BENOS V.

LAWILAO
G.R. NO. 172259
DECEMBER 5, 2006

FACTS:
On February 11, 1999, petitioner-spouses Benos and respondent Lawilao executed a Pacto
de Retro Sale where Benos sold their lot and the building erected thereon for P300,000, one-half
of which to be paid in cash to the Benos and the other half to be paid to the bank to pay off the
loans of the Benos which was secured by the same lot and building. Under the contract, Benos
could redeem the property within 18 months from the date of execution by returning the contract
price, otherwise, the sale would become irrevocable. After paying the P150,000, Lawilao took
possession of the property, restructured it twicw, eventually the loan become due and demandable.
On August 14, 2000, a son of Benos and Lawilao paid the bankl but the bank refused. Lawilao
filed for consignation against the bank and deposited the amount of P159,000.00. RTC declared
Lawilao of the ownership of the subject property, which was affirmed by the Court of Appeals.

ISSUE:
Whether or not the contract of Pacto de Retro Sale may be rescinded by the petitioner.

RULING:
In the instant case, records show that Lawilao filed the petition for consignation against the
bank in Civil Case without notifying the Benos. Hence, Lawilao failed to prove their offer to pay
the balance, even before the filing of the consignation case. Lawilao never notified the Benos.
Thus, as far as the Benos are concerned, there was no full and complete payment of the contract
price which gives them the right to rescind.
Petition is granted. Court of Appeals decision is reversed and set aside, that the Pacto de Retro
Sale is rescinded and petitioner are ordered to return the amount of P150,000 to respondents.
 PEOPLE'S INDUSTRIAL AND COMMERCIAL CORPORATION
VS. COURT OF APPEALS AND MAR-ICK INVESTMENT CORPORATION
G.R. NO. 112733
OCTOBER 24, 1997

FACTS:
Private respondent Mar-ick Investment Corporation is the exclusive and registered owner
of Mar-ick Subdivision in Barrio Buli, Cainta, Rizal. On May 29, 1961, private respondent entered
into six agreements with petitioner People's Industrial and Commercial Corporation sell to
petitioner six subdivision lots. Five of the agreements, involving similarly stipulate that the
petitioner agreed to pay private respondent for each lot, the amount of P7,333.20 with a down
payment of P480.00. The balance of P6,853.20 shall be payable in 120 equal monthly installments
of P57.11 every 30th of the month, for a period of ten years. With respect to Lot No. 8, the parties
agreed to the purchase price of P7,730.00 with a down payment of P506.00 and equal monthly
installments of P60.20.

After ten years, however, petitioner still had not fully paid for the six lots; it had paid only
the down payment and eight installments, even after private respondent had given petitioner a
grace period of four months to pay the arrears. As of May 1, 1980, the total amount due to private
respondent under the contract was P214,418.00.

In his letter of March 30, 1980 to Mr. Tomas Siatianum, who signed the agreements for
petitioner, private respondent's counsel protested petitioner's encroachment upon a portion of its
subdivision. It added that petitioner had failed to abide by its promise to remove the encroachment,
or to purchase the lots involved "at the current price or pay the rentals on the basis of the total area
occupied, all within a short period of time." It also demanded the removal of the illegal
constructions on the property that had prejudiced the subdivision and its neighbors.

After a series of negotiations between the parties, they agreed to enter into a new contract
to sell 8 involving seven lots. The contract stipulates that the previous contracts involving the
same lots "have been cancelled due to the failure of the purchaser to pay the stipulated
installments." It states further that the new contract was entered into "to avoid litigation,
considering that the purchaser has already made use of the premises since 1981 to the present
without paying the stipulated installments." The parties agreed that the contract price would be
P423,250.00 with a down payment of P42,325.00 payable upon the signing of the contract and the
balance of P380,925.00 payable in forty-eight equal monthly amortization payments of P7,935.94.
The new contract bears the date of October 11, 1983 but neither of the parties signed it. Thereafter,
Tomas Siatianum issued the checks in the total amount of P37,642.72 to private respondent.

Private respondent received but did not encash those checks. Instead filed in the trial court
a complaint for accion publiciana de posesion against petitioner and Tomas Siatianum, as president
and majority stockholder of petitioner.

The lower court rendered a decision finding that the original agreements of the parties were
validly cancelled in accordance with provision No. 9 of each agreement. The parties did not enter
into a new they did not sign the draft contract. Receipt by private respondent of the five checks
could not amount to perfection of the contract because private respondent never encashed and
benefited from those checks, they represented the deposit under the new contract because
petitioner failed to prove that those were monthly installments that private respondent refused to
accept. Thus, the fact that the parties tried to negotiate a new Contract indicated that they
considered the first contract as "already cancelled." This decision was affirmed by the Court of
Appeals.

ISSUE:
Whether there was a tender of payment and consignation in the case.
RULING:
The parties' failure to agree on a fundamental provision of the contract was aggravated by
petitioner's failure to deposit the installments agreed upon. Neither did it attempt to make a
consignation of the installments. As held in the Adelfa Properties case:

"The mere sending of a letter by the vendee expressing the intention to pay, without the
accompanying payment, is not considered a valid tender of payment. Besides, a mere tender of
payment is not sufficient to compel private respondents to deliver the property and execute the
deed of absolute sale. It is consignation which is essential in order to extinguish petitioner's
obligation to pay the balance of the purchase price. The rule is different in case of an option
contract or in legal redemption or in a sale with right to repurchase, wherein consignation is not
necessary because these cases involve an exercise of a right or privilege (to buy, redeem or
repurchase) rather than the discharge of an obligation, hence tender of payment would be sufficient
to preserve the right or privilege. This is because the provisions on consignation are not applicable
when there is no obligation to pay. A contract to sell, as in the case before us, involves the
performance of an obligation, not merely the exercise of a privilege or a right. Consequently,
performance or payment may be effected not by tender of payment alone but by both tender and
consignation."

In the case, petitioner did not lift a finger towards the performance of the contract other
than the tender of down payment. There is no record that it even bothered to tender payment of
the installments or to amend the contract to reflect the true intention of the parties as regards the
number of lots to be sold. Indeed, by petitioner's inaction, private respondent may not be judicially
enjoined to validate a contract that the former appeared to have taken for granted. As in the earlier
agreements, petitioner ignored opportunities to resuscitate a contract to sell that were rendered
moribund and inoperative by its inaction.

Petition denied. Decision affirmed.

 ETERNAL GARDENS MEMORIAL PARK CORPORATION
VS. COURT OF APPEALS AND NORTH PHILIPPINE UNION MISSION OF THE
SEVENTH DAY ADVENTIST
G.R. NO. 124554
DECEMBER 9, 1997

FACTS:
Petitioner EGMPC and private respondent NPUM entered into a Land Development
Agreement dated October 6, 1976. Under the agreement, EGMPC was to develop a parcel of land
owned by NPUM into a memorial park subdivided into lots. The parties further agreed that
EGMPC had the obligation to remit monthly to NPUM forty percent (40%) of its net gross
collection from the development of a memorial park on property owned by NPUM. It also
provides for the designation of a depository/trustee bank to act as the depository/trustee for all
funds collected by EGMPC.

Later, two claimants of the parcel of land surfaced Maysilo Estate and the heirs of a certain
Vicente Singson Encarnacion. EGMPC thus filed an action for interpleader against Maysilo Estate
and NPUM. The Singson heirs in turn filed an action for quieting of title against EGMPC and
NPUM.

From these two cases, several proceedings ensued. One such case, from the interpleader
action, EGMPC assailed the appellate court's resolution requiring "petitioner Eternal Gardens [to]
deposit whatever amounts are due from it under the Land Development Agreement with a
reputable bank to be designated by the respondent court."

The trial court dismissed the cases and the appellate court affirmed insofar as it dismissed
the claims of the intervenors, including the Maysilo Estate, and the titles of NPUM to the subject
parcel of land were declared valid; and the trial court's decision favor of the Singson heirs was
reversed and set aside.

Through the resolution issued by the Supreme Court resolution, the Court of Appeals
proceeded with the disposition of the case and required the parties to appear at a scheduled hearing
on June 16, 1994, "with counsel and accountants, as well as books of accounts and related records,'
to determine the remaining accrued rights and liabilities of said parties."

The accounting of the parties' respective obligations was referred to the Court's
Accountant, Mrs. Carmencita Angelo, with the concurrence of the parties, to whom the documents
were to be submitted. NPUM prepared and submitted a Summary of Sales and Total Amounts Due
based on the following documents it likewise submitted to the court. However, EGMPC did not
submit any document whatsoever to aid the appellate court in its mandated task. Thus, the
appellate court declared that EGMPC has waived its right to present the records and documents
necessarily for accounting, and that it will now proceed "to the mutual accounting required to
determine the remaining accrued rights and liabilities of the said parties…and that the Court will
proceed to do what it is required to do on the basis of the documents submitted by the NPUMC.
Ms. Angelo submitted her Report dated January 31, 1995, to which the appellate court required
the parties to comment on. EGMPC took exception to the appellate court's having considered it to
have waived its right to present documents. Considering EGMPC's arguments, the court set a
hearing date where NPUM would present its documents "according to the Rules [of Court], and
giving the private respondent [EGMPC] the opportunity to object thereto." Subsequently, NPUM
asked for and the appellate court issued a subpoena duces tecum and subpoena ad testificandum to
EGMPC's President, Mr. Gabriel O. Vida requiring him to produce documents in relation to the
case. However, EGMPC failed to present the documents required by the subpoena. It further filed
a Denial and/or Objection to the Requests for Admission on the ground that it could not make
comparison of the documents with the originals thereof. On November 10, 1995, Ms. Angelo
submitted her Report. On January 15, 1996, the Court of Appeals approved the report of Ms.
Angelo, finding that EGMPC owes to the petitioner NPUMSDA the amounts of P167,065,195.00
as principal and P167,235,451.00 in interest.
ISSUE:
Whether or not EGMPC is liable for interest because there was still the unresolved issue
of ownership over the property subject of the Land Development Agreement of October 6, 1976.

RULING:
The Supreme Court held that the argument is without merit. EGMPC under the agreement
had the obligation to remit monthly to NPUM forty percent (40%) of its net gross collection from
the development of a memorial park on property owned by NPUM. It also provides for the
designation of a depository/trustee bank to act as the depository/trustee for all funds collected by
EGMPC. There was no obstacle, legal or otherwise, to the compliance by EGMPC of this
provision in the contract, even on the affectation that it did not know to whom payment was to be
made.

Even disregarding the agreement, EGMPC cannot "suspend" payment on the pretext that
it did not know who among the subject property's claimants was the rightful owner. It had a
remedy under the New Civil Code of the Philippines to give in consignation the amounts due, as
these fell due.

Consignation produces the effect of payment. The rationale for consignation is to avoid
the performance of an obligation becoming more onerous to the debtor by reason of causes not
imputable to him. For its failure to consign the amounts due, EGMPC’s obligation to NPUM
necessarily became more onerous as it became liable for interest on the amounts it failed to remit.

Thus, the Court of Appeals correctly held Eternal Gardens liable for interest at the rate of
twelve percent (12%). The withholding of the amounts due under the agreement was tantamount
to a forbearance of money.
LOSS OF THE PRESTATION: KINDS OF LOSS

OCCENA VS. JABSON, COURT OF APPEALS AND TROPICAL HOMES, INC

GR NO. L-44349,
OCTOBER 29, 1976
73 SCRA 637
FACTS:
Private respondent Tropical Homes, Inc had a subdivision contract with petitioners who
are the owners of the land subject of subdivision development by private respondent. The contract
stipulated that the petitioners’ fixed and sole share and participation is the land which is equivalent
to forty percent of all cash receipts from the sale of the subdivision lots. When the development
costs increased to such level not anticipated during the signing of the contract and which threatened
the financial viability of the project as assessed by the private respondent, respondent filed at the
lower court a complaint for the modification of the terms and conditions of the contract by fixing
the proper shares that should pertain to the parties therein out of the gross proceeds from the sales
of the subdivision lots. Petitioners moved for the dismissal of the complaint for lack of cause of
action. The lower court denied the motion for dismissal which was upheld by the CA based on
the civil code provision that “when the service has become so difficult as to be manifestly beyond
the contemplation of the parties, the obligor may also be released therefrom, in whole or in part”.
Insisting that the worldwide increase in prices cited by private respondent does not constitute a
sufficient cause of action for the modification of the terms and conditions of the contract,
petitioners filed the instant petition.

ISSUE:
Whether or not private respondent may demand modification of the terms of the contract
on the ground that the prestation has manifestly come beyond the contemplation of the parties.

