TOPIC: NOVATION

BAR FORMAT
QUESTION
PMRDC, one of the respondents, entered into different agreements with
the other respondents HIGC and Land Bank of the Philippines (LBP) in reference to
construction projects contemplated. PMRDC entered into a MOA with petitioners
A, B, and C wherein PMRDC was given the option to buy pieces of land owned by
the former within 12 months from the date of the instrument along with the
payment of option money. It was further stated that in the case there is failure to
avail within the stipulated option period of 12 months, the option money shall be
forfeited in favor of the vendor and the vendee shall return all the TCTs of the
covered parcels of land to the former.
PMRDC entered into a Deed of Assignment and Conveyance (DAC) with LBP
and C, who acted through the same Special Power of Attorney used in the MOA.
The DAC sought to transfer and assign some lands in Area II to the asset in
exchange for a number of shares of stock which had been issued in favor and in
the name of C.
PMRDC admits that they did not avail the express stipulation of 12-month
option period in the MOA. Petitioners demand that the TCTs be returned to them
but PMRDC refused contending there was novation of the obligation since the
properties were already transferred and assigned pursuant to the DAC. Was the
MOA novated by the Deed of Assignment and Conveyance (DAC)?

SUGGESTED ANSWER
Yes. The memoradum of agreement was novated by the deed of
assignment and conveyance.
There are two ways which could indicate, in fine, the presence of novation
and thereby produce the effect of extinguishing an obligation by another which
substitutes the same. The first is when novation has been explicitly stated and
declared in unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of incompatibility is

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whether the two obligations can stand together, each one having its independent
existence. If they cannot, they are incompatible, and the latter obligation novates
the first. Corolarilly, changes the in breed incompatibility must be essential in
nature and not merely accidental. The incompatibility must take place in any of
the essential elements of the obligatons such as its object, cause or principal
conditions thereof; otherwise, the change would be merely modificatory in nature
and insufficient to extinguish the original obligation.
Petitioners, through C 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. This seems to suggest that with the execution of the DAC, PMRDC
has already entered into the exercise of its option except that its obligation to
deliver the option money has, by subsequent agreement embodied in the DAC,
been substituted instead by the obligation to issue participation certificates in
Demetrio’s name but which, likewise, has not yet been performed by PMRDC.
TOPIC: STATUTE OF FRAUDS

QUESTION
The subject lot was firstly registered under the name of A around 1996. A
sold the subject lot to B without executing a formal deed. The price of the lot was
payable in installment and A accepted the set-up. B and her sons have long been
residing in the lot since 1979 and even had a house constructed therein. They
also paid real property taxes and declared the lot for tax purposes. After the
death of A, his son A1 continued to accept installment payments from B.
However, despite the payment made by B, A1 sold the subject lot C without the
knowledge of B and the rest of the petitioners. C then sold the subject lot to DSy
and E Sy. The Sy’s then ceded the subject lot to F. the latter, through his lawyer,
sent a letter to the residence of A1 ordering those living therein to vacate the lot
or else ejectment would commence. Is the Statute of Frauds applicable to this
case?

SUGGESTED ANSWER
No. Statute of Frauds is not applicable in this case since the contract is
partially executed.
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 The Statute of Frauds expressed in Article 1403, par. 2, of the Civil Code
applies only to executory contracts, i.e., those where no performance has yet
been made. Stated a bit differently, the legal consequence of non-compliance
with the Statute of Frauds does not come into play where the contract in question
is completed, executed, or partially consummated.
The Statute of Frauds, in context, provides that a contract for the sale of
real property or of an interest therein shall be unenforceable unless the sale or
some note or memorandum thereof is in writing and subscribed by the party or
his agent. However, where the verbal contract of sale has been partially
executed through the partial payments made by one party duly received by the
vendor, as in the present case, the contract is taken out of the scope of the
Statute.
A contract that infringes the Statute of Frauds is ratified by the acceptance
of benefits under the contract. Evidently, A1.as his father earlier, had benefited
from the partial payments made by the petitioners. As it were, petitioners need
only to pay the outstanding balance of the purchase price and that would
complete the execution of the oral sale.

TOPIC: EXTINGUISHMENTS OF OBLIGATIONS

QUESTION
X obtained a loan from Y and was evidenced by a promissory note, and
secured by a real estate mortgage over the X’s land and 4-storey building.
To be able to pay the loan in favor of Y, X applied for a loan with the
PNBank and offered as collateral the same properties previously mortgaged to
Y. The PNBand approved the loan application conditioned on the cancellation of
the mortgage in favor of MTLC.
X then executed a Special Power of Attorney (SPA) authorizing Y to collect the
proceeds of his PNBank loan as payment of X’s loan to Y. However, Y refused to

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sign the deed of release/cancellation of mortgage and to collect the proceeds of
the PNBank loan and instead instituted foreclosure proceedings on the subject
property.

Is X’s execution of the SPA in favor of Y a valid tender of payment as

required by law?

a. What the effect of Y’s refusal to accept such form of payment to the
standing of the loan in question?

SUGGESTED ANSWER

No, Obligations are extinguished, among others, by payment or

performance. Under Article 1232 of the Civil Code, payment means not only the
delivery of money but also the performance, in any other manner, of an
obligation. Article 1233 of the Civil Code states that “a debt shall not be
understood to have been paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as the case may be.” In
contracts of loan, the debtor is expected to deliver the sum of money due the
creditor.

The delivery of the SPA was not, strictly speaking, a delivery of the sum of
money due to Y, thus Y could not be compelled to accept it as payment based on
Article 1233.

ALTERNATIVE ANSWER

Yes, in a case decided by the Supreme Court, Cinco vs CA, G.R. No. 151903
October 9, 2009, The court found that there is nothing legally objectionable in a
mortgagor’s act of taking a second or subsequent mortgage on a property already
mortgaged; a subsequent mortgage is recognized as valid by law and by
commercial practice, subject to the prior rights of previous mortgages. Section 4,
Rule 68 of the 1997 Rules of Civil Procedure on the disposition of the proceeds of
sale after foreclosure actually requires the payment of the proceeds to, among
others, the junior encumbrancers in the order of their priority. Under Article 2130
of the Civil Code, a stipulation forbidding the owner from alienating the
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immovable mortgaged is considered void. If the mortgagor-owner is allowed to
convey the entirety of his interests in the mortgaged property, reason dictates
that the lesser right to encumber his property with other liens must also be
recognized. X, therefore, could not validly require X to first obtain her consent to
the PNBank loan and mortgage. Besides, with the payment of the X’s loan using
the proceeds of the PNBank loan, the mortgage in favor of the Y would have
naturally been cancelled.
Thus, under the circumstances, X has undertaken, at the very least, the equivalent
of a tender of payment that cannot but have legal effect. Since payment was
available and was unjustifiably refused, justice and equity demand that X be freed
from the obligation to pay interest on the outstanding amount from the time the
unjust refusal took place; X would not have been liable for any interest from the
time tender of payment was made if the payment had only been accepted. Under
Article 19 of the Civil Code, they should likewise be entitled to damages, as the
unjust refusal was effectively an abusive act contrary to the duty to act with
honesty and good faith in the exercise of rights and the fulfillment of duty.

a. Article 1256 is clear and unequivocal on this point when it provides that –

ARTICLE 1256. If the creditor to whom tender of payment has been

made refuses without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due.

In short, a refusal without just cause is not equivalent to payment; to have the
effect of payment and the consequent extinguishment of the obligation to pay,
the law requires the companion acts of tender of payment and consignation. In
the case at bar, X was not released from responsibility because of failure to
consign his payment upon the refusal of Y to accept payment.

ALTERNATIVE ANSWER:

While Y’s refusal was unjustified and unreasonable, this refusal did not
have the effect of payment that extinguished X’s obligation to Y. Article 1256 is
clear and unequivocal on this point when it provides that – ARTICLE 1256. If the
creditor to whom tender of payment has been made refuses without just cause to
accept it, the debtor shall be released from responsibility by the consignation of
the thing or sum due.
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 However, the law also provides that obligations are extinguished, among
others, by payment or performance. Under Article 1232 of the Civil Code,
payment means not only the delivery of money but also the performance, in any
other manner, of an obligation. Article 1233 of the Civil Code states that “a debt
shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may
be.” In contracts of loan, the debtor is expected to deliver the sum of money due
the creditor. These provisions must be read in relation with the other rules on
payment under the Civil Code, which rules impliedly require acceptance by the
creditor of the payment in order to extinguish an obligation. Thus, in a recent case
decided by the Supreme Court, Cinco vs CA, G.R. No. 151903 October 9, 2009,
the court ruled that under the circumstances, the debtor have undertaken, at the
very least, the equivalent of a tender of payment that cannot but have legal effect
since payment was available and was unjustifiably refused, justice and equity
demand that the debtor must at least be freed from the obligation to pay interest
on the outstanding amount from the time the unjust refusal took place and
directing creditor to accept the payment sufficient to cover debtor’s the total
indebtedness.

TOPIC: ESSENTIAL ELEMENTS IN A CONTRACT OF SALE

QUESTION

X, bought a 10,000 square meter of land from Z which was negotiated by Y.

Y, later acquired 1000 meters of lot adjacent to X’s lot, also from Z. The
controversy arose when Y informed X that X’s house stood on a portion of the lot
allegedly owned Y, thus, X consulted a lawyer, who advised them that 1000
meters lot be segregated from the 10,000 meters whose title they own and to
make it appear that they are selling to Y 512 square meters thereof. This sale was
embodied in the February 12, 2000 Kasulatan where it was made to appear that Y
paid PhP 15,000 for the purchase of the 512-square meter portion of the 1000
square meter lot. In reality, the consideration of PhP 15,000 was not paid to
X. Actually, it was X who paid Y PhP 50,000 for the 500-square meter portion
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where X built their house on, believing respondents’ representation that the
latter own the 1000-square meter lot. Decide on the validity of the Kasulatan
(Contract of Sale).

SUGGESTED ANSWER
The Kasulatan is null and void because of the lack of two (2) essentials
requisites of a valid contract.
A contract, as defined in the Civil Code, is a meeting of minds, with respect
to the other, to give something or to render some service. For a contract to be
valid, it must have three essential elements: (1) consent of the contracting
parties; (2) object certain which is the subject matter of the contract; and (3)
cause/consideration of the obligation which is established. In the case at bar, 2
essential requisites are absent. First, there was vitiated consent on the part of
petitioners and second is the lack of consideration.

Article (Art.) 1330 of the Civil Code provides that when consent is given
through fraud, the contract is voidable.

One form of fraud is misrepresentation through insidious words or

machinations. Under Art. 1338 of the Civil Code, there is fraud when, through
insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which without them he would not have agreed
to. Insidious words or machinations constituting deceit are those that ensnare,
entrap, trick, or mislead the other party who was induced to give consent which
he or she would not otherwise have given.

Deceit is also present when one party, by means of concealing or omitting

to state material facts, with intent to deceive, obtains consent of the other party
without which, consent could not have been given. Art. 1339 of the Civil Code is
explicit that failure to disclose facts when there is a duty to reveal them, as when
the parties are bound by confidential relations, constitutes fraud.

In the case at bar, it is clear that actual fraud is present because the sale
between X and Z was negotiated Y. As such, Y was fully aware that what X bought

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was the entire 10,000 square meters and that the 1000-square meter lot which Y
claims he also bought from Z actually forms part of X lot.
Also, there is total absence of consideration in the case at bar. It is a well-
entrenched rule that where the deed of sale states that the purchase price has
been paid but in fact has never been paid, the deed of sale is null and void ab
initio for lack of consideration. Moreover, Art. 1471 of the Civil Code, which
provides that “if the price is simulated, the sale is void,” also applies to the instant
case, since the price purportedly paid as indicated in the contract of sale was
simulated for no payment was actually made.

Consideration and consent are essential elements in a contract of

sale. Where a party’s consent to a contract of sale is vitiated or where there is
lack of consideration due to a simulated price, the contract is null and void ab
initio.

TOPIC: OBLIGATION; EXTINGUISHMENTOFOBLIGATION; WRITE-OFF

QUESTION

Do accounts written-off extinguish the obligation or liability of the erring

employees?

SUGGESTED ANSWER

The accounts written-off do not extinguish the obligation or liability of the

erring employees.

