OBLIGATIONS

General Provisions

PAYMENT OF DEBT EVEN IF ARISING FROM GAMBLING MUST BE PAID FOR

1. LEUNG BEN v. OBRIEN

G.R. No. L-13602, April 6, 1918
Street, J.

FACTS:
In a petition for a writ of certiorari, petitioner Leung Ben seeks to quash an attachment issued from the
Court of First Instance.

On December 12, 1917, an action was instituted in the Court of First Instance of Manila by P.J. O’Brien
to recover of Leung Ben the sum of P15,000, all alleged to have been lost by the plaintiff to the
defendant in a series of gambling, banking, and percentage games conducted during the two or three
months prior to the institution of the suit.

The plaintiff asked for an attachment against the property of the defendant, on the ground that the
latter was about to depart from the Philippines with intent to defraud his creditors. This attachment was
issued. The provision of law under which this attachment was issued requires that there should be a
cause of action arising upon contract, express or implied.

The contention of the petitioner is that the statutory action to recover money lost at gaming is not such
an action as is contemplated in this provision, and he insists that the original complaint shows on its
face that the remedy of attachment is not available in aid thereof; that the Court of First Instance acted
in excess of its jurisdiction in granting the writ of attachment; that the petitioner has no plain, speedy,
and adequate remedy by appeal or otherwise; and that consequently the writ of certiorari supplies the
appropriate remedy for this relief.

ISSUE:
Is the statutory obligation to restore money won at gaming is an obligation arising from contract,
express or implied?

RULING:
Yes. In permitting the recovery money lost at play, Act No. 1757 has introduced modifications in the
application of Articles 1798, 1801, and 1305 of the Civil Code.

The first two of these articles relate to gambling contracts, while article 1305 treats of the nullity of
contracts proceeding from a vicious or illicit consideration. Taking all these provisions together, it must
be apparent that the obligation to return money lost at play has a decided affinity to contractual
obligation; and the Court believes that it could, without violence to the doctrines of the civil law, be held
that such obligations is an innominate quasi-contract.

It is however, unnecessary to place the decision on this ground. In the opinion of the Court, the cause
of action stated in the complaint in the court below is based on a contract, express or implied, and is
therefore of such nature that the court had authority to issue the writ of attachment.
Hence, the application for the writ of certiorari must therefore be denied and the proceedings
dismissed.

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 OBLIGATIONS
General Provisions

LETTER WITH INTENTION TO DONATE IS NOT SUFFICENT

2. ALDABA v. COURT OF APPEALS

G.R. No. L-21676, February 28, 1969
Zaldivar, J.

FACTS:
This is a petition for review by the Supreme Court for a decision rendered by the Court of Appeals. The
Court of First Instance decided that donation was not present in the case at bar.

Vicente Aldaba, the petitioner, is the doctor of Belen Aldaba. On the other hand Cesar Aldaba, the
brother of Belen Aldaba, is one of the respondents. Belen Aldaba died leaving her heirs surviving
spouse Estanislao Bautista and her brother Cesar Aldaba. Dr. Vicente Aldaba together with his
daughter lived in a house owned by Mrs. Aldaba. Mrs. Aldaba allowed them to live in one of her
properties because a fire burned down Dr. Aldaba's house. After Belen Aldaba's death, the partition of
the properties left Cesar Aldaba and Emmanel Bautista as the owners of the two lots in question.

Petitioners contend that having rendered services for the deceased for more than ten years without
compensation, the said lots were the actual compensation. Furthermore a letter saying, "Huwag
kayong umalis diyan. Talagang iyan ay para sa inyo. Alam nila na iyan ay sa inyo" was used as
evidence to prove donation.

Respondents contend that the evidence of the letter does not disclose that donation has been made.

ISSUE:
Was there a disposition of the property in question made by the deceased Belen Aldaba in favor of
petitioners by virtue of the letter?

RULING:
No. There was no disposition of the property in question made by the deceased Belen Aldaba in favour
of petitioner by virtue of the letter.

For the following reasons: (1) The note was insufficient conveyance, and hence could not be
considered as evidence of a donation with onerous cause. The note can be considered, at most, as
indicative of the intention to donate. (2) no notarial document was executed by Belen to the petitioners
during those 10 years. (3) P53,000 worth of services made by the petitioners no way proves the
alleged donation.

Again, donation must be clearly stated. Mere intention to donate is not sufficient. If at all, the
petitioners believed that the gratuitous use of the property was not sufficient to compensate them for
their services, they could have presented their claims in the intestate proceedings, which they
themselves could have initiated, if none was instituted.

Hence there was no donation for the services rendered. A letter showing an intention to donate is not
sufficient to prove donation.

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 OBLIGATIONS
Nature and Effect

NECESSITY OF DEMAND UPON DEFAULT AS REQUISITE TO FORFEITURE

3. BAYLA v. SILANG TRAFFIC CO.

73 Phil 557, May 1, 1942
Ozaeta, J.

FACTS:
This is a petition and cross-petition for certiorari filed by both parties to the Supreme Court.

Petitioners decided to purchase several shares of stock from Silang Traffic Co (SILANG). The
purchase price is to be paid 5% upon the execution of the contract and the remainder in installments of
5%, payable within the 1st month of each and every quarter starting July 1, 1935, with interest on
deferred payments at 6% per annum until paid. Both parties also agreed to forfeit in favor of seller in
case of default without court proceedings. On July 31, 1937, petitioners failed to pay the installment. A
resolution was then approved by the board rescinding the contract.

Petitioners then filed an action against SILANG to recover certain sum of money which they had paid
severally on account of shares of stock they individually agreed to take and pay for under certain
conditions.

SILANG, on the other hand, contended that the resolution is not applicable to the petitioners because
on the date thereof their subscribed shares of stock had already automatically reverted to SILANG,
and the installments paid by them had already been forfeited.

ISSUE:
Did the failure of the purchaser to pay any of the quarterly installments on the purchase price
automatically give rise to the forfeiture of the amounts already paid and the reversion of the shares to
the corporation?

RULING:
No. The failure of purchaser to pay any of the quarterly installments on the purchase price did not
automatically give rise to the forfeiture of the amount already paid.

Under article 1100 of the Civil Code persons obliged to deliver or do something are not in default until
the moment the creditor demands of them, judicially or extra-judicially the fulfillment of their obligation,
unless (1) the obligation or the law expressly provides that demand shall not be necessary in order that
default may arise, or (2) by reason of the nature and circumstances of the obligation it shall appear
that the designation of the time at which the thing was to be delivered or the service rendered was the
principal inducement to the creation of the obligation.

The contract here involved provides that if the purchaser fails to pay any of the installments when due,
the shares of stock which are the object of the sale are to revert to the seller and the payments already
made are to be forfeited in favor of said seller. The seller, through its board of directors, annulled a
previous resolution rescinding the sale and declared the forfeiture of the pay-ments already made and
the reversion of the shares of stock to the corporation. Such forfeiture was ineffective. The contract did
not expressly provide that the failure of the purchaser to pay any installment would give rise to
forfeiture and cancellation without the necessity of any demand from the seller.

Hence, such failure to pay any of the quarterly installments did not automatically give rise to forfeiture
and cancellation of shares in favor of the corporation.

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 OBLIGATIONS
Nature and Effect

EMPLOYEE ENTITLED TO DAMAGES FOR BREACH OF CONTRACT OF EMPLOYMENT

4. LIRAG TEXTILE MILLS, INC. v. COURT OF APPEALS

G.R. No. L-30736, July 11, 1975
Esguerra, J.

FACTS:
This is a petition for certiorari which seeks to review the decision of the Court of Appeals sentencing
defendants Lirag Textile Mills Inc. (LIRAG) and Felix Lirag to jointly and severally pay plaintiff, Cristan
Alcantara for the actual damages.

An express agreement was entered into between LIRAG and Cristan involving the latter’s employment.
The agreement stipulated the duration of employment, time when employee may resign, and when
employer may terminate employment for a valid cause. LIRAG terminated Cristan’s employment on
the ground of “serious reverses, both in terms of pecuniary loss and in market opportunities”.

Cristan contends that there was bad faith on LIRAG’s part when the latter terminated his services
without any valid cause. Hence, he filed a civil case for damages against LIRAG before RTC.

LIRAG, on the other hand, invokes the applicability of Republic Act. 1052 and contends the validity of
termination of private respondent.

ISSUE:
Was there was bad faith on LIRAG’s part when he terminated the services of Cristan?

RULING:
Yes, bad faith was existent in the case at bar.

Article 1170 of the Civil Code states: “Those who in the performance of their obligations are guilty of
fraud, negligence, or delay and those who in any manner contravene the tenor thereof are liable for
damages.”

Here LIRAG terminated private respondent Cristan’s employment without a valid cause because its
contention of “serious reverses, both in terms of pecuniary loss and in market opportunities” was found
by both the trial and appellate courts and by Us as false and alleged in bad faith. It thereby committed
a breach of contract which made it liable to Alcantara for damages. It’s bad faith in committing the
breach of the contract of employment was compounded when LIRAG as appellants in the respondent
Appellate Court tried to raise for the first time the question of private respondent Cristan’s alleged lack
of skill in its desperate effort to find a ‘valid cause’ for that wrongful breach. The very act of petitioners
in trying to pull the wool over the eyes of both the trial court and the respondent Appellate Court as to
its true financial condition in its attempt to establish a false ‘valid cause’ for its wrongful act is not only
indicative of fraud and bad faith but likewise highly reprehensible because it is a deliberate distortion of
the truth to subvert the ends of justice.

Hence, given the presence of bad faith in the instant case, the decision of the Court of Appeals
ordering petitioners to pay respondent is affirmed.

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 OBLIGATIONS
Nature and Effect

REHABILITATION OF A MINING COMPANY; RESOLUTORY CONDITION; EQUITABLE

DOCTRINE

5. HANLON v. HAUSSERMANN
G.R. No. L-14617, February 18, 1920
Street, J.

FACTS:
This is an appeal from the favorable decision of the court granting the plaintiffs, R.Y. Haylon, as co-
adventurers, 24,000 shares each of the stock of Benguet Consolidated Mining Company, and to
payment of the dividends declared and paid for the years 1916 and 1917.

Defendants John W. Haussermann and A. W. Beam were shareholders and members of the board of
directors of Benguet Consolidated Mining Company. The milling plant of said company was completely
destroyed by high water. Plaintiff R. Y. Hanlon, an experienced mining engineer, presented a
proposition for the rehabilitation of the company. The proposition was accepted by the company and
incorporated in a written contract. Hanlon was to pay into the treasury of the mining company the sum
of P75,000 in cash within six months. Since Hanlon was without the financial resources necessary,
Haussermann and Beam agreed to find P25,000 and G. C. Sellner agreed to advance P50,000.
Shares of the stock of the company were to be used to raise the P75,000: Sellner to raise P50,000
from 200,000 shares allocated to him; while Haussermann and Beam had 100,000 shares to raise
P25,000. The contract further stated that if Sellner shall fail within the time specified, the obligation of
Haussermann and Beam shall be discharged. On the other hand, if Haussermann and Beam shall fail
within the time mentioned, then Sellner shall be released from his obligation. Unfortunately, Sellner
was unable to obtain the subscriptions and the period of six months specified in the contract for raising
of the sum of P75,000 passed. Haussermann and Beam assumed that they were absolved from the
obligations of their contract with Hanlon and Sellner, and that the mining company was no longer
bound by its contract with Hanlon. They therefore proceeded to make other arrangements for financing
the project and entered into a contract with Sendres of the Bank of the Philippine Islands, with
Haussermann as a silent partner. The Beam project was successfully carried out and the mining
company was brought to a dividend-paying basis.

R. Y. Hanlon instituted an action to compel defendants Haussermann and Beam to account for a share
of the profits gained by them in rehabilitating the plant of the Benguet Consolidated Mining Company
and to surrender 50,000 shares of the stock of said company, with dividends paid thereon. G. C.
Sellner was also permitted to intervene as co-plaintiff.

ISSUES:
1. Whether Haussermann and Beam have been discharged from the contract by the default of Sellner.
2. Whether the mining company has been discharged by the default of Hanlon in the performance of
the agreement.

RULING:
1. YES, Haussermann and Beam have been discharged from the contract by the default of Sellner.

This is a typical case of a resolutory condition under the civil law. In conditional obligations the
acquisition of rights as well as the extinction of those already acquired shall depend upon the
event constituting the condition. (Civ. Code, art. 1114.) If the condition consists in the happening
of an event within a fixed period the obligation shall be extinguished from the time the period
elapses or when it becomes certain that the event will not take place. (Civ. code, art. 1117.)

The contract stated that Haussermann and Beam would be discharged if Sellner should fail to pay
into the company's treasury on or before the expiration of the prescribed period the money which
he had agreed to raise. Under these conditions it is apparent enough that the parties to the later

5
 contract treated time as of the essence of the agreement and intended that the failure of Hanlon to
supply the necessary capital within the time stated should put an end to the whole project.

Hence, Haussermann and Beam have been discharged from the contract by the default of Sellner.

2. YES, the mining company has been discharged by the default of Hanlon in the performance of the
agreement.

The equitable doctrine there recognized as applicable in such situation is that if the contracting
parties have treated time as of the essence of the contract, the delinquency will not be excused
and specific performance will not be granted; but on the other hand, if it appears that time has not
been made of the essence of the contract, equity will relieve from the delinquency and specific
performance may be granted, due compensation being made for the damage caused by the delay.
It is uniformly held that time is of the essence of the contract for the sale of an option on mining
property, or a contract for the sale thereof, even though there is no express stipulation to that
effect. The same idea is clearly applicable to a contract like that now under consideration which
provides for the rehabilitation of a mining plant with funds to be supplied by the contractor within a
limited period.

Under the doctrine above expounded, it is evident that Hanlon would be entitled to no relief
against the mining company in an action of specific performance, even if he had been prepared
and had offered, after the period of six months, to advance the requisite money and proceed with
the performance of the contract. Much less can he be considered entitled to relief where he has
remained in default throughout and has at no time offered to comply with the obligations
incumbent upon himself.

Hence, the mining company has been discharged by the default of Hanlon.

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 OBLIGATIONS
Nature and Effect

BANK CONTEST FAILURE TO AWARD PRIZE; CONCEPT OF “PRINCIPAL INDUCEMENT”

6. DELA ROSA v. BANK OF THE PHILIPPINE ISLANDS

G.R. No. L-22359, November 28, 1924
Romualdez, J.

FACTS:
This is an appeal from the decision of the trial court in favor of the Plaintiff Julio Dela Rosa ordering the
Defendant Bank of the Philippine Islands to pay the plaintiff an indemnity of P4,000 and the costs.

This action was instituted by means of a complaint, for the sum of P30,000 as damages, with interest
and the costs, on the ground that the defendant bank started a contest of designs and plans for the
construction of a building, announcing that the prizes would be awarded not later that on November
30, 1921. The plaintiff took part in the contest, performed work and incurred expenses for that purpose.
However, the bank refrained from naming judges and awarding the prizes in accordance with the
conditions stipulated.

The plaintiff contends that according to paragraph 2 of article 1100 of the Civil Code, the bank is
already in default, even without the necessity of demand, because the said date of the award was the
principal inducement to the creation of the obligation. The defendant contends that the date set for the
award of prizes is not essential in the contract.

ISSUE:
Was the defendant bank in default in not awarding the prizes on November, 30, 1921?

RULING:
No. The defendant bank was not in default in not awarding the prizes on November, 30, 1921.

We do not find sufficient reason for considering that the date set for the reward of the prizes was the
principal inducement to the creation of the obligation. According to Manresa, the words "principal
inducement" in paragraph 2 of article 1100 of the Civil Code must be judged in each particular case, it
being impossible to give a general rule to explain them. It will for instance, be unquestionable that the
hypothesis implied in this exception is affected when the matter, for instance, is the delivery of things
of the rendition of services to be employed in agricultural work, and the time of said work has been
designated as the date for the fulfillment of the obligation; it will also exist when, for instance, fruits or
any objects are to be delivered which might be used by the creditor in industrial operations having a
determinate period for carrying them out and designated for their delivery; and, finally, it will also exist
whenever, as in these cases, it appears that the obligation would not have been created for a date
other than that fixed.

The defendant bank cannot be held to have been in default through the mere lapse of time. For this,
judicial or extrajudicial demand was necessary for the performance of the obligation, and it was not
alleged here, nor does it appear that before bringing this action the plaintiff had ever demanded it from
the defendant bank in any manner whatsoever.

The defendant bank, therefore, was not in default. We find the plaintiff has no cause of action in this
case.

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 OBLIGATIONS
Nature and Effect

EVENTS WHICH CANNOT BE FORESEEN AND WHICH HAVING BEEN FORESEEN, ARE
INEVITABLE" IS SYNONYMOUS WITH THE TERM "FORTUITOUS EVENT”

7. LASAM v. SMITH
G.R. No. 19495 February 2, 1924
Ostrand, J.

FACTS:
Both plaintiffs and defendant appeal from the judgment of the court, the former maintaining that the
damages awarded are insufficient while the latter denies all the liability for any damages whatever.

It appears from the evidence that on February 27, 1918, the defendant was the owner of public garage
in the town of San Fernando, La Union, and engaged in the business of carrying passengers for hire.
On the date mentioned, he undertook to convey plaintiff in a Ford automobile which was operated by a
licensed chauffeur. The chauffeur allowed his assistant to drive the car despite the lack of driver’s
license. The car functioned well until after the crossing of the Abra River in Tagudin, when, according
to the testimony of witnesses for the plaintiffs, defects developed in the steering gear so as to make
accurate steering impossible, and after zigzagging for a distance of about half a kilometer, the car left
the road and went down a steep embankment.In going over the bank of the road, the automobile was
overturned and the plaintiffs pinned down under it. Mr. Lasam escaped with a few contusions and a
"dislocated" rib, but his wife, Joaquina Sanchez, received serious injuries, among which was a
compound fracture of one of the bones in her left wrist. She also appears to have suffered a nervous
breakdown from which she had not fully recovered at the time of the trial.

The complaint alleges that the accident was due to defects in the automobile as well as to the
incompetence and negligence of the chauffeur.

The defendant maintains that there was no defect in the steering gear, neither before no after the
accident and expresses the opinion that the swaying or zigzagging of the car must have been due to
its having been driven at an excessive rate of speed.

ISSUE:
Was the breach of contract not due to fortuitous event making defendant liable for damages?

RULING:
Yes. The defendant’s liability is contractual.

The expression "events which cannot be foreseen and which having been foreseen, are inevitable" is
synonymous with the term "fortuitous event" of which some extraordinary circumstance independent of
the will of the obligor, or of his employees, is one of the essential elements.

As will be seen, these authorities agree that some extraordinary circumstance independent of the will
of the obligor, or of his employees, is an essential element of a caso fortuito. Turning to the present
case, it is at once apparent that his element is lacking. It is not suggested that the accident in question
was due to an act of God or to adverse road conditions which could not have been foreseen. As far as
the record shows, the accident was caused either by the defects in the automobile or else through the
negligence of the driver. That is not a caso fortuito. Hence, the judgment as to liability of the defendant
is affirmed.

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 OBLIGATIONS
Nature and Effect

FORTUITOUS EVENT IS UNAVAILING WHERE A PARTY FAILED TO PREVENT THE FIRE FROM
SPREADING AND DESTROYING THE OTHER FASTFOOD STALLS.

8. REAL v. BELO
G.R. No. 146224 January 26, 2007
Austria-Martinez, J.

FACTS:
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the Resolution of
the Court of Appeals dismissing outright the petition for review of the petitioner Virginia Real for being
procedurally flawed/deficient.

Around 7:00 o'clock in the morning of January 25, 1996, a fire broke out at petitioner's Wasabe
Fastfood stall. The fire spread and gutted other fastfood stalls in the area, including the respondent's
stall. An investigation on the cause of the fire revealed that the fire broke out due to the leaking fumes
coming from the Liquefied Petroleum Gas (LPG) stove and tank installed at petitioner's stall. For the
loss of his fastfood stall due to the fire, the respondent demanded compensation from the petitioner.
However, the petitioner refused to accede to the respondent's demand.

Respondent filed a complaint for damages and alleged that petitioner failed to exercise due diligence
in the upkeep and maintenance of her cooking equipments, as well as the selection and supervision of
her employees; that petitioner's negligence was the proximate cause of the fire that gutted the fastfood
stalls.

Petitioner denied liability on the grounds that the fire was a fortuitous event and that she exercised due
diligence in the selection and supervision of her employees. Petitioner avers that she should not be
held liable for a fire which was a fortuitous event since the fire could not be foreseen and the spread of
the fire to the adjacent fastfood stalls was inevitable.

ISSUE:
Can the petitioner be held liable for damages as a result of the fire that razed not only her own food
kiosk but also the adjacent food stalls at the Food Center premises including the respondents’?

RULING:
Yes. The petitioner can be held liable for damages as a result of the fire.

Jurisprudence defines the elements of a “fortuitous event” as follows: (a) the cause of the unforeseen
and unexpected occurrence must be independent of human will; (b) it must be impossible to foresee
the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid; (c)
the occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner; and (d) the obligor must be free from any participation in the aggravation of the injury resulting
to the creditor. Article 1174 of the Civil Code provides that no person shall be responsible for a
fortuitous event which could not be foreseen, or which, though foreseen, was inevitable. In other
words, there must be an entire exclusion of human agency from the cause of injury or loss.

It is established by evidence that the fire originated from leaking fumes from the LPG stove and tank
installed at petitioner’s fastfood stall and her employees failed to prevent the fire from spreading and
destroying the other fastfood stalls, including respondent’s fastfood stall. Such circumstances do not
support petitioner’s theory of fortuitous event.

Hence, petitioner can be held liable for damages as a result of the fire that razed not only her own food
kiosk but also the adjacent food stalls.

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 OBLIGATIONS
Kinds

CONTRACTS ARE NOT WHAT THE PARTIES MAY SEE FIT TO CALL THEM BUT WHAT THEY
REALLY ARE AS DETERMINED BY THE PRINCIPLES OF LAW

9. BALURAN v. NAVARRO
G.R. No. L-44428, September 30, 1977
Munoz-Palma, J.

FACTS:
This is an appeal by petitioner Avelino Baluran which seeks to resolve on the nature of the undertaking
contract of February 2, 1964, which is entitled “Barter Agreement”.

On February 2, 1964, Spouses Paraiso and Spouses Baluran executed an agreement entitled
“BARTER”; whereby the Paraisos agreed to “barter and exchange” with the Balurans their residential
lot with the latter’s unirrigated riceland situated in Sarrat, Ilocos Norte. However, the Paraisos and
Balurans stipulated that they would only transfer the material possession of their respective properties
and subject to the condition that when any of the children of Natividad Paraiso Obedencio, daughter of
Spouses Paraiso, choose to reside in the municipality and build his house on the residential lot,
Baluran shall be obliged to return the lot to said children.

Antonio Obedencio, a descendant of Spouses Paraiso, filed before the Court of First Instance of Ilocos
Norte a complaint to recover the residential lot from Avelino Baluran (herein Petitioner). He claimed
that he is the rightful owner of the same and that he needed the property for the purpose of
constructing his house and reside in the municipality.

In his answer, Baluran alleged that the barter agreement transferred to him the ownership of the
residential lot in exchange of the unirrigated riceland and that the Obedencio’s cause of action had
prescribed.

ISSUE:
Did the “Barter Agreement” transfer ownership of the lot in suit to herein petitioner?

RULING:
No. The Barter Agreement did not transfer ownership of the lot in suit to herein petitioner.

It is settled rule that to determine the nature of a contract, courts are not bound by the name or title
given to it by the contracting parties. This Court has held that contracts are not what the parties may
see fit to call them but what they really are as determined by the principles of law.

Thus, the use of the term “barter” in describing the agreement is not controlling. The stipulations in
said document are clear to indicate the there was no intention at all on the part of the signatories
thereto to convey the ownership of the respective properties; all that was intended, as provided in the
agreement, was to transfer the material possession thereof. Thus, with the material possession being
the only one transferred, all that the parties acquired was the right of usufruct which in essence is the
right to enjoy the property of another.

Hence, petitioner did not acquire ownership over the residential lot under the “barter” agreement.

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 OBLIGATIONS
Kinds

IF THE UNCERTAINTY SHOULD CONSIST IN THE ARRIVAL OR NON-ARRIVAL OF THE DAY,

THE OBLIGATION IS CONDITIONAL

10. SMITH, BELL & CO., LTD. v. VICENTE SOTELO MATTI

G.R. No. L-16570, March 9, 1922
Romualdez, J.

FACTS:
This is an appeal by both parties from judgment absolving defendants from complaint insofar as the
tanks and electric motors were concerned and ordering them to receive expellers and pay plaintiff the
sum of P50,000.

In August 1918, Plaintiff corporation Smith Bell & Co and the defendant Vicente Sotelo Matti, entered
into contracts whereby the former obligated itself to sell, and the latter to purchase from it, two steel
tanks to be shipped from New York and delivered to Manila “within 3 or 4 months”; two expellers which
were to be shipped from San Francisco in the month of September 1918, or as soon as possible; and
two electric motors which delivery is stipulated in such words “Approximate delivery within ninety
days.—This is not guaranteed.” Upon arrival, plaintiff notified the defendant but the latter refused to
receive the and to pay the prices stipulated.

Plaintiff brought the suit on the ground that it immediately notified the defendant of the arrival of the
good and asked instructions from him as to the delivery thereof, and that the defendant refused to
receive any of them and to pay their price and that the expellers and motors were in good condition.

Defendant alleged that plaintiff corporation incurred delay in making delivery of the goods.

ISSUE:
Was the plaintiff able to fulfill in due time, its obligation to bring the goods in question to Manila

RULING:
Yes. Plaintiff was able to fulfill his obligation to deliver to goods in question to Manila.

Considering these contracts in the light of the civil law, the Court conclude that the term in which the
parties attempted to fit is so uncertain that one cannot tell just whether, as a matter of fact, those
articles could be brought to Manila or not. The obligations are regarded as conditional. When the
delivery was subject to a condition the fulfillment of which depended not only upon the effort of the
plaintiff but upon the will of third persons who could in no way be compelled to fulfill the condition. The
obligor will be deemed to have sufficiently performed his part of the obligation if he has done all that
was in his power, even if the condition has not been fulfilled in reality.

Records show that the plaintiff did all within its power to have the machinery arrive at Manila as soon
as possible.

The Court held that the machinery was brought to Manila within reasonable time.

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 OBLIGATIONS
Kinds

A CONDITION WHICH STATES THAT PAYMENT BE MADE "AS SOON AS HE (INTESTATE)

RECEIVE FUNDS DERIVED FROM THE SALE OF HIS PROPERTY IN SPAIN," IS A VALID
SUSPENSIVE CONDITION.

11. HERMOSA v. LONGARA

G.R. No. L-5267, October 27,1953
Labrador, J.

FACTS:
This is an appeal by way of certiorari against a decision of the Court of Appeals, fourth
division, approving certain claims presented by defendant Epifanio M. Longara against the
intestate estate of Fernando Hermosa, Sr.

Fernando Hermosa, Sr died on December, 1944. Upon authorization of the probate court in
October, 1947, the administratrix, herein petitioner, sold the property in November, 1947, and the
same was paid for subsequently. The claim was filed on October 2, 1948. The claimant presented
evidence and the Court of Appeals found, in accordance therewith, that the intestate had asked for
the said credit advances for himself and for the members of his family "on condition that their
payment should be made by Fernando Hermosa, Sr. as soon as he receive funds derived from
the sale of his property in Spain."

It is contended on this appeal that the obligation contracted by the intestate was subject to a condition
exclusively dependent upon the will of the debtor (a condicion potestativa) and therefore null and void,
in accordance with article 1115 of the old Civil Code.

ISSUE:
Is the condition that payment of the advances should be made by Fernando Hermosa, Sr. “as soon as
he receive funds derived from the sale of his property in Spain” a valid suspensive condition?

RULING:
Yes. The condition subject of this case is a valid suspensive condition.

The condition in question does not depend exclusively upon the will of the debtor, but also upon other
circumstances beyond his power or control. If the condition were "if he decides to sell his house," or
"if he likes to pay the sums advanced," or any other condition of similar important implying that upon
him (the debtor) alone payment would depend, the condition would be potestativa, dependent
exclusively upon his will or discretion.

The will to sell on the part of the intestate was, therefore, present in fact, or presumed legally to exist,
although the price and other conditions thereof were still within his discretion and final approval. But in
addition to this acceptability of the price and other conditions of the sale to him (the intestate-
vendor), there were still other conditions that had to concur to effect the sale, mainly that of the
presence of a buyer, ready, able and willing to purchase the property under the conditions
demanded by the intestate. Without such a buyer the sale could not be carried out or the proceeds
thereof sent to the islands. It is evident, therefore, that the condition of the obligation was not a purely
potestative one, depending exclusively upon the will of the intestate, but a mixed one, depending partly
upon the will of the intestate and partly upon chance, i.e., the presence of a buyer of the property for
the price and under the conditions desired by the intestate.

Hence, the condition that payment of the advances should be made by Fernando Hermosa, Sr. “as
soon as he receive funds derived from the sale of his property in Spain” is a valid suspensive
condition.

12
 OBLIGATIONS
Kinds

A CONDITION AT ONCE FACULTATIVE AND RESOLUTORY MAY BE VALID EVEN THOUGH

THE CONDITION IS MADE TO DEPEND UPON THE WILL OF THE OBLIGOR.

12. TAYLOR v. UY TIENG PIAO

G.R. No. L-16109, October 2, 1922
Street, J.

FACTS:
This case comes by appeal from the court’s decision awarding to the plaintiff M.D Taylor the sum of
P300, as damages for breach of contract.

The plaintiff contracted his services to Tan Liuan & Co., as superintendent of an oil factory which the
latter contemplated establishing in his this city. The period of the contract extended over two years
from the date mentioned. At the time this agreement was made the machinery for the contemplated
factory had not been acquired, though ten expellers had been ordered from the United States; and
among the stipulations inserted in the contract with the plaintiff was a provision to the following effect
that should the machinery to be installed fail to arrive for any reason within a period of six months, the
contract may be cancelled by the party at its option. Since the machinery did not arrive within the time
specified, defendants communicated in writing their intention to rescind the contract.

The plaintiff thereupon instituted action to recover damages in the amount of P13,000, covering salary
and perquisites due and to become due under the contract. The plaintiff relies on article 1256 of the
Civil Code, which is to the effect that the validity and fulfillment of contracts cannot be left to the will of
one of the contracting parties, and to article 1119, which says that a condition shall be deemed fulfilled
if the obligator intentionally impedes its fulfillment.

ISSUE:
Is a resolutory provision giving to the obligor a right to cancel a contract upon a contingency within the
control of the obligor lawful?

RULING:
Yes. The resolutory provision giving the obligor a right to cancel a contract upon a contingency within
the control of the obligor is lawful.

Article 1256 of the Civil Code creates no impediment to the insertion in a contract for personal service
of a resolutory condition permitting the cancellation of the contract by one of the parties. Undoubtedly
one of the consequences of this stipulation was that the employers were left in a position where they
could dominate the contingency, and the result was about the same as if they had been given an
unqualified option to disperse with the services of the plaintiff at the end of six months. But this
circumstance does not make the stipulation illegal.

As we view the case, there is nothing in article 1256 which makes necessary for us to warp the
language used by the parties from its natural meaning and thereby in legal effect to restrict the words
“for any reason” as used in the contract, to mean “for any reason not having its origin in the will or acts
of the defendants”. To impose this interpretation upon those words would in our opinion constitute an
unjustifiable invasion of the power of the parties to establish the terms which they deem advisable, a
right which is expressed in article 1255 of the Civil Code and constitute one of the most fundamental
conceptions of contract right enshrined in the Code.
In other words, a condition at once facultative and resolutory may be valid even though the condition is
made to depend upon the will of the obligor.

13
 OBLIGATIONS
Kinds

WHEN THE FULFILLMENT OF THE CONDITION DEPENDS SOLELY UPON THE WILL OF THE
DEBTOR, THE CONDITIONAL OBLIGATION SHALL BE VOID.

13. TRILLANA v. QUEZON COLLEGE, INC.

G.R. No. L-5003, June 27, 1953
Paras, J.

FACTS:
This is an appeal from the order of CFI of Bulacan dismissing the claim of Quezon College, Inc.
against the estate of Damasa Crisostomo, represented by its administrator Nazario Trillana.

Crisostomo applied for subscription of 200 shares of appellant Quezon College, Inc’s capital stock with
a par value of P100 each. The application was written on a general form issued by appellant which
indicates that an applicant will enclose an amount as initial payment and will pay the balance in
accordance with law and the regulations of the College. Crisostomo did not attach her initial payment
with the form; rather, she stated that she will pay after she has harvested fish from her fishpond.
Crisostomo died without paying for the subscription.

As no payment had been made, the Quezon College, Inc. presented a claim before the CFI of Bulacan
in her testate proceeding for the collection of the sum of P20,000.

Appellee Trillana, the administrator of the estate, opposed the claim on the ground that the
subscription in question was neither registered in nor authorized by the Securities and Exchange
Commission.

ISSUE:
Can appellant enforce the obligation despite the fact that Crisostomo subjected the payment for the
subscription to a condition that she will pay after she has harvested fish?

RULING:
No, the obligation to pay cannot be enforced.

Article 1115 of the old Civil Code which provides as follows: "If the fulfillment of the condition should
depend upon the exclusive will of the debtor, the conditional obligation shall be void. If it should
depend upon chance, or upon the will of a third person, the obligation shall produce all its effects in
accordance with the provisions of this code."

There is nothing in the record to show that the Quezon College, Inc. accepted the term of payment
suggested by Damasa Crisostomo, or that if there was any acceptance the same came to her
knowledge during her lifetime. As the application of Damasa Crisostomo is obviously at variance with
the terms evidenced in the form letter issued by the Quezon College, Inc., there was absolute
necessity on the part of the College to express its agreement to Damasa's offer in order to bind the
latter.Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the
more imperative, in view of the proposal of Damasa Crisostomo to pay the value of the subscription
after she has harvested fish, a condition obviously dependent upon her sole will and, therefore,
facultative in nature, rendering the obligation void, under article 1115 of the old Civil Code which
provides as follows: "If the fulfillment of the condition should depend upon the exclusive will of the
debtor, the conditional obligation shall be void. If it should depend upon chance, or upon the will of a
third person, the obligation shall produce all its effects in accordance with the provisions of this code."

Hence, the obligation is void.

14
 OBLIGATIONS
Kinds

IF THE PROMISOR SHOULD VOLUNTARILY PREVENT THE FULFILLMENT OF THE CONDITION,

THE SAME SHALL BE DEEMED FULFILLED.

14. PHILIPPINE LONG DISTANCE TELEPHONE COMPANY v. JETURIAN, ET AL

G.R. No. L-7756, July 30, 1955
Reyes, J.B.L., J.

FACTS:
This is a petition for review filed by petitioner Philippine Long Distance Telephone Co. (PLDT) against
the decision of the Court of Industrial Relations (CIR) ordering that the company’s Pension plan be
liquidated in favor of the employees who served the company up to 1941, and that pension payments
be made to such employees in proportion to their respective ago and length of service.

In 1923, respondent’s predecessor, Philippine Telephone and Telegraph Co., adopted a "Plan for
Employees Pensions" under which the employees must reach the age of fifty years and must be
employed for twenty or more years to become eligible to pensions. In 1945, however, the Board of
Directors of the Company adopted a resolution discontinuing the Employees' Pension plan and all
payments thereunder, effective retroactively as of January 1, 1942, because of financial losses
incurred during the war. None of the petitioners has satisfied the conditions of the plan when the World
War broke out.

Respondents Crispin Jeturian and others, numbering about sixty, filed a petition in the CIR against
respondent claiming monetary benefits allegedly due them under the pension plan.

Petitioner submitted that the establishment of the pension plan didn’t constitute a binding contract but
was a mere offer of a gratuity to its employees; that the latter acquired no vested right under the plan
unless they complied with the conditions established therein and before any of the respondent
employees did so, the Company was at liberty to cancel and discontinue the pension plan.

ISSUE:
May the respondent company cancel and discontinue the pension plan at will?

RULING:
No. The company cannot cancel and discontinue the pension plan at will.

Under our law, even before the fulfillment of the conditions established by the plan, the employees
acquire an expectancy that is valuable, and one which the law protects. Thus, they may take such
action as may be appropriate to preserve their conditional right; and if the promisor should voluntarily
prevent the fulfillment of the condition, the same shall be deemed fulfilled. The conditional obligation to
pay the pension is one thing, and the contract or bargain producing such conditional obligation is quite
another; that the former should not arise until the condition is fulfilled, does not mean that the second
is non-existent. Neither does the fact that the effects of the contract are unilateral mean that one party
may repudiate it at will (Cf. Liebenow vs. Philippine Vegetable Oil Co., 39 Phil. 60, 64).

Similarly, the excuse that its war losses extinguished the Company's obligation to proceed with the
pension plan is not meritorious. Its obligation was a generic one (to pay money) and such obligations
are not extinguished by loss or inability to raise funds (new Civil Code, Art, 1263; Reyes vs. Caltex
(Philippines) Inc., 47 Off. Gaz. pp. 1193, 1200-1201).

Hence, the company cannot cancel and discontinue the pension plan at will.

15
 OBLIGATIONS
Kinds

BREACH OF EITHER PARTY OF HIS OBLIGATION ENTITLES THE OTHER OF ALTERNATIVE

REMEDIES

15. RAMIREZ v. COURT OF APPEALS

G.R No. L-6536 January 25, 1956
Reyes, J.B.L., J.

FACTS:
This is an appeal from the Decision of the Court of Appeals which reversed the CFI of Baguio’s
decision dismissing the case for recovery of purchase price of herein petitioner Emiliano Ramirez on
the ground that it was respondent Olga Muller Nease who had the right to choose to collect full
payment or recover her half participation of the boat.

Petitioner and respondents were co- owners in equal shares of a motor boat named “Olga” of 32 gross
(20 net) tons. By written contract dated February 19, 1947, Muller Nease sold her undivided half-
interest in the “Olga” to Ramirez, for the sum of P4,500, payable in three installments of P1,500 each,
on the 19th of February, March, and April of the year 1947. Inter alia, the contract stipulated that: “In
the event of first default of payment, the buyer shall pay six per centum per annum of all the amounts
due and payable to the seller. On the second default of payments, the buyer hereby authorizes the
seller to recover her half participation of ownership of the boat without obligation to reimburse the
payments made by the buyer.” The first installment was duly paid. Only P750 was paid on account of
the second, and nothing on the third. Later, the “Olga” was damaged by a typhoon.

On March 19, 1948, Nease filed action in the Court of First Instance of Baguio where she resided, to
recover the balance of P2,250, plus 6 per cent interest from default on March 19, 1947.

Petitioner answered that he was unable to pay due to causes independent of his will, and had notified
Nease to take over her half-interest in the boat, which she refused to do.

ISSUE:
Did Ramirez have the option to either pay the purchase price in full or to return to her the half
ownership of the boat?

RULING:
No. Ramirez did not have the option to either pay the purchase price in full or to return the half
ownership of the boat. It was plaintiff Nease who had the right to choose.

The contract of sale gives rise to reciprocal obligations between seller and buyer, since each party
assumes obligations conditioned upon those of the other, and the obligations of both are derived from
a common origin, the perfected contract. It follows that, pursuant to Article 1124 of the Civil Code of
1889 (now 1191 of the New Civil Code), the breach by either party of his obligation entitles the other to
a choice of alternative remedies: to exact specific performance or rescission, “with damages in either
case.”

The seller in the present case chose to exact specific performance of the contract in view of the
Petitioner’s defaults in the payment of the price, and demanded the balance thereof. She had the right
to do so, unless she had waived such remedy, either in the contract or by subsequent choice on her
part. Since the seller chose and now insists upon full payment, as she is entitled to do, the loss of the
boat without fault of the buyer (Petitioner herein) is irrelevant to the case. The generic obligation to pay
money is not excused by fortuitous loss of any specific property of the debtor.

Hence, Ramirez was not relieved of the obligation to pay the balance of purchase price.

16
 OBLIGATIONS
Kinds

THE RIGHT OF RESCISSION OF A PARTY TO AN OBLIGATION UNDER ART 1191 OF THE NCC
IS PREDICATED ON A BREACH OF FAITH BY THE OTHER THAT VIOLATES THE RECIPROCITY
BETWEEN THEM

16. GIL v. COURT OF APPEALS

G.R. No. 127206, September 12, 2003
Callejo, Sr., J.

FACTS:
Concepcion Palma Gil, and her sister, Nieves Palma Gil, married to Angel Villarica, were the co-
owners of a parcel of commercial land with an area of 829 square meters, identified as Lot No. 59-C,
covered by Transfer Certificate of Title (TCT) No. 432 located in Davao City. The spouses Angel and
Nieves Villarica had constructed a two-storey commercial building on the property. On October 13,
1953, Concepcion filed a complaint against her sister Nieves for specific performance, to compel the
defendant to cede and deliver to her an undivided portion of the said property with an area of 256.2
square meters. After due proceedings, the court rendered judgment on April 7, 1954 in favor of
Concepcion, ordering the defendant to deliver to the plaintiff an undivided portion of the said property
with an area of 256.2 square meters. Nieves appealed to the Court of Appeals which affirmed the
assailed decision. In due course, the decision became final and executory. On motion of the plaintiff
(Concepcion), the court issued a writ of execution. Nieves, however, refused to execute the requisite
deed in favor of her sister. The court then issued an order authorizing ex-officio sheriff Eriberto Unson
to execute the requisite deed of transfer to the plaintiff over an undivided portion of the property.
Instead of doing so, the sheriff had the property subdivided into 4 lots. The sheriff thereafter executed
a deed of absolute sale over one of the lots in favor of Pacetes for a purchase price of 21,600 pesos
upon which 7500 is to be paid upon signing of the contract and 14100 is to be paid upon delivery of
the title. Spouses Pacetes then executed a deed of absolute sale over the disputed lots to Magalana.
Which the latter sold in favor of Emilio Matulac for the purchase price of 150,000 pesos. Concepcion
then died, leaving her obligations to her heirs including the petitioners. The trial court then ruled in
favor of the defendants which affirmed the sales of the property from Concepcion Palma Gil to
Illuminada Pacetes then to Maglana and to Matulac. The CA likewise affirmed the decision of the lower
court. The appellants, now petittioners in this case, assert that private respondents Agapito and
Iluminada Pacetes failed to pay the balance of the purchase price despite consgination; that such
consignation did not produce any legal effect.

ISSUE:
Do the petitioners have the right to have the sale rescinded?

RULING:
No, the petitioners do not have the right to have the sale rescinded. Under the last paragraph of
Article 1169 of the New Civil Code, in reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay in the other begins. Thus, reciprocal
obligations are to be performed simultaneously so that the performance of one is conditioned upon the
simultaneous fulfillment of the other. The right of rescission of a party to an obligation under Article
1191 of the New Civil Code is predicated on a breach of faith by the other party that violates the
reciprocity between them. The deed of absolute sale executed by Concepcion Gil in favor of Iluminada
Pacetes is an executory contract and not an executed contract is a settled matter. In a perfected
contract of sale of realty, the right to rescind the said contract depends upon the fulfillment or non-
fulfillment of the prescribed condition. The court ruled that the condition pertains in reality to the
compliance by one party of an undertaking the fulfillment of which would give rise to the demandability
of the reciprocal obligation pertaining to the other party. The reciprocal obligation envisaged would
normally be, in the case of the vendee, the payment by the vendee of the agreed purchase price and
in the case of the vendor, the fulfillment of certain express warranties.

17
The vendee paid the downpayment of P7,500.00. By the terms of the contract, the obligation of the
vendee to pay the balance of the purchase price ensued only upon the issuance of the certificate of
title by the Register of Deeds over the property sold to and under the name of the vendee, and the
delivery thereof by the vendor Concepcion Gil to the latter. Concepcion failed to secure a certificate of
title over the property. When she died intestate on August 4, 1959, her obligation to deliver the said
title to the vendee devolved upon her heirs, including the petitioners. The said heirs, including the
petitioners failed to do so, despite the lapse of eighteen years since Concepcion’s death. The
petitioners, as successors-in-interest of the vendor, are not the injured parties entitled to a rescission
of the deed of absolute sale. It was Concepcion’s heirs, including the petitioners, who were obliged to
deliver to the vendee a certificate of title over the property under the latter’s name, free from all liens
and encumbrances within 120 days from the execution of the deed of absolute sale on October 24,
1956, but had failed to comply with the obligation. Although Illuminada is not yet bound to deliver the
14100 as there has been no delivery of title yet; she nevertheless consigned 11,900 pesos with the
Court. The consignation by the vendee of the purchase price of the property is sufficient to defeat the
right of the petitioners to demand for a rescission of the said deed of absolute sale.

18
 OBLIGATIONS
Kinds

A FRAUDULENT CONTRACT OF SALE MAY BE RESCINDED IN FAVOR OF CREDITORS IF THE

DEBTOR HAS NO OTHER PROPERTY THAT CAN BE APPROPRIATED BY THE CREDITORS
FOR THE SAFISFACTION OF THE DEBT

17. REGALADO v. LUCHSINGER AND CO.

L-2250 , February 17, 1906
Willard, J.

FACTS:
This is the second appearance of this case in this court. The decision upon the first appeal is reported
on December 31, 1902. Mr. Luchsinger and Mr. Co brought an action against Jose Regalado for the
recovery of P3929.60. Regalado’s warehouse was made a security for the debt. Thereafter, Jose
Regalado, sold the warehouse to his son Pedro Regalado and representing it as free from
encumbrance. When the decision is up for execution and foreclosure of the warehouse, Pedro
Regalado, son of the debtor instituted a suit of intervention under claim of ownership of the attached
warehouse.

The Supreme Court ruled that the sale was fraudulent because it appears in the records when the
father sold the warehouse to the son, there is judgement entered against him and a writ of execution
which was levied upon the warehouse.

Pedro now claims that upon Article 1291 of the Old Civil Code, contracts may be rescinded if it is
executed in fraud of creditors, when the latter can not recover, in any matter, what is due to them. He
claims that the evidence in the case shows that at the time of the sale in question, and at the time of
the trial of this case the father, Jose had property other than the warehouse in question, out of which
the defendants could have collected their debt against him. He argues that the contract of sale should
not be rescinded.

ISSUE:
Can the contract of sale between Jose and Pedro Regalado be rescinded in favor of creditors
Luchsinger and Co.?