RULING:
If the prayer of the private respondent is to be released from its contractual obligations on
account of the fact that the prestation has become beyond the contemplation of the parties, then
private respondent can rely on said provision of the civil code. But the prayer of the private
respondent was for the modification of their valid contract. The above-cited civil code provision
does not grant the court the power to remake, modify, or revise the contract or to fix the division
of the shares between the parties as contractually stipulated with the force of law between the
parties. Therefore, private respondent’s complaint for modification of its contract with petitioner
must be dismissed. The decision of respondent court is reversed.
 ORTIGAS & CO., LIMITED PARTNERSHIP VS. FEATI BANK AND TRUST CO.
G.R. NO. L-24670
DECEMBER 14, 1979
FACTS:
Plaintiff is a limited partnership and defendant Feati Bank and Trust Co., is a corporation
duly organized and existing in accordance with the laws of the Philippines. Plaintiff is engaged in
real estate business, developing and selling lots to the public, particularly the Highway Hills
Subdivision along EDSA, Mandaluyong, Rizal. On March 4, 1952, plaintiff, as vendor, and
Augusto Padilla and Natividad Angeles, as vendees, entered into separate agreements of sale on
installments over two parcels of land. On July 19, 1962, the said vendees transferred their rights
and interests over the aforesaid lots in favor of one Emma Chavez. Upon completion of payment
of the purchase price, the plaintiff executed the corresponding deeds of sale in favor of Emma
Chavez. Both the agreements (of sale on installment) and the deeds of sale contained some
stipulations or restrictions which were later annotated in TCT Nos. 101509 and 101511 of the
Register of Deeds of Rizal, covering the said lots and issued in the name of Emma Chavez.
Eventually, defendant-appellee acquired Lots Nos. 5 and 6, with TCT Nos. 101613 and 106092
issued in its name, respectively and the building restrictions were also annotated therein.
Defendant-appellee bought Lot No. 5 directly from Emma Chavez, "free from all liens and
encumbrances as stated in Annex 'D', 5 while Lot No. 6 was acquired from Republic Flour Mills
through a "Deed of Exchange," Annex "E". TCT No. 101719 in the name of Republic Flour Mills
likewise contained the same restrictions, although defendant-appellee claims that Republic Flour
Mills purchased the said Lot No. 6 "in good faith. free from all liens and encumbrances," as stated
in the Deed of Sale, Annex "F" between it and Emma Chavez.

Plaintiff-appellant claims that the restrictions annotated on TCT Nos. 101509, 101511,
101719, 101613, and 106092 were imposed as part of its general building scheme designed for the
beautification and development of the Highway Hills Subdivision which forms part of the big
landed estate of plaintiff-appellant where commercial and industrial sites are also designated or
established.

Defendant-appellee, upon the other hand, maintains that the area along the western part of
EDSA from Shaw Boulevard to Pasig River, has been declared a commercial and industrial zone,
per Resolution No. 27, dated February 4, 1960 of the Municipal Council of Mandaluyong, Rizal.
It alleges that plaintiff-appellant 'completely sold and transferred to third persons all lots in said
subdivision facing EDSA" and the subject lots thereunder were acquired by it "only on July 23,
1962 or more than two (2) years after the area ... had been declared a commercial and industrial
zone. On or about May 5, 1963, defendant-appellee began laying the foundation and commenced
the construction of a building on Lots Nos. 5 and 6, to be devoted to banking purposes, but which
defendant-appellee claims could also be devoted to, and used exclusively for, residential purposes.
The following day, plaintiff-appellant demanded in writing that defendant-appellee stop the
construction of the commerical building on the said lots. The latter refused to comply with the
demand, contending that the building was being constructed in accordance with the zoning
regulations, defendant-appellee having filed building and planning permit applications with the
Municipality of Mandaluyong, and it had accordingly obtained building and planning permits to
proceed with the construction.

ISSUE:
Whether or not Resolution No. 27 s-1960 is a valid exercise of police power; and whether
or not the said Resolution can nullify or supersede the contractual obligations assumed by
defendant-appellee.

RULING:
The validity of the resolution was admitted at least impliedly, in the stipulation of facts
below when plaintiff-appellant did not dispute the same. Granting that Resolution No. 27 is not an
ordinance, it certainly is a regulatory measure within the intendment or ambit of the word
"regulation" under the provision. As a matter of fact, the same section declares that the power
exists "(A)ny provision of law to the contrary notwithstanding ... "
 With regard to the contention that said resolution cannot nullify the contractual obligations
assumed by the defendant-appellee referring to the restrictions incorporated in the deeds of sale
and later in the corresponding Transfer Certificates of Title issued to defendant-appellee, it should
be stressed, that while non-impairment of contracts is constitutionally guaranteed, the rule is not
absolute, since it has to be reconciled with the legitimate exercise of police power.

Resolution No. 27, s-1960 declaring the western part of highway, now EDSA, from Shaw
Boulevard to the Pasig River as an industrial and commercial zone, was obviously passed by the
Municipal Council of Mandaluyong, Rizal in the exercise of police power to safeguard or promote
the health, safety, peace, good order and general welfare of the people in the locality. Judicial
notice may be taken of the conditions prevailing in the area, especially where lots Nos. 5 and 6 are
located. The lots themselves not only front the highway; industrial and commercial complexes
have flourished about the place. EDSA, a main traffic artery which runs through several cities and
municipalities in the Metro Manila area, supports an endless stream of traffic and the resulting
activity, noise and pollution are hardly conducive to the health, safety or welfare of the residents
in its route. Having been expressly granted the power to adopt zoning and subdivision ordinances
or regulations, the municipality of Mandaluyong, through its Municipal 'council, was reasonably,
if not perfectly, justified under the circumstances, in passing the subject resolution.

The motives behind the passage of the questioned resolution being reasonable, and it being
a " legitimate response to a felt public need," not whimsical or oppressive, the non-impairment of
contracts clause of the Constitution will not bar the municipality's proper exercise of the power.

It is, therefore, clear that even if the subject building restrictions were assumed by the
defendant-appellee as vendee of Lots Nos. 5 and 6, in the corresponding deeds of sale, and later,
in Transfer Certificates of Title Nos. 101613 and 106092, the contractual obligations so assumed
cannot prevail over Resolution No. 27, of the Municipality of Mandaluyong, which has validly
exercised its police power through the said resolution. Accordingly, the building restrictions,
which declare Lots Nos. 5 and 6 as residential, cannot be enforced.
REBUS SIC STANTIBUS

SO VS. FOOD FEST LAND, INC

G.R. NO. 183628
APRIL 7, 2010

Facts:
Food Fest Land Inc. (Food Fest) entered into a September 14, 1999 Contract of Lease1
with Daniel T. So (So) over a commercial space in San Antonio Village, Makati City for a period
of three years (1999-2002) on which Food Fest intended to operate a Kentucky Fried Chicken
carry out branch.
Before forging the lease contract, the parties entered into a preliminary agreement dated July 1,
1999, the pertinent portion of which states that the lease shall not become binding upon us unless
and until the government agencies concerned shall authorize, permit or license us to open and
maintain our business at the proposed Lease Premises.
While Food Fest was able to secure the necessary licenses and permits for the year 1999, it failed
to commence business operations. For the year 2000, Food Fest’s application for renewal of
barangay business clearance was "held in abeyance until further study of [its] kitchen facilities."
As the barangay business clearance is a prerequisite to the processing of other permits, licenses
and authority by the city government, Food Fest was unable to operate. Fearing further business
losses, Food Fest, by its claim, communicated its intent to terminate the lease contract to So who,
however, did not accede and instead offered to help Food Fest secure authorization from the
barangay.
On April 26, 2001, So filed a complaint for ejectment and damages against Food Fest before the
Metropolitan Trial Court (MeTC) of Makati City.
The MeTC, by Decision of July 4, 2005,7 rendered judgment in favor of So.The Regional Trial
Court (RTC), by Decision of November 30, 2006,9 reversed the MeTC Decision.
Court of Appeals however, declared that Food Fest’s obligation to pay rent was not extinguished
upon its failure to secure permits to operate.

Issue:
Whether or not the Principle of rebus sic stantibus is applicable to the instant case.

Ruling:
No. As for Food Fest’s invocation of the principle of rebus sic stantibus as enunciated in
Article 1267 of the Civil Code to render the lease contract functus officio, and consequently release
it from responsibility to pay rentals, the Court is not persuaded.
This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute
application of the principle of rebus sic stantibus, which would endanger the security of contractual
relations. The parties to the contract must be presumed to have assumed the risks of unfavorable
developments. It is, therefore, only in absolutely exceptional changes of circumstances that equity
demands assistance for the debtor.
Food Fest was able to secure the permits, licenses and authority to operate when the lease contract
was executed. Its failure to renew these permits, licenses and authority for the succeeding year,
does not, however, suffice to declare the lease functus officio, nor can it be construed as an
unforeseen event to warrant the application of Article 1267.
 MAGAT VS. COURT OF APPEALS
337 SCRA 298

FACTS:
Private respondent Santiago A. Guerrero was President and Chairman of "Guerrero
Transport Services", a single proprietorship. Sometime in 1972, Guerrero Transport Services won
a bid for the operation of a fleet of taxicabs within the Subic Naval Base, in Olongapo. As highest
bidder, Guerrero was to "provide radio-controlled taxi service within the U.S. Naval Base, Subic
Bay, utilizing as demand requires . . . 160 operational taxis consisting of four wheel, four-door,
four passenger, radio controlled, meter controlled, sedans, not more than one year . . . "

On September 22, 1972, with the advent of martial law, President Ferdinand E. Marcos
issued Letter of Instruction No. 1.

On September 25, 1972, pursuant to the aforequoted Letter of Instruction, the Radio
Control Office issued Administrative Circular No. 4: Subject: Suspending the acceptance and
processing of applications for radio station construction permits and for permits to own and/or
possess radio transmitters or transceivers.

On September 25, 1972, Guerrero and Victorino D. Magat, as General Manager of

Spectrum Electronic Laboratories, a single proprietorship, executed a letter-contract for the
purchase of transceivers at a quoted price of US$77,620.59, FOB Yokohoma. Victorino was to
deliver the transceivers within 60 to 90 days after receiving notice from Guerrero of the assigned
radio frequency, "taking note of Government Regulations.” The contract was signed and Victorino
contacted his Japanese supplier, Koide & Co., Ltd. and placed an order for the transceivers.

On September 29, 1972, Navy Exchange Officer, A. G. Mason confirmed that Guerrero
won the bid for the commercial transportation contract. On October 4, 1972, middle man and
broker Isidro Q. Aligada of Reliance Group Engineers, Inc. , wrote Victorino, informing him that
a radio frequency was not yet assigned to Guerrero and that government regulations might
complicate the importation of the transceivers. However, in the same letter, Victorino was advised
to advise his supplier "to proceed (with) production pending frequency information." Victorino
was also assured of Guerrero's financial capability to comply with the contract. On October 6,
1972, Guerrero informed Aligada of the frequency number assigned by Subic Naval Base
authorities. Aligada was instructed to "proceed with the order thru Spectrum Electronics
Laboratories." On October 7, 1972, Aligada informed Magat of the assigned frequency number.
Aligada also advised Victorino to "proceed with the order upon receipt of letter of credit." On
January 10, 1973, Guerrero applied for a letter of credit with the Metropolitan Bank and Trust
Company. This application was not pursued.

On March 27, 1973, Victorino, represented by his lawyer, Atty. Sinesio S. Vergara,
informed Guererro that the order with the Japanese supplier has not been canceled. Should the
contract be canceled, the Japanese firm would forfeit 30% of the deposit and charge a cancellation
fee in an amount not yet known, Guerrero to bear the loss. Further, should the contract be canceled,
Victorino would demand an additional amount equivalent to 10% of the contract price.

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 the transceivers, Guerrero commenced operation of the
taxicabs within Subic Naval Base, using radio units borrowed from the U.S. government. Victorino
thus canceled his order with his Japanese supplier.

On May 22, 1973, Victorino filed with the Regional Trial Court, Makati a complaint for
damages arising from breach of contract against Guerrero. On June 7, 1973, Guerrero moved to
dismiss the complaint on the ground that it did not state a cause of action. On June 16, 1973, the
trial court granted the motion and dismissed the complaint. On July 11, 1973, Victorino filed a
petition for review on certiorari with this Court assailing the dismissal of the complaint.
 On April 20, 1983, the Supreme Court ruled that the complaint sufficiently averred a cause
of action. The Court set aside the order of dismissal and remanded the case to the trial court for
further proceedings. On November 27, 1984, the trial court ordered that the case be archived for
failure of Victorino to prosecute. On March 11, 1985, petitioners, Olivia, Dulce, Ma. Magnolia,
Ronald and Dennis Magat, moved to reinstate the case and to substitute Victorino in its
prosecution. Apparently, Victorino died on February 18, 1985. On April 29, 1985, the trial court
granted the motion.

On July 12, 1991, the trial court decided in favor of the heirs of Victorino and ordered
Guerrero to pay temperate, moral and exemplary damages, and attorney's fees. On August 21,
1991, Guerrero appealed to the Court of Appeals. However it was dismissed. On October 26,
1995, the heirs of Victorino filed with the Court of Appeals a motion for reconsideration. On
March 12, 1996, the Court of Appeals denied the motion for reconsideration.

ISSUES:
Whether or not the transceivers were contraband items prohibited by the LOI and
Administrative Circular to import; hence, the contract is void.

Whether or not the contract was breached.

RULING:
Anent the 1st issue, NO. The contract was not void ab initio. Nowhere in the LOI and
Administrative Circular is there an express ban on the importation of transceivers. The LOI and
Administrative Circular did not render “radios and transceivers” illegally per se. The
Administrative Circular merely ordered the Radio Control Office to suspend the acceptance and
processing… of application… for permits to possess, own, transfer, purchase and sell radio
transmitters and transceivers… therefore; possession and importation of the radio transmitters and
transceivers was legal provided one had the necessary license for it. The LOI and Administrative
Circular did not render the transceivers outside the commerce of man. They were valid objects of
the contract.