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 are 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.

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 Furthermore, write-off cannot be likened to a novation, since the
obligations of both parties have not been modified. When a write-off occurs, the
actual worth of the asset is reflected in the books of accounts of the creditor, but
the legal relationship between the creditor and the debtor still remains the same
– the debtor continues to be liable to the creditor for the full extent of the unpaid
debt.As creditor, Phil Bank may write-off in its books of account the advance
payment released to REMAD in the interest of accounting accuracy given that the
loans were already uncollectible. Such write-off, however, as previously
discussed, does not equate to a release from liability of petitioners.

Accordingly, the Land Bank Epil Branch must be required to record in its
books of account the Php 3,115,000.00 disallowance, and petitioners, together
with their four co-employees, should be personally liable for the said amount.
Such liability, is, however, without prejudice to petitioners’ right to run after
REMAD, to whom they illegally disbursed the loan, for the full reimbursement of
the advance payment for the cattle.

TOPIC: CONTRACT; CONTRACT OF SALE AND CONTRACT TO SELL

QUESTIONS

1. Is there a perfected contract of sale?

2. Distinguish contract of sale from contract to sell?

SUGGESTED ANSWERS

1. Yes, there is a perfected contract of sale.

The elements of a contract of sale are, to wit: a) Consent or meeting of the

minds, that is, consent to transfer ownership in exchange for the price; b)
Determinate subject matter; and c) Price certain in money or its equivalent.

An examination of the alleged contract to sell, "Exhibit A," despite its

unconventional form, would show that said document, with all the stipulations
therein and with the attendant circumstances surrounding it, was actually a
Contract of Sale.

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 The rule is that it is not the title of the contract, but its express terms or
stipulations that determine the kind of contract entered into by the parties. First,
there was meeting of minds as to the transfer of ownership of the subject matter.
The letter though appearing to be a mere price quotation/proposal was not what
it seemed. It contained terms and conditions, so that, by the fact Y’s
representatives had signed their names under the word "CONFORME," they, in
effect, agreed with the terms and conditions with respect to the purchase of the
subject 10 MVA Power Transformer.

Besides, the uncontroverted attending circumstances bolster the fact that

there was consent or meeting of minds in the transfer of ownership. To begin
with, a board resolution was issued authorizing the purchase of the subject power
transformer. Next, armed with the said resolution, Y’s top officials visited X office
three times to discuss the terms of the purchase. Then, when the loan that Y was
relying upon to finance the purchase was not forthcoming, Y convinced X to do
away with the 50% downpayment and deliver the unit so that it could already
address its acute power shortage predicament, to which X acceded when it made
the delivery, through the carrier Willie Lines, as evidenced by a bill of lading.
Second, the document specified a determinate subject matter which was one (1)
Unit of 10 MVA Power Transformer with corresponding KV Line Accessories. And
third, the document stated categorically the price certain in money which was
P5,200,000.00 for one (1) unit of 10 MVA Power Transformer and P2,169,500.00
for the KV Line Accessories.

2. Contract of sale distinguish from contract to sell

The elements of a contract of sale are, to wit: a) Consent or meeting of the minds,
that is, consent to transfer ownership in exchange for the price; b) Determinate
subject matter; and c) Price certain in money or its equivalent. It is the absence of
the first element which distinguishes a contract of sale from that of a contract to
sell.

In a contract to sell, the prospective seller explicitly reserves the transfer of

title to the prospective buyer, meaning, the prospective seller does not as yet
agree or consent to transfer ownership of the property subject of the contract to
sell until the happening of an event, such as, in most cases, the full payment of
the purchase price. In other words, the full payment of the purchase price
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partakes of a suspensive condition, the non-fulfillment of which prevents the
obligation to sell from arising and, thus, ownership is retained by the prospective
seller without further remedies by the prospective buyer.

In a contract of sale, on the other hand, the title to the property passes to
the vendee upon the delivery of the thing sold. Unlike in a contract to sell, the
first element of consent is present, although it is conditioned upon the happening
of a contingent event which may or may not occur. If the suspensive condition is
not fulfilled, the perfection of the contract of sale is completely abated. However,
if the suspensive condition is fulfilled, the contract of sale is thereby perfected,
such that if there had already been previous delivery of the property subject of
the sale to the buyer, ownership thereto automatically transfers to the buyer by
operation of law without any further act having to be performed by the seller. The
vendor loses ownership over the property and cannot recover it until and unless
the contract is resolved or rescinded.

TOPIC: PURE OBLIGATIONS- DEMANDABLE AT ONCE

QUESTION

Y, a duly registered institution, through its Board of Trustees, established a

retirement plan for the benefit of its employees. X, an employee of Y, is a member
of the retirement plan.

After several contributions, X was able to obtain a car loan. On the

following year, she again applied and was granted with an appliance loan. She
authorized Y to make deductions from her payroll until her loans are fully paid.

Meanwhile, a labor dispute arose between Y and its employees. Majority

of Y’s employees were terminated, among whom is X. Because of her dismissal, X
was not able to pay the monthly amortizations of her respective loans. Thus, Y
considered the accounts of X delinquent. Demands to pay the respective
obligations were made upon X, but she failed to pay.

Consequently, Y filed a civil case against X for recovery and collection of

sums of money. Is the action of Y against X tenable?
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SUGGESTED ANSWER

Yes. The first paragraph of Article 1179 of the Civil Code provides that
“Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties,
is demandable at once”.

X termination from employment resulted in the loss of continued benefits

under her retirement plan. Thus, the loans secured by her future
retirement benefits to which she is no longer entitled are reduced to unsecured
and pure civil obligations. As unsecured and pure obligations, the loans are
immediately demandable.

TOPIC: PAYMENT FOR SERVICES DONE ON ACCOUNT OF THE GOVERNMENT,

BUT BASED ON A VOID CONTRACT, CANNOT BE AVOIDED

QUESTION
With the eruption of Mt. Pinatubo in 1991 and the consequent onslaught of
lahar and floodwater, the rehabilitation of the affected areas became urgent.
River systems needed to be channeled, dredged, desilted and diked to prevent
flooding and overflowing of lahar, and to avert damage of life, limb and property
of the people in the area.
ABC Development Corp. was one of the contractors of DPWH who engaged
for the services pursuant to an emergency project under the Pinatubo
Rehabilitation Project. DPWH demanded and insisted the urgency of the said
project.
Accordingly, ABC Development Corp. was able to finish the assigned
project. Upon completion of the said project, the DPWH made a favorable report
and issued the Certificate of Completion signed by the authorized personnel.
Subsequently, the latter contractor sought a collection of money as payment for
the project.

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 Unfortunately, DPWH denied the claim contending therewith that the
contract entered into between them and ABC Development Corp. was void
contract. Is the argument of DPWH meritorious? Is DPWH liable to pay the money
claim filed by ABC Development Corp. despite the irregularities of the contract?
SUGGESTED ANSWER
No. The argument of DPWH is not meritorious. It should be noted that the
completion of the work was recognized by the DPWH, as shown by the
certifications issued by the authorized personnel. Notwithstanding the said
recognition, DPWH chose not to act on the claims of ABC Development Corp., and
later denied liability for the payment of the works on the ground of the invalidity
of the contract.
Yes. It has been settled in several cases that payment for services done on
account of the government, but based on a void contract, cannot be avoided. The
Court first resolved such question in Royal Trust Construction vs. Commission on
Audit. In that case, the court issued a Resolution granting the claim of Royal Trust
Construction under a void contract. This exercise of equity to compensate
contracts with the government was repeated in Eslao vs. COA. In the said case,
the respondent was ordered to pay the company of petitioner for the services
rendered by the latter in constructing a building for a state university,
notwithstanding the contract’s violations of the mandatory requirements of law,
including the prior appropriation of funds.
Therefore, I submit that DPWH is liable to pay the money claim filed by ABC
Development Corp. despite some irregularities of the contract.

TOPIC: ELEMENTS OF VALID OFFER/ ELEMENTS OF VALID ACCEPTANCE

QUESTION:

Due to its net loss of over $367,000,000 in 2000 and in order to cut costs,
ABC Air offered its employees an early retirement program (ERP) to all its
employees. X an employee of the ABC Air accepted the offer for early retirement.
However, it’s Philippine general manager informed her that she was excluded
from the ERP because she was retiring on 8 January 2002. Consequently, in a
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letter dated 1 September 2001 and addressed to the General Manager, X claimed
that ABC Air was bound by the perfected contract and accused the company of
harassment and discrimination.
In her reply, the ABC Air General Manager stated that the ³Early Retirement
Program´ (³ERP´) was not an absolute offer but rather an invitation to possible
qualified employees to consider the ERP subject to the approval and acceptance
by the Company, through the Head Office, in the exercise of its discretion. The
ERP is supposedly for employees who have still a number of years to serve the
Company in order to prevent further losses.
Thus, on 28 November 2001, X filed with the arbitration branch of the NLRC
a complaint against ABC Air and the General Manager for payment of benefit
under the ERP, moral damages, exemplary damages, and attorney’s fees.
Will such action prosper?

SUGGESTED ANSWER
No, the action of X will not prosper because there was no definite offer.
For an offer to be certain, a contract must come into existence by the mere
acceptance of the offeree without any further act on the offeror’s part. The offer
must be definite, complete and intentional. In Spouses Paderes v. Court of
Appeals,[37] the Court held that, “There is an ‘offer’ in the context of Article 1319
only if the contract can come into existence by the mere acceptance of the
offeree, without any further act on the part of the offeror. Hence, the ‘offer’
must be definite, complete and intentional.

In the present case, the offer is not certain: (1) the offer was based on the
Management’s discretion (2) applications for the ERP were forwarded to the
head office for approval, and further acts on the offeror’s part were necessary
before the contract could come into existence; and (3) the ABC Air’s intention,
which was, “to prevent further losses.” ABC Air could not have intended to
ministerially approve all applications for the ERP.

TOPIC: VOID CONTRACT

QUESTION
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 X sold a conjugal lot property to YZ spouses without the consent of B, his
wife. As time passed, X and B spouses died while YZ spouses continued to posses
and control over the the property lot. Eight years thereafter, children of X and B
spouses filed a case to annul the sale made by their parents to YZ spouses and
reconvey the property on the ground that the sale was void due to absence of
consent from their mother B. On their part, YZ spouses claim that the action has
prescribed since an action to annul a sale on the ground of fraud is four years
from discovery and that the children of X and B have no legal standing to assail
the validity of the sale since it was only the wife B whose consent was not had
could bring the action to annul that sale.

Is the contention of YZ spouses tenable?

ANSWER

The contention of YZ spouses is untenable. Under the provisions of the Civil

Code governing contracts, a void or inexistent contract has no force and effect
from the very beginning. And this rule applies to contracts that are declared void
by positive provision of law as in the case of a sale of conjugal property without
the other spouse’s written consent. A void contract is equivalent to nothing and
is absolutely wanting in civil effects. It cannot be validated either by ratification or
prescription.

As with regards to the contention that its only B whose consent was not
obtained who can file a case assailing the validity of the sale, the court said its
bereft of authority since the sale was void from the beginning. Consequently, the
land remained the property of X and B despite that sale. When the two died, they
passed on the ownership of the property to their heirs.[ As lawful owners, the
they had the right, under Article 429 of the Civil Code, to exclude any person from
its enjoyment and disposal.

TOPIC: PRESCRIPTION
TOPIC: ESTOPPEL
QUESTION
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 Bank Y represented and committed to handle the financing and capital
requirements of X Co. – a corporation engaged in import and trade of energy
efficiency equipments, including related transactions such as insurance and trust
receipted merchandize. One day, X Co. entered into trust receipt transaction with
Y Bank for the shipping of hi-tech equipments from the U.S. The merchandize was
placed as collateral. In line with this transaction Bank Y advised its subsidiary
insurance company Z to initiate and manage the procurement and processing of
four (4) separate and independent fire insurance policies over the subject
merchandize. X Co. did its part by paying the premiums through DEBIT
arrangement with Bank Y.
A year after the trust receipt account was completely settled, X Co suffered
huge losses due to the destruction by fire of its office in Cebu City. X Co. filed
claims against the fire insurance but the claim was denied. The fire insurance
company put up the defense that X Co has not paid the premium. X Co. insisted its
right over the insurance claim since it was of the belief that the full settlement of
the trust receipt account already included the payment of the insurance
premium. Bank Y, however denied any responsibility, arguing that the trust
receipt account was a transaction separate from the insurance transaction. Is
Bank Y correct?