RULING:
Yes, the contract may be rescinded in favor of the creditors. The rescission of a contract on the ground
that it is fraudulent as to creditors is subsidiary. However, it cannot be rescinded if the debtor has other
property with which to pay the debt.

In this case evidence shows that the Jose, the father had no such other property, either at the time the
sale was made or at the time this action was tried out. The only property he had for the various debts
owing to him, is the warehouse. Therefore, the contract of sale should be rescinded in favor of the
creditors.

19
 OBLIGATIONS
Kinds

NO JUDICIAL ACTION FOR THE RESCISSION OF A CONTRACT IS NECESSARY TO

TERMINATE THE OBLIGATION WHERE THE CONTRACT ITSELF CONTAINS A RESOLUTORY
CONDITION THAT WILL EXTINGUISH THE CONTRACT

18. HANLON v. HAUSSERMANN AND BEAM

G.R. No. 14617, February 18, 1920
Street, J.

FACTS:
This action was originally instituted by R. Y. Hanlon to compel the defendants, John W. Haussermann
and A. W. Beam, to account for a share of the profits gained by them in rehabilitating the plant of the
Benguet Consolidated Mining Company and to compel them to surrender to the plaintiff 50,000 shares
of the stock of said company, with dividends paid thereon by virtue of the contract they entered with
Sellner.

Benguet Consolidated Mining Company’s milling plant near Baguio was destroyed by flood. A contract
was entered into by Engineer Hanlon, Haussermann, Beam and Sellner wherein the parties would
contribute funds to be used for rebuilding the milling plant. The contract provides that in case Sellner
should fail to obtain subscriptions in the amount of P50,000 within 6 months, then the obligation of
Haussermann and Beam shall be discharged; and, on the other hand, if Haussermann and Beam shall
fail to obtain subscriptions for P5,000 and payment thereof within the time herein mentioned, then said
Sellner shall be released from his obligation. Sellner was unable to fulfill his undertaking. Thereafter,
Haussermann and Beam assumed that they were absolved from the obligations of their contract. As a
result, Haussermann and Beam, with other directors of BCMC made a resolution declaring the contract
between Hanlon and BCMC cancelled. The directors created a new scheme in financing the project.

ISSUE:
Did Sellner’s failure to fulfill his obligation operate to discharge the other parties of their obligations?

RULING:
Yes, Sellner’s failure to fulfill his obligation effectively cancelled the contract between them.

An examination of the rights of the parties must begin with the interpretation of the contract. By
referring to the contract the promises with reference to the obtaining of subscriptions are mutual
concurrent conditions. It is expressly declared in the contract that upon the default of either party the
obligation of the other shall be discharged. From this it is clear that upon the happening of the
condition which occurred in this case, i.e., the default of Sellner to pay to the mining company on or
before May 6, 1914, the sum of money which he had undertaken to find, Haussermann and Beam
were discharged. This is a typical case of a resolutory condition under the civil law.

The obligations of two parties to a contract were so expressed as to constitute mutual concurrent
conditions, and it was expressly provided that the failure of one to perform within a stipulated period
would discharge the other.

The right of Hanlon to require any further aid or assistance from these defendants after May 6, 1914,
was expressly subordinated to a resolutory condition, and the contract itself declares in precise
language that the effect of the non-fulfillment of the condition shall be precisely the same as that which
the statute attaches to it — the extinction of the obligation.

20
 OBLIGATIONS
Kinds

SPECIAL PROVISIONS PREVAIL OVER GENERAL PROVISIONS

19. SANCHO v. LIZARRAGA

G.R. No. 33580, February 6, 1931
Romualdez, J.

FACTS:
Appeal from the Decision of the Trial Court by the plaintiff-appellant, Maximilliano Sancho against the
defendant-appellee, Severiano Lizarraga.

Sancho brought an action for rescission of a partnership contract which was entered between him and
Lizarraga on October 1920. He prays for the reimbursement of his 50,000 pesos investment with 12%
interest and costs. The defendant denies all the allegations of the complaint and set up a counterclaim.
Defendant prays for the dissolution of the partnership and payment to him as its manager and
administrator of P500 monthly from October 1920, until the final dissolution, with interest.
The Court of First Instance of Manila found that Lizarraga did not contribute all the capital he had
bound himself to invest, and that Sancho had demanded Lizarraga to liquidate the partnership. The
trial court declared their partnership dissolved on account of the expiration of the period for which it
was constituted, and ordered Lizarraga, as managing partner, to proceed without delay to liquidate it
and submit to the court the result of the liquidation together with the accounts and vouchers within the
period of thirty days from receipt of notice of said judgment.

Sancho appealed from said decision and contends that the court erred in holding that the plaintiff and
appellant is not entitled to the rescission of the partnership contract and that article 1124 of the Civil
Code is not applicable to the present case.

ISSUE:
Is plaintiff entitled to the rescission of the partnership contract?

RULING:
No, the plaintiff is not entitled to the rescission of the partnership contract.
In view of the lower court's findings referred to above, which we cannot revise because the parol
evidence has not been forwarded to this court, articles 1681 and 1682 of the Civil Code have been
properly applied. Owing to the defendant's failure to pay to the partnership the whole amount which he
bound himself to pay, he became indebted to it for the remainder, with interest and any damages
occasioned thereby, but the plaintiff did not thereby acquire the right to demand rescission of the
partnership contract according to article 1124 of the Code. This article cannot be applied to the case in
question, because it refers to the resolution of obligations in general, whereas articles 1681 and 1682
specifically refer to the contract of partnership in particular. And it is a well-known principle that special
provisions prevail over general provisions. By virtue of the foregoing, this appeal is hereby dismissed.

21
 OBLIGATIONS
Kinds

RESCISSION WILL NOT BE PERMITTED FOR A SLIGHT OR CASUAL BREACH OF THE

CONTRACT, BUT ONLY FOR SUCH BREACHES AS ARE SO SUBSTANTIAL AND
FUNDAMENTAL AS TO DEFEAT THE OBJECT OF THE PARTIES IN MAKING THE AGREEMENT

20. SONG FO & COMPANY v. HAWAIIAN PHILIPPINE CO.

G.R. No. 23769. September 16, 1925
Malcolm, J.

FACTS:
Appeal from the decision of trial court by Hawaiian-Philippine Co. (HPC), Defendant-Appellant against
Plaintiff-Apellee, Song Fo & Company (SFC).

SFC filed a complaint with the CFI of Iloilo for two breaches of contract against HPC. HPC first agreed
to deliver 300 gallons of molasses to Song Fo. Song Fo requested for an additional 100 gallons of
molasses which HPC promised to do its best to comply with the additional shipment. These
agreements were embodied in a letter that served as their contract. HPC was only able to deliver
55,006 gallons of molasses, hence SFC was compelled to look for other suppliers and incur expenses
of increased price and lost profits. HPC set up a special defense that since SFC had defaulted in the
payment for the molasses delivered to it under the contract, the HPC was entitled to rescind the said
contract.

The trial court ruled in favor of Song Fo. Hawaiian-Philippines Appealed.

ISSUE:
Does Hawaiian-Philippines Co have the right to rescind the contract of sale made with SFC?

RULING:
No, Hawaiian-Philippines Co. has no right to rescind the contract of sale.

The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the
contract should be treated as of the essence of the contract. Theoretically, agreeable to certain
conditions which could easily be imagined, the HPC would have had the right to rescind the contract
because of the breach of SFC. But actually, there is her present no outstanding fact which would
legally sanction the rescission of the contract by the HPC.

The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but
only for such breaches as are so substantial and fundamental as to defeat the object of the parties in
making the agreement. A delay in payment for a small quantity of molasses for some twenty days is
not such a violation of an essential condition of the contract as warrants rescission for non-
performance. Not only this, but the HPC waived this condition when it arose by accepting payment of
the overdue accounts and continuing with the contract. Thereafter, SFC was not in default in payment
so that the HPC had in reality no excuse for writing its letter of April 2, 1923, cancelling the contract.

Hence, appellant had no legal right to rescind the contract of sale because of the failure of Song Fo &
Company to pay for the molasses within the time agreed upon by the parties. We sustain the finding of
the trial judge in this respect. Agreeable to the foregoing, the judgment appealed from shall be
modified and the plaintiff shall have and recover from the defendant the sum of P3,000, with legal
interest from October 2, 1923, until payment.

22
 OBLIGATIONS
Kinds

THE TERM “WHILE THE WAR GOES ON, THE MORTGAGOR, HIS ADMINISTRATORS OR
ASSIGNS CANNOT REDEEM THE PROPERTY MORTGAGED” IN CONSIDERATION OF
REDUCING THE INTEREST RATES IS VALID

21. NEPOMUCENO v. NARCISO

G.R. No. L-1328, September 9, 1949
Ozaeta, J.

FACTS:
On November 14, 1938, Sps. Nepomuceno (appellants-mortgagors) executed a mortgage in favor of
the Sps. Narciso (appellees-mortgagees) on a parcel of land situated in the municipality of Angeles,
Province of Pampanga, to secure the payment within the period of seven years from the date of the
mortgage of the sum of P24,000 together with interest thereon at the rate of 8 per cent per annum. On
September 30, 1943, the parties modified the terms of said mortgage, reducing the interest rate on
certain periods and included another provision which provides that: “While the war goes on, the
mortgagor, his administrators or assigns, cannot redeem the property mortgaged.”

On July, 21, 1944, the mortgagor Nepomuceno and his wife filed their complaint in this case against
the mortgagees, contending that the stipulation in the contract of September 30, 1943, that "while the
war goes on the mortgagor, his administrators or assigns cannot redeem the property mortgaged," is
against public policy and therefore null and void. Further, they argued that "it would certainly be
against public policy and a restraint on the freedom of commerce to compel a debtor not to release his
property from a lien — even if he wanted to by the payment of the indebtedness — while the war goes
on, which was undoubtedly of a very uncertain duration."

ISSUE:
Are the modified stipulations against public policy, making the contract void?

RULING:
No, the modified stipulations are not against public policy, thus making the contract valid. Under the
law, obligation for the performance of which a day certain has been fixed shall be demandable only
when the day arrives. A day certain is understood to be one which must necessarily arrive, even
though its date be unknown. Furthermore, the law states, whenever a term for the performance of an
obligation is fixed, it is presumed to have been established for the benefit of the creditor and that of the
debtor, unless from its tenor or from other circumstances it should appear that the term was
established for the benefit of one or the other.

The Supreme Court found nothing immoral or violative of public order in that stipulation. The
mortgagees apparently did not want to have their prewar credit paid with Japanese military notes, and
the mortgagor voluntarily agreed not to do so in consideration of the reduction of the rate of interest. It
was a perfectly equitable and valid transaction, in conformity with the law. Appellants were bound by
said contract and appellees were not obligated to receive the payment before it was due. The latter
had reason not to accept the tender of payment made to them by the former. Hence, the modified
stipulations are valid.

23
 OBLIGATIONS
Kinds

A DAY CERTAIN IS UNDERSTOOD TO BE THAT WHICH MUST NECESSARILY ARRIVE, IF ITS

ARRIVAL IS UNCERTAIN, THE OBLIGATION IS CONDITIONAL.

22. BERG v. MAGDALENA ESTATE

G.R. No. L-3784, October 17, 1952
Bautista Angelo, J.

FACTS:
Ernest Berg (plaintiff) and Magdalena Estate, Inc. (defendant) were co-owners of Crystal Arcade, a
property situated in the City of Manila. One third of it belonged to the plaintiff-petitioner and two thirds,
to the defendant-respondent. These parties executed a deed of sale that should either of them sell his
share, the other party will have an irrevocable option to purchase it at the seller’s price. Later on, the
petitioner offered his share for ₱200,000 and was accepted by the defendant, including the stipulation
that Berg was giving the defendant a period of time which, including the extensions granted, would
expire on May 31, 1947.

The defendant claimed that, in spite of the acceptance of the offer, plaintiff refused to accept the
payment of the price, hence the former suffered damages in the amount of ₱100,000 and asked for
specific performance. The plaintiff argued that this transaction, referred to by the defendant, is not
supported by any note or memorandum subscribed by the parties and that this transaction falls under
the statue of frauds and cannot be the basis of the defendant’s special defense.

In an application to sell or dispose their properties, both parties filed for separate applications
regarding the subject property. The applications were offered as evidence and used as basis in
considering the existence of the alleged contract. In the defendant’s application, it desired a license in
order “to use a portion of the ₱400,000 requested as a loan from the National City Bank of New York,
Manila, or from any other bank in Manila, together with funds to be collected from old and new sales of
his real estate properties, for the purchase of the one-third (1/3) of the Crystal Arcade property in the
Escolta, Manila, belonging to Mr. Ernest Berg.

ISSUE:
Can the term of payment stipulated in the defendant’s application for license to sell/purchase, “until
they have obtained ₱400,000 from the National City Bank of New York, or after it has obtained funds
from other sources”, be considered a term within the meaning of the Civil Code?

RULING:
No, the term of payment stipulated in the application for license to sell/purchase cannot be considered
as a term within the meaning of the Civil Code. . The Civil Code provides that a day certain is
understood to be that which must necessarily come, although it may not be known when. If the
uncertainty consists in whether the day will come or not, the obligation is conditional. In considering
this article as to which the defendant relies for the enforcement of its right to buy the property, it would
seem that it is not a term, but a condition. Considering the first alternative, that is, until defendant shall
have obtained a loan from the National City Bank of New York – it is clear that the granting of such
loans is not definite and cannot be held to come within the terms “day certain” provided for in the Civil
Code, for it may or it may not happen. Moreover, the loan did not materialize. And if we consider that
the period given was until such time as defendant could raise money from other sources, we also find
it to be indefinite and contingent and so it is also a condition and not a term within the meaning of the
law. Hence, the abovementioned stipulation is not a term, but a condition.

24
 OBLIGATIONS
Kinds

FORTUITOUS EVENT DOES NOT OPERATE TO EXTEND THE PERIOD AGREED UPON TO
MAKE UP FOR FAILURE TO COMPLY WITH THE OBLIGATION FOR THE DURATION OF THE
FORTUITOUS EVENT

23. VICTORIAS PLANTERS ASSOCIATION INC v. VICTORIAS MILLING CO., INC.

G.R. No. L-6648, July 25, 1955
Padilla, J.

FACTS:
This is an action for declaratory judgment under Rule 66 where the petitioners call for an interpretation
of the contracts entered into by and between the sugar cane planters and the Victorias Milling
Company, Inc.

At various dates from 1917 to 1934, the sugar cane planters executed identical milling contracts
setting forth the terms and conditions under which the North Negros Sugar Co, Inc would mill the sugar
produced by the planters. A number of them executed such milling contracts with the North Negros
Sugar Co. while a number of them executed milling contracts with the Victorias Milling Co., Inc. The
North Negros Sugar Co., Inc. had its first molienda or milling during the 1918-1919 crop year, and the
Victorias Milling Co., had its first molienda or milling during the 1921-1922 crop year.

Subsequent millings took place every successive crop year except the 6-year period, comprising 4
years of the last World War II and 2 years of post-war reconstruction of respondent's central. After the
liberation, the North Negros Sugar Co. Inc did not reconstruct its central and instead, the sugar cane
produced by the planters were milled in that of respondent Victorias.
The planters of the North Negros Planters Association, Inc. considered that the stipulated 30-year
period of their milling contracts executed in the year 1918 had already expired and terminated in the
crop year 1947-1948, and the members of the Victorias Planters Association, Inc. considered theirs as
expired in the crop year 1948-1949. They represented their desire to negotiate new milling contracts.

Respondent corporation refused arguing that the milling contract had not yet expired considering that
there was no milling during the 4 year period during the war and the 2 year period for reconstruction. It
argued that the contracts were yet to expire on 1952 and 1957 respectively. It argued that these war
and reconstruction years accrue to it in equity.
The trial court found that the contracts had expired. On appeal, the appellant contends that the term
stipulated is 30 milling years and not 30 calendar years and hence, the planters must fulfill their
obligation for the 6 year period.

ISSUE:
Did the contracts expire after the lapse of 30 calendar years?

RULING:
Yes, the contract had expired after the lapse of the agreed upon 30 year period.

Fortuitous event relieves the obligor from fulfilling a contractual obligation. The fact that the contracts
make reference to "first milling" does not make the period of thirty years one of thirty milling years. The
term "first milling" used in the contracts under consideration was for the purpose of reckoning the
thirty-year period stipulated therein. Even if the thirty-year period provided for in the contracts be
construed as milling years, the deduction or extension of six years would not be justified.

The seventh paragraph of Annex "C", not found in the earlier contracts (Annexes "A", "B", and "B-1"),
quoted by the appellant in its brief, where the parties stipulated that in the event of flood, typhoon,
earthquake, or other force majeure, war, insurrection, civil commotion, organized strike, etc., the
contract shall be deemed suspended during said period, does not mean that the happening of any of
those events stops the running of the period agreed upon. It only relieves the parties from the

25
fulfillment of their respective obligations during that time — the planters from delivering sugar cane and
the central from milling it.

Nemo tenetur ad impossibilia. The obligee not being entitled to demand from the obligors the
performance of the latters' part of the contracts under those circumstances cannot later on demand its
fulfillment. The performance of what the law has written off cannot be demanded and required. The
prayer that the plaintiffs be compelled to deliver sugar cane to the appellant for six more years to make
up for what they failed to deliver during those trying years, the fulfillment of which was impossible, if
granted, would in effect be an extension of the term of the contracts entered into by and between the
parties.

26
 OBLIGATIONS
Kinds

COURT SHALL FIX PERIOD IF THE OBLIGATION DOES NOT FIX A PERIOD BUT IN CAN BE
INFERRED THAT ONE WAS INTENDED

24. BENITO GONZALES v. FLORENTINO DE JOSE

G.R. No. 43429, October 24, 1938
Imperial, J.

FACTS:
This is an appeal by the defendant, Florentino De Jose, from the decision of the Court of First Instance
ordering plaintiff to pay P547.95 within 30 days from the date of notification of the decision.
The plaintiff Benito Gonzalez instituted this action to recover from the defendant the amount of two
promissory notes which read:

I promise to pay Mr. Benito Gonzalez the sum of four hundred three pesos and fifty-five centavos
(P403.55) as soon as possible.

XXX

I promise to pay Mr. Benito Gonzalez the sum of three hundred and seventy-three pesos and thirty
centavos (P373.30) as soon as possible.

In Manila, this 13th day of September, 1922.

XXX

The defendant observed that the complaint did not specify when the indebtedness was incurred or
when it was demandable, and that, granting a cause of action, the same has prescribed. In resolving
the defense of prescription, the Trial Court held that the action for recovery has not prescribed citing
Article 1128 of the Civil Code (Art 1197, NCC). The court thus fixed the period at 30 days.
The defendant contends that Article 1113 of the Civil code should be applied as the same was
demandable from the time of their execution and if otherwise, that the action to ask the court to fix the
period has prescribed.

ISSUE:
Were the obligations arising from the promissory notes demandable from the time of their execution?

RULING:
No, the obligations were not demandable from the time of their execution.

We hold that the two promissory notes are governed by article 1123 (Note: Old Numbering) because
under the terms thereof the plaintiff intended to grant the defendant a period within which to pay his
debts. as the promissory notes do not fix this period, it is for the court to fix the same. (Eleizagui vs.
Manila Lawn Tennis club, 2 Phil., 309; Barretto vs. City of Manila, 7 Phil., 416 Floriano vs. Delgado, 11
Phil., 154; Levy Hermanos vs. Paterno, 18 Phil, 353.) The action to ask the court to fix the period has
already prescribed in accordance with section 43 (1) of the Code of Civil Procedure. This period of
prescription is ten years, which has already elapsed from the execution of the promissory notes until
the filing of the action on June 1, 1934. The action which should be brought in accordance with article
1128 is different from the action for the recovery of the amount of the notes, although the effects of
both are the same, being, like other civil actions, subject to the rules of prescription.

27
 OBLIGATIONS
Kinds

A STIPULATION AMOUNTING TO A WAIVER OF FUTURE PRESCRIPTION MAY BE VALID

25. BORROMEO, ET AL. v. COURT OF APPEALS AND JOSE A. VILLAMOR

G.R. No. L-22962, September 28, 1972
Fernando, J.

FACTS:
This is a petition for review by certiorari wherein the SC reviews a decision of the CA reversing the
order of the CFI ordering the defendant to pay his indebtedness despite prescription of the action due
to a stipulation renouncing such.

Jose A. Villamor borrowed money from his Canuto Borromeo to settle a pressing obligation. Borromeo
then asked for settlement of his obligation, but defendant instead offered to execute a document
promising to pay his indebtedness even after the lapse of ten years. Liquidation was made and
defendant was found to be indebted to plaintiff in the sum of P7,220.00, for which defendant signed a
promissory note therefor, agreeing to pay 'as soon as I have money'. The note also contained
a stipulation that defendant 'hereby relinquish, renounce, or otherwise waive my rights to the
prescriptions established by our Code of Civil Procedure for the collection or recovery of the above
sum of P7,220.00. (...) at any time even after the lapse of ten years from the date of this instrument'.
After the execution of the document, plaintiff only verbally requested the defendant to settle his
indebtedness from time to time. He did not file any complaint against the defendant within ten years
from the execution of the document as there was no property registered in defendant's name, who
furthermore assured him that he could collect even after the lapse of ten years. Later, plaintiff made
various oral demands, but defendants failed to settle his account, hence the present complaint.

The CFI of Cebu sentence the original defendant, Villamor, to pay Borromeo, now, the sum due with
interest. The CA reversed the decision alleging the lack of validity of the stipulation amounting to a
waiver in line with the principle "that a person cannot renounce future prescription."

ISSUE:
Is a stipulation amounting to a waiver renouncing future prescription valid?

RULING:
Yes, it is valid. It is a well-settled maxim that between two possible interpretations, that which saves
rather than destroys is to be preferred. It is a fundamental principle in the interpretation of contracts
that while ordinarily the literal sense of the words employed is to be followed, such is not the case
where they "appear to be contrary to the evident intention of the contracting parties," which "intention
shall prevail."

In the interpretation of contracts specifically referred to in Kasilag v. Rodriguez, as "not less important"
than other principles which "is to the effect that the terms, clauses and conditions contrary to law,
morals and public order should be separated from the valid and legal contract when such separation
can be made because they are independent of the valid contract which expresses the will of the
contracting parties.

The then Chief Justice Bengzon in Arrieta v. Bellos, invoked equity. Mention has been made of
"practical and substantial justice," "[no] sacrifice of the substantial rights of a litigant in the altar of
sophisticated technicalities with impairment of the sacred principles of justice," "to afford substantial
justice" and "what equity demands." There has been disapproval when the result reached is "neither
fair, nor equitable." What is to be avoided is an interpretation that "may work injustice rather than
promote justice." What appears to be most obvious is that the decision of respondent Court of Appeals
under review offended most grievously against the above fundamental postulate that underlies all
systems of law.
Hence, the decision of the CA is reversed, thus giving full force and effect to the decision of the lower
court.

28
 OBLIGATIONS
Kinds

FAILURE TO RENEW A BOND RESULTS IN THE LOSS OF THE RIGHT TO MAKE USE OF A
PERIOD, THUS MAKING AN OBLIGATION IMMEDIATELY DUE AND DEMANDABLE
THEREAFTER

26. GAITE v. FONACIER, ET AL

G.R. No. L-11827, July 31, 1961
Reyes, J.B.L., J.:

FACTS:
In this appeal to the Court, defendant Isabelo Fonacier challenges the decision of the CFI ordering the
payment to plaintiff Fernando A. Gaite of an obligation the former alleges should not be made on
account of nonfulfillment of the suspensive condition.

Fonacier, owner of 11 iron lode mineral claims (Dawahan Group) in Camarines Norte, constituted a
"Deed of Assignment”, and appointed Gaite as his true and lawful attorney-in-fact to enter into a
contract for its exploration and development on a royalty basis. Gaite executed a general assignment
to the Larap Iron Mines owned solely by him. However, Fonacier decided to revoke the authority
granted, which he assented. Said revocation included the transfer to Fonacier of the rights and
interests over the "24,000 tons of iron ore, more or less" already extracted for a certain consideration.
A balance needed to be paid. To secure payment, Fonacier delivered a surety agreement with Larap
Mines and some of its stockholders, and another one with Far Eastern Insurance. When the second
surety agreement expired with no sale being made on the ores, Gaite demanded the P65,000 balance.
Fonacier contended that the payment was subject to the condition that the ores will be sold.

Gaite alleged that the obligation was not conditional and as instead one with a term and that the
obligation became due and demandable under Article 1198 of the New Civil Code. The lower court
ruled in favor of Gaite. Hence, the defendants jointly filed an appeal.

ISSUE:
Is the obligation of Fonacier to pay Gaite one with a period or term and not one with a suspensive
condition?

RULING:
It is an obligation subject to a period or term.

We find the court below to be legally correct in holding that the shipment or local sale of the iron ore is
not a condition precedent (or suspensive) to the payment of the balance of P65,000.00, but was only a
suspensive period or term. What characterizes a conditional obligation is the fact that its efficacy or
obligatory force (as distinguished from its demandability) is subordinated to the happening of a future
and uncertain event; so that if the suspensive condition does not take place, the parties would stand as
if the conditional obligation had never existed.

The parties did not intend such state. The words of the contract expressed that obligation to pay and
intended Gaite to be paid. Furthermore, the sale of the ore to Fonacier was a sale on credit, not an
aleatory contract. For their failure to renew the bond, the appellant has forfeited the right to compel
Gaite to wait for the sale of the ore before receiving payment of the balance.

Under paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines, the debtor shall lose
every right to make use of the period when he does not furnish to the creditor the guaranties or
securities which he has promised, and when by his own acts he has impaired said guaranties or
securities after their establishment, and when through fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory.

29
 OBLIGATIONS
Kinds

TO BE EXEMPT FROM LIABILITY, ONE MUST BE FREE FROM ANY PREVIOUS NEGLIGENCE
OR MISCONDUCT BY WHICH THAT LOSS OR DAMAGE MAY HAVE BEEN OCCASIONED.

27. NAKPIL & SONS v. COURT OF APPEALS

G.R. No. L-47851, October 3, 1986
Paras, J.

FACTS:
Philippine Bar Association hired Juan Nakpil and Sons to plan the specifications of an office building
and United Construction to construct it.

In 1968, an unusually strong earthquake hit Manila by which the building in question sustained major
damage. The building’s front columns buckled, causing the building to tilt forward dangerously. PBA
filed a suit for damages against United Construction, but United Construction subsequently filed a suit
against Nakpil and Sons, alleging defects in the plans and specifications. A commissioner was
ultimately appointed by the Trial Court to assess the damage who submitted a report indicating that
while the damage sustained by the PBA building was caused directly by the earthquake, they were
also caused by the defects in the plans and specifications, deviations from said plans and
specifications by the contractors and failure of the latter to observe requisite workmanship in the
construction of the building and of the contractors, architects and even the owners to exercise the
requisite degree of supervision in the construction of subject building. The trial court concurred with the
commissioner. The IAC modified. Hence this appeal.

ISSUE:
Does an act of God (fortuitous event) exempt from liability parties who would otherwise be liable due to
negligence?

RULING:

No, it does not. To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of
an obligation due to an "act of God," the following must concur: (a) the cause of the breach of the
obligation must be independent of the will of the debtor; (b) the event must be either unforseeable or
unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation
in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the
injury to the creditor.

The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned
exclusively by the violence of nature and all human agencies are to be excluded from creating or
entering into the cause of the mischief. When the effect, the cause of which is to be considered, is
found to be in part the result of the participation of man, whether it be from active intervention or
neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and removed from the
rules applicable to the acts of God.

The decision appealed from is modified and the Court declares the defendants liable.

30
 OBLIGATIONS
Kinds

SOLIDARY LIABILITY DOES NOT PRECLUDE THE APPLICATION OF THE CIVIL CODE
PROVISION ON THE RIGHT OF REIMBURSEMENT FROM HIS CO-DEBTOR BY THE ONE WHO
PAID

28. MARIVELES SHIPYARD v. COURT OF APPEALS

G.R. No. 144134, November 11, 2003
Quisumbing, J.

FACTS:
Mariveles Shipyard Corporation engaged the services of Longest Force Investigation and Security
Agency, Inc. to render security services at its premises. It religiously complied with the terms of the
security contract with Longest Force but found the services being rendered by the assigned guards
unsatisfactory and inadequate, causing it to terminate its contract with Longest Force on April 1995.
Longest Force, in turn, terminated the employment of the security guards it had deployed at
petitioner’s shipyard.

Private respondents filed a case for illegal dismissal, underpayment of wages pursuant to the
PNPSOSIA-PADPAO rates, non-payment of overtime pay, premium pay for holiday and rest day,
service incentive leave pay, 13th month pay and attorney’s fees, against both Longest Force and
petitioner, before the Labor Arbiter. The case sought the guards’ reinstatement with full back wages
and without loss of seniority rights.

The Labor Arbiter rendered judgment that Longest Force and Mariveles Shipping be jointly and
severally liable to pay the money claims of the complainants. Petitioner appealed the foregoing to the
NLRC. The labor tribunal, affirmed the decision of the Labor Arbiter. Petitioner moved for
reconsideration, but this was denied by the NLRC. The petitioner then filed a special civil action for
certiorari assailing the NLRC judgment for having been rendered with grave abuse of discretion with
the Court of Appeals. The Court of Appeals denied due course to the petition and dismissed it outright.

ISSUE:
Is the petitioner is solidary liable with the security agency?

RULING:
Yes. Petitioner cannot evade its liability by claiming that it had religiously paid the compensation of
guards as stipulated under the contract with the security agency. Labor standards are enacted by the
legislature to alleviate the plight of workers whose wages barely meet the spiraling costs of their basic
needs. Labor laws are considered written in every contract. Stipulations in violation thereof are
considered null. Similarly, legislated wage increases are deemed amendments to the contract. Thus,
employers cannot hide behind their contracts in order to evade their (or their contractors’ or
subcontractors’) liability for noncompliance with the statutory minimum wage.

However, we must emphasize that the solidary liability of petitioner with that of Longest Force does not
preclude the application of the Civil Code provision on the right of reimbursement from his co-debtor by
the one who paid. As held in Del Rosario & Sons Logging Enterprises, Inc. v. NLRC , the joint and
several liability imposed on petitioner is without prejudice to a claim for reimbursement by petitioner
against the security agency for such amounts as petitioner may have to pay to complainants, the
private respondents herein. The security agency may not seek exculpation by claiming that the
principal’s payments to it were inadequate for the guards’ lawful compensation. As an employer, the
security agency is charged with knowledge of labor laws; and the adequacy of the compensation that it
demands for contractual services is its principal concern and not any other’s.

31
 OBLIGATIONS
Kinds

A CORPORATE OFFICER IS JOINTLY AND SOLIDARILY LIABLE WITH THE CORPORATION

FOR EMPLOYEE CLAIMS

29. NYK INTERNATIONAL KNITWEAR CORP. PHILIPPINES v. NLRC

G.R. No. 146267, February 17, 2003
Quisumbing, J.

FACTS:
Petitioner NYK hired respondent Virginia Publico as a sewer. Under the terms and conditions of her
employment, Publico was paid on a piece-rate basis, but required to work from 8:00 A.M. to 12:00
midnight. On the average, she earned P185.00 daily.

One day, she left work early without permission as she was not feeling well. Two days after, upon her
return to work, she was stopped by a guard from entering the premises and was later on informed of
her dismissal. Aggrieved, private respondent filed a complaint for illegal dismissal against petitioner
corporation and its manager, Cathy Ng.

Before the Labor Arbiter, petitioners predictably had a different version of the story. Allegedly, they
took the pains to verify why Publico did not report for work that day and found out that her husband did
not allow her to work at night. As night work is a must in their line of business, particularly when there
are rush orders, petitioners claimed that given Publico’s failure to render overtime work, they were left
with no other recourse but to fire her.

The LA held that there was illegal dismissal; the NLRC and CA affirmed the LA. Cathy Ng, the
company’s manager was held jointly and severally liable with NYK to pay the backwages of Publico.

ISSUE:
(A) Was Publico illegally dismissed?
(B) Was it proper for the Court to rule that Cathy Ng is jointly and severally liable?

RULING:
(A) Yes, Publico was illegally dismissed. Findings of facts of the NLRC, particularly in a case where
the NLRC and the Labor Arbiter are in agreement, are deemed binding and conclusive upon this
Court. Hence, petitioners’ bare allegations of abandonment cannot stand the unswerving
conclusion by both quasi-judicial agencies below that private respondent was unlawfully
dismissed. We find no reason to deviate from the consistent findings of the Labor Arbiter and the
NLRC that there was no basis to find that Virginia abandoned her work. Indeed, factual findings of
the NLRC affirming those of the Labor Arbiter, both bodies being deemed to have acquired
expertise in matters within their jurisdictions, when sufficiently supported by evidence on record,
are accorded respect if not finality, and are considered binding on this Court.

(B) Yes, it was proper for the Court to hold Cathy Ng jointly and severally liable. A corporation is an
artificial person; it must have an officer who can be presumed to be the employer, being the
"person acting in the interest of the employer." In other words the corporation, in the technical
sense only, is the employer. In a subsequent case, we ordered the corporate officers of the
employer corporation to pay jointly and solidarily the private respondents’ monetary award.

In this case Cathy Ng, admittedly, is the manager of NYK. Conformably with our ruling in A. C.
Ransom, she falls within the meaning of an "employer" as contemplated by the Labor Code, who may
be held jointly and severally liable for the obligations of the corporation to its dismissed employees.
Pursuant to prevailing jurisprudence, Cathy Ng, in her capacity as manager and responsible officer of
NYK, cannot be exonerated from her joint and several liability in the payment of monetary award to
private respondent.

32
 OBLIGATIONS
Kinds

PRESCRIPTION OF THE PRINCIPAL OBLIGATION CARRIES WITH IT THE PRESCRIPTION OF

ALTERNATIVE OBLIGATIONS.

30. AGONCILLO v. JAVIER

G.R. No. L-12611, August 7, 1918
Fisher, J.

FACTS:
In 1897, one Anastasio Cruz incurred a P2,730.50 loan from Marcela Mariño, wife of Felipe Agoncillo.
Cruz however died. Later, in February 1904, the heirs of Cruz, namely: Jose Alano, Anastasio Alano
(for his children), and Florencio Alano executed a document whereby they promised to pay Marcela
the said debt, and as security for such debt, the house bequeathed by the deceased was deemed
mortgaged. The debt is scheduled to mature on February 27, 1905. In 1908, Anastasio Alano paid
P200.00 pesos to Marcela. The payment was received as “payment made on the account of the debt o
Anastacio Alano”. Apparently, other than the P200.00 payment from Anastasio Alano, no other
payment was received from the Alanos.

In 1912, Anastasio Alano died. Crisanto Javier was named as the administrator of Anastasio Alano’s
estate.

In March 1916, Agoncillo and Marcela filed a civil case against the Javier as administrator of Anastasio
Alano’s estate. Florencio and Jose were impleaded. In the main case, Javier et al invoked the defense
of prescription; that Agoncillo’s claim is barred by the statute of limitations; that Agoncillo had ten years
from the date of maturity (February 1905) to collect hence his collection effort in 1916 was already way
beyond the prescriptive period.

Agoncillo averred that the payment of P200.00 by Anastasio Alano in 1908 had tolled the running of
the prescriptive period hence his civil action in 1916 is still within the 10 year prescriptive period.

ISSUE:
Is the claim to demand payment, as well as the obligation to convey the house deemed mortgaged
under the document already barred by prescription?

RULING:
Yes, the claim is already barred by prescription. The principal undertaking evidenced by the document
is the payment of money. The attempt to create a mortgage upon the house and lot described in the
second clause of the contract is invalid, as it is admitted that the so-called mortgage was never
recorded. The agreement to convey the house and lot at an appraised valuation in the event of failure
to pay the debt in money at its maturity is simply an undertaking that if the debt is not paid in money, it
will be paid in another way.

It is quite clear that under the terms of the contract, as we read it, and as the parties themselves have
interpreted it, the liability of the defendants as to the conveyance of the house and lot is subsidiary and
conditional, being dependent upon their failure to pay the debt in money. Thus, if the action to recover
the debt has prescribed, the action to compel a conveyance of the house and lot is likewise barred, as
the agreement to make such conveyance was not an independent principal undertaking, but merely a
subsidiary alternative pact relating to the method by which the debt might be paid. Also, it cannot be
said that the payment made by Anastasio Alano in 1908 suspended the running of the period of
prescription because there is not the slightest foundation in the evidence for the belief that the
payment made by Anastasio was for the benefit of Jose or Florencio or that it was authorized by either
of them. Thus, since the principal undertaking has already prescribed, the right to enforce any
alternative undertaking has already prescribed.

33
 OBLIGATIONS
Kinds

IN ORDER THAT AN OBLIGATION MAY BE EXTINGUISHED BY ANOTHER WHICH

SUBSTITUTES IT, IT IS NECESSARY THAT IT SHOULD BE SO EXPRESSLY DECLARED OR
THAT THE OLD AND THE NEW BE INCOMPATIBLE IN ALL POINTS

31. INCHAUSTI v. YULO

G.R. No., L-7721 March 25, 1914
Arellano, C.J.

FACTS:
Appeal from the CFI to the SC regarding a suit for the recovery of a certain sum of money tackling the
subject of novation

Teodoro Yulo borrowed money from Inchausti & Company, and when he died, this was continued by
his children. Six of the Yulo children executed a document admitting to their indebtedness to Inchausti.
When they defaulted in the payment of their installments, Inchausti filed a case against one of the
children, Gregorio Yulo.

Three of the six siblings filed another contract with different stipulations, particularly, that the debt
would be reduced. They obligated themselves to pay but failed to pay right at the first instalment.

An action was brought against Gregorio Yulo. However, another notarial instrument was executed by
the Yulos in recognition of the debt and the obligation of payment, and then asking plaintiff to include
in the filed suit Pedro Yulo, and in that case, they would procure all means for the judgment to be in
favor of the plaintiff. However, the court ruled in favor of Gregorio instead. Court reversed the judgment
and held that plaintiff can sue Gregorio Yulo alone since the Yulos obligated themselves in solidum.

ISSUE:
WON THE CONTRACT with the 3 obligors constitute a novation (substitution) of Aug 12 1909 affidavit,
entered into the 6 debtors who assumed the payment

RULING:
No. The contract does not constitute a novation of the former contract with respect to the other debtors
who executed the contract.

“in order that an obligation may be extinguished by another which substitutes it, it is necessary
that it should be so expressly declared or that the old and the new be incompatible in all
points(art. 1292). It is always necessary to state that it is the intentionof the contracting parties
to extinguish the former obligation by the new one.”

The obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified, by
changing only the term of payment and adding other obligations not incompatible with the old one.

Therefore, the obligation being solidary, the remission of any part of the debt made by a creditor in
favor of one or more of the solidary debtors necessarily benefits the others, and therefore there can be
no doubt that, in accordance with the provision of Art. 1215, 1222, the defendant has the right to enjoy
the benefits of the partial remission.

34
 OBLIGATIONS
Kinds

DEATH IS NOT AN ESCAPE TO LIABILITY

32. STRONGHOLD INSURANCE COMPANY, INC. v. REPUBLIC – ASAHI GLASS CORP.

G.R. No., 147561 June 22, 2006
Panganiban, C.J.

FACTS:
Petition for Review under Rule 45 to reverse decision of CA

Respondent entered into a contract with JDS for the construction of roadways and drainage systems in
the compound of RAG. JDS files the required compliance bond with Petitioner acting as surety. JDS
fell behind schedule with the contract.

RAG was prompted to rescind the contract and demand the compliance bond. The owner of JDS dies
and JDS disappears.

Petitioner refuses to pay the bond claiming that the death of JDS owner extinguishes the obligation.

ISSUE:
Was petitioner’s liability under the performance bond automatically extinguished by the death of the
owner of JDS, the principal?

RULING:
No. Only obligations that are personal or are identified with the persons themselves are extinguished
by death.

“A surety company’s liability under the performance bond it issues is solidary. The death of the
principal obligor, does not, as a rule, extinguish the obligation and the solidary nature of that
liability.”

In the present case, whatever monetary liabilities or obligations JDS had under his
contracts with respondent were not intransmissible by their nature, by stipulation, or by provision of
law.

Hence, his death did not result in the extinguishment of those obligations or liabilities, which merely
passed on to his estate. Death is not a defense that he or his estate can set up to wipe out the
obligations under the performance bond. Consequently, petitioner as surety cannot use his death to
escape its monetary obligation under its performance bond.

35
 OBLIGATIONS
Kinds

A CONTRACT, ONCE PERFECTED, IS GENERALLY BINDING IN WHATEVER FORM

33. SAN MIGUEL FOODS, INC. (SMFI) v. ERNESTO MAGTUTO

G.R. No. 225007, July 24, 2019
Carpio, J.

FACTS:
The case is a petition for review on certiorari assailing decision of the CA which affirmed the decision
of the RTC and ruled that there was a contract of grower between Magtuto and SMFI.

Sometime in September 2002, Magtuto and Dr. James Vinoya, SMFI’s veterinarian and production
supervisor, agreed that Magtuto can be accommodated as a broiler chick grower of SMFI only if
excess chicks would be available from its hatchery in Laguna. They did not execute a written contract
nor did they agreed on a period, but Vinoya told Magtuto that he is bound by the same terms and
conditions as regular contract growers to which Magtuto agreed. The agreement involved the delivery
of 36,000 day-old chicks by SMFI which Magtuto would grow for a period of about 30-35 days at his
grow-out facility located in Camarines Sur. In January 2003, or on the fifth delivery, the broiler chicks
delivered by SMFI was short of 4,000 heads. Magtuto reported this to Vinoya who replied that there
were no more excess chicks due to the low demand. On August 2003, SMFI unilaterally terminated the
arrangement.

Magtuto filed a complaint for damages because of the pre-termination of the arrangement which
resulted to loss of income and the expenses he incurred. SMFI claimed that it did not execute any
written broiler chicken contract growing agreement with Magtuto. SMFI claims further that the
agreement is unenforceable in the absence of a written contract and Vinoya had no authority into any
contracts in the name of SMFI.

ISSUE:
Was there a valid and enforceable contract of grower between the parties?

RULING:
YES, there was a contract of grower between the parties.

Under the Civil Code, the contract is perfected at the moment there is a meeting of the minds upon the
thing that is the object of the contract and the price. In the present case, all the essential elements –
consent, object and cause – are present. Magtuto entered into an agreement with Vinoya for the
growing of broiler chicks. They agreed that SMFI would provide the day-old chicks, feeds, medicines,
materials and technical support, while Magtuto would be given a certain period to grow the chicks.
Afterwards, SMFI would harvest the chicks and Magtuto would be paid a grower's fee. The chicks
delivered by SMFI and grown by Magtuto constitutes the object or subject matter of the contract and
the grower's fee is the consideration.

Thus, a contract, once perfected, is generally binding in whatever form, whether written or oral, it may
have been entered into, provided the essential requisites for its validity are present.

SMFI cannot assail the unenforceability of the agreement on the ground that Vinoya had no authority
to bind the corporation. The contract, assuming that Vinoya had no authority, was impliedly ratified
when the-broiler chicks subject of the contract was delivered by SMFI until the grown chickens were
harvested by SMFI. This occurred not only once but five times over the course of nine months. In
Prime White Cement Corp. we held that implied ratification may take various forms – like silence or
acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of
benefits flowing therefrom.

36
 OBLIGATIONS
Kinds

PENAL CLAUSE IS VALID AND BINDING IF IT IS NOT CONTRARY TO ANY LAW, MORALS OR
PUBLIC ORDER

34. GOVERNMENT OF THE PHILIPPINE ISLANDS v. LIM

G.R. No. 41917, August 9, 1935
Imperial, J.

FACTS:
In an appeal from the judgment of the Manila CFI (lower court) against them, defendants-appellants
(defendants) challenges the penalty imposed by them by the lower court.

Defendants obtained two loans from the plaintiff in the amount of Php 10,000 and Php 3,000,
respectively. The former bound themselves to pay, jointly and severally, the first amount within five
years and the second amount within four years and nine months, as well as the interest which they
were ordered to pay, the taxes, the insurance premiums, the expenses of repair, and the stipulated
penalties. When they failed to fulfill both of their obligations, plaintiff instituted an action against them
with the lower court.

The lower court rendered judgment in favor of plaintiff. It sentenced defendants pay plaintiff the
amount of their loans plus interest and such other sum as the premiums, and repair of the mortgaged
property. The judgment likewise provides that, in case the aforesaid amounts should not be paid or
deposited with the court within three months, the mortgaged property be sold at public auction and the
proceeds be applied to the judgment. Hence, plaintiff filed an action to foreclose the mortgages
executed by defendants. Defendants do not deny their indebtedness, their obligation to pay the
stipulated interest and other amounts advanced by the plaintiff, nor question the right to foreclose the
mortgages. They are questioning plaintiff’s right to recover the sum of Php 1,300 representing 10% of
the principal indebtedness of Php 13,000, for cost, expenses of collection, and attorney’s fees.

They contend that the enforcement of the penalty is unjustified because the plaintiff has its own
salaried counsel, and that it did not employ private counsel in the instant case. They also contend that
said portion of the judgment would be tantamount to the allowance of double compensation.

ISSUE: Was the Manila CFI correct in imposing the penalty of Php 1,300?

RULING:
Yes, the Manila CFI is correct in imposing the penalty of Php 1,300.

In the promissory notes executed by the defendants and incorporated in the mortgage deeds, they
voluntary undertook to pay the sum of P1,300 as court costs, expenses of collection, and attorney's
fees, whether incurred or not. This stipulation is a valid and permissible penal clause, not contrary to
any law, morals, or public order, and is, therefore, strictly binding upon the defendants. It is neither
excessive nor exorbitant, and the defendants have not made any payment upon their principal
obligations, wherefore, the discretion conferred by article 1154 of the Civil Code (Now Art. 1229 of the
New Civil Code) may not be exercised to reduce the penalty.

37
 OBLIGATIONS
Kinds

PENALTY SHALL SUBSTITUTE INDEMNITY FOR DAMAGES AND PAYMENT OF INTERESTS

35. CABARROGUIS v. VICENTE

G.R. No. L-14304, March 23, 1960
Gutierrez David, J.