Anent the 2nd issue, NO. The contract was not breached. Affirming the validity of the
contract, the law provides that when the service (required by the contract) has become so
manifestly beyond the contemplation of the parties, the obligor may also be released there from in
whole or in parts. Here, Guerrero’s inability to secure a letter of credit and to comply with his
obligation was a direct consequence of the denial of the permit to import. For this, he cannot be
faulted. Even if the Court assumes that there was a breach of contract, damages cannot be awarded.
Damnum absque injuria comes into the fore.
 PNCC VS. COURT OF APPEALS
272 SCRA 183

FACTS:
On 18 November 1985, private respondents and petitioner entered into a contract of lease
of a parcel of land owned by the former. The terms and conditions of said contract of lease are as
follows: a) the lease shall be for a period of five (5) years which begins upon the issuance of permit
by the Ministry of Human Settlement and renewable at the option of the lessee under the terms
and conditions, b) the monthly rent is P20, 000.00 which shall be increased yearly by 5% based
on the monthly rate, c) the rent shall be paid yearly in advance, and d) the property shall be used
as premises of a rock crushing plan.

On January 7, 1986, petitioner obtained permit from the Ministry which was to be valid for
two (2) years unless revoked by the Ministry. Later, respondent requested the payment of the first
annual rental. But petitioner alleged that the payment of rental should commence on the date of
the issuance of the industrial clearance not on the date of signing of the contract. It then expressed
its intention to terminate the contract and decided to cancel the project due to financial and
technical difficulties. However, petitioner refused to accede to respondent’s request and reiterated
their demand for the payment of the first annual rental. But the petitioner argued that it was only
obligated to pay P20, 000.00 as rental for one month prompting private respondent to file an action
against the petitioner for specific performance with damages before the RTC of Pasig. The trial
court rendered decision in favor of private respondent. Petitioner then appealed the decision of
the trial court to the Court of Appeals but the later affirmed the decision of the trial court and
denied the motion for reconsideration.

ISSUE:
Whether or not petitioner can avail of the benefit of Article 1267 of the New Civil Code.

RULING:
NO. The petitioner cannot take refuge of the said article. Article 1267 of the New Civil
Code provides that when the service has become so difficult as to manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part. This
article, which enunciates the doctrine of unforeseen events, is not, however an absolute application
of the principle of rebus sic stantibus, which would endanger the security of contractual relations.
The parties to the contract must be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional chances of circumstances that equity
demands assistance for the debtor. The principle of rebus sic stantibus neither fits in with the facts
of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions,
and once these conditions cease to exist, the contract also ceases to exist.

In this case, petitioner averred that three (3) abrupt change in the political climate of the
country after the EDSA Revolution and its poor financial condition rendered the performance of
the lease contract impractical and inimical to the corporate survival of the petitioner. However, as
held in Central Bank v. CA, mere pecuniary inability to fulfill an engagement does not discharge
a contractual obligation, nor does it constitute a defense of an action for specific performance.
 NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY VS. THE
COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC.
(CASURECO II)
FEBRUARY 24, 1994
230 SCRA 351

FACTS:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local
as well as long distance service in Naga City while private respondent Camarines Sur II Electric
Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of operating
an electric power service in the same city.

On November 1, 1977, the parties entered into a contract for the use by petitioners in the
operation of its telephone service the electric light posts of private respondent in Naga City. In
consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone connections
for the use by private respondent. After the contract had been enforced for over ten (10) years,
private respondent filed with the Regional Trial Court against petitioners for reformation of the
contract with damages, on the ground that it is too one-sided in favor of petitioners; that it is not
in conformity with the guidelines of the National Electrification Administration (NEA); that after
eleven (11) years of petitioners' use of the posts, the telephone cables strung by them thereon have
become much heavier with the increase in the volume of their subscribers; that a post now costs
as much as P2,630.00; so that justice and equity demand that the contract be reformed to abolish
the inequities thereon.

As second cause of action, private respondent alleged that starting with the year 1981,
petitioners have used 319 posts outside Naga City, without any contract with it; that at the rate of
P10.00 per post, petitioners should pay private respondent for the use thereof the total amount of
P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had refused to pay
private respondent said amount despite demands. And as third cause of action, private respondent
complained about the poor servicing by petitioners.

The trial court ruled, as regards private respondent’s first cause of action, that the contract
should be reformed by ordering petitioners to pay private respondent compensation for the use of
their posts in Naga City, while private respondent should also be ordered to pay the monthly bills
for the use of the telephones also in Naga City. And taking into consideration the guidelines of
the NEA on the rental of posts by telephone companies and the increase in the costs of such posts,
the trial court opined that a monthly rental of P10.00 for each post of private respondent used by
petitioners is reasonable, which rental it should pay from the filing of the complaint in this case on
January 2, 1989. And in like manner, private respondent should pay petitioners from the same
date its monthly bills for the use and transfers of its telephones in Naga City at the same rate that
the public are paying.

On private respondent's second cause of action, the trial court found that the contract does
not mention anything about the use by petitioners of private respondent's posts outside Naga City.
Therefore, the trial court held that for reason of equity, the contract should be reformed by
including therein the provision that for the use of private respondent's posts outside Naga City,
petitioners should pay a monthly rental of P10.00 per post, the payment to start on the date this
case was filed, or on January 2, 1989, and private respondent should also pay petitioners the
monthly dues on its telephone connections located outside Naga City beginning January, 1989.
And with respect to private respondent's third cause of action, the trial court found the claim not
sufficiently proved.

The Court of Appeals affirmed the decision of the trial court, but based on different
grounds to wit: (1) that Article 1267 of the New Civil Code is applicable and (2) that the contract
was subject to a potestative condition which rendered said condition void.
ISSUE:
Whether or not the principle of Rebus Sic Stantibus is applicable in the case at bar.

RULING:
No. Article 1267 speaks of "service" which has become so difficult. Taking into
consideration the rationale behind this provision, the term "service" should be understood as
referring to the "performance" of the obligation.

In the present case, the obligation of private respondent consists in allowing petitioners to
use its posts in Naga City, which is the service contemplated in said article. Furthermore, a bare
reading of this article reveals that it is not a requirement thereunder that the contract be for future
service with future unusual change. According to Senator Arturo M. Tolentino, Article 1267 states
in our law the doctrine of unforseen events. This is said to be based on the discredited theory of
rebus sic stantibus in public international law; under this theory, the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist the contract also ceases to
exist. Considering practical needs and the demands of equity and good faith, the disappearance of
the basis of a contract gives rise to a right to relief in favor of the party prejudiced.

The allegations in private respondent's complaint and the evidence it has presented
sufficiently made out a cause of action under Article 1267. The Court, therefore, release the parties
from their correlative obligations under the contract. However, the disposition of the present
controversy does not end here. The Court has to take into account the possible consequences of
merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in the
posts of private respondent, resulting in disruption of their essential service to the public; while
private respondent, in consonance with the contract will return all the telephone units to petitioners,
causing prejudice to its business.

The Court shall not allow such eventuality. Rather, the Court requires, as ordered by the
trial court: 1) petitioners to pay private respondent for the use of its posts in Naga City and in the
towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where petitioners
use private respondent's posts, the sum of ten (P10.00) pesos per post, per month, beginning
January, 1989; and 2)private respondent to pay petitioner the monthly dues of all its telephones at
the same rate being paid by the public beginning January, 1989. The peculiar circumstances of
the present case, as distinguished further from the Occeña case, necessitates exercise of a equity
jurisdiction. By way of emphasis, the Court reiterates the rationalization of respondent court that:

". . . In affirming said ruling, we are not making a new contract for the parties herein, but we find
it necessary to do so in order not to disrupt the basic and essential services being rendered by both
parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff
..."

Decision affirmed.
CONDONATION/REMISSION OF THE DEBT

REYNA V. COA
G.R. NO. 167219
FEBRUARY 8, 2011

FACTS:
The Land Bank of the Philippines (Land Bank) was engaged in a cattle-financing program
wherein loans were granted to various cooperatives. Pursuant thereto, Land Bank's Ipil,
Zamboanga del Sur Branch (Ipil Branch) went into a massive information campaign offering the
program to cooperatives. Cooperatives who wish to avail of a loan under the program must fill up
a Credit Facility Proposal (CFP) which will be reviewed by the Ipil Branch. The Ipil Branch
approved the applications of four cooperatives. One of the conditions stipulated in the CFP is that
prior to the release of the loan, a Memorandum of Agreement (MOA) between the supplier of the
cattle, Remad Livestock Corporation (REMAD), and the cooperative, shall have been signed. As
alleged by petitioners, the terms of the CFP allowed for pre-payments or advancement of the
payments prior to the delivery of the cattle by the supplier REMAD but such was not stipulated in
the contracts.
Three checks were issued by the Ipil Branch to REMAD to serve as advanced payment for the
cattle. REMAD, however, failed to supply the cattle on the dates agreed upon. In post audit, the
Land Bank Auditor disallowed the amount of P3,115,000.00 under CSB No. 95-005 dated
December 27, 1996 and Notices of Disallowance Nos. 96-014 to 96-019 in view of the non-
delivery of the cattle. Also made as the basis of the disallowance was the fact that advanced
payment was made in violation of bank policies and COA rules and regulations. Petitioners were
made liable for the amount.

ISSUE:
Whether or not the writing off of a loan is considered as condonation.

RULING:
This Court rules that writing-off a loan does not equate to a condonation or release of a
debt by the creditor. As an accounting strategy, the use of write-off is a task that can help a
company maintain a more accurate inventory of the worth of its current assets. In general banking
practice, the write-off method is used when an account is determined to be uncollectible and an
uncollectible expense is recorded in the books of account. If in the future, the debt appears to be
collectible, as when the debtor becomes solvent, then the books will be adjusted to reflect the
amount to be collected as an asset. In turn, income will be credited by the same amount of increase
in the accounts receivable. Write-off is not one of the legal grounds for extinguishing an obligation
under the Civil Code. It is not a compromise of liability. Neither is it a condonation, since in
condonation gratuity on the part of the obligee and acceptance by the obligor required. In making
the write-off, only the creditor takes action by removing the uncollectible account from its books
even without the approval or participation of the debtor.
REQUISITES OF CONDONATION: NOT INOFFICIOUS

TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC.

VS. THE COURT OF APPEALS and ASSOCIATED BANK
AUGUST 19, 1994
235 SCRA 494

FACTS:
Sometime in 1979, petitioner applied for and was granted several financial
accommodations amounting to P1,300,000.00 by respondent Associated Bank. The loans were
evidence and secured by four (4) promissory notes, a real estate mortgage covering three parcels
of land and a chattel mortgage over petitioner's stock and inventories. Unable to settle its
obligation in full, petitioner requested for, and was granted by respondent bank, a restructuring of
the remaining indebtedness which then amounted to P1,057,500.00, as all the previous payments
made were applied to penalties and interests.

To secure the re-structured loan of P1,213,400.00, three new promissory notes were
executed by Trans-Pacific. The mortgaged parcels of land were substituted by another mortgage
covering two other parcels of land and a chattel mortgage on petitioner's stock inventory. The
released parcels of land were then sold and the proceeds amounting to P1,386,614.20, according
to petitioner, were turned over to the bank and applied to Trans-Pacific's restructured loan.
Subsequently, respondent bank returned the duplicate original copies of the three promissory notes
to Trans-Pacific with the word "PAID" stamped thereon. Despite the return of the notes, or on
December 12, 1985, Associated Bank demanded from Trans-Pacific payment of the amount of
P492,100.00 representing accrued interest on PN No. TL-9077-82. According to the bank, the
promissory notes were erroneously released. Initially, Trans-Pacific expressed its willingness to
pay the amount demanded by respondent bank. Later, it had a change of heart and instead initiated
an action before the Regional Trial Court for specific performance and damages. There it prayed
that the mortgage over the two parcels of land be released and its stock inventory be lifted and that
its obligation to the bank be declared as having been fully paid. After trial, the court a quo rendered
judgment in favor of Trans-Pacific. The appellate court which, as aforesaid, reversed the decision
of the trial court.

ISSUE:
Whether or not petitioner has indeed paid in full its obligation to respondent bank.

RULING:
No. The Court found no reversible error committed by the appellate court in disposing of
the appealed decision. As gleaned from the decision of the court a quo, judgment was rendered in
favor of petitioner on the basis of presumptions. The above disquisition finds no factual support,
however, per review of the records. 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 at bar, the Court finds sufficient justification to overthrow the presumption of
payment generated by the delivery of the documents evidencing petitioners’ indebtedness.

It may not be amiss to add that Article 1271 of the Civil Code raises a presumption, not of
payment, but of the renunciation of the credit where more convincing evidence would be required
than what normally would be 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 out of a private document, the intendment of the law would thus be to refer to the delivery
only of the original rather than to the original duplicate of which the debtor would normally retain
a copy. Petition denied
IMPLIED CONDONATION: PRESUMPTION OF DELIVERY

DALUPAN VS. HARDEN

NOVEMBER 27, 1951

FACTS:
The case is an appeal taken from an order of the First Instance of Manila dated May 19,
1950, setting aside the writs of execution and garnishment issued to the sheriff of Manila
commanding him to levy on two (2) checks, one for P9,028.50, and another for P24,546.00,
payable to Fred M. Harden which were then in possession of the receiver appointed in case
involving the liquidation of the conjugal partnership of the spouses Fred M. Harden and Esperanza
P. de Harden.

