceptable lot but since the property had already been sold to a third person and there is no evidence
on record that other lots are still available, private respondent is entitled to the refund of instalments paid plus interest at the
Under those circumstances, proof of violation is a condition precedent to resolution or rescission. It is only when the violation legal rate of 12% computed from the date of the institution of the action. It would be most inequitable if petitioners were to be
has been established that the contract can be declared resolved or rescinded. Upon such rescission, in turn, hinges a allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another.
pronouncement that possession of the realty has become unlawful. Thus, the basic issue is not possession but one of rescission
or annulment of a contract. which is beyond the jurisdiction of the Municipal Court to hear and determine. And if this is proved a Onstott not personally liable
justice of the peace court might make a finding to that effect, but it certainly cannot declare and hold that the contract is resolved Onstott was made liable because he was then the President of the corporation and the controlling stockholder but there was no
or rescinded. It is beyond its power so to do. sufficient proof that he used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just
because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not
The illegality of the possession of realty by a party to a contract to sell is premised upon the resolution of the contract, it follows of itself sufficient ground for disregarding the separate corporate personality.
that an allegation and proof of such violation, a condition precedent to such resolution or rescission, to render unlawful the
possession of the land or building erected thereon by the party who has violated the contract, cannot be taken cognizance of by Finally, there are no badges of fraud on the petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 (supra)
a justice of the peace court. of the contract when it rescinded the contract to sell extrajudicially and had sold it to a third person.

A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex Petitioner Palay, Inc. is liable to refund to respondent Dumpit the amount of P13,722.50, with interest at twelve (12%) p.a. from
proprio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and' November 8, 1974, the date of the filing of the Complaint.
determination. While a violation by a party of any of the stipulations of a contract on agreement to sell real property would entitle
the other party to resolved or rescind it, proof of violation of a contract is a condition precedent to resolution or rescission. It is BALANE CASE NOTE
only when the violation has been established that the contract can be declared resolved or rescinded. You cannot unilaterally rescind without giving notice to the other party.
BALANE CASE NOTE
When the contract between the parties provided for extrajudicial rescission, this takes legal effect only when the other party does ANGELES V. CALASANZ, 135 SCRA 323
not oppose it. Where it is objected to, a judicial determination of the issue is still necessary.

FACTS:
On December 19, 1957, defendants-appellants Ursula Torres Calasanz and plaintiffs-appellees Buenaventura Angeles and
PALAY INC V. CLAVE, 124 SCRA 638 Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest
per annum. The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay
Facts: the balance in monthly installments of P41.20 until fully paid,
1. On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott sold a parcel of land owned by the the installment being due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly installments
corporation to the private respondent, Nazario Dumpit, by virtue of a Contract to Sell. The sale price was P23,300.00 with 9% until July 1966, when their aggregate payment already amounted to P4,533.38.
interest per annum, payable with a down payment of P4,660.00 and monthly instalments of P246.42 until fully paid. Paragraph
6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly instalment after the lapse On December 7, 1966, the defendants-appellants wrote the plantiffs-appellees a letter requesting the remittance of past due
of 90 days from the expiration of the grace period of one month, without need of notice and with forfeiture of all instalments paid. accounts. On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs failed to meet
2. Respondent Dumpit paid the down payment and several instalments amounting to P13,722.50 with the last payment was subsequent payments. The plaintiffs’ letter with their plea for reconsideration of the said cancellation was denied by the
made on December 5, 1967 for instalments up to September 1967. Almost six (6) years later, private respondent wrote petitioner defendants.
offering to update all his overdue accounts and sought consent to the assignment of his rights to a certain Lourdes Dizon.
Petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and The plaintiffs-appellees filed a case before the Court of First Instance to compel the defendant to execute
that the lot had already been resold. in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they

4
12) That upon failure of the BUYER to fulfill any of the conditions herein stipulated, BUYER automatically and irrevocably his failure to comply with any of the herein conditions BUYER forfeits all money claims against OWNER and shall pay a monthly
authorizes OWNER to recover extra-judicially, physical possession of the land, building and other improvements which are the rental equivalent to his monthly installment under Condition 1 of this Contract from the date of the said failure to the date of
subject of this contract, and to take possession also extra-judicially whatever personal properties may be found within the recovery of physical possession by OWNER of the land, building and other improvements which are the subject of this Contract;
aforesaid premises from the date of said failure to answer for whatever unfulfilled monetary obligations BUYER may have with BUYER shall not remove his personal properties without the previous written consent of OWNER, who, should he take
OWNER; and this contract shall be considered as without force and effect also from said date; all payments made by the BUYER possession of such properties following the aforesaid failure of BUYER, shall return the same to BUYER only after the latter
to OWNER shall be deemed as rental payments without prejudice to OWNER's right to collect from BUYER whatever other shall have fulfilled all money claims against him by OWNER; in all cases herein, demand is waived;
monthly installments and other money obligations which may have been paid until BUYER vacates the aforesaid premises; upon
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
found out that they have already paid the total amount including interests, realty taxes and Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those
incidental expenses. The defendants alleged in their answer that the plaintiffs violated par. 6 of the contract to who in any manner contravene the terms thereof, are liable for damages. [Art. 1170, Civil Code].
sell when they failed and refused to pay and/or offer to pay monthly installments corresponding to the month of Also:
August, 1966 for more than 5 months, thereby constraining the defendants to cancel the said contract. 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. [Part 1, Art. 1191, Civil Code].
The Court of First Instance rendered judgment in favor of the plaintiffs, hence this appeal.
There is no doubt that the contract in question gave rise to reciprocal obligations. "Reciprocal obligations are those which arise
ISSUE: from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent
Has the Contract to Sell been automatically and validly cancelled by the defendants-appellants? upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon
the simultaneous fulfillment of the other" [Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1
RULING:
No. While it is true that par.2 of the contract obligated the plaintiffs-appellees to pay the defendants the The power to rescind is given to the injured party. "Where the plaintiff is the party who did not perform the undertaking
sum of P3,920 plus 7% interest per annum, it is likewise true that under par 12 the seller is obligated to transfer the title to the which he was bound by the terms of the agreement to perform, he is not entitled to insist upon the performance of the
buyer upon payment of the said price. contract by the defendant, or recover damages by reason of his own breach " [Seva vs. Alfredo Berwin 48 Phil. 581,
Emphasis supplied].
The contract to sell, being a contract of adhesion, must be construed against the party causing it. The
Supreme Court agree with the observation of the plaintiffs-appellees to the effect that the terms of a contract must be interpreted Another violation of the contract in question was the assignment and transfer, first to J. Amado Araneta, and subsequently, to
against the party who drafted the same, especially where such interpretation will help effect justice to buyers who, after having appellant Yulo, Jr., of the managerial rights over Boysaw without the knowledge or consent of Interphil.
invested a big amount of money, are now sought to be deprived of the same thru the prayed application of a contract clever in
its phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and its entirety is most unfair to The assignments, from Ketchum to Araneta, and from Araneta to Yulo, were in fact novations of the original contract which, to
the buyers. be valid, should have been consented to by Interphil.

Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an Novation which consists in substituting a new debtor in the place of the original one, may be made
aggregate amount of P4,533.38, the courts should only order the payment of the few remaining installments but not uphold the even without the knowledge or against the will of the latter, but not without the consent of the creditor.
cancellation of the contract. Upon payment of the balance of P671.67 without any interest thereon, the defendant must [Art. 1293, Civil Code, emphasis supplied].
immediately execute the final deed of sale in favor of the plaintiffs and execute the necessary transfer of documents, as provided
in par.12 of the contract. That appellant Yulo, Jr., through a letter, advised Interphil on September 5, 1961 of his acquisition of the managerial rights over
Boysaw cannot change the fact that such acquisition, and the prior acquisition of such rights by Araneta were done without the
consent of Interphil. There is no showing that Interphil, upon receipt of Yulo's letter, acceded to the "substitution" by Yulo of the
BOYSAW V. INTERPHIL PROMOTIONS, 148 SCRA 635 original principal obligor, who is Ketchum. The logical presumption can only be that, with Interphil's letter to the GAB expressing
concern over reported managerial changes and requesting for clarification on the matter, the appellees were not reliably informed
FACTS: of the changes of managers. Not being reliably informed, appellees cannot be deemed to have consented to such changes.
On May 1, 1961 Solomon Boysaw and his then Manager, Willie Ketchum, signed with Interphil Promotions, Inc. represented by
Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a boxing contest for the junior lightweight championship of the Under the law when a contract is unlawfully novated by an applicable and unilateral substitution of the obligor by another, the
world. aggrieved creditor is not bound to deal with the substitute.

It was stipulated that the bout would be held at the Rizal Memorial Stadium in Manila on September 30, 1961 or not later than The consent of the creditor to the change of debtors, whether in expromision or delegacion is an,
thirty [30] days thereafter should a postponement be mutually agreed upon, and that Boysaw would not, prior to the date of the indispensable requirement . . . Substitution of one debtor for another may delay or prevent the
boxing contest, engage in any other such contest without the written consent of Interphil Promotions, Inc. fulfillment of the obligation by reason of the inability or insolvency of the new debtor, hence, the
creditor should agree to accept the substitution in order that it may be binding on him.
Boysaw fought Louis Avila on June 19, 1961 in Las Vegas Nevada. Ketchum assigned to J. Amado Araneta the managerial
rights over Solomon Boysaw. J. Amado Araneta assigned to Alfredo J. Yulo, Jr. the managerial rights over Boysaw that he earlier In a show of accommodation, the appellees offered to advance the November 4, 1961 fight to October 28, 1961 just to place it
acquired from Ketchum and Ruskay. Yulo, Jr. wrote to Sarreal informing him of his acquisition of the managerial rights over within the 30- day limit of allowable postponements stipulated in the original boxing contract.
Boysaw and indicating his and Boysaw's readiness to comply with the boxing contract of May 1, 1961.
The refusal of Yulo to accept a postponement without any other reason but the implementation of the terms of the original boxing
On the same date, on behalf of Interphil Sarreal wrote a letter to the Games and Amusement Board [GAB] expressing concern contract entirely overlooks the fact that by virtue of the violations they have committed of the terms thereof, they have forfeited
over reports that there had been a switch of managers in the case of Boysaw, of which he had not been formally notified, and any right to its enforcement.
requesting that Boysaw be called to an inquiry to clarify the situation. On the validity of the fight postponement, the violations of the terms of the original contract by Yulo vested the Interphil with the
right to rescind and repudiate such contract altogether. That they sought to seek an adjustment of one particular covenant of the
The GAB called a series of conferences of the parties concerned culminating in the issuance of its decision to schedule the contract, is under the circumstances, within the appellee's rights.
Elorde-Boysaw fight for November 4, 1961. Yulo, Jr. refused to accept the change in the fight date, maintaining his refusal even
after Sarreal on September 26, 1961, offered to advance the fight date to October 28, 1961 which was within the 30-day period
of allowable postponements provided in the principal boxing contract of May 1, 1961. PILIPINAS BANK V. IAC, 151 SCRA 546

While an Elorde-Boysaw fight was eventually staged, the fight contemplated in the May 1, 1961 boxing contract never DOCTRINE
materialized. A contractual provision allowing "automatic rescission", without prior need of judicial rescission, resolution or cancellation, is
VALID. The remedy of one who feels aggrieved in a contract with an “automatic rescission” clause is to go to Court for the
As a result of the foregoing occurrences, on October 12, 1961, Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr. and Manuel cancellation of the rescission itself, in case the rescission is found unjustified under the circumstances.
Nieto, Jr. in the CFI of Rizal [Quezon City Branch] for damages allegedly occasioned by the refusal of Interphil and Sarreal,
aided and abetted by Nieto, Jr., then GAB Chairman, to honor their commitments under the boxing contract of May 1,1961. An “automatic rescission” clause in a contract, while valid, may be waived through the actions of the obligee when the obligee
allows the obligor to continue the fulfillment of the terms of the contract despite the initial breach bringing into force the automatic
ISSUE: rescission clause.
WON there was a violation of the fight contract of May 1, 1961; and if there was, who was guilty of such violation.
FACTS
HELD: Hacienda Benito, Inc. entered into a contract to sell with Manufacturers Bank and Trust Company, predecessor in interest of
YES. Boysaw and his manager violated the contract themselves Pilipinas Bank, over a parcel of land in Antipolo, Rizal. The contract contained an automatic rescission clause that allowed the
vendor to resell the property and to forfeit installments already made in favor of the vendor when the vendee fails to pay
RATIO: installments when due, “three or more consecutive installments as stipulated therein or to comply with any of the terms and
On the issue pertaining to the violation of the May 1, 1961 fight contract, the evidence established that the contract was violated conditions thereof…”
by appellant Boysaw himself when, without the approval or consent of Interphil, he fought Louis Avila on June 19, 1961 in Las
Vegas Nevada. During the contract, Hacienda sent series of notices to the Bank for the latter’s balances/arrearages. From time to time, the Bank
partially complied with this and requested for extensions.
While the contract imposed no penalty for such violation, this does not grant any of the parties the unbridled liberty to breach it
with impunity. Our law on contracts recognizes the principle that actionable injury inheres in every contractual breach. Thus: On May 19, 1970, the petitioner, for the last time, reminded the Bank to pay their balance. After more than two years [1973], the
Bank sent a letter expressing their desire to settle their desire to fully settle their obligation.

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
On March 27, 1974, petitioner wrote a letter to the Bank, informing them that the contract to sell had been rescinded. The Bank Article 1191 of the New Civil Code should be distinguished from rescission of contracts under Article 1383. Although both
filed Complaint for Specific Performance with Damages to compel petitioner to execute a deed of sale. presuppose contracts validly entered into and subsisting and both require mutual restitution when proper, they are not entirely
identical.
After trial, the lower court rendered a decision in the Bank’s favor, holding that petitioner could not rescind the contract to sell,
because: (a) petitioner waived the automatic rescission clause by accepting payment and by sending letters advising private While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code, from which the article was
respondents of the balances due, thus, looking forward to receiving payments thereon. Said decision was affirmed on appeal. based, was "resolution. Resolution is a principal action which is based on breach of a party, while rescission under
Hence, this Petition For Review on Certiorari. Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil Code,
which expressly enumerates the following rescissible contracts:
ISSUE/S 1. Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than
Whether or not the Contract to Sell was rescinded, under the automatic rescission clause contained therein. one fourth of the value of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
HELD 3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims due them;
YES. An “automatic rescission” clause in a contract, while valid, may be waived through the actions of the obligee when the 4. Those which refer to things under litigation if they have been entered into by the defendant without the knowledge
obligee allows the obligor to continue the fulfillment of the terms of the contract despite the initial breach bringing into force the and approval of the litigants or of competent judicial authority;
automatic rescission clause. Hacienda’s many extensions granted to the Bank never called attention to the proviso on "automatic 5. All other contracts specially declared by law to be subject to rescission.
rescission." Hacienda, by it’s own actions, waived the automatic rescission clause. The assailed decision is affirmed.

A contractual provision allowing "automatic rescission", without prior need of judicial rescission, resolution or cancellation, is FIL-ESTATE V. VERTEX, 698 SCRA 272 [2013]
VALID. The remedy of one who feels aggrieved in a contract with an “automatic rescission” clause is to go to Court for the
cancellation of the rescission itself, in case the rescission is found unjustified under the circumstances. FACTS:
FEGDI is a stock corporation whose primary business is the development of golf courses. FELI is also a stock corporation, but
is engaged in real estate development. FEGDI was the developer of the Forest Hills Golf and Country Club (Forest Hills) and, in
ONG V. CA, 310 SCRA 1 consideration for its financing support and construction efforts, was issued several shares of stock of Forest Hills.

Facts: Sometime in August 1997, FEGDI sold, on installment, to RS Asuncion Construction Corporation (RSACC) one Class "C"
Ong entered into an “Agreement of Purchase and Sale” with the Robles spouses concerning two parcels of land in San Antonio, Common Share of Forest Hills for P1,100,000.00. Prior to the full payment of the purchase price, RSACC sold, on February 11,
Quezon. The contract price was for P2M, where Ong, as buyer, will make an initial payment of 600,000 and the remaining 1999 the Class "C" Common Share to respondent Vertex Sales and Trading, Inc. (Vertex). RSACC advised FEGDI of the sale
balance to be paid in four quarterly installments. The initial payment was to be made by Ong to BPI to settle the loan of the to Vertex and FEGDI, in turn, instructed Forest Hills to recognize Vertex as a shareholder. For this reason, Vertex enjoyed
spouses (about almost 500,000) and the remaining amount (100,000) was paid to the spouses. Ong took possession of the said membership privileges in Forest Hills.
parcels of land together with their improvements, including a rice mill and a piggery. The spouses undertook to deliver the titles
upon full payment. Despite Vertex’s full payment, the share remained in the name of FEGDI. Seventeen (17) months after the sale (or on July 28,
2000), Vertex wrote FEDGI a letter demanding the issuance of a stock certificate in its name. FELI replied, initially requested
However, the post-dated checks issued by Ong for the installment payments were dishonored due to insufficiency of funds. To Vertex to first pay the necessary fees for the transfer. Although Vertex complied with the request, no certificate was issued. This
make the matters worse, Ong was not able to fully pay the loan of the spouses with BPI so the latter threatened to foreclose the prompted Vertex to make a final demand on March 17, 2001. As the demand went unheeded, Vertex filed on January 7, 2002 a
mortgage. Thus, the spouses were compelled to sell three transformers of the rice mill with Ong’s consent. Ong voluntarily Complaint for Rescission with Damages and Attachment against FEGDI, FELI and Forest Hills. It averred that the petitioners
permitted the spouses to operate the rice mill. defaulted in their obligation as sellers when they failed and refused to issue the stock certificate covering the subject share
despite repeated demands. On the basis of its rights under Article 1191 of the Civil Code, Vertex prayed for the rescission of the
The spouses then demanded from Ong the return of the properties, after which they filed for rescission and recovery of properties sale and demanded the reimbursement of the amount it paid (or P1,100,000.00), plus interest. During the pendency of the
with damages. During the pending of the suit, petitioner Ong introduced improvements on the property which prompted the rescission action (or on January 23, 2002), a certificate of stock was issued in Vertex’s name, but Vertex refused to accept it.
spouses to file for an injunction. The trial court ruled in favor of the spouses, which was affirmed on appeal.
ISSUE/S:
ISSUES: WON the contract entered into by the parties may be validly rescinded under Article 1191 of the New Civil Code; and Given the parties’ arguments, the sole issue for the Court to resolve is whether the delay in the issuance of a stock certificate
can be considered a substantial breach as to warrant rescission of the contract of sale.
HELD:
A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is in the nature of a contract to sell, as THE COURT’S RULING
distinguished from a contract of sale. In a contract of sale, the title to the property passes to the vendee upon the delivery of The petition lacks merit. Physical delivery is necessary to transfer ownership of stocks.
the thing sold; while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee
until full payment of the purchase price. In a contract to sell, the payment of the purchase price is a positive suspensive Section 63 of the Corporation Code provides:
condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the
vendor to convey title from acquiring an obligatory force. SEC. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed
The promise of the spouses to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property
by the petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the condition of and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person
full payment rendered the contract to sell ineffective and without force and effect. It must be stressed that the breach legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is
contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation. Failure to pay, in this recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number
instance, is not even a breach but merely an event which prevents the vendor's obligation to convey title from acquiring of the certificate or certificates and the number of shares transferred.
binding force. Hence, the agreement of the parties in the case at bench may be set aside, but not because of a breach
on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. In
a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force. this case, Vertex fully paid the purchase price by February 11, 1999 but the stock certificate was only delivered on January 23,
2002 after Vertex filed an action for rescission against FEGDI.
Discussion on rescission under Article 1191 in relation to rescission under Article 1383.

Petitioner contends that Article 1191 of the New Civil Code is not applicable since he has already paid respondent spouses a GOTESCO V. SPS. FAJARDO, 692 SCRA 319 [2013]
considerable sum and has therefore substantially complied with his obligation. He cites Article 1383 instead, to the effect that
where specific performance is available as a remedy, rescission may not be resorted to. FACTS:
Sps. Fajardo entered into a Contract to Sell with petitioner-corporation Gotesco Properties, Inc. (GPI) for the purchase of a lot
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to the contracting in Evergreen Executive Village, a subdivision project owned and developed by GPI located at Novaliches, Caloocan City. The
parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if this should be valid, subject lot is a portion of a bigger lot covered by Transfer Certificate of Title (TCT) No. 244220 (mother title). Under the contract,
by restoration of things to their condition at the moment prior to the celebration of the contract. It implies a contract, which even Sps. Fajardo undertook to pay the purchase within a 10-year period, including interest at the rate of nine percent (9%) per annum
if initially valid, produces a lesion or a pecuniary damage to someone. while GPI, on the other hand, agreed to execute a final deed of sale (deed) in favor of Sps. Fajardo upon full payment of the
stipulated consideration.
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal obligations. Reciprocal
obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that However, despite its full payment of the purchase price and subsequent demands, GPI failed to execute the deed and to deliver
the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously such that the the title and physical possession of the subject lot.
performance of one is conditioned upon the simultaneous fulfillment of the other. Rescission of reciprocal obligations under

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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Thus, Sps. Fajardo filed before the Housing and Land Use Regulatory Board-Expanded National Capital Region Field Office Since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to return the things which
(HLURBENCRFO) a complaint for specific performance or rescission of contract with damages against GPI and the members were the object of the contract, together with their fruits, and the price with its interest," the Court finds no justification to sustain
of its Board of Directors. petitioners’ position that said Article 1385 does not apply to rescission under Article 1191. x x x

Sps. Fajardo averred that GPI violated Section 20 of Presidential Decree No. 957 10 (PD 957) due to its failure to construct and In this light, it cannot be denied that only GPI benefited from the contract, having received full payment of the contract price plus
provide water facilities, improvements, infrastructures and other forms of development including water supply and lighting interests as early as January 17, 2000, while Sps. Fajardo remained prejudiced by the persisting non-delivery of the subject lot
facilities for the subdivision project. They also alleged that GPI failed to provide boundary marks for each lot and that the mother despite full payment. As a necessary consequence, considering the propriety of the rescission as earlier discussed, Sps.
title including the subject lot had no technical description and was even levied upon by the Bangko Sentral ng Pilipinas (BSP) Fajardo must be able to recover the price of the property pegged at its prevailing market value.
without their knowledge. They thus prayed that GPI be ordered to execute the deed, to deliver the corresponding certificate of
title and the physical possession of the subject lot within a reasonable period, and to develop Evergreen Executive Village; or in
the alternative, to cancel and/or rescind the contract and refund the total payments made plus legal interest. REYES V. ROSSI, 691 SCRA 57 [2013]

For their part, claimed that the failure to deliver the title to Sps. Fajardo was beyond their control because while GPI's petition Facts:
for inscription of technical description was favorably granted by the Regional Trial Court the same was reversed by the CA; this Petitioner Reyes and Advanced Foundation, represented by respondent Ettore Rossi, executed a deed of conditional sale
caused the delay in the subdivision of the property into individual lots with individual titles. Given the foregoing incidents, involving the purchase by Reyes of equipment consisting of a Dredging Pump. The parties agreed therein that Reyes would pay
petitioners thus argued that Article 1191 of the Civil Code (Code) – the provision on which Sps. Fajardo anchor their right of the sum of P3,000,000.00 as down payment, and the balance of P7,000,000.00 through four post-dated checks. Reyes complied,
rescission – remained inapplicable since they were actually willing to comply with their obligation but were only prevented from but he requested the restructuring of his obligation under the deed of conditional sale by replacing the four post-dated checks
doing so due to circumstances beyond their control. Separately, petitioners pointed out that BSP's adverse claim/levy which was with nine post-dated checks that would include interest accruing on the unpaid portion of the obligation.
annotated long after the execution of the contract had already been settled.
Reyes issued and delivered the following nine postdated checks drawn against the United Coconut Planters Bank. Rossi
ISSUE: deposited three of the post-dated checks but two of the checks were denied payment ostensibly upon Reyes’ instructions to stop
WON Sps. Fajardo have no right to rescind the contract considering that GPI's inability to comply therewith was due to reasons their payment, while the third was dishonored for insufficiency of funds. Rossi likewise deposited two more checks but the checks
beyond its control and thus, should not be held liable to refund the payments they had received. were returned with the notation Account Closed stamped on them. He did not anymore deposit the three remaining checks on
the assumption that they would be similarly dishonored.
HELD:
NO. Sps. Fajardo have a right to rescind the contract. Reyes commenced an action for rescission of contract and damages and sought judgment declaring the deed of conditional sale
"rescinded and of no further force and effect," and ordering Advanced Foundation to return the down payment with legal interest
RATIO: and to pay to him attorney’s fees, and various kinds and amounts of damages.
It is settled that in a contract to sell, the seller's obligation to deliver the corresponding certificates of title is simultaneous and
reciprocal to the buyer's full payment of the purchase price. In this relation, Section 25 of PD 957, which regulates the subject Rossi charged Reyes with five counts of estafa and five counts of violation of Batas Pambansa Blg. 22 for the dishonor of the
transaction, imposes on the subdivision owner or developer the obligation to cause the transfer of the corresponding certificate checks.
of title to the buyer upon full payment.
Reyes submitted his counter-affidavit claiming that the checks had not been issued for any valuable consideration; that he had
A perusal of the records shows that GPI acquired the subject property through a Deed of Partition and Exchange executed discovered from the start of using the dredging pump involved in the conditional sale that the Caterpillar diesel engine powering
between it and the former registered owner of the property. However, no plausible explanation was advanced by the petitioners the pump had been rated at only 560 horsepower instead of the 1200 horsepower; that welding works on the pump had neatly
as to why the petition for inscription was filed only after almost eight (8) years from the acquisition of the subject property. concealed several cracks; that he had written to Advanced Foundation complaining about the misrepresentations on the
specifications of the pump and demanding documentary proof of Advanced Foundation’s ownership of the pump; that he had
Neither did petitioners sufficiently explain why GPI took no positive action to cause the immediate filing of a new petition for caused the order to stop the payment of three checks; that Advanced Foundation had replied to his letter saying that the pump
inscription within a reasonable time from notice of the July 15, 2003 CA Decision which dismissed GPI’s earlier petition based had been sold to him on an as is, where is basis.
on technical defects, this notwithstanding Sps. Fajardo's full payment of the purchase price and prior demand for delivery of title.
Clearly, the long delay in the performance of GPI's obligation from date of demand was unreasonable and unjustified. It cannot The Assistant City Prosecutor handling the preliminary investigation recommended the dismissal of the charges of estafa and
therefore be denied that GPI substantially breached its contract to sell with Sps. Fajardo which thereby accords the the suspension of the proceedings relating to the violation of Batas Pambansa Blg. 22 based on a prejudicial question which the
latter the right to rescind the same pursuant to Article 1191 of the Code, viz: City Prosecutor of Makati approved.

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with Issues
what is incumbent upon him. W/N the civil action for rescission of the contract of sale raised a prejudicial question that required the suspension of the criminal
prosecution for violation of Batas Pambansa Blg. 22.
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. Ruling
The petition for review is without merit.
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 The action for the rescission of the deed of sale on the ground that Advanced Foundation did not comply with its obligation
1385 and 1388 and the Mortgage Law. actually seeks one of the alternative remedies available to a contracting party under Article 1191 of the Civil Code, to wit:

It is noteworthy to point out that rescission does not merely terminate the contract and release the parties from further obligations Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with
to each other, but abrogates the contract from its inception and restores the parties to their original positions as if no contract what is incumbent upon him.
has been made.31 Consequently, mutual restitution, which entails the return of the benefits that each party may have received
as a result of the contract, is thus required.32 To be sure, it has been settled that the effects of rescission as provided for in Article The injured party may choose between the fulfilment and the rescission of the obligation, with the payment of damages in either
1385 of the Code are equally applicable to cases under Article 1191, to wit: case. He may also seek rescission, even after he has chosen fulfilment, if the latter should become impossible.

xxxx The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
Mutual restitution is required in cases involving rescission under Article 1191.1âwphi1 This means bringing the parties
back to their original status prior to the inception of the contract. Article 1385 of the Civil Code provides, thus: This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles
ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with 1385 and 1388 and the Mortgage Law.
their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission
can return whatever he may be obligated to restore. 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
Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third is that in reciprocal obligations a party incurs in delay once the other party has performed his part of the contract; hence, the
persons who did not act in bad faith. 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
In this case, indemnity for damages may be demanded from the person causing the loss.
It is true that the rescission of a contract results in the extinguishment of the obligatory relation as if it was never created, the
This Court has consistently ruled that this provision applies to rescission under Article 1191: 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.

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
Accordingly, we agree with the holding of the CA that the civil action for the rescission of contract was not determinative of the
guilt or innocence of Reyes. We consider the exposition by the CA of its reasons to be appropriate enough, to wit: But in the SC’s view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic rescission. The
requirement for the right to resolve reciprocal obligations under the old provision has been retained in the third paragraph of
A careful perusal of the complaint for rescission of contract and damages reveals that the causes of action advanced by Article 1191, which states that "the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
respondent Reyes are the alleged misrepresentation committed by the petitioner and AFCSC and their alleged failure to comply a period." Consequently, even if the right to rescind is made available to the injured party, the obligation is not ipso facto
with his demand for proofs of ownership. On one hand, he posits that his consent to the contract was vitiated by the fraudulent erased by the failure of the other party to comply with what is incumbent upon him.
act of the company in misrepresenting the condition and quality of the dredging pump. Alternatively, he claims that the company
committed a breach of contract which is a ground for the rescission thereof. Either way, he in effect admits the validity and the The party entitled to rescind should apply to the court for a decree of rescission. The right cannot be exercised solely on a
binding effect of the deed pending any adjudication which nullifies the same. party’s own judgment that the other committed a breach of the obligation. The operative act which produces the resolution
of the contract is the decree of the court and not the mere act of the vendor. Since a judicial or notarial act is required by
Indeed, under the Jaw on contracts, vitiated consent does not make a contract unenforceable but merely voidable, the remedy law for a valid rescission to take place, the letter written by respondent declaring his intention to rescind did not operate to validly
of which would be to annul the contract since voidable contracts produce legal effects until they are annulled. On the other hand, rescind the contract.
rescission of contracts in case of breach pursuant to Article 1191 of the Civil Code of the Philippines also presupposes a valid
contract unless rescinded or annulled. What is more, it is evident that EMI had not rescinded the contract at all. The reports submitted by show entries as late as March
1999 (beyond pre-termination), signifying that EMI employees were availing of the services until the contract period were almost
over. The continued use by them of their privileges under the contract, with the apparent consent of EMI, belies any intention to
EDS MANUFACTURING V. HEALTH CHECK, GR 162802, OCT. 9, 2013 cancel or rescind it, even as they felt that they ought to have received more than what they got.

Facts:
Healthcheck (HCI) is a health maintenance organization that provides health and medical insurance to its clients. It maintains a CASE NOTE: HARMONIZING UP CASE WITH EDS MARKETING:
network of accredited hospitals and medical clinics, one of which is the De La Salle University Medical Center (DLSUMC) located
at Dasmariñas, Cavite. Eds Manufacturing (EMI) entered into a one-year contract with HCI for the insurance coverage of the In UP, the court said that parties are not prevented from agreeing that a contract is deemed cancelled (or resolved) in
former’s employees. After two months within the program, problems began to arise as HCI’s accreditation with DLSUMC was case of breach of the other party. This emanates from the reciprocal nature of the obligation under Art. 1191. Thus, a party
suspended because of the financial crisis. It happened again in two more instances and with other hospitals, prompting EMI to may consider the contract rescinded but does so at its own risk because the court may subsequently rule that rescission is not
rescind the agreement. However, EMI’s failed to collect the HMO cards and surrender them to HCI as stipulated in the agreement proper if the other party impugns such rescission. Thus, if there is automatic rescission and the injured party rescinds without
in order for the latter to finalize the reconciliation of the accounts. Thus, EMI employees were still using HCI’s services beyond objection from the alleged violator, then no judicial act is necessary. But in case the other party impugns the validity of the other
the pre-termination date. HCI reminded EMI that it would consider the agreement ongoing and subsisting until the cards are party's rescission, the former is not precluded from seeking relief from the court even if there's an automatic rescission provision.
surrendered. Without responding to this reminder, EMI sent two letters demanding the payment of the premiums that remained In effect, there's only a transfer of the initiative to sue--the defaulter will sue to question the rescission. In the normal course
unutilized from the date the agreement was rescinded. of things, it is the injured party who is supposed to file for rescission. "For it is only the final judgment of the corresponding court
that will conclusively and finally settle whether the action taken was or was not correct in law." Therefore, one party cannot
Pre-empting EMI’s threats of legal action, HCI instituted the present action based on the unlawful pre-termination of the unilaterally rescind based on its own determination that there is breach and such breach warranted a rescission because only
agreement and EMI’s failure to submit to a joint reconciliation of accounts and deliver such assets belonging to HCI. EMI the court can do that.
responded by alleging that HCI reneged on its duty to provide adequate medical coverage after paying the premium in full and
interposed a counterclaim for damages and unutilized premiums. The trial court ruled in favor of HCI. The same was reversed Thus, a party may go to court to question the rescission despite the automatic provision unless such party (defaulter) is barred
on appeal, stating that although HCI substantially breached its obligations, EMI did not validly rescind the agreement. Thus, the by "acquiescence, estoppel, or prescription." Thus, it is the court's determination that produces effect. So if one party considers
CA dismissed both the complaint by HCI and the counterclaim of EMI. it rescinded without judicial determination and the court finds rescission is not proper, such party may be liable for such action
(own risk). Thus, the court said in Eds that "even if the right to rescind is made available to the injured party, the obligation is not
The trial court ruled in favor of HCI. It found that EMI’s rescission of the Agreement on September 3, 1998 was not done through ipso facto erased by the failure of the other party to comply with what is incumbent upon him."
court action or by a notarial act and was based on casual or slight breaches of the contract. Moreover, despite the announced
rescission, the employees of EMI continued to avail of HCI’s services until March 1999. The services rendered by HCI from May In Eds, Eds unilaterally rescinded and it appears that Healthcheck was supposed to return the unused premiums upon delivery
1998 to March 1999 purportedly came to a total of P10,149,821.13. The court deducted from this figure the premium paid by of the HMO cards (allow rescission so to speak) but Eds did not deliver so the employees were still able to use the cards (so
EMI, leaving a net payable to HCI of P1,323,513.63, in addition to moral damages and attorney’s fees. EMI’s counterclaims, on this pertains to the risk that Eds took for unilaterally rescinding). SC said there was indeed substantial breach by HCI but it is the
the other hand, were dismissed for lack of merit. 3 judicial act that produces the effect. So when Eds "rescinded," such "rescission" was not yet operative and the continued use of
Eds of HCI's services beyond the contract period belied its intention to rescind.
On appeal, the CA reversed the decision of the Regional Trial Court (RTC) of Pasig City and ruled that although Healthcheck
International, (HCI) substantially breached their agreement, it also appears that Eds Manufacturing, Inc. (EMI) did not validly Article 1192
rescind the contract between them. Thus, the CA dismissed the complaint filed by HCI, while at the same time dismissing the
counterclaim filed by EMI. Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor
shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated
ISSUE: the contract, the same shall be deemed extinguished, and each shall bear his own damages. (n)

WON there was a valid rescission of the agreement between the parties.

HELD: CENTRAL BANK V. CA, 139 SCRA 46


No. The general rule is that rescission (more appropriately, 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 CASE SUMMARY
agreement. Tolentino made a loan from Island Savings Bank secured by a mortgage. The Bank did not release the whole amount but only
a portion thereof. Later, the Bank experienced liquidity problems and the Monetary Board of Central Bank prohibited it from
In his concurring opinion in Universal Food Corporation v. Court of Appeals, Justice J.B.L. Reyes clarifies: making new loans and much later, from doing business in the Philippines. Thereafter, the Acting Superintendent of Central Bank
It is probable that the petitioner’s confusion arose from the defective technique of the new Code that terms both took charge of its assets. Upon expiration of the loan term, the Bank filed extrajudicial foreclosure of the mortgage. Was there a
instances as "rescission" without distinction between them; unlike the previous Spanish Code of 1889 that perfected contract of loan when only a portion of the amount was delivered?
differentiated between "resolution" for breach of stipulations from "rescission" by reason of lesion or damage. But
the terminological vagueness does not justify confusing one case with the other, considering the patent difference The Supreme Court held that there was only partial delivery. As such, the contract is deemed perfect only in so far as what has
in causes and results of either action. been delivered. The mortgage cannot be entirely foreclosed, except for up to the amount of the actual amount released, but the
Bank can recover the interest of the partial loan. Tolentino cannot anymore demand the remaining amount of the loan from the
Thus, the rescission referred to in Article 1191, more appropriately referred to as resolution, is on the breach of faith by one Bank because he defaulted on his payment. His liability offsets the liability of the Bank to him.
of the parties which is violative of the reciprocity between them.
FACTS
In the present case, it is apparent that HCI violated its contract with EMI to provide medical service to its employees in a Apr 28, 1965: Tolentino’s loan application of P80k w/the Island Savings Bank (ISB) was approved. As security, he executed a
substantial way. As aptly found by the CA, there was gross denial of services to EMI’s employees at a time when the delivery real estate mortgage over his 100-hec land in Cubo, Las Nievas, Agusan. Terms of the loan:
was crucial to their health and lives. However, although a ground exists to validly rescind the contract between the parties, it 1.lump sum loan of P80k
appears that EMI failed to judicially rescind the same. In Iringan v. Court of Appeals, the SC reiterated the rule that in the 2.repayable in semi-annual installments for 3 yrs w/12% annual interest
absence of a stipulation, a party cannot unilaterally and extrajudicially rescind a contract. 3.loan to be used solely as an additional capital to develop his other property into a subdivision

Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic May 22, 1965: P17k partial release. Tolentino & his wife signed a promissory note for such amount at 12% annual interest
rescission has been stipulated. It is to be noted that the law uses the phrase "even though" emphasizing that when no payable in 3yrs from date of execution of contract at semi-annual installments of P3,459.00. Advance 6-month interest for the
stipulation is found on automatic rescission, the judicial or notarial requirement still applies.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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P80k loan was deducted from the P17k amounting to P4,800.00. But such amount was refunded to Tolentino on July 23, 1965. The mortgage can’t be enforced for more than the actual sum due (Metropolitan Life Ins. v Peterson). Since ISB failed to furnish
No fund available yet for the P63k balance. the P63k balance, the mortgage is unenforceable to such extent w/c is 78.75% of the total loan. Thus, 78.75 of the 100-hec
mortgage is unenforceable. The remaining 21.25 hec is more than sufficient to secure the P17k debt.
Aug. 13, 1965: Monetary Board of Central Bank issued Resolution No. 1049 finding ISB suffering liquidity problems. Bank was
prohibited making new loans & investments except in gov’t securities & loans already approved subj to the review of the Supt CC Art. 2089’s rule on indivisibility of real estate mortgage is not applicable since such rule presupposes several heirs of the
of Banks who may impose certain limitations. debtor/creditor w/c is not the case here.

June 14, 1968: Monetary Board issued Resolution No. 967 finding that ISB failed to put up required capital to restore its solvency. Holding:
Bank prohibited from doing business in RP & Acting Supt of Banks to take charge of ISB’s assets. 1.Tolentino to pay ISB P17k + P41,210.00 as 12% interest per annum from May 22, 1965 to Aug. 22, 1985 and 12% interest on
total amount counted from Aug. 22, 1985 until paid.
Aug. 1, 1968: due to Tolentino’s failure to pay P17k covered by promissory note, ISB filed for extra judicial foreclosure of the 2.In case Tolentino fails to pay, his real estate mortgage of 21.25 hectares shall be foreclosed to satisfy his total indebtedness.
real estate mortgage. Sheriff scheduled auction for Jan. 22, 1969. 3.78.75 hectares real estate mortgage is unenforceable & ordered released in favor of Tolentino.