FACTS:
Plaintiff Antonia A. Cabarroguis sustained physical injuries when the AC "jeepney" of which she was a
passenger hit another vehicle. The injury caused permanent partial disability to her right forearm. To
avoid court litigation, defendant Telesforo B. Vicente, owner and operator of the AC "jeepney" involved
in the accident, entered into a compromise agreement with the said victim Cabarroguis, obligating
himself to pay to her the sum of P2,500 as actual and compensatory, exemplary and moral damages.
The defendant paid a total of P1,500.00 leaving therefore, an unpaid balance of P1,000. It was also
stipulated in the agreement that should defendant fail to complete payment within a period of sixty (60)
days, he would pay an additional amount of P200.00 as liquidated damages.

After defendant failed to pay after repeated demands and refused to comply with his obligation under
the agreement after the same had become due and demandable, plaintiff Cabarroguis brought suit in
the Municipal Court of Davao City.

The inferior court rendered judgment in plaintiff's favor. From that judgment, defendant appealed to the
Court of First Instance which rendered judgement sentencing the defendant to pay to the plaintiff the
amount of P1,200.00 with interest at legal rate from the date of the filing of the complaint until full
payment. Defendant again appealed to the Court of Appeals, contending that the lower court erred in
sentencing him to pay interest on the amount of the judgment from the date of the filing of the
complaint until full payment. Citing Article 1226 of the new Civil Code, he argued that in obligations
with a penal clause, the penalty substitutes the indemnity for damages and payment of interest. The
question raised being one of law, the appellate court certified the case to this Court.

ISSUE: Is the defendant liable to pay interest on the amount of judgement?

RULING: No, the defendant is not liable to pay interest on the amount of judgement. In obligations with
a penal clause, as provided in Article 1226 of the new Civil Code, the penalty shall substitute the
indemnity for damages and the payment of interests. The exceptions to this rule, according to the
same article, are: (1) when the contrary is stipulated; (2) when the debtor refuses to pay the penalty
imposed in the obligation, in which case the creditor is entitled to interest on the amount of the penalty,
in accordance with Article 2209; and (3) when the obligor is guilty of fraud in the fulfillment of the
obligation.

Applying the law, it is evident that no interest can be awarded on the principal obligation of defendant,
the penalty of P200.00 agreed upon having taken the place of the payment of such interest and the
indemnity for damages. No stipulation to the contrary was made, and while defendant was sued for
breach of the compromise agreement, the breach was not occasioned by fraud. Hence, the defendant
is not liable to pay interest on the amount of judgement.

The case, however, takes a different aspect with respect to the penalty attached to the principal
obligation. It has been held that in obligations for the payment of a sum of money when a penalty is
stipulated for default, both the principal obligation and the penalty can be demanded by the creditor.
Defendant having refused to pay when demand was made by plaintiff, the latter clearly is entitled to
interest on the amount of the penalty.

38
 OBLIGATIONS
Kinds

INTEREST DUE SHOULD BE THAT WHICH MAY HAVE BEEN STIPULATED IN WRITING

36. RIZAL COMMERCIAL BANKING CORP. v. CA AND GOYU & SONS, INC.
G.R. No. 128833, April 20, 1998
Melo, J.

FACTS:
Respondent Goyu & Sons, Inc. (GOYU) applied for and was granted credit facilities and
accommodations with petitioner Rizal Commercial Banking Corporation (RCBC) in the amount of P30
million which was later increased to P117 million. As security for, GOYU executed two (2) real estate
mortgages and two (2) chattel mortgages in favor of RCBC. GOYU obtained in its name ten (10)
insurance policies on the mortgaged properties from Malayan Insurance Company, Inc. (MICO). Eight
(8) of those insurance policies were issued in favor of RCBC.

Subsequently, one of GOYU’s factory buildings was gutted in a fire which prompted respondent to file
a claim against MICO for the lass. However, MICO denied the claim on the ground that the insurance
policies were either attached pursuant to writs of attachments/garnishments issued by various courts
or that the insurance proceeds were also claimed by other creditors of GOYU alleging better rights to
the proceeds than the insured. GOYU then filed a complaint for specific performance and damages
with the RTC. As one of GOYU’s creditors, RCBC filed with MICO its formal claim over the proceeds of
the insurance policies, but said claims were also denied for the same reasons that MICO denied
GOYU’s claims.

The trial court ruled in favor of GOYU for the fire loss claims but ordered it to pay RCBC its loan
obligations in the amount of P68,785,069.04 with interest thereon at the rate stipulated, without
surcharges and penalties. However, on appeal, the CA without even laying down the factual or legal
justification for its ruling, modified the trial court's ruling and ordered GOYU to pay the principal amount
of P68,785,069.04 without any interest, surcharges and penalties.

ISSUE:
Is GOYU liable to pay interest on its loan obligation to RCBC?

RULING:
Yes, GOYU is liable to pay interest on the P68,785,069.04 loan obligation to RCBC.

The essence or rationale for the payment of interest or cost of money is separate and distinct from that
of surcharges and penalties. What may justify a court in not allowing the creditor to charge surcharges
and penalties despite express stipulation therefor in a valid agreement, may not equally justify non-
payment of interest. The charging of interest for loans forms a very essential and fundamental element
of the banking business, which may truly be considered to be at the very core of its existence or being.
It is inconceivable for a bank to grant loans for which it will not charge any interest at all. The Court
failed to find justification for the Court of Appeal's outright deletion of the payment of interest as agreed
upon in the respective promissory notes.

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

39
 OBLIGATIONS
Kinds

A STIPULATION ABOUT PAYMENT OF ADDITIONAL INTEREST RATE PARTAKES THE

NATURE OF A PENALTY CLAUSE WHICH MAY BE REDUCED BY THE COURTS

37. INSULAR BANK OF ASIA AND AMERICA v. SPOUSES SALAZAR

G.R. No. 82082, March 25, 1988
Gutierrez, J.

FACTS:
This is an appeal by the Insular Bank of Asia and America (IBAA) from the judgment of the RTC in a
case for collection of a sum of money with preliminary attachment wherein the RTC rendered a
summary judgment ordering the respondent spouses Ricardo Salazar and Epifania Salazar (Spouses)
to pay IBAA the sum of P11,253.25 with interest thereon at the rate of 19% per annum from the filing
of the complaint until fully paid.

On November 22, 1978, the Spouses obtained a loan of P42,050.00 from IBAA. This loan transaction
was evidenced by a promissory note where the spouses bound themselves jointly and severally to pay
the amount with interest at 19% per annum and with the express authority to increase without notice
the rate of interest up to the maximum allowed by law and subject further to penalty charges or
liquidated damages upon default equivalent to 2% per month on any amount due and unpaid. In
accordance with the agreement, IBAA increased the rate of interest to 21% pursuant to Central Bank
Circular No. 705 dated December 1, 1979. The promissory note matured but the spouses failed to pay
their account. It was only after several demands that the defendants-appellees were able to make
partial payment. They were able to pay a total of P68,676.75 which payments were applied to partially
satisfy the penalty and interest charges.

IBAA filed a complaint with the RTC alleging that the Spouses were indebted to IBAA in the amount of
P87,647.19 including interest at 21% per annum, penalty charges, and attorney's fees.

ISSUE:
Should the penalty of 2% per month provided in the penalty clause be reduced?

RULING:
Yes, the penalty should be reduced for being iniquitous.

The SC ruled that the Civil Code permits the agreement upon a penalty apart from the interest. Should
there be such an agreement, the penalty does not include the interest, and as such the two are
different and distinct things which may be demanded separately. The stipulation about payment of
such additional rate partakes of the nature of a penalty clause, which is sanctioned by law, (Art. 1226,
Civil Code), although, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable. (Art 1229, Civil Code).

Admittedly, the Spouses failed to pay the loan on the due date. However, with earnest efforts, they
tried to pay the loan little by little so that a total of P68,676.75 had been paid. IBAA, on the other hand,
merely applied this amount to satisfy the penalty and interest charges which it additionally imposed.
The SC noted the trial court's observation that IBAA did not even state in the complaint that the
Spouses had made partial payments, making it appear that they refused to pay the loan. The bank has
already profited considerably from the loan. In a span of about six (6) years, the bank was enriched by
P 26,626.75.

The penalty charges of 2% a month are, therefore, out of proportion to the damage incurred by the
bank. In accordance with Article 1229 of the Civil Code, the Court reduced the penalty for being highly
iniquitous.

40
 OBLIGATIONS
Kinds

PENALTY INTERESTS ARE IN THE NATURE OF LIQUIDATED DAMAGES AND MAY BE

EQUITABLY REDUCED BY THE COURTS IF THEY ARE INIQUITOUS OR UNCONSCIONABLE

38. ANTONIO M. GARCIA, DYNETICS, INC., AND MATRIX MANAGEMENT CORP. v. CA

AND SECURITY BANK AND TRUST COMPANY
G.R. No. 82282-83, November 24, 1988
Gutierrez, J.

FACTS:
This is a petition filed by Dynetics, Inc., Matrix Management and Trading Corporation and Antonio M.
Garcia (Petitioners) assailing the CA decision which affirmed the summary judgment rendered by the
RTC dismissing their complaint for lack of merit and ordering them to pay the private respondent
Security Bank and Trust Company (SBTC).

Petitioners filed a complaint for declaratory relief against SBTC. They sought a judicial declaration that
they were not liable to the bank under certain Indemnity Agreements they executed in favor of
Chemark Electric Motors, Inc. which had been extended a credit accommodation of about
P20,000,000.00 by the bank. SBTC filed its answer and counterclaim. The petitioners manifested that
they are adopting all allegations in their complaint as their answer to the respective counterclaim
against each of them. SBTC then filed a motion for summary judgment. The motion was granted.

In the summary judgment, the complaint was dismissed and the petitioners were ordered to pay the
private respondent the unpaid principal sum of P15 million remaining unpaid out of Chemark's
availment of the P20 million credit line, plus 18% interest per annum and 36% as penalty per annum
for the first promissory note until fully paid; and plus 24% interest per annum and 36% as penalty per
annum for the second promissory note until fully paid. The petitioners assail the awards of penalty
charges at 36% per annum and interest at 18% and 24% per annum respectively on the loans. They
contend that the interests are excessive.

ISSUE:
Are the awards of penalty charges made by the RTC excessive?

RULING:
Yes, the penalty charges are excessive. Penalty interests are in the nature of liquidated damages and
may be equitably reduced by the courts if they are iniquitous or unconscionable. (Articles 1229, 2227,
New Civil Code).

The records show that on the first loan, the penalty charges are already equivalent to P6,774,378.06
and that on the second loan, the penalty charges are equivalent to P8,662,008.53. The penalty
charges in the first loan would have been earned by the private respondent after only 725 days of
delay in the payment of the loan while the second penalty charges would have been earned by the
private respondent after only 646 days of delay in the payment of the loan. The figures from 1985 to
1988 would amount to several times the principal loans. Hence, the penalty charges are excessive and
unconscionable. The interest charges are enough punishment for the petitioners' failure to comply with
their obligations. The award of penalty charges is stricken from the judgment.

41
 OBLIGATIONS
Kinds

CONTRACTS WITH PENAL CLAUSE. ARTICLE 1255 OF THE CIVIL CODE RECOGNIZES AND
SANCTIONS LIBERTY TO CONTRACT, BUT ADDS THAT THE AGREEMENTS, CLAUSES, AND
CONDITIONS STIPULATED SHALL NOT BE IN CONTRAVENTION OF LAW, MORALS, OR
PUBLIC ORDER

39. IBARRA v. AVEYRO

G.R. No. L-11306, December 6, 1917
Torres, J.

FACTS:
This is an appeal from the judgment of the lower court which ruled that the penal clause was null and
void for being immoral, pursuant to Article 1255 of the Civil Code. The counsel for petitioner Ibarra filed
a complaint against defendants Aveyro and Pre, for the purpose of recovering from them jointly and
severally the sum of P465 as principal, besides such additional sum as might be found owing in
accordance with the penal clause of the contract, at the rate of P5 a day from the date of the maturity
of the obligation.

The defendant sold to the plaintiff a piece of land with the right of repurchase, for the sum of P450.
Subsequently, defendant borrowed from the plaintiff the title deed of the land sold, for the purpose of
selling the property to another person at a better price, and afterwards returned the deed to the plaintiff
as he had been unsuccessful in making such attempted second sale.

Defendant again borrowed the deed of said land and the plaintiff required defendant Aveyro to execute
in the plaintiff's favor a promissory note, with the security of a solvent surety, for the amount of P450,
and with a penal clause, to be effective in case of delinquency in the payment of said amount should
the defendant succeed in selling the property, and with the condition that, if the sale should not be
made, the borrowed deed should be returned. Defendant was unable to sell the land and when he
tried to return the borrowed deed, plaintiff refused.

ISSUE: Can the plaintiff demand that the defendants pay the penalty of P5 per day until complete
reimbursement of the outstanding principal for delinquency in the payment of said principal?

RULING:
No. Article 1255 of the Civil Code recognizes and sanctions liberty to contract, but adds that the
agreements, clauses, and conditions stipulated shall not be in contravention of law, morals, or public
order. The obligation on the par of the debtors to pay P5 per day, as penalty, from the date agreed
upon until that of payment, was, in the judgment appealed whom, qualified as immoral, and there will
not be found in the laws, in any principle of justice, or in general, in the human conscience, any reason
whatever which can justify such a penalty as appropriate and equitable or as one that may be
sustained within the sphere of public or private morals.

With respect to the accessory obligation to pay to the creditor in the manner stipulated, in case of
noncompliance with the principal obligation, the sum of P5 for each day that should elapse from the
5th of December, 1914, until the date of payment, it suffices our purpose to state that the record does
not disclose due proof as to what amount of damages were suffered during the period from December
5, 1914, to April 10, 1915, on which latter date the complaint was filed. The obligors who subscribed
said promissory note bound themselves to pay P5 per day as damages, and, in order that this court
may decide in favor of the plaintiff, it is indispensable that the record contain a specification of such
damages and their amount, since, in the sum mentioned in the promissory note, there is included that
of P150, as interest, compromised and included in the principal obligation.

42
 OBLIGATIONS
Kinds

IN OBLIGATIONS WITH A PENAL CLAUSE, THE PENALTY SHALL SUBSTITUTE THE

INDEMNITY FOR DAMAGES AND THE PAYMENT OF INTERESTS IN CASE OF NON-
COMPLIANCE, IF THERE IS NO STIPULATION TO THE CONTRARY
40. UMALI v. MICLAT
G.R. No. L-9262, July 10, 1959
Bautista Angelo, J.

FACTS:
This case is a petition for review of the CA’s decision which affirmed in toto the decision of the lower
court ordering defendant Umali to pay plaintiff Miclat the sum of P675.00, plus 10% surcharge as
stipulated, and the sum of P200.00 as attorney's fees; and with respect to the second claim, to pay the
sum of P344.50. The Court likewise ordered that the sums of P675.00 and P344.50 shall bear 6%
interest per annum from the date of the filing of the complaint until paid.

In accordance with the Contract and the Job Order, appellee Miclat prepared posters, a theater show
board display, a theater display standee, a float, and other forms of advertisement for the showing of
the film "LAGRIMAS". Under the contract, Umali agreed to pay the sum of P900, of which appellee
was paid P225 in advance. Under the Job Order, Umali agreed to pay the sum of P344.50. The work
covered by the Contract and the Job Order were completely done and the articles were delivered to
Umali. However, Umali refused to pay without justification despite several demands. This prompted
Miclat to file an action to recover sums of money plus damages and attorney’s fees against Umali.

It appears that there is a stipulation in the Contract stating that if appellant should fail to pay the
balance of P675 after the lapse of 30 days from the date exhibition of the film "LAGRIMAS" has
started, he should pay a surcharge of 10% every 30 days thereafter until the amount has been fully
paid. It is claimed that this surcharge is unconscionable and unreasonable, because it is tantamount to
imposing an interest of 10% a month, or 120% a year on the balance of the obligation until the same is
paid in full. Appellant likewise claims that the payment of 6% interest per annum from the date of the
filing of the complaint until full payment of the obligation due is also considered unreasonable
considering that appellant was already ordered to pay the penalty agreed upon.

ISSUE:
1. Is the 10% surcharge unconscionable and unreasonable?
2. Is the payment of 6% interest per annum unreasonable considering that appellant was already
ordered to pay the penalty agreed upon?

RULING:
1. Yes, the surcharge is unconscionable and unreasonable.
While this surcharge partakes of the nature of a penal clause which the parties may stipulate under the
law, however, one cannot deny that the same is unreasonable, for if that is to be maintained, we would
have that on the basis of P675 which is the balance that remains outstanding, appellant would pay
P67.50 a month, or P810 a year, which considering the time that has already elapsed since appellant
defaulted, would amount to P3,420. This is indeed a case where equity demands that the penalty be
reduced in fairness to the debtor. And so, making use of the discretion that the law grants us on the
matter, we are of the opinion that a surcharge of 20% per annum would be reasonable. We therefore
hold that the penalty should be reduced accordingly.

2. No, the payment of the 6%interest was reasonable.

Article 1226 of the new Civil Code provides that "in obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case of non-compliance, if there
is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty. . . .". The penalty takes the place of the interests only if there is no stipulation to the contrary,
and even then, damages may still be collected if the obligor refuses to pay the penalty. In this case not
only is there an express stipulation to pay damages in addition to the penalty, but appellant has failed
to pay his obligation as well as the penalty. This appears in paragraph (f) of the contract. The
imposition of 6% interest per annum is, therefore, justified.

43
 OBLIGATIONS
Extinguishment

AN OBLIGATION IS NOT NOVATED BY AN INSTRUMENT THAT EXPRESSLY RECOGNIZES THE

OLD, CHANGES ONLY THE TERMS OF PAYMENT, AND ADDS OTHER OBLIGATIONS NOT
INCOMPATIBLE WITH THE OLD ONES, OR WHERE THE NEW CONTRACT MERELY
SUPPLEMENTS THE OLD ONE

41. CALIFORNIA BUS LINES INC. v. STATE HOUSE INVESTMENTS INC.

G.R. No. 147950, December 11, 2003
Quisumbing, J.

FACTS:
This is a petition for review assailing the decision of the CA affirming the decision of the RTC Manila
finding petitioner California Bus Line Inc. (CBLI) liable for the value of five (5) promissory notes
assigned to respondent State Investment House Inc (SIHI).

CBLI purchased from Delta Motors Corp. (Delta) – which is indebted to SIHI by virtue of separate
credit lines granted by SIHI to Delta – 35 buses and 2 engines executing 16 promissory notes and
chattel mortgages over the 35 buses as security for payment. When CBLI defaulted, it entered into a
Restructuring Agreement with Delta providing for the following: new schedule of payments, extending
the period to pay, daily remittance of payments instead of the previous monthly remittance, increased
interest rates, and additional documentation and restructuring fee. Subsequently, CBLI and Delta
entered into a Compromise Agreement where Delta would exercise its right to foreclose the mortgages
on the buses.

Delta assigned 5 of the 16 PNs to SIHI and when Delta defaulted payment of its obligation to SIHI, the
latter demanded payment from CBLI by virtue of the assignment. CBLI refused payment alleging that
the compromise agreement settled its obligations with Delta. Hence, SIHI file a case for collection of
sum of money based on the 5 PNs against CBLI. The RTC ruled against SIHI and held that the
restructuring agreement between Delta and CBLI already novated the 5 PNs hence, at the time Delta
assigned the five promissory notes to SIHI, the notes were already merged in the restructuring
agreement and cannot be enforced against CBLI. CBLI contends that the Restructuring Agreement did
not merely change the incidental elements of the obligation under all sixteen (16) promissory notes,
but it also increased the obligations of CBLI with the addition of new obligations that were incompatible
with the old obligations in the said notes.

ISSUE:
Did the Restructuring Agreement entered into between CBLI and Delta novate the 5 PNs assigned by
Delta to SIHI?

RULING:
No, the Restructuring Agreement did not constitute a novation of the 5 PNs.

Novation is never presumed, and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.
There are two ways which could indicate 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. The incompatibility must take place in any of the essential
elements of the obligation, 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.

In this case, the attendant facts do not make out a case of novation. The restructuring agreement
between Delta and CBLI, shows that the parties did not expressly stipulate that the restructuring
agreement novated the promissory notes. Absent an unequivocal declaration of extinguishment of the

44
pre-existing obligation, only a showing of complete incompatibility between the old and the new
obligation would sustain a finding of novation by implication. However, review of its terms yields no
incompatibility between the promissory notes and the restructuring agreement. The Court ruled that an
agreement subsequently executed between a seller and a buyer that provided for a different schedule
and manner of payment, to restructure the mode of payments by the buyer so that it could settle its
outstanding obligation in spite of its delinquency in payment, is not tantamount to novation. The
addition of other obligations likewise did not extinguish the promissory notes. In Young v. CA, this
Court ruled that a change in the incidental elements of, or an addition of such element to, an
obligation, unless otherwise expressed by the parties will not result in its extinguishment.

Hence, considering that no express novation has been agreed upon by the parties and no
incompatibility between the Restructuring Agreement and notes exist, there is no novation.

45
 OBLIGATIONS
Extinguishment

THE MERE RETURN OF THE MORTGAGED PROPERTY BY THE MORTGAGOR TO THE

MORTGAGEE DOES NOT CONSTITUTE DATION IN PAYMENT OR DACION EN PAGO IN THE
ABSENCE, EXPRESS OR IMPLIED OF THE TRUE INTENTION OF THE PARTIES. IN THE
ABSENCE OF CLEAR CONSENT OF THE MORTGAGEE TO THE PROFFERED SPECIAL MODE
OF PAYMENT, THERE CAN BE NO TRANSFER OF OWNERSHIP OF THE MORTGAGED
PROPERTY

42. FILINVEST CREDIT CORP. v. PHIL. ACETYLENE CO., INC.

G.R. No L-50449, January 30, 1982
De Castro, J.

FACTS:
Respondent Phil. Acetylene Co., Inc. (PACI) purchased from Alexander Lim (Lim) a Chevrolet
automobile making a down payment and the balance payable on installments. PACI executed a
promissory note (PN) and a chattel mortgage over the same vehicle. Lim assigned to petitioner
Filinvest Credit Corp. (Filinvest) all his right, title, and interest in the PN and mortgage. After defaulting,
PACI returned the mortgaged vehicle to Filinvest executing a Voluntary Surrender with SPA to Sell.
However, Filinvest cannot sell the car as PACI also defaulted in paying taxes on the vehicle. Filinvest
offered offered to deliver back the motor vehicle to the appellant but the latter refused to accept it, so
appellee instituted an action for collection of a sum of money with damages in the CFI of Manila.

In its answer, PACI, while admitting the material allegations of the Filinvest’s complaint, avers that
Filinvest has no cause of action against it since its obligation towards the Filinvest was extinguished
when in compliance with the Filinvest's demand letter, it returned the mortgaged property.

ISSUE:
Did return of the mortgaged motor vehicle by virtue of PACI’s voluntary constitute constitute dation in
payment totally extinguishing and/or cancelling its obligation to the Filinvest?

RULING:
No, mere transfer of the mortgaged property to the mortgagee does not constitute dation in payment.

Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of an obligation. The undertaking really
partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of
the debtor, payment for which is to be charged against the debtor’s debt. As such, the essential
elements of a contract of sale, namely, consent, object certain, and cause or consideration must be
present. In its modern concept, what actually takes place in dacion en pago is an objective novation of
the obligation where the thing offered as an accepted equivalent of the performance of an obligation is
considered as the object of the contract of sale, while the debt is considered as the purchase price.

In this case, there is no showing that the mortgagee, Filinvest, consented to or at least intended, that
the mere delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as actual
payment, more specifically dation in payment or dacion en pago. If at all, only transfer of possession of
the mortgaged motor vehicle took place. Had appellee intended to completely release appellant of its
mortgage obligation, there would be no necessity of executing the document captioned "Voluntary
Surrender with Special Power of Attorney To Sell."

Hence, the return does not constitute dation in payment.

46
 OBLIGATIONS
Extinguishment

FOR A VALID DACION EN PAGO TO TRANSPIRE, HOWEVER, THE ATTENDANCE OF THE

FOLLOWING ELEMENTS MUST BE ESTABLISHED, NAMELY: (A) THE EXISTENCE OF A
MONEY OBLIGATION; (B) THE ALIENATION TO THE CREDITOR OF A PROPERTY BY THE
DEBTOR WITH THE CONSENT OF THE FORMER; AND (C) THE SATISFACTION OF THE MONEY
OBLIGATION OF THE DEBTOR

43. PEN v. JULIAN

G.R. No. 160408, January 11, 2016
Bersamin, J.

FACTS:
This is a petition for review on certiorari where Spouses Roberto and Adelaida Pen, the petitioners,
who were the buyers of the mortgaged property of Spouses Santos and Linda Julian, the respondents,
seek the reversal of the decision promulgated by the CA affirmed with modification the adverse
judgment rendered by the RTC, Branch 77, in Quezon City. In their respective rulings, the CA and the
RTC both declared the deed of sale respecting the respondents' property as void and inexistent, albeit
premised upon different reasons.

Respondents obtained loans from petitioners in the amount of P60, 000.00, P50,000.00 and P10,
000.00 respectively. As security, respondents executed a Real Estate Mortgage over their property
under the name of Santos Julian. When the loans became due and demandable, respondents failed to
pay despite several demand. To avoid foreclosure proceedings, respondents offered their mortgage
property as payment in kind to which petitioners agreed. Thereafter, petitioners required the
respondents to sign one-page document purportedly an “Absolute Deed of Sale”. Said document did
not contain any consideration, and was undated, unfilled, unnotarized. Later on, respondents offered
to pay respondent the amount of P150, 000.00 to which the latter refused and demanded that she be
paid the amount of P250,000.00. Unable to meet the demand, respondents desisted and requested
that they be shown the land title which is conveyed to petitioners, but was refused. Upon verification
with the Registry of Deeds, they were informed that the title to the mortgaged property had already
been registered in the name of respondents who have been paying the capital gains and required real
property tax.

After said discoveries, petitioners filed an Affidavit of Adverse Claim claiming that said Absolute Deed
of Sale is void. The complaint alleged that petitioners, through obvious bad faith, maliciously typed,
unilaterally filled up, and caused to be notarized the Deed of Sale earlier signed by respondents, and
used this spurious deed of sale as the vehicle for her fraudulent transfer unto herself the parcel of land.

ISSUE:
Is there a valid Absolute Deed of Sale?

RULING:
No. The Deed of Sale is void and inexistent.

Article 2088 of the Civil Code prohibits the creditor from appropriating the things given by way of
pledge or mortgage, or from disposing of them. Any stipulation to the contrary is null and void. The
elements for pactum commissorium to exist are as follows, to wit: (a) that there should be a pledge or
mortgage wherein property is pledged or mortgaged by way of security for the payment of the principal
obligation; and (b) that there should be a stipulation for an automatic appropriation by the creditor of
the thing pledged or mortgaged in the event of non-payment of the principal obligation within the
stipulated period.

The first element was present considering that the property of the respondents was mortgaged by the
latter in favor of the petitioners as security for the farmer's indebtedness. As to the second, the
authorization for petitioners to appropriate the property subject of the mortgage upon respondent's
default was implied from their having signed the blank deed of sale simultaneously with her signing of

47
the real estate mortgage. The haste with which the transfer of property was made upon the default by
respondents on their obligation, and the eventual transfer of the property in a manner not in the form of
a valid dacion en pago ultimately confirmed the nature of the transaction as a pactum commissorium.

It was not a valid dacion en pago as theorized by the petitioners because the alienation of the property
did not extinguish the entire indebtedness of the respondents. For a valid dacion en pago to transpire,
however, the attendance of the following elements must be established, namely: (a) the existence of a
money obligation; (b) the alienation to the creditor of a property by the debtor with the consent of the
former; and (c) the satisfaction of the money obligation of the debtor. The debt of the respondents
subsisted despite the transfer of the property in favor of petitioners. Hence, not a valid dacion en pago.
In a sale, the contract is perfected at the moment when the seller obligates herself to deliver and to
transfer ownership of a thing or right to the buyer for a price certain, as to which the latter agrees. The
absence of the consideration from the respondent’s copy of the deed of sale was credible proof of the
lack of an essential requisite for the sale. In other words, the meeting of the minds of the parties so
vital in the perfection of the contract of sale did not transpire. And, even assuming that the
respondent’s leaving the consideration blank implied the authority of the petitioners to fill in that
essential detail in the deed of sale upon the respondent's default on the loan, the conclusion of the CA
that the deed of sale was a pactum commisorium still holds, for, as earlier mentioned, all the elements
of pactum commisorium were present.

48
 OBLIGATIONS
Extinguishment

DACION EN PAGO IS A MODE OF EXTINGUISHING AN EXISTING OBLIGATION AND

PARTAKES THE NATURE OF SALE AS THE CREDITOR IS REALLY BUYING THE THING OR
PROPERTY OF THE DEBTOR, THE PAYMENT FOR WHICH IS TO BE CHARGED AGAINST THE
DEBTOR’S DEBT

44. PHILIPPINE NATIONAL BANK v. TAN DEE

G.R. No. 182128, February 19, 2014
Reyes, J.

FACTS:
This is a Petition for Review under Rule 45 of the Rules of Court filed by Philippine National Bank, the
petitioner against Teresita Tan Dee, Antipolo Properties, Inc., (now Prime East Properties, Inc.) and
AFP-RSBS, Inc., the respondents, assailing the Decision and Resolution rendered by the CA, which
affirmed the Decision of the Office of the President (OP) in HLURB Case No. REM-A-030724-0186.

Respondent, Dee, bought from respondent Prime East Properties Inc. (PEPI) on an installment basis a
residential lot located in Binangonan, Rizal, with an area of 204 square meters. Subsequently, PEPI
assigned its rights over a 213,093–square meters property to respondent Armed Forces of the
Philippines–Retirement and Separation Benefits System, Inc. (AFP–RSBS), which included the
property purchased by Dee. Thereafter, PEPI obtained a P205,000,000.00 loan from petitioner
Philippine National Bank, secured by a mortgage over several properties, including Dee’s property.
The mortgage was cleared by the Housing and Land Use Regulatory Board (HLURB). After Dee’s full
payment of the purchase price, a deed of sale was executed by respondents PEPI and AFP–RSBS in
Dee’s favor. Consequently, Dee sought from the petitioner the delivery of the owner’s duplicate title
over the property, to no avail. Thus, she filed with the HLURB a complaint for specific performance to
compel delivery of TCT by the petitioner, PEPI and AFP–RSBS, among others.

The petitioner claims that it has a valid mortgage over Dee’s property, which was part of the property
mortgaged by PEPI to it to secure its loan obligation, and that Dee and PEPI are bound by such
mortgage. The petitioner also argues that it is not privy to the transactions between the subdivision
project buyers and PEPI, and has no obligation to perform any of their respective undertakings under
their contract.

Respondent AFP-RSBS, meanwhile, contends that it cannot be compelled to pay or settle the
obligation under the mortgage contract between PEPI and the petitioner as it is merely an investor in
the subdivision project and is not privy to the mortgage. Respondent PEPI, on the other hand, claims
that the title over the subject property is one of the properties due for release by the petitioner as it has
already been the subject of a Memorandum of Agreement and dacion en pago entered into between
them.

ISSUE:
Whether or not respondent PEPI’s loan obligation to the petitioner insofar as it covers the value of the
property purchased by Dee is already extinguished making PNB liable to Dee for the deliver the
owner’s duplicate title over the property.

RULING:
YES. PEPI’s loan obligation to the petitioner insofar as it covers the value of the property purchased by
Dee is already extinguished. The petitioner is bound by the contract and Dee may sought from the
petitioner the delivery of the owner’s duplicate title over the property.

Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the
debtor to the creditor as an accepted equivalent of the performance of the obligation. It is a mode of
extinguishing an existing obligation and partakes the nature of sale as the creditor is really buying the
thing or property of the debtor, the payment for which is to be charged against the debtor’s debt.
Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as

49
agreed upon by the parties or as may be proved, unless the parties by agreement express or implied,
or by their silence consider the thing as equivalent to the obligation, in which case the obligation is
totally extinguished.

PEPI’s modified Rehabilitation Plan (MOA), which included the settlement of the latter’s unpaid
obligations to its creditors by way of dacion of real properties as ordered by the RTC states that "titles
to the lots which have been fully paid shall be released to the purchasers within 90 days after the
dacion to the secured creditors has been completed." Consequently, the agreement stipulated that as
partial settlement of PEPI’s obligation with the petitioner, the former absolutely and irrevocably
conveys by way of "dacion en pago" the properties listed therein, which included the lot purchased by
Dee. There is nothing on record showing that the Memorandum of Agreement has been nullified or is
the subject of pending litigation, hence, it carries with it the presumption of validity. Consequently, the
execution of the dation in payment effectively extinguished respondent PEPI’s loan obligation to the
petitioner insofar as it covers the value of the property purchased by Dee. This negates the petitioner’s
claim that PEPI must first redeem the property before it can cancel or release the mortgage. As it now
stands, the petitioner already stepped into the shoes of PEPI and there is no more reason for the
petitioner to refuse the cancellation or release of the mortgage.

Despite the apparent validity of the mortgage between the petitioner and PEPI, the former is still bound
to respect the transactions between respondents PEPI and Dee. And after the extinguishment of the
said contract of mortgage between PEPI and the Petitioner, there is more reason to compel the
petitioner to deliver the owner’s duplicate title over the property to Dee.

50
 OBLIGATIONS
Extinguishment

AWARD OF ATTORNEY'S FEES MUST HAVE FACTUAL, LEGAL AND EQUITABLE BASIS

45. INTER-ASIA INVESTMENTS INDUSTRIES, INC. v. COURT OF APPEALS

G.R. No. 125778, June 10, 2003
Carpio Morales, J.

FACTS:
The present petition for review on certiorari assails the Court of Appeals Decision, which held that
petitioner is liable to pay a sum of money plus interest and attorney’s fees to the private respondent
because the January 24, 1980 letter signed by petitioner's president is valid and binding.

Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase Agreement, sold to Asia Industries, Inc.
(respondent) for and in consideration of the sum of P19,500,000 all its right, title and interest in and to
all the outstanding shares of stock of FARMACOR, INC. The Agreement was signed by Leonides P.
Gonzales and Jesus J. Vergara, presidents of petitioner and private respondent, respectively. The final
adjusted contract price amounted to P6,225,775. Private respondent having already paid petitioner
P12,000,000, it was entitled to a refund of P5,744,225.00. Petitioner thereafter proposed, by letter of
January 24, 1980, signed by its president, that private respondent's claim for refund be reduced to
P4,093,993; to which the Respondent agreed. Petitioner, however, welched on its promise.

Private respondent filed a case before the RTC for the recovery of the aforementioned deficit. The
RTC ruled in favor of the private respondent and likewise ordered payment of attorney’s fees. The
dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of plaintiff and against defendant (a) ordering the latter to
pay to the former the sum of P4,853,503 plus interest thereon at the legal rate from the filing of the
complaint until fully paid, the sum of P30,000.00 as attorney's fees and the costs of suit; and (b)
dismissing the counterclaim.

Petitioner alleged on appeal that the order of payment of attorney’s fees is bereft of factual, legal and
equitable justification.

ISSUE:
Is the award of attorney’s fees proper on this case?

RULING:
No.

The power of the court to award attorney's fees under Article 2208 of the Civil Code demands factual,
legal and equitable justification, without which the award is a conclusion without a premise, its basis
being improperly left to speculation and conjecture.

The SC held that it is an accepted doctrine that the award thereof as an item of damages is the
exception rather than the rule, and counsel's fees are not to be awarded every time a party wins a suit.
In all events, the court must explicitly state in the text of the decision, and not only in the decretal
portion thereof, the legal reason for the award of attorney's fees.

51
 OBLIGATIONS
Extinguishment

PAYMENT MUST BE MADE TO THE PERSON IN WHOSE FAVOR THE OBLIGATION IS

CONSTITUTED OR TO ANOTHER AUTHORIZED TO RECEIVE IT IN HIS NAME

46. HARRY E. KEELER ELECTRIC CO., INC. v. DOMINGO RODRIGUEZ

G.R. No. 19001. November 11, 1922
Johns, J

FACTS:
This is an appeal from the lower court’s decision which rendered the judgment for defendant
Rodriguez. The lower court held that the payment to Montelibano discharged the debt of Rodriguez
following the fact that plaintiff corporation held out Montelibano as an agent authorized to collect
payment.

Montelibano approached Keeler at its Manila office claiming that he was from Iloilo and that that he
could find purchaser for the "Matthews" plant. Keeler told Montelibano that for any plant that he could
sell or any customer that he could find he would be paid a commission of 10% for his services, if the
sale was consummated. Montelibano was able to secure Rodriguez as a customer and through his
efforts, sold the plant to him. Thereafter, without the knowledge of Keeler, Rodriguez paid the
purchase price to Montelibano.

Keeler filed an action against the defendant, alleging that it sold and delivered to the defendant the
electric plant at the agreed price for which no part of which has been paid. For answer, Rodriguez
alleged that the plaintiff sold and delivered to the defendant a certain electric plant and that the
defendant paid the plaintiff the value of said electric plant.

During the trial, Harry E. Keeler, president of Keeler Electric, provided in his testimony that he sent
Juan Cenar, employee/ electrician, to install the plant and that Keeler issued a Statement of Account
(SoA) to Rodriguez including expenses of the mechanic. He further stated that Montelibano had no
authority to receive money, and his services were limited to the finding of a purchaser of the plant.
After Cenar returned to Manila, plaintiff wrote a letter to the defendant requesting the payment.
Rodriguez responded that he paid to Montelibano because the latter assured him that he was duly
authorized to collect the payment. He introduced in evidence a receipt which Montelibano signed.
Lower court ruled in favor of the defendant and thus, the appeal filed before this court.

ISSUE:
Was the payment made by the Respondent to Montelibano proper to extinguish his obligation to pay?

RULING:
No, the payment made did not extinguish the obligation to pay.

Article 1162 of the Civil Code provides: "Payment must be made to the person in whose favor the
obligation is constituted, or to another authorized to receive to in his name."

There is nothing of the face of this receipt to show that Montelibano was the agent of, or that he was
acting for, the plaintiff. It is his own personal receipt and his own personal signature. Outside of the fact
that Montelibano received the money and signed this receipt, there is no evidence that he had any
authority, real or apparent, to receive or receipt for the money. Neither is there any evidence that
Keeler ever delivered the statement to Montelibano, or authorized anyone to deliver it to him. It is very
apparent that the statement of account in question is the one which was delivered by the plaintiff to
Cenar, and is the one which Cenar delivered to the defendant at the request of the defendant.

The SC held that the testimony is conclusive that the plaintiff never authorized Montelibano to receive
or receipt for money in its behalf, and that the defendant had no right to assume by any act or deed of
the plaintiff that Montelibano was authorized to receive the money, and that the defendant made the

52
payment at his own risk and on the sole representations of Montelibano that he was authorized to
receipt for the money.
OBLIGATIONS
Extinguishment

PERSON AUTHORIZED TO RECEIVE PAYMENT DOES NOT ONLY MEAN A PERSON

AUTHORIZED BY SAME CREDITOR BUT ALSO A PERSON AUTHORIZED BY LAW

47. HAW PIA v. CHINA BANKING CORP.

80 Phil. 604, April 9, 1948
Feria, J.

FACTS:
In an appeal, plaintiff-appellant Haw Pia (Pia) challenges the decision of CFI, which ruled in favor of
defendant-appellee China Banking Corp. (China Bank) stating that Pia’s obligation was not
extinguished by payment made to Bank of Taiwan.

Pia filed an action in the CFI against China Bank to compel the latter to execute a deed of cancellation
of the mortgage on the property described in the complaint, and to deliver to the said plaintiff TCT, with
the mortgage annotated therein already cancelled. Pia asserts that her indebtedness to China Bank
has been completely paid to China Bank through Bank of Taiwan that was appointed by the Japanese
Military authorities as liquidator of China Bank.

China Bank sets up a counterclaim in the answer demanding Pia for the payment of the debt. It stated
that there was no evidence presented to show that China Bank had authorized Bank of Taiwan to
accept the payment of Pia's debt, and that said Bank of Taiwan, as an agency of the Japanese
invading army, was not authorized under the international law to liquidate the business of China Bank.

CFI ruled that the payment did not extinguish the indebtedness of Pia to China Bank under article 1162
(now Art. 1240) of the Civil Code. The Pia appealed from the decision to this Court.

ISSUE:
Has the payment of Pia to the Bank of Taiwan extinguished her obligation to China Bank?

RULING:
Yes, payment by Pia to Bank of Taiwan has extinguished her obligation to China Bank.

The payment in this case was made to an entity, Bank of Taiwan, authorized to receive the same in
the name of the bank creditor under Art. 1162 (now Art. 1240) of the Civil Code. It is evident that the
phrase “a person authorized to receive it,” as used therein, means not only a person authorized by the
same creditor, but also a person authorized by law to do so, such as guardian, executor or
administrator of estate of a deceased, and assignee or liquidator of a partnership or corporation, as
well as any other who may be authorized to do so by law.

The Japanese Military has the power to sequestrate the assets of China Bank, to liquidate it by
collecting the debts due to said bank from its debtors, pay its creditors, and to appoint the Bank of
Taiwan as liquidator with the authority to make the collection.

Hence, the payment by Pia to Bank of Taiwan of the debt to China Bank has extinguished her
obligation to the latter.

53
 OBLIGATIONS
Extinguishment

EMERGENCY NOTES WERE THEN VALID AND LEGAL TENDER

48. PHILIPPINE NATIONAL BANK v. TEVES

G.R. Nos. L-8706 & L-8813, December 14, 1951
Concepcion, J.

FACTS:
This is an appeal from the decision of the CFI of Negros Oriental which ordered defendant-appelle
Julian T. Teves (Teves) to pay PNB the loan of P3,130. The loan was secured by two promissory
notes – one, for P2,235 dated April 23, 1942 and the other, for P895 dated May 26,1942, issued by
Teves. Teves alleges that the consideration for his aforementioned promissory notes was paid to him
by the PNB in emergency currency, which the people in the mountains, where he and his family
stayed, for some time, refused to receive, and that part of said notes were destroyed, when his house
was consumed by fire. Teves asserts that the sum of money delivered to him by the PNB consisted of
valuless notes, which were not legal tender.

ISSUE:
Were the emergency notes received by Teves from PNB valid and legal tender?

RULING:
Yes, said emergency notes were then valid and legal tender.

Emergency notes refer to the currency which the officers of the Commonwealth in unoccupied areas
were authorized to issue by President Quezon before he left the Philippines in 1942. Said emergency
notes were then valid and legal tender. Otherwise, the same would not have been accepted by the
defendant.

Obviously, the alleged refusal of some people to receive said emergency notes from the defendant
and the alleged destruction thereof, while in his possession, by fire, affects neither the validity of the
promissory notes in question, nor plaintiff's right to demand of payment thereof.

Hence, Teves must pay PNB the amount of the loan as the emergency notes received by him were
then valid and legal tender.

54
 OBLIGATIONS
Extinguishment

THE AGREEMENT DID NOT REFER TO THE CLAIM IN THE BODY OF THE COMPLAINT ONLY
BUT AS "EMBODIED" IN THE COMPLAINT.

49. ZAGALA v. JIMENEZ

GR No. 33050, July 23, 1987
Gancayco, J.

FACTS:
This is a petition for certiorari and mandamus directly elevated by the petitioners to the Supreme Court
from the RTC. The petitioners filed with the trial court a complaint for the collection of sums of money
allegedly due them from the private respondent Guballa. One of the causes of action contained in the
complaint concerns the collection of a certain amount of money which the private respondent allegedly
owes the petitioners as collection agents of Moller & Rothe, Inc. Despite repeated demands made on
the defendant by the plaintiffs and the correspondent Banks, the said defendant has failed and
refused, to pay his said accounts with the Moller & Rothe, Inc. to the full satisfaction of the latter. The
said defendant has paid only the meagre amount of 1,004.66USD leaving an unpaid balance of
9,404.14USD due and unpaid to Moller & Rothe, Inc.

Moller & Rothe, Inc., has assigned to plaintiff Pablo V. Zagala the credit above-described and it has
accordingly executed a deed of assignment in favor of the said plaintiff. Without entering into any trial
on the merits and after the case had been set for pre-trial, the petitioners and the private
respondent entered into a Compromise Agreement. Based on the said Compromise Agreement,
the defendant is willing to pay the claims of the plaintiffs as embodied in the complaint (which stated an
amount equivalent to peso). The Agreement was not fully complied with by the private respondent,
prompting the petitioners to file with the trial court a motion for the fixing of the peso value of the
judgment in dollars and for the issuance of a writ of execution to enforce the same. The plaintiffs pray
that the Court should fix the peso value of the judgment in the first cause of action in the complaint
(which is in dollars) at the present rate of P6.55 to the dollar, as per certification of the Far East Bank
and trust Company. However, this was denied for the reason that “to grant it would be tantamount to
amending, or varying the terms of the Compromise judgment which has become final and executory.”

ISSUE:
Whether or not the Court should fix the peso value of the judgment at the present rate of 6.55 or at the
rate which was stated in the original complaint.

RULING:
No, the Court should not fix the peso value of the judgment.

In this case, it is true that in the complaint, the petitioners stated the peso equivalent of the
9,404.14USD that they were asking for. However, in paragraph 9 thereof, the petitioners made plain
that the amount due and unpaid to Moller & Rothe, Inc., is 9,404.14USD. The deed of assignment also
precisely stated the amount in U.S. dollars, with no equivalent amount in any other form of currency.
From the foregoing, it is clear that in filing the complaint, the petitioners intended to recover from the
private respondent the amount of 9,404.14USD. The Court agrees with the petitioners' explanation that
the only reason why they stated the peso equivalent of their claim was to facilitate and simplify the
computation of the judicial costs. Moreover, this Supreme Court cannot sustain the narrow
interpretation of the Compromise Agreement by the court a quo. The agreement did not refer to the
claim in the body of the complaint only but as "embodied" in the complaint. The complaint should,
therefore, be read in its totality including the prayer. And therein what is sought by the petitioners is the
recovery of the claim in U.S. dollars or its equivalent amount in peso based on the officially prevailing
exchange rate at the time of payment.

55
 OBLIGATIONS
Extinguishment

THE DELIVERY OF PROMISSORY NOTES PAYABLE TO ORDER, OR BILLS OF EXCHANGE OR

OTHER MERCANTILE DOCUMENTS SHALL PRODUCE THE EFFECT OF PAYMENT ONLY
WHEN THEY HAVE BEEN CASHED, OR WHEN THROUGH THE FAULT OF THE CREDITOR
THEY HAVE BEEN IMPAIRED

50. GOLEZ v. CAMARA

GR No. L-9160, April 30, 1957
Concepcion, J.