On August 26, 1948, plaintiff filed an action against the defendant for the collection of
P113,837.17, with interest thereon from the filing of the complaint, which represents fifty (50) per
cent of the reduction plaintiff was able to secure from the Collector of Internal Revenue in the
amount of unpaid taxes claimed to be due from the defendant. Defendant acknowledged this claim
and prayed that judgment be rendered accordingly. The receiver in the liquidation of case No. R-
59634 and the wife of the defendant, Esperanza P. de Harden, filed an answer in intervention
claiming that the amount sought by the plaintiff was exorbitant and prayed that it be reduced to 10
per cent of the rebate. By reason of the acquiescence of the defendant to the claim on one hand,
and the opposition of the receiver and of the wife on the other, an amicable settlement was
concluded by the plaintiff and the intervenor whereby it was agreed that the sum of P22,767.43 be
paid to the plaintiff from the funds under the control of the receiver "and the balance of P91,069.74
shall be charged exclusively against the defendant Fred M. Harden from whatever share he may
still have in the conjugal partnership between him and Esperanza P. de Harden after the final
liquidation and partition thereof, without pronouncement as to costs and interests." The court
rendered judgment in accordance with this stipulation.

Almost one year thereafter, plaintiff filed a motion for the issuance of a writ of execution
to satisfy the balance of P91, 069.74, which was favorably acted upon. At that time the receiver
had in his possession two (2) checks payable to Fred M. Harden amounting to P33,574.50,
representing part of the proceeds of the sale of two (2) lots belonging to the conjugal partnership
which was ordered by the court upon the joint petition of the spouses in order that they may have
funds with which to defray their living and other similar expenses. One-half of the proceeds was
given to Mrs. Harden. The sheriff attempted to garnish these two (2) checks acting upon the writ
of execution secured by the plaintiff, but the receivership court quashed the writ, stating however
in the order that it will be “without prejudice to the right of Francisco Dalupan to attach the money
of the defendant Fred M. Harden, after the same has been delivered to the latter. When said checks
were delivered to the latter.” When said checks were delivered to Jose Salumbides in his capacity
as attorney-in-fact of Fred M. Harden, plaintiff immediately secured another writ of garnishment
in line with the suggestion of the court, whereupon defendant again filed a motion to quash said
writ, and after due hearing, the court granted the motion setting aside the writ of garnishment, as
well as the writ of execution previously issued in the case. This is the order now subject of appeal.

ISSUE:
Whether or not the proffer made by the plaintiff to the defendant is binding.

RULING:
YES, the proffer made by the plaintiff to the defendant to the effect that “in the event you
lose your case with your wife, Mrs. Esperanza P. de Harden, and that after adjudication of the
conjugal property what is left with you will not be sufficient for your livelihood. I shall be pleased
to write off as bad debt the balance of your account in the sum of P42, 069.74.” This proffer was
contained in a letter sent by the plaintiff to the defendant on March 23, 1949, which was accepted
expressly by Fred M. Harden. Harden regarded this proffer as a binding obligation and acted
accordingly, and for plaintiff to say now that proffer is but a mere gesture of generosity or an act
of Christian charity without any binding legal effect is unfair to say at least. This is an added
circumstance, which confirms the Court’s view that the understanding between the plaintiff and
the defendant is really to defer payment of the balance of the claim until after the final liquidation
of the conjugal partnership.
 LEONIDES LOPEZ VITO
VS. MANUEL TAMBUNTING
G.R. NO. 9806
JANUARY 19, 1916
33 PHIL 226

FACTS:
These proceedings were brought to recover from the defendant the sum of P2,000, amount
of the fees, which, according to the complaint, are owing for professional medical services
rendered by the plaintiff to a daughter of the defendant from March 10 to July 15, 1913, which
fees the defendant refused to pay, notwithstanding the demands therefor made upon him by the
plaintiff. The defendant denied the allegations of the complaint, and furthermore alleged that the
obligation which the plaintiff endeavored to compel him to fulfill was already extinguished.

The Court of First Instance of Manila, after hearing the evidence introduced by both parties,
rendered judgment on December 17, 1913, ordering the defendant to pay to the plaintiff the sum
of P700, without express finding as to costs. The defendant, after entering a motion for a new trial,
which was denied, appealed from said judgment and forwarded to this court the proper bill of
exceptions.

ISSUE:
Whether or not the obligation alleged in the complaint has already been extinguished.

RULING:
No, the Supreme Court ruled that the obligation has not been extinguished. The receipt
signed by the plaintiff, for P700, the amount of his fees he endeavored to collect from the defendant
after he had finished rendering the services in question was in the latter's possession, and this fact
was alleged by him as proof that he had already paid said fees to the plaintiff. The court, after
hearing the testimony, reached the conclusion that, notwithstanding that the defendant was in
possession of the receipt, the said P700 had not been paid to the plaintiff.

Number 8 of section 334 of the Code of Civil Procedure provides as a legal presumption
"that an obligation delivered up to the debtor has been paid." Article 1188 of the Civil Code also
provides that the voluntary surrender by a creditor to his debtor, of a private instrument proving a
credit, implies the renunciation of the right of action against the debtor; and article 1189 prescribes
that whenever the private instrument which evidences the debt is in the possession of the debtor,
it will be presumed that the creditor delivered it of his own free will, unless the contrary is proven.

But the legal presumption established by the foregoing provisions of law cannot stand if
sufficient proof is adduced against it. In the case at bar the trial court correctly held that there was
sufficient evidence to the contrary, in view of the preponderance thereof in favor of the plaintiff
and of the circumstances connected with the defendant's possession of said receipt. Furthermore,
in order that such a presumption may be taken into account, it is necessary, as stated in the laws
cited, that the evidence of the obligation be delivered up to the debtor and that the delivery of the
instrument proving the credit be made voluntarily by the creditor to the debtor. In the present case,
it cannot be said that these circumstances concurred, inasmuch as when the plaintiff sent the receipt
to the defendant for the purpose of collecting his fee, it was not his intention that that document
should remain in the possession of the defendant if the latter did not forthwith pay the amount
specified therein.

By reason of the foregoing, the Court affirmed the judgment appealed from, with the costs
of this instance against the appellant.
CONFUSION OR MERGER OR RIGHTS

ESTATE OF MOTA VS. SERRA

47 PHIL. 464

FACTS:
On February 1, 1919, plaintiffs and defendant entered into a contract of partnership, for the
construction and exploitation of a railroad line from the "San Isidro" and "Palma" centrals to the
place known as "Nandong." The original capital stipulated was P150, 000. It was covenanted that
the parties should pay this amount in equal parts and the plaintiffs were entrusted with the
administration of the partnership. The agreed capital of P150,000, however, did not prove
sufficient, as the expenses up to May 15, 1920, had reached the amount of P226,092.92, presented
by the administrator and O.K.'d by the defendant.

January 29, 1920, the defendant entered into a contract of sale with Venancio Concepcion,
Phil. C. Whitaker, and Eusebio R. de Luzuriaga, whereby he sold to the latter the estate and central
known as "Palma" with its running business, as well as all the improvements, machineries and
buildings, real and personal properties, rights, choices in action and interests, including the sugar
plantation of the harvest year of 1920 to 1921, covering all the property of the vendor. This
contract was executed before a notary public of Iloilo.

Before the delivery to the purchasers of the hacienda thus sold, Eusebio R. de Luzuriaga
renounced all his rights under the contract of January 29, 1920, in favor of Messrs. Venancio
Concepcion and Phil. C. Whitaker. This gave rise to the fact that on July 17, 1920, Venancio
Concepcion and Phil. C. Whitaker and the herein defendant executed before Mr. Antonio Sanz, a
notary public in and for the City of Manila, another deed of absolute sale of the said "Palma" Estate
for the amount of P1,695,961.90, of which the vendor received at the time of executing the deed
the amount of P945,861.90, and the balance was payable by installments in the form and manner
stipulated in the contract. The purchasers guaranteed the unpaid balance of the purchase price by
a first and special mortgage in favor of the vendor upon the hacienda and the central with all the
improvements, buildings, machineries, and appurtenances then existing on the said hacienda.

Afterwards, on January 8, 1921, Venancio Concepcion and Phil. C. Whitaker bought from
the plaintiffs the one-half of the railroad line pertaining to the latter, executing therefore the
document. The price of this sale was P237,722.15, excluding any amount which the defendant
might be owing to the plaintiffs. Of the purchase price, Venancio Concepcion and Phil. C.
Whitaker paid the sum of P47,544.43 only. In the Deed, the plaintiffs and Concepcion and
Whitaker agreed, among other things, that the partnership "Palma" and "San Isidro," formed by
the agreement of February 1, 1919, between Serra, Lazaro Mota, now deceased, and Juan J.
Vidaurrazaga for himself and in behalf of his brother, Felix and Dionisio Vidaurrazaga, should be
dissolved upon the execution of this contract, and that the said partnership agreement should be
totally cancelled and of no force and effect whatever.

So it results that the "Hacienda Palma," with the entire railroad, the subject-matter of the
contract of partnership between plaintiffs and defendant, became the property of Whitaker and
Concepcion. Phil. C. Whitaker and Venancio Concepcion having failed to pay to the defendant a
part of the purchase price, that is, P750,000, the vendor, the herein defendant, foreclosed the
mortgage upon the said hacienda, which was adjudicated to him at the public sale held by the
sheriff for the amount of P500,000, and the defendant put in possession thereof, including what
was planted at the time, together with all the improvements made by Messrs. Phil. C. Whitaker
and Venancio Concepcion.

Since the defendant Salvador Serra failed to pay one-half of the amount expended by the
plaintiffs upon the construction of the railroad line, that is, P113,046.46, as well as Phil. C.
Whitaker and Venancio Concepcion, the plaintiffs instituted the present action praying: 1) that the
deed of February 1, 1919, be declared valid and binding; 2) that after the execution of the said
document the defendant improved economically so as to be able to pay the plaintiffs the amount
owed, but that he refused to pay either in part or in whole the said amount notwithstanding the
several demands made on him for the purpose; and 3) that the defendant be sentenced to pay
plaintiffs the aforesaid sum of

P113, 046.46, with the stipulated interest at 10 per cent per annum beginning June 4, 1920, until
full payment thereof, with the costs of the present action.

Defendant set up three special defenses: 1) the novation of the contract by the substitution
of the debtor with the conformity of the creditors; 2) the confusion of the rights of the creditor and
debtor; and 3) the extinguishment of the contract.

The court a quo in its decision held that there was a novation of the contract by the
substitution of the debtor, and therefore absolved the defendant from the complaint with costs
against the plaintiffs. With regard to the prayer that the said contract be declared valid and binding,
the court held that there was no way of reviving the contract which the parties themselves in
interest had spontaneously and voluntarily extinguished.

ISSUES:
Whether or not there was a novation of the contract by the substitution of the debtor with
the consent of the creditor, as required by Article 1205 of the Civil Code; and
Whether or not there was a merger of rights of debtor and creditor under Article 1192 of
the Civil Code.

RULING:
1. NO, there was no novation of the contract. It should be noted that in order to give novation
its legal effect, the law requires that the creditor should consent to the substitution of a new debtor.
This consent must be given expressly for the reason that, since novation extinguishes the
personality of the first debtor who is to be substituted by new one, it implies on the part of the
creditor a waiver of the right that he had before the novation which waiver must be express under
the principle that renuntiatio non praesumitur, recognized by the law in declaring that a waiver of
right may not be performed unless the will to waive is indisputably shown by him who holds the
right. The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the
defendant's obligation to the plaintiffs is of no avail, if the latter have not expressly consented to
the substitution of the first debtor. As has been said, in all contracts of novation consisting in the
change of the debtor, the consent of the creditor is indispensable, pursuant to Article 1205 of the
Civil Code which reads as follows: Novation which consists in the substitution of a new debtor in
the place of the original one may be made without the knowledge of the latter, but not without the
consent of the creditor.

2. NO, there was no merger of Rights. Another defense urged by the defendant is the merger
of the rights of debtor and creditor, whereby under Article 1192 of the Civil Code, the obligation,
the fulfillment of which is demanded in the complaint, became extinguished. It is maintained in
appellee's brief that the debt of the defendant was transferred to Phil. C. Whitaker and Venancio
Concepcion by the document. These in turn acquired the credit of the plaintiffs by virtue of the
debt; thus, the rights of the debtor and creditor were merged in one person. The argument would
at first seem to be incontrovertible, but if we bear in mind that the rights and titles which the
plaintiffs sold to Phil. C. Whitaker and Venancio Concepcion refer only to one-half of the railroad
line in question, it will be seen that the credit which they had against the defendant for the amount
of one-half of the cost of construction of the said line was not included in the sale. That the
plaintiffs sold their rights and titles over one-half of the line. The purchasers, Phil. C. Whitaker
and Venancio Concepcion, to secure the payment of the price, executed a mortgage in favor of the
plaintiffs on the same rights and titles that they had bought and also upon what they had purchased
from Mr. Salvador Serra. In other words, Phil. C. Whitaker and Venancio Concepcion mortgaged
unto the plaintiffs what they had bought from the plaintiffs and also what they had bought from
Salvador Serra. If Messrs. Phil. C. Whitaker and Venancio Concepcion had purchased something
from Mr. Salvador Serra, the herein defendant, regarding the railroad line, it was undoubtedly the
one-half thereof pertaining to Mr. Salvador Serra. This clearly shows that the rights and titles
transferred by the plaintiffs to Phil. C. Whitaker and Venancio Concepcion were only those they
had over the other half of the railroad line. Therefore, as already stated, since there was no novation
of the contract between the plaintiffs and the defendant, as regards the obligation of the latter to
pay the former one-half of the cost of the construction of the said railroad line, and since the
plaintiffs did not include in the sale, the credit that they had against the defendant, the allegation
that the obligation of the defendant became extinguished by the merger of the rights of creditor
and debtor by the purchase of Messrs. Phil. C. Whitaker and Venancio Concepcion is wholly
untenable.
 YEK TONG LIN VS. YUSINGCO
64 PHIL 473

FACTS:
The defendant Pelagio Yusingco was the owner of the steamship Yusingco and, as such,
he executed, on November 19, 1927, a power of attorney in favor of Yu Seguios to administer,
lease, mortgage and sell his properties, including his vessels or steamships. Yu Seguios, acting as
such attorneys in fact of Pelagio Yusingco, mortgaged to the plaintiff Yek Tong Lin Fire & Marine
Insurance Co., Ltd., with the approval of the Bureau of Customs, the steamship Yusingco
belonging to the defendant, to answer for any amount that said plaintiff might pay in the name of
the defendant on account of a promissory note for P45, 000 executed by it.