Jan. 20, 1969: Tolentino filed a petition for injunction, specific performance or recission & damages w/prelim injunction alleging Article 1197
that since ISB failed to deliver P63k balance, he’s entitled to specific performance by ordering delivery of balance w/12% per
annum interest from Apr. 28, 1965 & if such can’t be done, to rescind mortgage. 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.
Court issued TRO.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
CFI: ordered Tolentino to pay ISB P17k + legal interest & charges due and TRO lifted so foreclosure may proceed.
In every case, the courts shall determine such period as may under the circumstances have been
CA: Affirmed dismissal of Tolentino’s petition but ruled that ISB can neither foreclose mortgage nor collect P17k loan. probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.
(1128a)
Issues & Ratio:
1.WON ISB’s defenses in its failure to fulfill its obligation are acceptable – NO
CHAVES V. GONZALES, 32 SCRA 547
In reciprocal obligations such as in this case, obligation/promise of each party is the consideration for that of the other. When
one party has performed or is ready & willing to perform his part, the other party who has not yet performed or is not ready & FACTS:
willing incurs in delay (CC Art. 1169). Thus, consideration for Tolentino’s promise to pay was ISB’s obligation to furnish P80k In the early part of July, 1963, the plaintiff delivered to the defendant, who is a typewriter repairer, a portable typewriter for
loan. Oblig began when Tolentino executed real estate mortgage and it lasted until Central Bank issued Resolution No. 967 w/c routine cleaning and servicing. The defendant was not able to finish the job after some time despite repeated reminders made
made it legally impossible for ISB to furnish the balance. Resolution No. 1049 can’t interrupt ISB’s default in complying w/its by the plaintiff. The defendant merely gave assurances, but failed to comply with the same. In October, 1963, the defendant
oblig since it did not prohibit bank from releasing the loan balance of loan agreements previously contracted. asked from the plaintiff the sum of P6.00 for the purchase of spare parts, which amount the plaintiff gave to the defendant.

Mere pecuniary inability to fulfill an engagement does not discharge the oblig of the contract nor does it constitute any defense On October 26, 1963, after getting exasperated with the delay of the repair of the typewriter, the plaintiff went to the house of
to a decree of specific performance (Gutierrez Repide v. Afzelius) and mere fact of insolvency of a debtor is never an excuse for the defendant and asked for the return of the typewriter. The defendant delivered the typewriter in a wrapped package. On
the non-fulfillment of an oblig but instead it’s taken as a breach of contract by him (CJS). reaching home, the plaintiff examined the typewriter returned to him by the defendant and found out that the same was in
shambles, with the interior cover and some parts and screws missing. On October 29, 1963, the plaintiff sent a letter to
Fact that Tolentino demanded & accepted the refund of pre-deducted 6-month interest of P4,800 can’t be taken as a waiver of the dependant formally demanding the return missing parts, the interior cover and the sum of P6.00 (Exhibit D). The following
his rt to collect balance. In fact, collection of the pre-deducted interest was improper considering that only P17k was released. A day, the defendant returned to the plaintiff some of the missing parts, the interior cover and the P6.00.
person can’t be legally charged interest for a non-existing debt. In accepting the refund, Tolentino was only exercising his right.
On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business Machines, and the repair job cost him a total
ISB claims that there was an overvaluation of the loan collateral. But such does not exempt it from complying w/its reciprocal of P89.85, including labor and materials
oblig. Bank officials should exercise caution & prudence in the discharge of their functions by investigating existence & valuation
of properties being offered as loan security. They can’t rely merely on the customer’s representation. Besides, lower court On August 23, 1965, the plaintiff commenced this action before the City Court of Manila, demanding from the defendant the
prevented petitioner from presenting proof on alleged over-valuation because of their failure to raise the same in their pleadings payment of P90.00 as actual and compensatory damages, P100.00 for temperate damages, P500.00 for moral damages, and
in effect waiving their right to do so (ROC Sec. 9, Rule 9). Thus, such can’t be raised in the SC. P500.00 as attorney's fees.

2.WON a an action for specific performance can prosper – NO "In his answer as well as in his testimony given before this court, the defendant made no denials of the facts narrated above,
except the claim of the plaintiff that the typewriter was delivered to the defendant through a certain Julio Bocalin, which the
ISB is now prohibited from doing further business by Monetary Board Resolution No. 967. defendant denied allegedly because the typewriter was delivered to him personally by the plaintiff.

3.WON recission is proper – YES "The repair done on the typewriter by Freixas Business Machines with the total cost of P89.85 should not, however, be fully
chargeable against the defendant. The repair invoice, Exhibit C, shows that the missing parts had a total value of only P31.10.
But only for the P63k balance w/c ISB failed to deliver. Judgment was rendered ordering the defendant to pay the plaintiff the sum of P31.10, and the costs of suit.

Tolentino is bound by the promissory note he released WRT the P17k loan. He has a reciprocal oblig to pay such when it falls The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves, is that it awarded only the value of the
due. So WRT to this amount, he’s not entitled to recission since he’s also a party in default (CC Art. 1191). As a matter of fact, missing parts of the typewriter, instead of the whole cost of labor and material that went into the repair of the machine,
rt to rescind belongs to the aggrieved party, ISB. Had he not signed a promissory note, Tolentino would be entitled to ask for as provided for in Article 1167 of the Civil Code, reading as follows:
recission of entire loan there being no date for him to perform his reciprocal oblig to pay.
"Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.
Since both parties were in default, they’re both liable for damages. "This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed
that what has been poorly done be undone."
CC Art. 1192: In case both parties committed a breach of their reciprocal obligations, the liability of the first infractor
shall be equitably tempered by the courts. Thus, ISB’s liability for damages is offset by Tolentino’s liability for damages On the other hand, the position of the defendant-appellee, Fructuoso Gonzales, is that he is not liable at all, not even for the
in the form of penalties & surcharges. sum of P31.10 because his contract with plaintiff-appellant did not contain a period, so that plaintiff appellant did not
contain a period, so that plaintiff-appellant should have first filed a petition for the court to fix the period, under Article
The liability of Tolentino for the interest of the P17k debt shall not be included in offsetting the liabilities of both parties since he 1197 of the Civil Code, within which the defendant-appellee could be held liable for breach of contract.
derived some benefit for his use of said amount. But Tolentino’s real estate mortgage can’t be entirely foreclosed to satisfy his
P17k debt. Note that the consideration of the accessory contract of the real estate mortgage is the same as that of the principal HELD:
contract. In both instances, the consideration of the debtor’s oblig to pay is the existence of a valid, voidable or unenforceable The appealed judgment states that the "plaintiff delevered to the defendant... a portable typewriter for routine cleaning and
debt (CC Art. 2086 in relation to Art. 2052). The consideration in executing a mortgage may either be a prior or subsequent servicing"; that the "defendant was not able to finish the job after some time despite repeated reminders made by the plaintiff";
matter. But when the consideration is subsequent, the mortgage can only take effect when the debt secured by it is created as that the "defendant merely gave assurances, but failed to comply with the same"; and that "after getting exasperated with the
a binding contract to pay. And when there’s partial failure of consideration, the mortgage becomes unenforceable to the extent delay of the repair of the typewriter," the plaintiff went to the house of the defendant and asked for its return, which was done.
of such failure. The inferences derivable from these findings of fact are that the appellant and the appellee had a perfected contract for
cleaning and servicing a typewriter; that, they intended that the defendant was to finish it at some future time, although
such time was not specified; and that such time had, passed without the work having been accomplished, for the
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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defendant returned the typewriter cannibalized and unrepaired, which in itself is a breach of his obligation, without
demanding that he should be given more time to finish the job, or compensation for the work he had already done. The As a result the plaintiff filed a case for unlawful detainer for the restitution of the land claiming that article 1569 of the Civil Code
time for compliance having evidently expired, and there being a breach of contract by non-performance, it was provided that a lessor may judicially dispossess the lessee upon the expiration of the conventional term or of the legal term; the
academic for the plaintiff to have first petitioned the court to fix a period for the performance of the contract before conventional term — that is, the one agreed upon by the parties; the legal term, in defect of the conventional, fixed for leases by
filing his complaint in this case. Defendant cannot invoke Article 1197 of the Civil Code for he virtually admitted articles 1577 and 1581. The Plaintiffs argued that the duration of the lease depends upon the will of the lessor on the basis of
nonperformance by returning the typewriter that he was obliged to repair in a non-working condition, with essential Art. 1581 which provides that, "When the term has not been fixed for the lease, it is understood to be for years when an annual
parts missing. The fixing of a period would thus be a mere formality and would serve no purpose that to delay (cf. rental has been fixed, for months when the rent is monthly. . . ." The second clause of the contract provides as follows: "The rent
Tiglao, et al. v. Manila Railroad Co., 98 Phil. 181). of the said land is fixed at 25 pesos per month."

It is clear that the defendant-appellee contravened the tenor of his obligation because he not only did not repair the typewriter The lower court ruled in favor of the Plaintiffs on the basis of Article 1581 of the Civil Code, the law which was in force at the
but returned it "in shambles," according to the appealed decision. For such contravention, as appellant contends, he is liable time the contract was entered into. It is of the opinion that the contract of lease was terminated by the notice given by the plaintiff.
under Article 1167 of the Civil Code, jam quot, for the cost of executing the obligation in a proper manner. The cost of the The judgment was entered upon the theory of the expiration of a legal term which does not exist, as the case requires that a
execution of the obligation in this case should be the cost of the labor or service expended in teh repair of the term be fixed by the courts under the provisions of article 1128 with respect to obligations which, as is the present, are terminable
typewriter, which is in the amount of P58.75, because the obligation or contract was to repair it. at the will of the obligee.

In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code , for the cost of the missing parts, ISSUES:
in the amount P31.10, for in his obligaiton to repair the typewriter he was bound, but failed or neglected, to return it in Whether or not the parties have agreed upon the duration of the lease, and that the lease depends upon the will of the lessee.
the same condition it was when he received it.
HELD:
Appellant's claims for moral and temperate damages and attorney's fees were, however correctly rejected by the trial court, for YES, the parties have agreed upon a term hence Art. 1581 is inapplicable. The legal term cannot be applied under Art 1581 as
these were not alleged in his complaint (Record on Appeal, pages 105). Claims for damages and attorney's fees must be it appears that there was actually an agreement between the parties as to the duration of the lease, albeit implied that the lease
pleaded, and the existence of, the actual basis thereof must be proved. is to be dependent upon the will of the lessee. It would be absurd to accept the argument of the plaintiff that the contract was
terminated at its notice, given this implication.
The appealed judgment thus made no findings on these claims, nor on the fraud or malice charged to the appellee. As no findings
of fact were made on damages and attorney's fees, there is no factual basis upon which to make an award therefor. Appellant Interestingly, the contract should not be understood as one stipulated as a life tenancy, and still less as a perpetual lease since
is bound by such judgment of the court, a quo, by reason of his having resorted directly to the Supreme Court on questions of the terms of the contract express nothing to this effect, even if they implied this idea. If the lease could last during such time as
law. the lessee might see fit, because it has been so stipulated by the lessor, it would last, first, as long as the will of the lessee —
that is, all his life; second, during all the time that he may have succession, inasmuch as he who contracts does so for himself
IN VIEW OF THE FOREGOING REASONS, the appealed judgment is hereby modified, by ordering the defendants-appellee to and his heirs. (Art. 1257 of the Civil Code.) The lease in question does not fall within any of the cases in which the rights and
pay, as he is hereby ordered to pay, the plaintiff-appellant the sum of P89.85, with interest at the legal rate from the filing of the obligations arising from a contract cannot be transmitted to heirs, either by its nature, by agreement, or by provision of law.
complaint. Costs in all instances against appellee Fructuoso Gonzales. Moreover, being a lease, then it must be for a determinate period. (Art. 1543.) By its very nature it must be temporary, just as by
reason of its nature, an emphyteusis must be perpetual, or for an unlimited period. (Art. 1608.)
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Ruiz Castro, Fernando, Teehankee and Villamor, JJ., concur.
Barredo J., did not take part. The duration of the lease does not depend solely upon the will of the Lessee (defendant).

It cannot be concluded that the termination of the contract is to be left completely at the will of the lessee simply because it has
ENCARNACION V. BALDOMAR, 77:470 been stipulated that its duration is to be left to his will.

FACTS: The Civil Code has made provision for such a case in all kinds of obligations. In speaking in general of obligations with a term it
Vicente Singson Encarnacion leased his house to Jacinta Baldomar and her son, Lefrando Fernando upon a month-to-month has supplied the deficiency of the former law with respect to the "duration of the term when it has been left to the will of the
basis. After Manila was liberated in the last war, Singson Encarnacio notified Baldomar and her son Fernando to vacate the debtor," and provides that in this case the term shall be fixed by the courts. (Art. 1128, sec. 2.) In every contract, as laid down
house because he needed it for his office as a result of the destruction of the building where he had his office before. Despite by the authorities, there is always a creditor who is entitled to demand the performance, and a debtor upon whom rests the
the demand, obligation to perform the undertaking. In bilateral contracts the contracting parties are mutually creditors and debtors. Thus, in
Baldomar and Fernando continued their occupancy. this contract of lease, the lessee is the creditor with respect to the rights enumerated in article 1554, and is the debtor with
respect to the obligations imposed by articles 1555 and 1561. The term within which performance of the latter obligation is due
The defense of Baldomar and Fernando was that the contract with Singson Encarnacion authorized them to continue occupancy is what has been left to the will of the debtor. This term it is which must be fixed by the courts.
indefinitely while they should faithfully fulfill their obligation with respect to payment of rentals. Singson Encarnacion contended
that the lease had always and since the beginning been upon a month-to-month basis. The only action which can be maintained under the terms of the contract is that by which it is sought to obtain from the judge the
determination of this period, and not the unlawful detainer action which has been brought — an action which presupposes the
ISSUE: expiration of the term and makes it the duty of the judge to simply decree an eviction. To maintain the latter action it is sufficient
Was it tenable for Singson Encarnacion to discontinue the lease of Baldomar and her son? to show the expiration of the term of the contract, whether conventional or legal; in order to decree the relief to be granted in the
former action it is necessary for the judge to look into the character and conditions of the mutual undertakings with a view to
RULING: supplying the lacking element of a time at which the lease is to expire.
The continuance and fulfillment of the contract of lease cannot be made to depend solely and exclusively upon the free and
uncontrolled choice of the lessees between continuing paying the rentals or not, completely depriving the owner of all say in the The lower court’s judgment is erroneous and therefore reversed and the case was remanded with directions to enter a judgment
matter. Furthermore, carried to its logical conclusion, the defense thus set up by defendant Lefrado Fernando would leave to of dismissal of the action in favor of the defendant, the Manila Lawn Tennis Club.
the sole and exclusive will of one of the contracting parties (defendants in this case) the validity and fulfillment of the contract of
lease, within the meaning of article 1256 of the Civil Code, since the continuance and fulfillment of the contract would then
depend solely and exclusively upon their free and uncontrolled choice between continuing paying the rentals or not, completely PHILBANKING V. LUI SHE, 21 SCRA 53
depriving the owner of all say in the matter. If this defense were to be allowed, so long as defendants elected to continue the
lease by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner Facts:
should desire the lease to continue, the lessees could effectively thwart his purpose if they should prefer to terminate the contract Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a piece of land in Manila. The sisters
by the simple expedient of stopping payment of the rentals. This, of course, is prohibited by the aforesaid article of the Civil lived in one of the houses, while Wong Heng, a Chinese, lived with his family in the restaurant. Wong had been a long-time
Code. lessee of a portion of the property, paying a monthly rental of P2,620. Justina Santos then became the owner of the entire
property as her sister died with no other heir. Wong became Justina’s entrusted person to whom she delivered various amounts
for safekeeping, including rentals from her property at the corner of Ongpin and Salazar streets and the rentals which Wong
ELEIZEGUI V. LAWN TENNIS CLUB, 2:309 himself paid as lessee of a part of the Rizal Avenue property. Justina Santos executed on November 15, 1957 a contract of
[note: taken from http://lawsandfound.blogspot.com/2013/07/eleizegui-v-manila-lawn-tennis-club.html] lease (Plff Exh. 3) in favor of Wong, covering the portion then already leased to him and another portion fronting Florentino
Torres street for 50 years, although the lessee was given the right to withdraw at any time from the agreement. Ten days later
FACTS: (November 25), the contract was amended (Plff Exh. 4) so as to make it cover the entire property, including the portion on which
A contract of lease was executed on January 25, 1980 over a piece of land owned by the plaintiffs Eleizegui (Lessor) to the the house of Justina Santos stood, at an additional monthly rental of P360. For his part Wong undertook to pay, out of the rental
Manila Lawn Tennis Club, an English association (represented by Mr. Williamson) for a fixed consideration of P25 per month due from him.
and accordingly, to last at the will of the lessee. Under the contract, the lessee can make improvements deemed desirable for
the comfort and amusement of its members. It appeared that the plaintiffs terminated the lease right on the first month. The On December 21 she executed another contract (Plff Exh. 7) giving Wong the option to buy the leased premises. The option,
defendant is in the belief that there can be no other mode of terminating the lease than by its own will, as what they believe has written in Tagalog, imposed on him the obligation to pay for the food of the dogs and the salaries of the maids in her household,
been stipulated.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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the charge not to exceed P1,800 a month. The option was conditioned on his obtaining Philippine citizenship, a petition for which Development Co., Lt. filed its complaint against J. M. Tuason & Co., Inc., and instance, seeking to compel the latter to comply
was then pending in the Court of First Instance of Rizal. with their obligation, as stipulated in the above-mentioned deed of sale, and/or to pay damages in the event they failed or refused
to perform said obligation.
On November 18, 1958 she executed two other contracts, one (Plff Exh. 5) extending the term of the lease to 99 years, and
another (Plff Exh. 6) fixing the term of the option of 50 years. In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 & Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter particularly setting up the
279), she bade her legatees to respect the contracts she had entered into with Wong, but in a codicil (Plff Exh. 17) of a later date principal defense that the action was premature since its obligation to construct the streets in question was without a definite
(November 4, 1959) she claims that the various contracts were made by her because of machinations and inducements practiced period which needs to he fixed first by the court in a proper suit for that purpose before a complaint for specific performance will
by him, she now directed her executor to secure the annulment of the contracts. prosper.
Security Bank & Trust Co was then appointed the guardian of Justina’s properties.
The lower court rendered a decision giving defendant Gregorio Araneta, Inc., a period of two (2) years from notice hereof, within
Issue: which to comply with its obligation under the contract. Defendant Gregorio Araneta, Inc. presented a motion to reconsider the
WON the contracts were freely entered into? YES above quoted order, which motion, plaintiff opposed.

RATIO: Gregorio Araneta, Inc. contended mainly that the relief granted, i.e., fixing of a period, under the amendatory decision of July 16,
So it was held in Melencio v. Dy Tiao Lay that a "provision in a lease contract that the lessee, at any time before he erected any 1960, was not justified by the pleadings and not supported by the facts submitted at the trial of the case in the court below and
building on the land, might rescind the lease, can hardly be regarded as a violation of article 1256 [now art. 1308] of the Civil that the relief granted in effect allowed a change of theory after the submission of the case for decision.
Code."
Ruling on the above contention, the appellate court declared that the fixing of a period was within the pleadings and that there
Here, the right of the lessee to continue the lease or to terminate it is so circumscribed by the term of the contract that it cannot was no true change of theory after the submission of the case for decision since defendant-appellant Gregorio Araneta, Inc.
be said that the continuance of the lease depends upon his will. At any rate, even if no term had been fixed in the agreement, itself squarely placed said issue by alleging in paragraph 7 of the affirmative defenses contained in its answer which reads —
this case would at most justify the fixing of a period but not the annulment of the contract. 7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a reasonable time within which to
comply with its obligations to construct and complete the streets on the NE, NW and SW sides of the lot in question;
Indeed, the charge of undue influence in this case rests on a mere inference drawn from the fact that Justina Santos could not that under the circumstances, said reasonable time has not elapsed;
read (as she was blind) and did not understand the English language in which the contract is written, but that inference has been
overcome by her own evidence. As it was with the lease contract (Plff Exh. 3), so it was with the rest of the contracts (Plff Exhs. ISSUE:
4-7) — the consent of Justina Santos was given freely and voluntarily. WON fixing a period for Araneta fulfill the obligation was justified

HELD: NO
LIM V. PEOPLE, 133 SCRA 333
RATIO:
Facts: The decision of the Court of Appeals, affirming that of the Court of First Instance is legally untenable. The fixing of a period by
... The appellant is a businesswoman. On January 10, 1966, the appellant went to the house of Maria Ayroso and proposed to the courts under Article 1197 of the Civil Code of the Philippines is sought to be justified on the basis that petitioner (defendant
sell Ayroso's tobacco. Ayroso agreed to the proposition of the appellant to sell her tobacco consisting of 615 kilos at P1.30 a kilo. below) placed the absence of a period in issue by pleading in its answer that the contract with respondent Philippine Sugar
The appellant was to receive the overprice for which she could sell the tobacco. This agreement was made in the presence of Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable time within which to comply with its obligation
plaintiff's sister, Salud G. Bantug. Salvador Bantug drew the document, Exh. A, dated January 10, 1966. to construct and complete the streets." Neither of the courts below seems to have noticed that, on the hypothesis stated,
what the answer put in issue was not whether the court should fix the time of performance, but whether or not the
XxxThis is to certify that I have received from Mrs. Maria de Guzman Vda. de Ayroso. of Gapan, Nueva Ecija, six hundred fifteen parties agreed that the petitioner should have reasonable time to perform its part of the bargain. If the contract so
kilos of leaf tobacco to be sold at Pl.30 per kilo. The proceed in the amount of Seven Hundred Ninety Nine Pesos and 50/100 (P provided, then there was a period fixed, a "reasonable time;" and all that the court should have done was to determine if that
799.50) will be given to her as soon as it was sold.xxx reasonable time had already elapsed when suit was filed if it had passed, then the court should declare that petitioner had
breached the contract, as averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had
Whether or not the Honorable Court of Appeals was legally right in holding that the foregoing document (Exhibit "A") "fixed a not yet elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be logically
period" and "the obligation was therefore, immediately demandable as soon as the tobacco was sold" (Decision, p. 6) as against held that under the plea above quoted, the intervention of the court to fix the period for performance was warranted,
the theory of the petitioner that the obligation does not fix a period, but from its nature and the circumstances it can be inferred for Article 1197 is precisely predicated on the absence of any period fixed by the parties.
that a period was intended in which case the only action that can be maintained is a petition to ask the court to fix the duration
thereof Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial
court's amended decision nowhere declared any such fact) still, the complaint not having sought that the Court should set
Issue: a period, the court could not proceed to do so unless the complaint in as first amended; for the original decision is
Whether the receipt, Exhibit "A", is a contract of agency to sell or a contract of sale of the subject tobacco between petitioner clear that the complaint proceeded on the theory that the period for performance had already elapsed, that the contract
and the complainant, Maria de Guzman Vda. de Ayroso, thereby precluding criminal liability of petitioner for the crime charged. had been breached and defendant was already answerable in damages.

Held: Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is defective in
Contract of agency, that no basis is stated to support the conclusion that the period should be set at two years after finality of the judgment. The list
paragraph of Article 1197 is clear that the period can not be set arbitrarily. The law expressly prescribes that —
It is clear in the agreement, Exhibit "A", that the proceeds of the sale of the tobacco should be turned over to the complainant as the Court shall determine such period as may under the circumstances been probably contemplated by the parties.
soon as the same was sold, or, that the obligation was immediately demandable as soon as the tobacco was disposed of. Hence,
Article 1197 of the New Civil Code, which provides that the courts may fix the duration of the obligation if it does not fix a period, All that the trial court's amended decision says in this respect is that "the proven facts precisely warrant the fixing of such a
does not apply. period," a statement manifestly insufficient to explain how the two period given to petitioner herein was arrived at.

It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that
ARANETA INC V. PHIL. SUGAR ESTATES, 20 SCRA 330 "the obligation does not fix a period" (or that the period is made to depend upon the will of the debtor)," but from the
nature and the circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary
FACTS: point settled, the Court must then proceed to the second step, and decide what period was "probably contemplated by
J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as the Sta. Mesa Heights the parties" (Do., par. 3). So that, ultimately, the Court can not fix a period merely because in its opinion it is or should be
Subdivision, and covered by a Torrens title in its name. On July 28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold reasonable, but must set the time that the parties are shown to have intended. As the record stands, the trial Court appears to
a portion thereof to Philippine Sugar Estates Development Co., Ltd. The parties stipulated, among in the contract of purchase have pulled the two-year period set in its decision out of thin air, since no circumstances are mentioned to support it. Plainly, this
and sale with mortgage, that the buyer will — is not warranted by the Civil Code.
Build on the said parcel land the Sto. Domingo Church and Convent
In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land described
while the seller for its part will — therein was occupied by squatters, because the fact is expressly mentioned therein. As the parties must have known that they
Construct streets on the NE and NW and SW sides of the land herein sold so that the latter will be a block could not take the law into their own hands, but must resort to legal processes in evicting the squatters, they must have realized
surrounded by streets on all four sides; and the street on the NE side shall be named "Sto. Domingo Avenue;" that the duration of the suits to be brought would not be under their control nor could the same be determined in advance. The
conclusion is thus forced that the parties must have intended to defer the performance of the obligations under the contract until
The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto. Domingo Church and Convent, but the squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc.
the seller, Gregorio Araneta, Inc., which began constructing the streets, is unable to finish the construction of the street in the
Northeast side named (Sto. Domingo Avenue) because a certain third-party, by the name of Manuel Abundo, who has been
physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine Sugar Estates
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the circumstances expressly declared to be solidary, consequently each defendant is obliged to pay only his own pro-rata or 1/4 of the amount due
admit no other reasonable view; and this very indefiniteness is what explains why the agreement did not specify any exact and payable.
periods or dates of performance.
A writ of execution was issued by the court for the payment of P82,500 [P55,000 (balance from the whole debt) + 27500 (unpaid
It follows that there is no justification in law for the setting the date of performance at any other time than that of the eviction of shares of initial payment from two other defendants or P13,750 + P13750)] against the properties of the defendants including
the squatters occupying the land in question; and in not so holding, both the trial Court and the Court of Appeals committed Ronquillo, “singly or jointly liable.” The sheriff issued a notice for the sale of certain furniture and appliances found in Ronquillo’s
reversible error. It is not denied that the case against one of the squatters, Abundo, was still pending in the Court of Appeals residence to satisfy the sum of P82,500.
when its decision in this case was rendered.
Issue:
In view of the foregoing, the decision appealed from is reversed, and the time for the performance of the obligations of petitioner W/N the liability of the 4 defendants including Ronquillo solidary.
Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on affected areas are finally evicted therefrom.
Held:
Yes.
MILLARE V. HERNANDO, 151 SCRA 484
[note: taken from https://sites.google.com/site/1213digests/home/case-list/millare-v-hernando] The pertinent provisions are Art. 1207 and Art. 1208. By the terms of the compromise agreement and the decision based upon
it, the defendants obligated themselves to pay their obligation “individually and jointly.”
FACTS:
Petitioner Pacifica Millare as lessor and private respondent Elsa Co, as lessee executed a 5-year contract of lease. The parties An agreement to be “individually liable” undoubtedly creates a several obligation. A several obligation is one by which one
agreed to rent out a commercial unit for a monthly rate of P350. Before the expiration of the lease contract, the lessor informed individual binds himself to perform the whole obligation.
them that the lessee can continue renting the unit as they were amenable to paying increased rentals of P1,200.00 a month. In
response, a counteroffer of P700.00 a month was made by the lessee. At this point, the lessor allegedly stated that the amount
of monthly rentals could be resolved at a later time since "the matter is simple among us", which alleged remark was supposedly MALAYAN INSURANCE V. CA, 165 SCRA 536
taken by the spouses Co to mean that the Contract of Lease had been renewed. On 22 July 1980, Mrs. Millare wrote the Co
spouses requesting them to vacate the leased premises as she had no intention of renewing the Contract of Lease. Lessees DOCTRINE
responded by reiterated their unwillingness to pay the P1,200.00 monthly rentals and by depositing the P700 monthly rentals in An insurer is not a solidary debtor in a case of joint tortfeasors where a third party liability insurance contract exists as their
court. on 1 September 1980, Mrs. Millare filed an ejectment case against the Co spouses in the Municipal Court of Bangued, liability for payment is based on different obligations – one is based on tort and the other on contract.
Abra. The judge rendered a "Judgment by Default" ordering the renewal of the lease contract for a term of 5 years counted from
the expiration date of the original lease contract, and fixing monthly rentals thereunder at P700.00 a month, payable in arrears. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidary, however jurisprudence
has interpreted this to mean that only be the owner and the driver of the vehicle who are guilty of tort [joint tortfeasors] who will
ISSUES: be solidarily liable, and this liability will not include the insurance company. While it is true that where the insurance contract
Whether or not private respondents have a valid cause of action against petitioner, and whether the trial court acquired provides for indemnity against liability to third persons, such third persons can directly sue the insurer, however, the direct liability
jurisdiction over Civil Case No. 1434. of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable
with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is
HELD: based on tort.
In the instant case, the lessor and the lessee conspicuously failed to reach agreement both on the amount of the rental to be
payable during the renewal term, and on the term of the renewed contract. The respondent judge cited Articles 1197 and 1670 If the insurer were solidarily liable with said two joint tortfeasors by reason of the indemnity contract against third party liability,
of the Civil Code to sustain the "Judgment by Default" by which he ordered the renewal of the lease for another term of five years under which an insurer can be directly sued by a third party, this will result in a violation of the principles underlying solidary
and fixed monthly rentals thereunder at P700.00 a month. The first paragraph of Article 1197 is clearly inapplicable, since the obligation and insurance contracts.
Contract of Lease did in fact fix an original period of five years. The second paragraph of Article 1197 is equally clearly
inapplicable since the duration of the renewal period was not left to the will of the lessee alone, but rather to the will of both the In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. On the other hand,
lessor and the lessee. The implied new lease during the continued occupancy could not possibly have a period of five years, but insurance is defined as „a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or
rather would have been a month-to-month lease since the rentals (under the original contract) were payable on a monthly basis. liability arising from an unknown or contingent event.
It follows that the respondent judge's decision requiring renewal of the lease has no basis in law or in fact since courts have no
authority to prescribe the terms and conditions of a contract for the parties. WHEREFORE, the Petition for Certiorari, Prohibition FACTS
and mandamus is granted. On 29 March 1967, Malayan Insurance Co., Inc., issued in favor of Sio Choy a personal (P600) and third party liability (P20,000)
insurance policy over Choy’s Willy’s jeep, effective from 18 April 1967 to 18 April 1968. The jeep had a Motor No. ET-03023,
Article 1207 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967.

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same During the effectivity of said insurance policy, on 19 December 1967, at about 3:30 o’clock in the afternoon, the insured jeep
obligation does not imply that each one of the former has a right to demand, or that each one of the latter collided with a passenger bus at the national highway in Barrio San Pedro, Rosales, Pangasinan. The jeep was driven by Juan
is bound to render, entire compliance with the prestation. There is a solidary liability only when the P. Campollo, employee of San Leon Rice Mill, Inc., and the bus was owned by Pangasinan Transportation Co., Inc.
obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a) (PANTRANCO, for short). Damage was caused to the insured vehicle and injuries to the driver Campollo, and jeepney passenger
Martin C. Vallejos. Campollo later died.

RONQUILLO V. CA, 132 SCRA 274 Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the PANTRANCO before the Court of
First Instance of Pangasinan. Vallejos prayed that defendants be ordered to pay him, jointly and severally, the amount of
Facts: INDIVIDUALLY AND JOINTLY IS SOLIDARY CASE P15,000.00, as reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and
Ernesto Ronquillo (“Ronquillo”) was one of four defendants in a Civil Case filed by respondent Antonio So (“So”) for the collection compensatory damages; and P5,000.00, for attorney’s fees.
of P118,498.98, the value of the check issued by the said defendant in payment for foodstuffs delivered to and received by them.
The said checks were dishonored by the drawee bank. Answering, PANTRANCO laid the blame on the jeep of Sio Choy, which was then operated at an excessive speed and bumped
the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep; and that it
The lower court rendered a decision based on the compromise agreement by the parities. The agreement reduced the claim to had observed the diligence of a good father of a family to prevent damage, especially in the selection and supervision of its
P110,000 and bound the defendants to initially pay P55,000 of the debt before December 24, 1978. The defendants agreed to employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability.
pay the balance “individually and jointly” within a period of six months or before June 30, 1980.
Sio Choy Malayan also denied liability, claiming that the fault in the accident was solely imputable to the PANTRANCO. Sio
So filed a Motion for Execution on the ground that the defendants failed to make the initial payment of P55,000 as provided i n Choy, however, later filed a separate answer with a cross-claim against Malayan, alleging that he had actually paid Vallejos, the
the abovementioned decision. Ronquillo opposed the motion for execution alleging that his inability to make the payment was amount of P5,000.00 for hospitalization and other expenses. Sio Choy also alleged that Malayan had issued in his favor a private
due to So’s own act of making himself inaccessible. car comprehensive policy obligating itself to indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as for
any liability to third persons arising out of any accident during the effectivity of such insurance contract, which was in effect when
Ronquillo tendered the amount of P13,750 as his share of the P55,000 initial payment. Another defendant, Pilar Tan (“Tan”) the vehicular accident complained of occurred.
offered to pay the same amount. Because So refused to accept their payments, demanding the full initial payment. Ronquillo
and Tan deposited the amount with the court. The court ordered the issuance of a writ of execution for the balance of the ini tial Malayan also filed a third-party complaint against San Leon Rice Mill, Inc. on the basis of Art. 2180 of the Civil Code, and prayed
amount payable to the two other defendants. that the Mill be liable for reimbursing Malayan any sum ordered to be paid to Vallejos.

So sought the reconsideration of the Order and prayed for the execution of the decision in its entirety against all defendants, TC ruled for Vallejos, and adjudged Sio Choy, Malayan and third-party defendant San Leon Rice Mill, Inc., held jointly and
jointly and severally. So opposed the motion arguing that the lower court held that the liability of the 4 defendants was not severally liable. The court limited Malayan’s liability to P20,000.00, following the terms of the insurance contract.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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intent and agreement of the parties was that the maturity dates of the trust receipts were to be extended at the end of the
CA affirmed, adding only that San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the Malayan for whatever stipulated dates, as had been the customary practice of RCBC with PBM."
amount it has been ordered to pay on its policy, since the Mill is not a privy to the contract of insurance.
On 23 September 1981, PBM and Ching moved to discharge the attachment, which RCBC opposed. On 4 December 1981 the
ISSUE/S Court issued an Order lifting the attachment upon their filing of a satisfactory counter-bond.
(1) Whether Malayan, Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to respondent Vallejos. Meanwhile, on 1 April 1982, PBM filed a Petition for Suspension of Payments with the Securities and Exchange Commission,
(2) Whether Malayan is entitled to be reimbursed by San Leon Rice Mill, Inc. for whatever amount petitioner has been adjudged docketed as SEC Case No. 2250, seeking at the same time its rehabilitation.
to pay respondent Vallejos on its insurance policy.
In an injunctive Order, dated 6 July 1982, all actions for claims against PBM pending before any Court or tribunal, in whatever
HELD stage the same may have been, were ordered suspended by the SEC in order to give the Commission the opportunity to pass
(1) NO. Only respondents Sio Choy and San Leon Rice Mill, Inc, to the exclusion of insurer Malayan, are solidarily liable to upon the feasibility of any rehabilitation plans. And on 26 April 1982, SEC approved the revised rehabilitation plan and ordered
Vallejos for the damages awarded to Vallejos as the basis of their liabilities differ. its implementation.

Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to Article 2184 of the Civil Code [OWNER]; On 14 October 1982, RCBC pursued its claims with the Trial Court and filed, unopposed, a Motion for Summary Judgment in
The basis of liability of San Leon Rice Mill, Inc. is by being the employer of the driver of the Willys jeep at the time of the motor CV-42333, a motion for extension to file said opposition having been earlier withdrawn. RCBC contended that respondents PBM
vehicle mishap, under Article 2180 of the Civil Code [EMPLOYER]; - Sio Choy and San Leon Rice Mill, Inc. are the principal and Ching had not denied their indebtedness to RCBC and, therefore, no genuine issue was raised in the pleadings.
tortfeasors who are primarily liable to respondent Vallejos, as the law states that the responsibility of two or more persons who
are liable for a quasi-delict is solidary. On 25 November 1982, the CFI rendered such summary judgment** in RCBC's favor, declaring:
WHEREFORE, judgment is hereby rendered against the defendants (PBM and Ching) in favor of plaintiff (RCBC)
In the Guingon case, the court clarified that in cases of tort where the vehicle is insured it is only the owner and the driver of the ordering defendants to pay plaintiff jointly and severally the following:
jeepney at fault, not the insurance company, who are solidarily liable to the heirs of the victim. a) P7,982,649.08 inclusive of interest, service charges and penalties as of August 7, 1981 on account
of their liability in solidum arising from the trust receipts and comprehensive surety agreements
While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can plus such other additional amount by way of interest, service charges and penalties from August
directly sue the insurer, however, the direct liability of the insurer under indemnity contracts against third party liability does not 7,1981 until fully paid; and
mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the b) P10,000.00 as attorney's fees.
insurer is based on contract; that of the insured is based on tort. With costs against the defendants.
SO ORDERED (p. 192, Original Record).
In the case at bar, Malayan as insurer of Sio Choy, is liable to respondent Vallejos, but is not solidarily liable with the two principal
tortfeasors. For if Malayan were solidarily liable with the tortfeasors by reason of the indemnity contract against third party liability On appeal, respondent Court of Appeals,*** ruling that it was precipitate and improper for the lower Court to have continued with
(under which an insurer can be directly sued by a third party) this will result in a violation of the principles underlying solidary the proceedings despite the SEC Order of suspension, set aside the lower Court Decision and ordered it to hold in abeyance
obligation and insurance contracts. the determination of the merits invoked in CV-42333 pending the outcome of SEC Case No. 2250. On 6 October 1988, the
Appellate Court denied RCBC's Motion for Reconsideration.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. On the other hand,
insurance is defined as „a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or Hence, this Petition for Review, to which we gave due course on 31 May 1989, and required the filing of Memoranda by the
liability arising from an unknown or contingent event. parties, the last of which was submitted on 27 July 1989.

(2) YES, this follows the principle of subrogation in insurance contracts. RCBC takes the position that the SEC injunctive Order pertains and affects only PBM, the corporation under rehabilitation, and
that its right, as creditor, to proceed against respondent Ching, as Surety, is not affected by said Order. In fine, RCBC avers that
When the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property to hold the injunctive Order applicable to both respondents PBM and Ching is to deprive RCBC of its right to proceed against
and all remedies which the insured may have for the recovery thereof. That right is not dependent upon, nor does it grow out of, the Surety based on the latter's separate and independent undertaking.
any privity of contract,
(italics supplied) or upon written assignment of claim, and payment to the insured makes the insurer an assignee in equity. PBM and Ching counter that the liabilities incurred by PBM were corporate in character and, hence, as a corporate officer,
Alfredo Ching cannot be held liable therefor; that the pendency of SEC Case No. 2250 and the rendition of an Order therein on
Malayan, upon paying respondent Vallejos the amount of not exceeding P20,000.00, shall become the subrogee of the insured, 26 April 1988 implementing respondent PBM's rehabilitation plan must necessarily benefit the Surety, inasmuch as payment of
the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill, Inc. PBM obligations must be made pursuant to that plan; and that the liability of the Surety can not be more than what would remain
Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by hi s co- after payment of all the obligations of the principal. Moreover, they continue, it is usual for majority stockholders to act as co-
debtors for the share which corresponds to each. signors with their respective corporations where promissory notes, collaterals or guaranty or security agreements are involved.
Respondent Ching's action may, it is claimed, be classified as a corporate act.