FACTS:

Plaintiff Adriano Golez deposited the sum of P25,386.33 (P386.33 in cash and P25,000 in P.N.B.
Manager’s check No. 444021) with said court and prayed that defendant Carmelo S. Camara be
ordered to make the conveyance directed in our aforementioned decision.

The Respondent contended that Petioner Golez’ payment is not effective. Camara relies on the
provision which states that "The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.

ISSUE:
Was the judicial consignation through check ineffective because it was not made in cash?

RULING:

No, the judicial consignation was not ineffective.

Pursuant to Article 1249, paragraph 2, of the Civil Code of the Philippines, the delivery of bills of
exchange — and hence, of checks, shall produce the effect of payment . . . when they have been
cashed.

In the case at bar, the manager’s check deposited by plaintiff had, in fact, been cashed, for, upon its
receipt, the clerk of court indorsed the check to the Provincial Treasurer of Negros Occidental, who
deposited it with the Philippine National Bank, and the latter honored the check and placed the amount
thereof to the credit of the Provincial Treasurer.

The effect of these facts, in contemplation of law, was the same as if the aforementioned amount had
been deposited, in cash, with the clerk of court, for said sum thereby became available to him in cash.

56
 OBLIGATIONS
Extinguishment

CREDITOR IS ACCOUNTABLE FOR THE IMPAIRMENT OF THE BILL OF EXCHANGE FOR

FAILURE TO PROTEST THE BILL FOR NONPAYMENT.

51. FRANCISCO QUIROS v. CARLOS TAN-GUINLAY

G.R. No. L-1904, March 3, 1906
Willard, J.

FACTS:
Plaintiff Quiros filed an action to recover the sum of ₱10,217, the value of goods sold to the defendant
Tan-Guilay, and the sum of ₱64,984, as damages for failure to pay for the goods at the time agreed
upon. The goods referred to in the complaint were sold to the defendant in two parcels. The value of
the first lot was ₱2,235 pesos. For the purpose of paying this sum, the defendant delivered a bill of
exchange (BOE) for ₱2,700, purporting to be drawn by Juan Vy-Teco to the order of Chua-Sengco on
Lucio Icaza. The plaintiff took the bill of exchange and gave the defendant the change for the
difference of the BOE and value of the first lot, in cash. At the maturity of the acceptance, Icaza
refused to pay the bill of exchange on the ground that his signature thereto was a forgery. The plaintiff
neglected to have the bill of exchange protested for this non-payment. The defendant claims that the
court committed an error in ordering judgment for the full value of the goods sold, inasmuch as the
plaintiff, by reason of his failure to protest the bill of exchange, must suffer the loss occasioned by its
nonpayment.

ISSUE:
Should the plaintiff be held to account for the value of the bill of exchange for failure to protest?

RULING:
Yes. This contention, we thin, should be sustained.

Article 1170 of the Civil Code provides that payments of debts of money shall be made in the species
stipulated and, should it not be possible to deliver the species, then in legal silver or gold coin current
in Spain. The delivery of promissory notes to order or drafts of other commercial paper shall only
produce the effects of payment when collected or when, by the fault of the creditor, their value has
been affected. In the meantime the action arising from the original obligation shall be suspended.

The bill of exchange in this case comes within the second class, and by the terms of the second
paragraph of Article 1170 it must be considered as a payment of the debt, inasmuch as its value has
been affected by the fault of the creditor (the plaintiff) in failing to have the bill of exchange protested
for nonpayment.

Therefore, the value of the BOE that was not protested for non-payment by plaintiff should be
deducted from the total obligation of the defendant Tan-Guinlay.

57
 OBLIGATIONS
Extinguishment

CERTIFIED CASHIER CHECK: AN EXCEPTION TO THE RULE THAT PAYMENT OF DEBT SHALL
BE IN THE CURRENCY STIPULATED

52. NEW PACIFIC TIMBER & SUPPLY COMPANY, INC. v. HON. ALBERTO SENERIS
G.R. No. L-41764 dated December 19, 1980
Concepcion Jr., J.

FACTS:
Private Respondent Ricardo Tong filed a complaint for collection of a sum of money against petitioner
New Pacific. A compromise judgment was rendered in accordance with an amicable settlement
entered into by the parties. Petitioner undertakes to pay P54,500 at 6% interest per annum within 5
months and in case of failure to pay, a writ of execution may be issued by the Court for the satisfaction
of the obligation. Thereafter, petitioner failed to pay the obligation and respondent Judge Seneris,
upon motion of the private respondent, issued an order for the issuance of a writ of execution on
December 21, 1974. The Sheriff levied several personal properties of petitioner. However, before the
auction sale, petitioner deposited the sum of P63,130 for the payment of the judgment obligation in the
form of cashier’s check and cash. Private respondent through counsel, refused to accept the check as
well as the cash deposit.

Petitioner now questions said order by way of the present petition that there was already a full
satisfaction of the judgment before the auction sale was conducted with the deposit made to the Ex-
Officio Sheriff in the amount of P63,000 consisting of P50,000.00 in Cashier's Check and P13,130 in
cash.

ISSUE:
Can private respondent Tong refuse acceptance of the payment of the judgment obligation in the form
of cashier’s check and cash?

RULING:
No, the payment of the judgment obligation in the form of cashier’s check cannot be refused.

Section 63 of the Central Bank Act (CBA) provides that checks representing deposit money do not
have legal tender power and their acceptance in payment of debts, both public and private, is at the
option of the creditor, Provided, however, that a check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to
the amount credited to his account. Further, Article 1249 of the New Civil Code provides that the
payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.

It is to be emphasized in this connection that the check deposited by the petitioner in the amount of
P50,000 is not an ordinary check but a Cashier's Check of the Equitable Banking Corporation, a bank
of good standing and reputation. It is a well-known and accepted practice in the business sector that a
Cashier's Check is deemed as cash.

Hence, the exception to the rule enunciated under Section 63 of the CBA shall apply in this case.
Considering that the whole amount deposited by the petitioner consisting of Cashier's Check of
P50,000 and P13,130 in cash covers the judgment obligation of P63,000. The Court saw no valid
reason for the private respondent to have refused acceptance of the payment of the obligation in his
favor.

58
 OBLIGATIONS
Extinguishment

REFORMATION OF A CONTRACT PRECLUDES FROM INSERTING STIPULATIONS THAT ARE

NOT EXTANT IN THE CONTRACT ITSELF LEST THE VERY AGREEMENT EMBODIED IN THE
INSTRUMENT IS ALTERED

53. HUIBONHOA VS. COURT OF APPEALS

G.R. Nos. 95897 & 102604, December 14, 1999
Purisima, J.

FACTS:
These two petitions for review on certiorari under Rule 45 of the Rules of Court seek the reversal of the
Decisions of the CA which affirmed, respectively, the decision of the RTC of Makati City, dismissing
the complaint for reformation of contract, and the decision of the RTC of Manila, reversing that of the
MeTC of Manila, which favorably acted in the ejectment case. Both petitions involve the same parties.

Huibonhoa (lessee) entered into contract of lease with siblings Rufina Gojocco Lim, Severino Gojocco
and Loreta Gojocco Chua (designated as ‘lessor’) for the lease of 3 adjacent commercial lots. The
lease was for a period of 15 years commencing on July 1, 1983. Huibonhoa was to construct a 4-
storey building within 8 months from the date of the execution of the contract of lease which she, as
lessee could let/sublease its spaces to interested parties. The contract of lease provided that the
lessee’s obligation to pay the rental shall start only upon completion of the building, but if it is not
completed within eight (8) months from the date of the execution of the contract, the monthly rental
shall already accrue and shall be paid by lessee to lessor. In other words, during the period of
construction, no monthly rental shall be collected from lessee. Huibonhoa failed to complete the
construction within the stipulated 8-month period. Under the contract, Huibonhoa was supposed to
start paying rental in March 1984 but she failed to do so. Consequently, the Gojoccos made several
verbal demands upon Huibonhoa for the payment of rental arrears and, for her to vacate the leased
premises. On December 19, 1984, lessors sent lessee a final letter of demand to pay the rental
arrearages and to vacate the leased premises. The former also notified the latter of their intention to
terminate the contract of lease.

Huibonhoa brought an action for reformation of contract before the RTC of Makati alleging that their
true intention as to when the monthly rental would accrue was not expressed in the contract due to
mistake or accident, and that their true intention was that during the entire period of actual construction
of the building, no rents would accrue. Thus, according to Huibonhoa, the first rent would have been
due only in October 1984 and not March 1984 (8 months after July 1, 1983). Moreover, she alleged
that the assassination of former Senator Benigno Aquino, Jr., an unforeseen event, affected the
country’s political and economic stability, and as a result, the prices of commodities like construction
materials increased so that the building worth 6 Million pesos escalated to 11 to 12 million pesos.
However, she averred that by reason of mistake or accident, the lease contract failed to provide for a
clause that in case some unforeseen event dramatically increase the cost of construction, the monthly
rental would be reduced and the term of the lease would be extended for such duration as may be fair
and equitable to both the lessors and the lessee. The Gojoccos in turn, assert that the contract need
no reformation because it already expressed the true intention of the parties which was to obligate
Huibonhoa to pay rents immediately upon the expiration of the maximum period of eight (8) months
from the execution of the lease contract.

Likewise, the Gojoccos filed a civil case against Huibonhoa for cancellation of lease, ejectment and
collection with the MeTC of Manila for her failure to pay the rentals despite demand. However, Rufina
Gojocco Lim thereafter entered into a new agreement with Huibonhoa to put an end to the cancellation
of lease case. The agreement expressly provided that no rents would be collected unless and until the
construction work was already completed or that during the construction, no monthly rental should be
collected. It also provided for a fortuitous event clause. A similar contract was thereafter entered
between Huibonhoa and Severino Gojocco. Huibonhoa interposed the defense of amicable settlement
in the ejectment case.

59
ISSUES:
1. May the contract be reformed?
2. Assuming that reformation is not feasible, may the Courts construe the contract according to the
Huibonhoa’s stance that she should only begin paying monthly rent in October 1984 and not in March
1984?

RULING:

1. No.

Reformation is that remedy in equity by means of which a written instrument is made or construed so
as to express or conform to the real intention of the parties. An action for reformation of instrument
under this Article 1359 of the Civil Code may prosper only upon the concurrence of the following
requisites: (1) there must have been a meeting of the minds of the parties to the contact; (2) the
instrument does not express the true intention of the parties; and (3) the failure of the instrument to
express the true intention of the parties is due to mistake, fraud, inequitable conduct or accident.

Paragraph 5 of the lease contract states that the LESSEEs obligation to pay the rental shall start only
upon the completion of the building, but if it is not completed within eight (8) months from date hereof
as provided for in par. 5 (sic) above, the monthly rental shall already accrue and shall be paid by
LESSEE to LESSOR. That qualification applies even though the next sentence states that (I)n other
words, during the period of construction, no monthly rentals shall be collected from LESSEE.
Otherwise, there was no reason for the insertion of that qualification on the period of construction of
the building the termination of which would signal the accrual of the monthly rentals. Non-inclusion of
that qualification would also give the lessee the unbridled discretion as to the period of construction of
the building to the detriment of the lessors right to exercise ownership thereover upon the expiration of
the 15-year lease period.

In actions for reformation of contact, the onus probandi is upon the party who insists that the contract
should be reformed. Huibonhoa having failed to discharge that burden of proving that the true intention
of the parties has not been accurately expressed in the lease contract sought to be reformed, the trial
court correctly held that no clear and convincing proof warrants the reformation thereof.

Furthermore, Huibonhoa honestly admitted that there was an oversight in the drafting of the contract
by her own counsel. By such admission, oversight may not be attributed to all the parties to the
contract and therefore, it cannot be considered a valid reason for the reformation of the same contract.
In fact, because it was Huibonhoas counsel himself who drafted the contract, any obscurity therein
should be construed against her.

2. No.

Such contention betrays Huibonhoas confusion on the distinction between interpretation and
reformation of contracts.

Interpretation is the act of making intelligible what was before not understood, ambiguous, or not
obvious. It is a method by which the meaning of language is ascertained. The interpretation of a
contract is the determination of the meaning attached to the words written or spoken which make the
contract. On the other hand, reformation is that remedy in equity by means of which a written
instrument is made or construed so as to express or conform to the real intention of the parties. In
granting reformation, therefore, equity is not really making a new contract for the parties, but is
confirming and perpetuating the real contract between the parties which, under the technical rules of
law, could not be enforced but for such reformation. As aptly observed by the Code Commission, the
rationale of the doctrine is that it would be unjust and inequitable to allow the enforcement of a written
instrument which does not reflect or disclose the real meeting of the minds of the parties.

By bringing an action for the reformation of subject lease contract, Huibonhoa chose to reform the
instrument and not the contract itself. She is thus precluded from inserting stipulations that are not
extant in the lease contract itself lest the very agreement embodied in the instrument is altered.

60
 OBLIGATIONS
Extinguishment

ARTICLE 1250 OF THE NEW CIVIL CODE APPLIES ONLY TO CASES WHERE A CONTRACT OR
AGREEMENT IS INVOLVED

54. COMMISSIONER OF PUBLIC HIGHWAYS v. BURGOS

G.R. No. L-36706 March 31, 1980
De Castro, J.

FACTS:
This is a petition for review by certiorari, filed by the Solicitor General as counsel of the petitioner,
Republic of the Philippines, against the landowner, Victoria Amigable, as private respondent.

Amigable is the owner of parcel of land situated in Cebu City. Sometime in 1924, the Government took
this land for road-right-of-way purpose. The land had since become streets known as Mango Ave. and
Gorordo Ave. On February 6, 1959, Amigable filed in the CFI of Cebu a complaint against the
Government for non-payment of just compensation. Eventually, the case reached the Supreme Court
(SC) where a decision in favor of respondent was made, directing that to determine just compensation
for the land, the basis should be the price or value thereof at the time of the taking. In view of such
decision, the CFI rendered a decision directing the Republic to Amigable the sum of the value of the
property taken applying Art. 1250 of the Civil Code, plus interest at 6% on the principal amount.

The Solicitor General now contends that in applying Art. 1250, the CFI raised the amount of the value
of the peso to the dollar at the time of hearing. In so doing, it violated the order of SC in its decision to
make as basis of the determination of just compensation the price or value of the land at the time of
the taking.

ISSUE:
Is the provision of Article 1250 of the New Civil Code applicable in determining the amount of
compensation to be paid to respondent Victoria Amigable for the property taken?

RULING:
No, Art. 1250 is not applicable.

It is clear that the foregoing provision applies only to cases where a contract or agreement is involved.
It does not apply where the obligation to pay arises from law, independent of contract. The taking of
private property by the Government in the exercise of its power of eminent domain does not give rise
to a contractual obligation.

Moreover, it is only when there is an "agreement to the contrary" that the extraordinary inflation in Art.
1250 will make the value of the currency at the time of payment, not at the time of the establishment of
the obligation, the basis for payment. In other words, an agreement is needed for the effects of an
extraordinary inflation to be taken into account to alter the value of the currency at the time of the
establishment of the obligation which, as a rule, is always the determinative element, to be varied by
agreement that would find reason only in the supervention of extraordinary inflation or deflation.
Nevertheless, there can be no "agreement to the contrary" to speak of because the obligation of the
Government sought to be enforced in the present action does not originate from contract, but from law
which, generally is not subject to the will of the parties.

61
 OBLIGATIONS
Extinguishment

ARTICLE 1250 NOT APPLICABLE TO OBLIGATIONS NOT ARISING FROM CONTRACTS

55. VELASCO v. MANILA ELECTRIC CO.

G.R. No.L-18390, December 20, 1971
Reyes, JBL, J.

FACTS:
This is a resolution to Velasco’s motion for reconsideration with regard the award of damages
rendered by the court in his favor.

Velasco filed a case for abatement of a nuisance against Meralco for the sound its substation was
making which can be heard from Velasco’s home which is 10-20 meters away. The court, in its August
6, 1971 decision, awarded the following in favor of Velasco as to the damages: Loss of professional
earnings P12,600, Damage to life expectancy P180,000, Moral damages P100,000, Loss due to
frustration of sale of house P125,000, Exemplary damages P25,000 and Attorneys' fees P45,000. He
contends that the said noise caused him anxiety neurosis, which, in turn, predisposed him to, or is
concomitant with, the other ailments which he was suffering at the time of the trial, namely,
pyelonephritis, ureteritis and others; that these resulted in the loss of his professional income and
reduced his life expectancy.

Velasco in his motion for reconsideration posits that the court incorrectly assessed the damages and
reduced the amount. He argues that the damages awarded to him are inadequate considering the
present high cost of living and calls the attention to Article 1250 involving extraordinary inflation or
deflation.

ISSUE:
Whether Article 1250 applies to obligations not arising from contracts.

RULING:
No, Article 1250 does not apply to obligations not arising from contracts.

It can be seen from the employment of the words "extraordinary inflation or deflation of the currency
stipulated" that the legal rule envisages contractual obligations where a specific currency is selected
by the parties as the medium of payment; hence it is inapplicable to obligations arising from tort and
not from contract, as in the case at bar, besides there being no showing that the factual assumption of
the article has come into existence.

As remarked in the main decision, there is no adequate proof of loss, since there is no evidence of the
depreciation in the market value of the house in question caused by the acts of defendant Meralco The
house, after all, has remained with appellant and that properties have increased in value by 200%
since then.

62
 OBLIGATIONS
Extinguishment

MATERIAL ALTERATION OF THE PRINCIPAL CONTRACT, EFFECTED BY THE CREDITOR AND

PRINCIPAL DEBTOR WITHOUT THE KNOWLEDGE AND CONSENT OF THE SURETY,
COMPLETELY DISCHARGES THE SURETY FROM ALL LIABILITY ON THE CONTRACT OF
SURETYSHIP

56. PNB v. VERAGAUTH

G.R. No. L-26833, April 1, 1927
Villamor, J.

FACTS:
Appealed case. PNB seeks to recover from defendants the amount of Php 40,000 and Php 30,000
plus interest, by virtue of a credit which was extended to Union de Agricultores de Negros y Panay,
Inc. secured by the defendants by means of a bond.

Defendants guaranteed the payment of a credit in current account not to exceed of P40,000 at 8 per
cent per annum granted by plaintiff PNB to La Union de Agricultores de Negros y Panay, Inc. An
increase of Php 30,000 credit was further granted, however, the defendants did not sign a bond for the
additional credit of P30,000 obtained by the said Union de Agricultores.

The defendants deny being indebted to the plaintiff in the sum claimed, and as special defenses allege
that the obligation of P40,000 has already been extinguished by the payments made by the "La Union
de Agricultores de Negros y Panay, Inc.," and that, not having subscribed to the second bond for
P30,000, they cannot be held liable for said obligation.

ISSUE:
Are the defendants liable to pay for the additional credit granted to the principal debtor?

RULING:
NO, the defendants are liable for the additional credit granted to the principal debtor.

Article 1827 of the Civil Code provides: "Guaranty shall not be presumed; it must be express and
cannot be extended beyond its specified limits." The defendants guaranteed the payment of a credit in
current account not to exceed of P40,000 at 8 per cent per annum granted by plaintiff to La Union de
Agricultores de Negros y Panay, Inc. It further appears that defendants did not sign a bond for the
additional credit of P30,000 obtained by the said Union de Agricultores.

The increase in the credit of P40,000 secured by the defendants by an additional P30,000 without their
consent, constitutes a material change in the principal contract. A material alteration of the principal
contract, effected by the creditor and principal debtor without the knowledge and consent of the surety,
completely discharges the surety from all liability on the contract of suretyship. It is fundamental in the
law of suretyship that any agreement between the creditor and the principal debtor which essentially
varies the terms of the principal contract, without the consent of the surety, will release the surety from
liability.

Hence, there being material alteration, the defendants are released from its liability as a surety.

63
 OBLIGATIONS
Extinguishment

THE PAYMENTS MADE BY THE DEBTOR IN THE ABSENCE OF ANY AGREEMENT TO THE
CONTRARY SHOULD BE FIRST APPLIED TO THE MOST BURDENSOME OF THE MATURED
DEBTS

57. MENZI & CO. v. QUING CHUAN

69 PHIL 46, October 26, 1939
Concepcion, J.

FACTS:
The question to be determined in this appeal has to do with the extent and limit, of the liability of a
surety

King Meng purchased merchandise on credit from the plaintiff-appellee Menzi & Co., Inc. The plaintiff
corporation required him to give a bond for P10,000. Quing Tong Co gave the bond and obligated
himself to pay in the manner set out in the invoices, with interest at 12 per cent, the value of the
merchandise from the date of maturity.

King Meng purchased from the plaintiff on different dates merchandise and goods totalling P32,453.70.
Adding to this sum the preexisting debt of P3,168.80, gives a total of P35,622.30. King Meng then
made payments amounting to P35,264.60. The plaintiff corporation applied the payment to the amount
of the successive purchases made by King Meng. This resulted in a balance in favor of the plaintiff in
the sum of P358, payment of which is claimed, with interest and attorney’s fees, from the intestate of
the surety Quing Tong Co. The trial court gave judgment for the plaintiff corporation, but on appeal to
the Court of Appeals, the latter reversed the judgment of the trial court and absolved the administrator
of the intestate of Quing Tong Co from the complaint.

ISSUE:
Was the payment made by King Meng properly applied?

RULING:
NO, the payment was not properly applied.

The payment or payments made by the debtor, in the absence of any agreement to the contrary,
should first be applied, under the provisions of article 1174 of the Civil Code, to the most burdensome
of the matured debts. The debt of P32,453.70 was more burdensome than the old indebtedness of
P3,168.80 because, unlike the latter, it earned interest at 12 per cent.

Moreover, according to the decision of the Court of Appeals, the period fixed for the payment of the
invoices is one week, after which they become due and payable. Accordingly, the various payments
made by King Meng should have been applied first to the amount of the goods taken one week earlier.

From this it follows that the amount claimed by the plaintiff is the balance of the former indebtedness of
P3,168.80 from which the surety is not liable because the bond given by him cannot be extended to
debts incurred before the execution thereof.

64
 OBLIGATIONS
Extinguishment

LACK OF OBJECTION AGAINST APPLICATION OF PAYMENT IS EQUIVALENT TO AN

AGREEMENT AND HAS THE FORCE AND EFFICACY OF A CONTRACT

58. SANZ v. LAVIN

G.R. No. L-2726, June 1, 1906
Arellano, C.J.

FACTS:
The plaintif-appellant Juan Sanz filed a complaint against the defendants-appellees Vicente Lavin and
Brothers before the trial court praying for a judgment for the sum of 33,768.50 pesos, Mexican
currency, but he said in his brief that he made a mistake, hence, the amount demanded was reduced
to 18,076.55.

In the complaint, no statement was made of any other basis for the indebtedness than the notarial
instrument of mortgaged deed dated March 31, 1885, by which Paulino Lavin, the ancestor,
acknowledges the indebtedness, under whom the plaintiff claims the sum of 18,000 pesos which Lavin
undertook to pay at the rate of 2,000 pesos per annum, commencing from that date. However, the
appellant contended that, in addition to this source of indebtedness, which was referred to as "the old
account" there is another, arising from the accounts-current which subsequent to March 31, 1885,
were continued between the plaintiff and Lavin, this claim being designated as the "new account”.

The trial court rendered its decision solely with respect to the indebtedness of the 18,000 pesos
secured by a mortgage of real property, and determined whether the amount has been paid. The trial
court decided that it had been more than paid, and, therefore, dismissed plaintiff's complaint.

ISSUE:
Whether the 18,000 pesos mentioned in that instrument had or had not been paid.

RULING:
Yes, the 18,000 pesos had been paid. Payments are not to be supposed or inferred but must be
proved as facts. With respect to the annual payment due in 1887, the court credits the application of
payment made by the defendant in his letter of October 4 of that year, but this correction is improper,
for against this application of payment no objection was made by Paulino Lavin, and such
acquiescence is equivalent to an agreement and has the force and efficacy of a contract. (Art. 1172 of
the Civil Code.) The payments shown to have been made during 1887-1889 make a total of 9,082.54
pesos, so that at the end of that year the indebtedness was reduced to 8,917.46 pesos. The appellant
in his brief said that since the 31st of December, 1889, no more than $601 had been paid on account
of the mortgage debt. This sum should be deducted from the amount of 8,917.46 pesos above referred
to, as also should that of 2,734.44 pesos accepted by the plaintiff. As a rule, as among various
demandable debts, it is to be presumed that the payment is to be applied to the one which is most
onerous, according to article 1174 of the Civil Code. Also, it appears that one of the mortgage
properties was sold by agreement with the plaintiff at public auction by the family counsel of the Lavin
minors, for the sum of 5,500 pesos to Miguel Ortis, who, sold it for the same amount to Servillo Robles,
representative of Juan Sanz, therefore, the amount obtained from this sale, which the plaintiffs accepts
as applied to the payment of the mortgage deed. The Court considered that the Lavins already paid a
total of 17, 920.98 (Paulino: 9,683.54 + minors of Lavin: 5,500 + Vicente Lavin: 2737.44) which
deducted from 18,000 pesos leaves a balance of only 79.02 pesos. The Court did not consider this
amount (79.02) as a debt to be paid by the defendants, for in the evidence presented by the plaintiff
himself, Court found a letter from Vicente Lavin that he already paid $300 to the aunt of the plaintiff
who received the same.

Therefore, the Court affirmed the judgment appealed from in so far as it absolves the defendants from
the complaint and order the cancellation of the mortgage and the inscription made in the Registry of
Property in consequence thereof

65
 OBLIGATIONS
Extinguishment

TENDER OF PAYMENT CANNOT BE PRESUMED BY A MERE INFERENCE FROM

SURROUNDING CIRCUMSTANCES

59. ROMAN CATHOLIC BISHOP OF MALOLOS, INC., v. INTERMEDIATE APPELLATE COURT,

and ROBES-FRANCISCO REALTY AND DEVELOPMENT CORPORATION
G.R. No. 72110., November 16, 1990
SARMIENTO, J.

FACTS:
This is a petition for review on certiorari which seeks the reversal and setting aside of the decision of
the Court of Appeals ordering the defendant-appellee Roman Catholic Bishop of Malolos, Inc. to
accept the balance of P124,000.00 being paid by plaintiff-appellant and thereafter to execute in favor
of Robes-Francisco Realty Corporation a registerable Deed of Absolute Sale.

Petitioner Roman Catholic Bishop of Malolos, Inc., as vendor and private respondent Robes-Francisco
Realty and Development Corporation, through its then president, Mr. Carlos F. Robes, as vendee,
executed a contract of sale over a parcel of land in the Province of Bulacan, issued and registered in
the name of the petitioner. It is stipulated that a downpayment of P23,930.00 and the balance of
P100,000.00 plus 12% interest per annum will be paid within 4 years from execution of the contract.
The contract likewise provides for cancellation, forfeiture of previous payments, and reconveyance of
the land in question in case the private respondent would fail to complete payment within the said
period.

After the expiration of the stipulated period for payment, the private respondent, wrote the petitioner a
formal request that the company be allowed to pay the balance in 3 equal installments of 6 months
each with the first installment and the accrued interest of P24,000.00 to be paid immediately upon
approval of the said request. The petitioner denied the said request, but granted the latter a grace
period of 5 days from the receipt of the denial to pay the total balance otherwise, the provisions of the
contract regarding cancellation, forfeiture, and reconveyance would be implemented. Thereafter, the
private respondent requested an extension of 30 days from said date to fully settle its account,
however, the petitioner denied said request.

Consequently, the private respondent protested the alleged refusal of the petitioner to accept tender of
payment purportedly made by the former on the last day of the grace period and demanded the
execution of a deed of absolute sale over the land in question. The petitioner refused to execute the
deed of absolute sale due to private respondent’s failure to pay its full obligation. Moreover, the
petitioner denied that the private respondent had made any tender of payment whatsoever within the
grace period. In view of this alleged breach of contract, the petitioner cancelled the contract and
considered all previous payments forfeited and the land as ipso facto reconveyed.

The private respondent filed a complaint against the petitioner for specific performance with damages
before the CFI (now RTC). The trial court dismissed the complaint and found that the available funds
of the private respondent were insufficient and that the latter did not effect a valid tender of payment
and consignation. However, IAC reversed said decision and found that the private respondent had
sufficient available funds, ipso facto concluded that the latter had tendered payment. Thus, petitioner
filed a petition contending that the finding that the private respondent had sufficient available funds on
or before the grace period for the payment of its obligation does not constitute proof of tender of
payment by the latter for its obligation within the said period.

ISSUE:
1) Was a finding that private respondent had sufficient available funds on or before the grace
period for the payment of its obligation proof that it (private respondent) made tender of
payment for its said obligation within said period?

66
 2) Was it the legal obligation of the petitioner (as vendor) to execute a deed of absolute sale in
favor of the private respondent (as vendee) before the latter has actually paid the complete
consideration of the sale?

RULING:
1) NO, the finding that private respondent had sufficient available funds on or before the grace
period for the payment of its obligation is not a proof that it did tender of payment for its said
obligation within said period. Tender of payment involves a positive and unconditional act by
the obligor of offering legal tender currency as payment to the obligee for the former’s
obligation and demanding that the latter accept the same. Thus, tender of payment cannot be
presumed by a mere inference from surrounding circumstances. At most, sufficiency of
available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of the
bargain. But whether or not the obligor avails himself of such funds to settle his outstanding
account remains to be proven by independent and credible evidence. Tender of payment
presupposes not only that the obligor is able, ready, and willing, but more so, in the act of
performing his obligation. Ab posse ad actu non vale illatio. "A proof that an act could have
been done is no proof that it was actually done."

The respondent court was therefore in error to have concluded from the sheer proof of
sufficient available funds on the part of the private respondent to meet more than the total
obligation within the grace period, the alleged truth of tender of payment. The same is a
classic case of non-sequitur. Hence, the finding that private respondent had sufficient
available funds on or before the grace period for the payment of its obligation is not a proof
that it did tender of payment for its said obligation within said period.

2) NO, it is not the legal obligation of the petitioner (as vendor) to execute a deed of absolute
sale in favor of the private respondent (as vendee) before the latter has actually paid the
complete consideration of the sale. Art. 1159 of the Civil Code of the Philippines provides that
"obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith." And unless the stipulations in said contract are
contrary to law, morals, good customs, public order, or public policy, the same are binding as
between the parties. (Article 1409, Civil Code, par. 1).

What the private respondent should have done if it was indeed desirous of complying with its
obligations would have been to pay the petitioner within the grace period and obtain a receipt
of such payment duly issued by the latter. Thereafter, or, allowing a reasonable time, the
private respondent could have demanded from the petitioner the execution of the necessary
documents. In case the petitioner refused, the private respondent could have had always
resorted to judicial action for the legitimate enforcement of its right. For the failure of the
private respondent to undertake this more judicious course of action, it alone shall suffer the
consequences.

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 OBLIGATIONS
Extinguishment

VALID TENDER OF PAYMENT TO EXTINGUISH OBLIGATION

60. FAR EAST BANK & TRUST CO. v. DIAZ REALTY, INC.
G.R. No. 138588, August 23, 2001
Panganiban, J.

FACTS:
This is a Petition for Review on Certiorari which seeks to reverse the decision of the CA affirming the
ruling of RTC finding that Diaz failed to effectively rebut respondent FEBTC evidence that it so
tendered the check to liquidate its indebtedness

Diaz and Company got a loan from the former PaBC (Pacific Banking Corporation) in the amount of
P720,000.00, with interest at 12% per annum, later increased to 14%, 16%, 18% and 20%. The loan
was secured by a real estate mortgage over two parcels of land owned by the plaintiff Diaz Realty. In
1981, Allied Banking Corporation rented an office space in the building constructed on the properties
covered by the mortgage contract, with the conformity of mortgagee PaBC, the parties agreed that the
monthly rentals shall be paid directly to the mortgagee for the lessors account, either to partly or fully
pay off the aforesaid mortgage indebtedness. On July 5, 1985, the Central Bank closed PaBC, placed
it under receivership, and appointed Renan Santos as its liquidator. Sometime in December 1986,
appellant FEBTC purchased the credit of Diaz & Company in favor of PaBC, but it was not until March
23, 1988 that Diaz was informed about it.

According to the plaintiff, on March 23, 1988, he went to office of PaBC which by then housed FEBTC
and was told that the latter had acquired PaBC; He was told that as of such date, his loan was
P1,447,142.03; that on December 14, 1988, Diaz tendered to FEBTC the amount of P1,450,000.00
through an Interbank check, in order to prevent the imposition of additional interests, penalties and
surcharges on its loan and asked it to release the mortgage; that FEBTC did not accept it as payment;
that instead, Diaz was asked to deposit the amount with the defendants; that when there was still no
news from the defendant whether or not it would accept his tender of payment, he filed this case with
RTC Davao.

ISSUE:
Was there a valid tender of payment to extinguish the obligation of Diaz?

RULING:
YES. Jurisprudence holds that, in general, a check does not constitute legal tender, and that a creditor
may validly refuse it. It must be emphasized, however, that this dictum does not prevent a creditor from
accepting a check as payment. In other words, the creditor has the option and the discretion of
refusing or accepting it. In the present case, petitioner bank did not refuse respondents check. On the
contrary, it accepted the check which, it insisted, was a deposit. As earlier stated, the check proved to
be fully funded and was in fact honored by the drawee bank. Moreover, petitioner was in possession of
the money for several months.

Tender of payment is the definitive act of offering the creditor what is due him or her, together with the
demand that the creditor accept the same. There must be a fusion of intent, ability and capability to
make good such offer, which must be absolute and must cover the amount due. That respondent Diaz
intended to settle its obligation with petitioner FEBTC is evident from the records of the case. After
learning that its loan balance was P1,447,142.03, it presented to petitioner a check with the specific
notation that it was for full payment of its Pacific Bank account. The latter accepted the check. The
check was sufficiently funded, as in fact it was honored by the drawee bank. When petitioner refused
to release the mortgage, respondent instituted the present case. These acts demonstrate respondent’s
intent, ability and capability to fully settle and extinguish its obligation to petitioner.

It also does not matter that Diaz withdrew the money from petitioner-bank because such withdrawal
would not affect the efficacy or the legal ramifications of the tender of payment made on November 14,

68
1988. There is also no need for consignation. For a consignation to be necessary, the creditor must
have refused, without just cause, to accept the debtors payment. However, as pointed out earlier,
petitioner accepted respondents check.

69
 OBLIGATIONS
Extinguishment

CONSIGNATION PRODUCES THE EFFECT OF PAYMENT

61. ETERNAL GARDENS MEMORIAL PARK CORP. v. COURT OF APPEALS

G.R. No. 124554, December 9, 1997
KAPUNAN, J

FACTS:
This case is the derivative of G.R. No. 73794, which was decided by the Second Division of this Court
on September 19, 1988

EGMPC and private respondent NPUM entered into a Land Development Agreement dated October 6,
1976. Under the agreement, EGMPC was to develop a parcel of land owned by NPUM into a memorial
park subdivided into lots. The parties further agreed that EGMPC had the obligation to remit monthly to
NPUM forty percent (40%) of its net gross collection from the development of a memorial park on
property owned by NPUM. It also provides for the designation of a depository/trustee bank to act as
the depository/trustee for all funds collected by EGMPC. Later, two claimants of the parcel of land
surfaced — Maysilo Estate and the heirs of a certain Vicente Singson Encarnacion. EGMPC thus filed
an action for interpleader against Maysilo Estate and NPUM The Singson heirs in turn filed an action
for quieting of title against EGMPC and NPUM.

From these two cases, several proceedings ensued. One such case, from the interpleader action,
culminated in the filing and subsequent resolution of G.R. No. 73794. In G.R. No 73794, EGMPC
assailed the appellate court's resolution requiring "petitioner Eternal Gardens to deposit whatever
amounts are due from it under the Land Development Agreement with a reputable bank to be
designated by the respondent court.” Sometime thereafter, the trial court rendered decisions in Civil
Case Nos. 9556 (interpleader) and C-11836 (quieting of title). These decisions were appealed to the
Court of Appeals, and the appeals were consolidated. The CA ruled in favour of NPUM and dismissed
the claims of the Singsong heirs. The decision of the CA was again appealed to the SC were the Court
ruled that there is no further legal obstacle in carrying out the respective covenants of the parties to the
Land Development Agreement. In respect to the mutual accounting required to determine the
remaining accrued rights and liabilities of said parties, the case is hereby remanded to the Court of
Appeals for proper determination and disposition.

The accounting of the parties' respective obligations was referred to the Court's Accountant, Mrs.
Carmencita Angelo, with the concurrence of the parties, to whom the documents were to be submitted.
Eternal failed to submit any documents. In a Resolution dated January 15, 1996, the CA approved the
report of Ms. Angelo, finding this "to be a just and fair account of what Eternal Gardens and Memorial
Park owes to the petitioner North Philippine Union Mission of the Seventh-Day Adventists, and
accordingly orders the former to pay and turn over to the latter the amounts of P167,065,195.00 as
principal and P167,235,451.00 in interest . . .”

EGMPCs' contends that it owes the amount of only P35,000,000.00 less advances and not
P167,065,195.00 as principal and P167,235,451.00 in interest as computed by Court Accountant
Carmencita C. Angelo. It contends that it is not liable for interest. It claims that it was justified in
withholding payment as there was still the unresolved issue of ownership over the property subject of
the Land Development Agreement of October 6, 1976.

ISSUE:
Can an obligation to pay a sum of money in exchange for a lot be suspended if the ownership of the
said land is being resolved in court?

RULING:
NO. The argument is without merit EGMPC under the agreement had the obligation to remit monthly to
NPUM forty percent (40%) of its net gross collection from the development of a memorial park on
property owned by NPUM. The same agreement provided for the designation of a depository/trustee

70
bank to act as the depository/trustee for all funds collected by EGMPC. There was no obstacle, legal
or otherwise, to the compliance by EGMPC of this provision in the contract, even on the affectation
that it did not know to whom payment was to be made.

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

The rationale for consignation is to avoid the performance of an obligation becoming more onerous to
the debtor by reason of causes not imputable to him. For its failure to consign the amounts due,
Eternal Gardens' obligation to NPUM necessarily became more onerous as it became liable for
interest on the amounts it failed to remit. We thus find that the Court of Appeals correctly held Eternal
Gardens liable for interest at the rate of twelve percent (12%). The withholding of the amounts due
under the agreement was tantamount to a forbearance of money.

71
 OBLIGATIONS
Extinguishment

LAWS AND RESERVATION OF ESSENTIAL ATTRIBUTES OF SOVEREIGN POWER ARE READ

INTO EVERY CONTRACTS

62. ORTIGAS & CO., LTD. PARTNERSHIP v. FEATI BANK AND TRUST CO.
G.R. No. L-24670, Dec. 14, 1979
Santos, J.

FACTS: This is a petition for review on certiorari from the decision of the Court of First Instance of
Rizal which dismissed plaintiff Ortigas & Co., Limited Partnership’s complaint against defendant Feati
Bank and Trust Co. for lack of merit.

Plaintiff sold two parcels of Land, known as Lots Nos. 5 and 6 of the Highway Hills Subdivision. The
deeds of sale contained stipulations or restrictions that the lots shall be used by the buyer exclusively
for residential purposes.

The buyers transferred their rights and interests in favor of one Emma Chavez. Eventually, defendant
acquired Lot No. 5 from Chavez and Lot No. 5 from Republic Flour Mills. Defendant began
constructing a building on these lots for banking purposes which could also be used for residential
purposes. Plaintiff demanded in writing that defendant stop said construction. Defendant refused to
comply with the demand, contending that the building was being constructed in accordance with the
zoning regulations that declared the western part of EDSA, where the subject lots were situated, a
commercial and industrial zone.

Plaintiff alleges that the trial court erred when it sustained the view that Resolution No. 27, series of
1960 of the Municipal Council of Mandaluyong, Rizal declaring Lots Nos. 5 and 6, among others, as
part of the commercial and industrial zone, is valid in the exercise of its police power.

ISSUE: Can the assailed resolution nullify or supersede the contractual obligations assumed by the
defendant?

RULING: Yes. While non-impairment of contracts is constitutionally guaranteed, the rule is not
absolute, since it has to be reconciled with the legitimate exercise of police power, i.e., “the power to
prescribe regulations to promote the health, morals, peace, education, good order or safety and
general welfare of the people.” Furthermore, laws and reservation of essential attributes of sovereign
power are read into contracts agreed upon by the parties.

Resolution No. 27, s.-1960 declaring the western part of EDSA as an industrial and commercial zone,
was obviously passed by the Municipal Council of Mandaluyong, Rizal in the exercise of police power
to safeguard or promote the health, safety, peace, good order and general welfare of the people in the
locality. Judicial notice may be taken of the conditions prevailing in the area, especially where Lots
Nos. 5 and 6 are located. The lots themselves not only front the highway; industrial and commercial
complexes have flourished about the place. EDSA, a main traffic artery which runs through several
cities and municipalities in the Metro Manila area, supports an endless stream of traffic and the
resulting activity, noise and pollution are hardly conducive to the health, safety or welfare of the
residents in its route. Hence, the contention that the trial court erred in sustaining the validity of
Resolution No. 27 as an exercise of police power is without merit.

It is, therefore, clear that even if the subject building restrictions were assumed by the defendant as
vendee of Lots Nos. 5 and 6, the contractual obligations so assumed cannot prevail over Resolution
No. 27, of the Municipality of Mandaluyong, which has validly exercised its police power through the
said resolution. Accordingly, the building restrictions, which declare Lots Nos. 5 and 6 as residential,
cannot be enforced.

72
 OBLIGATIONS
Extinguishment

THE DOCTRINE OF UNFORESEEN EVENTS

63. NAGA TELEPHONE CO., INC. (NATELCO) v. COURT OF APPEALS AND CAMARINES SUR II
ELECTRIC COOPERATIVE, INC. (CASURECO II)
G.R. No. 107112, Feb. 24, 1994
Nocon, J.

FACTS: This is a petition for review on certiorari by petitioner Naga Telephone Co., Inc. (NATELCO)
from the application by the Court of Appeals of Article 1267 of the Civil Code in favor of respondent
Camarines Sur II Electronic Cooperative, Inc. (CASURECO II).

The parties entered into a contract for the use by NATELCO in the operation of its telephone service
the electric light posts of CASURECO II in Naga City. In consideration therefor, petitioners agreed to
install, free of charge, 10 telephone connections for the use by respondent in the agreed places. The
contract also provided that the term or period of this contract shall be as long as the party of the first
part has need for the electric light posts of the party of the second part, it being understood that this
contract shall terminate when for any reason whatever, the party of the second part is forced to stop or
abandon its operation as a public service and it becomes necessary to remove the electric lightpost.
After 10 years, CASURECO II file a complaint against NATELCO for reformation of the contract with
damages, on the ground, among others, that it is too one-sided in favor of petitioners.

The trial court found that while the contract appeared to be fair to both parties when it was entered into
by them during the first year of respondent’s operation, it had become disadvantageous and unfair to
respondent because of subsequent events and conditions, particularly the increase in the volume of
the subscribers of petitioners for more than 10 years without the corresponding increase in the number
of telephone connections to respondent free of charge. The trial court concluded that while in an action
for reformation of contract, it cannot make another contract for the parties, it can, however, for reasons
of justice and equity, order that the contract be reformed to abolish the inequities therein. Thus, said
court ruled that the contract should be reformed by ordering petitioners to pay respondent
compensation for the use of their posts inside and outside Naga City, while respondent should also be
ordered to pay the monthly bills for the use of the telephones also in Naga City. Upon appeal, the CA
affirmed the trial court’s decision but based on different grounds to wit: (1) that Article 1267 of the New
Civil Code is applicable and (2) that the contract was subject to a potestative condition which rendered
said condition void.

NATELCO asserts that Art. 1267 of the Civil Code is not applicable because the contract does not
involve the rendition of service or a personal prestation and it is not for future service with future
unusual change.

ISSUE: Is Art. 1267 of the Civil Code applicable in the instant case?

RULING: Yes. The rationale behind Art. 1267 of the Civil Code is that the intention of the parties
should govern and if it appears that the service turns out to be so difficult as to have been beyond their
contemplation, it would be doing violence to that intention to hold the obligor still responsible.

Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale
behind this provision, the term "service" should be understood as referring to the "performance" of the
obligation. In the present case, the obligation of private respondent consists in allowing petitioners to
use its posts in Naga City, which is the service contemplated in said article. Furthermore, a bare
reading of this article reveals that it is not a requirement thereunder that the contract be for future
service with future unusual change. According to Senator Arturo M. Tolentino, 10 Article 1267 states in
our law the doctrine of unforeseen events. This is said to be based on the discredited theory of rebus
sic stantibus in public international law; under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist the contract also ceases to exist.

73
Considering practical needs and the demands of equity and good faith, the disappearance of the basis
of a contract gives rise to a right to relief in favor of the party prejudiced.

The allegations in private respondent's complaint and the evidence it has presented sufficiently made
out a cause of action under Article 1267. Hence, the parties are released from their correlative
obligations under the contract. However, our disposition of the present controversy does not end here.
We have to take into account the possible consequences of merely releasing the parties therefrom:
petitioners will remove the telephone wires/cables in the posts of private respondent, resulting in
disruption of their essential service to the public; while private respondent, in consonance with the
contract will return all the telephone units to petitioners, causing prejudice to its business. We shall not
allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay private
respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and
Pili, Camarines Sur and in other places where petitioners use private respondent's posts, the sum of
ten (P10.00) pesos per post, per month, beginning January, 1989; and 2) private respondent to pay
petitioner the monthly dues of all its telephones at the same rate being paid by the public beginning
January, 1989.

74
 OBLIGATIONS
Extinguishment

CREDITOR’S CONSENT TO THE SUBSTITUTION OF A NEW DEBTOR IS NECESSARY TO

EXTINGUISH OBLIGATION BY NOVATION

64. TESTATE ESTATE OF MOTA v. SERRA

G.R. No. 22825, February 14, 1925
Villamor, J.

FACTS:
Plaintiffs had appealed judgment of trial court and as causes for the review, alleged that the trial court
erred: (a) In holding that Messrs. Whitaker and Concepcion, upon purchasing the "Palma" Central,
were subrogated in the place of the defendant in all his rights and obligations under the contract
relating to the railroad line existing between the "Palma" and the "San Isidro" centrals and that the
plaintiffs agreed to this subrogation; (b) in holding that the deed of February 1, 1919, had been
extinguished in its entirety and made null and void.