SUGGESTED ANSWER
Bank Y is wrong. Article 1431 of the New Civil Code provides that “though
estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying
thereon”. Bank Y represented and committed to handle the financing and capital
requirements of X Co., including related transactions such as insurance and trust
receipted merchandize. Bank Y, in fact, in pursuance of this representation
advised its subsidiary insurance company Z to initiate and manage the
procurement and processing of four separate and independent fire insurance
policies over the merchandize subject to its trust receipt transaction with X Co.
Meanwhile, X Co. did its part by paying the premiums through debit arrangement
with Bank Y. These acts of Bank Y led X Co. to believe that the settlement of the
trust receipt account also settled the insurance premium obligation of X Co. By

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estoppel Bank Y cannot deny any responsibility as regards the effectivity of the
insurance policy without committing injustice.
In Marquez vs FEBTC, [G.R. NO. 171419, 10 JANUARY 2011] the Supreme
Court held that in Estoppel, a party creating an appearance of fact which is false is
bound by the appearance as against another person who acted in good faith and
justice. Its purpose is to forbid one to speak against his own act, representations
or comments to the injury of one who reasonably relied thereon. It springs from
equity and is designed to aid the law in the administration of justice where
without its aid, injustice might result.
Article 1433 classifies estoppel into estoppel in pais or by deed. Estoppel in
pais may be by conduct, representation, silence, omission or laches. Estoppel by
silence arises where a person who by force of circumstances is obliged to another,
to speak, refrains from doing so and thereby induces the other to believe in the
existence of a state of facts in reliance on which he acts to his prejudice. Silence
may support an estoppel whether the failure to speak is intentional or negligent.
Bank Y is estopped from claiming that the insurance premium has been unpaid
because Bank Y induced X Co. to believe that the insurance premium has in fact
been debited from X Co. account.

TOPIC: CONSIGNATION
QUESTION
X leased a parcel of land to Y. But soon after, X sold the land to Z
Corporation without the knowledge of Y. From then on X and Z Corporation
decided not to accept rentals anymore from Y for the purpose of terminating the
lease. Y filed a complaint with the Regional Trial Court. In the complaint, Y
attached a CONSIGNATION of the rental payments. Y failed to notify the other
party of such action. X and Z Corporation withdrew the consigned amount with
reservation to question the validity of the consignation. Is the CONSIGNATION
made by Y valid?

SUGGESTED ANSWER

17 | P a g e
 The consignation is NOT VALID. Under Article 1257 of our Civil Code, “in
order that consignation of the thing due may release the obligor, it must first be
announced to the persons interested in the fulfillment of the obligation. The
consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulate payment.” In Article 1258 it is further stated that “the
consignation having been made, the interested party shall also be notified
thereof”.
In the case at bar, when Y made the consignation to the Regional Trial
Court of his monthly rentals to the lot of X (now sold to Z), he failed to notify X of
the said action. In Dalton vs. FGR REALITY AND DEVELOPMENT CORP., et al., [G.R.
NO. 182577, January 19, 2011] the Supreme Court held that the essential
requisites of a valid consignation must be complied with fully and strictly in
accordance with the law, as Article 1256 to 1261 of the New Civil Code say. That
these articles must be accorded a mandatory construction is clearly evident and
plain from the very language of the codal provisions themselves which require
absolute compliance with the essential requisites therein provided. Substantial
compliance is not enough for that would render only a directory construction to
the law. The use of the words “shall” and “must” which are imperative operating
to impose a duty which may be enforced positively indicate that all the essential
requisites of a valid consignation may be complied with.
TOPIC: COMPENSATION
QUESTION
XYZ leased the building of ABC. The building was not in a fit condition so
XYZ incurred expenses for necessary repairs as well as expenses for structural
repairs. After several months, XYZ failed to pay for the rentals amounting to P95,
000. ABC sent a demand letter, but despite demand, XYZ failed to pay. ABC then
filed a complaint for sum of money. XYZ moved that the complaint should be
dismissed and judgment be rendered in their counterclaim. XYZ alleged that they
should be compensated for the amount of P545,000.00 for repairs, P125,000.00
of which was spent for structural repairs. ABC however contended that they are
not aware of the repairs done by XYZ and further contended that if the claim of
XYZ were true then the latter were not able to prove that they spent the said
amounts. Should XYZ be compensated for their expenses?
SUGGESTED ANSWER
18 | P a g e
 No they cannot be compensated. The law provides that
compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. Article 1279, of the New Civil Code
provides that in order for compensation to be proper, it is necessary that:
1. Each one of the obligors be bound principally and that he be at the same
time a principal creditor of the other;
2. 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. The two debts are due:
4. The debts are liquidated and demandable;
5. Over neither of them be any retention or controversy, commenced by third
parties and communicated in due time to the debtor

A claim is liquidated when the amount and time of payment is fixed. If

acknowledged by the debtor, although not in writing, the claim must be treated as
liquidated. When the defendant, who has an unliquidated claim, sets it up by way of
counterclaim, and a judgment is rendered liquidating such claim, it can be compensated
against the plaintiff’s claim from the moment it is liquidated by judgment. (Solinap v.
Hon. Del Rosario 208 Phil 561)

As the contract contrastingly treats necessary repairs, which are on the

account of the lessee, and repairs of structural defects, which are the
responsibility of the lessor, the onus of the petitioners is two-fold: (1) to establish
the existence, amount and demandability of their claim; and (2) to show that
these expenses were incurred in the repair of structural defects.

As to the case at hand, XYZ failed to prove that the repairs undertaken by
them were on structural defects. In fact, ABC was never informed of the structural
repairs, hence, unliquidated and legal compensation is inapplicable.

TOPIC: VOID CONTRACTS

QUESTION

19 | P a g e
 EDC is awarded of a market stall in Mabuhay City. He sold his market stall
to CBN for P20,000.000. A Deed of Assignment confirming the sale - assigning,
selling, transferring, and conveying his market stall to CBN was made. In the
same Deed of Assignment, it was stated that EDC will have the possession of the
stall but as tenant of CBN. He is to pay a monthly rental of PhP 250.00 renewable
every year at the option of CBN. However, EDC defaulted in his payment on the
lease. CBN then demanded that EDC should vacate the stall but it fell on deaf
ears. CBN then filed a complaint for recovery of possession and damages.
Was there a valid contract of sale?
SUGGESTED ANSWER
No, there was none.
Article 1318 of the Civil code provides that there is no contract unless the
following requisites concur:
1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract
3. Cause of the obligation which is established.
As to the case, consent was absent. It is Mabuhay City who owns the
subject market stall. Thus, EDC as a mere grantee of the subject stall, was
prohibited from selling, donating, or otherwise alienating the same without the
consent of the City Government. Such would be a violation of the condition shall
automatically render the sale, donation, or alienation null and void.
A void contract is equivalent to nothing for it produces no civil effect. It
does not create, modify, or extinguish a juridical relation. Parties to a void
agreement cannot expect the aid of the law; the courts leave them as they are,
because they are deemed in pari delicto or in equal fault.
TOPIC: DEGREE OF DILIGENCE OF A GOOD FATHER OF THE FAMILY; EXTENT
TOPIC: PERFECTION OF A CONTRACT
TOPIC: EXTINGUISMENT OF OBLIGATION; NOVATION

QUESTION
20 | P a g e
 S borrowed P500, 000.00 from G evidenced by promissory note dated July
23, 1986. Upon S failure to pay, G filed an action for collection of the full amount
of the loan including interests and other charges. The Supreme Court affirmed the
decision of the RTC ordering S to pay the principal obligation of P500, 000.00 plus
12% interest per annum from July 23, 1986 until the whole amount is fully paid.
Upon finality of the decision G moved for execution. S opposed claiming that his
agreement with G to fix the entire obligation at P775, 000.00 allegedly embodied
in a receipt dated February 5, 1992, whereby he made an initial payment of P400,
000.00 and promised to pay the balance of P375, 000.00 on February 29, 1992,
superseded the July 23, 1986 promissory note. S insisted that the RTC could not
validly enforce a judgment based on a promissory note that had been already
novated; that the promissory note had been impliedly novated when the principal
obligation of P500, 000.00 had been fixed at P750, 000.00, and the maturity date
had been extended from August 23, 1986 to February 29, 1992. Is S correct?
Explain.

SUGGESTED ANSWER

No.
A novation arises when there is a substitution of an obligation by a
subsequent one that extinguishes the first, either by changing the object or the
principal conditions, or by substituting the person of the debtor, or by
subrogating a third person in the rights of the creditor. In short, the new
obligation extinguishes the prior agreement only when the substitution is
unequivocally declared, or the old and the new obligations are incompatible on
every point.

Novation is never presumed. This means that the parties to a contract

should expressly agree to abrogate the old contract in favor of a new one. In the
absence of the express agreement, the old and the new obligations must be
incompatible on every point.

The issuance of the receipt created no new obligation. Instead, the

respondents only thereby recognized the original obligation by stating in the
receipt that the P400, 000.00 was “partial payment of loan” and by referring to
“the promissory note subject of the case in imposing the interest.” The loan
21 | P a g e
mentioned in the receipt was still the same loan involving the P500, 000.00
extended to Servando. Advertence to the interest stipulated in the promissory
note indicated that the contract still subsisted, not replaced and extinguished, as
the petitioners claim. The receipt dated February 5, 1992 was only the proof of
Servando’s payment of his obligation as confirmed by the decision of the RTC. It
did not establish the novation of his agreement with the respondents.

TOPIC: CONTRACT; RELATIVE SIMULATION.

QUESTION

D asked V to obtain a loan behalf in view of her need for additional capital to
finance her business venture. V would agree only if D transferred the title of her
property that was already mortgaged to PNB to V so on June 19, 1996 D executed
a Deed of Absolute Sale in favor of V. On the same day, they went to PNB and
paid the amount of P721, 891.67 using the money of V. V registered the Deed of
Saleand secured TCT on her name. Thereafter, V mortgaged the property with Far
East Bank & Trust Company (FEBTC) Santiago City to secure a loan of P1, 485,000.
However, V concealed the loan release from D. Later, when D learned of the loan
release, she asked for the loan proceeds less the amount advanced by the
spouses Villaceran to pay the PNB loan. However, V refused to give the money
stating that she is already the registered owner of the property and that she
would reconvey the property to D once she returns the P721, 891.67 V paid to
PNB. D offered to pay P350, 000 provided that V would execute a deed of
reconveyance of the property. V executed a Deed of Absolute Sale dated
September 6, 1996 in favor of D. V also promised to pay her mortgage debt with
FEBTC to avoid exposing the property to possible foreclosure and auction sale.
However, V failed to settle the loan and subsequently the property was
extrajudicially foreclosed. A Sheriff’s Certificate of Sale was issued in favor of
FEBTC for the amount of P3, 594,000. D asserted that V should be compelled to
redeem their mortgage so as not to prejudice her as the real owner of the
property. D filed a complaint for declaration of nullity of sale for being a simulated
contract. V on the other hand claimed that the previous loans she extended to D
added to the settled PNB loan is the valuable consideration for the deed of sale,
thus, it is not a simulated contract. Is D correct? Explain.

SUGGESTED ANSWER
22 | P a g e
 No.

Article 1345 of the Civil Code provides that the simulation of a contract may
either be absolute or relative. In absolute simulation, there is a colorable contract
but it has no substance as the parties have no intention to be bound by it. The
main characteristic of an absolute simulation is that the apparent contract is not
really desired or intended to produce legal effect or in any way alter the juridical
situation of the parties. As a result, an absolutely simulated or fictitious contract is
void, and the parties may recover from each other what they may have given
under the contract. However, if the parties state a false cause in the contract to
conceal their real agreement, the contract is only relatively simulated and the
parties are still bound by their real agreement. Hence, where the essential
requisites of a contract are present and the simulation refers only to the content
or terms of the contract, the agreement is absolutely binding and enforceable
between the parties and their successors in interest. The primary consideration in
determining the true nature of a contract is the intention of the parties. If the
words of a contract appear to contravene the evident intention of the parties, the
latter shall prevail. Such intention is determined not only from the express terms
of their agreement, but also from the contemporaneous and subsequent acts of
the parties. In the case at bar, there is a relative simulation of contract as the
Deed of Absolute Sale dated June 19, 1996 executed by De Guzman in favor of
petitioners did not reflect the true intention of the parties.