RCBC V. CA, 178 SCRA 739 ISSUE:


Will a Securities and Exchange Commission (SEC) Order suspending, during the pendency of a rehabilitation proceeding,
DOCTRINE: payment of all claims against the principal debtor bar or preclude the creditor from recovering from the surety?
Where an obligation expressly states a solidary liability, the concurrence of two or more creditors or two or more debtors in one
and the same obligation implies that each one of the former has a right to demand, or that each one of the latter is bound to HELD:
render, entire compliance with the prestation (Article 1207, Civil Code). The creditor may proceed against any one of the solidary NO. Where an obligation expressly states a solidary liability, the concurrence of two or more creditors or two or more debtors in
debtors or some or all of them simultaneously (Article 1216, Civil Code). one and the same obligation implies that each one of the former has a right to demand, or that each one of the latter is bound to
render, entire compliance with the prestation (Article 1207, Civil Code). The creditor may proceed against any one of the solidary
As held in Zenith Insurance Corporation vs. Court of Appeals (No. L-57957, 29 December 1982,119 SCRA 485), the extent of a debtors or some or all of them simultaneously (Article 1216, Civil Code).
surety's liability is determined only by the clause of the contract of suretyship. It cannot be extended by implication, beyond the
terms of the contract. Conversely, liability therefor may not be restricted unless expressly so stated. That there exists a Comprehensive Surety Agreement between RCBC and respondent Ching is admitted. There is no escaping
the attendant liability that binds respondent Ching, as Surety. He is charged as an original promissor by virtue of his primary
FACTS: obligation under the Suretyship Agreement. That Agreement is bare of words imputing to respondent Ching any liability other
On 4 May 1979, Alfredo Ching signed a 'Comprehensive Surety Agreement' with Rizal Commercial Banking Corporation (RCBC), than that of a Surety who binds himself to insure a debt in his personal capacity, lacking consideration therefor notwithstanding
binding himself to jointly and severally guarantee the prompt payment of all Philippine Blooming Mills [PBM] obligations owing (p. 94, Original Record). That respondent Ching acted for and on behalf of respondent PBM as part of its usual corporate
RCBC in the aggregate sum of Forty Million (P40,000,000.00) Pesos. procedure is not supported by the evidence nor the pleadings on record, nor the Agreement itself .We can not give any additional
meaning to the plain language of the subject agreement. It is basic that the parties are bound by the terms of their contract,
Between 8 September to 30 October 1980, (PBM) filed several applications for letters of credit with RCBC. Through said which is the law between them. As held in Zenith Insurance Corporation vs. Court of Appeals (No. L-57957, 29 December
applications, PBM obligated itself, among other things, to pay on demand for all draft(s) drawn under or purporting to be drawn 1982,119 SCRA 485), the extent of a surety's liability is determined only by the clause of the contract of suretyship. It cannot be
under the credits. Everything being in order, RCBC opened the corresponding letters of credit and imported various goods for extended by implication, beyond the terms of the contract. Conversely, liability therefor may not be restricted unless expressly
PBM's account. In due time the imported goods arrived and were released, in trust, to PBM who acknowledged receipt thereof so stated.
through various trust receipts. All in all, PBM's obligations stood at P7,982,649.08.
Neither can respondent Ching seek refuge behind the SEC injunctive Order. Under Section 3 of P.D. 902-A, as amended by
Less than a year later, or on 7 August 1981, RCBC filed a Complaint for collection of said sum against respondents PBM and P.D. 1758, the Commission is given absolute jurisdiction, supervision and control only over corporations or associations, which
Alfredo Ching with the then Court of First Instance of Pasig, docketed as CV-42333. Upon filing of a bond satisfactory to the are grantees of a primary franchise and/or a license or permit issued by the government to operate in the Philippines. The SEC
Court, a Writ of Preliminary Attachment was issued against the assets and properties of respondents PBM and Ching on the injunctive Order can not effect a suspension of payment of respondent Surety's due and demandable obligation, it being clear
same day. By way of special and affirmative defenses they alleged that "although the trust receipts stipulate due dates, the true therefrom that the rehabilitation receivers were limited "to tak(ing) custody and control over all the existing assets and property
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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of PBM." Nothing in said Order puts respondent Ching within its scope. premature to consider this conjecture for such it is at this stage. The possibility may seem remote, indeed, since they have
actually acknowledged the completion of the house in the second agreement, where they also agreed to pay the balance of the
contract price. At any rate, the allegation, if made and proved, could still be enforceable against the petitioner alone as one of
QUIOMBING V. CA, 189 SCRA 325 the solidary debtors, subject to his right of recourse against Biscocho.

DOCTRINE Solidary Obligation distinguished from joint obligation


Where the obligation of the parties is solidary, either one of the parties is indispensable, and the other is not even necessary The concept of the solidary obligation requires a brief restatement. Distinguishing it from the joint obligation, Tolentino makes
because complete relief may be obtained from either. the following observations in his distinguished work on the Civil Code: A joint obligation is one in which each of the debtors is
liable only for a proportionate part of the debt, and each creditor is entitled only to a proportionate part of the credit. A solidary
FACTS obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole
This case stemmed from a "Construction and Service Agreement" 1 concluded on August 30, 1983, whereby Nicencio Tan obligation. Hence, in the former, each creditor can recover only his share of the obligation, and each debtor can be made to pay
Quiombing and Dante Biscocho, as the First Party, jointly and severally bound themselves to construct a house for private only his part; whereas, in the latter, each creditor may enforce the entire obligation, and each debtor may be obliged to pay it in
respondents Francisco and Manuelita Saligo, as the Second Party, for the contract price of P137,940.00, which the latter agreed full.
to pay.
The same work describes the concept of active solidarity thus: The essence of active solidarity consists in the authority of
On October 10, 1984, Quiombing and Manuelita Saligo entered into a second written agreement 2 under which the latter each creditor to claim and enforce the rights of all, with the resulting obligation of paying every one what belongs to him; there
acknowledged the completion of the house and undertook to pay the balance of the contract price in the manner prescribed in is no merger, much less a renunciation of rights, but only mutual representation.
the said second agreement.

On November 19, 1984, Manuelita Saligo signed a promissory note for P125,363.50 representing the amount still due from her (2&3) As either party is indispensible, there is no non-joinder nor is the secondary solidary creditor be considered an indispensible
and her husband, payable on or before December 31, 1984, to Nicencio Tan Quiombing. 3 On October 9, 1986, Quiombing filed party.
a complaint for recovery of the said amount, plus charges and interests, which the private respondents had acknowledged and
promised to pay but had not, despite repeated demands as the balance of the contract price for the construction of their house. The complaint could have been filed alone by the petitioner. The rest of the pieces should easily fall into place. Section 7, Rule
3 of the Rules of Court mandates the inclusion of indispensable parties as follows: Sec. 7. Compulsory joinder of indispensable
Instead of filing an answer, the defendants moved to dismiss the complaint on February 4, 1987, contending that Biscocho was parties. Parties in interest without whom no final determination can be had of an action shall be joined either as plaintiffs or
an indispensable party and therefore should have been included as a co-plaintiff. The motion was initially denied but was defendants. Indispensable parties are those with such an interest in the controversy that a final decree would necessarily affect
subsequently reconsidered and granted by the trial court. The complaint was dismissed, but without prejudice to the filing of an their rights, so that the court cannot proceed without their presence. Necessary parties are those whose presence is necessary
amended complaint to include the other solidary creditor as a co-plaintiff. to adjudicate the whole controversy, but whose interests are so far separable that a final decree can be made in their absence
without affecting them. 9 (Necessary parties are now called proper partiesunder the 1964 amendments of the Rules of Court.).
Rather than file the amended complaint, Quiombing chose to appeal the order of dismissal to the respondent court, where he
argued that as a solidary creditor he could act by himself alone in the enforcement of his claim against the private respondents.
Moreover, the amounts due were payable only to him under the second agreement, where Biscocho was not mentioned at all. REPUBLIC PLANTERS BANK V. CA, 216 SCRA 738
The respondent court sustained the trial court and held that it was not correct at that point to assume that Quiombing and
Biscocho were solidary obliges only. It noted that as they had also assumed the reciprocal obligation of constructing the house, FACTS:
they should also be considered obligors of the private respondents under the contract. If, as was possible, the answer should In 1979, World Garment Manufacturing, through its board authorized Shozo Yamaguchi (President) and Fermin Canlas
allege a breach of the agreement, "the trial court cannot decide the dispute without the involvement of Biscocho whose rights (Treasurer) to obtain credit facilities from Republic Planters Bank (RPB). For this, 9 promissory notes were executed. They were
will necessarily be affected since he is a part of the First Party." Refuting the petitioner's second contention, the respondent court authorized to apply for credit facilities with the petitioner bank. The two officers signed the promissory notes issued to secure
declared that the "second agreement referred to the Construction and Service Agreement as its basis and specifically stated the payment of the obligations.
that it (was) merely a `part of the original agreement.'"
The note became due and no payment was made. RPB eventually instituted an acitio for collection of money against Yamaguchi
ISSUE/S and Canlas. Canlas, in his defense, averred that he should not be held personally liable for such authorized corporate acts that
(1) May one of the two solidary creditors sue by himself alone for the recovery of amounts due to both of them without joining he performed inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide Garment
the other creditor as a co-plaintiff? YES Manufacturing.

(2) In such a case, is the defendant entitled to the dismissal of the complaint on the ground of non-joinder of the second creditor ISSUE:
as an indispensable party? NO. Whether Yamaguchi and Canlas are solidarily liable.

(3) More to the point, is the second solidary creditor an indispensable party? NO. HELD:
Yes. Canlas is solidarily liable on each of the promissory notes to which his signature appears. The solidary liability of
HELD private respondent Fermin Canlas is made clearer and certain, without reason for ambiguity, by the presence of the phrase “joint
(1) Either solidary creditor may sue by himself. Although he signed the original Construction and Service Agreement, Biscocho and several” as describing the unconditional promise to pay to the order of Republic Planters Bank.
need not be included as a co-plaintiff in the complaint filed by the petitioner against the private respondents. Quiombing as
solidary creditor can by himself alone enforce payment of the construction costs by the private respondents and as a solidary Where an instrument containing the words “I promise to pay” is signed by two or more persons, they are deemed to be jointly
debtor may by himself alone be held liable for any possible breach of contract that may be proved by the private respondents. and severally liable thereon. Canlas is solidarily liable on each of the promissory notes bearing his signature for the following
In either case, the participation of Biscocho is not at all necessary, much less indispensable. reasons: The promissory notes are negotiable instruments and must be governed by the Negotiable Instruments Law.

According to Justice Jose Y. Feria, "where the obligation of the parties is solidary, either one of the parties is Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes are makers and are
indispensable, and the other is not even necessary (now proper) because complete relief may be obtained from either." liable as such. By signing the note, the maker promises to pay to the order of the payee or any holder the tenor of the obligation.
Based on the above provisions of the law, there is no denying that Canlas is one of the co-makers of the promissory note.
The question of who should sue the private respondents was a personal issue between Quiombing and Biscocho in
which the spouses Saligo had no right to interfere. It did not matter who as between them filed the complaint because the
private respondents were liable to either of the two as a solidary creditor for the full amount of the debt. Full satisfaction of a INCIONG V. CA, 257 SCRA 578
judgment obtained against them by Quiombing would discharge their obligation to Biscocho, and vice versa; hence, it
was not necessary for both Quiombing and Biscocho to file the complaint. Inclusion of Biscocho as a co-plaintiff, when DOCTRINE
Quiombing was competent to sue by himself alone, would be a useless formality. Article 1212 of the Civil Code provides: Where the promissory note expressly states that the three signatories therein are jointly and severally liable, any one, some or
Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudice to the all of them may be proceeded against for the entire obligation - the choice is left to the solidary creditor to determine against
latter. Suing for the recovery of the contract price is certainly a useful act that Quiombing could do by himself alone. whom he will enforce collection.

Parenthetically, it must be observed that the complaint having been filed by the petitioner, whatever amount is awarded FACTS
against the debtor must be paid exclusively to him, pursuant to Article 1214. This provision states that "the debtor may Baldomero Inciong, Jr. executed a promissory note for P50,000.00 together with Rene C. Naybe and Gregorio D. Pantanosas
pay any of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by any one of them, payment should on February 3, 1983, holding themselves jointly and severally liable to private respondent Philippine Bank of Communications
be made to him." If Quiombing eventually collects the amount due from the solidary debtors, Biscocho may later claim his share [PBC/the bank], Cagayan de Oro City branch. The promissory note was due on May 5, 1983.
thereof, but that decision is for him alone to make. It will affect only the petitioner as the other solidary creditor and not the private
respondents, who have absolutely nothing to do with this matter. As far as they are concerned, payment of the judgment debt to The due date expired without the promissors having paid their obligation, consequently several letters of demand were sent via
the complainant will be considered payment to the other solidary creditor even if the latter was not a party to the suit. Regarding telegram (on November 14, 1983; June 8, 1984), with the final letter of demand sent by registered mail on December 11, 1984
the possibility that the private respondents might plead breach of contract in their answer, we agree with the petitioner that it is to Rene C. Naybe. Since both obligors did not respond to the demands made, the bank filed on January 24, 1986 a complaint
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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for collection of the sum of P50,000.00 against the three obligors. to a loan of P5,000.00 only considering that, where a parol contemporaneous agreement was the inducing and moving cause of
the written contract, it may be shown by parol evidence. However, fraud must be established by clear and convincing evidence,
The complaint was initially dismissed on On November 25, 1986, for failure to prosecute the case. On reconsideration, January mere preponderance of evidence, not even being adequate. Petitioner’s attempt to prove fraud must, therefore, fail as it was
9, 1987, the lower court reversed and required the sheriff to serve the summonses. On January 27, 1987, the lower court evidenced only by his own uncorroborated and, expectedly, self-serving testimony.
dismissed the case against defendant Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons
addressed to petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia. 3. Dismissal of the action against the co-maker’s of the promissory note did not release Inciong’s liability, as he is a
solidary debtor and not a mere guarantor.
Inciong alleged in his defense that he had only signed the promissory notes as a favor to a friend, Rudy Campos, who
approached him in January 1983 for his help for the grant of the approval of a loan for his falcata logs operation business. Petitioner signed the promissory note as a solidary co-maker and not as a guarantor. This is patent even from the first sentence
Campos said he and his partner Pio Tio (branch manager PBC, Cagayan de Oro City) needed his help as co-maker of the loan of the promissory note.5
that will be used for expanding the business with Rene C. Naybe. Naybe was interested in the business, would contribute a A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled
chainsaw to the venture, and had been promised by Pio Tio that although Naybe had no money, the loan to be co-signed by to demand the whole obligation. On the other hand, Article 2047 of the Civil Code states: By guaranty a person, called the
Campos would be approved. Campos then persuaded petitioner to act as a co-maker in the said loan. Inciong acceded, but with guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
the understanding that he would only be a co-maker for the loan to the extent of P5,000.00. Inciong said 5 copies of a blank
promissory note were brought to him by Campos at his office, and he affixed his signature to all of them, writing in one copy that If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be
he bound himself only for the amount of P5,000.00. observed. In such a case the contract is called a suretyship.

The TC ruled for PBC, adjudged Inciong solidarily liable for “the amount of FIFTY THOUSAND PESOS (P50,000.00), with While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a
interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6% per annum on the total amount due, as liquidated solidary debtor. Thus, Tolentino explains: A guarantor who binds himself in solidum with the principal debtor under the
damages or penalty from May 5, 1983 until fully paid; plus 10% of the total amount due for expenses of litigation and attorneyÊs provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
fees; and to pay the costs.” between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to
The TC also noted that the typewritten figure 50,000· clearly appears directly below the admitted signature of the petitioner in him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter
the promissory note. Hence, the latter’s uncorroborated testimony on his limited liability cannot prevail over the presumed 3, Title I, Book IV of the Civil Code
regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added that it was rather odd for petitioner
to have indicated in a copy and not in the original, of the promissory note, his supposed obligation in the amount of P5,000.00 Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof,
only. Finally, the lower court held that, even granting that said limited amount had actually been agreed upon, the same would when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each
have been merely collateral between him and Naybe and, therefore, not binding upon the private respondent as creditor-bank. of the debtors is liable only for a proportionate part of the debt. There is a solidary liability only when the obligation expressly so
Cross-claim and counter-claim dismissed. states, when the law so provides or when the nature of the obligation so requires.

On appeal to the CA, the court affirmed. The MR was denied. Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally
liable, any one, some or all of them may be proceeded against for the entire obligation. The choice is left to the solidary creditor
In the present appeal Inciong presented new evidence, the affidavit of co-maker MTCC judge Pantanosas, executed on 3 May to determine against whom he will enforce collection. Consequently, the dismissal of the case against Judge Pantanosas may
1988, after the rendition of judgment by the TC. not be deemed as having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as provided by law.
The affidavit is clearly intended to buttress petitioner’s contention in the instant petition that the Court of Appeals should have
declared the promissory note null and void on the following grounds: (a) the promissory note was signed in the office of Judge Article 1216
Pantanosas, outside the premises of the bank; (b) the loan was incurred for the purpose of buying a secondhand chainsaw which
cost only P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner and Judge Pantanosas simultaneously. The demand made against one of them shall not be an obstacle to those which may
were not present at the time the loan was released in contravention of the bank practice, and (g) notices of default are sent subsequently be directed against the others, so long as the debt has not been fully collected. (1144a)
simultaneously and separately but no notice was validly sent to him. Finally, petitioner contends that in signing the promissory
note, his consent was vitiated by fraud as, contrary to their agreement that the loan was only for the amount of P5,000.00, the
promissory note stated the amount of P50,000.00. PNB v. Independent Planters, 122 SCRA 113

Petitioner also argued on appeal that the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas, Facts:
his co-maker, constituted a release of his obligation, especially because the dismissal of the case against Pantanosas was upon Appeal by PNB from the CFI of Manila dismissing PNB's complaint against several solidary debtors for the collection of a sum
the motion of private respondent itself. He cites as basis for his argument, Article 2080 of the Civil Code which provides that: of money on the ground that one of the defendants (Ceferino Valencia) died during the pendency of the case and therefore the
The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor, they complaint, being a money claim based on contract, should be prosecuted in the testate or intestate proceeding for the settlement
cannot be subrogated to the rights, mortgages, and preferences of the latter. of the estate of the deceased defendant pursuant to Section 6 of Rule 86 of the Rules of Court.

ISSUE/S The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of its solidary debtors under
Whether Inciong is solidarily liable under the promissory note. Article 1216 of the Civil Code — ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be
HELD directed against the others, so long as the debt has not been fully collected.
YES.
Issue:
1. The SC is not a trier of facts Whether in an action for collection of a sum of money based on contract against all the solidary debtors, the death of one
First, it is too late for petitioner to present the affidavit this late in the course of the trial, the SC is not a trier of facts. Having lost defendant deprives the court of jurisdiction to proceed with the case against the surviving defendants.
the chance to fully ventilate his factual claims below, petitioner may no longer be accorded the same opportunity in the absence
of grave abuse of discretion on the part of the court below. Had he presented Judge Pantanosas’ affidavit before the lower court, Held:
it would have strengthened his claim that the promissory note did not reflect the correct amount of the loan. NO. Section 6, Rule 86 of the Revised Rules of Court cannot be made to prevail over Article 1216 of the New Civil Code, the
former being merely procedural, while the latter, substantive.
2. The parol evidence rule does not require that the written document be a public document.
What is required is that the agreement be in writing as the rule is in fact founded on „long experience that written evidence is so It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek satisfaction of his credit from one,
much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have some or all of his solidary debtors, as he deems fit or convenient for the protection of his interests; and if, after instituting a
expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the collection suit based on contract against some or all of them and, during its pendency, one of the defendants dies, the court
parties intended a different contract from that expressed in the writing signed by them. Thus, for the parol evidence rule to apply, retains jurisdiction to continue the proceedings and decide the case in respect of the surviving defendants.
a written contract need not be in any particular form, or be signed by both parties. As a general rule, bills, notes and other
instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence. Similarly, in PNB vs. Asuncion, A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that nothing therein
prevents a creditor from proceeding against the surviving solidary debtors. Said provision merely sets up the procedure in
By alleging fraud in his answer, petitioner was actually in the right direction towards proving that he and his co- makers agreed

5
Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest x x x at the rate of
PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of SIXTEEN (16) per cent per annum until fully paid.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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enforcing collection in case a creditor chooses to pursue his claim against the estate of the deceased solidary, debtor. Article 1226
It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in this matter. Said provision gives the creditor
the right to 'proceed against anyone of the solidary debtors or some or all of them simultaneously.' The choice is undoubtedly Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
left to the solidary, creditor to determine against whom he will enforce collection. In case of the death of one of the solidary and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
debtors, he (the creditor) may, if he so chooses, proceed against the surviving solidary debtors without necessity of filing a claim Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the
in the estate of the deceased debtors. It is not mandatory for him to have the case dismissed against the surviving debtors and fulfillment of the obligation.
file its claim in the estate of the deceased solidary debtor.
The penalty may be enforced only when it is demandable in accordance with the provisions of this
Article 1222 Code. (1152a)

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are
derived from the nature of the obligation and of those which are personal to him, or pertain to his own BACHRACH V. ESPIRITU, 52 PHIL. 346
share. With respect to those which personally belong to the others, he may avail himself thereof only
as regards that part of the debt for which the latter are responsible. (1148a) 
 DOCTRINE
Article 1152 of the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement,
the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the interest, and as such the two are
UNIVERSAL MOTORS V. CA, 205 SCRA 448 different and distinct things which may be demanded separately. The penalty is not to be added to the interest for the
FACTS: determination of whether the interest exceeds the rate fixed by the law, since said rate was fixed only for the interest.
On December 15, 1962 private respondents Rafael Verendia, Teodoro Galicia and Marcelina Galicia purchased from petitioner
Universal Motors Corporation two (2) Mercedes Benz trucks at a cash price of P33,608.27 each payable within ninety (90) days. When the obligation has been partly performed, article 1154 of the Civil Code authorizes the court to reduce the penalty imposed
Private respondents failed to pay the cash price within the 90-day period however they re-scheduled their account giving them therein.
30 months to comply with payment.On June 3, 1963 private respondents executed a promissory note in favor of the petitioner
covering the re-scheduled account thereby promising to pay the same in monthly installments at the rates stipulated on the FACTS:
promissory note with interest thereon at 12% per annum until said promissory note is fully paid. This is a consolidated case(Cases no. 28497 and 28948) involving two separate sale transactions. One made in Feb. 18, 1925
(case 28498), when the defendant earlier bought a truck on installment from the petitioner and said truck was mortgaged together
But despite repeated demands, the private respondents failed to comply with their foregoing undertaking, so that on January 4, with the two others (no. 77197 & 92744 in the the subsequent sale transaction dated July 28, 1925. The said two of the other
1966 the petitioner commenced a complaint for the recovery of the unpaid balance among others with the Court of First Instance trucks were also purchased (but already paid previously) from the plaintiff.
of Manila.
The defendant failed to pay the balance. In July 1925, defendant again purchased another truck from Bachrach. The said truck,
The lower court ordered respondents to pay, jointly and severally to the Plaintiff, Universal Motors Corporation, the sum of together with the 3 other vehicles were mortgaged to the plaintiff to secure the remaining balance. The defendant failed to pay
P47,732.35, with interest at the rate of 12% per annum on one-half of the principal balance of P69,672.66 from February 10, the balance for the latest truck obtained. It was agreed in both sales that 12% interest will be paid on the unpaid price, and in
1967, until fully paid, plus the further sum equivalent to 25% of the amount due as attorney's fees and the costs of the suit. case of the non-payment of the total debt at maturity, 25% shall be the penalty. The defendant also signed a promissory note
solidarily with his brother Rosario (acting as intervenor), the sums secured by the mortgages. Rosario is alleged to be the owner
Only respondent Verendia appealed and the decision was reversed and set aside and ordered restitution to the defendants by of the two white trucks no. 77197 & 92744 mortgaged.
the plaintiff of whatever amounts received in excess of the amount due under the promissory note, with interest at the legal rate
from the date with overpayment. Petitioner filed a motion for reconsideration. While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of the mortgage, all of them
together bringing in, after deducting the sheriff's fees and transportation charges to Manila, the net sum of P3,269.58. The lower
ISSUES: court ordered the defendants and the intervenor to pay plaintiff in case 28497 the sum of P7,732.09 with interest at the rate of
WON the result of the appeal of respondent Verendia will inure to the benefit of the other respondents who have not appealed 12 per cent per annum from May 1, 1926 until fully paid, and 25 per cent thereof in addition as penalty. In case 28498, the trial
the decision. court ordered the defendant and the intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per cent per annum from
December 1, 1925 until fully paid, and 25 per cent thereon as penalty.
HELD:
YES, the decision will inure to the benefit of the other respondents The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the defendant signed the mortgage
deeds these trucks were not included in those documents, and were only put in later, without defendant's knowledge. Appellants
RATIO: also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos. 77197 and 92744 to the intervenor, and
Petitioner's claim that the result of the appeal interposed by private respondent Verendia, one of the solidary debtors will not that as the latter did not sign the mortgage deeds, such trucks cannot be considered as mortgaged. But there is positive proof
inure to the benefit of the other private respondents who did not appeal is devoid of merit. that they were included at the time the defendant signed these documents. Besides, there were presented two of defendant's
letters to Hidalgo, an employee of the plaintiff's written a few days before the transaction, acquiescing in the inclusion of all his
In the recent case of Citytrust Banking Corporation v. The Court of Appeals and William Samara, G.R. No. 92591, April 30, 1991, White trucks already paid for, in the mortgage (Exhibit H-I).
196 SCRA 553, 563, We already ruled that "the Court will not allow the absurd situation where a co-defendant who is adjudged
to be primarily liable for sums of money and for tort would be charged for an amount lesser than what its co-defendant is bound ISSUE:
to pay to the common creditor and allowed to collect from the first co-defendant. Such a situation runs counter to the principle of Whether the 25% penalty upon the debt in addition to the 25% p.a. is usurious. (NOTE: Art. 1226 would be whether a penalty
solidarity in obligations as between co-defendants established by a judgment for recovery of sum of money and damages . . ." clause be allowed to be imposed separately from the interest.)

The Court therein noted the modification made by the respondent court which ordered not only the appellant therein but both Ruling:
"defendants jointly and severally" to pay the new amount. It explained that though, as a matter of procedure, the modification No (NOTE: yes on Art. 1226), Article 1152 of the Civil Code permits the agreement upon a penalty apart from the interest. Should
shall be applied only to the appellant, substantial justice and equity also demand that the decision should be interpreted to refer there be such an agreement, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the
to the non-appealing defendant as well. There exists a strong and compelling reason to warrant an exception to the rule that a interest, and which may be demanded separately. The penalty is not to be added to the interest for the determination of whether
judgment creditor is entitled to execution of a final and executory judgment against a party especially if that party failed to appeal. the interest exceeds the rate fixed by the law, since said rate was fixed only for the interest. But considering that the obligation
(Olacao v. National Labor Relations Commission, 177 SCRA 38 [1989]; Quigui v. Boncaros, 151 SCRA 416 [1987]; Orata v. was partly performed, and making use of the power given to the court by article 1154 of the Civil Code, this penalty is reduced
Intermediate Appellate Court, 185 SCRA 148 [1990]) to 10 per cent of the unpaid debt. The penalty is however reduced from 25 % upon the sum owed, the defendants need pay only
10 % thereon as penalty. (Judgment appealed from is affirmed in all other respects).
It is obvious that the respondent court committed no error in ruling that its decision inures to the benefit of all the private
respondents regardless of the fact that only one appealed. It is erroneous to rule that the decision of the trial court could be BALANE NOTE
reversed as to the appealing private respondent and continue in force against the other private respondents. The latter could Is not a penal clause because the interest imposed is even lower than the legal rate of interest, “that’s not a penalty, that’s a
not remain bound after the former had been released; although the other private respondents had not joined in the appeal, the reward!”
decision rendered by the respondent court inured to their benefit. When the obligation of the other solidary debtors is so
dependent on that of their co-solidary debtor, the release of the one who appealed, provided it be not on grounds
personal to such appealing private respondent, operates as well as to the others who did not appeal. It is for this reason, ROBES-FRANCISCO V. CFI, 86 SCRA 59
that a decision or judgment in favor of the private respondent who appealed can be invoked as res judicata by the other private DOCTRINE
respondents. A contract of sale which stipulate payment of interest at 4% per annum in case vendor fails to issue a certificate of title to vendee
is not a penal clause because even without it vendee would be entitled to interest at the legal rate of 6% per annum.—The
All premises considered, the Court is convinced that the respondent court committed no error in reversing the decision of the foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the clause in question were to be
trial court and in dismissing the complaint in favor of the private respondents. considered as a penal clause. Nevertheless, for very obvious reasons, said clause does not convey any penalty, for even without
it, pursuant to Article 2209 of the Civil Code, the vendee would be entitled to recover the amount paid by her with legal rate of
interest which is even more than the 4% provided for in the clause. It is therefore inconceivable that the aforecited provision in
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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the deed of sale is a penal clause which will preclude an award of damages to the vendee Millan. In fact the clause is so worded yards valued at $8,050; 352 cases. $5,200;
as to work to the advantage of petitioner corporation. (3) Firm Offers Nos. 329 and 343 for November 15, 1960·11 cases out of (2) 37 cases containing 18,440 yards
175,000 and 18,440 yards valued at 352 cases. valued at $2,305;
Facts: $22,445 and $2,305, respectively, and November 15, 1960·10 cases out of (3) 60 cases containing 30,000 yards
This is an appeal from the decision of the CFI of Rizal rendering judgment against Robes-Francisco Corporation to register the (4) Firm Offer No. 330 for 26,000 100 cases. valued at $5,400 and
deed of absolute sale in favor of Millan with the Register of Deeds of Caloocan City and secure the corresponding title within ten yards valued at $5,200. November 15, 1960·30 cases out of (4) 83 cases containing 40,850 yards
days and if not possible said Corporation shall pay Millan the total amount she paid P5,193.63 with interest at 4% per annum 100 cases. valued at $5,236.97.
from June 22, 1972 until fully paid. In either case Robes Corporation is sentenced to pay Millan nominal damages of P20,000.00
plus P5,000.00 attorney’s fees. TOTAL : 339,440 yards with an TOTAL : 449 cases out of 1,044 cases. TOTAL: 115,290 yards valued at
aggregate value of $47,000 (pp. 4-5 [224,150 yards valued at $18,141.9 or P102,502.13.
Petitioner Corporation questions the award of P20,000.00 nominal damages and P5,000.00 attorney’s fees alleging such to be and 239-40, Record on Appeal). P163,047.87, of inferior quality]
excessive and unjustified.
While the plastic sheetings were arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc., Benito Y.C.
In May 1962, Robes Corporation entered into a contract of sale with Millan for a parcel of land in the amount of 3,864.00 payable Espiritu, that he was in dire need of cash with which to pay his obligations to the Philippine National Bank, and alleged that the
in installments. Millan complied with her obligation and made her final payment on December 22, 1971 for a total payment of computation of the delivery would be too long a process to wait. They entered into an agreement to fix the price of the P0.782 a
P5,193.63 including interests and expenses for registration of title. On March 2, 1973 the deed of absolute sale was executed yard, regardless of the kind, quality or actual invoice value thereof. The parties arrived at that figure by dividing the total price of
but the transfer certificate of title could not be executed because the parcel of land conveyed to Millan was included among other P265,550 by 339,440 yards, the aggregate quantity of the shipments.
properties of the corporation mortgaged to GSIS to secure an obligation of P10 million, hence, the owner’s duplicate certificate
of title of the subdivision was in the possession of the GSIS. After Pamintuan had delivered 224,150 yards of sheetings of inferior quality (P163,047.87), he refused to deliver the remainder
of the shipments with a total value of P102,502.13. Pamintuan justified his refusal on the company’s alleged failure to comply
Issue: with the change or novation in price.
Is the 4% interest provision of the contract a penal clause?
The company filed a case for recovery of compensatory damages for breach of a contract of sale in addition to liquidated
Held: damages in the RTC on December 2, 1960. The court ruled for the company, including a grant of (a) P10,000 as stipulated
No. Said clause does not convey any penalty, for even without it, pursuant to Article 2209 of the Civil Code, the vendee would liquidated damages, (b) P10,000 as moral damages, (c) P1,102.85 as premium paid by the company on the bond of P102,502.13
be entitled to recover the amount paid by her with legal rate of interest which is even more than the 4% provided for in the clause. for the issuance of the writ of preliminary attachment and (d) P10,000 as attorney’s fees, or total damages of P110,559.28). In
the computation for unrealized profits, the court based it on the selling price at the time of delivery amounting in total to
A penal clause is an accessory undertaking to assume greater liability in case of breach. From this alone, the 4% provision does P67,174.17.
not come to be penal in character, hence, Robes Corporation’s contention that the penalty shall substitute the indemnity for
damages and the payment of interest in case of non-compliance does not hold water. The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards, which the trial court
regarded as an item of damages suffered by the company, was computed as follows (p. 71, Record on Appeal):
Unfortunately, Millan failed to show the actual damages she suffered as a result of the nonperformance. Nonetheless, the facts . Liquidation value of 224.150 yards at P0.7822 a yard ..........................................................................................
show that the right of the vendee was violated and this entitles her at the very least to nominal damages. P175,330.13
. Actual peso value of 224,150 yards as per firm offers
 or as per contract ...........................................................
“In the situation before Us, We are of the view that the amount of P20,000.00 is excessive.” Bad faith can not be presumed. 163,047.87
Petitioner Corporation expected that arrangements were possible for the GSIS to make partial releases of the subdivision lots . Overpayment................................................................. P 12,282.26
from the overall real estate mortgage. It was only unfortunate for it not to succeed in that regard. Hence, the sum of ten thousand
pesos by way of nominal damages is fair and just. The Court of Appeals affirmed that judgment with the modification, disallowing moral damages. The Court found that the contract
of sale between Pamintuan and the company was partly consummated. The company fulfilled its obligation to obtain the
Japanese suppliers confirmation of their acceptance of firm offers totalling $47,000. Pamintuan reaped certain benefits from the
PAMINTUAN V. CA, 94 SCRA 556 contract. Hence, he is estopped to repudiate it; otherwise, he would unjustly enrich himself at the expense of the company.

DOCTRINE The Court also found that the writ of attachment was properly issued. It also found that Pamintuan was guilty of fraud because
The theory that penal and liquidated damages are the same cannot be sustained where the obligor is guilty of fraud in the (1) he was able to make the company agree to change the manner of paying the price by falsely alleging that there was a delay
fulfillment of his obligation. The second sentence of Article 1226 itself provides that nevertheless, damages shall be paid if the in obtaining confirmation of the suppliers’ acceptance of the offer to buy; (2) he caused the plastic sheetings to be deposited in
obligor x x x is guilty of fraud in the fulfillment of the obligation. Responsibility arising from fraud is demandable in all obligations the bonded warehouse of his brother and then required his brother to make him (Pamintuan), his attorney-in-fact so that he could
(Art. 1171, Civil Code). In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages control the disposal of the goods; (3) Pamintuan, as attorney-in-fact of the warehouseman, endorsed to the customs broker the
which may be reasonably attributed to the nonperformance of the obligation (Ibid, Art. 2201). warehouse receipts covering the plastic sheetings withheld by him and (4) he overpriced the plastic sheetings which he delivered
to the company.
FACTS
In 1960, Pamintuan was authorized to export to Japan one thousand metric tons of white flint corn valued at forty-seven thousand On present appeal to the SC, Pamintuan alleged that the buyer, Yu Ping Kun Co., Inc., is entitled to recover only liquidated
US dollars in exchange for a collateral importation of plastic sheetings of an equivalent by virtue of a barter license. Pamintuan damages. That contention is based on the stipulation that any violation of the provisions of this contract (of sale) shall entitle the
entered into an agreement to ship his corn to Tokyo Menka Kaisha, Ltd. of Osaka, Japan in exchange for plastic sheetings. aggrieved party to collect from the offending party liquidated damages in the sum of P10,000. Pamintuan relies on the rule that
a penalty and liquidated damages are the same; that in obligations with a penal clause, the penalty shall substitute the indemnity
Pamintuan contracted to sell the plastic sheetings to Yu Ping Kun Co., Inc. for P265,050.00. The company undertook to open for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary (1st sentence of
an irrevocable domestic letter of credit for that amount in favor of Pamintuan. Pamintuan would deliver the plastic sheetings to Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the contrary in this case and that liquidated damages are
the company at its bodegas in Manila or suburbs directly from the piers within one month upon arrival of the carrying vessels. those agreed upon by the parties to a contract, to be paid in case of breach thereof (Art. 2226, Civil Code).
Any violation of the contract of sale would entitle the aggreived party to collect from the offending party liquidated damages in
the sum of ten thousand pesos. ISSUE/S
Whether the buyer, Yu Ping Kun Co., Inc., is entitled to recover only liquidated damages.
On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka Kaisha, Ltd. confirming the
acceptance by Japanese suppliers of firm offers for the consignment to Pamintuan of plastic sheetings valued at $47,000.00. HELD
The company secured an irrevocable letter of credit in favor of Pamintuan for P265,050.00. The bank gave notice to Pamintuan NO. SC ruled that as Pamintuan was guilty of fraud in the performance of his obligation, he responsible for all damages which
about the existence of the letter of credit. may be reasonably attributed to the nonperformance of the obligation.

The cargo was shipped from Japan to the Philippines on September 27 and 30 and October 4, 1960, through Toyo Menka As a general rule, the penalty takes the place of the indemnity for damages and the payment of interest. This is subject to three
Kaisha, Ltd., four shipments. exceptions [Art. 1152 SCC; Art. 1226 NCC]: (1) when there is an express stipulation to that effect; (2) when the obligor having
failed to comply with the principal obligation also refuses to pay the penalty, in which case the creditor is entitled to interest in
The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments, Pamintuan delivered to the the amount of the penalty, in accordance with Article 2209; and (3) when the obligor is guilty of fraud in the fulfillment of the
company’s warehouse only certain quantities of plastic sheetings, and withheld delivery of the rest. obligation.

Shipments from Japan Shipments delivered Shipments withheld The reason for the third exception is based on the principle that an action to enforce is based on the principle that an action to
1) Firm Offer No. 327 for 50,000 yards November 11, 1960·140 cases, size Pamintuan withheld delivery of enforce liability for future fraud cannot be renounced, as that would be against public policy and would contravene the express
valued at $9,000; 48 inches by 50 yards. (1) 50 cases of plastic sheetings provisions of Article 1171 of the Civil Code which states that any waiver of an action for future fraud is void.
(2) Firm Offer No. 328 for 70,000 November 14, 1960·258 cases out of containing 26,000 yards valued at

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
The second sentence of article 1226 itself provides that nevertheless, damages shall be paid if the obligor x x x is guilty of fraud Sy filed an action for reformation of the lease agreement, damages and injunction. He regained possession and operation of the
in the fulfillment of the obligation. Responsibility arising from fraud is demandable in all obligations (Art. 1171, Civil Code), and theaters.
in case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably
attributed to the nonperformance of the obligation (Ibid, art. 2201). Sy argued that
(1) the amount of deposit—P600,000.00 as agreed upon, P300,000.00 of which was to be paid o1n June 13,
There is no justification for the Civil Code to make an apparent distinction between penalty and liquidated damages because the 1977 and the balance on December 13, 1977—was too big; and that OVEC had assured him that said
settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are concerned and that forfeiture will not come to pass.
either may be recovered without the necessity of proving actual damages and both may be reduced when proper (Arts. 1229, (2) he sought reimbursement: of sums spent for “major repairs” (P1 00,000,00) on Broadway Theater;
2216 and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino’s Civil Code, p. 251).
electrical current used by OVEC through it’s “illegal connection” to Capitol Theater (P48,000.00) Broadway
However, justice would be adequately done in this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages Theater (P31,000.00) and for damages
proven and not to award to it the stipulated liquidated damages of ten thousand pesos for any breach of the contract. The proven (3) Damages suffered by Sy due to the padlocking of the theaters for lost income and inability to push through
damages supersede the stipulated liquidated damages. This view finds support in the opinion of Manresa (whose comments with contracts entered into with movie and booking companies for the showing of movies at ABC.
were the bases of the new matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the (4) he prayed for the issuance of a restraining order/preliminary injunction to enjoin OVEC and all persons
difference between the proven damages and the stipulated penalty may be recovered. Hence, the damages recoverable by the employed by it from entering and taking possession of the three theaters, conditioned upon Sy’s filing of a
firm would amount to (P90,559.28), with 6%/yr from the filing of the complaint.
P500,000.00 bond supplied by Country Bankers Insurance Corporation (CBISCO).
Antonio, J., concurring:
A creditor, in case of fraud by the obligor is entitled only to the stipulated penalty plus the difference between the proven damages OVEC alleged in its answer by way of counterclaims,
and such stipulated penalty. It is evident from the foregoing that in case of fraud in the fulfillment of an obligation with a penal (1) that by reason of Sy’s violation of the terms of the subject lease agreement, OVEC became authorized to
clause, proof of such fraud is incumbent upon the creditor, and in case of demands indemnity in addition to the penalty stipulated, enter and possess the three theaters in question and to terminate said agreement and the balance of the
proof of the existence and amount of the damages shall also correspond to him. However, the creditor may demand only the deposits given by Sy to OVEC had thus become forfeited;
difference of such amount over the amount of the penalty stipulated as the creditor cannot recover both the proven damages
(2) that OVEC would be losing P50,000.00 for every month that the possession and operation of said three
and the stipulated penalty. In the case at bar, he is only entitled to the stipulated penalty plus the difference between the proven
damages and the stipulated penalty. theaters remain with Sy and that OVEC incurred P500,000.00 for attorney’s service.

