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 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,

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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.

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.

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 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 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
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
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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.

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.

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 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 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

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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 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.

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.

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 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.

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

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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 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

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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?

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.

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

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 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 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
10 | P a g e
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

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

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 TOPIC: ESTOPPEL

QUESTION

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 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.

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 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

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

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 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

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

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 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

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

15 | P a g e
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
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
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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

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

Perfection, Absolute/Qualified Acceptance

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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 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.

18 | P a g e
 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

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.
19 | 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.

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

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 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 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.

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 TOPIC: SALE

Rescission for Breach, Constructive Delivery & Execution of Public Instrument

QUESTION

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 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.

22 | P a g e
 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.

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.

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 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.

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
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.
24 | P a g e
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
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
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 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 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
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?

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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?

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.

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 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.

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

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,

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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.

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

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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 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.

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 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 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.

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 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.

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.

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 TOPIC: LOAN

Perfection of Contract of Loan

QUESTION

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.

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
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 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 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

34 | P a g e
 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 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.

35 | 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 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.

36 | P a g e
 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

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

37 | P a g e
 terminating the contract, ABC Insurance liability, as surety, arose. The claim of Apple Galaxy
Company against ABC insurance 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.

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
38 | P a g e
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

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

39 | P a g e
motorized sewing machines under the doctrine of "first in time, stronger in right" (prius tempore, potior
jure).

TOPIC: ANTICHRESIS
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 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

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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

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.

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 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, 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 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

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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:

(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

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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 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

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

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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 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
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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 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. It is defined as that cause which, in natural and continuous sequence,

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 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.)

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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