One year and some months later, or in February, 1930, and in April, 1931, the steamship
Yusingco needed some repairs which were made by the Earnshaw Docks & Honolulu Iron Works
upon petition of A. Yusingco Hermanos which, according to documentary evidence of record, was
co-owner of Pelagio Yusingco. The repairs were made upon the guaranty of the defendant and
appellant Vicente Madrigal at a cost of P8,244.66.

When neither A. Yusingco Hermanos nor Pelagio Yusingco could pay said sum to the
Earnshaw Docks & Honolulu Iron Works, the defendant and appellant Vicente Madrigal had to
make payment thereof with the stipulated interest thereon, which was at the rate of 9 per cent per
annum, on March 9, 1932, because he was bound thereto by reason of the bond filed by him, the
payment then made by him having amounted to P8,777.60. Some days later, when said defendant
discovered that he was not to be reimbursed for the repairs made on the steamship Yusingco, he
brought an action against his co-defendant Pelagio Yusingco and A. Yusingco Hermanos to
compel them to reimburse him, which resulted in a judgment favorable to him and adverse to the
Yusingcos, as the latter were ordered to pay him the sum of P3,269.66 plus interest thereon at said
rate of 9 per cent per annum from May 6, 1931, with the costs of the suit. It was provided in the
judgment that upon failure of the Yusingcos to pay the above-stated amounts to Vicente Madrigal,
a writ of execution would be issued in order to have the steamship Yusingco sold at public auction
for the purpose of satisfying said amounts with the proceeds thereof.

Inasmuch as neither the defendant Pelagio Yusingco nor A. Yusingco Hermanos paid the
amount of the judgment rendered in civil case No. 41654, in favor of the defendant and appellant
Vicente Madrigal, the latter sought and obtained from the Court of First Instance, which tried the
case, the issuance of the corresponding writ of execution. However, before the sale of the
steamship Yusingco, by virtue of the writ of execution so issued, was carried out, the plaintiff and
appellant filed with the defendant sheriff a third party claim demanding said ship for himself,
alleging that it had been mortgaged to him long before the issuance of said writ and, therefore, he
was entitled to the possession thereof. The defendant sheriff then informed the defendant and
appellant Vicente Madrigal that if he wished to have the execution sought by him carried out, he
should file the indemnity bond required by section 451 of Act No. 190. This was done by Vicente
Madrigal, but in order to prevent him and the sheriff from proceeding with the execution, the
plaintiff and appellant instituted this case in the court of origin and asked for the issuance of a writ
of preliminary injunction addressed to said two defendants to restrain them from selling the
steamship Yusingco at public auction. The writ of preliminary injunction, which was issued on
August 19, 1932, was later dissolved, the defendant and appellant Vicente Madrigal having filed
a bond of P5,000. This left the preliminary injunction unimpaired and valid for the sale of the
steamship Yusingco at public auction. For this reason, said ship was sold at public auction on
September 19, 1932, and was purchased, under the circumstances, by the plaintiff and appellant
itself, which was the highest bidder, having made the highest bid of P12,000. Of said amount, the
defendant sheriff turned over P10,195 to Vicente Madrigal in payment of his judgment credit. It
is said sum of P10,195 which the lower court ordered Vicente Madrigal to turn over to the plaintiff.

ISSUE:
 Whether or not the credit of the plaintiff, as mortgaged creditor of Pedagio Yusingco, is
superior to that of Vicente Madrigal, as judgment creditor of said Pelagio Yusingco and A.
Yusingco Hermones.

RULING:
NO, the defendant and appellant Vicente Madrigal enjoy preference in the payment of his
judgment credit.

After the steamship Yusingco had been sold by virtue of the judicial writ issued in civil
case No. 41654 for the execution of the judgment rendered in favor of Vicente Madrigal, the only
right left to the plaintiff was to collect its mortgage credit from the purchaser thereof at public
auction, inasmuch as the rule is that a mortgage directly and immediately subjects the property on
which it is imposed, whoever its possessor may be, to the fulfillment of the obligation for the
security of which it was created (Article 1876, Civil Code); but it so happens that it cannot take
such steps now because it was the purchaser of the steamship Yusingco at public auction, and it
was so with full knowledge that it had a mortgage credit on said vessel. Obligations are
extinguished by the merger of the rights of the creditor and debtor (Articles 1156 and 1192, Civil
Code).
COMPENSATION – REQUISITES

E.G.V. REALTY VS. COURT OF APPEALS

G.R.NO. 120236
JULY 20, 1999

FACTS:
Petitioner E.G.V. Realty Development Corporation is the owner/developer of a seven-
storey condominium building known as Cristina Condominium. Cristina Condominium
Corporation holds title to all common areas of Cristina Condominium and is in charge of
managing, maintaining and administering the condominium’s common areas and providing for the
building’s security. Respondent Unisphere International, Inc. (hereinafter referred to as Unisphere)
is the owner/occupant of Unit 301 of said condominium. On November 28, 1981, respondent
Unisphere’s Unit 301 was allegedly robbed of various items valued at P6,165.00. The incident was
reported to petitioner CCC. On July 25, 1982, another robbery allegedly occurred at Unit 301
where the items carted away were valued at P6,130.00, bringing the total value of items lost to
P12,295.00. This incident was likewise reported to petitioner CCC. On October 5, 1982,
respondent Unisphere demanded compensation and reimbursement from petitioner CCC for the
losses incurred as a result of the robbery. On January 28, 1987, petitioners E.G.V. Realty and CCC
jointly filed a petition with the Securities and Exchange Commission (SEC) for the collection of
the unpaid monthly dues in the amount of P13,142.67 against respondent Unisphere.

ISSUE:
Whether or not set-off or compensation has taken place in the instant case.

RULING:
Compensation or offset under the New Civil Code takes place only when two persons or
entities in their own rights, are creditors and debtors of each other. (Art. 1278).

A distinction must be made between a debt and a mere claim. A debt is an amount actually
ascertained. It is a claim which has been formally passed upon by the courts or quasi-judicial
bodies to which it can in law be submitted and has been declared to be a debt. A claim, on the other
hand, is a debt in embryo. It is mere evidence of a debt and must pass thru the process prescribed
by law before it develops into what is properly called a debt. Absent, however, any such categorical
admission by an obligor or final adjudication, no compensation or off-set can take place. Unless
admitted by a debtor himself, the conclusion that he is in truth indebted to another cannot be
definitely and finally pronounced, no matter how convinced he may be from the examination of
the pertinent records of the validity of that conclusion the indebtedness must be one that is admitted
by the alleged debtor or pronounced by final judgment of a competent court or in this case by the
Commission.

There can be no doubt that Unisphere is indebted to the Corporation for its unpaid monthly
dues in the amount of P13,142.67. This is admitted.
 AEROSPACE CHEMICAL VS COURT OF APPEALS
G.R.NO. 108129
SEPTEMBER 23, 1999

FACTS:
On June 27, 1986, petitioner Aerospace Industries, Inc. (Aerospace) purchased five
hundred (500) metric tons of sulfuric acid from private respondent Philippine Phosphate Fertilizer
Corporation (Philphos). Initially set beginning July 1986, the agreement provided that the buyer
shall pay its purchases in equivalent Philippine currency value, five days prior to the shipment
date. Petitioner as buyer committed to secure the means of transport to pick-up the purchases from
private respondent's loadports. Per agreement, one hundred metric tons (100 MT) of sulfuric acid
should be taken from Basay, Negros Oriental storage tank, while the remaining four hundred
metric tons (400 MT) should be retrieved from Sangi, Cebu. On December 18, 1986, M/T Sultan
Kayumanggi docked at Sangi, Cebu, but withdrew only 157.51 MT of sulfuric acid. Again, the
vessel tilted. Further loading was aborted. Two survey reports conducted by the Societe Generale
de Surveillance (SGS) Far East Limited, dated December 17, 1986 and January 2, 1987, attested
to these occurrences. Later, on a date not specified in the record, M/T Sultan Kayumanggi sank
with a total of 227.51 MT of sulfuric acid on board. Petitioner chartered another vessel, M/T Don
Victor, with a capacity of approximately 500 MT.6 [TSN, September 1, 1989, pp. 28-29.] On
January 26 and March 20, 1987, Melecio Hernandez, acting for the petitioner, addressed letters to
private respondent, concerning additional orders of sulfuric acid to replace its sunken purchases.

ISSUE:
Should expenses for the storage and preservation of the purchased fungible goods, namely
sulfuric acid, be on seller's account pursuant to Article 1504 of the Civil Code?

RULING:
Petitioner tries to exempt itself from paying rental expenses and other damages by arguing
that expenses for the preservation of fungible goods must be assumed by the seller. Rental expenses
of storing sulfuric acid should be at private respondent's account until ownership is transferred,
according to petitioner. However, the general rule that before delivery, the risk of loss is borne by
the seller who is still the owner, is not applicable in this case because petitioner had incurred delay
in the performance of its obligation. Article 1504 of the Civil Code clearly states: "Unless
otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to
the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's
risk whether actual delivery has been made or not, except that: (2) Where actual delivery has been
delayed through the fault of either the buyer or seller the goods are at the risk of the party at fault."

On this score, we quote with approval the findings of the appellate court, thus: The
defendant [herein private respondent] was not remiss in reminding the plaintiff that it would have
to bear the said expenses for failure to lift the commodity for an unreasonable length of time.But
even assuming that the plaintiff did not consent to be so bound, the provisions of Civil Code come
in to make it liable for the damages sought by the defendant.
 APODACA Vs NLRC
G.R.No. 80039
April1 8, 1989

FACTS:
Petitioner was employed in respondent corporation. On August 28, 1985, respondent Jose
M. Mirasol persuaded petitioner to subscribe to P1,500 shares of respondent corporation it P100.00
per share or a total of P150,000.00. He made an initial payment of P37,500.00. On September 1,
1975, petitioner was appointed President and General Manager of the respondent corporation.
However, on January 2, 1986, he resigned.

On December 19, 1986, petitioner instituted with the NLRC a complaint against private
respondents for the payment of his unpaid wages, his cost of living allowance, the balance of his
gasoline and representation expenses and his bonus compensation for 1986. Petitioner and private
respondents submitted their position papers to the labor arbiter. Private respondents admitted that
there is due to petitioner the amount of P17,060.07 but this was applied to the unpaid balance of
his subscript in the amount of P95,439.93. Petitioner questioned the set-off alleging that there was
no call or notice for the payment of unpaid subscription and that, accordingly, the alleged
obligation is not enforceable.

ISSUE:
Does the National Labor Relations Commission (NLRC) have jurisdiction to resolve a
claim for non-payment of stock subscriptions to a corporation? Assuming that it has, can an
obligation arising therefrom be offset against a money claim of an employee against the employer?

RULING:
Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute between
the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is
within the exclusive jurisdiction of the Securities and Exchange Commission.

Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter
under the circumstances of this case, the unpaid subscriptions are not due and payable until a call
is made by the corporation for payment. Private respondents have not presented a resolution of the
board of directors of respondent corporation calling for the payment of the unpaid subscriptions.
It does not even appear that a notice of such call has been sent to petitioner by the respondent
corporation.
COMPENSATION: TOTAL OR PARTIAL

SPS. CHUNG V. ULANDAY CONSTRUCTION

G.R. NO. 156038
OCTOBER 11, 2010

FACTS:
In 1985, the petitioners contracted with respondent Ulanday Construction, Inc. to construct,
within a 150-day period, the concrete structural shell of the former’s two-storey residential house
in Urdaneta Village, Makati City at the contract price of P3,291,142.00.The Contract provided
that: (a) the respondent shall supply all the necessary materials and labor indispensable for the
completion of the project; (b) the petitioners shall pay down payment, with the balance to be paid
in progress payments based on actual work completed; (c) the Construction Manager or Architect
shall check the respondent’s request for progress payment (d) the petitioners shall pay the
respondents within 7 days from receipt of the Construction Manager’s or Architect’s certificate;
(e) the respondent cannot change or alter the plans, specifications, and works without the
petitioners’ prior written approval; (f) a penalty shall be imposed for each day of delay in
completion (g) the respondent shall correct at its expense, defects appearing during the 12-month
warranty period after the petitioners’ issuance of final acceptance of work.Subsequently, the
parties agreed to exclude from the contract the roofing and flushing work, reducing the contract
price. The petitioners paid the downpayment with the balance to be paid based on the progress
billings. Actual construction started prior to the issuance of the permit. The respondent notified
the petitioners that the delay in the payment of progress billings delays the accomplishment of the
contract work and made similar follow-up letters. Subsequently, the respondent demanded full
payment for progress billings and change orders. However, the petitioners denied liability,
asserting that the respondent violated the contract provisions by, among others, failing to finish
the contract within the 150-day stipulated period, failing to comply with the provisions on change
orders, and overstating its billings.