BALANE NOTE The RTC held that Sy is not entitled to the reformation of the lease agreement; that the repossession of the leased premises by
Under the exception of 1226, the aggrieved party can demand the entire amount of the liquidated damages, with part of it OVEC after the cancellation and termination of the lease and forfeiture of the cash deposit was in accordance with the lease
absorbed by the penalty. agreement and the law applicable thereto.

The RTC further held that Sy was not entitled to the writ of preliminary injunction issued in his favor after the commencement
COUNTRY BANKERS V. CA, 201 SCRA 458 of the action and that the injunction bond filed by Sy is liable for whatever damages OVEC may have suffered by reason of the
injunction. The lessor was deprived of the possession and enjoyment of the leased premises and also suffered damages as a
DOCTRINE/S result of the filing of the case by Sy and his violation of the terms and conditions of the lease agreement. Hence, it held that
As a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of OVEC is entitled to recover the said damages in addition to the arrears in rentals and amusement tax delinquency of Sy and the
interests in case of non-compliance.—A provision which calls for the forfeiture of the remaining deposit still in the possession of accrued interest thereon:
the lessor, without prejudice to any other obligation still owing, in the event of the termination or cancellation of the agreement OVEC finally regained the possession of the three (3) theaters under lease at the end of November, 1980, and
by reason of the lessee’s violation of any of the terms and conditions of the agreement is a penal clause that may be validly Sy’s unpaid rentals and amusement tax liability amounted to P289,534.78.,
entered into. A penal clause is an accessory obligation which the parties attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a special prestation (generally consisting in the payment of a sum of money) To pay P10,000.00 every month from February to November, 1980 or the total amount of P100,000.00 with interest
in case the obligation is not fulfilled or is irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases on Civil on each amount of P1 0,000.00 from the time the same became due; This P10,000.00 portion of the monthly
Law, Vol. IV, First Edition, pp. 199–200) As a general rule, in obligations with a penal clause, the penalty shall substitute the lease rental was supposed to come from the remaining cash deposit of Sy but with the consequent
indemnity for damages and the payment of interests in case of non-compliance. This is specifically provided for in Article 1226, forfeiture of the remaining cash deposit of P290,000.00, there was no more cash deposit from which said
par. 1, New Civil Code. In such case, proof of actual damages suffered by the creditor is not necessary in order that the penalty amount could be deducted.
may be demanded.
Attorney’s fees equivalent to 10% of the amounts above-mentioned.
Exceptions to the rule that the penalty shall substitute the indemnity for damages and the payment of interests in case of non-
compliance with the principal obligation.—However, there are exceptions to the rule that the penalty shall substitute the indemnity Through the injunction bond liable to pay the sum of P10,000.00 every month from February to November, 1980.
for damages and the payment of interests in case of non-compliance with the principal obligation. They are first, when there is The amount represents the supposed increase in rental from P50,000.00 to P60,000.00 in view of the offer of one
a stipulation to the contrary; second, when the obligor is sued for refusal to pay the agreed penalty; and third, when the obligor RTG Productions, Inc. to lease the three theaters involved for P60,000.00 a month.
is guilty of fraud (Article 1226, par. 1, New Civil Code).
On appeal to the CA, the court affirmed and declared as lawful: the cancellation of the lease agreement, the forfeiture clause;
FACTS ordered the payment of unremitted amusement tax, with interest at 12%/year in line with the lease agreement; the unpaid monthly
Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and Enrique F. Sy, as lessee, entered into a lease agreement over lease rentals, increase in rentals plus interest; and attorney’s fees.
the Avenue, Broadway and Capitol Theaters and the land on which they are situated in Cabanatuan City; including their air-
conditioning systems, projectors and accessories needed for showing the films or motion pictures. The term of the lease was for The court found no ambiguity in the provisions of the lease agreement. It held that the provisions are fair and reasonable and
six (6) years commencing from June 13, 1977 and ending June 12, 1983. After more than two (2) years of operati on of the therefore, should be respected and enforced as the law between the parties. It held that the cancellation or termination of the
Avenue, Broadway and Capitol Theaters, the lessor OVEC made demands for the repossession of the said leased properties in agreement prior to its expiration period is justified as it was brought about by Sy’s own default in his compliance with the terms
view of the Sy’s arrears in monthly rentals and non-payment of amusement taxes. On August 8, 1979, OVEC and Sy had a of the agreement and not “motivated by fraud or greed.” It also affirmed the award to OVEC of the amount of P1 00,000.00
conference and by reason of Sy’s request for reconsideration of OVEC’s demand for repossession of the three (3) theaters, the chargeable against the injunction bond posted by CBISCO, which was soundly and amply justified by the trial court.
former was allowed to continue operating the leased premises upon his conformity to certain conditions imposed by the latter in
a supplemental agreement dated August 13, 1979. The respondent Court likewise found no merit in OVEC’s appeal and held that the trial court did not err in not charging and
holding the injunction bond posted by Sy liable for all the awards as the undertaking of CBISCO under the bond referred only to
Pursuant to the agreement, Sy’s arrears in rental was reduced to P71,028.91 as of December 31, 1979. However, the accrued damages which OVEC may suffer as a result of the injunction.
amusement tax liability of the three (3) theaters to the City Government of Cabanatuan City had accumulated to P84,000.00
despite the fact that Sy had been deducting the amount of P4,000.00 from his monthly rental with the obligation to remit the said ISSUE/S
deductions to the city government. Hence, letters of demand dated January 7, 1980 and February 3, 1980 were sent to Sy (1) Whether the penalty clauses unjustly enriched OVEC at the expense of Sy.
demanding payment of the arrears in rentals and amusement tax delinquency. The latter demand was with warning that OVEC
(2) Whether there can be set-off arising from the damage caused by the injunction against the remaining cash deposit of
will re-enter and repossess the theaters on February 11,1980 in pursuance of the pertinent provisions of their lease contract of
June 11, 1977 and their supplemental letter-agreement of August 13, 1979. Sy.

Sy still failed to pay the liabilities, and OVEC padlocked the gates of the three theaters under lease and took possession thereof HELD
in the morning of February 11, 1980 by posting its men around the premises of the said movie houses and preventing the (1) NO.
lessee’s employees from entering the same.
A provision which calls for the forfeiture of the remaining deposit still in the possession of the lessor, without prejudice to any

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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other obligation still owing, in the event of the termination or cancellation of the agreement by reason of the lessee’s violation of
any of the terms and conditions of the agreement is a penal clause that may be validly entered into. A penal clause is an Obligations arising from contracts, after all, have the force of law between the contracting parties who are expected to abide in
accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by good faith with their contractual commitments, not weasel out of them. Moreover, when the terms of the contract are clear and
imposing on the debtor a special prestation (generally consisting in the payment of a sum of money) in case the obligation is not leave no doubt as to the intention of the contracting parties, the rule is settled that the literal meaning of its stipulations should
fulfilled or is irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases on Civil Law, Vol. IV, First Edition, govern. In such cases, courts have no authority to alter a contract by construction or to make a new contract for the parties.
pp. 199–200) As a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages and Since their duty is confined to the interpretation of the one which the parties have made for themselves without regard to its
the payment of interests in case of non-compliance. This is specifically provided for in Article 1226, par. 1, New Civil Code. In wisdom or folly, it has been ruled that courts cannot supply material stipulations or read into the contract words it does not
such case, proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded (Article contain. Indeed, courts will not relieve a party from the adverse effects of an unwise or unfavorable contract freely entered into.
1228, New Civil Code). However, there are exceptions to the rule that the penalty shall substitute the indemnity for damages
and the payment of interests in case of non-compliance with the principal obligation. They are first, when there is a stipulation to An accessory undertaking to assume greater liability on the part of the obligor in case of breach of an obligation, the foregoing
the contrary; second, when the obligor is sued for refusal to pay the agreed penalty; and third, when the obligor is guilty of fraud stipulation is a penal clause which serves to strengthen the coercive force of the obligation and provides for liquidated damages
(Article 1226, par. 1, New Civil Code). It is evident that in all said cases, the purpose of the penalty is to punish the obligor. for such breach. “The obligor would then be bound to pay the stipulated indemnity without the necessity of proof of the existence
Therefore, the obligee can recover from the obligor not only the penalty but also the damages resulting from the non-fulfillment and the measure of damages caused by the breach.”
or defective performance of the principal obligation.
In obligations with a penal clause, the penalty generally substitutes the indemnity for damages and the payment of interests in
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed forfeited, without prejudice to any case of non-compliance. Usually incorporated to create an effective deterrent against breach of the obligation by making the
other obligation still owing by the lessee to the lessor. the penalty cannot substitute for the P100,000.00 supposed damage consequences of such breach as onerous as it may be possible, the rule is settled that a penal clause is not limited to actual
resulting from the issuance of the injunction against the P290,000.00 remaining cash deposit. This supposed damage suffered and compensatory damages.
by OVEC was the alleged P10,000.00 a month increase in rental from P50,000.00 to P60,000.00), which OVEC failed to realize
for ten months from February to November, 1980 in the total sum of P1 00,000.00. This opportunity cost which was duly proven Article 1229
before the trial court, was correctly made chargeable by the said court against the injunction bond posted by CBISCO.
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
(2) NO. irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable. (1154a)
The undertaking assumed by CBISCO under subject injunction refers to “all such damages as such party may sustain by reason
of the injunction if the Court should finally decide that the Plaintiff was/were not entitled thereto,” (Rollo, p. 101) Thus, the
respondent Court correctly sustained the trial court in holding that the bond shall and may answer only for damages which OVEC LO V. CA, 411 SCRA 523 [2003]
may suffer as a result of the injunction. The arrears in rental, the unmeritted amounts of the amusement tax delinquency, the
amount of P1 00,000.00 (P10,000.00 portions of each monthly rental which were not deducted from plaintiff s cash deposit from FACTS:
February to November, 1980 after the forfeiture of said cash deposit on February 11, 1980) and attorney’s fees which were all At the core of the present controversy are two parcels of land with an office building constructed thereon, located at Bo. Potrero,
charged against Sy were correctly considered by the respondent Court as damages which OVEC sustained not as a result of Malabon, Metro Manila.
the injunction.
Petitioner acquired the subject parcels of land in an auction sale from the Land Bank of the Philippines (Land Bank).
BALANE NOTE
In case of any of the exception, you pay both the penalty and the entire amount of damages, because this is more in line with Private respondent National Onion Growers Cooperative Marketing Association, Inc., an agricultural cooperative, was the
the nature of the “penalty clause”. occupant of the disputed parcels of land under a subsisting contract of lease with Land Bank. The lease was valid until December
31, 1995.

HEIRS OF MANUEL UY V. MEER CASTILLO, 697 SCRA 294 [2013] Upon the expiration of the lease contract, petitioner demanded that private respondent vacate the leased premises and surrender
its possession to him. Private respondent refused on the ground that it was, at the time, contesting petitioner’s acquisition of the
DOCTRINE parcels of land in question in an action for annulment of sale, redemption and damages.
In the absence of a showing that they expressly reserved the right to pay the penalty in lieu of the performance of their obligation
under the Kasunduan, respondents were correctly ordered by the RTC to execute and deliver a deed of conveyance over their On February 23, 1996, petitioner filed an action for ejectment before the Metropolitan Trial Court and asked, inter alia, for the
60% share in the subject parcels in favor of petitiOners. Considering that the Kasunduan stipulated that respondents would imposition of the contractually stipulated penalty of P5,000 per day of delay in surrendering the possession of the property to
retain a portion of their share consisting of 1,750 square meters, said disposition should, however, be modified to give full effect him. On September 3, 1996, the trial court decided the case in favor of petitioner.
to the intention of the contracting parties. Since the parties also fixed liquidated damages in the sum of P50,000.00 in case of
breach, we find that said amount should suffice as petitioners' indemnity, without further need of compensation for moral and On appeal to the Regional Trial Court of Malabon, the MTC decision was affirmed in toto. The Court of Appeals rendered its
exemplary damages. In obligations with a penal clause, the penalty generally substitutes the indemnity for damages and the assailed decision affirming the decision of the trial court, with the modification that the penalty imposed upon private respondent
payment of interests in case of non-compliance.68 Usually incorporated to create an effective deterrent against breach of the for the delay in turning over the leased property to petitioner was reduced from P 5,000 to P 1000 per day.
obligation by making the consequences of such breach as onerous as it may be possible, the rule is settled that a penal clause
is not limited to actual and compensatory damages69 ISSUE:
W/N the CA erred in reducing the penalty awarded by the trial court, the same having been stipulated by the parties in their
FACTS: Contract of Lease?
Respondent Mauricia Meer (together with her husband Felipe Castillo) owned four parcels of land located in Mayao, Lucena
City. Upon the death of Felipe, a deed of extrajudicial partition was made in favor of his heirs. Utilized as security for the payment HELD:
of a tractor purchased by Mauricia’s nephew, Santiago Rivera, from Bormaheco, Inc., it appears, however, that the subject NO. The petition has no merit.
properties were subsequently sold at a public auction where Insurance Corporation of the Philippines (ICP) tendered the highest
bid. Having consolidated its title, ICP likewise sold said parcels in favor of Philippine Machinery Parts Manufacturing Co., Inc. Generally, courts are not at liberty to ignore the freedom of the parties to agree on such terms and conditions as they see fit as
(PMPMCI) which, in turn, caused the same to be titled in its name. long as they are not contrary to law, morals, good customs, public order or public policy. Nevertheless, courts may equitably
reduce a stipulated penalty in the contract if it is iniquitous or unconscionable, or if the principal obligation has been
Respondents filed an action in the CFI of Quezon for the annulment of the proceedings involving the parcels of land. Having partly or irregularly complied with.
financial difficulties, respondents entered into an agreement with Manuel Uy Ek Liong to shoulder the litigation expenses. In the
event of a favorable decision, Uy would be granted “40% of the all the realties and/or monetary benefits, gratuities or damages” This power of the courts is explicitly sanctioned by Article 1229 of the Civil Code which provides:
which may be adjudicated in favor of respondents.” Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if
On the same date, respondents and Buenaflor entered into another notarized agreement denominated as a Kasunduan whereby it is iniquitous or unconscionable.
they agreed to sell their remaining sixty (60%) percent share in the subject parcels in favor of Manuel for the sum of P180,000.00.
However, after securing a favorable judgment, the 60% share were divided equally among the respondents. The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the court and
depends on several factors, including, but not limited to, the following: the type, extent and purpose of the penalty, the nature
Having failed to reach an agreement as to the consideration for the supposed sale, petitioners (already the hiers of Uy Ek Liong) of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of
filed an action for specific performance against the respondents for their unjustified refusal to comply with the Kasunduan. The the parties.
RTC ruled in favor of the petitioners, but the decision was set aside on appeal (CA ruled that the contract was null and void).
In this case, the stipulated penalty was reduced by the appellate court for being unconscionable and iniquitous. As
ISSUE: provided in the Contract of Lease, private respondent was obligated to pay a monthly rent of P30,000. On the other hand, the
Viewed in the light of the autonomous nature of contracts enunciated under Article 1306 of the Civil Code, on the other hand, stipulated penalty was pegged at P5,000 for each day of delay or P150,000 per month, an amount five times the monthly
we find that the Kasunduan was correctly found by the RTC to be a valid and binding contract between the parties. rent. This penalty was not only exorbitant but also unconscionable, taking into account that private respondent’s delay
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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in surrendering the leased premises was because of a well-founded belief that its right of preemption to purchase the
subject premises had been violated. Considering further that private respondent was an agricultural cooperative, collectively FLORO V. CA, 249 SCRA 354
owned by farmers with limited resources, ordering it to pay a penalty of P150,000 per month on top of the monthly rent of P30,000
would seriously deplete its income and drive it to bankruptcy. In Rizal Commercial Banking Corp. vs. Court of Appeals, the Court DOCTRINES
tempered the penalty charges after taking into account the debtor’s pitiful financial condition. Contracts; Sales; Lease; Whether the contract is characterized as a sale or a lease, the consequences of the cancellation would
be the same-the parties are to be restored to their original positions inter se as far as practicable.—It would seem that the issue
Accordingly, we rule that the Court of Appeals did not commit any reversible error in the exercise of its discretion when to be resolved in this case is whether the contract entered into by petitioner Floro, Inc. and private respondent Phil. Rabbit was
it reduced the award of penalty damages from P5,000 to P1,000 for each day of delay. one of sale on installment basis, as found by the CA, or one of lease, as found by the RTC. However, the Court does not see
any real need for resolving this issue in view of the fact that the parties had agreed to a mutual cancellation of their transaction.
WHEREFORE, petition is hereby DENIED. The decision of the Court of Appeals reducing the amount of penalty damages As established by both respondent appellate court and the trial court, on 10 January 1983 private respondent Phil. Rabbit wrote
against private respondent is AFFIRMED. petitioner Floro, Inc. asking for the cancellation of the Agreement and the latter, through a letter dated 4 February 1983,
communicated to the former its conformity thereto. Whether the contract is characterized as a sale or a lease, the consequences
Article 1231 of the cancellation would be the same. The parties are to be restored to their original positions inter se as far as practicable.

Art. 1231. Obligations are extinguished: Same; Where one party opts to cancel an existing agreement and the other party expresses its conformity thereto, in legal effect
(1) By payment or performance:
 the parties enter into another contract for the dissolution of the previous one, and they are bound by that contract.—When
(2) By the loss of the thing due:
 petitioner Floro, Inc. failed to deliver the Model 85 monitors, private respondent Phil. Rabbit would have been entitled to refuse
(3) By the condonation or remission of the debt;
 to pay the full amount stipulated in the Agreement. However, private respondent Phil. Rabbit opted to cancel the Agreement, to
(4) By the confusion or merger of the rights of creditor and debtor;
 which petitioner Floro, Inc. expressed its conformity. In legal effect, the parties entered into another contract for the dissolution
(5) By compensation;
 of the previous one, and they are bound by that contract.
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory Same; The dissolution or the cancellation of the original agreement necessarily involves restoration of the parties to the status
condition, and prescription, are governed elsewhere in this Code. (1156a) quo ante prevailing immediately prior to the execution of the agreement.—The dissolution or the cancellation of the original
Agreement necessarily involves restoration of the parties to the status quo ante prevailing immediately prior to the execution of
BALANE NOTE, OTHER CASES WHERE OBLIGATIONS ARE EXTINGUISHED the Agreement i.e. the computer equipment reverts back to petitioner Floro, Inc. and private respondent Phil. Rabbit is
(7) annulment reimbursed the amounts it had paid to the former. However, in this case, Phil. Rabbit cannot reasonably demand reimbursement
(8) rescission for the full amount it had paid to petitioner Floro, Inc. because it cannot be gainsaid that Phil. Rabbit had utilized the computer
(9) fulfillment of a resolutory condition equipment for its operations and benefitted from such use. Phil. Rabbit cannot be allowed to unjustly enrich itself at the expense
(10) prescription of Floro, Inc.
(11) death
(12) renunciation Same; Rescission; Equity; Article 1385 of the Civil Code refers to contracts that are rescissible for causes specified in Articles
(13) compromise 1381 and 1382 of the Civil Code but it does not refer to contracts that are dissolved by mutual consent of the parties.—Hence,
(14) arrival of resolutory term respondent appellate court was correct in ordering the parties to restore to each other what each of them had received under
(15) mutual dissent or mutual disistance (See saura v. DBP) the contract but taking into account the use by private respondent Phil. Rabbit of the computer equipment. However, it was not
(16) unilateral withdrawal quite correct in invoking, in this connection, Article 1385 of the Civil Code. Article 1385 refers to contracts that are rescissible for
(17) change of civil status causes specified in Articles 1381 and 1382 of the Civil Code but it does not refer to contracts that are dissolved by mutual
(18) rebus sic stantibus [Art 1267] – fortuitious event consent of the parties. Rather, the mutual restoration is in consonance with the basic principle that when an obligation has been
(19) want of interest (see Tiu v. Platinum) extinguished or resolved, it is the duty of the court to require the parties to surrender whatever they may have received from the
Non-involvent clause is invalid and no longer operable when the employer changes the nature of their business. A other so that they may be restored, as far as practicable, to their original situation.
chef previously subject of the clause, if during the period stated in the contract that he should not be involved the
employer changes his/her business, is no longer bound. FACTS OF THE CASE:
(20) judicial insolvency On 25 February 1981, Floro, Inc. and Phil. Rabbit entered into an agreement denominated as "Agreement for Equipment Lease,
Service and Maintenance" whereby Floro, Inc. agreed to furnish Phil. Rabbit with certain computer equipment including four (4)
Model 85 Visual Display Units or monitors. Appearing on the bottom portion of the Agreement was a handwritten annotation
SAURA V. DBP, 44 SCRA 445 made by Mr. Ernesto P. Lagman, a sales representative of Floro, Inc., which read: "After (5) five years, the computer becomes
Source: http://lextheorica.blogspot.com/2012/02/credit-transactions-digest.html your property."

FACTS The Agreement provided for the payment by Phil. Rabbit to Floro, Inc. of a downpayment upon signing of the Agreement and
Saura applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an industrial loan to be used certain monthly payments, plus certain other amounts upon delivery of the computer equipment.The computer equipment
for construction of factory building, for payment of the balance of the purchase price of the jute machinery and equipment and specified in the Agreement was delivered to Phil. Rabbit on September 1981 except for the four (4) Model 85 monitors. In lieu
as additional working capital. In Resolution No.145, the loan application was approved to be secured first by mortgage on the thereof, Floro, Inc. delivered and installed Model 82 monitors. Phil. Rabbit made several verbal and written demands on Floro,
factory buildings, the land site, and machinery and equipment to be installed. Inc. to deliver the Model 85 monitors. Upon assurances made by Floro, Inc. that the Model 85 monitors "will be forthcoming",
Phil. Rabbit made several payments in accordance with the terms of the Agreement. However, despite the assurances made
The mortgage was registered and documents for the promissory note were executed. The cancellation of the mortgage was by Floro, Inc., the Model 85 monitors were never delivered to Phil. Rabbit.
requested to make way for the registration of a mortgage contract over the same property in favor of Prudential Bank and Trust
Co., the latter having issued Saura letter of credit for the release of the jute machinery. As security, Saura execute a trust receipt Phil. Rabbit wrote Floro, Inc. asking for the cancellation of the Agreement alleging that the computers were not placed in full
in favor of the Prudential. For failure of Saura to pay said obligation, Prudential sued Saura. operation due to the nondelivery of the Model 85 monitors. In a letter dated 4 February 1983, Floro, Inc. expressed its conformity
to the "mutual cancellation" of the Agreement and demanded the return of the computer equipment. Phil. Rabbit informed Floro,
After 9 years after the mortgage was cancelled, Saura sued RFc alleging failure to comply with tits obligations to release the Inc. that the computer equipment would be returned only upon the reimbursement of the amount of P295,169.00, which the
loan proceeds, thereby prevented it from paying the obligation to Prudential Bank. former had already paid the latter.

The trial court ruled in favor of Saura, ruling that there was a perfected contract between the parties ad that the RFC was guilty On 31 May 1983, Floro, Inc. wrote Phil. Rabbit reiterating its demand for the return of the equipment and payment of back rentals
of breach thereof. in the amount of P265,291.50. Phil. Rabbit insisted on the return of the payments it had previously made.

ISSUE ISSUE:
Whether or not there was a perfected contract between the parties. 1. WHETHER THE CONTRACT BETWEEN THE PARTIES IS A CONTRACT OF LEASE OR A CONTRACT OF SALE ON
INSTALLMENT
HELD 2. WHETHER THE PARTIES SHOULD RESTORE TO EACH OTHER WHAT EACH OF THEM HAVE RECEIVED IN THE
The Court held in the affirmative. Article 1934 provides: An accepted promise to deliver something by way of CONTRACT
commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until
delivery of the object of the contract. HELD:
1. The agreement between the parties is one of sale on an installment basis and not of lease. That the intention of Phil. Rabbit
There was undoubtedly offer and acceptance in the case. When an application for a loan of money was approved by resolution and Floro, Inc. was to enter into a contract of sale on installment has been sufficiently established by the handwritten
of the respondent corporation and the responding mortgage was executed and registered, there arises a perfected consensual annotation stating that after five years, the computer becomes the property of the respondents.
contract 2. The mutual restoration is in consonance with the basic principle that when an obligation has been extinguished or resolved,
it is the duty of the court to require the parties to surrender whatever they may have received from the other so that they
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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may be restored, as far as practicable, to their original situation. Since the parties had agreed to a mutual cancellation of Hence, the present petition for review, wherein petitioners insist on their right of cancellation under the "plainly valid written
the Agreement, the court ordered each to restore to the other what each had received under the Agreement in accordance agreements which constitute the law between the parties" as against "the broad principles of equity and justice" applied by the
with Article 1385 of the Civil Code. The computer equipment had been previously returned to Floro, Inc. by virtue of the appellate court. Respondent on the other hand while adhering to the validity of the doctrine of the Caridad Estates cases 5 which
writ of replevin issued by the trial court. The CA found that Phil. Rabbit had been able to make use of the computer recognizes the right of a vendor of land under a contract to sell to cancel the contract upon default, with forfeiture of the
equipment for a period of six (6) months; hence, Phil. Rabbit was ordered to pay the sum of P120,564.00 to be deducted installments paid as rentals, disputes its applicability herein contending that here petitioners-sellers were equally in default as
from the sum of P295,169.00 which it had already paid to Floro, Inc. For its part, Floro, Inc. was ordered to return the the lots were "completely under water" and "there is neither evidence nor a finding that the petitioners in fact cancelled the
balance of P174,605.00. contracts previous to receipt of respondent's letter." 6

Article 1234 The Court finds that the appellate court's judgment finding that of the total sum of P3,582.06 (including interests of P1,889.78)
already paid by respondent (which was more than the value of two lots), the sum applied by petitioners to the principal alone in
Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as the amount of P1,682.28 was already more than the value of one lot of P1,500.00 and hence one of the two lots as chosen by
though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n) respondent would be considered as fully paid, is fair and just and in accordance with law and equity.

As already stated, the monthly payments for eight years made by respondent were applied to his account without specifying or
LEGARDA HERMANOS V. SALDANA, 55 SCRA 324 distinguishing between the two lots subject of the two agreements under petitioners' own statement of account, Exhibit "1". 7
Even considering respondent as having defaulted after February 1956, when he suspended payments after the 95th installment,
FACTS: he had as of the already paid by way of principal (P1,682.28) more than the full value of one lot (P1,500.00). The judgment
The Court, in affirming the decision under review of the Court of Appeals, which holds that the respondent buyer of two small recognizing this fact and ordering the conveyance to him of one lot of his choice while also recognizing petitioners' right to retain
residential lots on installment contracts on a ten-year basis who has faithfully paid for eight continuous years on the principal the interests of P1,889.78 paid by him for eight years on both lots, besides the cancellation of the contract for one lot which thus
alone already more than the value of one lot, besides the larger stipulated interests on both lots, is entitled to the conveyance of reverts to petitioners, cannot be deemed to deny substantial justice to petitioners nor to defeat their rights under the letter and
one fully paid lot of his choice, rules that the judgment is fair and just and in accordance with law and equity. spirit of the contracts in question.

The action originated as a complaint for delivery of two parcels of land in Sampaloc, Manila and for execution of the The Court's doctrine in the analogous case of J.M. Tuason & Co. Inc. vs. Javier 8 is fully applicable to the present case, with the
corresponding deed of conveyance after payment of the balance still due on their purchase price. Private respondent as plaintiff respondent at bar being granted lesser benefits, since no rescission of contract was therein permitted. There, where the therein
had entered into two written contracts with petitioner Legarda Hermanos as defendant subdivision owner, whereby the latter buyer-appellee identically situated as herein respondent buyer had likewise defaulted in completing the payments after having
agreed to sell to him Lots Nos. 7 and 8 of block No. 5N of the subdivision with an area of 150 square meters each, for the sum religiously paid the stipulated monthly installments for almost eight years and notwithstanding that the seller-appellant had duly
of P1,500.00 per lot, payable over the span of ten years divided into 120 equal monthly installments of P19.83 with 10% interest notified the buyer of the rescission of the contract to sell, the Court upheld the lower court's judgment denying judicial confirmation
per annum, to commence on May 26, 1948, date of execution of the contracts. Subsequently, Legarda Hermanos partitioned of the rescission and instead granting the buyer an additional grace period of sixty days from notice of judgment to pay all the
the subdivision among the brothers and sisters, and the two lots were among those allotted to co-petitioner Jose Legarda who installment payments in arrears together with the stipulated 10% interest per annum from the date of default, apart from
was then included as co-defendant in the action. reasonable attorney's fees and costs, which payments, the Court observed, would have the plaintiff-seller "recover everything
due thereto, pursuant to its contract with the defendant, including such damages as the former may have suffered in
It is undisputed that respondent faithfully paid for eight continuous years about 95 (of the stipulated 120) monthly installments consequence of the latter's default."
totalling P3,582.06 up to the month of February, 1956, which as per petitioners' own statement of account, Exhibit "1", was
applied to respondent's account (without distinguishing the two lots), as follows: In affirming, the Court held that "Regardless, however, of the propriety of applying said Art. 1592 thereto, We find that plaintiff
To interests P1,889.78 herein has not been denied substantial justice, for, according to Art. 1234 of said Code: 'If the obligation has been substantially
To principal 1,682.28 performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages
Total P3,582.06 1 suffered by the obligee,'" and "that in the interest of justice and equity, the decision appealed from may be upheld upon the
authority of Article 1234 of the Civil Code." 9
It is equally undisputed that after February, 1956 up to the filing of respondent's complaint in the Manila court of first instance in
1961, respondent did not make further payments. The account thus shows that he owed petitioners the sum of P1,317.72 on ACCORDINGLY, the appealed judgment of the appellate court is hereby affirmed. Without pronouncement as to costs.
account of the balance of the purchase price (principal) of the two lots (in the total sum of P3,000.00), although he had paid more
than the stipulated purchase price of P1,500.00 for one lot.
J.M. TUASON V. JAVIER, 31 SCRA 829
Almost five years later, on February 2, 1961 just before the filing of the action, respondent wrote petitioners stating that his desire
to build a house on the lots was prevented by their failure to introduce improvements on the subdivision as "there is still no road FACTS:
to these lots," and requesting information of the amount owing to update his account as "I intend to continue paying the balance On September 7, 1954, petitioner J.M. Tuason & Co., Inc. entered a contract to sell with respondent Ligaya Javier a parcel of
due on said lots." land known as Lot No. 28, Block No. 356, PSD 30328, of the Sta. Mesa Heights Subdivision for the sum of Php3,691.20 with
Petitioners replied in their letter of February 11, 1961 that as respondent had failed to complete total payment of the 120 10% interest per annum; Php396.12 will be payable upon execution of the contract, and an installment of Php43.92 monthly for
installments by May, 1958 as stipulated in the contracts to sell, "pursuant to the provisions of both contracts all the amounts paid a period of ten (10) years. It was further stipulated in the contract, particularly the sixth paragraph, that upon failure of respondent
in accordance with the agreement together with the improvements on the premises have been considered as rents paid and as to pay the monthly installment, she is given a one month grace period to pay such installment together with the monthly
payment for damages suffered by your failure," 2 and "Said cancellation being in order, is hereby confirmed." installment falling on the said grace period. Furthermore, failure to pay both monthly installments, respondent will pay an
additional 10% interest. And after 90 days from the end of the grace period, petitioner can rescind the contract, the payments
From the adverse decision of July 17, 1963 of the trial court sustaining petitioners' cancellation of the contracts and dismissing made by respondent will be considered as rentals. Upon the execution of the contract, respondent religiously paid the monthly
respondent's complaint, respondent appellate court on appeal rendered its judgment of July 27, 1966 reversing the lower court's installment until January 5, 1962. Respondent, however, was unable to the pay the monthly installments within the grace period
judgment and ordering petitioners "to deliver to the plaintiff possession of one of the two lots, at the choice of defendants, and which petitioner, subsequently, sent a letter to respondent on May 22, 1964 that the contract has been rescinded and asked the
to execute the corresponding deed of conveyance to the plaintiff for the said lot," 3 ruling as follows: — respondent to vacate the said land. So, upon failure of respondent to vacate the said land, petitioner filed an action to the Court
of First Instance of Rizal for the rescission of the contract. The CFI rendered a decision in favor of respondent in applying Article
During the hearing, plaintiff testified that he suspended payments because the lots were not actually delivered to him, or could 1592 of the New Civil Code. Hence, petitioner made an appeal to the Supreme Court alleging that since Article 1592 of the New
not be, due to the fact that they were completely under water; and also because the defendants-owners failed to make Civil applies only to contracts of sale and not in contracts to sell.
improvements on the premises, such as roads, filling of the submerged areas, etc., despite repeated promises of their
representative, the said Mr. Cenon. As regards the supposed cancellation of the contracts, plaintiff averred that no demand has ISSUE:
been made upon him regarding the unpaid installments, and for this reason he could not be declared in default so as to entitle Did the CFI erroneously apply Article 1592 of the New Civil Code?
the defendants to cancel the said contracts.
The issue, therefore, is: Under the above facts, may defendants be compelled, or not, to allow plaintiff to complete payment of RULING:
the purchase price of the two lots in dispute and thereafter to execute the final deeds of conveyance thereof in his favor? Yes. Regardless, however, of the propriety of applying Article 1592, petitioner has not been denied substantial justice under
Article 1234 of the New Civil Code. In this connection, respondent religiously satisfied the monthly installments for almost eight
xxx xxx xxx (8) years or up to January 5, 1962. It has been shown that respondent had already paid Php4,134.08 as of January 5, 1962
which is beyond the stipulated amount of Php3,691.20. Also, respondent has offered to pay all installments overdue including
Whether or not plaintiffs explanation for his failure to pay the remaining installments is true, considering the circumstances the stipulated interest, attorney’s fees and the costs which the CFI accordingly sentenced respondent to pay such installment,
obtaining in this case, we elect to apply the broad principles of equity and justice. In the case at bar, we find that the plaintiff has interest, fees and costs. Thus, petitioner will be able recover everything that was due
paid the total sum of P3,582.06 including interests, which is even more than the value of the two lots. And even if the sum applied thereto. Under these circumstances, the SC feel that, in the interest of justice and equity, the decision appealed from may be
to the principal alone were to be considered, which was of the total of P1,682.28, the same was already more than the value of upheld upon the authority of Article 1234 of the New Civil Code.
one lot, which is P1,500.00. The only balance due on both lots was P1,317.72, which was even less than the value of one lot.
We will consider as fully paid by the plaintiff at least one of the two lots, at the choice of the defendants. This is more in line with
good conscience than a total denial to the plaintiff of a little token of what he has paid the defendant Legarda Hermanos. 4 PRESBITERO V. CA, 217 SCRA 372

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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FACTS: compliance by partial payments. By and large, petitioners’ actuation is susceptible of but one construction — that they are now
Ricardo Presbitero, Sr. entered into a Conformity Contract with Leonardo Cañoso, to engage the services of the latter to negotiate estopped from reneging from their commitment on account of acceptance of benefits arising from overdue accounts of private
with the Land Bank of the Philippines and the Ministry of Agrarian Reform for the sale of his 270-hectare land under a voluntary respondent.
offer agreement. Presbitero bound himself to compensate Cañoso "for his efforts, services and other related expenses in making
the necessary follow up (sic) of the preparation, production of pertinent documents required," and "to effect the recovery of the Article 1235
proceed (sic) of the land transfer payment from the Land Bank of the Philippines," in an amount equivalent to "Twenty Five per
cent (25%) of the gross total sales of my properties described above which is (sic) subject of Operation Land Transfer." However, Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and
when a part of the proceeds was released, the private respondent was not given his share as agreed upon. Hence, the latter without expressing any protest or objection, the obligation is deemed fully complied with. (n)
filed a complaint against Presbitero before the RTC of Cotabato City which was docketed as Civil Case No. 68 and assigned to
Branch 15 of the said court. The trial court ruled in favor of Cañoso.
AZCONA V. JAMANDRE, 151 SCRA 317
ISSUE:
Whether Presbitero is entitled to rescind the contract. Same; Same; Where landlord signs a receipt for P7,000.00 as rental payment “as per contract” he cannot ask for cancellation
of the lease on the ground that the lessee did not pay the full rent of P 7,200.00 fixed in the contract. The landlord should have
HELD: made an express reservation for the deficiency. Rent deemed reduced to P 7,000.00.—After a study of the receipt as signed by
No. (But since this is under Art. 1234, read further down the held!) [Even assuming that the private respondent breached the the petitioner and witnessed for the respondent, this Court has come to the conclusion, and so holds, that the amount of
agreement by not fully accomplishing his obligation within the stipulated period, said breach was not of a nature which would P7,000.00 paid to by the respondent and received by the petitioner represented payment in full of the rental for the agricultural
justify a rescission of the contract. In the case of Bacolod-Murcia Milling Co., Inc. vs. Court of Appeals that rescission of a contract year 1961–62. The language is clear enough: “The amount of SEVEN THOUSAND PESOS (P7,000.00), Philippine Currency,
will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very as payment for the rental corresponding to crop year 1961–62 . . . to the rental due on or before January 30, 1961, as per
object of the parties in making the agreement; the question of whether a breach of contract is substantial depends upon the contract.” The conclusion should be equally clear. The words “as per contract” are especially significant as they suggest that the
attending circumstances. parties were aware of the provisions of the agreement, which was described in detail elsewhere in the receipt. The rental
stipulated therein was P7,200.00. The payment being acknowledged in the receipt was P7,000.00 only. Yet no mention was
In the case at bar, no substantial breach was committed by the private respondent sufficient enough to warrant a rescission. made in the receipt of the discrepancy and, on the contrary, the payment was acknowledged “as per contract.” We read this as
From all indications, private respondent was able to perform his obligation; this conclusion follows in the wake of the approval of meaning that the provisions of the contract were being maintained and respected except only for the reduction of the agreed
the claim.] rental.