The document of sale was executed only to enable petitioners to use the
property as collateral for a bigger loan, by way of accommodating De Guzman.
Thus, the parties have agreed to transfer title over the property in the name of
petitioners who had a good credit line with the bank. The CA found it
inconceivable for De Guzman to sell the property for P75, 000,00 as stated in the
June 19, 1996 Deed of Sale when petitioners were able to mortgage the property
with FEBTC for P1, 485,000. Another indication of the lack of intention to sell the
property is when a few months later, on September 6, 1996, the same property,
this time already registered in the name of petitioners, was reconveyed to De
Guzman allegedly for P350, 000.

TOPIC: CONTRACT OF SALE

23 | P a g e
 Perfection, Absolute/Qualified Acceptance

QUESTION

S entered into a contract with ABC Bank wherein he will sell together with
his shares of stock, the shares of the rest of the minority stockholders of X
Company subject to the following terms and conditions: (1) that prior to its
implementation, the shares of stocks shall first be surrendered to the ABC Bank;
(2) that written conformity to the arrangement be given by the shareholders; and
(3) that the transaction shall be implemented within forty-five (45) days from the
date of approval otherwise, the same shall be deemed canceled.

Pursuant thereof, S and some of the minority stockholders indorsed and

delivered to ABC Bank their shares. When S demanded for payment, ABC Bank
refused arguing that no perfected contract of sale existed between them due to
the non-fulfillment of the terms and conditions agreed upon. Is the argument of
ABC Bank tenable?

SUGGESTED ANSWER

Yes, the contention of ABC Bank is tenable.

Article 1475 of the Civil Code provides that a contract of sale is perfected
the moment there is a meeting of the minds on the thing which is the object of
the contract and on the price. As held in a long line of cases decided by the
Supreme Court, meeting of the minds is produced when a definite offer is
accepted absolutely and unqualifiedly.

In the case at bar, the contract entered into by the parties was subject to
certain terms and conditions. It was not absolutely and unconditionally accepted
by ABC Bank. Such as when S failed to meet the imposed conditions, a meeting of
the minds is not reached. Therefore, it cannot be said that a perfected contract of

24 | P a g e
sale between the parties existed.

TOPIC: CONTRACT OF SALE

Delivery, Contract of Sale vs. Contract to Sell

QUESTION

Cebu Hardware agreed to supply a 10 MVA power transformer to VECO,

Inc. (VECO). A proposal containing the terms and conditions of the purchase was
in turn presented by Cebu Hardware to VECO to which the latter’s authorized
signatories conformed to.

Upon the instance of Mr. A, one of VECO’s authorized signatories, the

transformer was delivered in accordance with the agreed terms and conditions
even without the required down payment. When no payment has been received
several months after its delivery, Cebu Hardware sent a demand to collect its
payment. When VECO failed to settle the unpaid obligation, Cebu Hardware
subsequently filed against the former a case for specific performance and
damages.

VECO, on the other hand moved for its dismissal arguing that: (a) there is
no perfected contract of sale but only a mere contract to sell; and (b) that there
exists no delivery that consummates the contract.

Are the arguments of VECO correct?

SUGGESTED ANSWER

25 | P a g e
a. No, VECO, Inc. is not correct.

As held in the case of David vs. Misamis Occidental II Electric Cooperative, Inc.
The elements of a contract of sale are, to wit: a) Consent or meeting of the minds,
that is, consent to transfer ownership in exchange for the price; b) Determinate
subject matter; and c) Price certain in money or its equivalent. What distinguishes
a contract of sale from that of a contract to sell is the absence of the first
element.

In the instant case, all the elements of a contract of sale are present. The signed
proposal which contained the terms and conditions indicate consent on the part
of Cebu Hardware to transfer ownership thereby complying the first requisite.
The second and third elements were also complied with. The subject matter of
the agreement which is a one (1) unit 10 MVA Power Transformer with
corresponding KV Line accessories, is determinate and that the consideration
agreed upon by the parties is definitely a price certain in money.

b. No, VECO, Inc. is not correct.

There was delivery that consummates the contract. Since the freight, handling,
insurance, custom duties, and incidental expenses are shouldered by VECO, Inc.,
Article 1523 of the Civil Code which states that “Where, in pursuance of a
contract of sale, the seller is authorized or required to send the goods to the
buyer delivery of the goods to a carrier, whether named by the buyer or not, for
the purpose of transmission to the buyer is deemed to be a delivery of the goods
to the buyer, except in the cases provided for in Article 1503, first, second and
third paragraphs, or unless a contrary intent appears.” applies in this case.

26 | P a g e
 Since in the instant case, Cebu Hardware was authorized to send the power
transformer to the buyer pursuant to their agreement, it’s delivery as evidenced
by the Bill of Lading, was deemed to be a delivery to VECO, Inc. Hence, there
exists a delivery that consummates the contract.

TOPIC: CONTRACT OF SALE

Double Sale
QUESTION

On May 19, 1998, P1 purchased a parcel of land from S. Later on, when P1
was about to register the sale on October 18, 1999, the registration was refused
by the Register of Deeds because P1 failed to produce the Original Certificate of
Title.

When P1 filed a petition for the issuance of owner’s duplicate certificate of

title, P2 opposed claiming that she was in possession of the Original Certificate of
Title having bought the property from S on January 27, 1999 without knowledge
of the prior sale. Upon payment of the purchase price, P2 immediately took
possession of the property and enjoyed its produce.

Who between P1 and P2 has a better right to the subject property?

SUGGESTED ANSWER

P2 has a better right to the property.

Art. 1544 of the Civil Code states that if the same thing should have been
sold to different vendees, the ownership shall be transferred to the person who
may have first taken possession thereof in good faith, if it should be movable
property.

27 | P a g e
 Should it be immovable property, the ownership shall belong to the person
acquiring it who in good faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person

who in good faith was first in possession; and, in the absence thereof, to the
person who presents the oldest title, provided there is good faith.

Admittedly, the two sales were not registered with the Registry of Property.
Since there was no inscription, the next question is who, between P1 and P2, first
took possession of the subject property in good faith. In this case P2 immediately
took possession of the parcel of land on January 1999 upon payment of the
purchase price. Therefore, P2 has a better right to the property

TOPIC: CONTRACT OF SALE

Installment Sale of Real Property under R.A. 6552 (MACEDA Law)

QUESTION

X agreed to sell a parcel of land to Y. X received P20,000 as earnest money.

Thereafter 2 checks were issued by Y but X refused to accept the check saying
that the heirs as co-owners did not want to sell the property. Was there a
perfected contract between the parties? What is the nature of contract between
them?

SUGGESTED ANSWER:

A. There was a perfected contract between the parties since all the essential
requisites of a contract were present.

Article 1318 of the Civil Code declares that no contract exists unless the
following requisites concur: (1) consent of the contracting parties; (2) object
28 | P a g e
certain which is the subject matter of the contract; and (3) cause of the obligation
established.

That a thing is sold without the consent of all the co-owners does not
invalidate the sale or render it void. Article 493 of the Civil Code recognizes the
absolute right of a co-owner to freely dispose of his pro indiviso share as well as
the fruits and other benefits arising from that share, independently of the other
co-owners. Thus, when X agreed to sell to Y the property , what she in fact sold
was her undivided interest consisted of one-half interest, representing her
conjugal share, and one-sixth interest, representing her hereditary share.

B. The parties entered into a nature of contract to sell.

Significantly, the Court has consistently held that the Maceda Law covers
not only sales on installments of real estate, but also financing of such acquisition;
its Section 3 is comprehensive enough to include both contracts of sale and
contracts to sell, provided that the terms on payment of the price require at least
two installments. The contract entered into by the parties herein can very well fall
under the Maceda Law.

The 2 checks issued Y of the installment payment due effectively defeated

the petitioners-heirs’ right to have the contract rescinded or cancelled. Whether
the parties’ agreement is characterized as one of sale or to sell is not relevant in
light of the respondents’ payment within the grace period provided under Article
1592 of the Civil Code and Section 4 of the Maceda Law. The petitioners-heirs’
obligation to accept the payment of the price and to convey X conjugal and
hereditary shares in the subject properties subsists.

TOPIC: SALE

Rescission for Breach, Constructive Delivery & Execution of Public Instrument

QUESTION

29 | P a g e
 A entered into an agreement with B for the purchase and sale of two-
hectare parcel of land which was mortgaged in favor of XY Bank for a loan. The
said land was sold to B for P100, 000 per hectare totalling P200, 000. B already
paid P100,000 as payment to XY bank so that the certificate of title can be
released in favor of A and thereafter make another payment to C to whom the
land is also mortgaged. Moreover, the parties under their contract of sale
stipulated conditions that certificate of title be delivered to B and thereafter
execute a deed of sale so that he can use the title as collateral for the application
of loan as full payment for the balance of the sale. However, B backed out from
the sale due to the area which is not yet fully cleared by encumbrances because C
is not willing to vacate the land. Consequently, the respondent filed a complaint
in court for the rescission of contract against A. Will the action prosper?

SUGGESTED ANSWER

The action will prosper.

Although Articles 1458, 1495 and 1498 of the NCC and case law do not
generally require the seller to deliver to the buyer the physical possession of the
property subject of a contract of sale and the certificate of title covering the
same, the agreement entered into by the petitioner and the respondent provides
otherwise. However, the terms of the agreement cannot be considered as
violative of law, morals, good customs, public order, or public policy, hence, valid.

Article 1458 of the NCC obliges the seller to transfer the ownership of and
to deliver a determinate thing to the buyer, who shall in turn pay therefor a price
certain in money or its equivalent. In addition thereto, Article 1495 of the NCC

30 | P a g e
binds the seller to warrant the thing which is the object of the sale. On the other
hand, Article 1498 of the same code provides that when the sale is made through
a public instrument, the execution thereof shall be equivalent to the delivery of
the thing which is the object of the contract, if from the deed, the contrary does
not appear or cannot clearly be inferred.

In the case at bar, the petitioner failed to deliver to the respondent the
possession of the subject property due to the continued presence and occupation
of Parangan and Lacaden. Thus, the petitioner failed in her undertaking to deliver
the subject property to the respondent.

TOPIC: SALE

Right to Transfer Title, Right to Recover & Exception under Estoppel

QUESTION
A, a blind person, who has been in cement business for a decade entered
into a contract of sale with B who represented himself as radio operator and
confidential secretary of C, manager of ABC company. B offered to sell to A a
certain quantity of ABC’s cement. After checking B’s identification card, A agreed
to purchase ABC’s cement without knowing that said cements were actually
stolen since there was no proper authority issued by ABC company to B for such
sale. There were 5 deliveries made to A. However, upon demand of payment. A
rejected the same. Consequently, ABC company filed a complaint for sum of
money and damages against A. ABC company argued that A didn’t exercise the
proper diligence required of him when he transacted business with B. Rule on
ABC company’s contention.

31 | P a g e
SUGGESTED ANSWER

ABC’s contention is tenable.

Standard of conduct is the level of expected conduct that is required by the
nature of the obligation and corresponding to the circumstances of the person,
time and place.The most common standard of conduct is that of a good father of
a family or that of a reasonably prudent person. To determine the diligence which
must be required of all persons, we use as basis the abstract average standard
corresponding to a normal orderly person.

However, one who is physically disabled is required to use the same degree
of care that a reasonably careful person who has the same physical disability
would use.Physical handicaps and infirmities, such as blindness or deafness, are
treated as part of the circumstances under which a reasonable person must act.
Thus, the standard of conduct for a blind person becomes that of a reasonable
person who is blind.