ISSUE:
Whether or not the non-objection to the other change orders effected by the respondent
cannot give rise to estoppel in pais that would render the petitioners liable for the payment of all
change orders?

RULING:
In contractual relations, the law allows the parties leeway and considers their agreement as
the law between them. Contract stipulations that are not contrary to law, morals, good customs,
public order or public policy shall be binding and should be complied with in good
faith. No party is permitted to change his mind or disavow and go back upon his own acts, or to
proceed contrary thereto, to the prejudice of the other party. In the present case, we find that both
parties failed to comply strictly with their contractual stipulations on the progress billings and
change orders that caused the delays in the completion of the project. Estoppel in pais, or equitable
estoppel, arises when one, by his acts, representations or admissions or by his silence when he
ought to speak out, intentionally or through culpable negligence, induces another to believe certain
facts to exist and the other rightfully relies and acts on such beliefs so that he will be prejudiced if
the former is permitted to deny the existence of such facts. The real office of the equitable norm
of estoppel is limited to supplying deficiency in the law, but it should not supplant positive law.In
this case, the requirement for the petitioners’ written consent to any change or alteration in the
specifications, plans and works is explicit in Article 1724 of the Civil Code and is deemed written
in the contract betweenparties.The contract also expressly provides that a mere act of tolerance
does not constitute approval. Thus, the petitioners did not, by accepting and paying for Change
Orders, do away with the contractual term on change orders nor with the application of Article
1724.
LEGAL COMPENSATION: REQUISITES
MONDRAGON V. SOLA, JR.
G.R. NO. 174882
JANUARY 21, 2013

FACTS:

Mondragon Personal Sales, Inc, a company engaged in the business of selling different
consumer products through a network of sales representatives, entered into a Contract of Services
with Victoriano Sola, Jr. (Sola) for three years. In the contract, the Sola shall provide facilities for
a service fee. In accordance therewith, goods were delivered by Sola to Mondragon’s bodega.
Previously, Sola’s wife incurred obligation with Mondragon arising from her Franchise
Distributorship Agreement with the latter. Sola wrote a letter to Mondragon's VP Finance wherein
he acknowledged and confirmed his wife's indebtedness in the amount of P1,973,154.73, and,
together with his wife, bound himself to pay on installment basis the said debt. Consequently, the
Mondragon withheld payment of the service fees and applied the partial payments to the wife’s
debt. Sola eventually suspended the operation of his bodega where Mondragon’s products were
stored and customers were being dealt with. Sola filed with the Regional Trial Court (RTC) a
complaint for accounting and rescission alleging that Mondragon withheld portions of his service
fees covering the months from October 1994 to January 1995 and his whole service fees for the
succeeding months of February to April 1995, with a total amount of P222,202.84. The trial court
ruled in favor of Mondragon and said that none of the grounds to rescind a contract existed and
there was no showing that fraud was employed when it entered into a contract with Sola. The Court
of Appeals (CA) on the other hand granted the appeal and ordered the Contract of Services be
rescinded for the reason that Mondragon breached the contract by withholding the service fees
lawfully due Sola. It also ruled that the latter did not assume his wife’s obligation as he did not
substitute himself in her shoes.

ISSUE:

Whether or not the Court of Appeals erred in granting the appeal and ordered the Contract
of Services to be rescinded for the reason that Mondragon breached the contract by withholding
the service fees lawfully due Sola.

RULING:

Legal compensation: Compensation is a mode of extinguishing to the concurrent amount

the obligations of persons who in their own right and as principals are reciprocally debtors and
creditors of each other. Legal compensation takes place by operation of law when all the requisites
are present, as opposed to conventional compensation which takes place when the parties agree to
compensate their mutual obligations even in the absence of some requisites.
Legal Compensation requires the concurrence of the following conditions:
 (a) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other

(b) That both debts consist in a sum of money, or if the things due are consumable, they
be of thesame kind, and also of the same quality if the latter has been stated

(c) That the two debts be due

(d) That they be liquidated and demandable

(e) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
 INSULAR INVESTMENT V. CAPITAL ONE
G.R. NO. 183308
APRIL 25, 2012

FACTS:

Insular Investment and Trust Corporation (IITC) and Capital One Equities Corp. (COEC)
and Planters Development Bank (PDB) have been regularly engaged in trading, sale and purchase
of Philippine Treasury bills. On various dates, IITC had purchased from COEC. IITC purchased
from COEC treasury bills worth P 260, 683, 392.51 and was able to deliver only 121,050,000. On
May 2, 1994, COEC purchased from IITC P 186,790,000 worth of treasury bills.PDC issued
confirmation on the sale in favor of IITC. On May 10, 1994, COEC demanded a letter from IITC
the physical delivery of the securities last May 2, 1994. Then, on its May 18, 1994 letter to PDB,
IITC requested, on behalf of COEC, the delivery of IITC treasury bills, which had been fully paid.
On May 30, 1994, COEC protested the tenor of IITC’s letter to PDB and took exception to IITC’s
assertion that it merely acted as a facilitator with regard to the sale of the treasury bills. IITC sent
COEC a letter dated June 3, 1994, demanding that COEC deliver to it (IITC) the P139,833,392.00
worth of treasury bills or return the full purchase price. In either case, it also demanded that COEC
(1) pay IITC the amount of P1,729,069.50 representing business opportunity lost due to the non-
delivery of the treasury bills, and (2) deliver treasury bills worth P121,050,000 with the same
maturity dates originally purchased by IITC. COEC sent a letter-reply dated June 9, 1994 to IITC
in which it acknowledged its obligation to deliver the treasury bills worth P139,833,392.00 which
it sold to IITC and formally demanded the delivery of the treasury bills worthP186,774,739.49
which it purchased from IITC.COEC also demanded the payment of lost profits in the amount
ofP3,253,250.00. Considering that COEC and IITC both have claims against each other for the
delivery of treasury bills, COEC proposed that a legal set-off be effected, which would result in
IITC owing COEC the difference of P46,941,446.49. In its June 13, 1994 letter to COEC, IITC
rejected the suggestion for a legal setting-off of obligations, alleging that it merely acted as a
facilitator between PDB and COEC. Despite repeated demands, however, PDB failed to deliver
the balance of P136,790,000.00 worth of treasury bills which IITC purchased from PDB allegedly
for COEC. COEC was likewise unable to deliver the remaining IITC T-Bills amounting to
P119,633,392.00. Neither PDB nor COEC returned the purchase price for the duly paid treasury
bills. Thus COEC filed a complaint with the RTC which found that COEC still has obligations to
pay IITC P119,633,392.00 worth of treasury bills. However, since IITC and COEC were both
debtors and creditors of each other, the RTC off-set their debts, resulting in a difference of P
17,056,608.00 in favor of COEC. As to PDB’s liability, it ruled that PDB had the obligation to pay
P136,790,000.00 to IITC. Thus, the trial court ordered (a) IITC to pay COEC P17,056,608.00 with
interest at the rate of 6% from
June 10, 1994 until full payment and(b) PDB to pay IITC P136,790,000.00 with interest at the rate
of 6% from March 21, 1995 until full payment.
 ISSUE:

Whether or not COEC can set-off its obligation to IITC as against the latter’s obligation
to it.

RULING:

Yes, the Supreme Court ruled that the set-off compensation is allowed. As against the
contention of IITC, COEC had proven that IITC is a principal on its sale of the treasury bills thus
holding them liable for paying such. Therefore, both IITC and COEC are principal creditors of the
other over debts which consist of consumable things or a sum of money, the RTC correctly ruled
that COEC may validly set-off its claims for undelivered treasury bills against that of IITC’s
claims. The court ruled the applicable provisions of law are Articles 1278, 1279 and 1290 of the
Civil Code of the Philippines. In Article 1278 states that compensation shall take place when two
persons, in their own right, are creditors and debtors of each other. Also, in Article 1290, states
that when all the requisites mentioned in Article 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount, even though the creditors
and debtors are not aware of the compensation. The requisites of a valid compensation are present
in the cases of the debts between IITC and COEC.

As stated in Article 1279 of the Civil Code of the Philippines, such requisites are

(1)That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable; and

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor. Therefore, both shall be allowed to set-off
their obligations with each other.
 LAO, ET AL. V. SPECIAL PLANS, INC
G.R. NO. 164791
JUNE 29, 2010

FACTS:

Petitioners Selwyn F. Lao and Edgar Manansala, together with Benjamin Jim, entered into
a Contract of Lease with respondent Special Plans, Inc. (SPI) for the period January 16, 1993 to
January 15, 1995 over SPI’s building at No. 354 Quezon Avenue, Quezon City. Petitioners
intended to use the premises for their karaoke and restaurant business known as "Saporro
Restaurant". Upon expiration of the lease contract, it was renewed for a period of eight months at
a rental rate of P23,000.00 per month. On June 3, 1996, SPI sent a Demand Letter to the petitioners
asking for full payment of rentals in arrears. Receiving no payment, SPI filed on July 23, 1996 a
Complaint for sum of money with the Metropolitan Trial Court (MeTC) of Quezon City, claiming
that Jim and petitioners have accumulated unpaid rentals of P118,000.00 covering the period
March 16, 1996 to August 16, 1996. Petitioners filed their Verified Answer faulting SPI for making
them believe that it owns the leased property. They likewise asserted that SPI did not deliver the
leased premises in a condition fit for petitioners’ intended use. Thus, petitioners claimed that they
were constrained to incur expenses for necessary repairs as well as expenses for the repair of
structural defects, which SPI failed and refused to reimburse.

Issue:

Whether or not the cost of repairs incurred by petitioners should be compensated against
the unpaid rentals.
Ruling:

The petitioners attempted to prove that they spent for the repair of the roofing, ceiling and
flooring, as well as for waterproofing. However, they failed to appreciate that, as per their lease
contract, only structural repairs are for the account of the lessor, herein respondent SPI. In which
case, they overlooked the need to establish that aforesaid repairs are structural in nature, in the
context of their earlier agreement. It would have been an altogether different matter if the lessor
was informed of the said structural repairs and he implicitly or expressly consented and agreed to
take responsibility for the said expenses. Such want of evidence on this respect is fatal to this
appeal. Consequently, their claim remains unliquidated and, legal compensation is inapplicable.
 UNITED PLANTERS SUGAR VS. CA
G.R. NO. 126890
MARCH 9, 2010

FACTS:
In 1974, petitioner, obtained "takeoff loans" from respondent PNB to finance the
construction of a sugar milling plant. The takeoff loans were secured by a real estate mortgage
over two parcels of land where the milling plant stood and chattel mortgagesover certain
machineries and equipment. From 1984 to 1987, petitioner contracted another set of loans, They
were likewise secured by pledge contracts whereby petitioner assigned to respondent PNB all its
sugar produce for the latter to sell and apply the proceeds to satisfy the indebtedness arising from
the loans. Later, respondent APT and petitioner agreed to an "uncontested" or "friendly
foreclosure" of the mortgaged assets, in exchange for petitioner’s waiver of its right of redemption.
On July 28, 1987, respondent PNB and respondent APT filed a Petition for Extrajudicial
Foreclosure Sale with the Ex-Officio Regional Sheriff of Dumaguete City, seeking to foreclose on
the real estate and chattel mortgages which were executed to secure the takeoff loans. On 27
February 1987, through a Deed of Transfer, PNB assigned to the Government its "rights" titles and
interests over UPSUMCO, among several other assets. The Deed of Transfer acknowledged that
said assignment was being undertaken "in compliance with Presidential Proclamation No. 50."
The Government subsequently transferred these "rights" titles and interests" over UPSUMCO to
respondent Asset and Privatization Trust (APT).

ISSUE:
Whether or not there was legal compensation.

RULING:
The right of respondent PNB to set-off payments from UPSUMCO arose from
conventional compensation rather than legal compensation, even if all the requisites for legal
compensation were present between those two parties. The determinative factor is the mutual
agreement between PNB and UPSUMCO to set-off payments. Even without an express agreement
stipulating compensation, PNB and UPSUMCO would have been entitled to set-off of payments,
as the legal requisites for compensation under Article 1279 were present. As soon as PNB assigned
its credit to APT, the mutual creditor-debtor relation between PNB and UPSUMCO ceased to exist.
However, PNB and UPSUMCO had agreed to a conventional compensation, a relationship which
does not require the presence of all the requisites under Article 1279. And PNB too had assigned
all its rights as creditor to APT, including its rights under conventional compensation. The absence
of the mutual creditor-debtor relation between the new creditor APT and UPSUMCO cannot
negate the conventional compensation. Accordingly, APT, as the assignee of credit of PNB, had
the right to set-off the outstanding
obligations of UPSUMCO on the basis of conventional compensation before the condonation
took effect on 3 September 1987.
LEGAL COMPENSATION: WHEN PROHIBITED

PNB MANAGEMENT VS. R & R METAL

G.R. NO. 132245
JANUARY 2, 2002
Facts:
It appears that on November 19, 1993, respondent R&R Casting and Fabricating, Inc.
(R&R) obtained a judgment in its favor against Pantranco North Express, Inc. (PNEI). PNEI was
ordered to pay respondent P213, 050.00 plus interest as actual damages. P50, 000.00 as exemplary
damages, 25 percent of the total amount payable as attorneys’ fees, and the costs of suit. However,
the writ of execution was returned unsatisfied since the sheriff did not find any property of PNEI
recorded at the Registries of Deeds of the different cities of Metro Manila. Neither did the sheriff
receive a reply to the notice of garnishment he sent to PNB-Escolta. On March 27, 1995,
respondent filed with the trial court motion for the issuance of subpoenaeducestecumand ad
testificandum requiring petitioner PNB Management and Development Corp. (PNB MADECOR)
to produce and testify on certain documents pertaining to transactions between petitioner and PNEI
from 1981 to 1995.