Under Article 1234 of the New Civil Code, if the obligation has been substantially performed in good faith, the obligor (private Same; Same; Same.—It seems to us that this meaning was adequately conveyed in the acknowledgment made by the petitioner
respondent) may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee that this was “payment for the rental corresponding to crop year 1961–62“and “corresponds to the rentals due on or before
(Presbitero). Moreover, when the obligee accepts the performance, as what happened in this case, knowing its incompleteness January 30, 1961, as per contract.” On the other hand, if this was not the intention, the petitioner does not explain why he did
or irregularity, and without expressing a protest or objection, the obligation is deemed fully complied with. Finally, to all ow not specify in the receipt that there was still a balance of P200.00 and, to be complete, the date when it was to be paid by the
Presbitero to rescind the contract would not only violate the well-settled rule on mutuality of contracts — which provides that the respondent.
validity or compliance of a contract cannot be left to the will of one of the contracting parties 41 — but would also work an injustice
to the rights of the private respondent who has already performed his obligation pursuant to their agreement. Presbitero's
correlative obligation must perforce be also fulfilled. There is no evidence to indicate that the private respondent was remise or PAGSIBIGAN V. CA, 221 SCRA 202
negligent in the performance of his obligation. Neither was there any evidence presented to show that it was through Presbitero's
own efforts that this claim with the LBP was approved. Contracts; Loan agreement with real estate mortgage; Acceleration clause; Effect of acceptance of delayed payments.—There
is no question that the respondent bank has the right to foreclose the mortgage upon the first default of petitioner on May 3,
1977, but the records show that it did not. When it received payment of petitioner on July 6, 1977, which had been 2 months and
TAYAG V. CA, 219 SCRA 480 3 days delayed, it applied P154.80 to the principal, P210.00 to interest, and only P25.20 to penalty. From this act of receiving
Facts: delayed payment, it is clear that the respondent bank had waived its right under the acceleration clause so that instead of
Siblings Juan Galicia Sr. and Celerina Labuguin entered into a contract to sell a parcel of land in Nueva Ecija to a certain Albrigido claiming penalty charges on the entire amount of P4,500.00, it only computed the penalty based on the defaulted amortization
Leyva:
 o 3K upon agreement
 o 10K ten days after the agreement
 o 10K representing vendor’s indebtedness to Phil Veterans payment which is P1,018.14. If it computed the penalty charge at 19% of the entire amount of P4,500.00 which would have been
Bank
 o 27K payable within one year from execution of contract. due and demandable by virtue of the acceleration clause, the penalty charges would be much more than P25.20.

Leyva only paid parts of the obligation. Same; Same; Application of payments; Waiver.—We also noticed that in Exhibit “D-3”, the receipt which the respondent bank
issued to petitioner for the August 26, 1978 partial payment, it waived its right under Article 1253 of the Civil Code on Application
But even after the grace period for payment made in the contract and while litigation of such case, the petitioners still allowed of Payments when it applied the payment to the principal instead of the interest. Thus, on that date the outstanding obligation of
Leyva to make payments. petitioner was already reduced to P3,558.21 after she had paid a total of P2,200.00 over a period of nine months from the time
the loan was obtained.
With regards to the obligation payable to the Phil Veterans bank by the vendee, as they deemed that it was not paid in full, such
obligation they completed by adding extra amount to fulfill such obligation. This was fatal in their case as this is Leyva’s argument Same; Same; Substantial performance under Art. 1234 of the New Civil Code.—We hold that the payment amounting to
that they constructively fulfilled the obligation which is rightfully due to him. (Trivia: It was Celerina, Juan’s sister, that paid the P8,650.00 for the balance of P3,558.20 as of August 26, 1978 plus the P1,000.00 it was asked to pay on April 24, 1984 would
bank to complete such obligation). at the very least constitute substantial performance. Article 1234 of the Civil Code, provides: “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,
Petitioners claim that they are only “OBLIGEES” with regards to the contract, so the principle of constructive fulfillment cannot less damages suffered by the obligee.” Petitioner in this case has the right to move for the cancellation of the mortgage and the
be invoked against them. release of the mortgaged property, upon payment of the balance of the loan. Definitely, it would not be in the amount demanded
by the respondent bank, which the trial court held to be P29,554.81.
Petitioners, being both creditor and debtor to private respondent, in accepting piecemeal payment even after the grace period,
are barred to take action through estoppel. Article 1240

Issue: Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or
1. WON there was constructive fulfillment in the part of the petitioners that shall make rise the obligation to deliver to Leyva the his successor in interest, or any person authorized to receive it. (1162a)
deed of sale? YES

2. WON they are still entitled to rescind the contract? NO, barred by estoppel.
ARANAS V. TUTAAN, 127 SCRA 828
Held:
1. In a contract of purchase, both parties are mutually obligors and also obligees, and any of the contracting parties may, upon Facts:
non-fulfillment by the other privy of his part of the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code). The stocks of Universal Textile Mills (UTEX) were issued to co-defendants Manuel and Castaneda. Subsequently, in 1971, the
lower court declared that Luisa Aranas is the rightful owner of the 400 shares of stocks at Universal Textile Mills (UTEX. Further,
In short, it is puerile for petitioners to say that they are the only obligees under the contract since they are also bound as obligors it ordered that dividends in cash or stocks pertaining to the same be delivered to Aranas. UTEX then filed a motion to clarify the
to respect the stipulation in permitting private respondent to assume the loan with the Philippine Veterans Bank which petitioners phrase in said decision which states “to deliver to her all dividends appertaining to the same, whether in cash or in stocks” meant
impeded when they paid the balance of said loan. As vendors, they are supposed to execute the final deed of sale upon full dividends properly pertaining to the plaintiffs after the court’s declaration of her ownership. The said motion was granted, where
payment of the balance as determined hereafter. the court ordered UTEX to pay the plaintiff the cash dividends which accrued to the stocks in question after the current decision
was rendered but the cash dividends already paid to the co-defendants before the court decision may not be claimed by the
2. Petitioners accepted Leyva’s delayed payments not only beyond the grace periods but also during the pendency of the case plaintiffs.
for specific performance. Indeed, the right to rescind is not absolute and will not be granted where there has been substantial
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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The co-defendants filed for a new trial and the decision was the same as the the 1971 ruling. Upon appeal to the CA, the said In the meantime, the action derived from the original obligation shall be held in abeyance.
ruling was affirmed. The lower court issued a writ of execution in 1979 directed to UTEX to 1) cancel the certificate of stocks of
the co-defendants and issue new ones in the name of the petitioners, and 2) Pay the cash dividends accrued from 1972 to 1979 In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in money and
(period from the new trial to the issuance of writ of execution). UTEX alleged that the cash dividends had already been paid. unless the parties so agree, a debtor has no rights, except at his own peril, to substitute something in lieu of cash as medium of
payment of his debt. Consequently, unless authorized to do so by law or by consent of the obligee a public officer has no authority
ISSUE: to accept anything other than money in payment of an obligation under a judgment being executed. Strictly speaking, the
Whether or not there was valid payment acceptance by the sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment
debt.
RULING:
No. It is elementary that payment made by a judgment debtor to a wrong party cannot extinguish the obligation of such debtor Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by
to its creditor. It was clear in the motion for clarification that all dividends accruing to the said shares after the rendition of itself, operate as payment. A check, whether a manager's check or ordinary cheek, is not legal tender, and an offer of a check
judgement belonged to the Aranas. When UTEX paid the wrong parties, despite its knowledge and understanding of the final in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of
judgment, it is still liable to pay Aranas as the lawful declared owners of the said shares. The burden to recover the wrong checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the
payment is on UTEX and cannot be passed on to the Aranas as the innocent parties. payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).

If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no payment. After
PAL V. CA, 181 SCRA 557 dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that she has received no value for
what had been awarded her. Because the checks were drawn in the name of Emilio Z. Reyes, neither has she received anything.
Facts: The same rule should apply.
Amelia Tan under the company Able Printing Press filed a complaint for damages versus PAL. The trial court rendered judgment
in favor of Tan and ordered PAL to pay damages. PAL appealed the judgment which the CA granted by reducing the amount of It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal contemplation. The
damages. reasoning is logical but is it valid and proper? Logic has its limits in decision making. We should not follow rulings to their logical
extremes if in doing so we arrive at unjust or absurd results.
Judgment became final and executory and was correspondingly entered in the case, which was remanded to the trial court for
execution. The trial court upon the motion of Amelia Tan issued an order of execution with the corresponding writ in favor of the In the first place, PAL did not pay in cash. It paid in cheeks.
respondent. Said writ was duly referred to Deputy Sheriff Reyes for enforcement.
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash in a careless and
Four months later, Amelia Tan moved for the issuance of an alias writ of execution, stating that the judgment rendered by the inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer being waylaid or running off with
lower court, and affirmed with modification by the CA, remained unsatisfied. PAL opposed the motion, stating that it had already what he is carrying for another. Payment in checks is precisely intended to avoid the possibility of the money going to the wrong
fully paid its obligation to plaintiff through the issuance of checks payable to the deputy sheriff who later did not appear with his party. The situation is entirely different where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way to
return and instead absconded. experience and to reality. Having paid with checks, PAL should have done so properly.

The CA denied the issuance of the alias writ for being premature. After two months the CA granted her an alias writ of execution Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt but the Court
for the full satisfaction of the judgment rendered, when she filed another motion. Deputy Sheriff del Rosario is appointed special has never, in the least bit, suggested that judgment debtors should settle their obligations by turning over huge amounts of cash
sheriff for enforcement thereof. or legal tender to sheriffs and other executing officers. Payment in cash would result in damage or interminable litigations each
time a sheriff with huge amounts of cash in his hands decides to abscond.
PAL filed an urgent motion to quash the alias writ of execution stating that no return of the writ had as yet been made by Deputy
Sheriff Reyes and that judgment debt had already been fully satisfied by the former as evidenced by the cash vouchers signed As a protective measure, therefore, the courts encourage the practice of payments by cheek provided adequate controls are
and received by the executing sheriff. instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds. If particularly big amounts are involved,
Deputy Sheriff del Rosario served a notice of garnishment on the depository bank of PAL, through its manager and garnished escrow arrangements with a bank and carefully supervised by the court would be the safer procedure. Actual transfer of funds
the latter’s deposit. Hence, PAL brought the case to the Supreme Court and filed a petition for certiorari. takes place within the safety of bank premises. These practices are perfectly legal. The object is always the safe and incorrupt
execution of the judgment.
Issue:
WON the payment of judgment to the implementing officer as directed in the writ of execution constitutes satisfaction of It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of another. Making the
judgment? Or did the payment made to the absconding sheriff by check in his name operate to satisfy the judgment debt? NO. checks payable to the judgment creditor would have prevented the encashment or the taking of undue advantage by the sheriff,
or any person into whose hands the checks may have fallen, whether wrongfully or in behalf of the creditor. The issuance of the
Ratio: checks in the name of the sheriff clearly made possible the misappropriation of the funds that were withdrawn.
In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article 1240 of the
Civil Code provides: As explained and held by the respondent court:
Payment shall be made to the person in whose favor the obligation has been constituted, or his ... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan,
successor in interest, or any person authorized to receive it. (Emphasis supplied) the petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable
about the accepted procedures and resulting consequences of the checks drawn, nevertheless, in
Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive the particular this instance, without prudence, departed from what is generally observed and done, and placed as
payment. Payment made to one having apparent authority to receive the money will, as a rule, be treated as though actual payee in the checks the name of the errant Sheriff and not the name of the rightful payee. Petitioner
authority had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it thereby created a situation which permitted the said Sheriff to personally encash said checks and
will work a discharge. The receipt of money due on a judgment by an officer authorized by law to accept it will, therefore, satisfy misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted,
the debt. the petitioner himself must bear the fault. The judicial guideline which we take note of states as
follows:
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to such a person so
authorized is deemed payment to the creditor. Under ordinary circumstances, payment by the judgment debtor in the case at As between two innocent persons, one of whom must suffer the consequence of a breach of trust,
bar, to the sheriff should be valid payment to extinguish the judgment debt. the one who made it possible by his act of confidence must bear the loss.

There are circumstances in this case, however, which compel a different conclusion. Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible the loss had but
itself to blame.
The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The checks were
not payable to Amelia Tan or Able Printing Press but to the absconding sheriff. Article 1244

Did such payments extinguish the judgment debt? Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter
Article 1249 of the Civil Code provides: may be of the same value as, or more valuable than that which is due.
The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance
against the obligee's will. (1166a)
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of
the creditor they have been impaired. CATHAY PACIFIC V. VAZQUEZ, 399 SCRA 207 [2003]
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract
DOCTRINE: of sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale
Same; Same; Same; Upgrading; Airline passengers have every right to decline an upgrade and insist on the accommodation or innovation to have the effect of totally extinguishing the debt or obligation.
they had booked, and if an airline insists on the upgrade, it breaches its contract of carriage with the passengers.—We note that
in all their pleadings, the Vazquezes never denied that they were members of Cathay’s Marco Polo Club. They knew that as The evidence fails to show that Filinvest consented, or at least intended, that the mere delivery to, and acceptance by him, of
members of the Club, they had priority for upgrading of their seat accommodation at no extra cost when an opportunity arises. the mortgaged motor vehicle be construed as actual payment, more specifically dation in payment or dacion en pago. The fact
But, just like other privileges, such priority could be waived. The Vazquezes should have been consulted first whether they that the mortgaged motor vehicle was delivered to him does not necessarily mean that ownership thereof, as juridically
wanted to avail themselves of the privilege or would consent to a change of seat accommodation before their seat assignments contemplated by dacion en pago, was transferred from appellant to appellee. In the absence of clear consent of appellee to the
were given to other passengers. Normally, one would appreciate and accept an upgrading, for it would mean a better proferred special mode of payment, there can be no transfer of ownership of the mortgaged motor vehicle from appellant to
accommodation. But, whatever their reason was and however odd it might be, the Vazquezes had every right to decline the appellee. If at all, only transfer of possession of the mortgaged motor vehicle took place, for it is quite possible that appellee, as
upgrade and insist on the Business Class accommodation they had booked for and which was designated in their boarding mortgagee, merely wanted to secure possession to forestall the loss, destruction, fraudulent transfer of the vehicle to third
passes. They clearly waived their priority or preference when they asked that other passengers be given the upgrade. It should persons, or its being rendered valueless if left in the hands of the appellant.
not have been imposed on them over their vehement objection. By insisting on the upgrade, Cathay breached its contract of
carriage with the Vazquezes. Finally the Voluntary Surrender with SPA to Sell executed reveals that the possession of the mortgaged motor vehicle was
voluntarily surrendered by the appellant to the appellee authorizing the latter to look for a buyer and sell the vehicle in behalf of
FACTS: the former who retains ownership thereof, and to apply the proceeds of the sale to the mortgage indebtedness, with the
In respondents’ return flight to Manila from Hongkong, they were deprived of their original seats in Business Class with thei r undertaking of the appellant to pay the difference, if any, between the selling price and the mortgage obligation. With the
companions because of overbooking. Since respondents were privileged members, their seats were upgraded to First Class. stipulated conditions as stated, the appellee, in essence was constituted as a mere agent to sell the motor vehicle which was
Respondents refused but eventually persuaded to accept it. Upon return to Manila, they demanded that they be indemnified in delivered to the appellee, not as its property. There is no estoppel on part of Filinvest to demand payment from the unpaid
the amount of P1million for the “humiliation and embarrassment” caused by its employees. Petitioner’s Country Manager failed obligation since it never accepted the mortgaged motor vehicle in cull satisfaction of the mortgaged debt.
to respond. Respondents instituted action for damages. The RTC ruled in favor of respondents. The Court of Appeals affirmed
the RTC decision with modification in the award of damages.
CITIZENS SURETY V. CA, 162 SCRA 738
ISSUE:
Whether or not the petitioners (1) breached the contract of carriage, (2) acted with fraud and (3) were liable for damages. There is no dation in payment when there is no obligation to be extinguished.—The transaction could not be dation in payment.
As pointed out in the concurring and dissenting opinion of Justice Edgardo L. Paras and the dissenting opinion of Justice Mariano
RULING: Serrano when the deed of assignment was executed on December 4, 1959, the obligation of the assignor to refund the assignee
(1) YES. Although respondents have the priority of upgrading their seats, such priority may be waived, as what respondents did. had not yet arisen. In other words, there was no obligation yet on the part of the petitioner, Citizens’ Surety and Insurance Co.,
It should have not been imposed on them over their vehement objection. to pay Singer Sewing Machine Co. There was nothing to be extinguished on that date, hence, there could not have been a dation
(2) NO. There was no evident bad faith or fraud in upgrade of seat neither on overbooking of flight as it is within 10% tolerance. in payment.
(3) YES. Nominal damages (Art. 2221, NCC) were awarded in the amount of P5,000.00. Moral damages (Art.2220, NCC) and
attorney’s fees were set aside and deleted from the Court of Appeals’ ruling. In order to judge the intention of the parties, their contemporaneous and subsequent acts shall be principally considered.—It is
the general rule that when the words of a contract are plain and readily understandable, there is no room for construction thereof
Article 1245 (San Mauricio Milling Co. v. Ancheta, 105 SCRA 371). However, this is only a general rule and it admits exceptions. On its face,
the document speaks of an assignment where there seems to be a complete conveyance of the stocks of lumber to the petitioner,
Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in as assigned. However, in the light of the circumstances obtaining at the time of the execution of said deed of assignment, we
money, shall be governed by the law of sales. (n) can not regard the transaction as an absolute conveyance. As held in the case of Sy v. Court of Appeals, (131 SCRA 116, 124).

FILINVEST V. PHIL. ACETYLENE, 111 SCRA 421 LO V. KJS, 413 SCRA 182
FACTS:
FACTS: Respondent KJS Eco-Framework System is a corporation engaged in the sale of steel scaffoldings, while petitioner Sonny Lo,
Phil. Acetylene (Defendant) purchased a vehicle through a Deed of Sale from Alexander Lim payable on installment. The balance doing business under the name of San’s Enterprises, is a building contractor.
is to be paid under a promissory note with the said vehicle as the subject of a chattel mortgage to secure the obligation. 1. In February 1990, petitioner ordered scaffolding equipments from the respondent amounting to P540, 425.80. He paid a
Subsequently, Lim assigned his rights to the vehicle to appellee corporation (Filinvest). Phil. Acetylene defaulted after it failed to down payment of P150,000 and the balance was to be paid in 10 monthly installments
pay nine (9) successive installments. The petitioner through a demand letter informed the defendant to make the full payment 2. However, Lo was only able to pay the first 2 monthly installments due to financial difficulties despite demands from the
plus interests and charges or return the mortgaged property. As a result, the defendant returned the vehicle together with the respondent
document "Voluntary Surrender with Special Power of Attorney To Sell" by appellant on March 12, 1973 and confirmed to by 3. In October 1990, petitioner and respondent executed a deed of assignment whereby petitioner assigned to respondent his
Filinvest’s vice-president. receivables of P335,462.14 from Jomero Realty Corp
4. But when respondent tried to collect the said credit from Jomero Realty Corp, the latter refused to honor the deed of
Filinvest then informed appellant thru a letter that it cannot sell the vehicle due to its unpaid taxes in the amount of P70,122. On assignment because it claimed that the petitioner was also indebted to it. As such, KJS sent Lo a demand letter but the latter
the last portion of the said letter, appellee requested the appellant to update its account by paying the instalments in arrears and refused to pay, claiming that his obligation had been extinguished when they executed the deed of assignment
accruing interest in the amount of P4,232.21 on or before April 9, 1973. On May 8, 1973, appellee, in a letter, offered to deliver 5. Subsequently, respondent filed an action for recovery of sum of money against petitioner.
back the motor vehicle to the appellant but the latter refused to accept it, so the appellee instituted an action for collection of a 6. Petitioner argued that his obligation was extinguished with the execution of the deed of assignment of credit. Respondent
sum of money with damages in the CFI of Manila. alleged that Jomero Realty Corp refused to honor the deed of assignment because it claimed that the petitioner had outstanding
indebtedness to it
Phil. Acetylene argued that appellee has no cause of action against it since its obligation towards the appellee was extinguished 7. The trial court dismissed the complaint on the ground that the assignment of credit extinguished the bligation
when it returned the mortgaged property, and that assuming that the return of the property did not extinguish its obligation, it 8. Upon appeal, CA reversed the trial court decision and held in favor of KJS. CA held that
was nonetheless justified in refusing payment since the appellee is not entitled to recover the same due to the breach of warranty a. Petitioner failed to comply with his warranty under the deed
committed by the original vendor-assignor Alexander Lim. b. The object of the deed did not exist at the time of the transaction, rendering it void under Art 1409 NCC
c. Petitioner violated the terms of the deed of assignment when he failed to execute and do all acts necessary to effectually
ISSUE: enable the respondent to recover the collectibles
Whether or not the return of the mortgaged motor vehicle to the appellee by virtue of a voluntary surrender by the appellant
totally extinguished and/or cancelled the obligation ISSUE:
WON the deed of assignment extinguished the petitioner’s obligation
RULING:
No. No dacion en pago here since there’s nothing in the evidence to show that Filinvest consented or intended that the mere HELD:
delivery to and acceptance by him of the vehicle be construed as actual payment or more specifically, dacion en pago. The mere No, the petitioner’s obligation was not extinguished with the execution of the deed of assignment.
return of the mortgaged motor vehicle by the mortgagor (herein appellant) to the mortgagee, (appellee), does not constitute
dation in payment or dacion en pago in the absence, express or implied of the true intention of the parties. Dacion en pago, An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such
(according to Manresa) is the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights
the performance of obligation. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it
who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of against the debtor.
sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the
debtor's debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of
must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation payment of an outstanding debt. In order that there be a valid dation in payment, the following are the requisites: (1) There must
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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be the performance of the prestation in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing shall produce the effect of payment only when they have been cashed, or when through the fault of the
or a real right or a credit against the third person; (2) There must be some difference between the prestation due and that which creditor they have been impaired.
is given in substitution (aliud pro alio); (3) There must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from that due. The undertaking really partakes In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170)
in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to
be charged against the debtor’s debt. As such, the vendor in good faith shall be responsible, for the existence and legality of
the credit at the time of the sale but not for the solvency of the debtor, in specified circumstances. DBP V. SIMA WEI, 219 SCRA 736

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property, produced the Facts:
effects of a dation in payment which may extinguish the obligation. However, as in any other contract of sale, the vendor Sima Wei acquired a loan from Development Bank of Rizal. He executed and delivered to the former a promissory note, engaging
or assignor is bound by certain warranties. More specifically, the first paragraph of Article 1628 of the Civil Code provides: to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum.
The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale,
unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei issued
stipulated or unless the insolvency was prior to the sale and of common knowledge. two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial
numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500K. The said checks were allegedly issued
From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and legality of the credit at the in full settlement of the drawer’s account evidenced by the promissory note.
time of the sale or assignment. When Jomero claimed that it was no longer indebted to petitioner since the latter also had an
unpaid obligation to it, it essentially meant that its obligation to petitioner has been extinguished by compensation. In other words, These two checks were not delivered to the Development Bank. For reasons not shown, these checks came into the possession
respondent alleged the non-existence of the credit and asserted its claim to petitioner’s warranty under the of respondent Lee Kian Huat, who deposited the checks without the Development’s indorsement (forged or otherwise) to the
assignment. Therefore, it necessary for the petitioner to make good its warranty and pay the obligation. account of respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. The Branch
Manager of the Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic
Furthermore, the petitioner breached his obligation under the Deed of Assignment, to execute and do all such further acts and Corporation, that the transaction was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit
deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR and to credit them to the account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to
has in accordance with the true intent and meaning of these presents. petitioner Bank and bore no indorsement of the latter. Hence, Development filed the complaint for sum of money against Wei
and/or Kian Huat, Uy, Tung, Plastic Corporation and the Producers Bank.
Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the performance thereof in case
the same is later found to be inexistent. He should be held liable to pay to respondent the amount of his indebtedness. Bank alleged that its cause of action was not based on collecting the sum of money evidenced by the negotiable instruments
stated but on quasi-delict — a claim for damages on the ground of fraudulent acts and evident bad faith of the alternative
Article 1248 respondents.

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially Issue:
to receive the prestations in which the obligation consists. Neither may the debtor be required to make WON Development Bank has a cause of action against the respondents?
partial payments.
Held:
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the No. Unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by some other cause,
debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a) petitioner Bank has a right of action against her for the balance due thereon.

The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom
NASSER V. CUEVAS, 188 SCRA 812 of using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the
drawer’s signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However,
Facts: the mere fact that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the
A probate settlement was instituted for the estate of Amadeo Molave. A document embodying a supplemental compromise payee or his representative.
agreement and project of partition was executed among the heirs and other interested parties. It was approved by the Probate
Court some eight months later . 3 It rendered moot related cases then pending in this Court 4 Which on that account were A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property.
consequently dismissed. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding contract.
The agreement provided inter alia for the payment of the attorney's fees of respondent Atty. Paterno Canlas in the aggregate
amount of P600,000.00, in property (Hacienda Cadiatan, valued at P128,000.00) and cash (P412,000.00). Relative to said fees, Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an
the agreement also contained a provision creating a charging lien in Canlas' favor. The provision stated that until there has been instrument means transfer of possession, actual or constructive, from one person to another. Without the initial delivery of the
full payment, all the properties of the estate are charged with a lien for attorney’s fees. The agreement was approved by the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended
court. to give effect to the instrument. Without the delivery of said checks to petitioner-payee, the former did not acquire any right or
interest therein and cannot therefore assert any cause of action, founded on said checks, whether against the drawer Sima Wei
Canlas then moved for the execution of the agreement which was opposed by the heirs (Nassers and Matutes) on the ground or against the Producers Bank or any of the other respondents.
that execution was improper in the absence of a written agreement on the precise terms of payment of Canlas attorney's fees.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner Bank never
Issue: received the checks on which it based its action against said respondents, it never owned them (the checks) nor did it acquire
WON the stipulation provided for payment in instalments? NO any interest therein
Velasco vs. Manila Electric Co., 42 SCRA 556 , No. L-18390, December 20, 1971
Ratio:
The proviso that "upon full payment of the corresponding liability of a party the lien on his/ her share is extinguished," evidently
contemplates the probability that the heirs obliged to pay Canlas' fees would pay at different times, and denotes nothing more TIBAJIA V. CA, 223 SCRA 163
than that if one of the obligors separately pays his share in Canlas' fees, the lien on his share of the estate is thereby extinguished
a quite obvious proposition, to be sure. The clause cannot be construed as granting to any of the obligors, by implication, the Facts:
option to pay in installments, or as impliedly binding the obligee to accept payment by parts. A suit for collection of sum of money was ruled in favor of Eden Tan and against the spouses Norberto Jr. and Carmen Tibajia.
After the decision was made final, Tan filed a motion for execution and levied upon the garnished funds which were deposited
The legal principle, in any event, is that "the creditor cannot be compelled partially to receive the presentations in which the by the spouses with the cashier of the Regional Trial Court of Pasig. The spouses, however, delivered to the deputy sheriff the
obligation consists" unless "there is an express stipulation to that effect," in much the same way that the debtor may not "be total money judgment in the form of Cashier’s Check (P262,750) and Cash (P135,733.70). Tan refused the payment and insisted
required to make partial payments. upon the garnished funds to satisfy the judgment obligation. The spouses filed a motion to lift the writ of execution on the ground
that the judgment debt had already been paid. The motion was denied.
Article 1249 Issue:
WON payment by means of check is considered payment in legal tender as
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not required by Civil Code
possible to deliver such currency, then in the currency which is legal tender in the Philippines. Held:
No, it is not considered legal tender. The provisions of law applicable to the case at bar are the following:
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
a. Article 1249 of the Civil Code which provides:
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to lacking. In this case, petitioner contends that the element of "value" is not present, therefore, respondent could not be a holder
deliver such currency, then in the currency which is legal tender in the Philippines. in due course.
b. Section 1 of Republic Act No. 529, as amended
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) Furthermore, it bears emphasis that the disputed check is a cashier’s check. In International Corporate Bank v. Spouses
Gueco, this Court held that a cashier’s check is really the bank’s own check and may be treated as a promissory note with the
From the aforequoted provisions of law, it is clear that this petition must fail. bank as the maker. The check becomes the primary obligation of the bank which issues it and constitutes a written
promise to pay upon demand. In New Pacific Timber & Supply Co. Inc. v. Señeris, this Court took judicial notice of the "well-
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals 4 and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate known and accepted practice in the business sector that a cashier’s check is deemed as cash." This is because the mere
Appellate Court, 5 this Court held that — issuance of a cashier’s check is considered acceptance thereof.

A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in In view of the above pronouncements, petitioner bank became liable to respondent from the moment it issued the cashier’s
payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. check. Having been accepted by respondent, subject to no condition whatsoever, petitioner should have paid the same upon
presentment by the former
The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a
check is not legal tender and that a creditor may validly refuse payment by check, whether it be a Article 1250
manager's, cashier's or personal check.
Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the
Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case to support their cause. The dissenting value of the currency at the time of the establishment of the obligation shall be the basis of payment,
opinion however does not in any way support the contention that a check is legal tender but, on the contrary, states that "If the unless there is an agreement to the contrary. (n)
PAL checks in question had not been encashed by Sheriff Reyes, there would be no payment by PAL and, consequently, no
discharge or satisfaction of its judgment obligation." Moreover, the circumstances in the Philippine Airlines case are quite different
from those in the case at bar for in that case the checks issued by the judgment debtor were made payable to the sheriff, Emilio VELASCO V. MERALCO, 42 SCRA 556
Z. Reyes, who encashed the checks but failed to deliver the proceeds of said encashment to the judgment creditor.
FACTS:
In the more recent case of Fortunado vs. Court of Appeals, 8 this Court stressed that, "We are not, by this decision, sanctioning This is a Motion for Reconsideration sought by both parties emanating from a decision of the Supreme Court regarding an
the use of a check for the payment of obligations over the objection of the creditor." abatement complaint filed by Velasco against MERALCO. In the main case, Velasco bought three lots, two of which he sold to
MERALCO for the latter’s construction of a substation. A sound was emanating from said substation which Velasco made as a
basis for abatement.
CITIBANK V. SABENIANO, 504 SCRA 378 [2006]
In this MR, Velasco alleges that that the damages awarded him are inadequate considering the present high cost of living, and
FACTS: calls attention to Article 1250 of the present Civil Code.
Petitioner Citibank is a banking corporation duly authorized under the laws of the USA to do commercial banking activities n the
Philippines. Sabeniano was a client of both Petitioners Citibank and FNCB Finance. Respondent filed a complaint against Issue:
petitioners claiming to have substantial deposits, the proceeds of which were supposedly deposited automatically and directly WON Article 1250 is applicable.
to respondent’s account with the petitioner Citibank and that allegedly petitioner refused to despite repeated demands. Petitioner
alleged that respondent obtained several loans from the former and in default, Citibank exercised its right to set-off respondent’s Held:
outstanding loans with her deposits and money. RTC declared the act illegal, null and void and ordered the petitioner to refund No. It can be seen from the employment of the words "extraordinary inflation or deflation of the currency stipulated" that the legal
the amount plus interest, ordering Sabeniano, on the other hand to pay Citibank her indebtedness. CA affirmed the decision rule envisages contractual obligations where a specific currency is selected by the parties as the medium of payment; hence it
entirely in favor of the respondent. is inapplicable to obligations arising from tort and not from contract, as in the case at bar, besides there being no showing that
the factual assumption of the article has come into existence. As to the Pantoja ruling, the regard paid to the decreasing purchase
ISSUE: of the peso was considered a factor in estimating the indemnity due for loss of life, which in itself is not susceptible of accurate
Whether petitioner may exercise its right to set-off respondent’s loans with her deposits and money in Citibank-Geneva estimation. It should not be forgotten that the damages awarded to herein appellant were by no means full compensatory
damages, since the decision makes clear that appellant, by his failure to minimize his damages by means easily within his reach,
RULING: was declared entitled only to a reduced award for the nuisance sued upon; and the amount granted him had already taken into
Petition is partly granted with modification. account the changed economic circumstances.
1. Citibank is ordered to return to respondent the principal amount of P318,897.34 and P203,150.00 plus 14.5% per annum
2. The remittance of US $149,632.99 from respondent’s Citibank-Geneva account is declared illegal, null and void, thus Citibank
is ordered to refund said amount in Philippine currency or its equivalent using exchange rate at the time of payment. COMMISSIONER V. BURGOS, 96 SCRA 831
3. Citibank to pay respondent moral damages of P300,000, exemplary damages for P250,000, attorney’s fees of P200,000.
4. Respondent to pay petitioner the balance of her outstanding loans of P1,069,847.40 inclusive off interest. DOCTRINES
Obligations and Contracts; Constitutional Law; Expropriation; Article 1250 of the New Civil Code applies only to payments
stipulated in contracts, not to taking, by way of expropriation, of property by the Government.—It is clear that the foregoing
BPI V. ROXAS, 536 SCRA 169 [2007] provision applies only to cases where a contract or agreement is involved. It does not apply where the obligation to pay arises
from law, independent of contracts. The taking of private property by the Government in the exercise of its power of eminent
Facts: domain does not give rise to a contractual obligation. We have expressed this view in the case of Velasco vs. Manila Electric
Gregorio C. Roxas, respondent, is a trader. Sometime in March 1993, he delivered stocks of vegetable oil to spouses Rodrigo Co., et al., L-19390, December 29, 1971.
and Marissa Cawili. As payment therefor, spouses Cawili issued a personal check in the amount of P348,805.50. However,
when respondent tried to encash the check, it was dishonored by the drawee bank. Spouses Cawili then assured him that they Same; Same; Same.—Moreover, the law as quoted, clearly provides that the value of the currency at the time of the
would replace the bounced check with a cashier’s check from BPI. On March 31, 1993, respondent and Rodrigo Cawili went to establishment of the obligation shall be the basis of payment which, in cases of expropriation, would be the value of the peso at
petitioner’s branch at Shaw Boulevard where Elma Capistrano, the branch manager, personally attended to them. Upon Elma’s the time of the taking of the property when the obligation of the Government to pay arises. It is only when there is an “agreement
instructions, Lita Sagun, the bank teller, prepared BPI Cashier’s Check No. 14428 in the amount of P348,805.50, drawn against to the contrary” that the extraordinary inflation will make the value of the currency at the time of payment, not at the time of the
the account of Marissa Cawili, payable to respondent. Rodrigo then handed the check to respondent in the presence of Elma. establishment of the obligation, the basis for payment. In other words, an agreement is needed for the effects of an extraordinary
The following day, April 1, 1993, respondent returned to petitioner’s branch at Shaw Boulevard to encash the cashier’s check inflation to be taken into account to alter the value of the currency at the time of the establishment of the obligation which, as a
but it was dishonored. Elma informed him that Marissa’s account was closed on that date. Despite the insistence of the rule, is always the determinative element, to be varied by agreement that would find reason only in the supervention of
respondent, BPI refused to encash the check. extraordinary inflation or deflation.

A complaint for sum of money was then filed against BPI. The lower courts eventually decided in favor of respondent and ordered Same; Same; Civil Law; Actions; The long delay of respondent in filing the recovery case justifies non-payment of a bigger
BPI to pay the value of the check and damages. amount for the expropriated property.—In the present case, the unusually long delay of private respondent in bringing the present
action—a period of almost 25 years—which a stricter application of the law on estoppel and the statute of limitations and
Issue: prescription may have divested her of the rights she seeks in this action over property in question, is an added circumstance
WON Roxas (respondent) is a holder in due course? YES militating against payment to her of an amount bigger—nay three-fold more—than the value of the property should have been
paid at the time of the taking. For conformably to the rule that one should take good care of his own concern, private respondent
Ratio: should have commenced proper action soon after she bad been deprive of her right of ownership and possession over the land,
As a general rule, under the above provision, every holder is presumed prima facie to be a holder in due course. One who claims a deprivation she knew was permanent in character, for the land was intended for, and had become, avenues in the City of
otherwise has the onus probandi to prove that one or more of the conditions required to constitute a holder in due course are Cebu. A penalty is always visited upon one for his allegedly withheld from him, or otherwise transgressed upon by another.

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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Same; Same; Judgments; Loans; Interest; The ruling in this case that legal interest shall accrue from the date of taking is now
the law of the case and, therefore, what the case law is in other cases that legal interest shall be computed from the filing of the  Extraordinary inflation exists "when there is a decrease or increase in the purchasing power of the Philippine
complaint is not applicable.—In our decision in G.R. No. No. L-26400, February 29, 1972, We have said that Victoria Amigable currency which is unusual or beyond the common fluctuation in the value said currency, and such decrease or
is entitled to the legal interest on the price of the land from the time of the taking. increase could not have reasonably foreseen or was manifestly beyond contemplation the the parties at the time
of the establishment of the obligation. (Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p.
De Castro, J: 284.)

Facts:
 While appellant's voluminous records and statistics proved that there has been a decline in the purchasing power
of the Philippine peso, this downward fall of the currency cannot be considered "extraordinary." It is simply a
 On 1924, the government took private respondent Victor Amigable's land for road-right-of-way purpose. universal trend that has not spared our country.

 On 1959, Amigable filed in the Court of First Instance a complaint to recover the ownership and possession of the
land and for damages for the alleged illegal occupation of the land by the government (entitled Victor Amigable vs. DEL ROSARIO V. SHELL, 164 SCRA 556
Nicolas Cuenco, in his capacity as Commissioner of Public Highways and Republic of the Philippines).
 Amigable's complaint was dismissed on the grounds that the land was either donated or sold by its owners to
Facts:
On September 20, 1960 the parties entered into a Lease Agreement whereby the plaintiff- appellant leased a parcel of land
enhance its value, and that in any case, the right of the owner to recover the value of said property was already known as Lot No. 2191 of the cadastral Survey of Ligao, Albay to the defendant-appellee Shell at a monthly rental of Two
barred by estoppel and the statute of limitations. Also, the non-suability of the government was invoked. Hundred Fifty Pesos (P250.00).
 In the hearing, the government proved that the price of the property at the time of taking was P2.37 per square
Paragraph 14 of said contract of lease provides:
meter. Amigable, on the other hand, presented a newspaper showing that the price was P6.775.
“14. In the event of an official devaluation or appreciation of the Philippine Peso the rental specified herein shall be
 The public respondent Judge ruled in favor of Amigable and directed the Republic of the Philippines to pay adjusted in accordance with the provisions of any law or decree declaring such devaluation or appreciation as may
Amigable the value of the property taken with interest at 6% and the attorney's fees. specifically apply to rentals."