In the case at bar, Adespite being blind, had been managing and operating
a cement business for 15 years and this was not a hindrance for him to transact
business until this time. In this instance, however, A failed to exercise the
standard of conduct expected of a reasonable person who is blind. He merely
relied on the identification card of B and didn’t investigate whether the latter was
authorized by ABC. A did not do any other background check on the identity and
authority of B which is an apparent negligence on his part.
32 | P a g e
 TOPIC: LEASE

Implied Lease or Tacita Reconduccion

QUESTION

XYZ Company entered into a contract with Inday for the lease of a portion
of lot. The lease contract was for a period of one (1) year, with a monthly rental of
P3,960.00. After the expiration of the lease contract on December 31, 1997, the
petitioner continued occupying the subject premises without paying the rent. On
August 5, 1998, XYZ Company sent a letter to the petitioner demanding that she
vacate the subject premises and pay compensation for its use and occupancy. The
petitioner, however, refused to heed these demands. On November 18, 1998,
XYZ Company filed a complaint for unlawful detainer against the petitioner before
the Metropolitan Trial Court (MeTC) and prayed, among others, that the Inday
and those claiming rights under her be ordered to vacate the subject premises,
and to pay compensation for its use and occupancy.

1. Is tacita reconduccion present in this case? Why? Or Why not?

2. What are the requisites for tacita reconduccion?

SUGGESTED ANSWERS

1. Yes. Article 1670 provides that, If at the end of the contract the lessee should
continue enjoying the thing leased for fifteen days with the acquiescence of the
lessor, and unless a notice to the contrary by either party has previously been
given, it is understood that there is an implied new lease, not for the period of the
original contract, but for the time established in Articles 1682 and 1687. The other
terms of the original contract shall be revived.

Since the rent was paid on a monthly basis, the period of lease is
considered to be from month to month, in accordance with Article 1687 of the
Civil Code. " Lease from month to month is considered to be one with a definite
period which expires at the end of each month upon a demand to vacate by the

33 | P a g e
lessor." When the respondent sent a notice to vacate to the petitioner on August
5, 1998, the tacita reconduccion was aborted, and the contract is deemed to have
expired at the end of that month. " Notice to vacate constitutes an express act on
the part of the lessor that it no longer consents to the continued occupation by
the lessee of its property." After such notice, the lessee’s right to continue in
possession ceases and her possession becomes one of detainer.

2. An implied new lease or tacita reconduccion will set in when the following
requisites are found to exist: a) the term of the original contract of lease has
expired; b) the lessor has not given the lessee a notice to vacate; and c) the lessee
continued enjoying the thing leased for fifteen days with the acquiescence of the
lessor." As earlier discussed, all these requisites have been fulfilled in the present
case.

TOPIC: LEASE

Right of Lessee as to Improvements

QUESTION

A lot owned by Candy and her co-heirs was leased on a month-to-month

basis to the Spouses XY who has constructed a residential house thereon. After
the death of X in 1995, heirs of X requested Candy and her co-heirs to extend the
lease and even volunteered to temporarily vacate the said property after the
expiration; Candy and her co-heirs agreed; nonetheless, petitioners failed to
comply with their commitment to temporarily vacate; they continued to stay
within the premises of the subject property and refused to vacate the same
notwithstanding repeated demands from Celia and her co-heirs. As such, Candy
filed a Complaint for Unlawful Detainer against Heirs of X and prayed, among
others, for the demolition of the residential house constructed on the subject lot.
The Heirs of X, contends that their construction of a residential house on the
subject property was by virtue of a right granted under the said contract of lease
and that they were very much willing to vacate the disputed lot but only upon
34 | P a g e
payment of the value of all the improvements that they have legally introduced as
builders in good faith on the said lot. Can Candy and her co-heirs be compelled by
respondents to pay of the value of all the improvements that they have
introduced on the said lot?

SUGGESTED ANSWER

No, the Candy and her co-heirs cannot be compelled. Under Article 1678,
the lessor has the option of paying one-half of the value of the improvements that
the lessee made in good faith, which are suitable to the use for which the lease is
intended, and which have not altered the form and substance of the land. On the
other hand, the lessee may remove the improvements should the lessor refuse to
reimburse.

It appears, nonetheless, that in her Complaint, Candy,et al., prayed for the
demolition of petitioners' residential house constructed on the subject lot. It is,
thus, clear that private respondent does not want to appropriate the
improvements. As such, petitioners cannot compel her to reimburse to them one-
half of the value of their house. The sole right of petitioners under Article 1678
then is to remove the improvements without causing any more damage upon the
property leased than is necessary.

TOPIC: LEASE

Failure to Maintain Lessee in Peaceful Possession and Increase in Rental

QUESTION

X entered into a contract of lease with Y for an original rate of P6,000.00 with a
provision that “any subsequent amendment that will effect an increase or
decrease of the monthly rental or impose new and additional fees and charges,
including but not limited to government/MIAA circulars, rules and regulation to
35 | P a g e
this effect, shall be deemed incorporated herein and shall automatically amend
this Contract insofar as the monthly rental is concerned”. A government circular
was issued thereby increasing the monthly rent to P10,000.00. Nonetheless, X
continued to pay the original rate which was duly received by Y without protest
requiring X to pay the new rate. Three years after, a bill was forwarded to X
charging the new rate of monthly lease and a recovery of the difference of the
monthly rents previously paid after the effectivity of the circular. Is X liable to pay
the difference sought by Y to recover?

SUGGESTED ANSWER

No, Y is already stopped for seeking recovery of the amount claimed for failing to
make any protest or objection upon tender of payment by X. No bill was made
and forwarded to respondent on the basis of which it could have given or
withheld its conformity to the provision of the contract of lease.

TOPIC: LEASE

Lease Term and Month-to-Month Basis

QUESTION

X mortgaged a parcel of land to Bank A. X leased said property Y, the

contract of lease not registered with the Registry of Properties. Subsequently, X
failed to settle their obligation which caused its foreclosure and thereby
transferred ownership to Bank A. A letter was sent to Y by Bank A notifying its
ownership thereby directing Y to come to the bank within 30 days to execute a
lease contract but was not acted upon. Thereafter, Bank A offered the sale of said
land which Y offered to purchase but was nonetheless rejected due to
insufficiency. W offered to purchase said land which was acknowledged and

36 | P a g e
accepted by Bank A thereby issued a Deed of Sale upon full payment. Is the sale of
said land to W valid considering the right of first refusal contended by Y?

SUGGESTED ANSWER

Yes, the sale of said land to W was valid. Y does not have the right of first
refusal for there was no contract of lease between Y and Bank A. The offer of
Bank A to execute of a new lease contract was not acted by Y and that there can
be no implied contract because the previous lease between X and Y was not
registered with the Registry of Properties. As a rule, a buyer in a foreclosure sale
may terminate an unregistered lease except when it knows of the existence of the
lease.

TOPIC: PARTNERSHIP

Existence of Partnership

QUESTION

A formed a partnership with B and C to engage in the trucking business for

the hauling and transport of lumber. Barely a year thereafter, before the
partnership contract was executed and before the partnership was formally
organized, A died and the partnership operation was continued under the helm of
A1 (A’s son) without any participation from A’s other heirs.

A1 ran the affairs of the partnership wielding absolute control, power and
authority, without any intervention or opposition from the other heirs of A, and
all the properties were registered in his name, and he did not receive wages or
salaries but shares of the profits of the business.

Is A1 a PARTNER in the business? Why or why not?

37 | P a g e
SUGGESTED ANSWER

YES, A1 is a partner in the business. Article 1769 of the New Civil Code
provides that in determining whether a partnership exists, the receipt by a person
of a share of the profits of a business is a prima facie evidence that he is a partner
in the business, unless such profits were received as payment of a debt by
installment, wages to employee, rent to landlord, annuity to a
widow/representative of a deceased partner, interest on a loan or as
consideration for the sale of a goodwill of a business or other property by
installments.

Applying the legal provisions of Article 1769, circumstances tend to prove

that A1 was himself the partner of B and C, considering that he ran the affairs of
the partnership wielding absolute control, power and authority, without any
intervention or opposition from petitioners, and all the properties were
registered in his name, and he did not receive wages or salaries but shares of the
profits of the business.

TOPIC: PARTNERSHIP

Joint Venture, Assignment of Share, Dissolution

QUESTION

J entered into a joint venture with F, a French national for the operation of
an ice manufacturing business. Their agreement was that J, as industrial partner,
will receive 40%, and F as capitalist partner will also receive 40% of the net profit
with the remaining 20% to be used as payment of machineries.

38 | P a g e
 After three years, F executed a Deed of Assignment in favor of respondent
E, transferring all his rights and interests in the business in favor of the latter. F
eventually left the country and E demanded from J an accounting and inventory
thereof as well as remittance of their portion of the profits, to which J.

a) By virtue of the Deed of Assigment executed by F, did E become a

partner to the business, dissolving the partnership between J & F?

b) What are the rights of E as assignee of F’s interest?

SUGGESTED ANSWER

a) No, E did not become a partner of the business. Article 1813 of the Civil
Code provides that a conveyance by a partner of his whole interest in
the partnership does not itself dissolve the partnership or make the
assignee a partner in the business. Settled is the rule that partnerships
are based on mutual agency or delectus personae.

b) The rights of E as assignee is merely to receive in accordance with his

contracts the profits to which the assigning partner would otherwise be
entitled. During the continuance of the partnership, he cannot interfere
in the management or administration of business affairs, or to require
any information or account of partnership transactions, or to inspect the
partnership books. However, in case of fraud in the management of the
partnership, the assignee may avail himself of the usual remedies
(Article 1813, Civil Code).

TOPIC: AGENCY

Doctrine of Apparent Authority, Agency by Estoppel

QUESTION

39 | P a g e
 Spouses X and Y obtained a loan (subject loan) from Z bank through the
execution of the real estate mortgage over the property and promissory note of
the spouses to secure its payment. Later on, spouses X and Y obtained from the
same bank two other loans which were secured by mortgages of their other
properties. In a later year, before the subject loan became due, spouses X and Y
asked permission from Z bank to sell the properties. Requiring that the subject
loan be fully paid first, Mr. Q, the manager of the Z bank verbally agreed with
spouses X and Y of their request. Spouses X and Y fully paid the subject loan and
thereafter requested that Deed of Release of Mortgaged Property be given to
them. However, Z bank refused to grant the request.

As unequivocally agreed in the cross-collateral stipulation, Z bank

contended that the three loans and not just the subject loan shall be fully paid
first before any of the mortgages could be released. On the other hand, spouses X
and Y contended that mortgaged property should be released on the basis of
their verbal agreement they made with Mr. Q. Being the manager or an agent of Z
bank, Mr.Q has the authority to modify or nullify existing contracts or
agreements. Thus, the agreement between Mr. Q and spouses X and Y is valid and
therefore the same shall bind the corporation, Z bank.

Z bank answered that the agreement shall not bind the corporation (Z
bank) since the manager lacks the authority to do so. Hence, such agreement is
invalid and shall not release the mortgagors over their mortgaged property.

Does the verbal agreement between Mr. Q, the manager or agent of Z bank
and spouses X and Y valid and thus bind the corporation?

If you were the judge, how would you rule the case?

SUGGESTED ANSWER

The verbal agreement in this case between the corporation’s agent, Mr. Q
and spouses X and Y is not valid and therefore would not bind the said
corporation. Hence, if I were the judge, I will rule in favor of the corporation, the Z
bank.
40 | P a g e
 Under the doctrine of apparent authority, acts and contracts of the agent,
as are within the apparent scope of the authority conferred on him, although no
actual authority to do such acts or to make such contracts has been conferred,
bind the principal. The principal's liability, however, is limited only to third
persons who have been led reasonably to believe by the conduct of the
principal that such actual authority exists, although none was given.

In other words, apparent authority is determined only by the acts of the

principal and not by the acts of the agent. There can be no apparent authority of
an agent without acts or conduct on the part of the principal; such acts or conduct
must have been known and relied upon in good faith as a result of the exercise of
reasonable prudence by a third party as claimant, and such acts or conduct must
have produced a change of position to the third party's detriment.

Although a branch manager, within his field and as to third persons, is the
general agent and is in general charge of the corporation, with apparent authority
commensurate with the ordinary business entrusted him and the usual course
and conduct thereof, yet the power to modify or nullify corporate contracts
remains generally in the board of directors.