Issue:
Whether or not legal compensation occurred in the instant case.

Ruling:
Legal compensation could not have occurred because of the absence of one requisite in this
case: that both debts must be due and demandable. Petitioner’s obligation to PNEI appears to be
payable on demand, following the above observation made by the CA and the assertion made by
the petitioner. Petitioner is obligated to pay the amount stated in the promissory note upon receipt
of a notice pay from PNEI. If petitioner fails to pay after such notice, the obligation will earn an
interest of 18 percent per annum. Since petitioner’s obligation to PNEI is payable on demand, and
there being no demand made, it follows that the obligation is not yet due. Therefore, this obligation
may not be subject to compensation for lack of a requisite under law. Without compensation having
taken place, petitioner remains obligated to PNEI to the extent stated in the promissory note. This
obligation may undoubtedly be garnished in favor of respondent to satisfy PNEI’s judgment debt.
 SILAHIS VS. IAC
G. R. NO. L-74027
DECEMBER 7, 1989

FACTS:
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
invoices in the aggregate amount of P 22,213.75 payable within thirty (30) days from date of the
covering invoices. Allegedly due to Silahis' failure to pay its account upon maturity despite
repeated demands, de Leon filed before the then Court of First Instance of Manila a complaint for
the collection of the said accounts including accrued interest thereon in the amount of P 661.03
and attorney's fees of P 5,000.00 plus costs of litigation.

ISSUE:
Whether or not respondent is liable to petitioner for commission which the former
consummated with Dole Philippines.

RULING:
When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation
takes effect by operation of law, even without the consent or knowledge of the creditors and
debtors. Article 1279 requires, among others, that in order that legal compensation shall take place,
"the two debts be due" and "they be liquidated and demandable." Compensation is not proper
where the claim of the person asserting the set-off against the other is not clear nor liquidated;
compensation cannot extend to unliquidated, disputed claim existing from breach of contract.
Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in
the amount of P 22,213.75 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. The Court
held that there is no evidence on record from which it can be inferred that there was any agreement
between the petitioner and private respondent prohibiting the latter from selling directly to Dole
Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was a contract
binding between the parties considering that the same was not signed by private respondent nor
was there any mention therein of any commitment by the latter to pay any commission to the
former. Indeed, such document can be taken as self-serving with no probative value absent a
showing or at the very least an inference, that the party sought to be bound assented to its contents
or showed conformity thereto.
 FRANCIA VS. CA
G.R. NO. L-67649
JUNE 28, 1988

FACTS:
Engracio Francia is the registered owner of a residential lot and a two-story house built
upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. On
October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the
Republic of the Philippines for the sum of P4,116.00representing the estimated amount equivalent
to the assessed value of the aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to
pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction by
the City Treasurer of Pasay City in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez
was the highest bidder for the property. Francia was not present during the auction sale since he
was in Iligan City. On March 3, 1979, Francia received a notice of hearing and the issuance in his
name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a
Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on December
11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No.
4739 (37795) by the Register of Deeds.

Issue:
Whether or not Francia’s tax delinquency has been extinguished by legal compensation.

Ruling:
There is no legal basis for the contention. By legal compensation, obligations of persons,
who in their own right are reciprocally debtors and creditors of each other, are extinguished. The
circumstances of the case do not satisfy the requirements provided by Article 1279 (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 the two debts be due.The court ruled that there can be no off-setting of taxes against
the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax
on the ground that the government owes him an amount equal to or greater than the tax
beingcollected. The collection of a tax cannot await the results of a lawsuit against the government.
In addition, a taxpayer cannot refuse to pay his tax when called upon by the collector because he
has a claim against the governmental body not included in the tax levy.The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the
amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot
was deposited with the Philippine National Bank long before the sale at public auction of his
remaining property. It would have been an easy matter to withdraw P2,400.00 from the deposit so
that he could pay the tax obligation thus aborting the sale at public auction.Petitioner had one year
within which to redeem his property although, he claimed that he pocketed the notice of the auction
sale without reading it. Petitioner, therefore, was notified
about the auction sale. It was negligence on his part when he ignored such notice. By his very own
admission that he received the notice, his now coming to court assailing the validity of the auction
sale loses its force. As a general rule, gross inadequacy of price is immaterial when the law gives
the owner the right to redeem as when a sale is made at public auction, upon the theory that the
lesser the price, the easier it is for the owner to effect redemption.
 TRINIDAD VS. ACAPULCO
G.R. NO. 147477
JUNE 27, 2006

FACTS:
On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking
the nullification of a sale she made in favor of petitioner Hermenegildo M. Trinidad. She alleged:
Sometime in February 1991, a certain PrimitivoCañeterequested her to sell a Mercedes Benz for
P580,000.00. Cañete also said that if respondent herself will buy the car, Cañete was willing to
sell it for P500,000.00. Petitioner borrowed the car from respondent for two days but instead of
returning the car as promised, petitioner told respondent to buy the car from Cañete for
P500,000.00and that petitioner would pay respondent after petitioner returns from Davao.
Following petitioner’s instructions, respondent requested Cañete to execute a deed of sale covering
the car in respondent’s favor for P500,000.00 for which respondent issued three checks in favor of
Cañete. Respondent thereafter executed a deed of sale in favor of petitioner even though petitioner
did not pay her any consideration for the sale. When petitioner returned from Davao, he refused to
pay respondent the amount of P500,000.00 saying that said amount would just be deducted from
whatever outstanding obligation respondent had with petitioner. Due to petitioner’s failure to pay
respondent, the checks that respondent issued in favor of Cañete bounced, thus criminal charges
were filed against her.

Issue:
Whether or not there is valid dacion en pago.

Ruling:
Compensation takes effect by operation of law even without the consent or knowledge of
the parties concerned when all the requisites mentioned in Article 1279 of the Civil Code. While
the proceedings in the RTC focused on ascertaining the presence of the elements of dacion en
pago, it was likewise proven that petitioner owed respondent the amount of P500,000.00 while
respondent owed petitioner P566,000.00; that both debts are due, liquidated and demandable, and;
that neither of the debts or obligations are subject of a controversy commenced by a third person.
By operation of law, the P500,000.00 which petitioner owed respondent is off-set against the
P566,000.00 owed by respondent to petitioner, leaving a balance of P66,000.00, which respondent
should pay with 12% interest per annum from date of judicial or extrajudicial deed. Since there
was no extrajudicial deed in this case, the interest shall be resolved from the date petitioner filed
its Supplemental Motion for Reconsideration invoking for the first time legal compensation, that
is, May 20, 1992. The court held that the P500,000.00 which Hermenegildo M. Trinidad owed
Estrella Acapulco is offset against the P566,000.00 which Acapulco owed Trinidad. Acapulco is
ordered to pay Trinidad the amount of P66,000.00 plus interest at 12% per annum from May 20,
1992 until full payment.
NOVATION

HEIRS OF FRANCO VS. SPS. GONZALES

G.R. NO. 159709
JUNE 27, 2012

FACTS:
On Nov. 7, 1985, Servando Franco and Leticia Medel obtained a loan from Veronica
Gonzales. Franco and Medel executed a promissory note to evidence the loan. On Nov. 19, 1985,
they obtained another loan. On maturity of the 2 promissory notes, they failed to pay. On June 11,
1986, they executed another loan secured by a REM over a property belonging to Leticia
Yaptinchay, who issued a SPA in favor of Medel. Like the previous loans, Franco and Medel failed
to pay on maturity. On July 23, 1986, Franco and Medel consolidated all unpaid loans totaling
P440K and sought another loan. On maturity, they failed to pay the indebtedness of P500K plus
interests and penalties.Sps. Gonzales filed with the RTC a complaint for collection of the full
amount of the loan including interests and other charges. The lower court ruled that, although the
Usury Law had been repealed, the interest charged by Sps. Gonzales was unconscionable. Hence,
it applied the provision of the Civil Code that the "legal rate of interest for loan or forbearance of
money, goods, or credit is 12% per annum." The CA reversed the decision of the RTC.Upon
finality of the decision, Sps. Gonzales moved for execution. Franco opposed, claiming that their
agreement, which was allegedly embodied in a receipt dated Feb. 5, 1992 whereby he made an
initial payment of P400K and promised to pay the balance of P375K on Feb. 29, 1992, superseded
the July 23, 1986 promissory note.

ISSUE:
Whether or not there was a novation of the Aug. 23, 1986 promissory note when Veronica
Gonzales issued the Feb. 5, 1992 receipt.

RULING:
Novation did not transpire because no irreconcilable incompatibility existed between the
promissory note and the receipt. The receipt did not create a new obligation incompatible with the
old one under the promissory note. Instead, Sps. Gonzales only recognized the original obligation
by stating in the receipt that the P400K was partial payment of the loan and by referring to the
promissory note subject of the case in imposing the interest. Advertence to the interest stipulated
in the promissory note indicated that the contract still subsisted, not replaced and
extinguished.Worth noting is that Franco's liability was joint and solidary with his co-debtors. In
a solidary obligation, the creditor may proceed against any one of the solidary debtors or some or
all of them simultaneously. The choice to determineagainst whom the collection is enforced
belongs to the creditor until the obligation is fully satisfied. Thus, the obligation was
being enforced against Franco, who, in order to escape liability, should have presented evidence
to prove that his obligation had already been cancelled by the new obligation or that another debtor
had assumed his place. In case of change in the person of the debtor, the substitution must be clear
and express and made with the consent of the creditor. Yet, these circumstances did not obtain,
proving that Franco remained a solidary debtor against whom the entire or part of the obligation
might be enforced. Lastly, the extension of the maturity date did not constitute a novation of the
previous agreement.
OBJECTIVE NOVATION

HERNANDEZ-NIEVERA VS. HERNANDEZ

G.R. NO. 171165
FEBRUARY 14, 2011

FACTS:
Project Movers Realty & Development Corporation (PMRDC), is a duly organized
domestic corporation engaged in real estate development. On November 13, 1997, PMRDC
entered into a Memorandum of Agreement whereby it was given the option to buy pieces of land
owned by petitioners Carolina Hernandez-Nievera, Margarita H. Malvar and Demetrio P.
Hernandez, Jr., under authority of a Special Power of Attorney to Sell or Mortgage. In the
aggregate, the realty measured 4,580,451 square meters and was segregated by agreement into
Area I and Area II. On March 23, 1998, it entered with LBP and Demetrio the latter purportedly
acting under authority of the same special power of attorney as in the MOA into a Deed of
Assignment and Conveyance. Although PMRDC delivered to petitioners certain checks
representing the money, the same however allegedly bounced. Hence, on January 8, 1999,
petitioners demanded the return of the corresponding TCTs.

Issue:
Whether or not the novation of MOA is valid.

Ruling:
Petitioners cause stems from the failure of PMRDC to restore to petitioners the possession
of the TCTs of the lands within Area II upon its failure to exercise the option to purchase within
the 12-month period stipulated in the MOA. Respondents maintain, that said obligation, has
altogether been expressly obliterated by the terms of the DAC whereby petitioners, through
Demetrio as attorney-in-fact, have agreed to novate the terms of the MOA by extinguishing the
core obligations of PMRDC on the payment of option money. But petitioners stand against the
validity of the DAC on the ground that the signature of Demetrio therein was spurious.
Respondents are quick to reason that a request is unnecessary because Demetrio has been legally
enabled by his special power to give such consent and accordingly execute the DAC, effect a
novation of the MOA, and extinguish the stipulated obligations of PMRDC therein, or at least that
he could assent to the implementation of the MOA provisions in the way that transpired. Thus, it
becomes clear that Demetrio’s special power of attorney to sell is sufficient to enable him to make
a binding commitment under the DAC in behalf of Carolina and Margarita. In particular, it does
include the authority to extinguish PMRDC’s obligation under the MOA to deliver option money
and agree to a more flexible term by agreeing instead to receive shares of stock in lieu thereof and
in consideration of the assignment and conveyance of the properties to the Asset Pool. Indeed, the
terms of his special power of attorney allow much leeway to accommodate not only the terms of
the MOA but also those of the subsequent
agreement in the DAC which, in this case, necessarily and consequently has resulted in a
novation of PMRDC’s integral obligations.
 ST. JAMES COLLEGE VS. EQUITABLE PCI BANK
G.R. NO. 179441
AUGUST 9, 2010
FACTS:
Petitioners-spouses Jaime and Myrna Torres owned and operated St. James College of
Parañaque. In 1995, the Philippine Commercial and International Bank (PCIB) granted the Torres
spouses and/or St. James College a credit line facility of up to PhP 25,000,000. This
accommodation or any of its extension or renewal was secured by a real estate mortgage over a
parcel of land situated in Parañaque. As petitioners had defaulted in the payment of the loan, their
total unpaid loan obligation, as of September 2001, stood at PhP 18,300,000.In a bid to settle its
loan availment, petitioners first proposed to EPCIB that they be allowed to pay their account in
equal quarterly installments for five years. EPCIB informed petitioners that it is denying their
request for the reinstatement of their credit line, but proposed a restructuring package with a soft
payment scheme for the outstanding loan balance of PhP 18,300,000. Petitioner Jaime Torres
chose and agreed to the second option, by affixing his signature at the bottom portion of EPCIB’s
letter.
ISSUE:
Whether or not there was a novation of the contract and whether the required grounds for
the issuance of preliminary injunction are present.
RULING:
It has often been said that the minds that agree to contract can agree to novate. And the
agreement or consent to novate may well be inferred from the acts of a creditor, since volition may
as well be expressed by deeds as by words. In the instant case, however, the acts of EPCIB before,
simultaneously to, and after its acceptance of payments from petitioners argue against the idea of
its having acceded or acquiesced to petitioners request for a change of the terms of payments of
the secured loan. Thus, a novation through an alleged implied consent by EPCIB, as proffered and
argued by petitioners, cannot be given imprimatur by the Court. The Court held that the petitioners
have not shown a right in esse to be protected. Indeed, the Rules requires that the applicant’s right
must be clear or unmistakable. An injunction will not issue to protect a right not in esse and which
may never arise, or to restrain an act which does not give rise to a cause of action. An application
for a preliminary injunction is a mere adjunct to the main action. In all then, the preliminary
evidence presented by petitioners and the allegations in their complaint did not clearly make out
any entitlement to the injunctive relief prayed for. Trial courts are reminded to see to it that
applications for preliminary injunction clearly allege facts and circumstances showing the
existence of the requisites. An application for injunctive relief is construed strictly against the
pleader
 TOMIMBANG VS. TOMIMBANG
G.R. NO. 165116
AUGUST 4, 2009