Issue: On November 6, 1965, President Diosdado Macapagal promulgated Executive Order No. 195 changing the par value (official
 Whether or not the provision of Article 1250 of the New Civil Code is applicable in determining the amount of
quoted exchange rate) of the Peso.
compensation to be paid to private respondent Amigable for the property taken. By reason of this Executive Order No. 195, plaintiff-appellant demanded from the defendant-appellee ailieged increase in the
monthly rentals from P250.00 a month to P487.50 a month.
Held:
 Not applicable. On January 16, 1967, plaintiff-appellant filed a complaint (Civil Case No. 68154) with the CFI of Manila, Branch XVII praying that
Ratio: defendant-appellee be ordered to pay the monthly rentals as increased by reason of Executive Order 195 and further prayed
that plaintiff-appellant be paid the following amounts: The difference between P487.50 and P250.00 from noon of November 8,
 Article 1250 of the NCC provides that the value of currency at the time of the establishment of the obligation shall 1965 until such time ar, the defendant-appellee begins to pay the adjusted amount of P487.50 a month.
be the basis of payment which would be the value of peso at the time of taking of the property when the obligation
of the government to pay arises. It is only when there is an agreement that the inflation will make the value of The court ruled against Del Rosario, reasoning that the Peso did not devalue but its par value merely changed.
currency at the time of payment, not at the time of the establishment, the basis for payment.
 The correct amount of compensation would be P14,615.79 at P2.37 per square meter, not P49,459.34, and the
Issue:
W/N petitioner Del Rosario is entitled to the increased rentals based on the contract.
interest in the sum of P145,410.44 at the rate of 6% from 1924 up to the time respondent court rendered its decision
as was awarded by the said court should accordingly be reduced.
Held:
Yes. In the case at bar, while no express reference has been made to metallic content, there nonetheless is a reduction in par
value or in the purchasing power of Philippine currency.
FILIPINO PIPE & FOUNDRY CORP V. NAWASA, 161 SCRA 32
(a) Sloan and Zurcher’s classic treatise, "A Dictionary of Economics," 1951 ed. pp. 80-81, defines devaluation (as applied to
a monetary unit) as.
FACTS
"a reduction in its metallic content as determined by law 2 resulting in "the lowering of the value of one nation’s
 NAWASA entered into a contract with the plaintiff FPFC for the latter to supply iron pressure pipes worth currency in terms of the currencies of other nations" (Emphasis supplied)
P270,187.50 to be used in the construction of the Anonoy Waterworks in Masbate and the Barrio San Andres- Samuelson and Nordhaus, writing in their book, "Economics" (Singapore, Mc-Graw Hill Book Co., 1985, p. 875)
Villareal Waterworks in Samar. "when a country’s of official exchange rate 3 relative to gold or another currency is lowered, as from $35 an ounce


of gold to $38, we say the currency has been devalued."
NAWASA paid in installments on various dates, a total of P134,680.00 leaving a balance of P135,507.50 excluding (b) Upon the other hand, "depreciation" (opposite of "appreciation" the term used in the contract), according to Gerardo P.
interest. Sicat in his "Economics" (Manila: National Book Store, 1983, p. 636).
 FPFC demanded payment from NAWASA of the unpaid balance of the price with interest in accordance with the
(c)
"occurs when a currency’s value falls in relation to foreign currencies."
It will be noted that devaluation is an official act of the government (as when a law is enacted thereon) and refers to a
terms of their contract
reduction in metallic content; depreciation can take place with or without an official act, and does not depend on metallic
 NAWASA failed to pay, plaintiff filed a collection suit content (although depreciation may be caused by devaluation).
 RTC rendered judgment orderedNAWASA to pay the unpaid balance in NAWASA negotiable bonds Even assuming there has been no official devaluation as the term is technically understood, the fact is that there has been a
 NAWASA did not deliver the bonds to the judgment creditor diminution or lessening in the purchasing power of the peso, thus, there has been a "depreciation" (opposite of
"appreciation"). Moreover, when laymen unskilled in the semantics of economics use the terms "devaluation" or
 FPFC filed another complaint seeking an adjustment of the unpaid balance in accordance with the value of the "depreciation" they certainly mean them in their ordinary signification decrease in value. Hence as contemplated by
Philippine peso the parties herein in their lease agreement, the term "devaluation" may be regarded as synonymous with
 FPFC presented voluminous records and statistics showing that a spiralling inflation has marked the progress of
"depreciation," for certainly both refer to a decrease in the value of the currency. The rentals should therefore by their
agreement be proportionately increased.
the country from 1962 up to the present. There is no denying that the price index of commodities, which is the
usual evidence of the value of the currency has been rising.
SANGRADOR V. VALDERAMA, 168 SCRA 215
ISSUE
W/N there exists an extraordinary inflation of the currency justifying an adjustment of NAWASA's unpaid judgment obligation to Facts:
FPFC. Sps Valderrama obtained a loan from Manuel Asencio in the amount of 500k. It was secured by a real estate mortgage on the
spouses’ house and lot. Foreseeing that they would not be able to pay the loan and redeem their property upon maturity of the
RULING loan, the defendants scouted around for money-lenders who would be willing to lend them money with which to pay off their
Article 1250 of the Civil Code provides: mortgage to Asencio. Through the help of a loan broker, Wilson Jesena, they were able to obtain on April 6, 1984 a P1,000,000
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time loan from the plaintiff Teresita Sangrador, who is an aunt of Jesena, on the security of the same property which they redeemed
of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.. from Asencio. The loan is evidenced by promissory note (Exh. B) dated April 6, 1 984 providing for the payment of P1,400,000

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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to the creditor eight months after date wherein they promise to jointly and severally pay Sangrador. There was also a stipulation
that if there is a default, 20 percentum of the amount due will be paid. 2. Art. 1250 of the CC states that in case there is extraordinary inflation or deflation of the currency stipulated, the value at the
time of the establishment of the obligation shall be basis of payment unless there is an agreement to the contrary. Extraordinary
Another stipulation said that “in the event that an extraordinary inflation of the Philippine Peso should supervene between now inflation or deflation, as the case may be, exists when there is an unusual increase or decrease in the purchasing power of the
and eight (8) months after date, then the value of the Philippine Peso at the time of the establishment of this obligation, shall be Philippine peso which is beyond the common fluctuation in the value of said currency, and such increase or decrease could not
the basis of payment pursuant to Art. 1250, and for this purpose, we hereby acknowledge the official exchange rate of the have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of
Philippine Peso to the US Dollar at P14.002 to $1. The corresponding adjustment in the value of the Philippine Peso shall be the obligation. Extraordinary inflation can never be assumed; he who alleges the existence of such phenomenon must prove the
made in the event that at the time of the maturity of this obligation, the rate of exchange will have changed as a result of the same. In this case the SC said there was no extraordinary inflation, even if the price of goods rose during the intervening period
supervening inflation. We further agree that the official rate of exchange as set by the Central Bank of the Philippines for private the increase cannot be said to be extraordinary. Furthermore, absent an official pronouncement by competent authorities of the
transactions, shall be the basis of this adjustment.” existence of extraordinary inflation during a given period as here, the effects of extraordinary inflation cant apply.

When the defendants failed to pay the sum stated in the promissory note, a complaint for foreclosure was instituted. The Art. 1250 is clear when it states that the value of the peso at the time of establishing the obligation shall control and be the basis
defendants in their answer denied that the loan was P1,400,000. They alleged that it was only P1,000,000.00 and that the of payment unless there is an agreement to the contrary. In other word as said in the Mobil Oil case, an agreement is needed
additional P400,000 represented usurious interest. The trial court rendered judgment directing the foreclosure, and ordering for the effects of extraordinary inflation to be taken into account to alter the value of the currency at the time of the establishment
defendants to pay the amount stated in the obligation plus sum pursuant to the escalation clause. In default of the payment, the of the obligation for payment. Neither the CA nor the trial court pointed to any provision of the bill of ladings to this effect.
mortgaged properties would be sold at public auction.
Article 1253
Issue:
WON the escalation clause is valid? NO / WON there is a cause for extraordinary inflation? NO Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been
made until the interests have been covered. (1173)
Ratio:
The disputed amount of P400,000.00 was a hidden interest that the petitioners had required the respondents to pay at the
maturity of the loan, but said amount of P400,000.00 was not received by or delivered to the respondents. This conclusion is RAPANUT V. CA, 246 SCRA 323
strengthened by the fact that the promissory note and the deed of real estate mortgage, strangely enough, do not contain any FACTS
express stipulation on interest, or rate of interest, when the loan involved therein is in the substantial amount of allegedl y On November 29, 1985, petitioner and private respondent executed a Deed of Conditional Sale with Mortgage. Under the
P1,400,000.00. contract, private respondent agreed to sell to petitioner a parcel of land in San Rafael, Pasay City, payable in monthly installments
of P500.00 to be paid not later than the fifth day of every month and in semi-annual installments of P1,000.00 to be paid on June
Despite having no interest ceiling on loans, if no interest rate is expressly stipulated in the agreement, Circular 905 of the BSP 30 and December 31 of every year, "with an interest of 10% per annum on the remaining balance until the full amount is paid"
is controlling which provides:
Section 1. The rate of interest, including commissions, premiums, fees and other charges on a loan In April 1986, petitioner and private respondent entered into a Supplemental Agreement with the following stipulations:
or forbearance of any money, goods, or credits, regardless of maturity and whether secured or WHEREAS, the VENDOR/MORTGAGEE is willing to sell said portion of her lots to the VENDEE/MORTGAGOR for a
unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be total price of P37,485.00 payable in monthly installments of P500.00 with an interest of 10% per annum on the
subject to any ceiling prescribed under or pursuant to the Usury law, as amended. remaining balance until the full amount is paid.

Section 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate Payments of the monthly installments of P500.00 shall be made not later than the fifth day of every month without need
allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to of demand starting January, 1986. Failure to pay any of the monthly installments when due for three months, shall be
be twelve per cent (1 2%) per annum. sufficient cause for rescission of this contract and all payments made shall be applied as corresponding rentals.

The rate of interest for loans or forbearance of money, in the absence of express contract as to such rate of interest, shall Petitioner, thus, had been making the P500.00 monthly installment payments until he received a letter dated February 13, 1990
continue therefore to be twelve per cent (12%) per annum. from private respondent' s counsel informing him that for his failure to pay the monthly installments plus 10% per annum interest
on the balance, the Deed of Conditional Sale with Mortgage and the Supplemental Agreement were rescinded "as of receipt
In Filipino Pipe and Foundry Corporation vs. National Waterworks and Sewerage Authority, this Court held: hereof," and that payments made were considered rentals. The letter further demanded that petitioner vacate the premises within
Extraordinary inflation exists when 'there is a decrease or increase in the purchasing power of the 15 days from receipt thereof.
Philippine currency which is unusual or beyond the common fluctuation in the value of said currency,
and such decrease or increase could not have been reasonably foreseen or was manifestly beyond Respondent filed a complaint against petitioner in the Regional Trial Court of Pasay City for rescission of the Deed of Conditional
the contemplation of the parties at the time of the establishment of the obligation. Sale with Mortgage and Supplemental Agreement which the court granted.

While appellant's voluminous records and statistics proved that there has been a decline in the The controversial provision in the Supplemental Agreement reads: ". . . the VENDOR/MORTGAGEE is willing to sell said portion
purchasing power of the Philippine peso, this downward fall of the currency cannot be considered of her lot to the VENDEE/MORTGAGOR for a total price of P37,485.00 payable in monthly installments of P500.00 with an
"extraordinary." It is simply a universal trend that has not spared our country. interest of 10% per annum on the remaining balance until the full amount is paid"

Since petitioners failed to prove the supervening of extraordinary inflation between 6 April 1984 and 7 December 1984—no Private respondent's view is that the 10% interest must be paid every year and posits that the P500.00 monthly installments
proofs were presented on how much, for instance, the price index of goods and services had risen during the intervening period— include the 10% interest.
an extraordinary inflation cannot be assumed; consequently, there is no reason or basis, legal or factual, for adjusting the value
of the Philippine Peso in the settlement of respondents' obligation. Issue:
W/N the 10% interest must be paid every year and the P500.00 paid by petitioner monthly inludes the 10% interest.

TELANGTAN V. US LINES, 483 SCRA 458 [2006] Held:


FACTS: After pondering on the meaning of Article 1253, we reach the conclusion that in a contract involving installment payments with
Telengtan which is a domestic corporation in the Philippines hired U.S. Lines for to ship cargo from overseas. During the period interest chargeable against the remaining balance of the obligation, it is the duty of the creditor to inform of the amount of interest
material to this case the provisions of Far East Conference Tariff No. 12 were made applicable to Philippine containerized cargo, that falls due and that he is applying the installment payments to cover said interest. Otherwise, the creditor cannot apply the
which required the payment of demurrage charges if the consignee fails to take delivery of the containerized cargo within the payments to the interest and then hold the debtor in default for non-payment of installments on the principal.
10-day free period. US Lines filed a case against Telengtan seeking payment of demurrage charges plus interest and damages
because petitioner failed to withdraw its goods from the containers wherein the goods had been shipped. Telengtan on the other A liberal interpretation of the contracts in question is that at the end of each year, all payments made shall be deducted from the
hand disclaims liability saying they never entered into any agreement on demurrage. Aside from this respondent claims that principal obligation. The 10% interest on the balance is then added to whatever remains of the principal. Thereafter,
there should be a re-computation of the award based on the currency at the time of the obligation to account for devaluation of petitioner shall pay the monthly installments on the stipulated dates. In other words, the interest due are added to and paid
the peso. like the remaining balance of the principal. Thus, we must rule that the parties intended that petitioner pay the monthly
installments at predetermined dates, until the full amount, consisting of the purchase price and the interests on the balance, is
ISSUE: paid.
1. WON Telengtan was liable for demurrage charges – yes
2. WON there should be devaluation of the peso – No. Significant is the fact that private respondent accepted the payments petitioner religiously made for four years. Private
respondent cannot rely on the clause in the contract stating that no demand is necessary to explain her silence for four years as
HELD: to the 10% interest, as such clause refers to the P500.00 monthly installments.
1. The court held that petitioner is in fact liable for demurrage charges for failing to remove its goods during the ten day free
period. Furthermore, as shown by evidence, the appellant is used to paying demurrage charges because it is its practice not to Even granting as acceptable private respondent's theory that the monthly amortizations shall first be applied to the payment of
get its cargo from the carrier immediately upon notification of its arrival. the interests, we must still rule for petitioner.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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required by the Civil Code. The reason for this is obvious, namely, to enable the creditor to withdraw the goods or money
The contracts provided for private respondent's right of rescission which may be exercised upon petitioner's failure to pay deposited. Indeed, it would be unjust to make him suffer the risk for any deterioration, depreciation or loss of such goods or
installments for three months. Private respondent's failure to exercise her right of rescission after petitioner's alleged default money by reason of lack of knowledge of the consignation."
constitutes a waiver of such right. Her continued acceptance of the installment payments places her in estoppel.
Also the fourth requisite that Francisco failed to prove is the actual deposit or consignation of the monthly rentals except the two
cashier's checks referred to in Exhibit 12. As indicated earlier, not a single copy of the official receipts issued by the Clerk of
GOBONSENG V. CA, 246 SCRA 472 Court was presented at the trial of the case to prove the actual deposit or consignation. The copy of the receipts were only
presented in the MR, and the date of payment on the receipt was 2 years late than the actual demand.
If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been
covered.—As a matter of fact, an amount of P7,417.86 was credited to the principal in the promissory note with the code IF-84-
CB022-GG per Official Receipt No. 14173 dated 2 May 1984. This partial payment for the principal clearly proves that the interest ALFONSO V. CA, 168 SCRA 545
due had been paid. Article 1253 of the Civil Code provides that if the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been covered. Consequently, automatic renewal of the loans by way of Facts:
promissory notes for the succeeding interest period was unavoidable. Danilo and Luzviminda C. Basco are the owners of an apartment building located in Grace Park, Caloocan City, having acquired
it by purchase from Pacifico Vibar and Antonia Mapay Vibar. A unit (fourth door) of the aforesaid apartment bearing the number
Article 1256 275 was being rented out by the former owners to Roland Alfonso at a monthly rental of P 185.00, while the other suits were
being rented out to different lessees. The new owners were also the former lessees of a ground floor unit located at the back of
Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to the apartment building. After the new owners had purchased the property from the former owners, or on March 19, 1984, spouses
accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Basco sent to Alfonso a letter demanding him and other lessees to vacate the premises. Alfonso refused and sent by registered
mail his rental payment which was rejected by the spouses who proposed to give the Alfonso a period of one (1) year from April
Consignation alone shall produce the same effect in the following cases: 1, 1984 or up to March 31, 1985 within which to stay at the premises free from rental in exchange for the voluntary surrender of
the premises.
(1) When the creditor is absent or unknown, or does not appear at the place of payment;

(2) When he is incapacitated to receive the payment at the time it is due; Despite the offer, Alfonso refused to vacate the premises; spouses then filed a complaint for ejectment. Alfonso, through counsel,

 (3) When, without just cause, he refuses to give a receipt; 
 prayed that the rentals be ordered deposited in court. The spouses, on the other hand, contended that the deposit of the rentals
(4) When two or more persons claim the same right to collect; 
 cannot render ineffective the provision of BP25 which allows the ejectment of a lessee in case of arrears in payment of rent for
(5) When the title of the obligation has been lost. (1176a) three (3) months at one time, provided, that in case of refusal by the lessor to accept payment of the rental agreed upon, the
lessee shall either deposit by way of consignation, the amount in Court or in a bank in the name of and with notice to the lessor.

SOCO V. MILITANTE, 123 SCRA 160 Issue:


WON Alfonso incurred default? YES
Facts: WON the METC had jurisdiction to determine the ejectment case since there was no demand to vacate on the part of the
Soco leased her commercial building and lot situated at Manalili Street, Cebu City, to Francisco for a monthly rental of P 800.00 spouses? YES
for a period of 10 years renewable for another 10 years at the option of the lessee. The terms of the contract were in a Contract
of Lease (Exhibit "A" for Soco and Exhibit "2" for Francisco). It can readily be discerned from Exhibit "A" that par. 10 and 11 Ratio:
appear to have been cancelled while in Exhibit "2" only par. 10 has been cancelled. Claiming that par. 11 of the Contract of The tenor of the two letters dated March 19, 1984 and May, 1984, respectively, shows that the free rent offer was merely a
Lease was in fact not part of the contract because it was cancelled, Soco filed for annulment and/or reformation of the contract. proposal of plaintiffs to defendant who rejected it by tendering his payment corresponding to the April, 1984 rental and by
consistently refusing to vacate the premises.
Before this case, Soco also learned that Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more
than P3,000.00 which is definitely very much higher than what Francisco was paying to Soco under the Contract of Lease. Since Such rejection rendered the proposal of free rental without force and effect. Defendant therefore was duty bound to pay the
Soco felt he was on the losing end of the contract, he looked for ways to terminate the contract. Soco through her lawyer served rentals as they fall due in order to abort any ejectment proceedings against him. If the lessor refuses to accept the payment, as
notice to the Francisco 'to vacate the premises leased.' Soco stopped sending his collector to Francisco and has not accepted in the case at bar, defendant had a remedy provided for by law, namely consignation in court or deposit in a bank in the lessor's
payment. As a response, Francisco through his lawyer informed Soco that all payments of rental due were in fact paid by name with due notice to the lessor. Unfortunately, it is of record that defendant did not avail of such remedy so that when plaintiffs
Commercial Bank and Trust Company through the Clerk of Court of the City Court of Cebu since Soco was not collecting filed the ejectment proceedings against him on July 30, 1984, the rentals corresponding to the month of April to July 1984 had
anymore directly from Francisco. not yet been paid by defendant. Tender of payment is not enough — consignation must follow in order to extinguish the debt.
Otherwise failure to comply with the requirements provided for under Sec. 5, paragraph (b) Batas Pambansa Blg. 25 is a ground
Taking into account the factual background setting of this case, the Court holds that there was in fact a tender of payment of the for ejectment. Delayed consignation or deposit will not do.
rentals made by Francisco to Soco through Comtrust and since these payments were not accepted by Soco evidently because
of her intention to evict Francisco, by all means, culminating in the filing of Civil Case R-16261, Francisco was impelled to deposit
the rentals with the Clerk of Court of the City Court of Cebu. There was therefore substantial compliance of the requisites of TAYAG V. CA, 219 SCRA 480
consignation, hence his payments were valid and effective. Consequently, Francisco cannot be ejected from the leased premises
for non-payment of rentals. Thus, this appeal. Facts:
Siblings Juan Galicia Sr. and Celerina Labuguin entered into a contract to sell a parcel of land in Nueva Ecija to a certain Albrigido
Issue: Leyva: 3K upon agreement, 10K ten days after the agreement, 10K representing vendor’s indebtedness to Phil Veterans Banko
W/N there was valid cosignation by Francisco? No. Substantial compliance is not allowed. The rules on consignation must be and 27K payable within one year from execution of contract.
followed strictly. Leyva only paid parts of the obligation.

Ratio: But even after the grace period for payment made in the contract and while litigation of such case, the petitioners still allowed
Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or Leyva to make payments.
refuses to accept payment and it generally requires a prior tender of payment. In order that consignation may be effective, the
debtor must first comply with certain requirements prescribed by law. The debtor must show (1) that there was a debt due; (2) With regards to the obligation payable to the Phil Veterans bank by the vendee, as they deemed that it was not paid in full, such
that the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to obligation they completed by adding extra amount to fulfill such obligation. This was fatal in their case as this is Leyva’s argument
accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount that they constructively fulfilled the obligation which is rightfully due to him. (Trivia: It was Celerina, Juan’s sister, that paid the
due (Art. 1176, Civil Code); (3) that previous notice of the consignation had been given to the person interested in the bank to complete such obligation).
performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178,
Civil Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code). Petitioners claim that they are only “OBLIGEES” with regards to the contract, so the principle of constructive fulfillment cannot
Failure in any of these requirements is enough ground to render a consignation ineffective. be invoked against them.

Recapitulating the above testimony of the Bank Comptroller, it is clear that the bank did not send notice to Soco that the checks Petitioners, being both creditor and debtor to private respondent, in accepting piecemeal payment even after the grace period,
will be deposited in consignation with the Clerk of Court (the first notice) and also, the bank did not send notice to Soco that the are barred to take action through estoppel.
checks were in fact deposited (the second notice) because no instructions were given by its depositor, the lessee, to this effect,
and this lack of notices started from September, 1977 to the time of the trial, that is June 3, 1980 Lastly, petitioners argue that there was no valid tender of payment nor consignation of the sum of P18,520.00 which they
acknowledge to have been deposited in court on January 22, 1981 five years after the amount of P27,000.00 had to be paid.
The reason for the notification to the persons interested in the fulfillment of the obligation after consignation had been made,
which is separate and distinct from the notification which is made prior to the consignation, is stated in Cabanos vs. Calo, G.R. Issue:
No. L-10927, October 30, 1958, 104 Phil. 1058. thus: "There should be notice to the creditor prior and after consignation as 1. WON there was constructive fulfillment in the part of the petitioners that shall make rise the obligation to deliver to Leyva the
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
deed of sale? YES Held:
2. WON they are still entitled to rescind the contract? NO, barred by estoppel. YES. PETITION Granted.

Ratio: Rationale:
1.In a contract of purchase, both parties are mutually obligors and also obligees, and any of the contracting parties may, upon While Ester’s refusal was unjustified and unreasonable, Manuel’s position that this refusal had the effect of payment that
non-fulfillment by the other privy of his part of the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code). extinguished his obligation to MTLC is wrong because a refusal without just cause is not equivalent to payment; to have the
effect of payment and the consequent extinguishment of the obligation to pay, the law requires the companion acts of tender of
In short, it is puerile for petitioners to say that they are the only obligees under the contract since they are also bound as obligors payment and consignation. Article 1256 is clear and unequivocal on this point.
to respect the stipulation in permitting private respondent to assume the loan with the Philippine Veterans Bank which petitioners
impeded when they paid the balance of said loan. As vendors, they are supposed to execute the final deed of sale upon full Nevertheless, the spouses Go Cinco duly established that they have legitimately secured a means of paying off their loan with
payment of the balance as determined hereafter. MTLC; they were only prevented from doing so by the unjust refusal of Ester to accept the proceeds of the PNB loan through
her refusal to execute the release of the mortgage on the properties mortgaged to MTLC.
2.Petitioners accepted Leyva’s delayed payments not only beyond the grace periods but also during the pendency of the case
for specific performance. Indeed, the right to rescind is not absolute and will not be granted where there has been substanti al In the present case, Manuel sought to pay Ester by authorizing her, through an SPA, to collect the proceeds of the PNB loan –
compliance by partial payments. By and large, petitioners’ actuation is susceptible of but one construction — that they are now an act that would have led to payment if Ester had collected the loan proceeds as authorized. Admittedly, the delivery of the
estopped from reneging from their commitment on account of acceptance of benefits arising from overdue accounts of private SPA was not, strictly speaking, a delivery of the sum of money due to MTLC, and Ester could not be compelled to accept it as
respondent payment based on Article 1233. Nonetheless, the SPA stood as an authority to collect the proceeds of the already-approved
PNB loan that, upon receipt by Ester, would have constituted as payment of the MTLC loan. Had Ester presented the SPA to
Consignation alone produced the effect of payment in the case at bar because it was established below that two or more heirs the bank and signed the deed of release/cancellation of mortgage, the delivery of the sum of money would have been effected
of Juan Galicia, Sr. claimed the same right to collect (Article 1256, (4), Civil Code; pp. 4-5, Decision in Civil Case No. 681-G; pp. and the obligation extinguished. Since payment was available and was unjustifiably refused, justice and equity demand that the
67-68, Rollo). Moreover, petitioners did not bother to refute the evidence on hand that, aside from the P18,520. which was spouses Go Cinco be freed from the obligation to pay interest on the outstanding amount from the time the unjust refusal took
consigned, private respondent also paid the sum of P13,908.25. These two figures representing private respondent's payment place.
of the fourth condition amount to P32,428.25, less the P3,778.77 paid by petitioners to the bank, will lead us to the sum of
P28,649.48 or a refund of P1,649.48 to private respondent as overpayment of the P27,000.00 balance.
BONROSTRO V. LUNA, GR 172346, 24 JULY 2013

PASRICHA V. LUIS DISON REALTY, 548 SCRA 273 [2008] FACTS:


Respondent Constancia Luna, as buyer, entered into a Contract to Sell with Bliss Development Corporation (Bliss) involving a
FACTS: house and lot of New Capitol Estates in Diliman, Quezon City. Barely a year after, Constancia, this time as the seller, entered
Respondent and petitioners executed two Contracts of Lease over a building in Ermita as lessor and lessees respectively. into another Contract to Sell with petitioner Lourdes Bonrostro concerning the same property.
Lessees agreed to pay monthly rentals. While the contracts were in effect, Pacheco, then General Manager was replaced by
Bautista. They paid monthly rentals until May 1992. Despite final demand by respondents, lessees did not comply still. Hence, Immediately after the execution of the said second contract, the spouses Bonrostro took possession of the property. However,
a complaint for ejectment was filed. Petitioners admitted their failure to provide for the stipulated rent but claimed it is justified except for the P200,000.00 down payment, Lourdes failed to pay any of the stipulated subsequent amortization payments.
because of the confusion as to the person authorized to receive the payment because of the change in management.
Constancia and her husband, respondent Juan Luna filed before the RTC a Complaint for Rescission of Contract and Damages
ISSUE: against the spouses Bonrostro praying for the rescission of the contract, delivery of possession of the subject property, payment
W/n lessee is justified in not paying the rentals because of lessor’s fault by the latter of their unpaid obligation, and awards of actual, moral and exemplary damages, litigation expenses and attorney’s
fees.
HELD:
Not knowing to whom payment should be made does not justify the failure of lessees to pay because they were not without In their Answer the spouses Bonrostro averred that they were willing to pay their total balance to the spouses Luna after they
remedy. They should have availed provisions of the Civil Code on consignation of payment by depositing things due at the sought from them a 60-day extension to pay the same. However, during the time that they were ready to pay the said amount,
disposal of judicial authority. Constancia and her lawyer, Atty. Arlene Carbon (Atty. Carbon), did not show up at their rendezvous. Claiming that they are still
willing to settle their obligation, the spouses Bonrostro prayed that the court fix the period within which they can pay the spouses
Luna. The spouses Bonrostro likewise asserted that they paid Bliss, the developer of New Capitol Estates, the amount of
GO CINCO V. CA, 603 SCRA 108 [2009] P46,303.44. Later during trial, Lourdes testified that Constancia instructed Bliss not to accept amortization payments from
anyone.
Facts:
Manuel Cinco obtained a commercial loan for P700,000.00 from Maasin Traders Lending Corp. (MTLC) evidenced by a The RTC rendered its Decision focusing on the sole issue of whether the spouses Bonrostro’s delay in their payment of the
promissory note dated Dec. 11, 1987 and secured it by way of a real estate mortgage over his conjugal land and four storey installments constitutes a substantial breach of their obligation under the contract warranting rescission. The RTC ruled that the
building in Maasin, Southern Leyte. The terms for payment imposed a 3%-36% per annum interest rate on the principal and was delay could not be considered a substantial breach considering that Lourdes (1) requested for an extension within which to pay;
payable within a term of 180 days or 6 months, renewable for another 180 days. As of July 16, 1989, Manuel’s outstanding (2) was willing and ready to pay and even wrote Atty. Carbon about this; (3) gave Constancia a down payment of P200,000.00;
obligation ammounted to P1,071, 256.66. and, (4) made payment to Bliss.

To be able to pay the loan, the spouses applied for a loan from Philippine National Bank and was granted on July 8, 1989, on The CA concluded that there being no cancellation effected in accordance with the procedure prescribed by law, the contract
the condition that the existing mortgage would be cancelled so the land could be used as security for the new loan under a new therefore remains valid and subsisting. However, the CA modified the RTC Decision with respect to interest, viz:
mortgage contract.
Nevertheless, there is a need to modify the appealed decision insofar as (i) the interest imposed on the sum of P300,000.00 is
On July 16, 1989, Manuel went to the house of MTLC’s President (Ester Servacio) and informed her that payment for the loan only for the period April 1993 to November 1993; (ii) the interest imposed on the sum of P330,000.00 is 2% per month and is
was ready at PNB. Ester then proceeded to the bank but was informed by them that Manuel had no pending loan application only for the period July 1993 to November 1993; (iii) it does not impose interest on the amount of P214,492.62 which was paid
with them. by Constancia to BLISS in behalf of Lourdes x x x

On July 20, 1989, Manuel executed a Special Power of Attorney authorizing Ester to collect the proceeds of his PNB loan. This The rule is that ‘no interest shall be due unless it has been expressly stipulated in writing’ (Art. 1956, Civil Code). However, the
time when Ester returned to the bank the officers told her that there was indeed a loan for P1.3 million and that the proceeds contract does not provide for interest in case of default in payment of the sum of P330,000.00 to Constancia and the monthly
were hers as long as she signed a deed of release/cancellation of mortgage. Outraged that the spouses Go Cinco used the amortizations to BLISS.
same properties mortgaged to MTLC as collateral for the PNB loan, Ester refused to sign the deed and did not collect the P1.3
Million loan proceeds. Issue:
W/N tender of payment has been made in this case so as to amount to consignation?
On July 24, 1989 Ester instituted foreclosure proceedings against the spouses Go Cinco while the latter filed an action for specific
performance, damages, and preliminary injuction in the RTC of Maasin. Held: NO!

RTC ruled in favor of spouses Go Cinco finding that Ester unjusty refused to collect the amount. On appeal the CA reversed the The spouses Bonrostro assert that Lourdes’ letter of November 24, 1993 amounts to tender of payment of the remaining balance
RTC. Hence, the instant petition for review on certiorari. amounting to P630,000.00. Accordingly, thenceforth, accrual of interest should be suspended.

Issue: Tender of payment “is the manifestation by the debtor of a desire to comply with or pay an obligation. If refused without
(1) W/N the loan to MTLC was extinguished through payment or performance. just cause, the tender of payment will discharge the debtor of the obligation to pay but only after a valid consignation
of the sum due shall have been made with the proper court.” “Consignation is the deposit of the [proper amount with
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
a judicial authority] in accordance with rules prescribed by law, after the tender of payment has been refused or because by seasonably informing the Department of Foreign Affairs and other agencies of the Government of the fact that the accused
of circumstances which render direct payment to the creditor impossible or inadvisable.” whose provisional liberty it had posted a bail bond, was facing a criminal charge in a particular court of the country.

“Tender of payment, without more, produces no effect.” “[T]o have the effect of payment and the consequent
extinguishment of the obligation to pay, the law requires the companion acts of tender of payment and consignation.” IMMACULATA V. NAVARRO, 160 SCRA 211

As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino explained as follows: Facts
This case is a Motion for Reconsideration on a decision rendered by the court denying Immaculata’s petition to set aside a
When a tender of payment is made in such a form that the creditor could have immediately realized payment if he had accepted decision in another civil case. In the latter case, Victoria filed for specific performance in order to compel Immaculata to execute
the tender, followed by a prompt attempt of the debtor to deposit the means of payment in court by way of consignation, the a document registrable with the Register of Deeds. This case was regarding the sale of a 5000 sqm parcel of land allegedly sold
accrual of interest on the obligation will be suspended from the date of such tender. But when the tender of payment is not by Immaculata in favor of Victoria. In that case, a judgment in default was entered against Immaculata. Thus, Immaculata sought
accompanied by the means of payment, and the debtor did not take any immediate step to make a consignation, then to annul said judgment on the ground that the court did not acquire jurisdiction over the person of Immaculata because he was
interest is not suspended from the time of such tender. x x x x36 (Emphasis supplied) mentally ill and did not receive the summons. On certiorari, the court ruled that Immaculata was barred by res judicata and that
his wife, his then guardian ad litem, received the alias summons and that, assuming there was no proper service of summons,
Here, the subject letter merely states Lourdes’ willingness and readiness to pay but it was not accompanied by he voluntarily submitted himself when he filed a petition to set aside judgment.
payment. She claimed that she made numerous telephone calls to Atty. Carbon reminding the latter to collect her payment,
but, neither said lawyer nor Constancia came to collect the payment. After that, the spouses Bonrostro took no further steps In this MR, Immaculata is seeking the court to consider a point inadvertently missed by the court in its 1986 this decision. (The
to effect payment. They did not resort to consignation of the payment with the proper court despite knowledge that resolution of this MR was in 1988) Immaculata alternatively prayed therein that, in case the validity of the sale is upheld, he be
under the contract, non-payment of the installments on the agreed date would make them liable for interest allowed to legally redeem the parcel of land previously obtained through a free patent.
thereon. The spouses Bonrostro erroneously assumed that their notice to pay would excuse them from paying interest. Their
claimed tender of payment did not produce any effect whatsoever because it was not accompanied by actual payment Held:
or followed by consignation. Hence, it did not suspend the running of interest. The spouses Bonrostro are therefore liable for The MR should be GRANTED. While res judicata may bar questions on the validity of the sale in view of alleged insanity and
interest on the subject installments from the date of default until full payment of the sums of P300,000.00 and P330,000.00. intimidation (and this point is no longer pressed by counsel for the petitioner) still the question of the right of legal redemption
has remained unresolved.. While the sale was originally executed sometime in December, 1969, it was only on February 3, 1974
when a "deed of conveyance" was formally executed. Since offer to redeem was made on March 24, 1975, this was clearly
SPS. CACAYORIN V. AFPMBAI, 696 SCRA 311 [2013] within the five-year period of legal redemption allowed by the Public Land Act.

Civil Law; Consignation; Under Article 1256 of the Civil Code, the debtor shall be released from responsibility by the consignation The allegation that the offer to redeem was not sincere, because there was no consignation of the amount in Court is devoid of
of the thing or sum due, without need of prior tender of payment, when the creditor is absent or unknown, or when he is merit. The right to redeem is a RIGHT, not an obligation, therefore, there is no consignation required to preserve the right to
incapacitated to receive the payment at the time it is due, or when two or more persons claim the same right to collect, or when redeem.
the title to the obligation has been lost.―Under Article 1256 of the Civil Code, the debtor shall be released from responsibility
by the consignation of the thing or sum due, without need of prior tender of payment, when the creditor is absent or unknown,
or when he is incapacitated to receive the payment at the time it is due, or when two or more persons claim the same right to PNCC V. NLRC, 193 SCRA 401
collect, or when the title to the obligation has been lost. Applying Article 1256 to the petitioners’ case as shaped by the allegations
in their Complaint, the Court finds that a case for consignation has been made out, as it now appears that there are two entities Civil Law; Contracts; The non-renewal of private respondent’s permit had the effect of resolving or rendering cancellable the
which petitioners must deal with in order to fully secure their title to the property: 1) the Rural Bank (through PDIC), which is the employment contract.—Appraising the second employment contract between petitioner and private respondent in terms of
apparent creditor under the July 4, 1994 Loan and Mortgage Agreement; and 2) AFPMBAI, which is currently in possession of Philippine law, there are three (3) reasons why petitioner cannot be held liable under that contract for breach thereof under the
the loan documents and the certificate of title, and the one making demands upon petitioners to pay. Clearly, the allegations in circumstances of this case. The first reason relates to paragraph 13 of the second contract, quoted earlier. It will be seen that
the Complaint present a situation where the creditor is unknown, or that two or more entities appear to possess the same right the renewal of private respondent’s Residence and Work permit constituted a condition to his continued employment in Saudi
to collect from petitioners. Whatever transpired between the Rural Bank or PDIC and AFPMBAI in respect of petitioners’ loan Arabia. That condition was resolutory in nature, that is, the non-renewal of private respondent’s permit had the effect of resolving,
account, if any, such that AFPMBAI came into possession of the loan documents and TCT No. 37017, it appears that petitioners or rendering cancellable, that contract.
were not informed thereof, nor made privy thereto.
Same; Same; Same; An obligor shall be released from his obligation when the prestation has become legally or physically
Same; Same; Article 1256 authorizes consignation alone, without need of prior tender of payment, where the ground for impossible without fault on his part.—The second reason is found in the rule that an obligor shall be released from his obligation
consignation is that the creditor is unknown, or does not appear at the place of payment; or is incapacitated to receive the when the prestation has become legally or physically impossible without fault on his part. The supervening impossibility of
payment at the time it is due; or when, without just cause, he refuses to give a receipt; or when two or more persons claim the performance, based upon some factor independent of the will of the obligor, releases the obligor from his obligation after
same right to collect; or when the title of the obligation has been lost.―The lack of prior tender of payment by the petitioners is restitution of what he may have received, if any, in advance from the other contracting party; the obligor incurs no liability for
not fatal to their consignation case. They filed the case for the exact reason that they were at a loss as to which between the damages for his inability to perform.
two―the Rural Bank or AFPMBAI―was entitled to such a tender of payment. Besides, as earlier stated, Article 1256 authorizes Same; Same; Same; Paragraph 13 of the second contract expressly envisaged the possibility that renewal of the residence and
consignation alone, without need of prior tender of payment, where the ground for consignation is that the creditor is unknown, work permit of private respondent could be denied by the concerned authorities for any reason in which case the contract would
or does not appear at the place of payment; or is incapacitated to receive the payment at the time it is due; or when, without just be cancelled.—There is a third and final reason why private respondent cannot hold petitioner liable for breach of the second
cause, he refuses to give a receipt; or when two or more persons claim the same right to collect; or when the title of the obligation contract of employment. Paragraph 13 of the second contract expressly envisaged the possibility that renewal of the Residence
has been lost. and Work permit of private respondent could “be denied by the concerned authorities for any reason,” in which case, the contract
would be “cancelled.” Private respondent was, of course, aware that his original permit was about to expire when he left for
Article 1266 Saudi Arabia the second time. He must or should have been also alerted by the second contract of employment to the possibility
of non-renewal of his Residence and Work permit and the ensuing cancellability of the contract. Petitioner did not, in other words,
Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or conceal the legal and practical situation from private respondent. We find no bad faith on the part of petitioner.
physically impossible without the fault of the obligor. (1184a)

PNCC V. CA, 272 SCRA 183


PEOPLE V. FRANKLIN, 39 SCRA 363
Civil Law; Contracts; Article 1266 of the Civil Code is an exception to the principle of the obligatory force of contracts.—It is a
Bail bond; Article 1266, New Civil Code, does not apply to a, surety upon a, bail bond.—Art. 1266, New Civil Code, does not fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the force
apply to a surety upon a bail bond, as said Article speaks of a relation between a debtor and creditor, which does not exist in the of law between the parties and should be complied with in good faith. But the law recognizes exceptions to the principle of the
case of a surety upon a bail bond, on one hand, and the State, on the other. For while sureties upon a bail bond (or recognizance) obligatory force of contracts. One exception is laid down in Article 1266 of the Civil Code, which reads: “The debtor in obligations
can discharge themselves from liability by surrendering their principal, sureties on ordinary bonds or commercial contracts, as a to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.”
general rule, can only be released by payment of the debt or performance of the act stipulated.
Same; Same; Said article is applicable only to obligations “to do” and not to obligations “to give.”—Petitioner cannot, however,
Same; Obligations of surety.—In the eyes of the law a surety becomes the legal custodian and jailer of the accused, thereby successfully take refuge in the said article, since it is applicable only to obligations “to do,” and not obligations “to give.” An
assuming the obligation to keep the latter at all times under surveillance, and to produce and surrender him to the court the obligation “to do” includes all kinds of work or service; while an obligation “to give” is a prestation which consists in the delivery
latter's demand. of a movable or an immovable thing in order to create a real right, or for the use of the recipient, or for its s imple poss ession,
or in order to return it to its owner.
Same; Where negligent so as to justify forfeiture of its bond.—A forfeiture of a bail bond is justified by failure to produce the
accused in court by reason of her obtaining a Philippine Passport and leaving for the United States. For it was the surety Same; Same; The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation “to give”; hence,
company's duty to do every thing and take all steps necessary to prevent that departure , which could have been accomplished it is not covered within the scope of Article 1266.—The obligation to pay rentals or deliver the thing in a contract of lease falls
within the prestation “to give”; hence, it is not covered within the s cope of Article 1266. At any rate, the unforeseen event and
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
causes mentioned by petitioner are not the legal or physical impossibilities contemplated in the said article. Besides, petitioner speculation that it would yield no substantial profit for the lessee bus company. Petitioners' profits may be reduced due to
failed to state specifically the circumstances brought about by “the abrupt change in the political climate in the country” except increase operating costs; but the volume of passenger traffic along the leased lines not only remains same but may even increase
the alleged prevailing uncertainties in government policies on infrastructure projects. as the tempo of the movement of population is intensified by the industrial development of the areas covered or connected by
the leased routes. Moreover, upon proper showing, the PSC might have granted petitioners an increase in rates, as it has done
Same; Same; Under the theory of rebus sic stantibus, the parties stipulate in the light of certain prevailing conditions and once so in several instances, so that public interest will always be promoted by a continuous flow of transportation facilities to service
these conditions cease to exist, the contract also ceases to exist.—The principle of rebus sic stantibus neither fits in with the the population and the economy. The citizenry and the economy will suffer by reason of any disruption in the transportation
facts of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions facilities.
cease to exist, the contract also ceases to exist. This theory is said to be the basis of Article 1267 of the Civil Code, which
provides: ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the Furthermore, we are not at all convinced that the lease contract brought no material advantage to the lessor for the period of
obligor may also be released therefrom, in whole or in part. suspension. It must be recalled that the lease contract not only stipulated for the transfer of the lessor's right to operate the lines
covered by the contract, but also for a forbearance on the part of the lessor to operate transportation business along the same
Same; Same; Mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute lines - and to hold a certificate for that purpose. Thus, even if the lessee would not actually make use of the lessor's certificates
a defense to an action for specific performance.—Anent petitioner’s alleged poor financial condition, the same will neither release over the leased lines, the contractual commitment of the lessor not to operate on the lines would sufficiently insure added profit
petitioner from the binding effect of the contract of lease. As held in Central Bank v. Court of Appeals, cited by private respondents, to the lessees on account of the lease contract. In other words, the commitment alone of the lessor under the contract would
mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute a defense to enable the lessees to reap full benefits therefrom since the commuting public would, after all, be forced - at their inconvenience
an action for specific performance. and prejudice

Same; Same; The motive or particular purpose of a party in entering into a contract does not affect the validity nor existence of "(S)ince, by the lease, the lessee was to have the advantage of casual profits of the leased premises, he should run the hazard
the contract, except when the realization of such motive or particular purpose has been m ade a condition upon which the of casual losses during the term and not lay the whole burden upon the lessor." (Reyes v. Caltex)
contract is made to depend.—With regard to the non-materialization of petitioner’s particular purpose in entering into the contract
of lease, i.e., to use the leased premises as a site of a rock crushing plant, the same will not invalidate the contract. The cause Militating further against a grant of reduction of the rentals to the petitioners is the petitioners' conduct which is not in accord with
or essential purpose in a contract of lease is the use or enjoyment of a thing. As a general principle, the motive or particular the rules of fair play and justice. Petitioners, it must be recalled, promised to pay the accrued rentals in due time. Later, however,
purpose of a party in entering into a contract does not affect the validity nor existence of the contract; an exception is when the when they believed they found a convenient excuse for escaping their obligation, they reneged on their earlier promise.
realization of such motive or particular purpose has been made a condition upon which the contract is made to depend. The Moreover, petitioners' option to suspend operation on the leased lines appears malicious. Thus, Justice Esguerra, speaking for
exception does not apply here. the Court of Appeals, propounded the following questions: "If it were true that the cause of the suspension was the high prices
of spare parts, gasoline and needed materials and the reduction of the dollar allocation, why was it that only plaintiff-appellee's
Article 1267 certificate of public convenience was sought to be suspended? Why did not the defendants-appellants ask for a corresponding
reduction or suspension under their own certificate along the same route? Suppose the prices of the spare parts and needed
Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the materials were cheap, would the defendants-appellants have paid more than what is stipulated in the lease contract? We believe
parties, the obligor may also be released therefrom, in whole or in part. (n) not. Hence, the suspension of operation on the leased lines was conceived as a scheme to lessen operation costs with the
expectation of greater profit."