Being a mere branch manager alone is insufficient to support the

conclusion that Mr. Q has been clothed with "apparent authority" to verbally alter
terms of written contracts, especially when viewed against the telling
circumstances of this case: the unequivocal provision in the mortgage contract
and the fact that the purported agreement was not even reduced into writing
considering its legal effects on the parties' interests.

It is a settled rule that persons dealing with an agent are bound at their
peril, if they would hold the principal liable, to ascertain not only the fact of
agency but also the nature and extent of the agent's authority, and in case either
is controverted, the burden of proof is upon them to establish it. As parties to the
mortgage contract, spouses X and Y are expected to abide by its terms. The

41 | P a g e
subsequent purported agreement is of no moment, and cannot prejudice Z bank,
as it is beyond Mr. Q's actual or apparent authority.

TOPIC: AGENCY

Principle of Undisclosed Principal

QUESTION

Mrs. C executed a special power of attorney in favor of her daughter Ms. T

authorizing her to contract a loan from F bank in an amount of P300,000and to
mortgage her 2 lots with TCT numbers 12304 and 11621. For the approval of the
loan, Mrs. C also executed an affidavit of non-tenancy.

F bank approved the loan in the amount of P100,000 secured by

promissory notes and a real estate mortgage over Mrs. C’s properties. However,
the mortgage was signed by Ms. T and the husband of Mrs. C as mortgagors in
their individual capacities without stating that Ms. T was executing the mortgage
contract for and in behalf of Mrs. C, the owner of the mortgaged lots.

Later F bank foreclosed the mortgage for failure to pay the loan. A notice of
public auction sale was sent to Mrs. C and her husband. Subsequently, F bank
consolidated its title and obtained new titles in its name after the redemption
period lapsed. The counsel of Mrs. C contended that the latter is not bound by the
real estate mortgage executed by her authorized agent, Ms. T. This is because the
name of Mrs. C was not indicated as the principal in the contract of loan. Thus,
the counsel of Mrs. C sought nullification of the real estate mortgage and
extrajudicial foreclosure sale, as well as the cancellation of F banks’s title over the
properties. Is the contention of Mrs. C’s counsel meritorious?

SUGGESTED ANSWER

Yes. The contention of Mrs. C’s counsel is meritorious.

42 | P a g e
 Under the principle of undisclosed principal or in the law of agency, it is a
general rule that, in order to bind the principal by a mortgage on real property
executed by an agent, it must upon its face purport to be made, signed and sealed
in the name of the principal, otherwise, it will bind the agent only. It is not
enough merely that the agent was in fact authorized to make the mortgage, if
he has not acted in the name of the principal. Neither is it ordinarily sufficient
that in the mortgage the agent describes himself as acting by virtue of a power of
attorney, if in fact the agent has acted in his own name and has set his own hand
and seal to the mortgage. This is especially true where the agent himself is a party
to the instrument. However clearly the body of the mortgage may show and
intend that it shall be the act of the principal, yet, unless in fact it is executed by
the agent for and on behalf of his principal and as the act and deed of the
principal, it is not valid as to the principal.

TOPIC: AGENCY

Ratification, Agency By Estoppel

QUESTION

X contracted the services of Y, for dry docking and ship repair works on its
vessel, the M/V Pacific Ocean. In compliance with the agreement, x, through A,
secured from Q Insurance Corp. through the latter’s agent, B, Q Insurance Corp. Q
Surety Inc. executed a special power of attorney in favor of B. The SPA includes
the authority to issue a surety bond in favor of Department of Public Works and
Highways, the National Power Corporation, and other government agencies and
report the same to the company. Later, X failed to pay Y for the repair of the Ship
despite repeated demand. Y inform Q Insurance Corp. of X’s nonpayment, and to

43 | P a g e
ask them to fulfill their obligations as sureties, but Q Insurance Corp. refuse to pay
saying that that the surety bond was issued by its B, in excess of his authority. Is
Q Insurance Corp. liable for the acts of its agent in excess of its authority?

SUGGESTED ANSWER

Our law mandates an agent to act within the scope of his authority. The
scope of an agent’s authority is what appears in the written terms of the power of
attorney granted upon him. Under Article 1878(11) of the Civil Code, a special
power of attorney is necessary to obligate the principal as a guarantor or surety.

In the case at bar, Q Insurance Corp. could be held liable even if B exceeded
the scope of his authority only if B’s act of issuing Surety Bond is deemed to have
been performed within the written terms of the power of attorney he was
granted.

Q Insurance Corp. not only clearly stated the limits of its agents’ powers in
their contracts, it even stamped its surety bonds with the restrictions, in order to
alert the concerned parties. Moreover, its company procedures, such as reporting
requirements, show that it has designed a system to monitor the insurance
contracts issued by its agents. Q Insurance Corp. cannot be faulted for B’s
deliberate failure to notify it of his transactions with X.

It is apparent that X had been negligent or less than prudent in its dealings
with B. It is a settled rule that persons dealing with an agent are bound at their
peril, if they would hold the principal liable, to ascertain not only the fact of
agency but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it. The basis for
agency is representation and a person dealing with an agent is put upon inquiry
and must discover upon his peril the authority of the agent. If he does not make
such an inquiry, he is chargeable with knowledge of the agent’s authority and his
ignorance of that authority will not be any excuse.

44 | P a g e
 TOPIC: AGENCY

Agency Accounting and Fruits

QUESTION

X is a resident of the USA, she entrusted the management, administration,

care and preservation of her properties to Y. Y as the administrator has collected
and received all the fruits and income accruing therefrom. For 18 years Y never
rendered a full accounting of the fruits and income derived from the properties,
but has instead appropriated and in fact applied these for her own use and
benefit. Denying this allegation, Y presented five letters which had been sent Xt as
proof of the accounting. Are letters considered proof of accounting?

SUGGESTED ANSWER

No. the letters cannot be considered as sufficient to keep the principal

informed and updated of the condition and status of the X’s properties.

Art. 1891. Every agent is bound to render an account of his transactions

and to deliver to the principal whatever he may have received by virtue of the
agency, even though it may not be owing to the principal.

Every stipulation exempting the agent from the obligation to render an

account shall be void.

In the case at bar, the five letters sent by Y to X is not a sufficient proof of
accounting considering the many years of his administration of X’s property.

TOPIC: LOAN

Perfection of Contract of Loan

QUESTION

45 | P a g e
 A loaned from Bank B for the amount of Php 3M.A then received from the
bank the amount of 1M as additional working capital evidenced by a promissory
npte and secured by a real estate mortgage in favor of the bank coceringseveral
real propertied. Later, A defaulted which caused the bank to foreclose on the
properties of A. A now claims that the foreclosure was invalid on the ground of
fraud and bad faith for releasing only 1M of the agreed 3M loan andthat some of
the foreclosed properties cannot be included in the list of properties mortgaged
as these were mortgaged with another bank at that time.

Was the foreclosure valid and the loan perfected?

SUGGESTED ANSWER

The loan contract was perfected.

Under Article 1934 of the Civil Code, a loan contract is perfected only upon the
delivery of the object of the contract.

In Palada vs Solidbank [G.R. NO. 172227, June 29, 2011] the Supreme Court
held that bad faith and fraud must be proved by clear and convincing evidence.In
this case, although petitioners applied for a P3 million loan, only the amount of P1
million was approved by the bank because petitioners became collaterally deficient
when they failed to purchase TCT No. T-227331 which had an appraised value
of P1,944,000.00Hence, only the amount of P1 million was released by the bank to
petitioners

There was nothing on the face of the real estate mortgage contract to arouse any
suspicion of insertion or forgery. Except for the bare denials of petitioner, no other
evidence was presented to show that the signatures appearing on the dorsal portion of
the real estate mortgage contract are forgeries.

Further, our laws provide that a mortgagor is allowed to take a second or

subsequent mortgage on a property already mortgaged, subject to the prior rights of
the previous mortgagor.

46 | P a g e
 Clearly, the positive presumption of the due execution of the subject real estate
mortgage outweighs bare and unsubstantiated denial and imputations of fraud.

TOPIC: LOANS

Accommodation Party on Contract of Loan

QUESTION

Bank A extended a loan to B through the accommodation of C. Later, B

defaulted resulting to the freezing of account including that of C. C now claims
that he should not be made liable for he is merely an accommodation party and
that he was not properly notified by Bank A that B had defaulted in his payments.

Is C liable to Bank A?

SUGGESTED ANSWER

Yes, C is liable to Bank A.

Under Section 29 of the Negotiable Instruments Law, an accommodation

party is a person "who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his
name to some other person."

In the case of Gonzales vs PCIB ( GR # 180257, Feb. 23, 2011), the Court
explained that :

The accommodation party is liable on the instrument to a holder for value

even though the holder, at the time of taking the instrument, knew him or her to
47 | P a g e
be merely an accommodation party, as if the contract was not for
accommodation.

As petitioner acknowledged it to be, the relation between an accommodation

party and the accommodated party is one of principal and surety--the
accommodation party being the surety. As such, he is deemed an original
promisor and debtor from the beginning; he is considered in law as the same party
as the debtor in relation to whatever is adjudged touching the obligation of the
latter since their liabilities are interwoven as to be inseparable any benefit
therefrom.

However, C, as accommodation party must be properly apprised of

the default of B precisely because he is a co-signatory of the promissory
notes and has solidary liability. Proper notice of the default is mandatory.
TOPIC: DEPOSIT
Contract of Deposit and Necessary Deposit in Hotels/Inns

QUESTION

J checked-in at XYZ Hotel in Makati. R, the hotel’s parking attendant,

approached and volunteered to park his Pajero at the parking area in front of the
hotel and issued him a valet customer parking claim stub. Hours later, he found
out that his Pajero was carnapped while parked at parking space of the hotel. J
filed and was paid of his claim with the insurance company. Consequently, by
right of subrogation, the insurance company filed a complaint for recovery of
damages against XYZ Hotel. Is XYZ Hotel liable by virtue of the necessary contract
of deposit?

SUGGESTED ANSWER

YES, XYZ Hotel is liable. Under Article 1962 of our Civil Code,“A deposit is
constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and returning the same. If the safekeeping
48 | P a g e
of the thing delivered is not the principal purpose of the contract, there is no
deposit but some other contract.

In the case at bar, J, upon checked-in at XYZ Hotel, deposited his vehicle for
safekeeping by giving the key to R, the hotel’s parking attendant. In turn, R issued
a claim stub to Jeffrey as proof of necessary deposit of the latter’s Pajero.
Needless to state, the contract of deposit was perfected upon J’s delivery, when
he handed over to R the key to his Pajero, which R received with the obligation of
safely keeping and returning it.

Therefore, XYZ Hotel is liable for the loss of J’s Pajero by virtue of the
necessary contract of deposit. (Durban Apartments Corp., etc. vs. Pioneer
Insurance and Surety Corp.;G.R. No. 179419. January 12, 2011.)

TOPIC: COMPROMISE

Compromise Agreement

QUESTION

X filed a complaint for illegal dismissal against ABC Company.

Unfortunately, the Labor Arbiter dismissed the complaint. On appeal, the NLRC
reversed the Labor Arbiter’s decision in favor of X. Aggrieved by the ruling, ABC
Company filed a Petition for Certiorari to the Court of Appeals but was later
denied. Not contented, ABC Company filed a Petition for Review on Certiorari to
the Supreme Court. Pending resolution of the case, the parties have reached an
amicable settlement through Compromise Agreement executed between the
parties. Subsequently, the case was terminated on the basis of the Compromise
Agreement. What is the effect of the Compromise Agreement in relation to this
case?

SUGGESTED ANSWER

The Compromise Agreement shall have the effect and authority of res
judicata upon its approval by the court where the litigation is pending.

49 | P a g e
 Under the Civil Code of the Philippines, contracting parties may establish
such stipulations, clauses, terms, and conditions, as they deem convenient, so
long as they are not contrary to law, morals, good customs, public order, or public
policy. A compromise agreement is a contract whereby the parties undertake
reciprocal obligations to resolve their differences in order to avoid litigation or
put an end to one already instituted. It is a judicial covenant having the force and
effect of a judgment, subject to execution in accordance with the Rules of Court,
and having the effect and authority of res judicata upon its approval by the court
where the litigation is pending.