FACTS:
Petitioner and respondent are siblings. Their parents donated to petitioner an eight- door
apartment, with the condition that during the parents’lifetime, they shall retain control over the
property and petitioner shall be the administrator thereof. Petitioner failed to obtain a loan from
PAG-IBIG Fund, hence, respondent offered to extend a credit line to petitioner on the following
conditions: (1) petitioner shall keep a record of all the advances; (2) petitioner shall start paying
the loan upon the completion of the renovation; (3) upon completion of the renovation, a loan and
mortgage agreement based on the amount of the advances made shall be executed by petitioner
and respondent; and (4) the loan agreement shall contain comfortable terms and conditions which
petitioner could have obtained from PAG-IBIG. However, respondent and petitioner entered into
a new agreement whereby petitioner was to start making monthly payments on her loan. Upon
respondent ‘s demand, petitioner turned over to respondent all the records of the cash advances for
the renovations. Petitioner however discontinued the renovations and her whereabouts could not
be located. Respondent filed a complaint demanding the former to pay the loan plus interest. The
trial court and the Court of Appeals rendered judgment in favor of the plaintiff.

ISSUE:
Whether or not petitioner ‘s obligation is due and demandable. Whether or not there was a
novation of the original terms of the loan agreement.

RULING:
The Court finds that the obligation was already due and demandable. The evidence on
record clearly shows that after renovation of seven out of the eight apartment units had been
completed, petitioner and respondent agreed that the former shall already start making monthly
payments on the loan even if renovation on the last unit was still pending. She agreed and complied
with respondent’s demand for her to begin paying her loan, since she believed this was in
accordance with her commitment to pay whenever she was able. By her very own admission and
partial performance of her obligation, there can be no other conclusion that petitioner’s obligation
is already due and demandable. Evidently, by virtue of the subsequent agreement, the parties
mutually dispensed with the condition that petitioner shall only begin paying after the completion
of all renovations. There was, in effect, a partial novation, of petitioner’s obligation. As can be
gleaned from the foregoing, the aforementioned four essential elements and the requirement that
there be total incompatibility between the old and new obligation, apply only to extinctive
novation. In partial novation, only the terms and conditions of the obligation are altered, thus, the
main obligation is not changed and it remains in force. Her partial performance
of her obligation is unmistakable proof that indeed the original agreement between her and
respondent had been novated by the deletion of the condition that payments shall be made only
after completion of renovations.
SUBSTITUTION OF THE DEBTOR: EXPROMISION

MINDANAO SAVINGS VS. WILLKOM

G.R. NO. 178618
OCTOBER 11, 2010
FACTS:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by
Mindanao Savings and Loan Association, Inc. (MSLAI), represented by its liquidator, Philippine
Deposit Insurance Corporation (PDIC), against respondents Edward R. Willkom (Willkom); Gilda
Go (Go); RemediosUy (Uy); MalayoBantuas (sheriff Bantuas), in his capacity as sheriff of the
Regional Trial Court (RTC), Branch 3 of Iligan City; and the Register of Deeds of Cagayan de
Oro City. MSLAI seeks the reversal and setting aside of the Court of Appeals (CA) Decision dated
March 21, 2007 and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337.

ISSUE:
Whether or not the Court of Appeals, Cagayan de Oro committed grave and reversible error
when it refused to recognize the merger between FISLAI and DSLAI with DSLAI as the surviving
corporation.

RULING:
The merger, however, does not become effective upon the mere agreement of the
constituent corporations. Since a merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and creditors, there must be an express
provision of law authorizing them. Clearly, the merger shall only be effective upon the issuance
of a certificate of merger by the SEC, subject to its prior determination that the merger is not
inconsistent with the Corporation Code or existing laws. Where a party to the merger is a special
corporation governed by its own charter, the Code particularly mandates that a favorable
recommendation of the appropriate government agency should first be obtained.
 AQUINTEY V. TIBONG
G.R. NO. 166704
DECEMBER 20, 2006

FACTS:
On May 6, 1999, petitioner AgrifinaAquintey filed before the RTC of Baguio City, a
complaint for sum of money and damages against the respondents, spouses Felicidad and Rico
Tibong. Agrifina alleged that Felicidad had secured loans from her on several occasions, at
monthly interest rates of 6% to 7%. Despite demands, the spouses Tibong failed to pay their
outstanding loan, amounting to P773,000.00 exclusive of interests. In their Answer with
Counterclaim, spouses Tibong admitted that they had secured loans from Agrifina. The proceeds
of the loan were then re-lent to other borrowers at higher interest rates. They, likewise, alleged that
they had executed deeds of assignment in favor of Agrifina, and that their debtors had executed
promissory notes in Agrifina’s favor. According to the spouses Tibong, this resulted in a novation
of the original obligation to Agrifina. They insisted that by virtue of these documents, Agrifina
became the new collector of their debtors; and the obligation to pay the balance of their loans had
been extinguished.

ISSUE:

Whether or not there is valid novation in the instant case.

RULING:

Novation which consists in substituting a new debtor in the place of the original one may
be made even without the knowledge or against the will of the latter but not without the consent
of the creditor. Substitution of the person of the debtor may be effected by delegacion, meaning,
the debtor offers, and the creditor, accepts a third person who consents to the substitution and
assumes the obligation. Thus, the consent of those three persons is necessary. In this kind of
novation, it is not enough to extend the juridical relation to a third person; it is necessary that the
old debtor be released from the obligation, and the third person or new debtor take his place in the
relation. Without such release, there is no novation; the third person who has assumed the
obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to
solidarity, the first and the new debtor are considered obligated jointly. In the case at bar, the court
found that respondents' obligation to pay the balance of their account with petitioner was
extinguished, pro tanto, by the deeds of assignment of credit executed by respondent Felicidad in
favor of petitioner. As gleaned from the deeds executed by respondent Felicidad relative to the
accounts of her other debtors, petitioner was authorized to collect the amounts of P6,000.00 from
Cabang, and P63,600.00 from Cirilo. They obliged themselves to pay petitioner. Respondent
Felicidad, likewise, unequivocally declared that Cabang and Cirilo no longer had any obligation
to her.
SUBROGATION TO THE RIGHTS OF THE CREDITOR: LEGAL VS.
CONVENTIONAL

ASIAN TERMINALS VS. PHILAM

G.R. NO. 181163
JULY 24, 2013
FACTS:
On April 15, 1995, Nichimen Corporation shipped to Universal Motors Corporation 219
packages containing 120 units of brand new Nissan Pickup Truck Double Cab 4x2 model, without
engine, tires and batteries, on board the vessel S/S Calayan Iris from Japan to Manila. The
shipment, which had a declared value of US$81,368 or P29,400,000, was insured with Philam
against all risks under the marine Policy no. 708-8006717-4. The carrying vessel arrived at the
port of manila on April 20, 1995, and when the shipment was unloaded by the staff of ATI, it was
found that the package marked as 03-245-42K/1 was in bad order. The Turn Over Survey of bad
order cargoes dated April 21, 1995 identified two packages, labeled 03-245-42K/1 and
03/237/7CK/2, as being dented and broken. Thereafter, the cargoes were stored for temporary
safekeeping inside CFS Warehouse in Pier No. 5. On May 11, 1995, the shipment was withdrawn
by R.F. Revilla Customs Brokerage, Inc., the authorized broker of Universal Motors, and delivered
to the latter’s warehouse in Mandaluyong City. Upon the request of Universal Motors, a bad order
survey was conducted on the cargoes and it was found that one Frame Axle Sub without LWR was
deeply dented on the buffle plate while six Frame Assembly with Bush were deformed and
misaligned. Owing to the extent of the damage to said cargoes, Universal Motors declared them a
total loss. On August 4, 1995, Universal Motors filed a formal claim for damages in the amount
of P643,963.84 against Westwind, ATI and R.F. Revilla Customs Brokerage, Inc. When Universal
Motors’ demands remained unheeded, it sought reparation from and was compensated in the sum
of P633,957.15 by Philam. Accordingly, Universal Motors issued a Subrogation Receipt dated
November 15, 1995 in favor of Philam. On January 18, 1996, Philam, as subrogee of Universal
Motors, filed a Complaint for damages against Westwind, ATI and R.F. Revilla Customs
Brokerage, Inc. before the Regional Trial Court of Makati City. The trial court rendered judgment
in favour of Philam which ruling was affirmed by the Court of Appeals modifying the amount to
be paid by Westwind and ATI.

ISSUE:
Whether or not Philam may claim against Westwind and ATI as a subrogee.

RULING:
The Court holds that petitioner Philam has adequately established the basis of its claim
against petitioners ATI and Westwind. Philam, as insurer, was subrogated to the rights of the
consignee, Universal Motors Corporation, pursuant to the Subrogation receipt executed by the
latter in favor of the former. The right of subrogation accruessimply upon payment by the insurance
company of the insurance claim. Petitioner Philam’s action finds support in Article 2207 of the
Civil Code which provides that if the plaintiff’s property has been insured, and he
has received indemnity from the insurance company for the injury or loss arising out of the wrong
or breach of contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. In Malayan
Insurance Co., Inc. vs. Alberto, the Court explained the effect of payment by the insurer of the
insurance claim in this wise: We have held that payment by the insurer to the insured operates as
an equitable assignment to the insurer of all the remedies that the insured may have against the
third party whose negligence or wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon payment
by the insurance company of the insurance claim. The doctrine of subrogation has its roots in
equity. It is designed to promote and accomplish justice; and is the mode that equity adopts to
compel the ultimate payment of a debt by one who, in justice, equity, and good conscience, ought
to pay.
 LOADMASTERS VS. GLODEL BROKERAGE
G.R. NO. 179446
JANUARY 10, 2011

FACTS:
Columbia engaged the services of Glodel for the release and withdrawal of the cargoes
from the pier and the subsequent delivery to its warehouses/plants. Glodel, in turn, engaged the
services of Loadmasters for the use of its delivery trucks to transport the cargoes to Columbia’s
warehouses/plants in Bulacan and Valenzuela City. The goods were loaded on board twelve (12)
trucks owned by Loadmasters, driven by its employed drivers and accompanied by its employed
truck helpers. Six (6) truckloads of copper cathodes were to be delivered to Balagtas, Bulacan,
while the other six (6) truckloads were destined for Lawang Bato, Valenzuela City. The cargoes
in six truckloads for Lawang Bato were duly delivered in Columbia’s warehouses there. Of the six
(6) trucks en route to Balagtas, Bulacan, however, only five (5) reached the destination. One
(1) truck, loaded with 11 bundles or 232 pieces of copper cathodes, failed to deliver its cargo.
Later on, the said truck, an Isuzu with Plate No. NSD-117, was recovered but without the copper
cathodes. Because of this incident, Columbia filed with R&B Insurance a claim for insurance
indemnity in the amount of P1,903,335.39. After the requisite investigation and adjustment, R&B
Insurance paid Columbia the amount of P1,896,789.62 as insurance indemnity.

ISSUE:
Whether or not petitioner Loadmasters be held liable to Respondent Glodel in spite of the
fact that the latter respondent Glodel did not file a cross-claim against it (Loadmasters).

RULING:
Subrogation is the substitution of one person in the place of another with reference to a
lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to
a debt or claim, including its remedies or securities. Doubtless, R&B Insurance is subrogated to
the rights of the insured to the extent of the amount it paid the consignee under the marine
insurance, as provided under Article 2207 of the Civil Code, which reads: ART. 2207. If the
plaintiff’s property has been insured, and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrong-doer or the person who
has violated the contract. If the amount paid by the insurance company does not fully cover the
injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury. As subrogee of the rights and interest of the consignee, R&B Insurance
has the right to seek reimbursement from either Loadmasters or Glodel or both for breach of
contract and/or tort.