LAGUNA V. MANABAT, 58 SCRA 650 Indeed, petitioners came to court with unclean hands, which fact militates against their plea for equity.

Facts:
A contract was executed whereby the Biñan Transpo. Co. leased to the Laguna-Tayabas Bus Company at a monthly rental of OCCENA V. JABSON, 73 SCRA 637
P2,500.00 its certificates of public convenience over the lines known as Manila-Biñan, Manila-Canlubang and Sta. Rosa-Manila,
and to the Batangas Transportation Company its certificate of public convenience over the line known as Manila-Batangas Facts:
Wharf, together with one "International" truck, for a period of five years, renewable for another similar period, to commence from Private respondent Tropical Homes, Inc. entered into a subdivision contract with petitioners wherein respondent guaranteed
the approval of the lease contract by the Public Service Commission (PSC). The PSC provisionally approved the lease contract petitioners (as landowners of a 55,330 square meter parcel of land in Davao City) an amount equivalent to 40% of all cash
on condition that the lessees should operate on the leased lines in accordance with the prescribed time schedule and that such receipts from the sale of the subdivision lots. Respondent filed a complaint for modification of the terms and conditions of the
approval was subject to modification or cancellation. contract with petitioners, alleging that:

Sometime after the execution of the lease contract, the plaintiff Biñan was declared insolvent, and Manabat was appointed as • “due to the increase in price of oil and its derivatives and the concomitant worldwide spiralling of prices, which
its assignee. From time to time, the defendants paid the lease rentals. However, while case was pending rentals accrued. are not within the control of plaintiff, of all commodities including basis raw materials required for such
development work, the cost of development has risen to levels which are unanticipated, unimagined and not
Batangas Transpo and Laguna-Tayabas Bus Co. separately filed with the PSC a petition for authority to suspend the operation within the remotest contemplation of the parties at the time said agreement was entered into and to such a
on the lines covered by the certificates of public convenience leased to each of them by Biñan. They alleged as reasons the degree that the conditions and factors which formed the original basis of said contract, have been totally
reduction in the amount of dollars allowed by the Monetary Board of the Central Bank of the Philippines for the purchase of spare changed;”
parts needed in the operation of their trucks, the alleged difficulty encountered in securing said parts, and their procurement at
exorbitant costs, thus rendering the operation of the leased lines prohibitive. Further, that the high cost of operation, coupled • “further performance by the plaintiff under the contract will result in situation where defendants would be
with the lack of passenger traffic on the leased lines resulted in financial losses. For these reasons they asked permission to unustly enriched at the expense of the plaintiff; will cause an inequitous distribution of proceeds from the sales
suspend the operation of the leased lines. of subdivided lots in manifest actually result in the unjust and intolerable exposure of plaintiff to implacable
losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in
Lessees Batangas and Laguna, then pleaded for a reduction of the rentals on the ground that the subject matter of the lease violation of the primordial concepts of good faith, fairness and equity which should pervade all human
was allegedly not used by them as a result of the suspension of operations on the lines authorized by PSC. relations.”

Issue: Petitioners insist that the worldwide increase in prices cited by respondent does not constitute a sufficient cause of action for
W/N lessee can be allowed equitable reduction of the stipulated rentals? NO. modification of the subdivision contract.

Rationale: Issue/Held:
Performance is not excused by subsequent inability to perform, by unforeseen difficulties, by unusual or unexpected expenses, Does the increase in prices constitute a sufficient cause of action of for modification of the subdivision contract? No.
by danger, by inevitable accident, by breaking of machinery, by strikes, by sickness, by failure of a party to avail himself of the
benefits to be had under the contract, by weather conditions, by financial stringency or bystagnation of business. Neither is Rationale:
performance excused by the fact that the contract turns out to be hard and improvident, unprofitable, or impracticable, ill-advised, ART. 1267 of the Civil Code:
or even foolish, or less profitable, unexpectedly burdensome. “When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor
may also be released therefrom, in whole or in part.
Article 1680 is a special provision for leases of rural lands. No other legal provision makes it applicable to ordinary leases. Even
if the cited article were a general rule on lease, its provisions nevertheless do not extend to petitioners. One of its requi sites is Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under
that the cause of loss of the fruits of the leased property must be an "extraordinary and unforeseen fortuitous event." The the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity
circumstances of the instant case fail to satisfy such requisite. As correctly ruled by the CA, the alleged causes for the suspension grant the relief sought.
of operations on the lines leased, namely, the high prices of spare parts and gasoline and the reduction of the dollar allocations,
"already existed when the contract of lease was executed". The cause of petitioners' inability to operate on the lines cannot be While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article 1267 of the
ascribed to fortuitous events or circumstances beyond their control, but to their own voluntary desistance Civil Code, to wit: “[t]he general rule is that impossibility of performance releases the obligor. However, it is submitted that when
the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized
Obviously, no reduction can be sustained on the ground that the operation of the leased lines was suspended upon the mere to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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be so difficult as have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still abandoned (sic) its operation as a public service and it becomes necessary to remove the electric light post (sic)” which are
responsible,” the respondent court misapplied the same to respondent's complaint. 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
If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it could show at do not invalidate the aforementioned provision.
the trial that the service undertaken contractually by it had "become so difficult as to be manifestly beyond the contemplation of
the parties", then respondent court's upholding of respondent's complaint and dismissal of the petition would be justifiable under
the cited codal article. Without said article, respondent would remain bound by its contract under the prevailing doctrine that MAGAT V. CA, 337 SCRA 298
performance therewith is not excused "by the fact that the contract turns out to be hard and improvident, unprofitable, or
unexpectedly burdensome", since in case a party desires to be excused from performance in the event of such contingencies Facts:
arising, it is his duty to provide it in the contract. Guerrero, President of Guerrero Transport Services [GTS], won a bid to "provide radio-controlled taxi service within the U.S.
Naval Base for not more than one year. At the birth of Martial Law, Marcos issued LOI No. 1 seizing and controlling all privately
However, respondent's complaint seeks not release from the subdivision contract but that the court render judgment in modifying owned newspapers, magazines… and other media of communication. Thus, the Radio Control Office issued an Administrative
the terms and conditions of the contract by fixing the proper shares that should pertain to the herein parties out of the gross Circular suspending the acceptance and processing of applications for radio station permits and to own or possess radio
proceeds from the sales of subdivided lots of subject subdivision. transmitters or transceivers, Except: 1. Aeronautical Stations; 2. Aeronautical Fixed Stations; 3. Aircraft Stations; 4. Coastal
Stations; and 5. Ship Stations.
The cited article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of shares
between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for Guerrero and Magat, the General Manager of Spectrum Electronic Laboratories, executed a letter-contract for the purchase of
those covenanted by the parties themselves. transceivers. It appears though that Magat is also ordering the transceivers from a Japanese supplier. Thus, Magat told Guerrero
that should the contract be cancelled, the Japanese firm would forfeit 30% of the deposit and charge a cancellation fee in an
amount not yet known and that Guerrero shall bear the loss. Further, should the contract be canceled, Magat would demand an
NAGA TELEPHONE V. CA, 230 SCRA 351 additional amount equivalent to 10% of the contract price.

Facts: Unable to get a letter of credit from the Central Bank due to the refusal of the Philippine government to issue a permit to import
In 1977, the parties entered into a contract for the use by petitioners in the operation of its telephone service the electri c light the transceivers, Guerrero commenced operation of the taxi cabs within Subic Naval Base, using radio units borrowed from the
posts of private respondent in Naga City. In consideration therefor, petitioners agreed to install, free of charge, 10 telephone U.S. government. Magat thus canceled his order with his Japanese supplier and sued Guerrero. Latter claims the contract is
connections for the use by private respondent. Said contract also provided that the term or period of the contract shall be as void because it was a contraband.
long as the petitioner has need for the electric light posts. In 1989, private respondent filed with the RTC against petitioners for
reformation of the contract with damages, on the grounds that: 1) petitioners' use of the posts have become much heavier with The RTC and CA decided in favor of the heirs of Magat and ordered Guerrero to pay temperate, moral and exemplary damages,
the increase in the volume of their subscribers; 2) petitioners have used 319 posts without any contract with it and that petitioners and attorney's fees. Hence, this appeal.
had refused to pay private respondent rent despite demands; and 3) the poor servicing by petitioners of the 10 telephone units
which had caused it great inconvenience and damages. The RTC ruled in favor of private respondents, ordering the reformation Issue:
of the contract, ruling that while in an action for reformation of contract, it cannot make another contract for the parties, it can, 1. Was the contract for the purchase of radio transceivers void? No, valid.
however, for reasons of justice and equity, order that the contract be reformed to abolish the inequities therein. The CA affirmed 2. Were the transceivers subject of the contract banned contraband items prohibited by the LOI and the Administrative Circular
the RTC decision but said that: (1) Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a to import? No. Not contraband.
potestative condition which rendered said condition void. Petitioners filed an MR but was denied. Hence, the present petition.
Petitioners assert that Article 1267 is not applicable because the contract does not involve the rendition of service or a personal Held:
prestation and it is not for future service with future unusual change. While contract is valid, no exemplary moral and actual damages should be awarded.

Issue/Held: Ratio:
W/N Art. 1276 is applicable. – YES. 1. As to the validity of the contract: "Contraband" generally refers to "any property which is unlawful to produce or possess." It
refers to goods which are exported and imported into a country against its laws.
Rationale:
Article 1267 speaks of "service" which should be understood as referring to the "performance" of the obligation. In the present The contract was not void ab initio. Nowhere in the LOI and Admin. Circular is there an express ban on the importation of
case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga City, which is the service transceivers. The LOI and Administrative Circular did not render "radios and transceivers" illegal per se. The Administrative
contemplated in said article. Furthermore, it is not a requirement thereunder that the contract be for future service with future Circular merely ordered the Radio Control Office to suspend the "acceptance and processing . . . . of applications . . . for permits
unusual change. According to Tolentino, Article 1267 states in our law the doctrine of unforeseen events. This is said to be based to possess, own, transfer, purchase and sell radio transmitters and transceivers . . . " Therefore, possession and importation of
on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the light of the radio transmitters and transceivers was legal provided one had the necessary license for it. Transceivers were not prohibited
certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist. Considering practical but merely regulated goods. The LOI and Administrative Circular did not render the transceivers outside the commerce of man.
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 They were valid objects of the contract. Thus, the contract was valid.
favor of the party prejudiced. We, therefore, release the parties from their correlative obligations under the contract. However,
we have to take into account the possible consequences of merely releasing the parties therefrom: petitioners will remove the The law provides that "[w]hen the service (required by the contract) has become so manifestly beyond the contemplation of the
telephone wires/cables in the posts of private respondent, resulting in disruption of their service to the public; while private parties, the obligor may also be released therefrom, in whole or in part." Here, Guerrero's inability to secure a letter of credit and
respondent, in consonance with the contract will return all the telephone units to petitioners, causing prejudice to its business. to comply with his obligation was a direct consequence of the denial of the permit to import. For this, he cannot be faulted.
We shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for
the use of its posts in Naga City and in the other places where petitioners use private respondent's posts, P10 per post, per 2. As to the damages: No Moral and exemplary damages:
month; and 2) private respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by the
public. The peculiar circumstances of the present case necessitates exercise of our equity jurisdiction. We are not making a new Even if we assume that there was a breach of contract, damages cannot be awarded. Damnum absque injuria.
contract for the parties, but we find it necessary to do so in order not to disrupt the basic and essential services being rendered
by both parties to the public and to avoid unjust enrichment by appellant at the expense of plaintiff. There was no bad faith. Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. True, Guerrero borrowed equipment from the Subic Naval Base authorities at
OTHER ISSUES: zero cost. This does not automatically translate to bad faith. Guerrero was faced with the danger of the cancellation of his contract
On the issue of prescription, petitioners allege that private respondent’s cause of action already prescribed as the action was with Subic Naval Base. He borrowed equipment as a prudent and swift alternative. There was no proof that he resorted to this
filed more than 10 years from the execution of the contract. However, the 10-year period when the right of action accrues is not option with a deliberate and malicious intent to dishonor his contract with Victorino.
necessarily the date of execution of the contract. Private the right of action arose only after said contract had already become
disadvantageous due to subsequent events and conditions, which must be sometime during the latter part of 1982 or in 1983 Neither can actual damages be awarded. To recover actual damages, the amount of loss must not only be capable of proof, but
when Atty. General was asked by private respondent's Board of Directors to study said contract as it already appeared must be proven with a reasonable degree of certainty. The claim must be premised upon competent proof or upon the best
disadvantageous is erroneous. evidence obtainable, such as receipts or other documentary proof.

Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of either party because Only the testimony of the broker was presented to substantiate petitioners' claim for unrealized profits. Not only is his testimony
petitioner's permission for free use of telephones is not made to depend purely on their will, neither is private respondent's self-serving, it is also hearsay.
permission for free use of its posts dependent purely on its will. Petitioners' allegations must be upheld in this regard. A
potestative condition is a condition, the fulfillment of which depends upon the sole will of the debtor, in which case, the conditional Article 1270
obligation is void. Based on this definition, the provision in the contract, to wit: “(a) 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 Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor.
respondent)…” is a potestative condition. However, the other conditions in the same provision, to wit: “…it being understood that It may be made expressly or impliedly.
this contract shall terminate when for any reason whatsoever, the party of the second part (private respondent) is forced to stop,
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
One and the other kind shall be subject to the rules which govern inofficious donations. Express Same; Same; Same; Same; The presumption created by Art. 1271 of the Civil Code is not conclusive but merely prima facie.—
condonation shall, furthermore, comply with the forms of donation. (1187) The presumption created by the Art. 1271 of the Civil Code is not conclusive but merely prima facie. If there be no evidence to
the contrary, the presumption stands. Conversely, the presumption loses its legal efficacy in the face of proof or evidence to the
contrary. In the case before us, we find sufficient justification to overthrow the presumption of payment generated by the delivery
YAM V. CA, 303 SCRA 1 of the documents evidencing petitioners indebtedness.

Facts: Same; Same; Same; Same; Private documents; Where several originals are made out of a private document, the intendment of
On May 10,1979, the parties in this case entered into a Loan Agreement with Assumption of Solidary Liability whereby petitioners the law would thus be to refer to the delivery only of the original original rather than to the original duplicate of which the debtor
were given a loan of P500,000.00 by private respondent. The contract provided for the payment of 12% annual interest, 2% would normally retain a copy.—It may not be amiss to add that Article 1271 of the Civil Code raises a presumption, not of
monthly penalty, 1 1/2% monthly service charge, and 10% attorney's fees. Denominated the first Industrial Guarantee and Loan payment, but of the renunciation of the credit where more convincing evidence would be required than what normally would be
Fund (IGLF), the loan was secured by a chattel mortgage on the printing machinery in petitioners' establishment. called for to prove payment. The rationale for allowing the presumption of renunciation in the delivery of a private instrument is
that, unlike that of a public instrument, there could be just one copy of the evidence of credit. Where several originals are made
Petitioners subsequently obtained a second IGLF loan evidenced by two promissory notes. For this purpose, a new loan out of a private document, the intendment of the law would thus be to refer to the delivery only of the original original rather than
agreement was entered into by the parties containing identical provisions as the first one, except as to certain provisions. to the original duplicate of which the debtor would normally retain a copy. It would thus be absurd if Article 1271 were to be
applied differently.
Yam paid the first loan. After a few months, Manphil was placed under receivership. A partial payment was then made on the
second loan. Yam later wrote a letter to Manphil proposing to settle their obligation. However, Manphil replied with a counter- Article 1278
offer of reducing the penalty charges if the obligation is paid on or before a certain date.
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
Manphil sent 2 demand letters seeking the payment of the balance. As petitioners did not pay, a case was filed in court for the debtors of each other. (1195)
collection or the foreclosure of the mortgages. Yam, on the other hand, contended that they fully paid their obligation when the
president of Manphil agreed to waive the penalties. This is the reason why according to them they only paid P410,854.47.
Petitioners added that this fact of full payment is reflected in the voucher accompanying the Pilipinas Bank check they issued, GAN TION V. CA, 28 SCRA 235
which bore the notation "full payment of IGLF loan."
DOCTRINE
Issue: An award for attorney's fees is a proper subject of legal compensation, it being an award of damages to the client and not the
WON Yam is liable for the payment of the penalties and service charges on their loan? YES counsel.

Ratio: The litigant, not his counsel, is the judgment creditor who may enforce the judgment for attorney's fees for execution.
Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of donation. Art. 748, par. 3
provides that the donation and acceptance of a movable, the value of which exceeds P5,000,00, must be made in writing, FACTS
otherwise the same shall be void. In this connection, under Art. 417, par. 1, obligations, actually referring to credits,l3 are Ong Wan Sieng leased was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an ejectment case against
considered movable property. In the case at bar, it is undisputed than the alleged agreement to condone P266,196.88 of the the former, alleging non-payment of rents for August and September of that year, at P180 a month, or P360 altogether. The
second IGLF loan was not reduced in writing. defendant denied the allegation and said that the agreed monthly rental was only P160, which he had offered to but was refused
by the plaintiff. The plaintiff obtained a favorable judgment in the municipal court (of Manila), but upon appeal the Court of First
Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check for P410,854.47, containing the notation that Instance, on July 2, 1962, reversed the judgment and dismissed the complaint, and ordered the plaintiff to pay the defendant
the amount is in "full payment of IGLF loan," constitutes documentary evidence of such oral agreement. This contention is without the sum of P500 as attorney's fees. That judgment became final.
merit. The notation in "full payment of IGLF loan" merely states petitioners' intention in making the payment, but in no way does
it bind private respondent. It would have been a different matter if the notation appeared in a receipt issued by respondent On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a month, effective
corporation, through its receiver, because then it would be an admission against interest. Indeed, if private respondent really November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate amount of P4,320.00,
condoned the amount in question, petitioners should have asked for a certificate of full payment from respondent corporation, corresponding to a period from August 1961 to October 1963.
as they did in the case of their first IGLF loan of P500,000.00.
In the meantime, over Gan Tion's opposition, Ong Wan Sieng was able to obtain a writ of execution of the judgment for attorney's
Petitioners, however, contend that the Central Bank examiner assigned to respondent corporation, Cristina Destajo, signed the fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where he pleaded legal compensation, claiming that Ong
voucher in question. Destajo claimed that, when she signed the voucher, she failed to notice the statement that the amount of Wan Sieng was indebted to him in the sum of P4,320 f or unpaid rents, The appellate court accepted the petition but eventually
P410,854.47 was being given in "full payment of IGLF Loan." She said she merely took note of the amount and the check number decided for the respondent, holding that although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount
indicated therein. In any event, Destajo, by countersigning the voucher, did no more than acknowledge receipt of the payment. of more than P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust fund for the benefit of
She cannot be held to have ascented thereby to the payment in full of petitioners' indebtedness to private respondent. It was the lawyer, which would have to be turned over by the client to his counsel." In the opinion of said Court, the requisites of legal
obvious she had no authority to condone any indebtedness, her "issuing official receipts, preparing check vouchers and compensation, namely, that the parties must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and
documentation." that each one of them must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not
present in the instant case, since the real creditor with respect to the sum of P500 was the defendant's counsel.
Article 1271
ISSUE/S
Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the Whether or not there has been legal compensation.
debtor, implies the renunciation of the action which the former had against the latter.
HELD
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold YES. It is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit,
it by proving that the delivery of the document was made in virtue of payment of the debt. (1188) therefore, may properly be the subject of legal compensation. Quite obviously it would be unjust to compel petitioner to pay his
debt for P500 when admittedly his creditor is indebted to him for more than P4,000.

TRANS-PACIFIC V. CA, 235 SCRA 494 The nature of the award of damages – attorney’s fees – is that it is made in favor of the litigant, not of his counsel, and is justified
by way of indemnity for damages recoverable by the former in the cases enumerated in Article 2208 of the Civil Code.
Contracts; Obligations; Evidence; Presumptions of Payment; Original Copies of Documents; Duplicate originals are admissible
as evidence.—Applying the legal presumption provided by Art. 1271 of the Civil Code, the trial court ruled that petitioner has
fully discharged its obligation by virtue of its possession of the documents (stamped “PAID”) evidencing its indebtedness. PNB V. ONG ACERO, 148 SCRA 166
Respondent court disagreed and held, among others, that the documents found in possession of Trans-Pacific are mere
duplicates and cannot be the basis of petitioner’s claim that its obligation has been fully paid. Accordingly, since the promissory FACTS:
notes submitted by petitioner were duplicates and not the originals, the delivery thereof by respondent bank to the petitioner A savings account of Isabela is being claimed by ACEROS and PNB. The ACEROS are judgment creditors of Isabela who seek
does not merit the application of Article 1271 (1st par.) of the Civil Code. Respondent court is of the view that the provision must to enforce against said savings account the final and executory judgment rendered in their favor. PNB on the other hand claims
be construed to mean the original copy of the document evidencing the credit and not its duplicate. The pronouncement of that since ISABELA was at some point in time both its debtor and creditor-ISABELA's deposit being deemed a loan to it (PNB)-
respondent court is manifestly groundless. It is undisputed that the documents presented were duplicate originals and are there had occurred a mutual set-off between them, which effectively precluded the ACEROS' recourse to that deposit.
therefore admissible as evidence. Further, it must be noted that respondent bank itself did not bother to challenge the authenticity
of the duplicate copies submitted by petitioner. A duplicate copy of the original may be admitted in evidence when the original is The controversy was decided by the Intermediate Appellate Court adversely to the PNB. It is this decision that the PNB would
in the possession of the party against whom the evidence is offered, and the latter fails to produce it after reasonable notice, as have this Court reverse.
in the case of respondent bank.
The ACEROS' claim to the bank deposit is more specifically founded upon the garnishment thereof by the sheriff, effected in
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
execution of the partial judgment rendered by the CFI at Quezon City in their favor on November 18, 1979. Ruling:
There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot
On the other hand, PNB's claim to the two-million-peso deposit in question is made to rest on an agreement between it and refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The
ISABELA in virtue of which, according to PNB: (1) the deposit was made by ISABELA as "collateral" in connection with its collection of a tax cannot await the results of a lawsuit against the government.
indebtedness to PNB as to which it (ISABELA) had assumed certain contractual undertakings; and (2) in the event of ISABELA's
failure to fulfill those undertakings, PNB was empowered to apply the deposit to the payment of that indebtedness. Isabela A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which
subsequently failed to fulfill the undetakings hence PNB’s claims are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes.
Its theory thereon based on a mutual set-off, or compensation, between it and ISABELA — in accordance with Articles 1278 et
al. of the Civil Code — that PNB intervened in the action between the ACEROS and ISABELA on or about February 28, 1980 Government and taxpayer are not mutually creditors and debtors of each other under Article 1278 of the Civil Code and a claim
and moved for reconsideration of the Order of February 15, 1980. for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

ISSUE:
WON PNB was correct in asserting that compensation automatically took place between them hence the P2M cannot be subject MONDRAGON V. SOLA, 689 SCRA 18 [2013]
to garnishment. NO
Civil Law; Obligations; Compensation; Legal Compensation; Compensation is a mode of extinguishing to the concurrent amount
RATIO: the obligations of persons who in their own right and as principals are reciprocally debtors and creditors of each other. Legal
PNB's main thesis is that when it opened a savings account for ISABELA on March 9, 1979 in the amount of P 2M, it (PNB) compensation takes place by operation of law when all the requisites are present, as opposed to conventional compensation
became indebted to ISABELA in that amount. So that when ISABELA itself subsequently came to be indebted to it on account which takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites.—We
of ISABELA's breach of the terms of the Credit Agreement of October 13, 1977, and therefore ISABELA and PNB became at find that petitioner’s act of withholding respondent’s service fees/commissions and applying them to the latter’s outstanding
the same time creditors and debtors of each other, compensation automatically took place between them, in accordance with obligation with the former is merely an acknowledgment of the legal compensation that occurred by operation of law between
Article 1278 of the Civil Code. The amounts due from each other were, in its view, applied by operation of law to satisfy and the parties. Compensation is a mode of extinguishing to the concurrent amount the obligations of persons who in their own right
extinguish their respective credits. More specifically, the P2M owed by PNB to ISABELA was automatically applied in payment and as principals are reciprocally debtors and creditors of each other. Legal compensation takes place by operation of law when
and extinguishment of PNB's own credit against ISABELA. This having taken place, that amount of P2M could no longer be all the requisites are present, as opposed to conventional compensation which takes place when the parties agree to compensate
levied on by any other creditor of ISABELA, as the ACEROS attempted to do in the case at bar, in order to satisfy their judgment their mutual obligations even in the absence of some requisites. Legal compensation requires the concurrence of the following
against ISABELA. conditions: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of
Article 1278 of the Civil Code does indeed provide that "Compensation shall take when two persons, in their own right, are the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5)
creditors and debtors of each other. " Also true is that compensation may transpire by operation of law, as when all the requisites That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to
therefor, set out in Article 1279, are present. Nonetheless, these legal provisions cannot apply to PNB's advantage under the the debtor.
circumstances of the case at bar.
Article 1279
The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC, by which upon firmly established rules
even this Court is bound, that it has not proven by competent evidence that it is a creditor of ISABELA. The only evidence present Art. 1279. In order that compensation may be proper, it is necessary:
by PNB towards this end consists of two (2) documents marked in its behalf as Exhibits 1 and 2, But as the IAC has cogently
observed, these documents do not prove any indebtedness of ISABELA to PNB. All they do prove is that a letter of credit might (1) That each one of the obligors be bound principally, and that he be at the same time a principal
have been opened for ISABELA by PNB, but not that the credit was ever availed of (by ISABELA's foreign correspondent MAN, creditor of the other;

or that the goods thereby covered were in fact shipped, and received by ISABELA.
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
PNB has however deposited an alternative theory, which is that the P2M deposit had been assigned to it by ISABELA as kind, and also of the same quality if the latter has been stated;

"collateral," although not by way of pledge; that ISABELA had explicitly authorized it to apply the P2M deposit in payment of its
indebtedness; and that PNB had in fact applied the deposit to the payment of ISABELA's debt on February 26, 1980, in concept (3) That the two debts be due;
of voluntary compensation. This second, alternative theory, is as untenable as the first. 

(4) That they be liquidated and demandable; 

In the first place, there being no indebtedness to PNB on ISABELA's part, there is in consequence no occasion to speak of any
mutual set-off, or compensation, whether it be legal, i.e., which automatically occurs by operation of law, or voluntary, i.e., which (5) That over neither of them there be any retention or controversy, commenced by third persons and
can only take place by agreement of the parties. communicated in due time to the debtor. (1196)

In the second place, the documents indicated by PNB as constitutive of the claimed assignment do not in truth make out any
such transaction. REPUBLIC V. DE LOS ANGELES, 98 SCRA 103

Even if it be assumed that such an assignment had indeed been made, and PNB had been really authorized to apply the P2M Constitutional Law; Due Process; Lessees of a commercial building, not parties to the case and not afforded an opportunity to
deposit to the satisfaction of ISABELA's indebtedness to it, nevertheless, since the record reveals that the application was be heard, cannot be ordered to pay rentals to a mortgagee of the building; Reasons.—But, the respondent Judge exceeded his
attempted to be made by PNB only on February 26, 1980, that essayed application was ineffectual and futile because at that jurisdiction in ordering or compelling the lessees of the said building, the RCA among others, to pay the rentals to the respondent
time, the deposit was already in custodia legis, notice of garnishment thereof having been served on PNB on January 9, 1980 Corporation, without giving the lessees an opportunity to be heard. The said lessees are not parties to the case between the
(pursuant to the writ of execution issued by the Court of First Instance on December 23, 1979 for the enforcement of the partial lessor and the Marcelo Steel Corporation. The RCA, in particular, was not furnished with a copy of the motion of the respondent
judgment in the ACEROS' favor rendered on November 18,1979). Corporation, dated December 9, 1967, praying that an order be issued directing and/or authorizing the RCA and other lessees
to channel or pay directly to the said corporation the rents for the use of the Doña Petra Building, so that the RCA was deprived
One final factor precludes according validity to PNB's arguments. On the assumption that the P 2M deposit was in truth assigned of its day in court and precluded it from presenting the defenses that it has against the lessor. x x x The said order clearly violated
as some sort of "collateral" to PNB — although as PNB insists, it was not in the form of a pledge — the agreement postulated the constitutional provision against depriving a person of his property without due process of law.
by PNB that it had been authorized to assume ownership of the fund upon the coming into being of ISABELA s indebtedness is
void ab initio, it being in the nature of a pactum commisoruim proscribed as contrary to public policy. Civil Law; Compensation; Compensation of debts arise even without proof of liquidation of claim, where the claim is
undisputed.—Proof of the liquidation of a claim, in order that there be compensation of debts, is proper if such claim is disputed.
But, if the claim is undisputed, as in the case at bar, the statement is sufficient and no other proof may be required. In the instant
FRANCIA V. IAC, 162 SCRA 753 case, the claim of the RCA that Petra R. Farin has an outstanding obligation to the RCA in the amount of P263,062.40 which
should be compensated against the rents already due or may be due, was raised by the RCA in its motion for the reconsideration
Facts: of the order of December 23, 1967. A copy of said motion was duly furnished counsel for Petra R. Farin and although the said
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for Petra R. Farin subsequently filed a similar motion for the reconsideration of the order of December 23, 1967, she did not dispute
the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion. nor deny such claim. Neither did the Marcelo Steel Corporation dispute such claim of compensation in its opposition to the
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold motion for the reconsideration of the order of December 23, 1967. The silence of Petra R. Farin, although the declaration is such
at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real as naturally one to call for action or comment if not true, could be taken as an admission of the existence and validity of such a
Property Tax Code in order to satisfy a tax delinquency of P2,400.00. claim. Therefore, since the claim of the RCA is undisputed, proof of its liquidation is not necessary. At any rate, if the record is
bereft of the proof mentioned by the respondent Judge of first instance, it is because the respondent Judge did not call for the
Issue: submission of such proof. Had the respondent Judge issued an order calling for proof, the RCA would have presented sufficient
May compensation take place? evidence to the satisfaction of the court.

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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balance to be paid in four quarterly installments. The initial payment was to be made by Ong to BPI to settle the loan of the
SOLINAP V. DEL ROSARIO, 123 SCRA 640 spouses (about almost 500,000) and the remaining amount (100,000) was paid to the spouses. Ong took possession of the said
parcels of land together with their improvements, including a rice mill and a piggery. The spouses undertook to deliver the titles
Civil Law; Obligations; Compensation, not a case of; For compensation to take place, both obligations must be certain and upon full payment.
liquidated; Mutual obligations of parties, not extinguished.—Petitioner contends that respondent judge gravely abused her
discretion in not declaring the mutual obligations of the parties extinguished to the extent of their respective amounts. He relies However, the post-dated checks issued by Ong for the installment payments were dishonored due to insufficiency of funds. To
on Article 1278 of the Civil Code to the effect that compensation shall take place when two persons, in their own right, are make the matters worse, Ong was not able to fully pay the loan of the spouses with BPI so the latter threatened to foreclose the
creditors and debtors of each other. The argument fails to consider Article 1279 of the Civil Code which provides that mortgage. Thus, the spouses were compelled to sell three transformers of the rice mill with Ong’s consent. Ong voluntarily
compensation can take place only if both obligations are liquidated. In the case at bar, the petitioner’s claim against the permitted the spouses to operate the rice mill.
respondent Luteros in Civil Case No. 12379 is still pending determination by the court. While it is not for Us to pass upon the
merits of the plaintiffs’ cause of action in that case, it appears that the claim asserted therein is disputed by the Luteros on both The spouses then demanded from Ong the return of the properties, after which they filed for rescission and recovery of properties
factual and legal grounds. More, the counterclaim interposed by them, if ultimately found to be meritorious, can defeat petitioner’s with damages. During the pending of the suit, petitioner Ong introduced improvements on the property which prompted the
demand. Upon this premise, his claim in that case cannot be categorized as liquidated credit which may properly be set-off spouses to file for an injunction. The trial court ruled in favor of the spouses, which was affirmed on appeal.
against his obligation. As this Court ruled in Mialhe vs. Halili, “compensation cannot take place where one’s claim against the
other is still the subject of court litigation. It is a requirement, for compensation to take place, that the amount involved be certain ISSUES:
and liquidated.” WON the contract entered into by the parties may be validly rescinded under Article 1191 of the New Civil Code; and

HELD:
SYCIP V. CA, 134 SCRA 317 A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is in the nature of a contract to sell, as
distinguished from a contract of sale. In a contract of sale, the title to the property passes to the vendee upon the delivery of
Obligations and Contracts; Criminal Law; Compensation cannot take place where, with respect to the money involved in the the thing sold; while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee
estafa case, the complainant was merely acting as agent of another. In set-off the two persons must in their own right be creditor until full payment of the purchase price. In a contract to sell, the payment of the purchase price is a positive suspensive
and debtor of each other.—In this third and fourth assigned errors, petitioner contends that respondent Court of Appeals erred condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the
in not applying the provisions on compensation or setting-off debts under Articles 1278 and 1279 of the New Civil Code, despite vendor to convey title from acquiring an obligatory force.
evidence showing that Jose K. Lapuz still owed him an amount of more than P5,000.00 and in not dismissing the appeal
considering that the latter is not legally the aggrieved party. This contention is untenable. Compensation cannot take place in The promise of the spouses to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price
this case since the evidence shows that Jose K. Lapuz is only an agent of Albert Smith and/or Dr. Dwight Dill. Compensation by the petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the condition of
takes place only when two persons in their own right are creditors and debtors of each other, and that each one of the obligors full payment rendered the contract to sell ineffective and without force and effect. It must be stressed that the breach
is bound principally and is at the same time a principal creditor of the other. Moreover, as correctly pointed out by the trial court, contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation. Failure to pay, in this
Lapuz did not consent to the off-setting of his obligation with petitioner’s obligation to pay for the 500 shares. instance, is not even a breach but merely an event which prevents the vendor's obligation to convey title from acquiring
binding force. Hence, the agreement of the parties in the case at bench may be set aside, but not because of a breach
on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about
CIA. MARITIMA V. CA, 135 SCRA 593 a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force.

Obligations; Compensation cannot take place where one of the debts is not liquidated as when there is a running interest still to
be paid thereon.—More, the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing useful PIONEER INSURANCE V. CA, 180 SCRA 126
expenses incurred by PAN-ORIENTAL, is also still unliquidated since interest does not stop accruing “until the expenses are COULDN’T FIND CASE.
fully paid.” Thus, we find without basis REPUBLlC’s allegation that PAN-ORIENTAL’s claim in the amount of P40,797.54 was
extinguished by compensation since the rentals payable by PAN-ORIENTAL amount to P59,500.00 while the expenses reach
only P40,797.54. Deducting the latter amount from the former, REPUBLIC claims that P 18, 702.46 would still be owing by PAN- SILAHIS MARKETING V. IAC, 180 SCRA 21
ORIENTAL to REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the
legal rate of interest “from February 3, 1951 until fully paid.” FACTS:
On various dates in October, November and December, 1975, Gregorio de Leon doing business under the name and style of
Mark Industrial Sales sold and delivered to Silahis Marketing Corporation various items of merchandise covered by several
INTERNATIONAL CORPORATE BANK V. IAC, 163 SCRA 296 invoices in the aggregate amount of P22,213.75 payable within thirty (30) days from date of the covering invoices.