On February 1, 1919, plaintiffs and defendant entered into a contract of partnership, for the
construction and exploitation of a railroad line from the "San Isidro" and "Palma" centrals to the place
known as "Nandong." On January 29, 1920, the defendant entered into a contract of sale with
Concepcion, Whitaker, and Luzuriaga, whereby he sold to the latter the estate and central known as
"Palma" with its running business, as well as all the improvements, machineries and buildings, real and
personal properties, rights, choices in action and interests, including the sugar plantation of the harvest
year of 1920 to 1921, covering all the property of the vendor. Before the delivery to the purchasers of
the hacienda, Luzuriaga renounced all his rights under the contract of January 29, 1920, in favor of
Concepcion and Whitaker. This gave rise to the fact that on July 17, 1920, Concepcion and Whitaker
and the herein defendant executed before a notary public, another deed of absolute sale of the said
"Palma" Estate for the amount of P1,695,961.90, of which the vendor received at the time of executing
the deed the amount of P945,861.90, and the balance was payable by installments in the form and
manner stipulated in the contract. Afterwards, Concepcion and Whitaker bought from the plaintiffs the
one-half of the railroad line pertaining to the latter, executing therefore the document. The price of this
sale was P237,722.15, excluding any amount which the defendant might be owing to the plaintiffs. Of
the purchase price, Concepcion and Whitaker paid the sum of P47,544.43 only. In the Deed, the
plaintiffs and Concepcion and Whitaker agreed, among other things, that the partnership "Palma" and
"San Isidro," should be dissolved upon the execution of this contract, and that the said partnership
agreement should be totally cancelled and of no force and effect whatever.

Since the defendant Serra failed to pay one-half of the amount expended by the plaintiffs upon the
construction of the railroad line, that is, P113,046.46, as well as Whitaker and Concepcion, the
plaintiffs instituted the present action praying: 1) that the deed of February 1, 1919, be declared valid
and binding; 2) that after the execution of the said document the defendant improved economically so
as to be able to pay the plaintiffs the amount owed, but that he refused to pay either in part or in whole
the said amount notwithstanding the several demands made on him for the purpose; and 3) that the
defendant be sentenced to pay plaintiffs the aforesaid sum of Defendant set up three special
defenses: 1) the novation of the contract by the substitution of the debtor with the conformity of the
creditors; 2) the confusion of the rights of the creditor and debtor; and 3) the extinguishment of the
contract.

ISSUES:
1. Is there novation of a contract by the substitution of the debtor with the consent of the creditor,
as required by Article 1205 of the Civil Code?

2. Is there a merger of rights of debtor and creditor under Article 1192 of the Civil Code?

75
RULING:

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

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

76
 OBLIGATIONS
Extinguishment

BANK HAS THE RIGHT TO SET OFF

65. GULLAS v. THE PHILIPPINE NATIONAL BANK

G.R. No. 43191, November 13, 1935
Malcolm, J.

FACTS:
This case is an appeal by both parties in the Supreme Court assailing the judgment of the Court of
First Instance of Cebu.

Petitioner Paulino Gullas has a current account with respondent Philippine National Bank (PNB). The
former along with a certain Lopez signed as indorsers of a treasury warrant issued by the Treasurer of
the United States for the United States Veterans Bureau payable to the order of one Francisco
Sabectoria Bacos. In turn, PNB cashed it but was dishonored by the Insular Treasurer. Consequently,
PNB sent notices to Gullas. However, the same were not delivered to him as he was in Manila. In such
notices, PNB informed Gullas that the balance in his current account was applied as part payment of
the dishonored check. Petitioner immediately settled the unpaid balance of the warrant upon his
receipt of the notices when he returned in Cebu. As a result, petitioner was prejudiced and allegedly
inconvenienced when the payment of his insurance was not given because of lack of funds and
caused him humiliation.

Issue:
Was PNB’s application of petitioner’s deposit to the unpaid balance proper?

Ruling:
No. As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. The Civil Code contains provisions regarding compensation
(set off) and deposit. These portions of Philippine law provide that compensation shall take place when
two persons are reciprocally creditor and debtor of each other. In this connection, it has been held that the
relation existing between a depositor and a bank is that of creditor and debtor.

Considering, therefore, that PNB had with respect to the deposit of Gullas a right of set off. However,
PNB failed to exercise it properly. The fact is undeniable that prior to the mailing of notice of dishonor,
and without for any action by Gullas, the bank made use of the money standing in his account to make
good for the treasury warrant. Petitioner Gullas, further, was merely and indorser and had issued the
same in good faith.

77
 OBLIGATIONS
Extinguishment

SHARES OF STOCK OF CORPORATIONS NOT AN INDEBTEDNESS OF SUCH CORPORATIONS

TO STOCKHOLDERS

66. GARCIA v. LIM CHU SING

G.R. No. 39427, February 24, 1934
VILLAREAL, J.

FACTS:
This is an appeal to the SC taken by defendant Lim Chu Sing from the judgment of the CFI of Manila.

A debt contracted by Lim Cuan Sy who had an account with plaintiff bank in the form of “trust receipts”
was guaranteed by defendant Lim Chu Sing as surety and with chattel mortgage securities. Lim Cuan
Sy failed to comply with his obligations, thus, prompting plaintiff to require defendant, as surety, to sign
a promissory note in the amount of P9,105.17 in favor of the bank. On the other hand, defendant is the
owner of shares of stock of the plaintiff Mercantile Bank of China amounting to P10,000. Therafter,
plaintiff bank compensated defendant’s indebtedness with the value of his shares of stock which the
latter contested.

ISSUE:
May defendant’s debt to the bank and the value of his shares of stocks thereto be the subject of
compensation?

RULING:
No. According to the weight of authority, a share of stock or the certificate thereof is not an
indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit. Stockholders,
as such, are not creditors of the corporation. It is the prevailing doctrine of the American courts,
repeatedly asserted in the broadest terms, that the capital stock of a corporation is a trust fund to be
used more particularly for the security of creditors of the corporation, who presumably deal with it on
the credit of its capital stock. Therefore, there is no sufficient ground to justify a compensation becayse
the defendant Lim Chu Sing, not being a creditor of the Mercantile Bank of China, although the latter is
a creditor of the former.

78
 OBLIGATIONS
Extinguishment

THERE SHOULD BE AN EXPRESSLY DECLARATION OR ABSOLUTE INCOMPATIBILITY

OF THE OLD AND NEW OBLIGATIONS IN NOVATION

67. ZAPANTA v. DE ROTAECHE

G.R. No. 6910, January 9, 1912
Johnson, J.

FACTS:
Ramon Echevarria, as legal representative of the firm, “Viuda e Hijos de F. Suarez”, commenced
an action against Andres Zapanta for the purpose of recovering 7,179.48 pesos Mexican
currency. Judgment was secured against Zapanta. Thereafter, the parties entered into an
agreement regarding said judgment. The contract provides that the judgment was to be
extinguished by monthly payments, with the provision that, in case of default in such monthly
payments, the “commercial firm shall be at liberty to enter suit against him”. Zapanta defaulted.
By reason thereof, a writ of execution was commenced for the purpose of recovering the balance
due. Zapanta filed a suit to recover damages, upon the theory that the judgment was merged in
the contract and the levy and sale under the execution was, therefore, null and void.

ISSUE:
Were the obligations existing in the judgment extinguished when the parties entered into the
contract?

RULING:
No. The contract does not expressly extinguish the obligations existing in said judgment. It
expressly recognizes the obligations existing between the parties in said judgment and expressly
provides a method by which the same shall be extinguished, which method is, as is expressly
indicated in said contract, by monthly payments. The contract, instead of containing provisions
"absolutely incompatible" with the obligations of the judgment, expressly ratifies such obligations
and contains provisions for satisfying them. The said agreement simply gave the plaintiff a
method and more time for the satisfaction of said judgment. It did not extinguish the obligations
contained in the judgment, until the terms of said contract had been fully complied with. Had the
plaintiff continued to comply with the conditions of said contract, he might have successfully
invoked its provisions against the issuance of an execution upon the said judgment. The contract
and the punctual compliance with its terms only delayed the right of the defendant to an execution
upon the judgment. The judgment was not satisfied and the obligations existing thereunder still
subsisted until the terms of the agreement had been fully complied with.

79
 OBLIGATIONS
Extinguishment

FAILURE TO ENTER INTO A NEW CONTRACT DO NOT CONSTITUTE NOVATION;

NOVATION IS NEVER PRESUMED

68. URACA v. COURT OF APPEALS

G.R. No. 115158, September 5, 1997
J. Panganiban

FACTS:

Private respondents (Velezes) offered to sell their lot and commercial building located at
Progreso and M.C. Briones Streets in Cebu City to herein petitioners for P1,050,000.00 and at
the same time requesting the petitioners to reply in three days. Two days after, petitioners
through their lawyer sent a letter reply to the Velezes accepting the offer to sell. The next day
petitioner Emilia Uraca went to see Carmen Velez Ting about the offer to sell but she was told by
the latter that the price was P1,400,000.00 in cash or in manager's check and not P1,050,000.00
as erroneously stated in their letter-offer. Petitioner Uraca agreed to the price, but counter-
proposed that payment be made in installments. Carmen Velez Ting did not accept the said
counter offer of Emilia Uraca. No payment was made by the petitioners to the Velezes. On July
13, 1985 the Velezes sold the subject lot and building to private respondent Avenue
Merchandising Inc. for P1,050,000.00 net of taxes, registration fees and expenses of the sale. On
July 31, 1985, petitioners filed a complaint against the Velezes and registered a notice of lis
pendens over the property in question with the Office of the Register of Deeds. The trial court
found two perfected contracts of sale between the Velezes and the petitioners. The first sale was
for P1,050,000.00 and the second was for P1,400,000.00. It also found that the Avenue Group
purchased the property in bad faith. Private respondents appealed to the Court of Appeals. The
appellate court ruled that although there was a perfected contract between the parties, the same
was mutually withdrawn, cancelled and rescinded by novation. Since there was no agreement as
to the "second price" offered, there was likewise no meeting of minds between the parties.
Hence, the present petition for review.

ISSUE:
Was the sale of the real property in controversy, by the Velezes to petitioners for P1,050,000,
extinguished by novation after the said parties negotiated to increase the price to P1,400,000?

RULING:
No. Extinctive novation requires: (1) the existence of a previous valid obligation; (2) the
agreement of all the parties to the new contract; (3) the extinguishment of the old obligation or
contract; and (4) the validity of the new one. Novation is effected only when a new contract has
extinguished an earlier contract between the same parties. In this light, it is never presumed; it
must be proven as a fact either by express stipulation of the parties or by implication derived from
an irreconcilable incompatibility between old and new obligations or contracts. This element is
lacking in the case at bar. The petitioners and the Velezes did not reach an agreement on the
new price of P1,400,000.00 demanded by the latter. In this case, the petitioners and the Velezes
clearly did not perfect a new contract because the essential requisite of consent was absent, the
parties having failed to agree on the terms of the payment. True, petitioners made a qualified
acceptance of this offer by proposing that the payment of this higher sale price be made by
installment, with P1,000,000.00 as down payment and the balance payable thirty days thereafter.
Under Article 1319 of the Civil Code, such qualified acceptance constitutes a counter-offer and
has the ineludible effect of rejecting the Velezes offer. Indeed, petitioners counter-offer was not
accepted by the Velezes. It is well-settled that an offer must be clear and definite, while an
acceptance must be unconditional and unbounded, in order that their concurrence can give rise
to a perfected contract. In line with this basic postulate of contract law, a definite agreement on

80
the manner of payment of the price is an essential element in the formation of a binding and
enforceable contract of sale. Since the parties failed to enter into a new contract that could have
extinguished their previously perfected contract of sale, there can be no novation of the latter.
Consequently, the first sale of the property in controversy, by the Velezes to petitioners
for P1,050,000.00, remained valid and existing.

81
 OBLIGATIONS
Extinguishment

CIVIL CODE PROVISIONS ON GUARANTEE, OTHER THAN THE BENEFIT OF EXCUSSION, ARE
APPLICABLE TO THE SURETY

69. AUTOCORP GROUP v. INTRA STRATA ASSURANCE CORP.

G.R. No. 166662, June 27, 2008
Chico-Nazario, J.

FACTS:
This is a Petition for Review on Certiorari from the Decision of the Court of Appeals dated 30 June
2004 in CA-G.R. CV No. 62564 which affirmed with modification the Decision of the RTC in a
collection of sum of money.

Autocorp Group, represented by its President, petitioner Peter Y. Rodriguez, secured an ordinary re-
export bond from private respondent Intra Strata Assurance Corporation (ISAC) in favor of public
respondent Bureau of Customs (BOC) to guarantee the re-export of one unit of Hyundai Excel 4-door
1.5 LS and/or to pay the taxes and duties thereon. Petitioners obtained another ordinary re-export
bond from ISAC in favor of the BOC to guarantee the re-export of one unit of Hyundai Sonata 2.4 GLS
and/or to pay the taxes and duties thereon. Petitioners executed and signed two Indemnity
Agreements with identical stipulations in favor of ISAC, agreeing to act as surety of the subject bonds.
Petitioner Rodriguez signed the Indemnity Agreements both as President of the Autocorp Group and in
his personal capacity. ISAC issued the subject bonds to guarantee compliance by petitioners with their
undertaking with the BOC to re-export the imported vehicles within the given period and pay the taxes
and/or duties due thereon. In turn, petitioners agreed, as surety, to indemnify ISAC for the liability the
latter may incur on the said bonds. Petitioner Autocorp Group failed to re-export the items guaranteed
by the bonds and/or liquidate the entries or cancel the bonds, and pay the taxes and duties pertaining
to the said items despite repeated demands made by the BOC, as well as by ISAC. By reason thereof,
the BOC considered the two bonds, with a total face value of P1,034,649.00, forfeited.

Failing to secure from petitioners the payment of the face value of the two bonds, despite several
demands sent to each of them as surety under the Indemnity Agreements, ISAC filed with the RTC an
action against petitioners to recover the sum of money. Petitioner Rodriguez invokes Article 2079 of
the Civil Code on Extinguishment of Guaranty. Petitioner Rodriguez argues that there was an
amendment as to the effectivity of the bonds, and this constitutes a modification of the agreement
without his consent, thereby exonerating him from any liability.

ISSUE:
Is the obligation of the petitioner extinguished?

RULING:
No.
Art. 2079 of the Civil Code provides: “An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of itself constitute any extension of time
referred to herein”|

Petitioners have not presented any evidence of this alleged amendment as to the effectivity of the
bonds. Be that as it may, even if there was indeed such an amendment, such would not cause the
exoneration of petitioner Rodriguez from liability on the bonds. The provisions of the Civil Code on
Guarantee, other than the benefit of excussion, are applicable and available to the surety. The Court
finds no reason why the provisions of Article 2079 would not apply to a surety. Even
granting arguendo that there was a modification as to the effectivity of the bonds, petitioners would still
not be absolved from liability since they had authorized ISAC to consent to the granting of any
extension, modification, alteration and/or renewal of the subject bonds, as expressly set out in the
Indemnity Agreements. The provision in the Indemnity Agreements clearly authorized ISAC to consent
to the granting of any extension, modification, alteration and/or renewal of the subject bonds.

82
83
 OBLIGATIONS
Extinguishment

SUBSTITUTION OF OBJECTS, DEBTORS OR SUBROGATION OF THE CREDITOR RESULT TO

NOVATION

70. ARCO PULP AND PAPER CO., INC. v. LIM

G.R. No. 206806, June 25, 2014
Leonen, J.

FACTS:
This is a petition for review on certiorari assailing the Court of Appeals' decision in CA-G.R. CV No.
95709, which stemmed from a complaint filed in the RTC for collection of sum of money.||
|
Dan T. Lim delivered scrap papers worth PhP7,220,968.31 to Arco Pulp and Paper Company, Inc. The
parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw
materials or deliver to him their finished products of equivalent value. Dan T. Lim alleged that when he
delivered the raw materials, Arco Pulp and Paper issued a post-dated check as partial payment. When
he deposited the check, it was dishonored for being drawn against a closed account. On the same
day, Arco Pulp and Paper and a certain Eric Sy executed a Memorandum of Agreement where Arco
Pulp and Paper bound themselves to deliver their finished products to Megapack Container
Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw materials
would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products. Dan T.
Lim sent a letter to Arco Pulp and Paper demanding payment of the amount of PhP7,220,968.31, but
no payment was made to him.

Dan T. Lim filed a complaint for collection of sum of money with prayer for attachment with the RTC
which rendered a judgment in favor of Arco Pulp and Paper and dismissed the complaint, holding that
when Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement, novation took
place, which extinguished Arco Pulp and Paper's obligation to Dan T. Lim. Dan T. Lim appealed the
judgment with the Court of Appeals. CA reversed the judgment of RTC.

ISSUE:
Was the obligation between the parties extinguished by novation?

RULING:
No. The memorandum of agreement did not constitute a novation of the original contract.

Novation extinguishes an obligation between two parties when there is a substitution of objects or
debtors or when there is subrogation of the creditor. It occurs only when the new contract declares so
"in unequivocal terms" or that "the old and the new obligations be on every point incompatible with
each other."

There is nothing in the memorandum of agreement that states that with its execution, the obligation of
petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy
somehow substituted petitioner Arco Pulp and Paper as respondent's debtor. It merely shows that
petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.
The consent of the creditor must also be secured for the novation to be valid. In this case, respondent
was not privy to the memorandum of agreement, thus, his conformity to the contract need not be
secured. If the memorandum of agreement was intended to novate the original agreement between the
parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and unequivocal terms that it has replaced the
original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is
present in this case.

Since there was no novation, petitioner Arco Pulp and Paper's obligation to respondent remains valid
and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of
PhP7,220,968.31.

84
 OBLIGATIONS
Extinguishment

IRRECONCILABLE INCOMPATIBILITY BETWEEN THE OLD AND THE NEW OBLIGATION IS THE
TOUCHSTONE FOR CONTRARIETY IN NOVATION.
71. OCAMPO-PAULE v. COURT OF APPEALS
G.R. No. 145872, February 4, 2002
Kapunan, J.
FACTS:
In a petition for review under Rule 45, petitioner Gloria Ocampo-Paule, received from private complainant
Felicitas M. Calilung several pieces of jewelry with a total value of P163,167.95. They agreed that petitioner
would sell the same and turn over and account for the proceeds of the sale, or otherwise return to private
complainant the unsold pieces of jewelry within two months from receipt thereof. No acknowledgement
receipt was issued because they are relatives.

Petitioner failed to remit the proceeds of the sale or to return the unsold pieces to private complainant. The
latter sent a demand letter but to no avail. Private complainant referred the matter to the barangay captain of
Sta. Monica, Lubao, Pampanga to which petitioner acknowledged having received several pieces of jewelry
worth P163,167.95. They executed an agreement entitled "Kasunduan sa Bayaran," whereby petitioner
promised to pay private complainant P3,000.00 every month to answer for the jewelry.

Petitioner failed to comply with the terms of the Kasunduan. Another demand letter was sent but she still
failed to comply with her obligation. Due to that, private complainant filed a criminal complaint against
petitioner . Consequently, an information charging petitioner with Estafa was filed in the Regional Trial Court
of Guagua, Pampanga. After trial, the lower court found petitioner guilty of Estafa. Petitioner appealed the
lower court’s decision to the Court of Appeals, but the latter dismissed the appeal for lack of merit. Hence,
the instant petition.

Petitioner contends that the Kasunduan executed by her and private complainant, which stipulate that she
was to pay for the pieces of jewelry received by her in monthly installments of P3,000.00 resulted in the
novation of her obligation and extinguished her criminal liability. In his Comment, the Solicitor General
argues that petitioner had committed the crime charged, and that her criminal liability was not extinguished
by the execution of the Kasunduan sa Bayaran.

ISSUE:
Whether or not the Kasunduan executed between petitioner and private complainant resulted in the novation
of petitioner’s obligation.

RULING:
No because there is no novation of the original agreement between petitioner and private complainant.

The extinguishment of the old obligation by the new one is a necessary element of novation which may be
effected either expressly or impliedly. While there is really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about novation, the touchstone for contrareity, however,
would be an irreconcilable incompatibility between the old and the new obligations. The test of
incompatibility is whether or not 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. Corollarily,
changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility
must take place in any of the essential elements of the obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to
extinguish the original obligation.

The execution of the Kasunduan sa Bayaran does not constitute a novation of the original agreement
between petitioner and private complainant. Said Kasunduan did not change the object or principal
conditions of the contract between them. The change in manner of payment of petitioner’s obligation did not
render the Kasunduan incompatible with the original agreement, and hence, did not extinguish petitioner’s
liability to remit the proceeds of the sale of the jewelry or to return the same to private complainant. An
obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing
only the terms of payment and adding other obligations not incompatible with the old one, or wherein the old
contract is merely supplemented by the new one. Hence, the petition is DENIED and the decision of the
Court of Appeals is AFFIRMED.

85
 OBLIGATIONS
Extinguishment

A MERE SUPPLEMENTARY AGREEMENT DOES NOT CONSTITUTE NOVATION

72. RAMOS v. GIBBON

G.R. No. L-45418, April 18, 1939
Laurel, J.

FACTS:
Sometime in 1934, plaintiffs validly located the eighty mineral lode claims known as the Cabayo Group
in the subprovince of Benguet, Mountain Province. The defendants H. A. Gibbon and J. C. Cowper
proceeded to examine the said properties, and finding them satisfactory, they, together with the other
appellants, L. F. Rothenhoefer, George Caldwell and Hardley McVay, decided to buy the claims
outright from the plaintiffs for P60,000 payable, according to Exhibit A, within the period of one year
from the execution of said document as follows: P10,000 on or before June 1, 1935; P20,000 on or
before September 15, 1935; and the balance of P30,000 on or before March 22, 1936. It was
stipulated that payment was to be made to Ambrosio Ramos who was the attorney-in-fact of the
claimowners. Of the first installment of P10,000 payable on or before June 1, 1935, the appellants paid
P2,000 on April 2, 1935, and P5,400 on June 6, 1935, or a total of P7,400, thus leaving a balance of
P2,600 on that installment. Since then, no further payment was made by the defendants, leaving a
balance of P52,600 payable and due the plaintiffs. Plaintiffs filed with the Court of First Instance of the
Mountain Province to which the lower court ruled for the plaintiffs and adjudged the defendants H. A.
Gibbon, J. C. Cowper, Hardley McVay, George Caldwell and L. F. Rothenhoefer liable and holden
jointly and severally to the plaintiffs in the sum of P52,600 and legal interest thereon and costs.

Appellants contend, among others, that upon the execution of Exhibit 1 on June 6, 1935, all the
obligations contracted by them in Exhibit A were automatically extinguished by novation. Exhibit 1
contains that the appellants have the right to retain the sum of P2,600 until the completion of the
survey of those claims by the appellants.

ISSUE:
Was there a change or alteration of the object and condition of the contract?

RULING:
No. There is none. Novation is never presumed, and in order that an obligation may be extinguished
by another which substitutes it, it shall be necessary that it is so declared expressly, or that the old and
new obligations be incompatible in every respect.

In this case, there is absolutely no provision in Exhibit 1 which expressly or even impliedly repeals that
of Exhibit A, and much less do we find any incompatibility between the two documents, in the absence
of which novation does not take place. As the learned trial judge says, Exhibit 1 is a mere
supplementary agreement in virtue of which the parties herein confirm and ratify the contents of Exhibit
A. The mere fact that Exhibit 1 contains an additional stipulation to the effect that of the purchase price
of the claims, the appellants have the right to retain the sum of P2,600 until the completion of the
survey of those claims by the appellants, does not in any manner constitute novation of contract as this
stipulation serves only to supplement and amphry that of exhibit A, there being no change or alteration
of the object and condition of that contract.
Hence, there is no novation.

86
 OBLIGATIONS
Extinguishment

NO NOVATION WHEN THERE IS NO INCOMPATIBILITY BETWEEN THE OBLIGATIONS

73. INCHAUSTI & CO. v. GREGORIO YULO

G.R. No. L-7721, March 25, 1914
Arellano, C.J.

FACTS:
Plaintiff appealed to the Supreme Court by way of bill of exceptions.

Teodoro Yulo, a property owner of Iloilo, for the exploitation and cultivation of his numerous haciendas
in the province of Occidental Negros, had been borrowing money from the firm of Inchausti &
Company under specific conditions. On April 9, 1903; Teodoro Yulo died testate and for the execution
of the provisions of his will he had appointed as administrators his widow and five of his sons, Gregorio
Yulo being one of the latter. Gregorio Yulo, for himself and in representation of his brother Manuel
Yulo, and in their own behalf Pedro Yulo, Francisco Yulo, Carmen Yulo, and Concepcion Yulo, the
latter being of age at the time, executed the notarial instrument which ratified all the contents of the
prior document of June 26, 1908, severally and jointly acknowledged and admitted their indebtedness
to Inchausti & Company. On August 12, 1909, Gregorio Yulo, for himself and in representation of his
brother Manuel Yulo, and in their own behalf Pedro Yulo, Francisco Yulo, Carmen Yulo, and
Concepcion Yulo, the latter being of age at the time, executed the notarial instrument. Through this,
the said persons, including Concepcion Yulo ratified all the contents of the prior document of June 26,
1908, severally and jointly acknowledged and admitted their indebtedness to Inchausti & Company.
The Yulos, brothers and sisters, who executed the preceding instrument, did not pay the first
installment of the obligation.

Inchausti & Company brought an ordinary action in the Court of First Instance of Iloilo, against
Gregorio Yulo for the payment of the said balance. On May 12, 1911, Francisco, Manuel, and Carmen
Yulo y Regalado executed in favor Inchausti & Company another notarial instrument in recognition of
the debt and obligation of payment. Thus was it stipulated between Inchausti & Company and the said
three Yulos, brothers and sisters, stipulating expressly in the sixth clause that "Inchausti & Company
should include in their suit brought in the Court of First Instance of Iloilo against Don Gregorio Yulo, his
brother and joint co-obligee, Don Pedro Yulo, and they will procure by all legal means and in the least
time possible a judgment in their favor against the said Don Gregorio and Don Pedro, sentencing the
later to pay the total amount of the obligation acknowledged by them in the aforementioned instrument
of August 12, 1909.

The Court of First Instance of Iloilo decided the case "in favor of the defendant without prejudice to the
plaintiff's bringing within the proper time another suit for his proportional part of the joint debt, and that
the plaintiff pay the costs."

ISSUE:
1. May the plaintiff sue Gregorio Yulo alone, there being other obligors?
2. Does the contract with the said three obligors constitute a novation of that of August 12, 1909,
entered into with the six debtors who assumed the payment?

RULING:
1. Yes. The obligation should be solidary having in mind the principle of law that, "when the obligation
is constituted as a conjoint and solidary obligation each one of the debtors is bound to perform in full
the undertaking which is the subject matter of such obligation."

In this case, the debtors having obligated themselves in solidum, the creditor can bring its action in toto
against any one of them. And even though the creditor may have stipulated with some of the solidary
debtors diverse installments and conditions, as in this case, Inchausti & Company did with its debtors
Manuel, Francisco, and Carmen Yulo through the instrument of May 12, 1911, this does not lead to the
conclusion that the solidarity stipulated in the instrument of August 12, 1909 is broken, as we already

87
know the law provides that solidarity may exist even though the debtors are not bound in the same
manner and for the same periods and under the same conditions.

2. No. There is no novation. In order that an obligation may be extinguished by another which
substitutes it, it is necessary that it should be so expressly declared or that the old and the new be
incompatible in all points.

In this case, the contract of May 12, 1911, does not constitute a novation of the former one of August
12, 1909, with respect to the other debtors who executed this contract, or more concretely, with
respect to the defendant Gregorio Yulo. The instrument of May 12, 1911, far from expressly declaring
that the obligation of the three who executed it substitutes the former signed by Gregorio Yulo and the
other debtors, expressly and clearly stated that the said obligation of Gregorio Yulo to pay the two
hundred and fifty-three thousand and odd pesos sued for exists, stipulating that the suit must continue
its course and, if necessary, these three parties who executed the contract of May 12, 1911, would
cooperate in order that the action against Gregorio Yulo might prosper with other undertakings
concerning the execution of the judgment which might be rendered against Gregorio Yulo in this same
suit. There exist no incompatibility between the old and the new obligation and we will merely reiterate
the legal doctrine that an obligation to pay a sum of money is not novated in a new instrument wherein
the old is ratified, by changing only the term of payment and adding other obligations not incompatible
with the old one.

88
 OBLIGATIONS
Extinguishment

ASSUMPTION OF A THIRD PARTY TO AN OBLIGATION DOES NOT AUTOMATICALLY RESULT

TO A NOVATION

74. DUÑGO v. LOPENA

G.R. No. L-18377, December 29, 1962
Regala, J.

FACTS:
In a petition for certiorari and prohibition before the SC, petitioner Anastacio Duñgo (Duñgo)
challenges the decision of the CA in dismissing his appeal and affirming the decision of the CFI in
approving the foreclosure sale on the strength of a compromise agreement.

Petitioner and Rodrigo Gonzales (Gonzales) purchased 3 parcels of land respondents Adriano Lopena
(Lopena) and Rosa Ramos (Ramos). Petitioner and Gonzales from executed a Deed of Real Estate
Mortgage over said parcels of land in favor of respondents. Petitioner and Gonzales defaulted which
resulted to the respondents’ filing for the foreclosure of the mortgage. However, before the case could
be tried, the parties executed a compromise agreement and submitted the same to the lower court for
approval. Respondents and Gonzales signed the said agreement, but petitioner did not. Gonzales
represented that his signature was for both himself and the herein petitioner. Said agreement extended
the date of payment of amount due and, that in case of default, petitioner and Gonzales consented to
the judgment of foreclosure, waiving the period of redemption. Later on, a certain Emma Santos
(Santos), petitioner, Gonzales, and respondent Lopena entered into a Tri-Party Agreement, wherein
Santos bound herself to be the payor in behalf of petitioner and Gonzales. The parties made reference
of the Compromise Agreement and its court approval in the said Tri-Party Agreement and stipulated
that, in case of default of payor Santos, petitioner allowed respondent Lopena to file the action for
foreclosure and sale of the parcels of land. Eventually, petitioner, Gonzales, and Santos failed to pay
their indebtedness which resulted to the foreclosure and sale of parcels of land. During the pendency
of the case, petitioner filed a motion to set aside all proceedings.

In the present petition, he insists that the Compromise Agreement was void ab initio and could have no
effect whatsoever against him because he did not sign the same. Furthermore, as it was void, all the
proceedings subsequent to its execution, including the Order approving it, were similarly void and
could not result to anything adverse to his interest. Petitioner finally argued that even assuming that
the Compromise Agreement was valid, it nevertheless could not be enforced against him because it
has been novated by the Tri-Party Agreement which brought in a third party, namely, Santos, who
assumed the mortgaged obligation of herein petitioner.

ISSUE:
Was there novation of the agreement when the parties entered into a Tri-Party Agreement?

RULING:
No, there was no novation of the agreement of the parties. Novation by presumption has never been
favored. To be sustained, it need be established that the old and new contracts are incompatible in all
points, or that the will to novate appears by express agreement of the parties or in acts of similar
import. (Martinez v. Cavives, 25 Phil. 581; Tiy Sinco vs. Havana, 45 Phil. 707; Asia Banking Corp. vs.
Lacson Co., 48 Phil. 482; Pascual vs. Lacsamana, 53 O.G. 2467, April 1957). An obligation to pay a
sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the term
of payment and adding other obligations not incompatible with the old one (Inchausti vs. Yulo, 34 Phil.
978; Pablo vs. Sapungan, 71 Phil. 145) or wherein the old contract is merely supplemented by the new
one (Ramos vs. Gibbon, 67 Phil. 371). It is necessary that the old debtor be released from the
obligation, and the third person or new debtor take his place in the new relation. Without such release,
there is no novation. There was no agreement that the first debtor, herein petitioner and Gonzales,
would be released from the responsibility. In light of the Tri-Party Agreement, Santos’ assumption as
payor merely had the effect of adding to the persons liable and did not necessarily imply the

89
extinguishment of the liability of petitioner and Gonzales. The fact that Santos was involved is
inconsequential. The respondents then can still enforce the obligation against the petitioner. Hence,
novation is not present in this case.

90
 OBLIGATIONS
Extinguishment

IMPLIED NOVATION REQUIRES CLEAR AND CONVINCING PROOF OF COMPLETE

INCOMPATIBILITY BETWEEN THE TWO OBLIGATIONS.

75. MILLAR v. COURT OF APPEALS

G.R. No. L-29981, April 30, 1971
Castro, J.

FACTS:
On February 11, 1956, Eusebio S. Millar obtained a favorable judgment from CFI of Manila, in civil
case condemning Antonio P. Gabriel to pay him the sum of P1,-746.98 with interest at 12% per annum
from the date of the filing of the complaint, the sum of P400 as attorney’s fees, and the costs of suit.
From the said judgment, the respondent appealed to the CA which was dismissed. After remand by
the CA of the case, petitioner moved ex parte in the court for the issuance of a writ of execution to
enforce the judgment. It issued the writ of execution and the sheriff of Manila seized the respondent’s
Willy’s Ford jeep. The respondent pleaded for the release of the jeep under an arrangement that, to
secure the payment of the judgement debt, respondent agreed to mortgage the vehicle in favor of the
petitioner. The petitioner agreed to the arrangement; thus, the parties executed a chattel mortgage on
the jeep. When the respondent failed to pay the first installment, the petitioner obtained an alias writ of
execution upon lapse of the entire period stipulated for the respondent to comply with his obligation—it
was returned unsatisfied. Petitioner obtained a fifth alias writ of execution, pursuant to such, the sheriff
levied on certain personal properties belonging to the respondent, and then scheduled them for
execution sale. The respondent filed an urgent motion for the suspension of the execution sale on the
ground of payment of the judgment obligation and was granted. The lower court ruled that novation
had taken place, and that the parties had executed the chattel mortgage only “to secure or get better
security for the judgment.” The respondent duly appealed the order to the CA. The CA stated that the
circumstances sufficiently demonstrate the incompatibility between the judgment debt and the
obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied novation.

ISSUE:
Whether or not the subsequent agreement of the parties as embodied in the deed of chattel mortgage
impliedly novated the judgment obligation in civil case 27116?

RULING:
The defense of implied novation requires clear and convincing proof of complete incompatibility
between the two obligations. The law requires no specific form for an effective novation by implication.
The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and
the second obligation novates the first. If they can stand together, no incompatibility results and
novation does not take place. Where the new obligation merely reiterates or ratifies the old obligation,
although the former effects but minor alterations or slight modifications with respect to the cause or
object or conditions of the latter, such changes do not effectuate any substantial incompatibility
between the two obligations. Only those essential and principal changes introduced by the new
obligation producing an alteration or modification of the essence of the old obligation result in implied
novation. In the case at bar, the mere reduction of the amount due in no sense constitutes a sufficient
indicium of incompatibility, especially in the light of (a) the explanation by the petitioner that the
reduced indebtedness was the result of the partial payments made by the respondent before the
execution of the chattel mortgage agreement and (b) the latter’s admissions bearing thereon.

91
 OBLIGATIONS
Extinguishment

THERE IS NO NOVATION INVOLVING REDUCTION OF MONEY JUDGMENT MADE THROUGH A

SETTLEMENT

76. SANDICO v. PIGUING

G.R No. L-26115, November 29, 1971
Castro, J.

FACTS:
Spouses Carlos Sandico and Enrica Timbol, and Teopisto P. Timbol, administrator of the estate of the
late Sixta Paras, obtained a judgment in their favor against Desiderio Paras in civil case 1554, an
action for easement and damages in the CFI of Pampanga. On appeal, the CA affirmed and modified
the judgment. The petitioners moved for the issuance of a writ of execution to enforce the appellate
court’s judgment which had acquired finality. However, the parties reached a settlement, finally
agreeing to the reduction of the money judgment which included that the portion of the judgment
rendered ordering him to reconstruct the irrigation canal. The petitioners sent the respondent a letter
demanding compliance relative to the reconstruction and reopening but it failed to do so. The
petitioners moved for the issuance of an alias writ of execution to enforce the judgment of the CA but
respondent judge ordered suspension of the said order considering that the agreement of the parties
“novated” the money judgment provided for in the decision of the CA providing that it “has already
been fully satisfied as to the money judgment and nothing more is left to be executed from the
aforesaid Decision as it does not allege any other condition except for the defendants to recognize the
easement therein.” With their subsequent motion for reconsideration denied the petitioners, before the
SC the petition for certiorari seeking to set aside the orders of the respondent judge dated granting the
respondent’s motion to set aside the alias writ of execution on the ground that the respondent judge
acted in excess of jurisdiction or with grave abuse of discretion.

ISSUE:
Whether or not the settlement of the parties after the court’s judgment extinguished the obligation
imposed by the judgment by virtue of novation?

RULING:
Yes. The appellate court's judgment obliges the respondent to do two things: (1) to recognize the
easement, and (2) to pay the petitioners the sums of P5,000 actual and P500 exemplary damages and
P500 attorney's fees, or a total of P6,000. The full satisfaction of the said judgment requires specific
performance and payment of a sum of money by the respondent.

We adjudge the respondent's judgment debt as having been fully satisfied. We see no valid objection
to the petitioners and the respondent entering into an agreement regarding the monetary obligation of
the latter under the judgment of the Court of Appeals, reducing the same from P6,000 to P4,000. The
payment by the respondent of the lesser amount of P4,000, accepted by the petitioners without any
protest or objection and acknowledged by them as "in full satisfaction of the money judgment" in civil
case 1554, completely extinguished the judgment debt and released the respondent from his
pecuniary liability. Both the petitioners and the respondent take exception to the respondent judge's
ruling that their agreement of August, 1964 to reduce the judgment debt, as evidenced by the receipt
hereinbefore adverted to, "novated" the money judgment rendered by the appellate court.

Novation results in two stipulations — one to extinguish an existing obligation, the other to substitute a
new one in its place. Fundamental it is that novation effects a substitution or modification of an
obligation by another or an extinguishment of one obligation in the creation of another. In the case at
hand, we fail to see what new or modified obligation arose out of the payment by the respondent of the
reduced amount of P4,000 and substitute the monetary liability for P6,000 of the said respondent
under the appellate court's judgment. Additionally, to sustain novation necessitates that the same be
so declared in unequivocal terms — clearly and unmistakably shown by the express agreement of the
parties or by acts of equivalent import — or that there is complete and substantial incompatibility
between the two obligations.

92
 OBLIGATIONS
Extinguishment

THERE IS NOVATION WHEN THE OLD AND THE NEW OBLIGATIONS BE ON EVERY POINT
INCOMPATIBLE WITH EACH OTHER

77. KABANKALAN SUGAR CO., INC. v. PACHECO

G.R. No. L-33654, December 29, 1930
Villa-real, J.

FACTS:
On appeal, Kabankalan Sugar Co. assails the decision of the RTC upholding the defense of novation,
and thereby absolving Josefa Pacheco from plaintiff’s complaint. On November 1, 1920, plaintiff
Kabankalan Sugar Co., represented by its manager Guillermo Lizarraga, entered into a contract with
defendant Josefa Pacheco granting plaintiff the right of way through the Hilabañgan estate for a period
of 20 years. In 1922, defendant suggested that plaintiff assume the obligation to pay the land tax upon
the Hilabañgan estate, and to assume her obligations with Ledesma Hermanos, in exchange of
delivery of 15% of all the sugar obtained from said estate, annually. Lizarraga told defendant that the
company would accept her proposition provided that she execute a new contract in a public instrument
and bind herself for like period, to deliver all the sugar produced in the estate to plaintiff’s sugar mill.
Defendant insisted that the new contract, both with regard to the easement and to the milling of the
sugar cane, should not be for the same period as that stipulated in the contract of November 1, 1920,
but only seven years or crops of sugar, beginning 1922-1923. After reaching an agreement, they
executed the deed on September 29, 1922. In October 1924, Ignacio Huarte, the new manager of
plaintiff, had the company’s notary draw up a document in order to convert the contract of November 1,
1920, into a public instrument. When the notary took it to defendant’s house for her to sign and ratify it
however, she declined to do so, claiming that the same had already been superseded by the public
instrument executed between plaintiff and herself on September 29, 1922.

Consequently, plaintiff sought to compel defendant to execute and ackonwledge before a notary public
the contract entered by the parties on November 1, 1920. Plaintiff also contended that the parties did
not intend to novate the first contract when the second was executed, there being no reason for doing
so, nor was the second any advantage to it, but, on the contrary, imposed an obligation not contained
in the first contract.

ISSUE:
Whether or not the contract of September 29, 1922 has extinguished the contract of November 1, 1920
by novation?

RULING:
Yes, there is extinguishment by novation. Art. 1203 provides that obligations may be modified: (1) by
the change of their object or principal conditions; (2) by substituting another in place of the debtor; or
(3) by subrogating a third person in the rights of the creditor. Meanwhile, Art. 1204 states that “in order
that an obligation may be extinguished by another which substitutes it, it shall be necessary that it be
so declared expressly, or that the old and new obligations be incompatible in every aspect.”

In the contract of November 1, 1920, the duration of the right of way was 20 years, while in the
contract of September 29, 1922, that period was reduced to seven crops, which is equivalent to seven
years. There can be no doubt that insofar as the duration of the right of way is concerned, the two
contracts are incompatible, for the second contract reduces the period agreed upon in the first
contract, and so both contracts cannot subsist at the same time. Further, while it is true that plaintiff
assumed the responsibility of a guarantos of defendant for certain obligations, it is likewise true that
the latter bound herself to mill her sugarcane in plaintiff’s mill—which obligation had likewise not been
imposed in the first contract.

93
 OBLIGATIONS
Extinguishment

ADDITION OF NEW OBLIGATIONS NOT INCOMPATIBLE WITH THE OLD ONES DOES NOT
CONSTITUTE NOVATION

78. SPOUSES REYES v. BPI FAMILY SAVINGS BANK

G.R. Nos. 149840-41, March 31, 2006
Corona, J.

FACTS:
Petitioners via petition for review under Rule 45, assail the decision of the CA which dismissed
petitioners’ actions for lack of a finding that the first contract was cancelled by reason of novation.

Petitioners Sps. Reyes executed a real estate mortgage on their property in favor of respondent BPI
Family Savings Bank (BPI-FSB) to secure a P15,000,000 loan of Transbuilders Resources and
Development Corporation (Transbuilders). When Transbuilders failed to pay its loan within the
stipulated period of one year, BPI-FSB restructured the loan through a promissory note executed by
Transbuilders in its favor, which stated that: (1) the proceed of the Note shall be applied to loan
account No. 21108336; and (2) the new obligation of Transbuilders to respondent Bank for
P15,000,000 shall be paid in twenty quarterly installments commencing on September 28, 1996 and at
an interest rate of 18% per annum.

Petitioners averred that they were not informed about the restructuring of Transbuilders’ loan, and that
when they learned of the new loan agreement, they requested that cancelllation of their mortgage and
the cancellation of their certificate of title to the property. They further claimed that the new loan
novated the loan agreement initially executed, and because the same was without their knowledge and
consent, they claim that they were allegedly released from their obligation under the mortgage.

ISSUE:
Whether or not there was a novation of the mortgage loan contract between petitioners and BPI-FSB
that would result in the extinguishment of petitioners’ liability to the bank.

RULING:
No, there was no novation of the mortgage loan contract.

Novation is defined as the extinguishment of an obligation by the substitution or change of the

obligation by a subsequent one which terminates the first, either by changing the object or principal
conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the
creditor. The cancellation of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly. In every novation, there are four essential
requisites: (1) a previous valid obligation; (2) the agreement of all the parties to the new contract; (3)
the extinguishment of the old contract; and (4) validity of the new one. Thus, the well-settled rule is
that, with respect to obligations to pay a sum of money, the obligation is not novated by an instrument
that expressly recognizes the old, changes only the terms of payment, adds other obligations not
incompatible with the old ones, or the new contract merely supplements the old one.

BPI-FSB and Transbuilders only extended the repayment term of the loan from one year to twenty
quarterly installments at 18% interest per annum. There was absolutely no intention by the parties to
supersede or abrogate the old loan contract secured by the real estate mortgage executed by
petitioners in favor of BPI-FSB. In fact, the intention of the new agreement was precisely to revive the
old obligation after the original period expired and the loan remained unpaid. The novation of a
contract cannot be presumed. In the absence of an express agreement, novation takes place only
when the old and the new obligations are incompatible on every point.

Therefore, there was no novation of the mortgage loan contract between petitioners and BPI-FSB.

94
 OBLIGATIONS
Extinguishment

THERE CAN BE NO NOVATION AFTER THE JUSTICE AUTHORITIES HAVE TAKEN

COGNIZANCE OF THE CRIME AND INSTITUTED ACTION IN COURT

79. PEOPLE v. NERY

G.R. No. L-19567, February 5, 1964
Reyes, J.B.L., J.

FACTS:
This is an appeal from a judgment of the Court of First Instance of Negros Occidental convicting
Soledad Nery for estafa. Soledad Nery received from Federico Matillano two diamond rings to be sold
by her on commission. She agreed to deliver to Matillano the sum of P230.00 the next day. Days,
weeks, and months passed but Nery failed to deliver the amount. Hence, the corresponding
information was filed with the court of first instance. During the pendency of the case, Nery executed a
deed, promising to pay the balance in 3 instalments. Matillano accepted the first payment but the
balance was never paid. Hence, Nery was found guilty beyond reasonable doubt of the crime of
estafa.

The accused insists that insists that there is no prohibition in our law to prevent the parties to a
contract to novate it so that any incipient criminal liability under the first is thereby avoided.

ISSUE:
Can a novation of the original transaction convert criminal responsibility into a simple civil
responsibility?

RULING:
No, a novation of the original transaction will not convert criminal responsibility into a simple civil
responsibility. Novation is not one of the means recognized by the Penal Code whereby criminal
liability can be extinguished. The role of novation may only be to either prevent the rise of criminal
liability or to cast doubt on the true nature of the original basic transaction.

The novation theory may perhaps apply prior to the filing of the criminal information in court by the
state prosecutors because up to that time the original trust relation may be converted by the parties
into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the
original trust. But after the justice authorities have taken cognizance of the crime and instituted action
in court, the offended party may no longer divest the prosecution of its power to exact the criminal
liability, as distinguished from the civil. The crime being an offense against the state, only the latter can
renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs.
Montañes, 8 Phil. 620).