In the case at bar, while the case is still pending before the Supreme Court,
X and ABC Company agreed to settle amicably by executing a Compromise
Agreement. Considering that such Compromise Agreement was executed in
accordance with law, morals, good customs, public order, or public policy, the
same was also adopted by the Labor Arbiter in terminating the case.

Therefore, the case of illegal dismissal filed by X against ABC Company was
validly terminated by virtue of the Compromise Agreement and therefor, res
judicata shall apply. (Coca-Cola Bottlers Philippines, Inc. vs. Rodrigo Mercado, et
al.;G.R. No. 190381. October 6, 2010)

TOPIC: GUARANTY & SURETY

Contract of Guaranty

QUESTION

JB purchased fertilizer from XYZ, payable from the proceeds of the loan that
ABC Bank extended to her. JB executed a document. The document stated that JB
had an approved loan with ABC Bank for Php 200,000 and was signed by branch
manager Reno stated that the "assignment has been duly accepted and payment
duly guaranteed within 60 days from XYZ's Invoice." XYZ presented the
documents but the bank denied the claim on the ground that it neither
50 | P a g e
authorized the transactions nor the execution of the documents which were not
part of its usual banking transactions. Is ABC Bank is bound by Reno's undertaking
on its behalf to deliver to XYZ the proceeds of the bank's loan to JB in payment of
the fertilizers she bought? Is Reno considered as a guarantee?

SUGGESTED ANSWER

A. No.

As a rule, a corporation is liable to innocent third persons where it

knowingly permits its officer, or any other agent, to perform acts within the scope
of his general or apparent authority, holding him out to the public as possessing
power to do those acts.

In the present case, ABC Bank cannot be bound by Reno's undertaking since
it is in his personal capacity. He signed it under his own name, not in ABC Banks
name or as its branch manager.

B. YES. Reno’s undertaking was a guarantee. Reno was acting for himself,
not in representation of ABC Bank.

As it happens, bank guarantees are highly regulated transactions under the

law. They are undertakings that are not so casually issued by banks or by their
branch managers at the dorsal side of a client’s promissory note as if an
afterthought. A bank guarantee is a contract that binds the bank and so may be
entered into only under authority granted by its board of directors. Such authority
does not appear on any document. Indeed, XYZ had no right to expect branch
manager Reno to issue one without such authorization.

TOPIC: GUARANTY & SURETY

Contract of Surety, Novation

51 | P a g e
QUESTION

Apple Galaxy Company entered into a building contract with Wood

Construction for the construction of Korpel Building. The parties agreed that the
construction work would begin on January 5,2012 and should be finished
by October 27, 2012. Wood Construction signed the Undertaking of
Surety holding themselves personally liable for the accountabilities of Wood
Construction. Wood Construction procured Performance Bond from ABC
Insurance Corporation to secure full and faithful performance of its obligation
under the Building Contract. Wood Construction failed to accomplish the project,
Apple Galaxy Company informed Wood Construction that it was terminating their
contract. Apple Galaxy Company sent demand letters to Wood Construction and
its officers for the payment of liquidated damages for the delay. Apple Galaxy
Company informed Wood construction that it was terminating their contract.
Apple Galaxy Company wrote ABC Insurance asking for remuneration pursuant to
Performance Bond. What is the effect in the failure of performance by Wood
Construction? What is Surety Agreement?

SUGGESTED ANSWER

a.

The effect of failure of performance by Wood Construction gave rise to the

obligation of Performance Bond that must be complied by ABC Insurance.
The primary purpose for the acquisition of the performance bond was to
guarantee to Apple Galaxy Company that the project would proceed in
accordance with the terms and conditions of the contract and to ensure the
payment of a sum of money in case the contractor would fail in the full
performance of the contract. When Apple Galaxy communicated to Wood
Construction that it was terminating the contract, ABC Insurance liability, as
surety, arose. The claim of Apple Galaxy Company against ABC insurance

52 | P a g e
 occurred from the failure of Wood Construction to perform its obligation
under the building contract.

b.

A contract of suretyship is an agreement whereby a party, called the surety,

guarantees the performance by another party, called the principal or
obligor, of an obligation or undertaking in favor of another party, called the
obligee. Although the contract of a surety is secondary only to a valid
principal obligation, the surety becomes liable for the debt or duty of
another although it possesses no direct or personal interest over the
obligations nor does it receive any benefit therefrom.

TOPIC: PLEDGE

Contract of Pledge

QUESTION
XYZ Securities is the stockbroker of ABC Corporation. Subsequently, the
latter made two stock purchases, first from Y-Claro Inc of 10,000,000 shares and
second from Y-Siguro Corp of 7,500,000 shares, all the stocks purchased were
placed in XYZ possession. On later dates, ABC ordered the sale of 10,000,000 Y-
Claro shares with buy-back obligation. As ABC failed to honor the buy-back, the
XYZ sold the 7,500,000 Y-Siguro shares to reacquire the Y-Claro shares without
ABC consent. On January 2012, ABC demanded the return of the 7,500,000 Y-
Siguro shares; however such demand was rejected as XYZ argued that Y-Siguro
shares were validly disposed since it was agreed that any properties of ABC held
by XYZ Securities shall be subject to a general lien in favour of the XYZ for the
discharge of all or any indebtedness of ABC. It also agreed that XYZ has also the
right to retain, apply, sell or dispose such property as payment thereof. XYZ
further argued that the notices of sales it issued to ABC upon selling the Y-Claro
shares, wherein the collateral is “Y-Claro Shares/Property” refers to all property
of ABC held by XYZ, in effect, XYZ can validly sell the Y-Siguro shares, to buy-back
the Y-Claro Shares.
53 | P a g e
 Is the sale of Y-Siguro shares to reacquire Y-Claro made by XYZ valid?

SUGGESTED ANSWER

The sale is void. It cannot be covered by the agreement between the

parties since such agreement is confined only to obligations of ABC to XYZ and not
to third parties like the purchase of the Y-Claro shares. Thus, the sale of the Y-
Siguro shares to buy back the Y-Claro shares is illegal and ineffective.

As to XYZ second contention, since it was stated in Notices of Sale that “Y-
Claro Shares/Property” were made as collaterals in selling the Y-Claro shares,
were placed to XYZ, a third party by common agreement, then the accessory
contract in this case is a contract of pledge. To have a valid pledge, the following
requisites must be present (Art. 2085 of Civil Code): (1) That they be constituted
to secure the fulfillment of a principal obligation; (2) That the pledgor or
mortgator be the absolute owner of the thing pledged or mortgaged; (3) That the
persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the
purpose. It is however such accessory contract terminated from the moment Y-
Claro shares were sold to third party, since ABC were no longer the absolute
owner of said shares. As to the word “Property” as collateral, it does not meet
the legal requirement laid down in Art. 2096 of Civil code which provides that "a
pledge shall not take effect against third persons if description of the thing
pledged and the date of the pledge do not appear in a public instrument."
Evidently, the word "Property" is vague, broad, and confusing as to the
ownership. Further, the notice of sale is not in a public instrument as required by
said legal provision; therefore, the pledge on "property" is void and without legal
effect.

TOPIC: PLEDGE

Presumption, Lesser Transmission of Rights

54 | P a g e
QUESTION

A executed a Chattel Mortgage over several motorized sewing machines in

favor of U-Bank on January 2, 2012 to secure his obligation arising from export
bills transactions. However, on May 8, 2012, A pledged the same equipment to B
as a guarantee for settlement of his obligation. This prompted U-Bank to file a
Complaint with prayer for the issuance of ex-parte writs of preliminary
attachment and replevin against A and B. Upon granting of writ by the RTC,
Union Bank sold the mortgaged machines. B now contended that his prior
possession of the sewing machines was made in good faith, likewise, since the
chattel mortgage was unnotarized it does not bind third party. On the other hand,
U-Bank argued that it has a better title to the proceeds of the sale, although the
Chattel Mortgage executed in its favor was not notarized, it is nevertheless valid,
and thus, has preference over a subsequent unnotarized pledge.

Who has the better title over the proceeds of the sale of sewing machines?

SUGGESTED ANSWER

U-Bank has the better title over the proceeds of the sale of the sewing
machines. Though it is true that unnotarized Chattel Mortgage does not bind B,
however such fact does not affect the cause of action of U-Bank since it is for a
sum of money. U-Bank only needed to show that the loan of A remains unpaid.
As to the question whose agreement will take precedence, Article 2096 of the
Civil Code provides that "[a] pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear in a
public instrument." Hence, just like the chattel mortgage executed in favor of U-
Bank, the pledge executed by A in favor of B cannot bind U-Bank, however, since
the Chattel Mortgage in favor of U-Bank was executed earlier, U-Bank has a
better right over the motorized sewing machines under the doctrine of "first in
time, stronger in right" (prius tempore, potior jure).

TOPIC: ANTICHRESIS
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QUESTION

A allegedly mortage a parcel of land to B who immediately took possession

of said property. 28 years later the heirs of A asked to redeem the said parcel of
land to B but the later refused claiming that the contract that was entered into
was of sale even without a proof of said sale. The heirs of A claimed before the
RTC that the contract was of antichresis who in turn failed to produce a valid
proof. What is the nature of the contract?

SUGGESTED ANSWER

There was neither an antichresis or sale existed. For the contract of

antichresis to be valid, Article 2134 of the Civil Code requires that "the amount of
the principal and of the interest shall be specified in writing; otherwise the
contract of antichresis shall be void."In this case, the Heirs of A were indisputably
unable to produce any document in support of their claim that the contract
between A and B was an antichresis. Likewise, the heirs of B failed to establish the
existence and due execution of the subject deed of sale on which their claim of
ownership was founded.

TOPIC: MORTGAGE

Validity of Blanket or Dragnet Clause

QUESTION

A, an owner of a parcel of land mortgage the same to PCSO in favor of

unpaid tickets of B in the amount of One Million pesos. Three years later A sold
the parcel of land to C which in turn filed a complaint in the RTC against A for
failure to deliver the TCT which is in the possession of PCSO. While the case is
pending, PCSO registered the mortgage and forclosed the parcel of land for the
subsequent unpaid tickets of B after the amount of One Million was paid. PCSO

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claimed that the sale was invalid for the mortgage is a continuing guaranty. Is
PCSO correct?

SUGGESTED ANSWER

PCSO is not correct. A mortgage liability is usually limited to the amount

mentioned in the contract. However, a mortgage that provides for a dragnet
clause is in the nature of a continuing guaranty and constitutes an exception to
the rule than an action to foreclose a mortgage must be limited to the amount
mentioned in the mortgage contract. . Its validity is anchored on Article 2053 of
the Civil Code and is not limited to a single transaction, but contemplates a future
course of dealing, covering a series of transactions, generally for an indefinite
time or until revoked.

In this case, the subject mortgage had already been cancelled or

terminated upon B’s full payment before PCSO availed of registration in 1992.In
other jurisdictions, it has been held that the use of the particular words and
expressions such as payment of “any debt”, “any indebtedness”, “any deficiency”,
or “any sum”, or the guaranty of “any transaction” or money to be furnished the
principal debtor “at any time”, or “on such time” that the principal debtor may
require, have been construed to indicate a continuing guaranty.

TOPIC: EQUITABLE MORTGAGE

Deficiency Claim after Extrajudicial Foreclosure

QUESTION

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 S executed a deed of sale of a parcel of land in favor of R for a
consideration of P 10, 000 although, the land worth was double the price. The
contract provided that S will retain the possession of the land as lessee and pay
the land taxes thereon. Is the sale made by S valid?

Suggested Answer

In reality, the contract in the instant case is an equitable mortgage. The

land is merely the collateral or security for the payment of a loan of P 10,000. This
is obvious from the deed of sale itself. In the first place, it says that S will retain
possession of the land as lessee and the latter shall pay the taxes thereon.

Moreover the purchase price is unusually inadequate. When there is a right

to redeem, inadequacy of price should not be material because the judgment
debtor may re-acquire the property or else sell his right to redeem and thus
recover any loss he claims to have suffered by reason of the price obtained at the
execution sale. Thus, respondent stood to gain rather than be harmed by the low
sale value of the auctioned properties because it possesses the right of
redemption.

These are badges of an equitable mortgage. According to the New Civil

Code, the presence of any of these will be sufficient to raise the presumption that
the contract is an equitable mortgage. Therefore, the sale made by S is valid
which is commonly known as pacto de retro sales.