Obligations and Contracts; Foreclosure of Mortgage; Requisites of Legal Compensation under Art. 1279 of Ciuil Code.— Allegedly due to Silahis' failure to pay its account upon maturity despite repeated demands, de Leon filed a complaint for the
Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as deficiency the amount of collection of the said accounts including accrued interest thereon in the amount of P661.03 and attorney's fees of P5,000.00
P6.81 million against which it has the right to apply or set off private respondent's money market claim ofPl,062,063.83. The plus costs of litigation.
argument is without merit. As correctly pointed out by the respondent Court of Appeals—"Compensation shall take place when
two persons, in their own right, are creditors and debtors of each other. (Art. 1278, Civil Code). 'When all the requisites mentioned The answer admitted the allegations of the complaint insofar as the invoices were concerned but presented as affirmative
in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge defenses; [a] a debit memo for P22,200.00 as unrealized profit for a supposed commission that Silahis should have received
of the debtors.' (Art. 1290, Civil Code). Article 1279 of the Civil Code requires among others, that in order that legal compensation from de Leon for the sale of sprockets in the amount of P111,000.00 made directly to Dole Philippines, Incorporated by the latter
shall take place, 'the two debts be due' and 'they be liquidated and demandable.' Compensation is not proper where the claim sometime in August 1975; and [b] Silahis' claim that it is entitled to return the stainless steel screen which was found defective
of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, by its client, Borden International, Davao City, and to have the corresponding amount cancelled from its account with de Leon.
disputed claim arising from breach of contract. (Compania General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo &
Martinez vs. Herrero, 17 Phil. 29). "There can be no doubt that petitioner is indebted to private respondent in the amount ISSUE:
ofPl,062,063.83 representing the proceeds of her money market investment. This is admitted. But whether private respondent Whether or not private respondent is liable to the petitioner for the commission or margin for the direct sale which the former
is indebted to petitioner in the amount of P6.81 million representing th$ deficiency balance after the foreclosure of the mortgage concluded and consummated with Dole Philippines, Incorporated without coursing the same through herein petitioner.
executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents legal compensation from taking
place." (CA Decision, Rollo, pp. 112-113). RULING:
It must be remembered that compensation takes place when two persons, in their own right, are creditors and debtors to each
Same; Same; Same; Requirement that debts ?nust be liquidated and demandable not yet been met since the validity ofthe other. Article 1279 of the Civil Code provides that: "In order that compensation may be proper, it is necessary: [1] that each one
extrajudicial foreclosure and petitioners claim for deficiency still in question.—It must be noted that Civil Case No. 83-19717 is of the obligors be bound principally, and that he be at the same time a principal creditor of the other; [2] that both debts consist
still pending consideration at the RTC Manila, for annulment of Sheriff s sale on extrajudicial foreclosure of private respondent's in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has
property from which the alleged deficiency arose. (Annex"AA", Rollo, pp. 181-189). Therefore, the validity of the extrajudicial been stated; [3] that the two debts be due; [4] that they be liquidated and demandable; [5] that over neither of them there be any
foreclosure sale and petitioner's claim for deficiency are still in question, so much so that it is evident, that the requirement of retention or controversy, commenced by third persons and communicated in due time to the debtor."
Article 1279 that the debts must be liquidated and demandable has not yet been met. For this reason, legal compensation cannot
take place under Article 1290 of the Civil Code. Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the amount of P22,213.75 as
contained in its answer. But whether private respondent is liable to pay the petitioner a 20% margin or commission on the subject
sale to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents legal compensation from taking place.
ONG V. CA, 177 SCRA 402
The Court agrees with respondent appellate court that there is no evidence on record from which it can be inferred that there
Facts: was any agreement between the petitioner and private respondent prohibiting the latter from selling directly to Dole Philippines,
Ong entered into an “Agreement of Purchase and Sale” with the Robles spouses concerning two parcels of land in San Antonio, Incorporated. Definitely, it cannot be asserted that the debit memo was a contract binding between the parties considering that
Quezon. The contract price was for P2M, where Ong, as buyer, will make an initial payment of 600,000 and the remaining the same, as correctly found by the appellate court, was not signed by private respondent nor was there any mention therein of
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
any commitment by the latter to pay any commission to the former involving the sale of sprockets to Dole Philippines, Inc. in the
amount of P111,000.00. On 17 March 1975, Sps. Suarez requested the Bank to convert their bonds from registered bonds to bearer bonds, in preparation
for their intended delivery or transfer to third parties. For this purpose, respondents were required to fill up three (3) sets of LBP
Indeed, such document can be taken as self-serving with no probative value absent a showing or at the very least an inference, Form No. 64· Request for Transfer/ Redenomination of Bonds. In each of said LBP forms, respondents themselves inserted the
that the party sought to be bound assented to its contents or showed conformity thereto. Thus the questioned decision of following notation·
respondent appellate court is hereby affirmed.
NOTE: It is understood that the interest from November 21, 1974 to March 17, 1975 shall accrue to the transferor.
Article 1285
This notation was typed in by a clerk of the Bank at the exclusive request of Sps. Suarez, and was done not in response to any
Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a question posed by the LBP Form 64 nor to fill in any blank line required by LBP Form 64 to be filled up. The LBP Forms 64 were
third person, cannot set up against the assignee the compensation which would pertain to him against processed and signed by the manager of Bank’s Cash Department, Mr. Bajada. Thereafter and upon the surrender by
the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he respondents of their registered bonds, 8 new bearer bonds with different denominations but of equivalent aggregate face value
reserved his right to the compensation. were issued by the Bank to the Spouses Suarez. The new bonds were covered by the same terms and conditions as the prior
registered bonds.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the cession, but not of subsequent ones. On 20 May 1975, the first interest payment date after the conversion, Sps. Suarez demanded from the Bank the payment of
P11,877.24 representing that part of the accrued interest on the three (3) registered bonds formerly held by them which
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all corresponded to the period from 21 November 1974 to 17 March 1975. The Bank declined to honor the demand when Sps
credits prior to the same and also later ones until he had knowledge of the assignment. (1198a) Suarez refused or failed to present the Bearer Bond Certificates as required by Land Bank Implementing Guidelines and
Procedures on The Processing Payment of Interest on LBP Bonds.

SESBRENO V. CA, 222 SCRA 466 On 10 November 1975, Sps Suarez filed a complaint with the then Manila CFI to compel payment by the Bank of the claimed
amount of
Extinguishment of Obligation; Compensation may defeat assignee’s rights before notice of the assignment is given to the interest on the registered bonds previously held by them.
debtor.—In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of
law because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are The RTC ruled for the spouses and ordered the Land Bank to pay the sum of P11,877.24 as accrued interest on the bonds from
not any greater than the rights of the assignor, since the assignee is merely substituted in the place of the assignor and that the 21 November 1974 to 17 March 1975 at six percent (6%) until fully paid plus P4,000.00 as attorney’s fees and to pay costs of
assignee acquires his rights subject to the equities—i.e., the defenses—which the debtor could have set up against the original suit.
assignor before notice of the assignment was given to the debtor. At the time that Delta was first put to notice of the assignment
in petitioner’s favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor On appeal, the Court of Appeals affirmed the decision of the trial court. The appellate court held that the Bank was bound by the
Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfmance, notation inserted by the respondents Suarez in the LBP Forms 64 because the Bank knew and in fact had approved the transfer
is similarly disabled from collecting from Delta the portion of the Note assigned to him. of the bonds to third persons. MR was denied.

Article 1290 Present Petition for Review was filed by the Bank to the SC.

Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes effect by The Bank argues that the unilateral notation made by the spouses on the LBP Form 64 does not bind it.
operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and
debtors are not aware of the compensation. (1202a)
 Respondent spouses Suarez contend that the Implementing Guidelines or Procedures of the Land Bank cannot prevail over
the notation they caused to be written into the LBP Forms 64; and that petitioner is estopped from disclaiming any liability for the
payment of the claimed interest, which liability it had implicitly accepted when it signed the LBP Forms 64 with knowledge of the
MINDANAO PORTLAND CEMENT V. CA, 120 SCRA 930 existence of the notation and without any objection on its part.

Civil Law; Obligations; Compensation; Automatic compensation, requisites of, present; Extinguishment of two debts arising from Spouses Suarez argue that novation had taken place in respect of their bonds when they had their registered bonds converted
final and executory judgments due to compensation by operation of law; Case at bar.—It is clear from the record that both into bearer bonds: their notation in the LBP Forms 64 novated the printed terms of the new bearer bonds and obligated Land
corporations, petitioner Mindanao Portland Cement Corporation (appellant) and respondent Pacweld Steel Corporation Bank to pay a portion of the November 21, 1974·May 20, 1975 interest not to the holder or bearer of such bonds (as required
(appellee), were creditors and debtors of each other, their debts to each other consisting in final and executory judgments of the by the terms thereof) but rather to the spouses Suarez.
Court of First Instance in two (2) separate cases, ordering the payment to each other of the sum of P10,000.00 by way of
attorney’s fees. The two (2) obligations, therefore, respectively offset each other, compensation having taken effect by operation ISSUE/S
of law and extinguished both debts to the concurrent amount of P10,000.00, pursuant to the provisions of Arts. 1278, 1279 and Whether or not novation had taken place.
1290 of the Civil Code, since all the requisites provided in Art. 1279 of the said Code for automatic compensation “even though
the creditors and debtors are not aware of the compensation” were duly present. HELD
NO. Petition for Review is hereby GRANTED and Land Bank is not liable to pay interest to the Spouses Suarez.
Article 1291
The printed terms of the new bearer bonds were not novated by the notation the spouses inserted in LBP Forms 64 and Land
Bank was not thereby bound or obligated to pay a portion of the November 21, 1974-May 20, 1975 interest to the spouses. None
Art. 1291. Obligations may be modified by:
of the requirements of novation either of the subject matter of the bond agreement or of (partial) subrogation of the creditor
(obligee) thereunder, is visible in the instant case. Of equal importance is the fact that the unilateral notation of the respondents
(1) Changing their object or principal conditions;

was not inserted in the new bearer bond certificates. The mischief implicit in the (assumed) suggestion of the spouses is plain
(2) Substituting the person of the debtor;

to see.
(3) Subrogating a third person in the rights of the creditor. (1203)
No consent from Land Bank or its agent, nor of the third party transferee of the new bonds, was obtained in the undertaking.
LAND BANK V. CA, 181 SCRA 610
The “new terms” were inserted by a unilateral notation done by the spouses on the LBP Forms 64. The notation apportioned the
DOCTRINE interest from November 21, 1974 to May 20, 1975 between the spouses (from November 21, 1974 to March 17, 1975 or
P11,877.24) and the third party transferees (from March 18, 1975 to May 20, 1975 or P6,822.96). This was done without the
A party cannot unilaterally novate the printed terms of a bond agreement by placing a notation on the application form for its
consent of either Land Bank or the unknown third party transferee.
issuance, without showing proof that there has been either novation in the subject matter of the bond agreement or (partial)
subrogation of the creditor (obligee).
Secondly, petitioner Land Bank did not really reject the demand absolutely and unconditionally. What the Land Bank required
FACTS respondent spouses to do on May 20, 1975 was to produce the relevant bond certificates, then already in bearer form.
Spouses Suarez were former owners of agricultural lands that was subjected to the Operation Land Transfer (OLT) under
Thirdly, the was no negligence on the part of Land Bank’s agent in approving the LBP Form 64 and failing to cross out the
Presidential Decrees Nos. 2 and 127. As part of the financing support for OLT, Land Bank of the Philippines (”Bank”) issued 3
notation made by the spouses Suarez as it was an undertaking done by the spouses and not by the Bank. Further, the defense
Land Bank Interim Bond Certificates registered in the name of Sps. Suarez as partial payment for their agricultural lands (Serial
of estoppel due to the allegedly negligent acts of Land Bank Manager Bajada cannot be raised by the spouses thus against the
Nos. A-02918-F for the amount of P241,160.00; A-02915-F for P309,440.00; and A- 03058-F for P72,740.00) with a maturity of
government. In view of the critical role of petitioner Land Bank, in the government’s Operation Land Transfer and its program of
25 years from date of issue and bear interest at the rate of 6% per annum, tax-free and payable semi- annually on May 20 and
land reform generally, the Land Bank was exercising functions indubitably governmental in nature and accordingly must be
November 20 of each year.
deemed part of the government so far as concern the application of the rule that the government is not estopped by the
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE 2014A
negligence of its officers or agents. 
 the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to
the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or
Any negligence, emphasized the SC, must be laid at the door of the spouses Suarez for their formulation of the notation. If that principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of
notation had been formulated with the specificity and clarity necessary to convey the meaning they now pretend it had, this the creditor (subjective or personal). Under this mode, novation would have dual functions—one to extinguish an existing
prolonged litigation would in all probability have been avoided. Of course, if the notation had clearly and specifically stated that obligation, the other to substitute a new one in its place—requiring a conflux of four essential requisites: (1) a previous valid
the Land Bank was being instructed and required to withhold from the holder of new bearer bonds a certain portion of the interest obligation; (2) an agreement of all parties con cerned to a new contract; (3) the extinguishment of the old obligation; and (4) the
that on May 20, 1975 the Land Bank was explicitly bound under the terms of the new bonds to pay to such holder, and to pay birth of a valid new obligation.
such interest to the respondents Suarez instead, Mr. Bajada would, in all probability too, have expressly rejected such instruction
and manually cancelled the notation. Same; Same; Same; Novation is never presumed.—Novation is never presumed, and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.
Moreover, the Land Bank Regulations or Implementing Guidelines or Procedures on The Processing/Payment of Interest on
LBP Bonds promulgated pursuant to an express statutory grant of authority to the Land Bank, are binding not only upon officers Same; Same; Same; Extinguishment of the old obligation by the new one is a necessary element of novation which may be
and employees of the Land Bank but also upon holders or owners of Lank Bank bonds and other members of the general public effected either expressly or impliedly.—The extinguishment of the old obligation by the new one is a necessary element of
who have to deal with the Land Bank in respect of its bonds. They cannot be modified, nor exemption therefrom demanded, by novation which may be effected either expressly or impliedly. The term “expressly” means that the contracting parties
a bond holder, and certainly not by a prior bond holder, without the consent of the Land Bank. incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon the other hand, no
specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between the two
The spouses Suarez proper remedy was to file an action against the first bearer to whom respondents delivered the bonds to contracts. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring
enforce their presumed agreement concerning the allocation as between them of the interest pertaining to the period from about novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new
November 21, 1974 to May 20, 1975, and not to insist that the Bank be doubly liable for interest to both spouses Suarez and the obligations.
third party bearer of the notes.
Same; Same; Same; Two ways which could indicate the presence of novation; Test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence.—There are two ways which could indicate, in fine,
REYES V. CA, 264 SCRA 35 the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same.
The first is when novation has been explicitly stated and declared in unequivocal terms. The second is when the old and the new
Obligations; Novation; Requisites.—Admittedly, in order that a novation can take place, the concurrence of the following obligations are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together,
requisites is indispensable: 1. there must be a previous valid obligation; 2. there must be an agreement of the parties concerned each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first.
to a new contract; 3. there must be the extinguishment of the old contract; and 4. there must be the validity of the new contract. Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must
take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise,
Same; Same; Same; The absence of a new contract extinguishing the old one destroys any possibility of novation by the change would be merely modificatory in nature and insufficient to extinguish the original obligation.
conventional subrogation.—Upon the facts shown in the record, there is no doubt that the last three essential requisites of
novation are wanting in the instant case. No new agreement for substitution of creditor was forged among the parties concerned Same; Same; Same; There are two forms of novation by substituting the person of the debtor, depending on whose initiative it
which would take the place of the preceding contract. The absence of a new contract extinguishing the old one destroys any comes from, to wit: expromision and delegacion.—There are two forms of novation by substituting the person of the debtor,
possibility of novation by conventional subrogation. depending on whose initiative it comes from, to wit: expromision and delegacion. In the former, the initiative for the change does
not come from the debtor and may even be made without his knowledge. Since a third person would substitute for the original
Same; Same; Same; Novation by substitution of creditor requires an agreement among the three parties concerned—the original debtor and assume the obligation, his consent and that of the creditor would be required. In the latter, the debtor offers, and the
creditor, the debtor and the new creditor.—In concluding that a novation took place, the respondent court relied on the two letters creditor accepts, a third person who consents to the substitution and assumes the obligation, thereby releasing the original
dated March 19, 1991, which, according to it, formalized petitioner’s and respondent Eleazar’s agreement that BERMIC would debtor from the obligation; here, the intervention and the consent of all parties thereto would perforce be necessary. In either of
directly settle its obligation with the real owners of the funds—the AFP-MBAI and DECS-IMC. Be that as it may, a cursory reading these two modes of substitution, the consent of the creditor, such as can be seen, is an indispensable requirement.
of these letters, however, clearly and unmistakably shows that there was nothing therein that would evince that respondent AFP-
MBAI agreed to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of loan. It is evident that
the two letters merely gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS- FOUNDATION SPECIALISTS V. BETONVAL, 596 SCRA 697 [2009]
IMC. It is essentially an agreement between petitioner and respondent Eleazar only. There was no mention whatsoever of AFP-
MBAI’s consent to the new agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAI’s Facts:
intention to be the substitute creditor in the loan contract. Well settled is the rule that novation by substitution of creditor requires FSI (buyer) and Betonval (seller) entered into a contract of sale of cement. The provisions of the contract state that:
an agreement among the three parties concerned—the original creditor, the debtor and the new creditor. It is a new contractual (a) for FSI to supply the cement to be made into ready mixed concrete;
relation based on the mutual agreement among all the necessary parties. Hence, there is no novation if no new contract was (b) for FSI to pay Betonval within seven days after presentation of the invoices plus 30% interest p.a. in case of
executed by the parties. overdue payments and
(c) a credit limit of P600,000 for FSI.
Same; Same; Same; Novation is never presumed—there must be an express intention to novate.—The fact that respondent
Eleazar made payments to AFP-MBAI and the latter accepted them does not ipso facto result in novation. There must be an FSI failed to pay on time since it was having financial difficulties. As an accommodation to FSI, Betonval extended the seven
express intention to novate—animus novandi. Novation is never presumed. Article 1300 of the Civil Code provides inter alia that day credit period to 45 days. After a while, Betonval demanded again (P2,349,460) and informed FSI that further defaults would
conventional subrogation must be clearly established in order that it may take effect. leave it no other choice but to impose the stipulated interest for late payments and take appropriate legal action to protect its
interest. FSI in turn replied that it was still verifying the correctness of Betonval’s claims but nevertheless sent Betonval a
Obligations; Novation; It is a rule that novation by substitution of debtor must always be made with the consent of the creditor.— proposed schedule of payments devised with a liability for late payments fixed at 24% p.a. FSI eventually paid P1,114,203.34,
This contention is bereft of any legal and factual basis. Just like in the first questioned resolution, no novation took place in this which is the principal amount without interest.
case. A thorough examination of the records shows that no hard evidence was presented which would expressly and
unequivocably demonstrate the intention of respondent AFP-MBAI to release petitioner from her obligation to pay under the Betoval filed case in RTC + attached properties of FSI. Betonval won, but FSI was awarded damages because of the wrongful
contract of sale of securities. It is a rule that novation by substitution of debtor must always be made with the consent of the attachment of their properties. Thus Betonval and FSI appealed (but FSI didn’t pay docket fees so their appeal was dismissed).
creditor. CA ruled that FSI should pay Betonval the value of unpaid ready mixed concrete at 24% p.a. with the aggregate sum to further
earn an annual interest rate of 12% from the finality of this decision, until full payment. FSI appealed to SC.
Same; Same; The mere circumstance of the creditor receiving payments from a third party who acquiesced to assume the
obligation of the debtor when there is clearly no agreement to release the debtor from her responsibility does not constitute FSI is claiming that since Betonval gave them a 45 day credit extension, and only claimed 24% interest when they filed the case
novation—at most, it only creates a juridical relation of co-debtorship or suretyship on the part of the third party to the contractual in court, the provisions of the contract were waived. Therefore, the interest should only be 6% because their contract stipulated
obligation of the debtor, and the creditor can still enforce the obligation against the debtor.—The consent of the creditor to a no interest since it was novated (extinctive novation).
novation by change of debtor is as indispensable as the creditor’s consent in conventional subrogation in order that a novati on
shall legally take place. The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to Issue:
assume the obligation of petitioner under the contract of sale of securities, when there is clearly no agreement to release W/N contract was novated such that interest is now 24% p.a. instead of 30% as stipulated
petitioner from her responsibility, does not constitute novation, at most, it only creates a juridical relation of co-debtorship or
suretyship on the part of respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and the latter can still enforce Held:
the obligation against the petitioner. Rate should be 24%

Ratio:
QUINTO V. PEOPLE, 305 SCRA 708 Novation is one of the modes of extinguishing an obligation. It is done by the substitution or change of the obligation by a
subsequent one which extinguishes the first, either by changing the object or principal conditions, or by substituting the person
Civil Law; Contracts; Novation; Novation may be extinctive or modificatory; Essential requisites for extinctive novation to exist.— of the debtor, or by subrogating a third person in the rights of the creditor. Novation may either be
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by 1. Extinctive novation
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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 never presumed; agreement simply gave the plaintiff a method and more time for the satisfaction of said judgment. It did not
 there must be an express intention to novate; extinguish the obligations contained in the judgment, until the terms of said contract had been fully complied
 has the twin effects of, with. Had the plaintiff continued to comply with the conditions of said contract, he might have successfully
o first, extinguishing an existing obligation and, invoked its provisions against the issuance of an execution upon said judgment. The contract and the punctual
o second, creating a new one in its stead. compliance with its terms only delayed the right of the defendant to an execution upon the judgment. The
• presupposes a confluence of four essential requisites: judgment was not satisfied and the obligations existing thereunder still subsisted until the terms of the
(1) a previous valid obligation, agreement had been fully complied with. The plaintiff was bound to perform the conditions mentioned in said
(2) an agreement of all parties concerned to a new contract, contract punctually and fully, in default of which the defendant was remitted to the original rights under his
(3) the extinguishment of the old obligation, and judgment. (pp. 159-160.)
(4) the birth of a valid new obligation.
2. Modificatory I see no reason why this decision cannot be made to control in the instant case. Here, as in the Zapanta case, there was an
• the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in agreement providing for the manner of payment of the obligation under the judgment. In both cases plaintiff has by express
interest rates or an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing stipulation, the option to enter an independent suit against defendant should the latter fail to comply with the terms of the
the first but would merely supplement it or supplant some but not all of its provisions.) settlement. If, in the Zapante case plaintiff alternative right to execute the judgment has been upheld. I perceive no cogent reason
why plaintiff in the instant case would be denied a like option to merely execute the judgment and be compelled, instead, to enter
Implied novation an independent suit on the terms of the settlement The spirit of the new Rules which frowns upon multiplicity of suits lends
• the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration additional argument against the majority view.
for the emergence of the new one.
• necessitates that the incompatibility between the old and new obligation be total on every point such that the old The majority maintains that here there is an implied novation by "reason of incompatibility resulting from the fact that, whereas
obligation is completely superseded by the new one. the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new obligation
• The test of incompatibility is whether they can stand together, each one having an independent existence; if they is for P1,200 payable in installments, stipulates for attorney's fees, and is secured by a mortgage." With respect to the amount,
cannot and are irreconcilable, the subsequent obligation would also extinguish the first. it should be noted that, "while the obligation under the judgment was reduced to P1,200, there was, however, a stipulation to the
effect that the discount would be recoverable in the event of appellants' default to comply with the terms of the agreement. And
The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms as to attorney's fees and the security by way of mortgage, the stipulation therefor contained in the agreement is of no moment,
of payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old one. for it is merely incidental to, and anticipatory of, a suit which appellee may choose to take against appellants. Far, therefore,
from extinguishing the obligation under the judgment, the agreement ratifies it and provides merely a new method and more time
The extension of the 45 day credit did not novate the obligation to extinguish it because for the judgment debtor to satisfy it. If the judgment debtor fail to comply with the terms of the agreement, the judgment creditor
a. 1. it wasn’t incompatible with the 30% provision shall be deemed remitted to his original rights under the judgment which he may choose to execute or enter, instead, a separate
b. 2. there was no intention to supersede the contract suit on the terms of the settlement. This is the ratio decidendi in the Zapanta case; this is the ratio decidendi here.

45 day extension was precisely to revive the application of the contract since it expired without the obligation having been fulfilled.
MILLAR V. CA, 38 SCRA 642
Besides, there was no waiver. A waiver is a voluntary and intentional relinquishment or abandonment of a known legal right or
privilege. A waiver must be couched in clear and unequivocal terms which leave no doubt as to the intention of a party to give Facts:
up a right or benefit which legally pertains to him. Eusebio Millar obtained a favorable judgment from the CFI in a collection case against Antonio Gabriel. After the remand of the
CA of the case, the petitioner moved ex parte for the execution of the judgment. The respondent, however, pleaded with the
Nonetheless, the interest should be 24%.Betonval sent FSI a statement of account with 24% interest + this was impliedly petitioner to release the jeep under an arrangement whereby the respondent, to secure the payment of the judgment debt,
accepted by FSI when it sent a proposed schedule of payments with the same 24% interest. FSI is thus estopped from claiming agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties, on February
that there was NO interest. (So in effect what happened was merely a modificatory novation, not an extinctive novation.) 22, 1957, executed a chattel mortgage on the jeep. It was stipulated that upon failure to pay the first instalment, a writ of execution
*12% interest after finality of decision is correct = it is treated as a forbearance of credit. would be obtained against respondent Gabriel.

Article 1292 For failure to pay, the sheriff levied on the properties of respondent. However, Gabriel filed a motion to suspend the execution
sale on the ground that there is payment of the judgment obligation. The lower court ruled that novation had taken place, and
Art. 1292. In order that an obligation may be extinguished by another which substitute the same, it is that the parties had executed the chattel mortgage only "to secure or get better security for the judgment.
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other. (1204) The appellate court stated that there are circumstances that sufficiently demonstrate the incompatibility between the judgment
debt and the obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied novation.

FUA V. YAP, 74:287 Issue:


WON the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the judgment
We concur in the theory that appellants liability under the judgment in civil case No. 42125 had been extinguished by the obligation in the case? NO
settlement evidenced by the mortgage executed by them in favor of the appellee on December 16, 1933. Although said mortgage
did not expressly cancel the old obligation, this was impliedly novated by reason of incompatibly resulting from the fact that, Ratio:
whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor alterations or slight
obligation is or P1,200 payable in installments, stipulated for attorney's fees, and is secured by a mortgage. The appellee, modifications with respect to the cause or object or conditions of he latter, such changes do not effectuate any substantial
however, argues that the later agreement merely extended the time of payment and did not take away his concurrent right to incompatibility between the two obligations Only those essential and principal changes introduced by the new obligation
have the judgment executed. This court not have been the purpose for executive the mortgage, because it was therein recited producing an alteration or modification of the essence of the old obligation result in implied novation. In the case at bar, the mere
that the appellants promised to pay P1,200 to the appellee as a settlement of the judgment in civil case No. 42125 (en forma de reduction of the amount due in no sense constitutes a sufficient indictum of incompatibility, especially in the light of (a) the
transaccion de la decision . . . en el asunto civil No. 42125). Said judgment cannot be said to have been settled, unless it was explanation by the petitioner that the reduced indebtedness was the result of the partial payments made by the respondent
extinguished. before the execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon.
At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the petitioner by virtue of the
Upon the issue of whether the agreement extinguished the judgment and plaintiff's right to an execution thereunder, this Court judgment in civil case 27116. The parties apparently in their desire to avoid any future confusion as to the amounts already paid
held: and as to the sum still due, decoded to state with specificity in the deed of chattel mortgage only the balance of the judgment
debt properly collectible from the respondent. All told, therefore, the first circumstance fails to satisfy the test of substantial and
A final judgment is one of the most solemn obligations incurred by parties known to law. The Civil Code, in complete incompatibility between the judgment debt an the pecuniary liability of the respondent under the chattel mortgage
article 1156, provides the method by which all civil obligations may be extinguished. One of the methods agreement.
recognized by said code for the extinguishment of obligations is that by novation. (Civil Code, arts. 1156, 1203,
1213.) In order, however, that an obligation shall be extinguished by another obligation (novation) which We see no substantial incompatibility between the mortgage obligation and the judgment liability of the respondent sufficient to
substitutes it, the law requires that the novation or extinguishment shall be expressly declared or that the old justify a conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the deed of chattel
and the new obligations shall be absolutely incompatible. (Civil Code, art. 1204.) In the present case, the mortgage serves only to provide an express and specific method for its extinguishment - payment in two equal installments. The
contract referred to does not expressly extinguish the obligations existing in said judgment. Upon the contrary, chattel mortgage simply gave the respondent a method and more time to enable him to fully satisfy the judgment indebtedness.
it expressly recognizes the obligation existing between the parties in said judgment and expressly provides a The chattel mortgage agreement in no manner introduced any substantial modification or alteration of the judgment. Instead of
method by which the same shall be extinguished which method is, as is expressly indicated in said contract, by extinguishing the obligation of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified and
monthly payments. The contract, instead of containing provisions "absolutely incompatible" with the obligations confirmed the existence of the same, amplifying only the mode and period for compliance by the respondent.
of the judgment, expressly ratifies such obligations and contains provisions for satisfying them. The said

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. 2 the old one. Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of
The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the
together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no emergence of the new one must be clearly discernible.
incompatibility results and novation does not take place.
We do not see any substantial incompatibility between the two obligations as to warrant a finding of an implied novation. Nor do Same; Same; Same; If old debtor is not released, no novation occurs and the third person who assumed the obligation becomes
we find satisfactory proof showing that the parties, by explicit terms, intended the full discharge of the respondent's liability under a codebtor or surety or a co-surety.—Again, if subjective novation by a change in the person of the debtor is to occur, it is not
the judgment by the obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding of express enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the
novation. old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor
is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-
debtor or surety or a co-surety.
SANDICO V. PIGUING, 42 SCRA 322
Same; Same; Same; Novation is not implied when the parties to the new obligation expressly negated the lapsing of the old
Judgments; Interpretation of parties as embodied in a subsequent agreement.—–No doubt exists that the parties entered into obligation.—Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of
the agreement, fully aware of the judgment of the appellate court ordering the respondent to comply with two obligations, to wit, extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and
payment of a sum of money and recognition of the easement. The receipt evidencing the agreement, aside from providing for nothing else) would sustain a finding of novation by implication. But where, as in this case, the parties to the new obligati on
the reduction of the money judgment, provides for the reconstruction of the irrigation canal. Such constitutes the interpretation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated
accorded by the parties to that part of the dispositive portion of the appellate court’s judgment condemning the respondent to the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all.
recognize the easement. This stipulation—– one wherein the respondent clearly recognizes his obligation “to reconstruct the
irrigation canal”—– embodied in precise and clear terms in the receipt binds the said respondent, a signatory to the said receipt, Same; Same; Same; Article 2079 of the Civil Code, not applicable; Case at bar.—The Indemnity Agreement speaks of the
and requires from him full compliance. several indemnitors “apply[ing] jointly and severally (in solidum) to the [R & B Surety]—to become SURETY upon a SURETY
BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions
Same; Reduction of money judgment by subsequent agreement of parties; Effect of.—We adjudge the respondent’s judgment set forth in said SURETY BOND—”. This part of the Agreement suggests that the indemnitors (including the petitioners) would
debt as having been fully satisfied. We see no valid objection to the petitioners and the respondent entering into an agreement become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-
regarding the monetary obligation of the latter under the judgment of the Court of Appeals, reducing the same from P6,000 to indemnitors ever in fact became cosureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes,
P4,000. The payment by the respondent of the lesser amount of P4.000, accepted by the petitioners without any protest or remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment
objection and acknowledged by them as “in full satisfaction of the money judgment” in civil case 1554, completely extinguished of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code—which provides in part
the judgment debt and released the respondent from his pecuniary responsibility. that “[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty”—could
apply in the instant case. The petitioner-indemnitors are, as it were, secondtier parties so far as the PNB was concerned and
Same; Contempt of court for failure to execute judgment; Section 9, Rule 39 of the Rules of Court in connection with Section 10 any extension of time granted by PNB to any of the first-tier obligors (PAGRICO, R & B Surety and the trustor[s]) could not
of the same Rule.—–Section 9 refers to a judgment directing the performance of a specific act which the said judgment requires prejudice the second-tier parties.
the party or person to personally do because of his personal qualifications and circumstances. Section 10 refers to a judgment
requiring the execution of a conveyance of land or the delivery of deeds or other documents or the performance of any other Same; Same; Same; Same; Theory behind Art 2079 is that an extension of time given to the principal debtor by the creditor
specific act susceptible of execution by some other person or in some other way provided by law with the same effect. Under without the surety’s consent would deprive the latter of his right to pay the creditor and to be immediately subrogated to the
section 10, the court may designate some other person todo the act ordained to be done by the judgment, the reasonable cost creditor’s remedies against the principal debtor upon original maturity.—The theory behind Article 2079 is that an extension of
of its performance chargeable to the disobedient party. The act, when so done, shall have the same effect as if performed by time given to the principal debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the
the party himself. In such an instance, the dis-obedient party incurs no liability for contempt. Under section 9, the court may creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the original maturity date.
resort to proceedings for contempt in order to enforce obedience to a judgment which requires the personal performance of a The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming
specific act other than the payment of money, or the sale or delivery of real or personal property. insolvent during the extended period. The underlying rationale is not present in the instant case.

Civil law; Obligations and contracts; Novation.—Novation results in two stipulations—one to extinguish an existing obligation, Same; Same; Same; Indemnity clauses held enforceable and not against any public policy.—The last issue can be disposed of
the other to substitute a new one in its place. Fundamental it is that novation effects a substitution or modification of an obligation quickly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover from petitioners even
by another or an extinguishment of one obligation by the creation of another. Additionally, to sustain novation necessitates that before R & B Surety shall have paid the PNB. We have previously held similar indemnity clauses to be enforceable and not
the same be so declared in unequivocal terms—– clearly and unmistakably shown by the express agreement of the parties or violative of any public policy. The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification
by acts of equivalent import—– or that there is complete and substantial incompatibility between the two obligations. not only against actual loss but against liability as well. While in a contract of indemnity against loss an indemnitor will not be
liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this
Remedial law; Writ of execution; Grounds for the quashal of the writ of execution.—Courtshave jurisdiction to entertain motions case, the indemnitor’s liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether
to quash previously issued writs of execution because courts have the inherent power, for the advancement of justice, to correct or not he has suffered actual loss. Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial
the errors of their ministerial officers and to control their own processes. However, this power, well circumscribed, to quash the payments already made but for the full amount owed by PAGRICO to the PNB.
writ, may be exercised only in certain situations, as when it appears that (a) the writ has been improvidently issued, or (b) the
writ is defective in substance, or (c) the writ has been issued against the wrong party, or (d) the judgment debt has been paid or
otherwise satisfied, or (e) the writ has been issued without authority, or (f) there has been a change in the situation of the parties BALILA V. IAC, 155 SCRA 262
which renders such execution inequitable, or (g) the controversy has never been submitted to the judgment of the court, and,
therefore, no judgment at all has ever been rendered thereon. Civil Law; Mortgage; Consolidation of Ownership; Subsequent mutual agreements and actions of petitioners and private
respondents allowing the former extension of time to pay their obligation and in installment novated and amended the period of
payment decreed by the trial court in its judgment by compromise.—The fact therefore remains that the amount of P84,000.00
NPC V. DAYRIT, 125 SCRA 849 payable on or before May 15, 1981 decreed by the trial court in its judgment by compromise was novated and amended by the
subsequent mutual agreements and actions of petitioners and private respondents. Petitioners paid the aforestated amount on
Civil Law; Novation; Novation is never presumed but must be explicitly stated; No novation in the absence of explicit novation or an installment basis and they were given by private respondents no less than eight extensions of time to pay their obligation.
incompatibility on every point between the old and the new agreements of the parties; Case at bar.—It is elementary that novation These transactions took place during the pendency of the motion for reconsideration of the Order of the trial court dated April
is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations 26, 1983 in Civil Case No. U-3501, during the pendency of the petition for certiorari in AC-G.R. SP 01307 before the Intermediate
in every aspect. x x x In the case at bar there is nothing in the May 14, 1982, agreement which supports the petitioner’s contention. Appellate Court and after the filing of the petition before Us. This answers the claim of the respondents on the failure of the
There is neither explicit novation nor incompatibility on every point between the “old” and the “new” agreements. petitioners to present evidences ot proofs of payment in the lower court and the appellate court.

COCHINGYAN V. R&B SURETY, 151 SCRA 339 PEOPLE’S BANK V. SYVEL’S, 164 SCRA 247

Civil Law; Obligations and Contracts; Novation defined.—Novation is the extinguishment of an obligation by the substitution or Civil Law; Obligations; Novation; When does novation take place; Novation is never presumed.—Novation takes place when the
change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by object or principal condition of an obligation is changed or altered. It is elementary that novation is never presumed; it must be
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Novation through explicitly stated or there must be manifest incompatibility between the old and the new obligations in every aspect (Goni v. CA,
a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by 144 SCRA 223 [1986]; National Power Corp. v. Dayrit, 125 SCRA 849 [1983]).
the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may
also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is Same; Same; Same; Absence of existence of an explicit novation nor incompatibility between the old and the new agreements.—
achieved—an obligation is extinguished and a new one is created in lieu thereof. In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants’ submission. The contract on its face
does not show the existence of an explicit novation nor incompatibility on every point between the “old” and the “new agreements
Same; Same; Same; Novation is never presumed.—If objective novation is to take place, it is imperative that the new obligation as the second contract evidently indicates that the same was executed as new additional security to the chattel mortgage
expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with previously entered into by the parties.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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Same; Same; Same; Novation was not intended in the case at bar as the real estate mortgage was taken as additional security the amount mentioned in the mortgage, but where on the four corners of the mortgage contracts, as in this case, the intent of
for the performance of the contract.—It is clear, therefore, that a novation was not intended. The real estate mortgage was the contracting parties is manifest that the mortgaged property shall also answer for future loans or advancements then the same
evidently taken as additional security for the performance of the contract (Bank of P.I. v. Herrige, 47 Phil. 57). is not improper as it is valid and binding between the parties. For merely consolidating and expediently making current the three
previous loans, the loan of P1.0 million under PN BDS No. 3605, secured by the real estate property, was correctly included in
the foreclosure’s bid price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583, however, was found
BROADWAY CENTRUM V. TROPICAL HUT, 224 SCRA 302 to be improper by public respondent which ruling we shall not disturb for Metrobank’s failure to appeal therefrom. Nonetheless,
the inclusion of PN BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As correctly pointed out by the
Civil Law; Contracts; Novation; Novation is the extinguishment of an obligation by the substitution of that obligation with a Court of Appeals, the proceeds of the auction sale should be applied to the obligation pertaining to PN BDS No. 3605 only, plus
subsequent one which terminates it.—We start with the basic conception that novation is the extinguishment of an obligation by interests, expenses and other charges accruing thereto. It is Metrobank’s duty as mortgagee to return the surplus in the selling
the substitution of that obligation with a subsequent one, which terminates it, either by changing its object or principal conditions price to the mortgagors.
or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Novation
through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation.
Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. CRUZ V. CA, 293 SCRA 239
Novation may also be objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual
purpose is achieved—an obligation is extinguished and a new one is created in lieu thereof. Doctrine:
Contracts constitute the law between the parties. They must be read together and interpreted in an manner that reconciles and
Same; Same; Same; If objective novation is to take place, it is essential that the new obligation expressly declare that the old gives life to all of them. The intent of the parties, as shown by the clear language used, prevails over post facto explanations
obligation is to be extinguished or that new obligation be on every point incompatible with the old one.—If objective novation is that find no support from the words employed by the parties of from their contemporary and subsequent acts showing their
to take place, it is essential that the new obligation expressly declare that the old obligation is to be extinguished, or that new understanding of such contracts. Furthermore, a subsequent agreement cannot novate or change by implication a previous one,
obligation be on every point incompatible with the old one. Novation is never presumed; it must be established either by the unless old and new contracts are, on every point, incompatible with each other. Finally, collateral facts may be admitted in
discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve evidence when a rational similarity exists between the conditions giving rise to the fact offered and the circumstances surrounding
the old obligation as a consideration of the emergence of the new one must be clearly manifested. It is hardly necessary to add the issue or fact to be proved.
that the rule that novation is never presumed, is not avoided by merely referring to partial novation. The will to novate, whether
totally or partially, must appear by express agreement of the parties, by their acts which are too clear and unequivocal to be Facts:
mistaken. A notarized deed of partial partition and a memorandum of agreement were executed by the Cruz children and their mother on
lands in Taytay. The MOA states that “despite the execution of this Deed of Partial Partition and the eventual disposal or sale of
Same; Same; Same; The letter-agreement of 20 April 1982 did not constitute a novation whether partial or total of the 28 their respective shares, the contracting parties herein covenanted and agreed among themselves and by these presents do
November 1980 Contract of Lease between Broadway and Tropical.—We conclude that the Court of Appeals fell into reversible hereby bind themselves to one another that they shall share alike and received equal shares from the proceeds of the sale of
error when it affirmed the decision of the trial court. We believe and so hold that the letter-agreement of 20 April 1982 did not any lot or lots allotted to and adjudicated in their individual names by virtue of this deed of partial partition; That this Agreement
constitute a novation, whether partial or total, of the 28 November 1980 Contract of Lease between Broadway and Tropical. shall continue to be valid and enforceable among the contracting parties herein up to and until the last lot covered by the Deed
of [