Even in Civil Law the acceptance of partial payments, without further change in the original relation
between the complainant and the accused, cannot produce novation. For the latter to exist, there must
be proof of intent to extinguish the original relations, and such intent cannot be inferred from the mere
acceptance of payments on account of what is totally due. Much less can it be said that the
acceptance of partial satisfaction, can effect the nullification of a criminal liability that is fully matured,
and already in the process of enforcement.

In the case at bar, the alleged novation occurred after the criminal case had been instituted, and while
it was pending trial. In fact, the novation theory advanced by the accused has been rejected, time and
again, by this Supreme Court, in a legion of decisions. Therefore, the accused cannot avoid criminal
liability as the alleged novation of the original transaction did not convert her criminal responsibility into
a simple civil responsibility.

95
 OBLIGATIONS
Extinguishment

NOVATION IS NEVER PRESUMED, AND MUST BE EXPRESSED

80. TIU SIUCO v. HABANA

G.R. No. 21106, February 21, 1924
Johns, J.

FACTS:
The plaintiff, a contractor and builder at Iloilo, entered into a written contract with Simeon Habana for
the construction of a certain building. The contract is specific as to the plans, specifications, and
materials to be used, and provides that the plaintiff at his own expense shall furnish all the labor and
materials to be used in the building. The contract price for the completed building was P54,000, to be
paid on specified instalments.

At different times during the contractions of the building modifications, changes and alterations were
requested by the defendant, and at other times, after specific portions of the building were completed
by the plaintiff, such portions were ordered torn down and reconstructed with other and different
materials to comply with the wishes of the defendant. In the course of time, the building was
substantially completed, and the defendant promptly took possession of it and has been in possession
of it ever since. The defendant paid P54,000, the contract price, and he also paid the further sum of
P4,000.

After the defendant took possession, the plaintiff presented his claim, and the parties undertook to
mutually settle the matter between themselves. Failing to agree, this action was brought in which
plaintiff seeks to recover P67,000 over and above the P58,000 which has been paid. It is largely
founded upon the theory that, on account of the numerous changes and alterations which were made
in the construction, there was a novation, and that in legal effect the contract was set aside by the
actions and conduct of the parties, and of the defendant in particular, and for such reason the plaintiff
was entitled to recover on a quantum meruit, and that the reasonable value of the building as it was
remodeled and reconstructed was P125,000, and plaintiff prays judgment for the unpaid balance of
P67,000.

ISSUE:
Whether or not the numerous changes and alteration in the performance of contract constitues
novation?

RULING:
Upon the question of what constitutes a novation, in Zapanta v. De Rotaeche (21 Phil., 154), this court
said, “Novation is never presumed, and must be expressed. It was a principle of the civil law that there
must be an express intention to novate — animus novandi. A novation is never presumed. Novation
takes place only when the contracting parties expressly disclose that their object in making the new
contract is to extinguish the old contract, otherwise the old contract remains in force and the new
contract is added to it, and each gives rise to an obligation still in force. (Hard v. Burton, 20 Atl., 62 Vt.,
314.)

When the defendant said to the plaintiff "pase cuenta" (bring in your bill), it is far more reasonable,
upon the facts, to construe it as meaning that defendant intended that plaintiff should bring in his bill for
the reasonable value of any alterations or changes which were made at his request. There is no claim
or pretense that anything was said by either party about terminating or rescinding the contract, or that
the remark was ever made at any other time than when defendant requested changes and alterations.

The original contract specified the price of the building, the amount of payments, and when they were
to be made. There was no occasion for the defendant to notify the plaintiff to bring in his bill for
anything under the written contract. As we construe it, the statement of the defendant "bring in your
bill" was never intended to apply to the original contract, and should be confined and limited to a bill for
the amount of any changes, alterations, or modifications which were made at defendant’s request.

96
Although numerous changes were made, and there was a material increase in the cost of the building,
there was no material change in its size or dimensions. In other words, the original contract was used
as a basis for the construction of the building, and any changes or alterations which were made were
founded upon the original contract, and were made with the understanding and agreement that the
defendant would pay the reasonable value of all of such changes and alterations.

97
 OBLIGATIONS
Extinguishment

CREDITOR SHOULD AGREE TO ACCEPT THE SUBSTITUTION IN ORDER TO EFFECT A VALID

NOVATION

81. DE CORTES v. VENTURANZA

G.R. No. L-26058, October 28, 1977
Makasiar, J.

FACTS:
Plaintiffs Felix Cortez y Ochoa and Noel J. Cortes sold and delivered to the defendants 33 parcels of
land with all the improvements thereon for the total sum of P716,573.90 of which defendants agreed to
pay jointly and severally; that upon the registration of the deed of sale and mortgage with the office of
the register of deeds of Bulacan new certificates of title for the 33 parcels of land were issued in the
names of the defendants and the mortgage obligation was noted thereon; that the mortgage obligation
fell due on January 1, 1962, but despite repeated demands for payment, defendants failed and refused
to pay the said balance of P576,573.90 to plaintiffs; that it is stipulated in the deed of sale with
purchase money mortgage that in the event or default by defendants to pay the obligation secured by
the mortgage. Thus, plaintiffs filed the instant action for foreclosure of real estate.

Defendants Oledan allege that they and their co-defendants executed and entered into an agreement
whereby they sold, transferred unto their co-defendants all their shares, ownership and interest in the
property subject of a deed of sale and plaintiffs had full knowledge of and gave their consent to the
transfer of their shares, ownership and interest in favor of their co-defendants, as well as the
assumption by the latter of the mortgage obligation.
Defendants claim that there had been a novation of the contract between them and plaintiffs on
account of the transfer made by defendants Oledans of their interest in the property in favor of their
defendants Venturanzas, with the knowledge and consent of the plaintiffs

ISSUE:
Whether or not sale and transfer of buyer-debtor’s share, ownership and interest in a property to third
person constitutes novation by substitution of the person of the debtor took place and, therefore, their
obligation had been extinguished.

RULING:
According to Manresa, novation is the extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which extinguishes or modifies the first, either by changing the
object or Principal conditions, or by substituting the person of the debtor, or by subrogating a third
person to the rights of the creditor (8 Manresa 428, cited in IV Civil Code of the Philippines by
Tolentino 1962 ed., p. 352). Unlike other modes of extinction of obligations, novation is a juridical act
with a dual function — it extinguishes an obligation and creates a new one in lieu of the old.

In view of the foregoing stipulations in the contract between the parties, while plaintiffs may have
knowledge of the transfer made by defendants Oledans of their interest in the property in question in
favor of their co-defendants, yet insofar as the original contract between plaintiffs and defendants are
concerned, 'the provisions thereof shall govern. For plaintiffs' written consent to any transfer is required
by the provisions of their contract. Since defendants were of the said provision, they should have taken
steps to obtain plaintiffs' written consent if only to effect a novation. To the mind of the court, it must
have been due to a premonition on the part of plaintiffs that there might be a substitution of debtor that
gave rise to the incIusion of the aforequoted provision in their original contract.

98
 OBLIGATIONS
Extinguishment

FAILURE TO OBJECT TO ASSUMPTION OR SUBROGATION CONSTITUTES CONSENT, WHICH

VALIDATES THE NOVATION

82. BABST v. COURT OF APPEALS

G.R. No. 99398, January 26, 2001
Ynares-Santiago, J.

FACTS:
The complaint was commenced principally to enforce payment of a promissory note and three
domestic letters of credit which Elizalde Steel Consolidated, Inc. (ELISCON) executed and opened
with the Commercial Bank and Trust Company (CBTC). On June 8, 1973, ELISCON obtained from
CBTC a loan in the amount of P8,015,900.84, with interest at the rate of 14% per annum, evidenced
by a promissory note. ELISCON defaulted in its payments, leaving an outstanding indebtedness in the
amount of P2,795,240.67 as of October 31, 1982. ELISCON defaulted in its obligation to pay the
amounts of the letters of credit, leaving an outstanding account, as of October 31, 1982, in the total
amount of P3,963,372.08. On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC
entered into a merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed
all the liabilities of CBTC.

Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the
Development Bank of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to
convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its
total indebtedness in the amount of P201,181,833. In October 1981, DBP formally took over the assets
of ELISCON, including its indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement
of all of ELISCON’s obligations to its creditors, but BPI expressly rejected the formula submitted to it
for not being acceptable. Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC,
instituted with the Regional Trial Court of Makati a complaint for sum of money against ELISCON and
MULTI. BPI contends that in order to have a valid novation, there must be an express consent of the
creditor. In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to
register its objection to the takeover by DBP of ELISCON’s assets, at the creditors’ meeting held in
June 1981 and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as
debtor.

ISSUE:
Whether or not BPI consented to the assumption by DBP of the obligations of ELISCON?

RULING:
Yes. Indeed, there exist clear indications that BPI was aware of the assumption by DBP of the
obligations of ELISCON. Indeed, the authority granted by BPI to its account officer to attend the
creditors’ meeting was an authority to represent the bank, such that when he failed to object to the
substitution of debtors, he did soon behalf of and for the bank. Even granting arguendo that the said
account officer was not so empowered, BPI could have subsequently registered its objection to the
substitution, especially after it had already learned that DBP had taken over the assets and assumed
the liabilities of ELISCON. Its failure to do so can only mean an acquiescence in the assumption by
DBP of ELISCON’s obligations. As repeatedly pointed out by ELISCON and MULTI, BPI’s objection
was to the proposed payment formula, not to the substitution itself. BPI’s conduct evinced a clear and
unmistakable consent to the substitution of DBP for ELISCON as debtor. Hence, there was a valid
novation which resulted in the release of ELISCON from its obligation to BPI, whose cause of action
should be directed against DBP as the new debtor.

Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it remains compatible with the
amendatory agreement. An extinctive novation results either by changing the object or principal
conditions (objective or real), or by substituting the person of the debtor or subrogating a third person

99
in the rights of the creditor (subjective or personal). Under this mode, novation would have dual
functions — one to extinguish an existing obligation, the other to substitute a new one in its place —
requiring a conflux of four essential requisites, (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation.

The original obligation having been extinguished, the contracts of suretyship executed separately by
Babst and MULTI, being accessory obligations, are likewise extinguished.

100
 OBLIGATIONS
Extinguishment

WHERE A CONDITION HAS NOT YET BEEN FULFILLED, THE OBLIGATION IS NOT DUE,
HENCE, THERE IS NO CAUSE OF ACTION THAT HAS ARISEN.

83. VILLANUEVA v. GIRGED

G.R. No. 15154, December 29, 1960
Concepcion, J.

FACTS:
The complaint purports to set up three (3) causes of action, for the recovery of the sums of P7,350.00,
P2,500.00 and P6,000.00, respectively. It is alleged therein that defendant Girged issued in favor of
the plaintiff a Philippine National Bank check representing the first sum, on February 27, 1956, in
exchange for the same amount, in cash, delivered by the latter to the former; and that upon
presentation, the check was dishonored by the bank, for "Girged had no deposits therein"; that in a
letter “Annex B” dated April 28, 1956, defendant Lucio S. Legaspi had "expressly acknowledged and
assumed the obligations" of Girged, who was his "business partner"; and that, despite repeated
demands, said sum of P7,350.00 is still unpaid. By way of second cause of action, plaintiff alleged in
the complaint that in February and April, 1956, defendants had hired his services as stevedore for the
loading of round logs for exportation to Japan, with a total volume of 2,500 cubic meters, at the rate of
P1.00 per cubic meter, making a total of P2,500.00; that the obligation to pay the same was, also,
acknowledged and assumed by Legaspi in said letter; and that said obligation has not been paid
despite repeated demands. By way of third cause of action, plaintiff claims P2,500.00 for moral
damages and P3,500.00 for attorney's fees. The complaint contains, also, some allegations in support
of the prayer therein that a writ of preliminary injunction be issued.

Letter Annex B, states that: "I wish to assure you that any amount that Mr. Girged owes you will be
taken care of in his 3rd shipment of logs to Japan. The 2nd shipment was a losing" proposition on
account of the fact that it was an attached shipment of Poblete and Nasipit Lumber. So please feel
assure that I, myself, will be the one to take care of his account you as soon as Mr. Girged has made
his 3rd shipment. I wish to know also by return mail how much really Mr. Girged is indebted to you so
that I may have full amount of Mr. Girged’s obligation. Xxx”

Defendant Legaspi filed an answer stating that, in said letter, Annex B, he merely tried to help plaintiff
in the collection of his credit against Girged, upon completion of a given shipment of logs to Japan by
Girged, which shipment has not been completed. The lower court dealt with this special defense as if it
were a motion to dismiss and, after due hearing, concluded that it was well taken. Hence, the order of
dismissal appealed from.

ISSUE:
Whether or not the allegations of the complaint are sufficient to state a cause of action against
Legaspi.

RULING:
No. As contended by Legaspi and sustained by the lower court, Legaspi did not thereby assume the
obligation of Girged. Legaspi merely assured the plaintiff that any amount due to him by Girged would
"be taken care of in his third shipment of logs to Japan" and that he (Legaspi) would "be the one to
take care" of Girged's account with plaintiff, "as soon as Mr. Girged has made his third shipment."
Moreover, there is no allegation in the complaint to the effect that this shipment has been made, so
that, even if said letter Annex B entailed an assumption of obligation, the condition imposed therefor
had not been fulfilled as yet, and, hence, said obligation is not due, insofar as Legaspi is concerned.
Indeed, the contrary is inferable from the fact that plaintiff's causes of action against Legaspi are based
upon the alleged assumption of obligation in consequence of Legaspi's letter Annex B, thus indicating
that Legaspi was not deemed bound prior to said alleged assumption and that his obligation, if any, did
not spring, therefore, from his status as alleged partner of Girged.

101
 OBLIGATIONS
Extinguishment

AN OBLIGATION IS EXTINGUISHED UPON HAPPENING OF A CONDITION WHICH IS

CONTEMPLATED IN A CROP LOAN OR AGRICULTURAL LOAN

84. HODGES v. REY

G.R. No. L-12554, February 28, 1961
Ponente, J.

FACTS:
On September 21, 1938 herein respondent Rey obtained a loan from petitioner Hodges in the sum of
P3,000 payable on or before February 21, 1939.Three days thereafter Rey wrote a letter authorizing
herein respondent bank PNB—Iloilo to pay his indebtedness to Hodges out of whatever crop loan
might be granted to him by said bank for the agricultural year of 1939-1940. PNB—Iloilo’s acting
manager, as the bank’s agent, confirmed the arrangement on the same day.

Rey, however, had an unpaid balance of P55,000 from the previous agricultural year as well as milling
expenses, to which PNB—Iloilo applied the money Rey received as a result of the crop loan or
agricultural line for 1939-1940, which only amounted to P39,000.

Despite the obvious lack of excess funds from the agricultural line, respondent bank’s acting manager
nevertheless authorized the payment of P2,000 for Rey’s loan. Hodges then sued respondent bank
and Rey for the still remaining unpaid balance from the loan amounting to P1,000.

ISSUE:
Whether or not the respondent PNB—Iloilo may still be obliged to pay for the remaining balance of
Rey’s loan

RULING:
No. Appellee did not assume the obligation to pay the indebtedness of Mattias C. Rey (M. C. R) to
appellant. M. C. R simply authorized appellee to pay the amount he owed appellant out of whatever
crop loan or agricultural line appellee might grant him for a given agricultural year, and all that appellee
did was confirm or accept said arrangement. Although the agricultural line that M. C. R. expected was
granted by appellee, it was subject to several conditions, and the happening of an event included in
one of those conditions resulted in the non-availability of funds with which appellees could pay
appellant the amount owed by M. C. R. Hence, appellee cannot be compelled to pay appellant the
indebtedness of M. C. R.

According to the evidence, respondent bank did not assume the obligation to pay Rey's indebtedness
to petitioner, neither as co-principal, nor as a surety or guarantor. Rey simply authorized PNB—Iloilo to
pay the amount he owed Hodges only out of whatever crop loan or agricultural line the bank might
grant him for the agricultural year 1939-40, and the bank simply accepted said arrangement through its
agent, the acting manager. As it was, there were no extra funds out of the crop loan and in the
possession of PNB—Iloilo that could have been legitimately used to pay Rey's obligation; hence, the
aforementioned arrangement with Rey should have already been treated as terminated or one that
cannot be effected.

Hence, it is clear that the acting manager acted in excess of his authority as agent and given the facts,
respondent bank cannot be obliged to pay the remainder of Rey's obligation.

102
 OBLIGATIONS
Extinguishment

AGENT OR CONDUIT FOR PAYMENT IS NOT A THIRD PARTY PAYOR IN SUBROGATION

UNDER ART. 1302 (2)

85. CHEMPIL EXPORT & IMPORT CORP. v. COURT OF APPEALS

G.R. Nos. 112438-39, December 12, 1995
Kapunan, J.

FACTS:
FCI, petitioner CEIC's predecessor-in-interest, paid SBTC the due obligations of a certain Garcia to the
said bank pursuant to the following stipulation in the Deed of Absolute Sale and Purchase of Shares of
Stock:

Manner of Payment

Payment of the Purchase Price shall be made in accordance with the following order of preference
provided that in no instance shall the total amount paid by the Buyer exceed the Purchase Price:

a. Buyer shall pay directly to the Security Bank and Trust Co. the amount determined by the Supreme
Court as due and owing in favor of the said bank by the Seller.

The foregoing amount shall be paid within fifteen (15) days from the date the decision of the Supreme
Court in the case entitled "Antonio M. Garcia, et al. vs. Court of Appeals, et al." G.R. Nos. 82282-83
becomes final and executory.

Petitioner then contended that after making such payment, FCI, and subsequently itself, was
subrogated to the rights of SBTC, particularly to the latter's aforementioned attachment lien over the
abovementioned shares.

ISSUE:
Whether or not FCI, and later petitioner CEIC, was subrogated to the rights of SBTC over the
aforementioned shares

RULNG:
NO—The Court held that since the money used to discharge Garcia's debt rightfully belonged to him,
FCI cannot be considered a third party payor under Art. 1302 (2), but was instead merely an agent or a
conduit; hence, FCI, and later CEIC, was not subrogated to SBTC’s lien.

By definition, subrogation is the transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights. Under Art. 1302 (2), there is subrogation in favour of a third party payor
or “a third person, not interested in the obligation, [who] pays with the express or tacit approval of the
debtor”.

In the present situation, there is no such subrogation because it is clear that when FCI issued a check
to SBTC to pay Garcia's indebtedness to the said bank, it was in effect paying with Garcia's money, no
longer with its own, because said amount was part of the purchase price which FCI owed Garcia in
payment for the sale of the disputed shares by the latter to the former. The money paid by FCI to
SBTC, properly belonged to Garcia. Thus, it was as if Garcia himself paid his own debt to SBTC, but
through a third party—FCI.

Hence, FCI, and subsequently CEIC, was not subrogated to the rights of SBTC against Garcia and did
not acquire SBTC's attachment lien over the disputed shares—which, in turn, had already been lifted
or discharged upon satisfaction by Garcia, through FCI, of his debt to the said bank.

103
 OBLIGATIONS
Extinguishment

MORTGAGOR OF A CHATTEL MORTGAGE IS RELIEVED FROM LIABILITY BY PAYING THE

MORTGAGEE AFTER ASSIGNMENT OF THE MORTGAGE TO A THIRD PERSON, WHEN HE HAS
NO ACTUAL NOTICE OF SAID TRANSFER.

86. SISON v. YAP TICO

G.R. No. L-11583, February 8, 1918
Johnson, J.

FACTS:
This is an appeal from the judgment of the trial court relieving the defendants F. M. Yap Tico and
Amando Avanceña from all liability under the complaint and ordered that the defendants recover from
the plaintiffs Jose and Emilio Sison the sum of P2,000.

Plaintiffs Emilio and Jose Sison borrowed from Eugenio Kilayko the sum of P2,000 guaranteed by a
chattel mortgage covering machinery, crops and a number of carabaos. The mortgage in question was
transferred by the mortgagee Kilayko to the defendant Yap Tico, within less than 2 months after its
execution and delivery. The assignment was duly registered on April 14, 1913, nearly 1 year after the
transfer had been made. Neither Kilayko nor Yap Tico gave notice to the plaintiffs that said mortgage
had been transferred and registered. On May 14, 1914, Kilayko executed and delivered a cancellation
of said mortgage. Later, the assignee Yap Tico, in accordance with the provisions of the Chattel
Mortgage Law, proceeded to foreclose said mortgage. It is admitted that the sheriff, as well as Yap
Tico, were notified by the plaintiffs, at the time of said attachment, that the mortgage had been paid
and canceled. Notwithstanding that notice, the sheriff insisted upon enforcing the attachment.

This action was brought for the purpose of recovering the property, together with damages caused by
said alleged illegal attachment.

ISSUE:
Whether the mortgagor of a chattel mortgage is relieved from liability by paying the mortgagee after
the mortgage has been assigned to a third person, when he has no actual notice of said transfer?

HELD:
Yes, the mortgagor is relieved from such liability. Article 1527 of the Civil Code provides that a debtor
who, before having been informed of the assignment, pays the creditor, shall be free from the
obligation. The registration of the assignment does not operate as notice, ipso facto, to the mortgagors
because the law does not require such assignments to be recorded. While such assignments may be
recorded, the law is permissible and not mandatory. It is generally held that if the law does not require
a particular instrument to be recorded or registered, the recording of that instrument will not be
constructive notice of its existence to anyone.

The debtor or party liable on contracts like the one in question is not affected by the assignment until
he has notice thereof, and consequently he may set up against the claim of the assignee any defense
acquired before notice that would avail him against the assignor had there been no assignment, and
payment by the debtor to the assignor, or any compromise or release of the assigned claim by the
latter before notice will be valid against the assignee and discharge the debtor.

It seems to be clear, then, that a debtor is protected if he pays his creditor without actual notice that
the debt has been assigned. Such notice must be actual, and the recording of the assignment, there
being no law requiring the same, will not operate as constructive notice to the debtor.
Hence, the payment made by Sison to the assignor Kilayko before actual notice of the transfer of the
mortgage to Yap Tico extinguished their liability under such mortgage.

104
 OBLIGATIONS
Extinguishment

RATIFICATION OF AN ORAL CONTRACT REMOVES IT FROM THE OPERATION OF THE

STATUTE OF FRAUDS

87. RODRIGUEZ v. COURT OF APPEALS

G.R. No. L-29264, August 29 1969
Castro, J.

FACTS:
This is a petition for mandamus and certiorari assailing the decision of the CA in annulling the deed of
sale executed by plaintiff Nieves Cruz in favor of Barbara Lombos Rodriguez.

By virtue of a document denominated as "Kasunduan", Nieves Cruz, now deceased, authorized the
defendants Sps Atanacio Valenzuela, and Maximina Victorio and Liberata Santos to sell a certain
parcel of land belonging to her. The stipulated "advance payment” of P20,000 was duly made to
Nieves in January 1959, as evidenced by a receipt. Meanwhile, in a land registration proceeding, the
registration court decreed the registration of the land in the name of Nieves, subject to the rights of the
defendants over the 1/2 share of Nieves of the parcel of land for which the latter was paid P22,000 as
partial payment thereof. Then, Nieves sold the property in question to Barbara Lombos Rodriguez.
Later, Nieves filed action for rescission of the "Kasunduan" and the cancellation of the annotation on
the title to the land respecting defendant's right thereto.

The petitioner and the heirs of Nieves alleged that the P20,000 were received by Nieves as partial or
installment payments of the purchase price on the representations of the respondents, that they had a
buyer for the property from whom these payments came, all pursuant to the agency agreement. The
defendants assert that those amounts were paid by them, as disclosed buyers, to Nieves and her
children, pursuant to a novatory verbal contract of sale entered into with Nieves Cruz, subsequent to
the agency agreement and prior to the issuance of the decree of registration.

ISSUE:
Was there a novatory oral contract to sell entered into by Nieves in favor of Atanacio Valenzuela, et
al.?

RULING:
Yes, there was such a novation in this case.

The testimony of Andres Nery, a successor-in-interest of Nieves, reveals that they were told that the
buyer was Salud de Leon, daughter of Santos, and that they were paid little by little and had been paid
a grand total of P48,000. On the faces of the receipts signed by Nieves, it is clear that the amounts
therein stated were in payment by defendants of the land which the recipients had sold to them. Of
incalculable significance is the notation in the OCT and in the TCT in the name of Nieves which
recorded Nieves' sale of her interest in the land to the defendants.

A legion of receipts there are of payments of the purchase price signed by Nieves Cruz. True, these
receipts do not state all the basic elements of a contract of sale, for they do not expressly identify the
object nor fix a price or the manner of fixing the price. The parties, however, agreed that the object of
the sale referred to in the receipts is Nieves' share in the land. At all events, by accepting from the
defendants the payment, the plaintiff thereby ratified the oral contract, conformably with Article 1405 of
the Civil Code, and removed the partly executed agreement from the operation of the Statute of
Frauds.

Hence, final decision of the land court — to the effect that Nieves Cruz had sold her undivided share to
defendants, and had received a partial payment of P22,000 — is now beyond judicial review.

105
 CONTRACTS
General Provisions

A PARTY WHO CONSENTS TO A “BAD BARGAIN” HAS NO CAUSE OF ACTION

88. VALES v. VILLA

G.R. No. 10028, December 16, 1916
Moreland, J.

FACTS:
This is an appeal to set aside certain transfers of real estate from the plaintiff Jose Vales to one of the
defendants and to require that defendant to recover such properties with a refund of sums paid, and
damages.

Jose Vales was the owner of two house and lots in Calle Marcado, Ermita and a house and lot in
Callejon Maria Paz. He was in debt to Felipa Silvestre for P20,000 and on the same year he executed
to her a conveyance of the properties. As he was still indebted to the Felipa in the sum of P5000, he
conveyed the premises to Felipa’s heir Maria Guia Garcia on March 22, 1909. After conveyance,
Garcia sold parcels of the properties. In 1911 and 1913, the plaintiff conveyed Garcia a certain
properties in Calle Salsipuedes. In 1911, plaintiff also conveyed to the defendant Maria Guia Garcia a
house and lot located on Padre Faura Street. On the April 4, 1913, Garcia conveyed to Vales the
March 22, 1909 properties, remaining unsold, for the consideration of P6,800.

In his action, Vales contends that there was a parol agreement in the 1909 conveyance, giving him the
right to repurchase the premises so conveyed at any time on paying P25,000. Vales also claims that
the Calle Salsipuedes and Padre Fauna properties were conveyed under the threat that, if he did not
do so, the defendants would not reconvey to him the properties described in the conveyance of the
22d of March 1909. The defendants deny that the verbal agreement existed and also specifically deny
that such threat or any threat was made.

ISSUE:
Whether or not the real estate contracts can be annulled on the basis of fraud or intimidation?

RULING:
No. There was no fraud or “imminent and serious injury threatened to his person or property” (Art.
1267) in this case. Most if not all of the elements of fraud are absent. His consent was not obtained by
deceit in any of the transactions. There did not exist in any one of the transactions complained of a
condition where "by words and insidious machinations on the part of one of the contracting parties the
other is (was) induced to execute a contract which, without them, he would not have made."

A distinction must be made between a case where a person gives his consent reluctantly and even
against his good sense and judgment, and where he, in reality, gives no consent at all, as where he
executes a contract or performs an act against his will under a pressure which he cannot resist. It is
clear that one acts as voluntarily and independently in the eye of the law when he acts reluctantly and
with hesitation as when he acts spontaneously and joyously. Legally speaking he acts as voluntarily
and freely when he acts wholly against his better sense and judgment as when he acts in conformity
with them. Between the two acts there is no difference in law.

In this case, there was no imminent and serious injury threatened to his person or property. There was
a simply refusal to comply with the terms of a contract unless plaintiff did certain things; but there was
no threat of imminent and serious injury to his person or property. Every person who makes a contract
assumes the risk of a refusal to comply. Breaches of contract are the commonest cause of litigation;
and settlements and readjustments between the parties after a breach of contract whereby the person
injured by the breach pays an additional consideration to the person breaking it in order to obtain a
fulfillment, are also common. We never have understood that such arrangements were voidable for
intimidation.

Hence, the contracts cannot be annulled.

106
 CONTRACTS
General Provisions

IN CONTRACTUAL RELATIONS, THE LAW ALLOWS THE PARTIES MUCH LEEWAY AND
CONSIDERS THEIR AGREEMENT TO BE THE LAW BETWEEN THEM

89. CUIZON v. COURT OF APPEALS

G.R. No. 102096. August 22, 1996
Torres, Jr., J.

FACTS:
Petitioner seeks to review and set aside the Decision of the respondent Court of Appeals dated
September 27, 1991 (CA-GR. NO. 17228) which reversed and annulled the January 20, 1988 decision
of the Regional Trial Court of Cebu City (Civil Case No. CEB-3835) and the Resolution promulgated on
September 27, 1991 which denied her Motion for Reconsideration.

In 1983, plaintiff, a businesswoman engaged in general merchandising under the trademark Tropic
Philippines Food, was introduced to defendants-spouses Gerardo and Maria Paray, who are in the real
estate business, by a certain Romy Verano, a mutual friend. When the friendship between the two
parties developed, Maria Paray proposed to Carmela Cuizon that the spouses Paray would execute
Special Power of Attorney in favor of plaintiff for five parcels of land with an aggregate area of 3,803
square meters, owned by defendants, which the plaintiff is to mortgage in her name using those same
parcels of land as collaterals.

The defendants at that time were in dire need of money to pay off their bank obligations. Plaintiff
acceded to the plans after much persuasion on the agreement that plaintiff pay for the amortization of
the loans and that for whatever amounts covered by the loans released from time to time, turned over
to the defendants by plaintiff, the defendants will immediately convey to the plaintiff, each lot within the
amount received by them computed at a mutually agreed price of P170.00 per square meter. As an
inducement to the proposal and in partial compliance with their agreement, defendants executed in
favor of plaintiff a Deed of Sale of Real Property accompanied with the SPA.

For the several loans entered into by plaintiff a total amount of P492,002.04 was actually received by
plaintiff as against the total loan of P544,851.75. From the net proceeds of P492,002.04, plaintiff
remitted to defendants P198,000.00 which was duly receipted.

After plaintiff remitted the P20,000.00 which was part of the proceeds, Mrs. Paray borrowed plaintiff’s
title to a lot in Ozamis City, and in turn Mrs. Paray handed to plaintiff the Deed of Sale for Lot No. 800-
A-1-B, together with two documents, a Deed of Agreement and a Supplemental Agreement for plaintiff
to sign. The Supplemental Agreement in effect prohibited plaintiff from selling the land unless with
consent of defendant spouses. Plaintiff initially refused to sign the Deed of Agreement as the purchase
price indicated P25,170.00 with a down payment of P20,000.00 but the balance reflected was
P33,380.00 instead of only P5,000.00, but upon defendants plea, she affixed her signature and issued
a post-dated check for P33,380.00 to accommodate defendants with the understanding that those will
be deducted from the loan releases and her assurance that these documents won’t be notarized.

On May 5, 1985, petitioner filed a complaint for specific performance with damages against private
respondents. She alleged, inter alia, that in compliance with their agreement, she turned over to
private respondents P198,000.00 of loan proceeds, deducting the purchase price of P25,120.00 for Lot
No. 800-A-1-B from P198,000.00, private respondents were still obligated to convey to petitioner a
total of no less than 1,017 square meters of land representing the amount of P172,880.00
(P198,000.00 minus P25,120.00) computed at a mutually agreed price of P170.00 per square meter.
She asked specifically for the conveyance of the 250 square meter Lot No. 800-A-1-A to provide a
spacious lawn to the house built on Lot No. 800-A-1-B and to pay back the amount of P130,380.00
(P172,880.00 minus the price of P42,500.00 for Lot No. 800-A-1-A), or in the alternative to pay back
the amount of P172,880.00 plus interest.

107
In their Answer, private respondents claim that petitioner undertook to buy their six parcels of land with
a total area of 4,117 square meters for P699,890.00 at a price of P170.00 per square meter. In
violation of their agreement that the purchase price would be paid out of the loans secured from
various financial institutions, petitioner remitted to private respondents the amount of P198,000.00 only
out of the total loan of P544,851.75. 17 As to Lot No. 800-A-1-B, they denied that its purchase price
was P25,120.00 as claimed by petitioner. They insisted that with the down payment of P20,000.00,
petitioner still had a balance of P33,380.00. So petitioner had to issue a postdated check of
P33,380.00 and execute a Deed of Agreement offering her real property (TCT No. 8648) as a security
for the balance of P33,380.00. They also alleged that petitioner incurred loans and advances from
them in the amount of P76,200.00 which were used by petitioner in the construction of her house on
Lot No. 800-A-1-B. TRIAL COURT: rendered a decision in favor of petitioner.

CA: annulled and set aside the ruling of the trial court. Petitioner’s claim: Their verbal agreement was
for her to secure loans from financial institutions using private respondents’ real properties as
collaterals. Though petitioner would pay the loan amortization, the proceeds of the loan would be
shared by them and whatever amount actually received by private respondents would then be treated
as purchase price of the lot covered by the loan releases at an agreed price of P170.00 per square
meter, hence, the number of lots that would be conveyed depends on the amount of loan proceeds
actually received by private respondents.

Respondent’s claim: They alleged that petitioner orally agreed to buy the six subject lots for
P699,890.00 at a rate of P170.00 per square meter, the purchase price of which would be paid by the
loan proceeds that would be secured by petitioner using the same lots as securities. They alleged that
the transfer of the lots would be made only upon completion of payment.

ISSUE:
Whether it was the petitioner or respondent’s claim that embodies the real agreement of the parties

RULING:
Upon a painstaking review of the records, this Court is persuaded to affirm petitioner’s claim. In
arriving at a sensible meaning of the agreement of the parties, the first thrust of the Court is to discover
and ascertain the intention of the contracting parties. And in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall be principally considered.

Where the parties to a contract have given a practical construction by their conduct, as by acts in
partial performance, such construction may be considered by the court in determining its meaning and
ascertaining the mutual intention of the parties at the time of the contracting. If it were true as private
respondents claim that their agreement was for the transfer of the subject lots only upon payment of
the full consideration of P699,890.00, why then did private respondents execute a deed of sale over
Lot No. 800-A-1-B although they knew too well that a partial amount only of the purchase price was
paid. No credible explanation was given by private respondents. The act of executing the Deed of Sale
of Real Property by the private respondents obviously destroys their claim that their agreement was for
the conveyance of the parcels of land only upon full payment of the purchase price. This circumstance
is decisive and we are convinced that their intention was that every lot covered by the loan proceeds
given from time to time by petitioner to private respondents, are to be transferred to the petitioner.

The Deed of Sale is duly notarized while the Deed of Agreement and the Supplemental Agreement are
not notarized. All the three documents are dated June 6, 1983. It is well settled that in construing a
written agreement, the reason behind and the circumstances surrounding its execution are of
paramount importance to place the interpreter in the situation occupied by the parties concerned at the
time the writing was executed. Admittedly, the intention of the contracting parties should always prevail
because their will has the force of law between them. The respondent court apparently failed to
consider certain relevant facts and circumstances surrounding the execution of the documents
involved which, if appreciated, would clearly indicate the intention of the parties and would result to a
different conclusion. First, the sale of Lot No. 800-A-1-B was an incentive given to petitioner who
acquiesced to the proposal of private respondents of securing loans for them by using their lands as
collaterals. Second, petitioner and private respondents in executing the Deed of Agreement did not
intend to be bound by the provisions thereof. The alleged balance of P33,380.00 was indicated in the
Deed of Agreement because private respondents wanted petitioner to issue a postdated check for the

108
same amount to pay the farmer’s obligations. Thus, the UCPB check which was issued afterwards,
was not intended for the payment of the alleged balance of P33,380.00 as appearing in the Deed of
Agreement but was made by petitioner to enhance the standing of private respondents to their
creditors. Third, private respondents gave no sensible explanation regarding the discrepancy in the
consideration between the Deed of Sale and Deed of Agreement and no reason whatsoever was given
as to why the Deed of Agreement, unlike the Deed of Sale, was not notarized, although both had the
same date. Their allegation that upon request of petitioner the amount of P25,120.00 was placed in the
Deed of Sale as the consideration of the sale so that petitioner would pay lesser taxes deserves scant
consideration because as pointed out correctly by the trial court the liability to pay capital gains tax falls
not on the buyer but on the seller, the private respondents in this case.

Considering these circumstances, we find that the Deed of Sale is the embodiment of the parties’ true
agreement. The consideration in the sale of Lot 800-A-1-B is P25,120.00 only which as appearing on
record was fully paid by petitioner. The Deed of Agreement was executed merely to suit private
respondents’ nefarious motive of boosting their credit image with an understanding that it was not to
become binding and operative between themselves. At most it was a simulated agreement, which is
not really designed nor intended by the parties to produce legal effects. As a fictitious and simulated
agreement it lacks valid consent so essential to a valid and enforceable contract.

109
 CONTRACTS
General Provisions

APPLICATION FOR REVOLVING CREDIT LINE; ABEYANCE OF RELEASE OF FULL AMOUNT

OF CREDIT LINE

90. SPOUSES OMENGAN v. PHILIPPINE NATIONAL BANK

G.R. No. 161319, January 23, 2007
CORONA, J.

FACTS:
This petition for review on certiorari seeks a review and reversal of the Court of Appeals (CA) decision
and resolution in CA-G.R. CV No. 71302.

In October 1996, the Philippine National Bank (PNB) Tabuk Branch approved petitioners-spouses’
application for a revolving credit line of P3 million. The loan was secured by two residential lots in
Tabuk, Kalinga-Apayao. The certificates of title were in the name of Edgar Omengan married to Dinah
Omengan. The first P2.5 million was released by Branch Manager Henry Montalvo on three separate
dates. The release of the final half million was, however, withheld because of a letter allegedly sent by
Edgar’s sisters which provides that the unreleased balance shall be held in abeyance pending an
understanding by the rest of the siblings of Edgar because the property mortgaged, while in the name
of Edgar, is owned in co-ownership by all the children of the late Roberto and Elnora Omengan.

Manuel Acierto, the new branch manager, released the remaining half million pesos to petitioners. He
also recommended the approval of a P2M increase in their credit line. The credit committee approved
the increase of petitioners’ credit line from P3 million to P5 million, provided Edgar’s sisters gave their
conformity. But petitioners failed to secure the consent of Edgar’s sisters; hence, PNB put on hold the
release of the additional P2M.

On October 7, 1998, Edgar Omengan demanded the release of the P2 million. He claimed that the
condition for its release was not part of his credit line agreement with PNB because it was added
without his consent. PNB denied his request. Petitioners filed a complaint for breach of contract and
damages against PNB with the RTC.

RTC rendered judgment in favor of petitioners. CA set aside the RTC decision.

ISSUE:
Was there a breach of contract?

RULING:
There was none.

Breach of contract is defined as follows: [It] is the "failure without legal reason to comply with the terms
of a contract." It is also defined as the "[f]ailure, without legal excuse, to perform any promise which
forms the whole or part of the contract."

In this case, the parties agreed on a P3 million credit line. This sum was completely released to
petitioners who subsequently applied10 for an increase in their credit line. This was conditionally
approved by PNB’s credit committee. For all intents and purposes, petitioners sought an additional
loan. The condition attached to the increase in credit line requiring petitioners to acquire the conformity
of Edgar’s sisters was never acknowledged and accepted by petitioners. Thus, as to the additional
loan, no meeting of the minds actually occurred and no breach of contract could be attributed to PNB.
There was no perfected contract over the increase in credit line.

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 CONTRACTS
General Provisions

A STIPULATION OF PRIOR PERMISSION FROM EMPLOYER BEFORE CONTRACTING

EMPLOYMENT IS CONTRARY TO PUBLIC POLICY

91. FERRAZZINI v. GSELL

G.R. No.L-10712, Aug. 10, 1916
Trent, J.

FACTS:
This action was brought to recover damages for an alleged wrongful discharge of the plaintiff, who had
been employed by the defendant for an indefinite time to work in the latter's industrial enterprises in
the city of Manila. The defendant sought affirmative relief for a further alleged breach of the contract by
the plaintiff after his discharge.

The portion of the contract provides that plaintiff “shall not engage xxx in any business enterprises
similar to or in competition with those conducted, maintained or operated by [defendant] and shall not
assist, aid or encourage any such enterprise xxx and shall not enter into the employ of any enterprises,
save and except after obtaining special written permission therefor from the [defendant].”

The plaintiff admits that he entered the employment of Mr. Whalen in the Philippine Islands as a
foreman on some construction work within a few days after his discharge and without the consent of
the defendant. This work was entirely different and disassociated from that engaged in by the
defendant, yet this act of the plaintiff was a violation of the above-quoted provisions of the contract
wherein he expressly agreed "not to enter into the employment of any enterprise in the Philippine
Islands, except after obtaining special written permission" from the defendant.

ISSUE:
Is the stipulation requiring the former employer’s permission before a discharged employee may enter
into a new employment contrary to public policy?

RULING:
Yes, the stipulation is contrary to public policy.

Articles 1091 and 1255 of the Civil Code read: ART. 1091. Obligations arising from contracts have
legal force between the contracting parties, and must be fulfilled in accordance with their stipulations."
ART. 1255. The contracting parties may make the agreement and establish the clauses and conditions
which they may deem advisable, provided they are not in contravention of law, morals, or public order.

It is well settled that contracts in undue or unreasonable restraint of trade are unenforceable because
they are repugnant to the established public policy in that country. There are two principal grounds on
which the doctrine is founded that a contract in restraint of trade is void as against public policy. One
is, the injury to the public by being deprived of the restricted party's industry; and the other is, the injury
to the party himself by being precluded from pursuing his occupation, and thus being prevented from
supporting himself and his family.

Hence, the contract under consideration is clearly one in undue or unreasonable restraint of trade and
therefore against public policy. It is limited as to time and space but not as to trade. It is not necessary
for the protection of the defendant, as this is provided for in another part of the clause. It would force
the plaintiff to leave the Philippine Islands in order to obtain a livelihood in case the defendant declined
to give him the written permission to work elsewhere in this country.

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 CONTRACTS
General Provisions

RESTRAINTS WHICH REASONABLY PROTECTS THE INTEREST OF THE PARTIES IS VALID

92. DEL CASTILLO v. RICHMOND

G.R. No.L-21127, Feb. 9, 1924
Johnson, J.

FACTS:
This action was commenced in the Court of First Instance of Albay on October 18, 1922. Its purpose
was to have declared null and of no effect the contract.

The pertinent provision of which is as follows:

xxx Alfonso del Castillo also agrees not to open, nor own nor have any interest xxx in any other
drugstore xxx situated within a radius of four miles from the district of Legaspi, municipality and
Province of Albay, while the said Shannon Richmond or his heirs may own or have open a drugstore,
or have an interest in any other one within the limits of the districts of Legaspi, Albay, and Daraga of
the municipality of Albay, Province of Albay. xxx

The plaintiff alleges that the provisions contained in the third paragraph of said contract constitute an
illegal and unreasonable restriction upon his liberty to contract, are contrary to public policy, and are
unnecessary in order to constitute a just and reasonable protection to the defendant. In the
defendant’s special defense he alleges "that during the time the plaintiff was in the defendant's employ
he obtained knowledge of his trade and professional secrets and came to know and became
acquainted and established friendly relations with his customers so that to now annul the contract and
permit plaintiff to establish a competing drugstore in the town of Legaspi, as plaintiff has announced
his intention to do, would be extremely prejudicial to defendant's interest."

ISSUE:
Is the stipulation limiting an employee’s right to establish a business the same or connected with his
employer contrary to public policy?

RULING:
No, such stipulation is not contrary to public policy.

In Ollendorff vs. Abrahamson (38 Phil., 585), we held that a contract by which an employee agrees to
refrain for a given length of time, after the expiration of the term of his employment, from engaging in a
business, competitive with that of his employer, is not void as being in restraint of trade if the restraint
imposed is not greater than that which is necessary to afford a reasonable protection.

From a reading of paragraph 3 of the contract above quoted, it will be noted that the restrictions placed
upon the plaintiff are strictly limited (a) to a limited district or districts, and (b) during the time while the
defendant or his heirs may own or have open a drugstore, or have an interest in any other one within
said limited district.

Therefore, considering the nature of the business in which the defendant is engaged, in relation with
the limitation placed upon the plaintiff both as to time and place, we are of the opinion, and so decide,
that such limitation is legal and reasonable and not contrary to public policy.

112
 CONTRACTS
General Provisions

10% COMMISSION BASED FROM THE VALUE OF THE IMPORT LICENSE IN FAVOR OF THE
PERSON “INTERMEDIARIES” WHO SECURED THE SAME

93. SY SUAN v. REGALA

G.R. No. L-9506. June 30, 1959
Endencia, J.

FACTS:
Appeal by certiorari against the decision of the Court of Appeals adjudging respondent Pablo L. Regal
the sum of P6.998.85, with legal interest, said to be the unpaid balance due him from petitioners Sy
Suan and Price Incorporated, as a result of their verbal contract whereby the said petitioners agreed to
pay 10% of the value of the licenses which respondent might obtain from the defunct Import Control
Commission for the importation of industrial starch for candy manufacture, plus P500 as attorney’s
fees, and costs.

On April 11, 1953 defendant Sy Suan, was at the time president and general manager of his co-
defendant Price Incorporated and owner of practically all the capital stock of said corporation,
executed in favor of plaintiff Regala a special power of attorney authorizing the latter to prosecute the
former’s applications for import licenses with the Import Control Office. At the time of the execution of
the said power of attorney, defendants had several pending in the Import Control Office. Pursuant to
said special power of attorney, plaintiff followed up and prosecuted said above-mentioned
applications with and through the different offices and divisions of the Import Control Office,
conferring with the corresponding Import Control officials. As a result of the effort made by the
herein plaintiff, on or about May 19, 1953, the Import Control Office issued the corresponding
licenses to said applications.
Petitioners argue that the 10% commission sought by respondent and granted by the Court of Appeals
is inimical to public policy in that it tends to increase the cost of production of candies which they
manufacture. respondent claims that the contract in question is not violative of sound public policy; that
a contract should not be declared void as against public except when the cases is clear and free from
doubt and the injury to the public is substantial and not theoretical or problematical.

ISSUE:
Was the agreement on the 10% commission from the total value of the amounts approved on the value
approved in said licenses valid?