TOPIC: EQUITABLE MORTGAGE

QUESTION

On June 29, 2005, X is a registered owner of a parcel of land with an area of

150, 000 square meters as evidence by a Deed of Sale with right of redemption
for P 500,000. X sold a portion of his land containing 100,000 square meters to Y,
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thus leaving an unsold portion of 50,000 square meters. X never redeemed the
sold portion to Y.

On October 12, 2012, X sold the entire lot to T without specifying whether
it included the 100,000-square portion sold (with right of redemption) to Y. X then
file a complaint of recovery and damages against Y. Will the case prosper?

SUGGESTED ANSWER

The petition is denied.

An equitable mortgage is one which, although lacking in some formality, or

form, or words, or other requisites demanded by a statute, nevertheless reveals
the intention of the parties to charge real property as security for a debt, and
contains nothing impossible or contrary to law. The essential requisites of an
equitable mortgage are: (1) the parties enter into what appears to be a contract
of sale, (2) but their intention is to secure an existing debt by way of mortgage.

Jurisprudence recognizes that there is no conclusive test to determine

whether a deed purporting to be a sale on its face is really a simple loan
accommodation secured by a mortgage. However, our case law consistently
shows that the presence of even one of the circumstances enumerated in Article
1602 suffices to convert a purported contract of sale into an equitable mortgage.

In sales denominated as pacto de retro, the price agreed upon should not
generally be considered as the just value of the thing sold, absent other
corroborative evidence. In the present case, there is no evidence herein
whatsoever to show that X did not understand the ramifications of her signing the
“Deed of Sale with Right of Redemption.” Nor is there any showing that she was
threatened, forced or defrauded into affixing her signature on the said contract. If
the terms of the pacto de retro sale were unfavorable to X, this Court has no

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business extricating her from that bad bargain. Courts are not guardians of
persons who are not legally incompetent, like X.

Also, X failed to prove before the trial court that the price agreed upon by
the parties in 2005 was grossly inadequate. Even assuming that the contract of
sale with right to repurchase executed by X and Y in 2005 is an equitable
mortgage, the fact remains that from 2005 up to the filing of the complaint in
2012, or a period of 7 years, she failed to redeem the property. X claim that she
had been paying the realty taxes follows that she owns the property, not Y.
Settled is the rule that tax receipts perse are not conclusive evidence of land
ownership absent other corroborative evidence.

TOPIC: MORTGAGE

Pactum Commissorium
QUESTION

A, the original owner of a piece of property, mortgaged the same to B as

security for a loan with a stipulation appointing B, the mortgagee, as the
mortgagor’s attorney-in-fact, to sell the property in case of default in the
payment of the loan. Thereafter, A again mortgaged the same subject property to
C to secure her loan. Later, A sold the subject property to B. As a result, C filed a
Complaint for Foreclosure of Real Estate Mortgage with Damages claiming that
the stipulation appointing B, the mortgagee, as the mortgagor’s attorney-in-fact,
to sell the property in case of default in the payment of the loan, is in violation of
the prohibition on pactum commissorium. Decide.

SUGGESTED ANSWER

B’s purchase of the subject property did not violate the prohibition
on pactum commissorium.
The following are the elements of pactum commissorium:

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 (1) There should be a property mortgaged by way of security for the
payment of the principal obligation; and
(2) There should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period.
In the case at bar, the power of attorney provision did not provide that the
ownership over the subject property would automatically pass to B upon A’s
failure to pay the loan on time. What it granted was the mere appointment of B,
as attorney-in-fact, with authority to sell or otherwise dispose of the subject
property, and to apply the proceeds to the payment of the loan. A’s decision to
eventually sell the subject property to B was well within the scope of her rights as
the owner of the subject property. The subject property was transferred to B by
virtue of another and separate contract, which is the Deed of Sale.

TOPIC: MORTGAGE

“Piece-Meal” Redemption

QUESTION

Spouses Jerloyd and Charo are the registered owners of seven (7) parcels of
land. Later, they executed a Real Estate Mortgage of all the lots in favor of PCI
Bank, predecessor of Banco De Oro (BDO), to secure a loan. Subsequently, they
sold the mortgaged lots to Lord without the consent and knowledge of BDO. This
sale was followed by a default on the part of Jerloyd and Charo to pay their loans
to BDO. Thus, BDO extrajudicially foreclosed the mortgage and had the lots sold
at public auction.

At the auction sale, BDO was proclaimed the highest bidder and bought
said lots. Twelve (12) days after the sale was registered, BDO sold two (2) of the
mortgaged lots to Candies under a Deed of Sale with Agreement to
Mortgage. Roughly a month before the one-year redemption period was set to
expire, Lord attempted to redeem the lots sold to Candies. He tendered the
amount to BDO and Candies, but both refused, contending that the redemption
should be for the full amount of the winning bid plus interest for all the
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foreclosed properties. They further contend that the mortgage is indivisible so in
order for the tender to be valid and effectual, it must be for the entire auction
price plus legal interest. Does the argument of Candies and BDO tenable?

SUGGESTED ANSWER

The argument of BDO and Candies on the indivisibility of the mortgage is

bereft of merit. As held in the case of Philippine National Bank v. De los Reyes, the
doctrine of indivisibility of mortgage does not apply once the mortgage is
extinguished by a complete foreclosure thereof.

What the law proscribes is the foreclosure of only a portion of the property
or a number of the several properties mortgaged corresponding to the unpaid
portion of the debt where before foreclosure proceedings partial payment was
made by the debtor on his total outstanding loan or obligation. This also means
that the debtor cannot ask for the release of any portion of the mortgaged
property or of one or some of the several lots mortgaged unless and until the loan
thus, secured has been fully paid, notwithstanding the fact that there has been a
partial fulfillment of the obligation. Hence, it is provided that the debtor who has
paid a part of the debt cannot ask for the proportionate extinguishment of the
mortgage as long as the debt is not completely satisfied.

That the situation obtaining in the case at bar is not within the purview of
the aforesaid rule on indivisibility is obvious since the aggregate number of the
lots which comprise the collaterals for the mortgage had already been foreclosed
and sold at public auction. There is no partial payment or partial extinguishment
of the obligation to speak of. The aforesaid doctrine, which is actually intended
for the protection of the mortgagee, specifically refers to the release of the
mortgage which secures the satisfaction of the indebtedness and naturally
presupposes that the mortgage still exists. Once the mortgage is extinguished by
a complete foreclosure thereof, said doctrine of indivisibility ceases to apply
since, with the full payment of the debt, there is nothing more to
secure. Nothing in the law prohibits the piecemeal redemption of properties sold
at one foreclosure proceeding.

TOPIC: QUASI-CONTRACTS
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 Solutio Indebiti

QUESTION

Y, availed a loan from X in the amount of P540,000.00. The agreement was

not reduced into writing. Y paid the loan by issuing a check amounting to
P500,000.00 and another check amounting to P200,000.00. Not satisfied with the
payment, X, demanded additional payment to be applied as interest and Y paid a
total amount of P1,200,000.00.

Feeling aggrieved of the overpayment made, he consulted a lawyer who

finished his law in USJR. Y was advised that X has no right to demand interest
because their was no agreement in writing made by the parties. Upon hearing the
advice of the brilliant lawyer from USJR, Y immediately sent demand letters for
the return of the overpayment based on the principle of solutio indebiti.

X, on the other hand, claimed that there was no overpayment because the
excess amount was a payment for the interest.

Is the contention of X tenable?

SUGGESTED ANSWER

The contention is without merit. Article 1956 of the Civil Code, which refers
to monetary interest, specifically mandates that no interest shall be due unless it
has been expressly stipulated in writing.

Payment of monetary interest is allowed only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement for the payment of
interest was reduced in writing. The concurrence of the two conditions is required
for the payment of monetary interest. Thus, we have held that collection of
interest without any stipulation therefor in writing is prohibited by law.

The quasi-contract of solutio indebiti harks back to the ancient principle

that no one shall enrich himself unjustly at the expense of another.The principle
of solutio indebiti applies where (1) a payment is made when there exists no
binding relation between the payor, who has no duty to pay, and the person who
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received the payment; and (2) the payment is made through mistake, and not
through liberality or some other cause.

In the case at bar, the parties did not agree in writing as to the charging of
interest for the loan. Therefore, X has no right to receive payment for the interest
and by the principle of solutio indebiti, he must return the payment made by
mistake of Y.

TOPIC: DAMAGES

Quasi-Delict and Vicarious Liability

QUESTION

X, was driving along the highway when suddenly, someone bumped his car
and ran after. Because of his 20-20 eye vision, X, was able to get the plate number
of the car who bumped him. Upon verification with the LTO, he learned that it
was owned by Y.

X sent demands to Y for the payment of the damages incurred by him

because of the hit and run that happened. Y, on the other hand, denied the claim
because, according to him, though the car is registered in his name but it was his
secretary who is using the car and the driver who bumped was hired by his
secretary.

Is the contention of Y, tenable?

SUGGESTED ANSWER

The contention is NOT tenable. As a general rule, one is only responsible for
his own act or omission. Thus, a person will generally be held liable only for the
torts committed by himself and not by another.

The law, however, provides for exceptions when it makes certain persons
liable for the act or omission of another. One exception is an employer who is

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made vicariously liable for the tort committed by his employee. Article 2180 of
the Civil Code states:

Article 2180. The obligation imposed by Article 2176 is demandable not only
for one’s own acts or omissions, but also for those of persons for whom one is
responsible.

Although the employer is not the actual tortfeasor, the law makes him
vicariously liable on the basis of the civil law principle of pater familias for failure
to exercise due care and vigilance over the acts of one’s subordinates to prevent
damage to another.

In the case at bar, Y, as registered owner, is deemed the employer of the

driver, and is thus vicariously liable under Article 2176 in relation with Article
2180 of the Civil Code.

Thus, whether there is an employer-employee relationship between the

registered owner and the driver is irrelevant in determining the liability of the
registered owner who the law holds primarily and directly responsible for any
accident, injury or death caused by the operation of the vehicle in the streets and
highways.

TOPIC: DAMAGES

Negligence, Proximate Cause and Diligence Required of Banks

QUESTION

What is meant by the following? Explain.

1. Doctrine of Proximate Cause

2. Doctrine of Contributory Negligence

SUGGESTED ANSWER:

1. One of the essential facts which the plaintiff must prove in order that he
can recover from the defendant is the relation of cause and effect between
the defendant’s negligence and the damage or injury which he has
incurred. This is more frequently known as the doctrine of proximate cause.
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 It is defined as that cause which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and
without which the result would not have incurred.

2. The doctrine of contributory negligence may be stated as follows: If the

negligence of the plaintiff cooperated with the negligence of the defendant
in bringing about the accident causing the injury complained of, such
negligence of the plaintiff would be an absolute bar to recovery. If the
negligence of the plaintiff was merely contributory to his injury, the
immediate and proximate cause of the accident causing the injury being the
defendant’s negligence, such negligence would be not be a bar to recovery,
but the amount recoverable shall be mitigated by the courts.

TOPIC: DAMAGES

Moral, Exemplary, Actual, Temperate Damages and Attorney’s Fees

QUESTION

What are the different kinds of damages recoverable under the New Civil Code?
Define each of them.

SUGGESTED ANSWER

1. Actual or compensatory damages, or the compensation awarded to a

person for such pecuniary loss suffered by him as he has duly proved. (Art.
2199, NCC.)

2. Moral damages, or the compensation awarded to a person for physical

suffering, mental anguish, fright, serious anxiety. Besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar injury. (Art.
2217, NCC.)

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 3. Nominal damages, or the account awarded to a person in order that his
right, which had been violated or invaded, may be vindicated or recognized.
(Art. 2221, NCC.)

4. Temperate or moderate damages, or the compensation which is more than

nominal but less than compensatory damages, awarded to a person when
the court finds that he has suffered some pecuniary loss, but its amount
cannot, from the nature of the case, be proved with certainty. (Art. 2224,
NCC.)

5. Liquidated damages, or that agreed upon by the parties to a contract, to be

paid in case of breach thereof. (Art. 2226, NCC.)

6. Exemplary or corrective damages, or that imposed by way of example or

correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages. (Art. 2229, NCC.)

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