RULING:
No. that the contract in question sought to be enforced by the respondent and assailed by petitioners
as null and void for being against public policy, is what is commonly known as 10% contracts which the
press decries and the public condemns as inimical to public interest. the intervention of intermediaries,
such as herein respondent, would be unwarranted and uncalled for, as such intervention would not
render an unmeritorious applications deserving, nor undeserving applications meritorious, but would
serve no other purpose than to influence, or possibly corrupt, in unmeritorious cases, the judgment of
the public official or officials performing an act or service connected with the issuance of import license
or quota allocation — an eventuality which the law precisely sought to avoid.

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 CONTRACTS
General Provisions

RENEWAL OF THE LEASE AT THE OPTION OF THE LESSEE

94. ALLIED BANKING CORPORATION v. COURT OF APPEALS

G.R. No. 124290 January 16, 1998
Bellosillo, J.

FACTS:
Spouses Tanqueco owned a 512-square meter lot. They leased the property to Allied Banking
Corporation (ALLIED). The lease contract specifically states in its Provision No. 1 that "the term of this
lease shall be fourteen (14) years commencing from April 1, 1978 and may be renewed for a like term
at the option of the lessee."

Sometime in February 1988, the Tanqueco spouses executed a deed of donation over the subject
property in favor of their four (4) children who accepted the donation in the same public instrument. A
year before the expiration of the contract of lease, the Tanquecos notified ALLIED that they were no
longer interested in renewing the lease. ALLIED replied that it was exercising its option to renew their
lease under the same terms with additional proposals.

When the lease contract expired, an action for ejectment was commenced before the MTC of Quezon
City. The MTC, RTC and CA ruled in favor of the Tanquecos. Hence, this present petition.

ISSUE:
Whether the stipulation in the contract regarding its renewal at the option of the lessee is void for being
potestative or violative of the principle of mutuality of contracts under Art. 1308 of the Civil Code.

RULING:
No. An express agreement which gives the lessee the sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the
same lease agreement, is fundamentally part of the consideration in the contract and is no different
from any other provision of the lease carrying an undertaking on the part of the lessor to act
conditioned on the performance by the lessee. It is a purely executory contract and at most confers a
right to obtain a renewal if there is compliance with the conditions on which the rights is made to
depend. The right of renewal constitutes a part of the lessee's interest in the land and forms a
substantial and integral part of the agreement.

Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of contracts.
It provides that "the contract must bind both the contracting parties; its validity or compliance cannot be
left to the will of one of them." The ultimate purpose is to render void a contract containing a condition
which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting
parties.

The fact that such option is binding only on the lessor and can be exercised only by the lessee does
not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the
lessee.

With respect to the meaning of the clause "may be renewed for a like term at the option of the lessee,"
we sustain petitioner's contention that its exercise of the option resulted in the automatic extension of
the contract of lease under the same terms and conditions. Note: ALLIED vacated the premises on 20
February 1993 indicating its abandonment of whatever rights it had under the renewal clause.
Consequently, what remains to be done is for ALLIED to pay rentals for the continued use of premises
until it vacated the same.

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 CONTRACTS
General Provisions

THE UNCERTAINTY OF THE AMOUNT TO BE PAID BY WAY OF BONUS IS NO OBSTACLE TO

THE VALIDITY OF THE CONTRACT

95. LIEBENOW v. THE PHILIPPINE VEGETABLE OIL COMPANY

G.R. No. L-13463, November 9, 1918
Street, J.

FACTS:
This is an appeal instituted by the plaintiff, H. C. Liebenow challenging the decision of the Court of
First Instance finding him not entitled to a bonus in addition to the salary earned by him while in the
employment of the defendant company as superintendent.

Plaintiff entered into a contract of employment with The Philippine Vegetable Oil Company (defendant
company) for a period of one year with monthly compensation of P500 and “such further amount in the
way of bonus as the board of directors may see fit to grant.” Plaintiff rendered his services not only for
the period of one year, but for an additional period of four months. During his employment, his monthly
salary was raised to P750. After the employment ceased, the defendant company continued to deliver
to the plaintiff each month a check for P750, the equivalent of the salary he had been receiving until
the total sum of P4,500 had been thus paid.

Plaintiff contended that the stipulation that the plaintiff should receive such further amount in the way of
bonus, over and above salary, as the board of directors might see fit to grant has not been satisfied.
The P4,500, which he received in the form of a monthly check of P750 for six successive months after
the termination of his services, seems to be considered by the plaintiff purely in the light of a free gift,
and it is insisted that this money was not paid to him in satisfaction of the stipulated bonus.

ISSUE:
Is the validity of the contract affected by the stipulation that the plaintiff should be entitled to such
“further amount in the way of bonus as the board of directors might see fit to grant”?

RULING:
No, the contract remains valid.

Under Article 1273 (now Art. 1349) of the Civil Code, the object of every contract must be determinate
as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of
the contract, provided it is possible to determine the same, without a need of a new contract between
the parties.

We see no reason to doubt that a promise of this character creates a legal obligation binding upon the
promisor, although in its actual results it may not infrequently prove to be illusory. Such a promise is
not, in our opinion, nugatory, under Art. 1115 (now Art. 1182) of the Civil Code, as embodying a
condition dependent exclusively upon the will of the obligor. Nor can it be held invalid under Art. 1256
(now Art. 1308), which declares that the validity and performance of a contract cannot be left to the will
of one of the contracting parties. The uncertainty of the amount to be paid by way of bonus is also no
obstacle to the validity of the contract (article 1273 now Article 1349); since the contract itself specifies
the manner in which the amount payable is to be determined, namely, by the exercise of the judgment
and discretion of the employer.
Hence, the contract is valid notwithstanding the stipulation that the plaintiff should be entitled to such
“further amount in the way of bonus as the board of directors might see fit to grant”.

115
 CONTRACTS
General Provisions

THE CONTINUANCE AND FULFILLMENT OF THE CONTRACT SHOULD NOT DEPEND UPON
THE SOLE AND EXCLUSIVE WILL OF ONE OF THE CONTRACTING PARTIES.

96. ENCARNACION v. BALDOMAR

G.R. No. L-264, October 4, 1946
Hilado, J.

FACTS:
This is an appeal from the decision of the Court of First Instance denying the motion to dismiss filed by
the defendants, Jacinto Baldomar and Lefrado Fernando.

Plaintiff Vicente Singson Encarnacion leased his house to Jacinto Baldomar and her son, Lefrado
Fernando upon a month-to-month basis. After Manila was liberated in the last war, plaintiff notified
defendants to vacate the house because plaintiff needed it for his offices as a result of the destruction
of the building where he had his offices before. Despite this demand, defendants insisted on
continuing their occupancy.

The defendants argued that the contract which they had celebrated with plaintiff since the beginning
authorized them to continue occupying the house indefinitely and while they should faithfully fulfill their
obligations as respects the payment of the rentals. The plaintiff, however, claimed that the lease had
always and since the beginning been upon a month-to-month basis.

ISSUE:
Is the defense interposed by the defendants that they could occupy the premises as long as they pay
the rent tenable?

RULING:
No, the defense set up by the defendants is not tenable.

Under Article1256 (now Article 1308) of the Civil Code, the contracts must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them.

The defense thus set up by defendant would leave to the sole and exclusive will of one of the
contracting parties (defendants in this case) the validity and fulfillment of the contract of lease, within
the meaning of article 1256 (now Article 1308) of the Civil Code, since the continuance and fulfillment
of the contract would then depend solely and exclusively upon their free and uncontrolled choice
between continuing paying the rentals or not, completely depriving the owner of all say in the matter. If
this defense were to be allowed, so long as defendants elected to continue the lease by continuing the
payment of the rentals, the owner would never be able to discontinue it; conversely, although the
owner should desire the lease to continue, the lessees could effectively thwart his purpose if they
should prefer to terminate the contract by the simple expedient of stopping payment of the rentals.
This, of course, is prohibited by the aforesaid article of the Civil Code.

Hence, the defense is not tenable.

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 CONTRACTS
General Provisions

FULFILLMENT OF A STIPULATION POUR AUTRUI MAY BE DEMANDED BY THE THIRD

PERSON IN WHOSE FAVOR IT WAS STIPULATED PROVIDED ACCEPTANCE IS
COMMUNICATED BEFORE THE OBLIGOR REVOKES THE SAME

97. FLORENTINO ET. AL. v. ENCARNACION, SR. ET. AL.

G.R. No. L-27696, September 30, 1977
Guerrero, J.

FACTS:
On May 22, 1964, petitioners Miguel Florentino et. al., and respondents Salvador Encarnacion, Sr.,
Salvador Encarnacion, Jr. and Angel Encarnacion filed with the Court of First Instance (CFI) of Ilocos
Sur an application for the registration under Act 496 of a parcel of agricultural land located at Barrio
Lubong, Dacquel, Cabugao, Ilocos Sur. The application alleged that the applicants are the common
and pro-indiviso owners; and that they acquired the land thru and by inheritance from their aunt, Doña
Encarnacion Florentino, who died in 1941, and for which said land was adjudicated to them by virtue of
the deed of Extrajudicial Partition dated August 1947; and that the respondents acquired their
respective shares of the land thru purchase from the original heirs.

In the Deed of Extrajudicial Partition there contains the controversial proviso which says that the
products of the land be used to defray the religious expenses of the Church as shown in Exhibit O-1
(Spanish text). Petitioners asked the court to include the said stipulation as an encumbrance on the
land, and cause the entry of the same on the face of the title to be issued. Respondents, on the other
hand, filed a manifestation seeking to withdraw their application on their respective shares of the land
sought to be registered.

The CFI of Ilocos Sur ruled that the self-imposed arrangement in favor of the Church is a simple
donation, but is void since the donee has not accepted the donation and Salvador Encarnacion, Jr.
and Angel Encarnacion had not made any oral or written grant at all. Thus, the court allowed the
religious expenses to be made and entered on the undivided shares, interests and participations of all
the petitioners in this case, except that of respondents Salvador Encarnacion, Sr., Salvador
Encarnacion, Jr. and Angel Encarnacion. The motion for reconsideration and new trial filed by
petitioners was likewise denied by the court, but it modified its decision by ruling that the donee Church
has not showed its clear acceptance of the donation, and is the real party of this case, not the
petitioners. Hence, this petition.

ISSUE:
Is the stipulation embodied in the Deed of Extrajudicial Partition in favor of the Church revocable at the
unilateral option of the owners? Is the said encumbrance binding only on the petitioners?

RULING:
No, the stipulation embodied in the extrajudicial partition on religious expenses is not revocable at the
unilateral option of the co‐owners. Neither is it binding on the petitioners alone.

A stipulation pour autrui is a stipulation in favor of a third person conferring a clear and deliberate favor
upon him, and which stipulation is merely a part of a contract entered into by the parties, neither of
whom acted as agent of the third person, and such third person may demand its fulfillment provided
that he communicates his acceptance to the obligor before it is revoked. Art. 1311(2) states the law on
stipulations pour autrui: “If a contract should contain a stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor before its revocation.”
A mere incidental benefit or interest of a person is not sufficient. The parties must have clearly and
deliberately conferred a favor upon a third person. The requisites of a valid stipulation pour autrui are:
(1) That the stipulation in favor of a third person should be apart, not the whole, of the contract, (2)
That the favorable stipulation should not be conditioned or compensated by any kind of obligation
whatever, and (3) neither of the contracting parties bears the legal representation or authorization of
third party. The fairest test is to rely upon the intention of the parties as disclosed by their contract. It

117
matters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from
the promise to the third person.

In this case, the stipulation is a stipulation pour autrui. The determining point is whether the co-owners
intended to benefit the Church when in their extrajudicial partition they agreed that with respect to the
land situated, the fruit thereof shall serve to defray the religious expenses of the Church. The Supreme
Court ruled in the affirmative because from the time of the death of Doña Encarnacion, the Church had
been enjoying the benefits of the stipulation (for 17 years already). Thus, there is an implied
acceptance even before the respondents wanted to revoke. The law does not provide for a time limit
on when acceptance must be made by the third party so as long as it is made before revocation.
Salvador Encarnacion Sr. must bear with the provision being a signatory to the Deed of Extrajudicial
Partition, while the other two are bound being privies or successors in interest. This is by reason that
contracts have the binding force of law between the parties.

Thus, the decision of CFI Ilocos Sur is modified to allow the annotation of Exhibit O-1 as an
encumbrance on the face of the title to be finally issued in favor of all the applicants in the registration
proceedings.

118
 CONTRACTS
General Provisions

INTENTION OF THE PARTIES IS DETERMINATIVE IN CLASSIFYING WHETHER A

CONTRACTUAL STIPULATION IS A STIPULATION POUR AUTRUI OR NOT

98. GEORGE KAUFFMAN v. PHILIPPINE NATIONAL BANK

G.R. No. 16454, September 29, 1921
Street, J.

FACTS:
George Kauffman (petitioner) was the president of the Philippine Fiber and Produce Company (PFPC).
On February 5, 1918, the board of directors of said company, declared a dividend of P100,000 from its
surplus earnings for the year 1917, of which petitioner was entitled to the sum of P98,000. The
treasurer of PFPC presented himself in the exchange department of the Philippine National Bank
(PNB) in Manila and requested that a telegraphic transfer of $45,000 should be made to petitioner in
New York City, upon account of the PFPC. He was informed that the total cost of said transfer would
be P90,355.50. Accordingly, the treasurer drew and delivered a check for that amount on the PNB and
the same was accepted by the officer selling the exchange in payment of the transfer in question.

However, the payment to petitioner was withheld by the PNB-Manila upon the suggestion of PNB-NY,
in view of his reluctance to accept certain bills of the PFPC. Hence, when petitioner went to PNB-NY to
get the money, payment to him was refused. In view of this, petitioner instituted this present action in
the CFI of Manila to recover said sum, with interest and costs. In its defense PNB argued, among
others, that inasmuch as the plaintiff Kauffman was not a party to the contract with the bank for the
transmission of this credit, no right of action can be vested in him for the breach thereof. In this
situation, PNB argued, if there exists a cause of action against the PNB, it would not be in favor of the
plaintiff who had taken no part at all in the transaction nor had entered into any contract with the
plaintiff, but in favor of the PFPC, the party which contracted in its own name with the PNB.

CFI Manila ruled in favor of petitioner (CFI’s basis not provided in the main decision). Hence, this
petition.

ISSUE:
Can petitioner Kaufmann maintain an action against PNB for the nonperformance of the undertaking
between PFPC and PNB to deliver money to petitioner? In other words, is the lack of privity with the
contract on the part of the petitioner fatal to the maintenance of an action by him?

RULING:
Yes, petitioner can maintain the present action against the PNB.

Article 1257 states an exception to the more general rule expressed in the first paragraph of the same
article to the effect that contracts are productive of effects only between the parties who execute them.
The paragraph introducing the exception states: "Should the contract contain any stipulation in favor of
a third person, he may demand its fulfillment, provided he has given notice of his acceptance to the
person bound before the stipulation has been revoked." In Uy vs. Leonard (30 Phil 471), it was held
that the fairest test to determine whether the interest of a third person in a contract is a stipulation pour
autrui, or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their
contract. If a third person claims an enforceable interest in the contract, that question must be settled
by determining whether the contracting parties desired to tender him such an interest. Did they
deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon such
third person? In resolving this question, of course, the ordinary rules of construction and interpretation
of writings must be observed. Moreover, in applying this test to a stipulation pour autrui, it matters not
whether the stipulation is in the nature of a gift or whether there is an obligation owing from the
promisee to the third person.

In this case, the right of petitioner Kauffman to maintain the present action is clear enough. It is
undeniable that the bank's promise to cause a definite sum of money to be paid to the petitioner in

119
New York City is a stipulation in his favor within the meaning of the paragraph above quoted. The
circumstances under which that promise was given disclose an evident intention on the part of the
contracting parties that the petitioner should have that money upon demand in New York City. The
recognition of this unqualified right in the plaintiff to receive the money implies the right in him to
maintain an action to recover it. It will be noted that under the paragraph cited, a third person seeking
to enforce compliance with a stipulation in his favor must signify his acceptance before it has been
revoked. In this case, petitioner clearly signified his acceptance to the bank by demanding payment
and although the PNB had already directed its New York agency to withhold payment when this
demand was made, the rights of the petitioner cannot be considered to have been prejudiced by that
fact. The word "revoked," as there used, must be understood to imply revocation by the mutual
consent of the contracting parties, or at least by direction of the party purchasing the exchange.

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 CONTRACTS
Essential Requisites

FILM EXHIBITION AGREEMENT; RIGHT OF FIRST REFUSAL; EXCLUSIVE FILM RIGHTS

99. ABS-CBN v. COURT OF APPEALS, REPUBLIC BROADCASTING CORPORATION, VIVA

PRODUCTIONS, INC., AND VICENTE DEL ROSARIO
G.R. No.128690, January 21,1999
Davide, JR, C.J.

FACTS:
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. seeks to reverse and
set aside the decision of 31 October 1996 and the resolution of 10 March 1997 of the Court of
Appeals.

In 1990, ABS-CBN and VIVA executed a Film Exhibition Agreement whereby the latter gave the former
an exclusive right to exhibit 24 VIVA Films for TV telecast. Later, VIVA, through respondent Vincent del
Rosario, offered ABS-CBN a list of 3 film packages (36 titles) from which the latter may exercise its
right of first refusal under their agreement. ABS-CBN, thru Charo Santos-Concio, ticked off 10 titles
therefrom.

Thereafter, in February 1992, Del Rosario offered ABS-CBN airing rights over a package of 104
movies for P60 million. In April, 1992, Del Rosario, and Eugenio Lopez of ABS-CBN, met to discuss
the package proposal. According to Lopez, however, what they agreed upon was ABS-CBN's
exclusive film rights to 14 films for P36 million. Del Rosario denied the same. He insisted that the
discussion was on VIVA's offer of 104 films for P60 million, to which ABS-CBN later made a counter
proposal but rejected by VIVA's Board of Directors. Hence, VIVA later granted Republic Broadcasting
Corporation (RBS) the exclusive right to air the 104 VIVA films, including the 14 films supposedly
granted to ABS-CBN. ABS-CBN then filed a complaint for specific performance with prayer for
injunction.

ISSUE:
Whether there was a perfected contract between VIVA and ABS-CBN

RULING:

NO.

Contracts that are consensual in nature are perfected upon mere meeting of the minds. Once there is
concurrence between the offer and the acceptance upon the subject matter, consideration, and terms
of payment, a contract is produced. The offer must be certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal,
unconditional, and without variance of any sort from the proposal. A qualified acceptance, or one that
involves a new proposal, constitutes a counter-offer and is a rejection of the original offer.
Consequently, when something is desired which is not exactly what is proposed in the offer, such
acceptance is not sufficient to generate consent because any modification or variation from the terms
of the offer annuls the offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they underwent
a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in a draft
contract. VIVA through its Board of Directors, rejected such counter-offer. Even if it be conceded
arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA, as there
was no proof whatsoever that Del Rosario had the specific authority to do so. That Del Rosario did not
have the authority to accept ABSCBN's counter-offer was best evidenced by his submission of the
draft contract to VIVA's Board of Directors for the latter's approval. In any event, there was between
Del Rosario and Lopez III no meeting of minds.

Therefore, there was no perfected contract between VIVA and ABS-CBN.

121
 CONTRACTS
Essential Requisites

LEASE; ACCEPTANCE BY LETTER; REVOCATION OF OFFER

100. LAUDICO v. RODRIGUEZ ET AL.

G.R. No.L-16530, March 31,1922
Avanceña, J.

FACTS:
Defendant Vicente Arias, who, with his co-defendants, owned a certain building. Arias, on his behalf
and that of his co-owners,wrote a letter to the plaintiff, Mamerto Laudico, giving him an option to lease
the building to a third person, and transmitting to him for that purpose a tentative contract in writing
containing the conditions upon which the proposed lease should be made. Later Mr. Laudico
presented his co-plaintiff, Mr. Fred Harden, as the party desiring it lease the building.

Other conditions were added to those originally contained in the tentative contract, and counter-
propositions were made. Since no definite agreement having been arrived at, Laudico, wrote a letter to
Arias on March 6, 1919, and advising him that all his propositions, as amended and supplemented,
were accepted. It is admitted that this letter was received by Arias by special delivery at 2:53PM of that
day. On that same day at 11:25 in the morning, Arias had, in turn, written a letter to Laudico
withdrawing the offer to lease the building. Thus, plaintiffs instituted an action against the defendants
to compel them to execute the contract of lease of the building.

ISSUE:
Whether there was a perfected contract between Laudico and Arias

RULING:
NO.

Under Article 1262, paragraph 2, of the Civil Code, an acceptance by letter does not have any effect
until it comes to the knowledge of the offerer. Therefore, before he learns of the acceptance, the latter
is not yet bound by it and can still withdraw the offer. Consequently, when Mr. Arias wrote Mr. Laudico,
withdrawing the offer, he had the right to do so, inasmuch as he had not yet received notice of the
acceptance. And when the notice of the acceptance was received by Mr. Arias, it no longer had any
effect, as the offer was not then in existence, the same having already been withdrawn. There was no
meeting of the minds, through offer and acceptance, which is the essence of the contract. While there
was an offer, there was no acceptance, and when the latter was made and could have a binding effect,
the offer was then lacking. Though both the offer and the acceptance existed, they did not meet to give
birth to a contract.

Our attention has been called to a doctrine laid down in some decisions to the effect that ordinarily
notice of the revocation of an offer must be given to avoid an acceptance which may convert it into a
binding contract, and that no such notice can be deemed to have been given to the person to whom
the offer was made unless the revocation was in fact brought home to his knowledge.

This, however, has no application in the instant case, because when Arias received the letter of
acceptance, his letter of revocation had already been received. The latter was sent through a
messenger at 11:25 in the morning directly to the office of Laudico and should have been received
immediately on that same morning, or least, before Arias received the letter of acceptance. On this
point we do not give any credence to the testimony of Laudico that he received this letter of revocation
at 3:30 in the afternoon of that day. Laudico is interested in destroying the effect of this revocation so
that the acceptance may be valid, which is the principal ground of his complaint.

Hence, there was no perfected contract.

122
 CONTRACTS
Essential Requisites

ACCEPTANCE BY LETTER DOES NOT BIND THE PERSON MAKING THE OFFER EXCEPT
FROM THE TIME IT CAME TO HIS KNOWLEDGE

101. ENRIQUEZ v. SUN LIFE ASSURANCE COMPANY OF CANADA

G.R. No. L-15895, November 29, 1920
Malcolm, J.

FACTS:

This is an action made by the administrator of the estate of Joaquin Herrer of P6,000.00 paid by the
deceased for a life annuity on the ground that the contract for a life annuity had not been perfected.

Joaquin Herrer made an application with Sun Life for a life annuity. He paid the amount of P6,000.00
to the Manila manager who gave him a "provisional" receipt "subject to medical examination and
approval of the Company's Central Office." The application was forwarded to the head office in
Canada and the policy was issued on December 4, 1917 in Canada. Meanwhile, on December 18,
1917, Herrer's attorney wrote to the Manila Office stating that Herrer wanted to withdraw his
application to which the office wrote a letter dated November 26, 1917 stating that the policy had
already been issued. The letter was received by the attorney on December 21, 1917. Herrer had died
a day earlier on December 20, 1920. The trial court ruled that the contract had been perfected, hence
this appeal.

ISSUE:

Has the contract of life annuity been perfected?

RULING:

No, the contract was not perfected.

Art. 1262 provides that acceptance by letter does not bind the person making the offer except from the
time it came to his knowledge.

The pertinent fact is that according to the provisional receipt, the insurance company had to: 1)
conduct a medical examination; 2) had to obtain the head office's approval; and 3) somehow
communicate such approval. The fact as to the letter of notification thus fails to concur with the
essential elements of the general rule pertaining to the mailing and delivery of mail matter as
announced by the American courts, namely, when a letter or other mail matter is addressed and
mailed with postage prepaid there is a rebuttable presumption of fact that it was received by the
addressee as soon as it could have been transmitted to him in the ordinary course of the mails. But if
any one of these elemental facts fails to appear, it is fatal to the presumption. For instance, a letter will
not be presumed to have been received by the addressee unless it is shown that it was deposited in
the post-office, properly addressed and stamped. The contract for a life annuity was not perfected
because it has not been proved satisfactorily that the acceptance of the application ever came to the
knowledge of the applicant.

Therefore, there contract was not perfected as Herrer was not informed of the acceptance of the policy
before his death.

123
 CONTRACTS
Essential Requisites

AN OFFER CAN BE WITHDRAWN AND MUST BE COMMUNICATED TO THE OFFEREE BEFORE

HIS ACCEPTANCE IS RECEIVED BY THE OFFEROR

102. LAUDICO v. ARIAS

G.R. No. 16530, March 31, 1922
Avanceña, J.

FACTS:
On February 5, 1919, the defendant, Vicente Arias, who, with his co-defendants, owned the building
Nos. 205 to 221 on Carriedo Street, on his behalf and that of his co-owners, wrote a letter to the
plaintiff, Mamerto Laudico, giving him an option to lease the building to a third person, and transmitting
to him for that purpose a tentative contract in writing containing the conditions upon which the
proposed lease should be made. Later, Mr. Laudico presented his co-plaintiff, Mr. Fred. M. Harden, as
the party desiring to lease the building. On one hand, other conditions were added to those originally
contained in the tentative contract, and, on the other, counter-propositions were made and
explanations requested on certain points in order to make them clear.

These negotiations were carried on by correspondence and verbally at interviews held with Mr. Vicente
Arias, no definite agreement having been arrived at until the plaintiff, Mr. Laudico, finally wrote a letter
to Mr. Arias on March 6, 1919, advising him that all his propositions, as amended and supplemented,
were accepted. It is admitted that this letter was received by Mr. Arias by special delivery at 2:53 p.m.
of that day. On that same day, at 11:25 in the morning, Mr. Arias had, in turn, written a letter to the
plaintiff, Mr. Laudico, withdrawing the offer to lease the building. Laudico prays that the defendants be
compelled to execute the contract of lease of the building in question.

ISSUE:
Was the contract perfected upon the letter of acceptance sent by Laudico?

RULING:
No.

Under Article 1262 (2) of the Civil Code, an acceptance by letter does not have any effect until it
comes to the knowledge of the offeror.

Before he learns of the acceptance, the offeror is not yet bound by it and can still withdraw the offer.
Consequently, when Arias wrote to Laudico, withdrawing the offer, he had the right to do so, inasmuch
as he had not yet receive notice of the acceptance. And when the notice of the acceptance was
received by Arias, it no longer had any effect, as the offer was not then in existence, the same having
already been withdrawn. There was no meeting of the minds, through offer and acceptance, which is
the essence of the contract. While there was an offer, there was no acceptance, and when the latter
was made and could have a binding effect, the offer was then lacking. Though both the offer and the
acceptance existed, they did not meet to give birth to a contract. When Arias received the letter of
acceptance, his letter of revocation had already been received. The letter was sent through a
messenger at 11:25 in the morning directly to the office of Laudico and should have been received
immediately on that same morning, or at least, before Arias received the letter of acceptance. On this
point, the SC do not give any credence to the testimony of Laudico that he received this letter of
revocation at 3:30 in the afternoon of that day.

Therefore, the contract was not perfected upon the sending of the letter of acceptance.

124
 CONTRACTS
Essential Requisites

AN OFFER THAT IS NOT ACCEPTED DOES NOT GIVE RISE TO A CONSENT

103. MARLBAROSA v. COURT OF APPEALS AND S.E.A. DEVELOPMENT CORP.

G.R. No. 125761, April 30, 2003
Callejo,Sr., J.

FACTS:
This is a petition for review on certiorari of the decision of the Court of Appeals.

S.E.A. Development Corp. (SEADC) wholly owned and controlled Philtectic Corporation and
Commonwealth Insurance Co. Inc. Petitioner Salvador P. Marlbarosa was the president and general
manager of Philtectic Corporation. SEADC assigned one of its vehicles to Marlbarosa, and was issues
membership certificates in the Architectural Center Inc. Louis Da Costa was the president of SEADC
and Commonwealth Insurance Co. while Senan Valero was its Vice-Chairman of the Board of
Directors.

Marlbarosa intimated to Valero his desire to retire and requested that his 1989 incentive compensation
as president of Philtectic Corporation be paid to him. Da Costa met with Marlbarosa twice stating that
petitioner would be entitled to an incentive compensation in the amount of P395,000. Valero sent a
letter-offer stating that his incentive compensation only amounts to P251,057.67. Believing that he is
entitled to P395,000, Marlbarosa refused to sign the letter-offer. Respondent decided to withdraw its
offer. The Board of Directors of respondent approved a resolution authorizing Valero to demand from
petitioner for the car to be returned and to take actions necessary. Philtectic Corporation sent a letter
informing petitioner its withdrawal of the letter-offer and demanding the return of the car and
membership certificates. To which Malbarosa replied stating that he had already accepted the offer
having affixed his signature to the original letter, photocopied the same and sent with his reply. Due to
the refusal of Marlbarosa to return the vehicle, SEADC filed a complaint for the recovery of a personal
property with replevin with damages and attorney’s fees.

The trial court issued the writ of replevin, to which petitioner placed a counterbond. On evidence
petitioner claimed that he called Commonwealth Insurance Co., and the receptionist Liwayway
Dinglasan informed him that Da Costa was out of the office. Marlbarosa asked Liwayway to inform Da
Costa of his acceptance to the letter-offer. Liwayway testified that she relayed the message and Da
Costa merely nodded. The trial court ruled in favor of SEADC on the ground that there existed no
perfected contract between the parties for failure of petitioner to notify respondent of his acceptance
before the offer was withdrew. On appeal, CA affirmed the same. Hence this case.

ISSUE:
1. Whether there was a valid acceptance of the letter-offer
2. Whether there was an effective withdrawal by the respondent of the letter-offer

RULING:
1. No.

Under Article 1319 of the New Civil Code, the consent by a party is manifested by the meeting of the
offer and the acceptance upon the thing and the cause which are to constitute the contract. An offer
may be reached at any time until it is accepted. An offer that is not accepted does not give rise to a
consent. The contract does not come into existence. To produce a contract, there must be acceptance
of the offer which may be express or implied but must not qualify the terms of the offer. The
acceptance must be absolute, unconditional and without variance of any sort from the offer.

The acceptance of an offer must be made known to the offeror. Unless the offeror knows of the
acceptance, there is no meeting of the minds of the parties, no real concurrence of offer and
acceptance. The offeror may withdraw its offer and revoke the same before acceptance thereof by the

125
offeree. The contract is perfected only from the time an acceptance of an offer is made known to the
offeror.

Petitioner failed to give a copy of the letter-offer with his signature as required by the respondent for its
acceptance. And even if he had accepted the same, the offer was already withdrawn.

2. Yes.
Implicit in the authority given to Philtectic Corporation to demand for and recover from the petitioner
the subject car and to institute the appropriate action against him to recover possession of the car is
the authority to withdraw the respondent's Letter-offer. It cannot be argued that respondent authorized
Philtectic Corporation to demand and sue for the recovery of the car and yet did not authorize it to
withdraw its Letter-offer to the petitioner.

126
 CONTRACTS
Essential Requisites

IN DACION EN PAGO, IT IS ONLY WHEN THE THING OFFERED AS AN EQUIVALENT IS

ACCEPTED BY THE CREDITOR THAT NOVATION TAKES PLACE, THEREBY, TOTALLY
EXTINGUISHING THE DEBT

104. TECHNOGAS PHILIPPINES MANUFACTURING CORP. v. PHILIPPINE NATIONAL BANK

G.R. No. 161004, April 14, 2008
Quisumbing, J.

FACTS:
This is a petition for review on certiorari under Rule 45.

Tecnogas Philippines (Tecnogas) obtained from respondent Philippine National Bank (PNB) an
Omnibus Line of P35 million and a 5-year Term Loan of P14 million. To secure the loan, Tecnogas
executed a Real Estate Mortgage (REM) over its parcel of land in Parañaque City authorizing PNB to
extrajudicially foreclose the mortgage in case Tecnogas defaults on its obligations. It also provided that
the mortgage will stand as a security for any and all other obligations of Tecnogas to PNB whether the
obligations had been contracted before, during or after the constitution of the mortgage. Finally, when
the loan matured, PNB sent collection letters to Tecnogas, but the latter only proposed to pay its
obligations by way of dacion en pago. PNB filed a petition for extrajudicial foreclosure of the REM in
the RTC of Parañaque City. A day before the auction sale, Tecnogas filed a complaint for annulment of
extrajudicial foreclosure sale, with application for the issuance of a temporary restraining order (TRO)
and writ of preliminary injunction. RTC granted the TRO and writ of preliminary injunction, and denied
the motion to dissolve the writ from petitioner.

PNB filed a petition for certiorari with CA seeking the annulment of the granting of the writ. CA granted
the same, and held that Tecnogas’ proposal to pay through dacion en pago did not constitute payment
as it was not accepted by PNB. Thus, injunction was not proper as the extrajudicial foreclosure of the
REM was a necessary consequence of Tecnogas’ default in its loan obligations. Tecnogas sought
reconsideration, but it was denied. Hence, this petition.

ISSUE:
Does the proposal of Technogas to pay through dacion en pago constitute as payment to their loan?

RULING:
No. Dacion en pago is a special mode of payment whereby the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding obligation. The undertaking is really
one of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is
to be charged against the debtor’s debt. As such, the essential elements of a contract of sale, namely,
consent, object certain, and cause or consideration must be present. It is only when the thing offered
as an equivalent is accepted by the creditor that novation takes place, thereby, totally extinguishing the
debt.

Tecnogas’ proposal to pay by way of dacion en pago was not accepted by PNB. Thus, the unaccepted
proposal neither novates the parties’ mortgage contract nor suspends its execution as there was no
meeting of the minds between the parties on whether the loan will be extinguished by way of dacion en
pago.

Therefore, the proposal to pay through dacion en pago does not constitute as payment of the loan.

127
 CONTRACTS
Essential Requisites

THE LAW PRESUMES THAT EVERY PERSON IS FULLY COMPETENT TO ENTER INTO A
CONTRACT UNTIL SATISFACTORY PROOF TO THE CONTRARY IS PRESENTED.

105. YASON v. ARCIAGA

G.R. No. 145017, January 28, 2005

FACTS:
This is a Petition for Review on Certiorari under Rule 45 assailing the Decision of the CA.

Spouses Emilio and Cluadia Arciaga executed a Conditional Deed of Sale whereby they sold a
property in Muntinlupa for ₱ 265,000 to Spouses Dr. Jose and Aida Yason. They tendered an initial
payment of ₱150 000, upon the payment of the balance of ₱115,000 on April 19, 1983 spouses
Arciaga executed a Deed of Absolute Sale. That day, Claudia died. Petitioners had the property
registered with the help of a certain Medina before the Register of Deeds, However, Without their
knowledge, Medina falsified the Deed of Absolute Sale and made it appear that the sale took place on
July 2, 1979, instead of April 19, 1983, and that the price of the lot was only ₱25,000.00, instead of
₱265,000.00.

Arciaga’s children learned of the falsified document of sale and caused the filing with the Office of the
Provincial Prosecutor of Makati City a complaint for falsification of documents against petitioners and a
declaration that the Sale was void. The Provincial Prosecutor dismissed the complaint for falsification
for lack of probable cause. Undaunted, respondents filed with the RTC a complaint for annulment of
the land titles alleging that the Deed of Absolute Sale is void ab initio considering that (1) Claudia
Arciaga did not give her consent to the sale as she was then seriously ill, weak, and unable to talk and
(2) Jesus Medina falsified the Deed of Absolute Sale; that without Claudia’s consent, the contract is
void; and that the land titles are also void because a forged deed conveys no title. The RTC however
sustained the validity of the Deed of Conditional Sale and the Deed of Absolute Sale. The CA affirmed
the decision of the RTC.

ISSUE:
Is there a valid Contract of Sale between the parties?

RULING:
Yes. In determining whether the Deed of Absolute Sale dated April 19, 1983 is valid, it must contain
the essential requisites of contracts. A contract of sale is perfected at the moment there is a meeting
of the minds upon the thing which is the object of the contract and upon the price. Consent is
manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract. To enter into a valid legal agreement, the parties must have the capacity to do
so. Only if there is unfairness in the transaction, such as gross inadequacy of consideration, the low
degree of intellectual capacity of the party, may be taken into consideration for the purpose of showing
such fraud as will afford a ground for annulling a contract. Hence, a person is not incapacitated to
enter into a contract merely because of advanced years or by reason of physical infirmities, unless
such age and infirmities impair his mental faculties to the extent that he is unable to properly,
intelligently and fairly understand the provisions of said contract. Respondents failed to show that
Claudia was deprived of reason or that her condition hindered her from freely exercising her own will at
the time of the execution of the Deed of Conditional Sale.

128
 CONTRACTS
Essential Requisites

THE SALE OF REAL ESTATE MADE BY MINORS WHO PRETENDED TO BE OF LEGAL AGE,
WHEN IN FACT THEY ARE NOT, IS VALID, AND THEY WILL NOT BE PERMITTED TO EXCUSE
THEMSELVES FROM THE FULFILLMENT OF THE OBLIGATION

106. MERCADO v. ESPIRITU

G.R. No. L-11872, December 1, 1917

FACTS:
This is an appeal by bill of exceptions, filed by counsel for the plaintiffs from the judgment of
September 22, 1914, in which the judge of the Seventh Judicial District dismissed the complaint filed
by the plaintiffs and ordered them to keep perpetual silence in regard to the litigated land, and to pay
the costs of the suit. The plaintiffs alleged that they and their sisters Concepcion and Paz, all
surnamed Mercado, were the children and sole heirs of Margarita Espiritu, a sister of the deceased
Luis Espiritu; That said Luis Espiritu, by means of cajolery, induced, and fraudulently succeeded in
getting the plaintiffs sign a deed of sale of the land left by their mother, for the sum of P400, which
amount was divided among the two plaintiffs and their sisters Concepcion and Paz, notwithstanding
the fact that said land, according to its assessment, was valued at P3,795; that one-half of the land in
question belonged to Margarita Espiritu, and one-half of this share, that is, one-fourth of said land, to
the plaintiffs, and the other one-fourth, to their two sisters Concepcion and Paz.

Said counsel therefore asked that judgment be rendered in plaintiffs' favor by holding to be null and
void the sale they made of their respective shares of their land, to Luis Espiritu, and that the defendant
be ordered to deliver and restore to the plaintiffs the shares of the land that fell to the latter in the
partition of the estate of their deceased mother Margarita Espiritu, together with the products thereof,
uncollected since 1901, or their equivalent, to wit, P450 per annum, and to pay the costs of the suit.

The court rendered the judgment aforementioned, to which the plaintiffs excepted and in writing moved
for a reopening of the case and a new trial. This motion was overruled, exception was taken by the
petitioners, and, the proper bill of exceptions having been presented, the same was approved and
transmitted to the clerk of this court. Plaintiffs assailed the validity of the deed of sale executed by
them on May 17, 1910, on the ground that they were minors when they executed it.

ISSUE:
Is the Deed of Sale valid?

RULING:
Yes, In this case, The court declared that the contract of sale was valid, even if it were made and
entered into by minors, who pretended to be of legal age. The court stated that they will not be
permitted to excuse themselves from the fulfilment of the obligations contracted by them, or to have
them annulled. Under Rule 123, Section 26 Paragraph 6 of the Civil Code, whenever a party has, by
its own declaration, act or omission, intentionally and deliberately led another party to believe a
particular thing to be true, and to act upon such belief, he cannot, in any litigation arising out of such
declaration, cannot be permitted to falsify it.

129
 CONTRACTS
Essential Requisites

THE FRAUD OF WHICH MINOR MAY BE HELD LIABLE TO ONE WHO CONTRACTS WITH HIM IN
THE BELIEF THAT HE IS OF FULL AGE MUST BE ACTUAL NOT CONSTRUCTIVE, AND MERE
FAILURE OF THE MINOR TO DISCLOSE HIS AGE IS NOT SUFFICIENT.

107. BRAGANZA v. VILLA ABRILLE

G.R. No. L-12471, April 13, 1959
Bengzon, J.

FACTS:
Petitioners Rosario L. de Braganza and her sons Rodolfo and Guillermo received from Villa Abrille, as
a loan, P70,000 in Japanese war notes and in consideration thereof, promised in writing to pay him
P10,000 "in legal currency of the P. I. two years after the cessation of the present hostilities or as soon
as International Exchange has been established in the Philippines", plus 2% per annum. Payment had
not been made, hence, Villa Abrille sued them in March 1949.

In their answer before the CFI of Manila, defendants claimed to have received P40,000 only — instead
of P70,000 as plaintiff asserted. They also averred that Guillermo and Rodolfo were minors when they
signed the promissory note. After hearing the parties and their evidence, said court rendered judgment
requiring the petitioners to pay solidarily Fernando Villa Abrille the sum of P10,000 plus 2% interest
from October 30, 1944, which appellate court affirmed. Hence, this petition.

ISSUE:
Are the sons who were 16 and 18 bound by the contract of loan which they have signed?

RULING:
Yes, there can be no question about the responsibility of Mrs. Rosario L. Braganza because the
minority of her co-signers will not release her from liability; since it is a personal defense of the minors.
However, with her sons, the SC reversed the decision of the CA which found them similarly liable due
to their failure to disclose their minority. According to Corpuz Juris Secundum, 43 p. 206;

. . . . Some authorities consider that a false representation as to age including a contract as part of the
contract and accordingly hold that it cannot be the basis of an action in tort. Other authorities hold that
such misrepresentation may be the basis of such an action, on the theory that such misrepresentation
is not a part of, and does not grow out of, the contract, or that the enforcement of liability for such
misrepresentation as tort does not constitute an indirect of enforcing liability on the contract. In order
to hold infant liable, however, the fraud must be actual and not constructive. It has been held
that his mere silence when making a contract as to age does not constitute a fraud which can
be made the basis of an action of deceit.

Nevertheless, these minors may not be entirely absolved from monetary responsibility. In accordance
with the provisions of Civil Code, even if their written contact is unenforceable because of non-age,
they shall make restitution to the extent that they have profited by the money they received. (Art. 1340)
There is testimony that the funds delivered to them by Villa Abrille were used for their support during
the Japanese occupation.

Accordingly, the appealed decision should be modified in the sense that Rosario Braganza shall pay
1/3 of P10,000 i.e., P3,333.33 plus 2% interest from October 1944; and Rodolfo and Guillermo
Braganza shall pay jointly the total amount of P1,166.67 plus 6% interest beginning March 7, 1949,
when the complaint was filed.

130
 CONTRACTS
Essential Requisites

MISTAKE OF LAW DOES NOT MAKE A CONTRACT VOIDABLE

108. LUNA v. LINATOC

G.R. No. L-48403, October 28, 1942
Bocobo, J.

FACTS:
This is a Petition for Review on Certiorari assailing the validity of the sale of the land, after the spouses
claimed ignorance of the prohibition under Article 1432 of the Old Civil Code.

Petitioner Agustin De Luna’s wife, who acted as an agent of the husband, sold a portion of their
conjugal property during the subsistence of their marriage. The land was under the name of the
husband only because they already partitioned the parcel of land. The wife, with the knowledge and
consent of the husband, sold it to respondent Jose Linatoc, as evidenced by the deed of sale and the
deed of recognition wherein the husband recognized and reiterated his acquiescence to the sale.
However, under Art.1432 of Old Civil Code, the wife could not sell her portions of those lands in the
name of her husband, because the partition was illegal and void, as it was made during the marriage
and there was no judicial order authorizing separation of property between the husband and the wife.
Hence, this petition.

ISSUE:
Can the sale be validly annulled by the spouses?

RULING:
No, Mistake of law does not make a contract voidable, because ignorance of the law does not excuse
anyone from its compliance under Article 3 of Civil Code (Article 2 of the CC during the time the
decision was rendered). That the petitioners did not know the prohibition against partition of the
conjugal partnership property during marriage (art. 1432, Civil Code) is no valid reason why they
should ask for the annulment of the sales made Exhibits C and D and recognized in Exhibit I.

Moreover, there is the time-honored legal maxim that no man can take advantage of his own wrong.
To repudiate the sales in question, petitioners are setting up their own wrongful act of partitioning their
conjugal property, which violated article 1432 of the Civil Code. The prohibition in said article affects
public policy, as it is designed to protect creditors of the conjugal partnership and other third persons.
Petitioners shall not, therefore, be allowed thus to rest their cause of action to recover the lands sold,
upon the illegality of the partition which they attempted to make. Otherwise, they would profit by their
own unlawful act.

131
 CONTRACTS
Essential Requisites

A CONTRACT MAY BE ANNULLED IF ALL THE ELEMENTS OF FRAUD VITIATING CONSENT

ARE PRESENT
109. CONSTANTINO v. COURT OF APPEALS, AURORA S. ROQUE, ET.AL.
G.R. No. 116018, November 13, 1996

FACTS:
Josefa Torres died intestate leaving a parcel of land located at Balagtas, Bulacan. Among her heirs are
respondents Aurora Roque, Priscilla Luna and Josefina Austria. Sometime in 1984, the heirs of Josefa
Torres, as vendors, and petitioner Nelia Constantino, as vendee, entered into a contract to sell a
parcel of land.The lot, owned in common by the Torres heirs, is being occupied by petitioners’ mother
and sister. An adjoining lot, also co-owned by the heirs, is being occupied by spouses Severino and
Consuelo Lim. Pursuant to their agreement, the heirs authorized petitioner to prepare the necessary
Deed of Extrajudicial Settlement of Estate with Sale. However, without the participation of any of the
Torres heirs, the property was subsequently surveyed and subdivided without furnishing the heirs with
copies of the Deed of Extrajudicial Settlement of Estate with Sale nor of the subdivision plan and the
certificates of title.

Upon securing a copy of the deed from the Registry of Deeds, the respondents learned that the area of
the property purportedly sold to petitioner was much bigger than that agreed upon by the parties. It
already included the portion being occupied by the spouses Severino and Consuelo Lim. Private
respondents reiterated that all the heirs signed the document before the land was surveyed and
subdivided, hence, there was as yet no definite area to be sold that could be indicated in the deed at
the time of the signing. They also claimed that they were not notified about the survey and the
subdivision of the lot and therefore they could not have agreed on the area supposedly sold to
petitioner. The respondent heirs insist that they could not have agreed to the extent of the area actually
reflected in the deed because it included the portion being occupied by the Lim spouses, which was
already the subject of a previous agreement to sell between them and their predecessor.

Respondents filed with the RTCan action for annulment of the deed and cancellation of the certificates
of title. The trial court entertained serious doubts with respect to the preparation and due execution of
the Deed of Extrajudicial Settlement of Estate with Sale and subsequently ordered the annulment and
cancellation of the Deed of Extrajudicial Settlement of Estate. The CA sustained the decision of the
RTC.
ISSUE:
Was the sale of the land valid?

RULING:
No. The allegation of respondents that they signed the deed prior to the survey, or before determina-
tion of the area to be sold, worthy of credit as against the contention of petitioner that they signed after
the survey or on 10 October 1984.

As found by the trial court, such contention was contradicted by petitioner’s own witness who positively
asserted that the survey was conducted only on 16 October 1984 or six (6) days after the signing.
Quite obviously, when respondents affixed their signatures on the deed, it was still incomplete since
petitioner who caused it to be prepared left several spaces blank, more particularly as regards the
dimensions of the property to be sold. The heirs were persuaded to sign the document only upon the
assurance of petitioner that respondent Roque, pursuant to their understanding, would be present
when the property would be surveyed after obtaining permission from the Bureau of Lands. As it
surfaced, the supposed understanding was merely a ruse of petitioner to induce respondents to sign
the deed without which the latter would not have given their conformity thereto. 7 Apparently, petitioner
deceived respondents by filling the blank spaces in the deed, having the lots surveyed and subdivided,
and then causing the issuance of transfer certificates of title without their knowledge, much less
consent. Thus all the elements of fraud vitiating consent for purposes of annulling a contract concur:
(a) It was employed by a contracting party upon the other, (b) It induced the other party to enter into
the contract; (c) It was serious; and, (d) It resulted in damages and injury to the party seeking
annulment.

132
 CONTRACTS
Essential Requisites

IT IS TO BE PRESUMED THAT AN INSTRUMENT SATISFYING A DEBT OR OBLIGATION

MANIFESTED IN ANOTHER INSTRUMENT EXTENDS NO FURTHER THAN THE TERMS OF THE
INSTRUMENT WHICH MANIFESTS THE OBLIGATION TO BE DISCHARGED, UNLESS IT IS
CLEAR THAT THE PARTIES INTENDED SOMETHING MORE.

110. STRONG v. REPIDE

G.R. No. L-7154, February 21, 1912

FACTS:
This is an action for the recovery of a sum of money.

Prior to October 10, 1903, Eleanor Erica Strong, was the owner of 800 shares of the capital stock of
the Philippine Sugar Estates Development Company, Limited (sociedad anonima), of the par value of
P100 each. On the said 10th day of October, 1903, the defendant, Francisco Repide, by means
subsequently found and adjudged to have been fraudulent, obtained possession of said shares and
thereafter alleged to be the owner thereof. This judgment fixed the value of the shares at P138,352.71,
awarding judgment in this amount to the plaintiff and directing that the said judgment might be satisfied
by defendant's delivering to the plaintiff the said shares, in which event the plaintiff should pay to the
defendant $16,000 Mexican currency, or its equivalent in Philippine currency.

On the 27th of July, 1909, the said judgment of April 29, 1904, was satisfied by defendant's returning
to the plaintiff 800 shares of stock of said company and the payment by the plaintiff to the defendant of
P14,159.29 Philippine currency, equivalent to $16,000 Mexican currency. Said satisfaction was
effected by means of a stipulation or agreement entered into between the attorneys for the plaintiff and
the defendant, in which the satisfaction of the judgment was acknowledged by both parties. From the
10th day of October, 1903, the date of the said fraudulent purchase by the defendant, until the 27th
day of July, 1909, the defendant retained said shares in his possession or under his control and after
the rendition of said judgment of April 29, 1904, collected the dividends earned by said shares for the
years 1905, 1906, 1907, and 1908 at the rate of 6 per cent per annum, amounting to a total of
P19,200, which sum the defendant retained and refused to pay over to the plaintiff. After demand upon
and refusal by the defendant, the plaintiff began this action for the recovery of said sum. He asserts
that that judgment is for a sum of money and not for the rescission of a contract and the return of
shares of stock. This being so, he maintains that the payment of the sum named in the judgment,
whether by money or by shares of stock, was a complete satisfaction of the judgment in that case

ISSUE:
Was the return of the dividend considered as payment for the obligation of the appellant?

RULING:
No. It is to be presumed that an instrument satisfying a debt or obligation manifested in another in-
strument extends no further than the terms of the instrument which manifests the obligation to be
discharged, unless, from the terms of the instrument, it is clear that the parties intended something
more. So far as the record discloses, at the time this satisfaction was executed nothing whatever
occurred between the parties relative to the dividends on the stock which formed the subject-matter of
that judgment, nor did anything transpire as to any other relations between the parties than those
embraced within the judgment itself. There was nothing in the conduct of the parties, or in their
relations or attitudes, from which it could be implied or inferred that they were dealing with aught else
than the judgement itself. There is no basis, then, for the contention of the appellant unless it be found
in the wording of that instrument itself.

133
 CONTRACTS
Essential Requisites

FALSE REPRESENTATION UPON A MERE MATTER OF OPINION IS NOT AN ACTIONABLE

DECIET, NOR IS IT A SUFFICIENT GROUND FOR AVOIDING A CONTRACT AS FRAUDULENT.

111. SONGCO v. SELLNER

G.R. No. 11513, December 4, 1917
Street, J.

FACTS:
In a petition for appeal, defendant-appellant, George C. Sellner challenges the judgment rendered by
the court finding him liable to pay the promissory note he issued in favor of plaintiff-appellee, Lamberto
Songco, as payment for the cane he bought from the latter.

Songco, the seller of the cane, made an exaggerated statement concerning the probable yield of sugar
from said cane but refused to warrant the amount of the yield. Nevertheless, Sellner credited his
statement and bought the cane in the belief that it would produce substantially the amount stated by
Songco. As a payment thereof, Sellner executed three (3) promissory notes in favor of Songco.
However, only two (2) promissory notes were paid because the yield in fact turned out to be much less
from what Songco has stated.

Sellner, for his defense, claimed that Songco made a false representation with respect to the quantity
of uncut cane. He argued that Songco estimated that the cane would produce 3,000 piculs of the
sugar. However, it only produced 2,017 piculs, gross, and after deducting the toll for milling the net left
to him was very much less. Songco, on the other hand, reiterated that he was sure the fields contained
the quantity estimated by him and presented some evidence showing that he knew at the time he
made the representation in question that he was greatly exaggerating the probable produce of his
fields.

ISSUE:
Was the exaggerated statement of Songco amounts to false representation and thereby relieving
Sellner from his contract to pay the price agreed upon?

RULING:
No, exaggerated statement does not amount to false representation.The law allows considerable
latitude to seller's statements and not every representation relating to the subject matter of a contract
will render it void. False representation upon a mere matter of opinion is not an actionable deceit, nor
is it a sufficient ground for avoiding a contract as fraudulent. In order for it to be considered as
fraudulent, it must be as to matters of fact substantially affecting the buyer's interest, not as to matters
of opinion, judgment, probability, or expectation.

The refusal of the seller to warrant his estimate should have admonished the purchaser that that
estimate was put forth as a mere opinion. Assertions concerning the property which is the subject of a
contract of sale, or in regard to its qualities and characteristics, are the usual and ordinary means used
by sellers to obtain a high price and are always understood as affording to buyers no ground for
omitting to make inquiries. Thus, a man who relies upon such an affirmation made by a person whose
interest might so readily prompt him to exaggerate the value of his property does so at his peril, and
must take the consequences of his own imprudence.Therefore, Songco’s statement does not amount
to false representation and Sellner is not relieved from paying the price agreed upon.

134
 CONTRACTS
Essential Requisites

CONSTRUCTION AND INTERPRETATION SHOULD NOT BE RESORTED TO WHERE IT IS

POSSIBLE TO APPLY THE TERMS OF THE CONTRACT.

112. SABALVARO v. ERLANGER & GALINGER, INC.

G.R. No. 43045, August 17, 1937
Diaz, J.

FACTS:
In a petition for appeal, plaintiff-appellant, Vincent Sabalvaro, challenges the judgment rendered by the
CFI finding that the defendants-appellees, Erlanger & Galinger, Inc (EGI) or its offiers do not have an
obligation to purchase his shares of stock in the corporation after his separation from EGI.

When Sabalvaro became an employee of EGI, he was offered to buy shares of the corporation.
Thereafter, two of the majority of the stockholders of EGI offered him an option to buy more shares of
the corporation. The sale of the shares of the corporation to him was attended with several conditions
which were embodied in a document manifesting their agreement where Sabalvaro and the
defendants have signed. When Sabalvaro voluntarily separated his service, he asked the corporation
and its officers to buy the shares he has acquired from the corporation and pay the 7% of the value of
his said shares as interest. EGI denied his request but he was given the authority to sell to
whomsoever he wished. Sabalvaro claimed that on previous occasions EGI voluntarily and
spontaneously purchased the shares of some other officers and stockholders thereof, who had
separated from its service. On the other hand, the defendants argued that shares he bought is not
subject to any condition and without any obligation on the their to purchase it from him, either during
his stay in the service of EGI or after his separation therefrom.

ISSUE:
Does the EGI or its offiers have an obligation to purchase his shares of stock in the corporation after
his separation from EGI?

RULING:
No, EGI and its officers do not have an obligation to buy his shares of stock.The clear terms of a
contract should never be the subject matter of interpretation. Their true meaning must be enforced as it
is to be presumed that the contracting parties know their scope and effects.

In the documents manifesting the agreement between EGI and Sabalvaro, there is nothing that
indicates that EGI or the officers thereof, are under obligation to purchase the shares of the plaintiff
after his separation from the service. Moreover, the fact that on previous occasions the EGI voluntarily
and spontaneously purchased the shares of some other officers and stockholders thereof, who had
separated from its service, does not permit the interference that the understanding had between EGI
and Sabalvaro was that it would purchase the latter's shares as soon as he left its service. It is evident
that in no contract may a contracting party be obligated to more than what he has really bound himself
and that the contract should not be construed as including things and cases different from those with
respect to which the persons interested intended to contract

Therefore, in the absence of a contract, either express or implied, providing for the acquisition by EGI
or its officers of the shares of the stockholders thereof, they cannot be obliged to acquire them.

135
 CONTRACTS
Essential Requisites

ESSENTIAL REQUISITES OF A VALID CONTRACT: CONSENT, OBJECT CERTAIN, AND CAUSE

113. CAMACHO v. COURT OF APPEALS AND ANGELINO BANZON.

G.R. No.127520, February 9, 2007
Callejo, Sr., J.

FACTS:
This is a Petition for Review on Certiorari of the Decision of the CA affirming with modification the
Decision of the RTC of Balanga, Bataan that Camacho is liable to pay Atty. Banzon.

Camacho, a dentistry graduate and an experienced business woman conversant in English, entered
into a contract for legal services with Atty. Angelino Banzon denominated as “Contract of Attorney’s
Fee.” Atty. Banzon was tasked to negotiate the sale of Camacho’s land with the municipal government
of Balanga, Bataan and for this undertaking, Atty. Banzon will be paid 5000 square meters of the
subject lot. This was signed by both parties. Pursuant to the agreement, Atty. Banzon sent a letter-
proposal to the municipal council and was given an SPA for the execution of pertinent documents in
relation to the transfer of the subject lot. Atty. Banzon was also engaged by Camacho in a case of
forcible entry and another civil case which all pertain to the lot in question. In Civil Case No. 3512,
Camacho filed a Manifestation declaring that she had terminated the services of Atty. Banzon and
retained a new counsel, Atty. De La Serna. In the same case, Atty. Banzon filed a Complaint-in-
Intervention, declaring that he was engaged as a counsel and that his requests for Camacho to deliver
the portions of the subject lot which should be his fees remained unheeded. In her Answer, she denied
that she solicited the services of Atty. Banzon and that it was the latter who approached her to donate
a portion of the lot to the municipality. She admitted the signing of the contract but only upon request of
Banzon and that it was never intended to bind her to pay attorney’s fees.

RTC and CA ruled in favor of Atty. Banzon. The CA held that all the elements of a valid contract was
present and that Camacho cannot plead that she did not understand the undertaking she entered into
being a dentistry graduate and businesswoman, among others.

ISSUE:
Is there a valid contract that exist between Camacho and Atty. Banzon which would render the former
liable to the latter?

RULING:
Yes, there is a valid contract between Camacho and Atty. Banzon. The three (3) essential requisites
for a valid contract: (1) consent of the contracting parties; (2) an object certain which is the subject of
the contract; and (3) the cause of the obligation must be established. Consent is manifested by the
meeting of the offer and the acceptance upon the thing and the cause which are to constitute the
agreement. The requisite that a thing be determinate is satisfied if at the time the contract is entered
into, the thing is capable of being made determinate without the necessity of a new or further
agreement between the parties. For the cause to be valid, it must be lawful.

Here, the consent of the parties was shown by their signatures in the contract. The failure of the
parties to state the exact location of Lot 261 is a mere error and does not indicate the absence of the
object, the lot, as to render the contract void. Finally, under the terms, Atty. Banzon was obliged to
negotiate with the municipality for the transfer of the property, to sell, and to take charge of the legal
phases of the transaction. These services which Atty. Banzon undertook to perform are not contrary to
law, morals, good customs, public order, or public policy. Thus, the contract is valid.

136
 CONTRACTS
Essential Requisites

LIBERALITY OF DONOR IS DEEMED CAUSA ONLY IN CONTRACTS OF PURE BENEFICENCE

114. LIGUEZ v. COURT OF APPEALS, MARIA NGO VDA. DE LOPEZ, ET. AL.
G.R. No. L-11240, December 18, 1957
Callejo, Sr., J.

FACTS:
From a decision of the CA, affirming that of the CFI of Davao dismissing her complaint for recovery of
land, Liguez has resorted to this Court, praying that the aforesaid decision be reversed on points of
law.

Liguez averred to be the legal owner of a parcel of land in Mati, Davao pursuant to a deed of donation
executed in her favor by Salvador Lopez. Respondents were the widow and heirs of Salvador. When
the donation was made, Salvador had been living with the parents of Liguez for barely a month. The
donation was made in view of the desire of Salvador, a man of mature years, to have sexual relations
with Liguez, then a minor, only 16 years of age. Salvador had confessed to his love for Liguez to the
instrumental witnesses, with the remark that her parents would not allow Salvador to live with her
unless he first donated the land in question. After the donation, the two lived together until some
guerrillas killed Salvador. The land originally belonged to the conjugal partnership of Salvador and his
wife, Maria Ngo. Ngo met and berated Liguez for living martially with her husband. Ngo and her
children were in possession of the land and it was assessed in the tax rolls in the name of Salvador
and later in her name. The deed of donation was never recorded.

Liguez contends that under Article 1274 of the Civil Code of 1889 (governing law at that time), “in
contracts of pure beneficence the consideration is the liberality of the donor”, and that liberality per se
can never be illegal, since it is neither against law, morals, or public policy.The respondents, on the
other hand, aver that the donation was void for having an illicit causa or consideration, which was
Liguez’s entering into marital relations with Salvador, a married man. The lower court held that the
deed of donation was inoperative and void because the husband, Salvador, had no right to donate
conjugal property to Liguez, and the donation was tainted with illegal causa or consideration.

ISSUE:
Is donation of the land by Salvador to Liguez void for having an illicit causa or consideration?

RULING:
Yes, the donation of the land is void for having an illicit causa or consideration which is the marital
relations of Liguez to Salvador, a married man. Under Article 1274, liberality of donor is deemed causa
only in those contracts that are of “pure” beneficence; that is, contracts designed solely and exclusively
to procure the welfare of the beneficiary, without any intent of producing any satisfaction for the donor;
contracts, in other words, in which the idea of self-interest is totally absent on the part of the transferor.
The same article provides that in remuneratory contracts, the consideration is the service or benefit for
which the remuneration is given; causa is not liberality in these cases because the contract is not
made out of pure beneficence, but solvendi animo.

Here, in making the donation in question, Salvador was not moved exclusively by the desire to benefit
Liguez, but also to secure her cohabiting with him, so that he could gratify his sexual impulses. This is
clear from the confession of Salvador that he was in love with Liguez but her parents would not agree
unless he donates the land to her. Therefore, the conveyance was predicated on an illicit causa.

137
 CONTRACTS
Essential Requisites

A MORAL OBLIGATION IS NOT DEMANDABLE IN LAW BUT ONLY IN CONSCIENCE, OVER

WHICH HUMAN JUDGES HAVE NO JURISDICTION

115. A.O. FISHER v. JOHN ROBB

G.R. No. 46274, November 2, 1939
Villa-real, J.

FACTS:
This is an appeal made by defendant-appellant John Robb from the Judgement of the Court of First
Instance of Manila in favor of plaintiff-appellee A.O. Fisher to pay the sum of P2,000, with interest at
the legal rate from March 11, 1938, until paid, plus costs.

The board of directors of the Philippine Greyhound Club, Inc., told defendant to make a business trip to
Shanghai to study the operation of a dog racing course. In Shanghai, Robb stayed at the American
Club where he became acquainted with the Fisher. Fisher asked Robb if he could have a part therein
as a stockholder wherein the latter answered in the affirmative, Fisher thereupon filled a subscription
blank and, through his bank in Shanghai, sent to the Philippine Greyhound Club, Inc., in Manila
telegraphic transfer for P3,000 in payment of the first installment of his subscription. Some months
thereafter, a call for the payment of the second installment of the subscriptions was made and Fisher
sent P2,000 directly to the Philippine Greyhound Club, Inc., in payment of the said installment.

Due to the manipulations of those who controlled the Philippine Greyhound Club, Inc., during the
absence of Robb undertook the organization of a company called The Philippine Racing Club. Robb
wrote a letter to the plaintiff-appellee in Shanghai explaining in detail the critical condition of the
Philippine Greyhound Club, Inc., and outlining his plans to save the properties and assets of Fisher. In
answer to said letter, Fisher wrote the Robb requiring him to return the entire amount paid by him to
the Philippine Greyhound Club, Inc. Upon receiving this letter, the Robb answered Fisher for any loss
which he might have suffered in connection with the Philippine Greyhound Club, Inc., in the same way
that he could not expect anyone to reimburse him for his own losses which were much more than
those of the plaintiff-appellee.

ISSUE:
Is there a sufficient consideration to justify the promise made by the defendant-appellant in his letters
to the plaintiff-appellee?

RULING:
No, Article 1261 states, “there is no contract unless the following requisites exists: consent of the
contracting parties; definite object; consideration.”

The promise made by an organizer of a dog racing course to a stockholder to return to him certain
amounts paid by the latter in satisfaction of his subscription upon the belief of said organizer that he
was morally responsible because of the failure of the enterprise, is not the consideration required by
article 1261 of the Civil Code as an essential element for the legal existence of an onerous contract
which would bind the promisor to comply with his promise. The promise which said defendant-
appellant has made to the plaintiff-appellee to return to him P2,000 which he had paid to the Philippine
Greyhound Club, Inc., as second installment of the payment of the amount of the shares for which he
has subscribed, was prompted by a feeling of pity which said defendant-appellant had for the plaintiff-
appellee as a result of the loss which the latter had suffered because of the failure of the enterprise.
Therefore, the third requisite is absent. The obligation which the said defendant-appellant had
contracted with the plaintiff-appellee is, therefore, purely moral and, as such, is not demandable in law
but only in conscience, over which human judges have no jurisdiction. It is now a well-established rule
that a mere moral obligation arising from wholly ethical motives not connected with any legal obligation
will not furnish a consideration from an executory promise.

138
 CONTRACTS
Essential Requisites

A NEW PROMISE TO PAY A PRESCRIBED DEBT IS A MORAL OBLIGATION. THE MORAL

OBLIGATION IS THE CONSIDERATION OF THE CONTRACT.

116. VILLARROEL v. ESTRADA

G.R. No. L-47362, December 19, 1940
Avanceña, Pres.

FACTS:
This is an appeal made by defendant defendant Juan F. Villarroel from the decision of the Court of
First Instance (CFI) of Laguna ordering him to pay plaintiff Bernardino Estrada P1,000 with his legal
interest of 12 percent a year from August 9, 1930 until its complete payment.

On May 9, 1912, Alejandra F. Callao, mother of the defendant Villarroel, obtained from the spouses
Mariano Estrada and Severina a loan of P1,000 payable after seven years. Alejandra passed away,
leaving the defendant as the only heir. The husbands Mariano Estrada and Severina also died, leaving
the plaintiff Bernardino Estrada as sole heir. On August 9, 1930, the defendant Villarroel signed a
document declaring the amount of P1,000 owed to the plaintiff Estrada, with an interest of 12 percent
per year.

An action for collection of sum of money was filed. The CFI of Laguna ordered the defendant Villarroel
to pay the plaintiff Estrada the claimed amount of P1,000 with his legal interest of 12 percent a year
from August 9, 1930 until its complete payment. Defendant Villarroel filed an appeal contending that
the action to recover the original debt has already prescribed when the lawsuit was filed.

ISSUE:
Will the action proceed notwithstanding that the action to recover the original debt has already
prescribed?

RULING:
Yes. Although the action to recover the original debt has already prescribed when the lawsuit was filed
in this case, the present action, however, is not based on the original obligation contracted by the
mother of the defendant, which has already prescribed, but on the one contracted by the defendant on
August 9, 1930 when he assumed compliance with that obligation. The defendant being the only heir
of the primitive debtor, with the right to succeed it in his inheritance, that debt contracted by his mother
legally, although it lost its effectiveness by prescription, is now, however, for him a moral obligation,

The rule that a new promise to pay a prescribed debt must be made by the same obligated person or
by another legally authorized by it, is not applicable to the present case in which compliance with the
obligation of the originally obligated is not required, but of the one who later voluntarily wanted to
assume this obligation.

Therefore, defendant Villarroel is ordered to pay plaintiff Estrada despite the fact that the action to
recover the original debt has already prescribed because the contract he entered on August 9, 1930
assuming the obligation is deemed a moral obligation.

139
 CONTRACTS
Essential Requisites

A CONTRACT BASED UPON AN UNLAWFUL CONSIDERATION OR DESIGNED TO PROMOTE

AN UNLAWFUL OBJECT IS VOID AB INITIO

117. VELEZ v. RAMAS

G.R. No. L-14997, February 16, 1920
Street, J.:

FACTS:
This action was instituted by the plaintiff Teodoro Velez, and his wife, Hermenegilda Chiong Veloso to
recover of the defendants, Salomon Ramas and Roberto Quirante, a sum of money evidenced by a
written obligation signed by said defendants wherein they acknowledged themselves to be jointly and
severally bound for the payment to the plaintiff. It appears in evidence that the defendant Roberto
Quirante is the father of Restituta Quirante, who in turn is the wife of the defendant Salomon Ramas
who was formerly employed by the spouses Velez from which she abstracted various sums of money
under conditions which supposedly constituted the offense of estafa. When this fact was discovered by
the plaintiffs they threatened to prosecute her, and in order to prevent his eventuality the contract in
question was executed by the defendants.

ISSUE:
Is the contract between the plaintiff and the defendants valid?

RULING:
No, the contract is not valid since the consideration is illicit. The Court opined that the consideration for
the agreement is clearly illicit, which fact is apparent on the face of the contract; and the case is
accordingly governed by Article 1275 of the Civil Code. A contract based upon an unlawful
consideration or designed to promote an unlawful object is an always has been void ad initio by the
common law, by the civil law, moral law, and all laws whatsoever (Collins vs. Bantern, 2 Wils. C. Pl.,
341.)

It is immaterial whether the illegal character of the contract is revealed in the matter of the
consideration, in the promise as expressed in the agreement, or in the purpose which the agreement,
though legal in expression, is intended to accomplish. If the illegality lurks in any element, or even
subsists exclusively in the purpose of the parties, it is fatal to the validity of the contract.

It has been considered contrary to public policy to allow parties to make agreements designed to
prevent or stifle prosecutions for crime. It is self-evident that the law cannot sanction an engagement
which is subversive of the law itself or which tends to weaken the foundations of human society. The
machinery for the administration of justice cannot be used to promote an unlawful purpose.

140
 CONTRACTS
Essential Requisites

A PRE-EXISTING DEBT AS A CONSIDERATION IS NOT ILLICIT NOR CONTRARY TO PUBLIC

POLICY

118. MACTAL v. MELEGRITO

G.R. No. L-16114, March 24, 1961
Concepcion, J.

FACTS:
The case is an appeal taken by the plaintiff, who maintains that the lower court erred in holding that
this action is based upon the aforementioned promissory note, and that the consideration thereof was
the dismissal of the estafa case against the appellee.

Mactal delivered to Melegrito the sum of money to be used by him in the purchase of palay for Mactal,
with a ten (10%) per cent commission in his (Melegrito's) favor or returned to Mactal, if he fails to buy
palay. He neither bought palay nor returned said amount. Mactal sued him of estafa and when the
case was about to be heard, Mactal was persuaded by the Chief of Police to move for the dismissal of
the case and be contented with a promise on the part of Melegrito to pay the sum of money. Despite
repeated demands by Mactal, the latter subsequently failed to pay the aforementioned sum. Mactal
then files an action to recover a sum of money from Melegrito, who then filed an answer admitting
some allegations of the complaint and denying other allegations thereof, and setting up some special
defenses and a counterclaim.

In due course, the Court of First Instance rendered a decision dismissing the case with costs against
plaintiff, Miguel Mactal, upon the ground that the consideration of the promissory note upon which the
complaint is based was the dismissal of a criminal case for estafa against the defendant and, hence,
illicit, immoral and contrary to public policy, as well as void ab initio.

ISSUE:
Is the consideration in the contract illicit, immoral; and contrary to public policy?

RULING:
No, Melegrito admitted, on the witness stand, that he is indebted to the plaintiff in the aggregate sum of
P1,777.00, although he claims that his liability therefor was merely that of a guarantor, not principal
debtor. So when the Chief of Police succeeded in persuading Mactal to withdraw the criminal case for
estafa, Melegrito was only too willing to sign Exhibit A, in which he promised to pay the
aforementioned amount in January, 1954. The consideration for this promise was, therefore, the
aforesaid pre-existing debt of Melegrito, not the dismissal of the estafa case, which merely furnished
the occasion for the execution of the promissory note.

141
 CONTRACTS
Reformation of Instruments

CONTRACTS ARE VALID AND BINDING FROM THEIR PERFECTION REGARDLESS OF FORM
WHETHER THEY BE ORAL OR WRITTEN

119. DAUDEN-HERNAEZ v. HON. WALFRIDO DELOS ANGELES

G.R. No.: L-27010, April 30, 1969
Reyes, JBL.

FACTS:
Marlene Dauden-Hernaez, a motion picture actress filed a complaint against herein private
respondents, Hollywood Far East Productions, Inc., and its President and General Manager, Ramon
Valenzuela, to recover P14,700.00 representing a balance allegedly due said petitioner for her
services as leading actress in two motion pictures produced by the company, and to recover damages.
Upon motion of defendants, the respondent court (Judge Walfrido de los Angeles presiding) ordered
the complaint dismissed, because the "claim of plaintiff was not evidenced by any written document,
either public or private, which is contrary to Art. 1358 of the Civil Code. According to delos Angeles,
said provision requires that the writing was absolute and indispensable, because the amount involved
exceeds P500.

ISSUE:
Will a contract for personal services involving more than P500.00 be invalid and unenforceable under
Article 1358 of the Civil Code if not reduced into writing?

RULING:
No, the contract is valid and enforceable even if the same is not reduced into writing. As a rule
contracts are valid and binding from their perfection regardless of form whether they be oral and
written. Art. 1315 only requires the presence of (1) consent (2) proper subject matter, and (3)
consideration or causa for the obligation.

The general rule that the form (oral or written) is irrelevant to the binding effect inter partes of a
contract that possesses the three validating elements of consent, subject matter, and causa, under
Article 1356 of the Civil Code establishes only two exceptions, to wit: (a) Contracts for which the law
itself requires that they be in some particular form (writing) in order to make them valid and
enforceable (the so-called solemn contracts) and; (b) Contracts that the law requires to be proved by
some writing (memorandum) of its terms, as in those covered by the old Statute of Frauds.

In the case at bar, the contract sued upon by petitioner herein (compensation for services) does not
come under either exception. It is true that it appears included in Article 1358, last clause, providing
that "all other contracts where the amount involved exceeds five hundred pesos must appear in
writing, even a private one." But Article 1358 nowhere provides that the absence of written form in this
case will make the agreement invalid or unenforceable. On the contrary, Article 1357 clearly indicates
that contracts covered by Article 1358 are binding and enforceable by action or suit despite the
absence of writing.

ART. 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe that
form, once the contract has been perfected. This right may be exercised simultaneously with the action
the contract. It thus becomes inevitable to conclude that even if petitioner Dauden's contract for
services was not in writing, the same could be sued upon.

142
 CONTRACTS
Reformation of Instruments

WHILE REFORMATION IS A RECOGNIZED REMEDY AFFORDED BY COURTS OF EQUITY, IT

MAY NOT BE APPLIED IF IT IS CONTRARY TO WELL-SETTLED PRINCIPLES OR RULES

120. HUIBONHOA v. COURT OF APPEALS

G.R. No. 95987; December 14, 1999
Purisima, J.

FACTS:
There are two Petitions for Review on Certiorari seeking the reversal of the decision of CA as to the
affirmation of the decision of RTC in an ejectment case involving the parties.

On June 8, 1983, Florencia T. Huibonhoa entered into a contract of lease with siblings Gojocco over 3
adjacent commercial lots for a period of 15 years commencing on July 1, 1983, which shall enable
Huibonhoa to construct a "four-storey reinforced concrete building.” The lessee undertook to complete
construction of the building "within 8 months from the date of the execution of the contract of lease."
Paragraph 5 of the contract further provided as follows: “the LESSEE's obligation to pay the rental
shall start only upon completion of the building, but if it is not completed within 8 months from date
hereof as provided, the monthly rental shall already accrue and shall be paid by LESSEE to LESSOR.
In other words, during the period of construction, no monthly rental shall be collected from LESSEE.”
During the construction of the building, former Senator Benigno Aquino, Jr. was assassinated,
allegedly affecting the country's political and economic stability upon the consequent hoarding of
construction materials and increase in interest rates such that Huibonhoa failed to complete the same
within the stipulated period. Under the contract, Huibonhoa was supposed to start paying rental in
March 1984 but she failed to do so. Hence, the Gojoccos sent lessee a final letter of demand to pay
the rental arrearages and to vacate the leased premises.

Huibonhoa brought an action for reformation of contract, alleging that Gojoccos had erroneously
considered the first accrual date of the rents to be March 1984 when their true intention was that
during the entire period of actual construction of the building, no rents would accrue. She averred that
by reason of mistake or accident, the lease contract failed to provide that should an unforeseen event
dramatically increase the cost of construction (in this case, the alleged death of Aquino), the monthly
rental would be reduced and the term of the lease would be extended for such fair duration as may be
fair and equitable to both the lessors and the lessee.

ISSUE:
Should there be reformation of the contract of lease?

RULING:
No. An action for reformation of instrument may prosper only upon the concurrence of the following
requisites: (1) there must have been a meeting of the minds of the parties to the contact; (2) the
instrument does not express the true intention of the parties; and (3) the failure of the instrument to
express the true intention of the parties is due to mistake, fraud, inequitable conduct or accident. The
meeting of the minds between Huibonhoa and the Gojoccos is manifest in the written lease contract
duly executed by them. Otherwise, there was no reason for the insertion of that qualification on the
period of construction of the building the termination of which would signal the accrual of the monthly
rentals. Non-inclusion of that qualification would also give the lessee the unbridled discretion as to the
period of construction of the building.

143
 CONTRACTS
Reformation of Instruments

IN AN ACTION FOR REFORMATION, THE PRESCRIPTIVE PERIOD OF 10 YEARS APPLIES BY

OPERATION OF LAW, NOT BY THE WILL OF THE PARTIES

121. BENTIR v. LEANDA

G.R. No. 128991, April 12, 2000
Kapunan, J.

FACTS:
This is a Petition for Review filed by Yolanda Rosello-Bentir (Bentir) and the spouses Samuel and
Charito Pormida (spouses Pormida) against respondents including Leyte Gulf Traders, Inc. (Leyte
Gulf).

Leyte Gulf entered into a contract of lease of a parcel of land with petitioner Bentir for a period of
twenty (20) years starting 1968 which was extended for another four (4) years. Prior to expiration of
the lease, Bentir sold the leased premises to spouses Pormada. Leyte Gulf questioned the sale
alleging that it had a right of first refusal. It filed a civil case in 1992 seeking the reformation of the
expired contract of lease on the ground that its lawyer inadvertently omitted to incorporate in the
contract of lease executed in 1968, the verbal agreement or understanding between the parties that in
the event Bentir leases or sells the lot after the expiration of the lease, Leyte Gulf has the right to equal
the highest offer. Petitioners filed a motion to dismiss on the ground of prescription. RTC issued an
order dismissing the complaint, but was subsequently reversed. The CA affirmed the decision of the
RTC.

Leyte Gulf contended that the extended period of lease was an "implied new lease" within the
contemplation of Article 1670 of the Civil Code. Hence, the 10-year prescriptive period should be
reckoned not from the execution of the contract of lease in 1968, but from the date of the alleged 4-
year extension of the lease contract after it expired in 1988.

ISSUE:
Did the complaint for reformation filed by respondent Leyte Gulf prescribe?

RULING:
Yes, the complaint for reformation has prescribed. The remedy of reformation of an instrument is
grounded on the principle of equity where, in order to express the true intention of the contracting
parties, an instrument already executed is allowed by law to be reformed. The rationale is that it would
be unjust and unequitable to allow the enforcement of a written instrument which does not reflect or
disclose the real meeting of the minds of the parties. The prescriptive period for actions based upon a
written contract and for reformation of an instrument is 10 years under Article 1144 of the Civil Code.

Leyte Gulf had 10 years from 1968, the time when the contract of lease was executed, to file an action
for reformation. Sadly, it did so only after 24 years since the cause of action accrued. If there was an
agreement between the parties to extend the lease contract for 4 years, Art. 1670 would not apply as
this provision speaks of an implied new lease. If the extended period of lease was expressly agreed
upon by the parties, then the term should be exactly what the parties stipulated. Also, even if the 4-
year extended lease be considered as an implied new lease, "the other terms of the original contract"
are only those terms which are germane to the lessee's right of continued enjoyment of the property
leased. The prescriptive period of 10 years applies by operation of law, not by the will of the parties.

144
 CONTRACTS
Reformation of Instruments

IN USURIOUS LOANS, THE ENTIRE OBLIGATION DOES NOT BECOME VOID BECAUSE OF AN
AGREEMENT FOR USURIOUS INTEREST

122. DEVELOPMENT BANK OF THE PHILIPPINES v. PEREZ

G.R. No. 148541, November 11, 2004
Callejo Sr., J.

FACTS:
This is a Petition for Review on Certiorari seeking to reverse and set aside the Decision of the CA and
to reinstate the Decision of the RTC in a complaint filed by respondents Bonita Perez and Alfredo
Perez against Development Bank of the Philippines (DBP).

DBP approved an industrial loan applied by the respondents amounting to P214,000.00 for the
acquisition of machinery and equipment and for working capital, and an additional industrial loan
amounting to P21,000.00 to cover unforeseen price escalation. The respondents signed four (4)
promissory notes covering the total amount of the loan and were secured by a mortgage contract. DBP
sent two (2) letters to the respondents informing them about the terms and conditions of their industrial
loan. Respondents failed to comply with their amortization payments, hence DBP decided to foreclose
the mortgages. However, Mrs. Perez requested for a restructuring of their account which was
thereafter approved by DBP. Respondents signed another promissory note in the amount of
P231,000.00 at 18% interest per annum, but they still failed to comply with the payment terms which
prompted DBP to institute foreclosure proceedings on the mortgages.

The respondents filed a complaint for the nullification of the new promissory note alleging that DBP
restructured the respondents' obligation in bad faith. They averred that the interest imposed on the
said transaction was usurious and that the new promissory note constituted a novation of the previous
obligations. RTC upheld the validity of the new promissory note and ordered the respondents to pay
their obligation. CA set aside the RTC’s decision.

ISSUE:
1) Is the new promissory note voidable for not having been voluntarily signed by the respondents and
for being a contract of adhesion?
2) Is the interest rate agreed upon by the parties in the new promissory note usurious?

RULING:
1) No. The respondents merely alleged that they were forced to sign their restructured loan for fear of
having their mortgaged properties foreclosed. It is axiomatic that this would not amount to vitiated
consent. The last paragraph of Article 1335 of the New Civil Code specifically states that a threat to
enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent.
Foreclosure of mortgaged properties in case of default in payment of a debtor is a legal remedy
afforded by law to a creditor. Hence, a threat to foreclose the mortgage would not, per se, vitiate
consent.

2) Yes. The 18% interest rate plus additional interest and penalty charges as agreed upon by the
parties based on the new Usury Law are highly usurious. The new promissory note was executed
when The Usury Law, Act No. 2655, as amended by Presidential Decree No. 116, was still in force and
effect. In effect, the unpaid principal debt still stands and remains valid, but the stipulation as to the
usurious interest is void. In the absence of an express stipulation as to the rate of interest, the legal
rate at twelve percent (12%) per annum shall be imposed. Hence, respondent’s obligation to DBP
remains but the interest shall be reduced to 12% per annum.

145
 CONTRACTS
Reformation of Instruments

ANY AMBUGUITY IN THE PROVISIONS OF A CONTRACT OF ADHESION SHALL BE

CONSTRUED AGAINTS THE PARTY WHO PREPARED THE CONTRACT

123. AZNAR v. CITIBANK, N.A

G.R. No 164273., March 28, 2007
Austria-Martinez, J.

FACTS:
This is a Petition for Review filed by Emmauel B. Aznar assailing the decision of the Court of Appeals
which set aside the order of the RTC and reinstated the prior decision of the lower court.

Aznar is a holder of a Preferred Master Credit Card issued by Citibank. As he, his and his wife planned
to take their two grandchildren on an Asian tour, Aznar made an advance with Citibank with the
intention of increasing his credit limit. Aznar claims that when he presented his Mastercard in some
establishments in Malaysia, Singapore and Indonesia, the same was not honored for the reason that
his card was blacklisted by Citibank. Aznar filed a complaint for damages against Citibank claiming
that the latter fraudulently or with gross negligence blacklisted his Mastercard forcing them to abort
important tour destinations and prevent them from buying items in their tour. Citibank denied the
allegation that it blacklisted Aznar’s card. Citibank contented that it is exempt from any liability for the
dishonor of its cards by any merchant affiliate, and that its liability for any action or incident which may
be brought against it in relation to the issuance and use of its credit cards is limited to ₱1,000.00 or the
actual damage proven, whichever is lesser. The RTC dismissed Aznar’s complaint for lack of merit.
The case was re-raffled and the motion for reconsideration was granted, rendering Citibank liable to
pay damages. The RTC ruled that the fine prints in the flyer of the credit card limiting the liability of the
bank is a contract of adhesion which must be interpreted against Citibank. Citibank filed an appeal
before the CA. The CA set aside the second decision and reinstated the first one.

Petition herein alleged that Citibank was grossly negligent in failing to credit the additional deposit and
make the necessary entries in its systems to prevent Aznar from encountering any embarrassing
situation with the use of his Mastercard. Citibank in turn contends that the terms and conditions of the
credit card cannot be considered as a contract of adhesion since Aznar was entirely free to reject the
card if he did not want the conditions stipulated therein.

ISSUE:
Was the agreement between the parties a contract of adhesion making Citibank liable for the damages
sustained by the petitioner?

RULING:
Yes. It is settled that contracts between cardholders and the credit card companies are contracts of
adhesion, so-called, because their terms are prepared by only one party while the other merely affixes
his signature signifying his adhesion thereto.
In this case, paragraph 7 of the terms and conditions states that "Citibank is not responsible if the Card
is not honored by any merchant affiliate for any reason x x x". While it is true that Citibank may have
no control of all the actions of its merchant affiliates, and should not be held liable therefor, it is
incorrect, however, to give it blanket freedom from liability if its card is dishonored by any merchant
affiliate for any reason. Such phrase renders the statement vague and as the said terms and
conditions constitute a contract of adhesion, any ambiguity in its provisions must be construed against
the party who prepared the contract, in this case, Citibank.

146
 CONTRACTS
Rescissible Contracts

CONTRACT MAY BE RESCINDED BY REASON OF INJURY TO THIRD PERSONS

124. GUZMAN, BOCALING & CO. v. RAOUL S.V. BONNEVIE

G.R. No. 86150, March 2, 1992
Cruz, J.

FACTS:
This is a Petition for Review under Rule 65 filed by petitioner Guzman, Bocaling & Co., assailing the
decision of the CA which affirm the conclusion of the RTC that the contract between Africa Valdez
Reynoso and the petitioner company was null and void.

The subject of the controversy is a parcel of land leased to private respondents, Raoul Bonnevie and
Christopher Bonnevie (Bonnevies), by Reynoso. Under the contract of lease, should the lessor decides
to sell the leased property, the lessees shall be given first priority to purchase the same. According to
Reynoso, the Bonnevies were notified of the sale of the leased property and gave them 30 days to
exercise their right of first priority to purchase the same in which they failed to. Thereafter, Bonnevies
were informed by Reynoso that property was already sold to the petitioner. The Bonnevies filed an
action for annulment of the sale and cancellation of the transfer certificate of title in the name of the
petitioner. The RTC ruled in favor of the Bonnevie as against Reynoso and the petitioner declaring the
deed of sale executed by Reynoso in favor of the petitioner null and void. Both Reynoso and the
petitioner filed with the CA a petition for review wherein the CA affirmed the conclusions of the RTC.

Petitioner herein argues that assuming the Contract of Sale to be voidable, only the parties thereto
could bring an action to annul it pursuant to Article 1397 of the Civil Code. It is stressed that private
respondents are strangers to the agreement and therefore have no personality to seek its annulment.
Petitioner asserts that the CA erred in holding that the Contract of Sale was not voidable but
rescissible.

ISSUE:
1) Is the contract rescissible?
2) May the Contract of Sale be rescinded by the private respondents?

RULING:
1) Yes. Under Article 1380 to 1381 (3) of the Civil Code, a contract otherwise valid may nonetheless
be subsequently rescinded by reason of injury to third persons, like creditors. The status of creditors
could be validly accorded the Bonnevies for they had substantial interests that were prejudiced by the
sale of the subject property to the petitioner without recognizing their right of first priority under the
Contract of Lease.

2) Rescission is a remedy granted by law to the contracting parties and even to third persons, to
secure reparation for damages caused to them by a contract, even if this should be valid, by means of
the restoration of things to their condition at the moment prior to the celebration of said contract. It is
true that the acquisition by a third person of the property subject of the contract is an obstacle to the
action for its rescission where it is shown that such third person is in lawful possession of the subject of
the contract and did not act in bad faith. However, this rule is not applicable in this case because the
petitioner is not considered a third party in relation to the Contract of Sale nor may the possession of
the subject property be regarded as acquired lawfully and in good faith. The petitioner cannot be
deemed a purchaser in good faith for the record shows that its categorically admitted it was aware of
the lease in favor of the Bonnevies, who were actually occupying the subject property at the time it was
sold to it. Thus, the Contract of Sale may be rescinded by the private respondents.

147
 CONTRACTS
Rescissible Contracts

AN ACTION FOR RESCISSION IS SUBSIDIARY; IT CANNOT BE INSTITUTED EXCEPT WHEN

THE PARTY SUFFERING DAMAGE HAS NO OTHER LEGAL MEANS TO OBTAIN REPARATION
FOR THE SAME

125. KHE HONG CHENG v. CA

G.R. No .144169, March 28, 2001
Kapunan, J.

FACTS:
Petition for Review on Certiorari under Rule 45 to SC seeking to set aside the decision of the CA, the
subject matter of which is an accion pauliana filed by Philam Insurance to rescind or annul the
donations made by petitioner Khe Hong Cheng allegedly in fraud of creditors.

The insurer American Home Insurance Company (Philam's assured) paid the value of the copra loss
due to the sinking of the vessel owned by petitioner Khe Hong Cheng, to the consignee. Philam's
assured instituted a case to recover the money by right of subrogation against the petitioner. While the
case was still pending, the petitioner executed deeds of donations of parcels of land in favor of his
children. The trial court rendered judgment against petitioner on December 29, 1993, four years after
the donations were made and the TCTs were registered in the donees' names. When the sheriff,
accompanied by counsel of respondent Philam, went to Butuan City on January 17, 1997, to enforce
the alias writ of execution, they discovered that the petitioner no longer had any property and that he
had conveyed the subject properties to his children.

On February 25, 1997, Philam filed a complaint for the rescission of the deeds of donation and for the
nullification of their titles. Philam alleged that petitioner executed the aforesaid deeds in fraud of his
creditors.

Petitioners moved for its dismissal on the ground that the action had already prescribed. They posited
that the registration of the deeds of donation on December 27, 1989 constituted constructive notice
and since the complaint was filed only on February 25, 1997, or more than four (4) years after said
registration, the action was already barred by prescription.

ISSUE:
Did the action for rescission of the donation prescribe?

RULING:
No. An accion pauliana accrues only when the creditor discovers that he has no other legal remedy for
the satisfaction of his claim against the debtor other than an accion pauliana. Accion pauliana is an
action of a last resort. It presupposes a judgment and the issuance by the trial court of a writ of
execution for the satisfaction of the judgment and the failure of the sheriff to enforce and satisfy the
judgment of the court. It shall be commenced within 4 years from the moment the cause of action
accrues.

Therefore, It was only when Philam learned about the unlawful conveyances made by the petitioner in
January 1997 that Philam's action for rescission accrued because then it could be said that Philam had
exhausted all legal means to satisfy the trial court's judgment in its favor. Since Philam filed its
complaint for accion pauliana against petitioners on February 25, 1997, barely a month from its
discovery that the petitioner had no other property to satisfy the judgment award against him, its action
for rescission of the subject deeds clearly had not yet prescribed.

148
 CONTRACTS
Rescissible Contracts

A FORCED HEIR CAN BRING AN ACTION TO RESCIND THE CONTRACT ENTERED INTO BY
THE DECEDENT

126. CONCEPCION v. STA. ANA

G.R. No. L-2277, December 29, 1950
Feria, J.

FACTS:
Plaintiff appealed the order of the court dismissing his complaint.

An action was instituted by Monico Concepcion against Paciencia Sta. Ana to annul the sale made by
the late Perpetua Concepcion, sister of the plaintiff, of three parcels of land with the improvements
thereon to the defendant. According to the complaint, the deceased, in connivance with the defendant
and with intent to defraud the plaintiff, (that is, in order not to leave the properties abovementioned
upon her death to the plaintiff) sold and conveyed them to the latter, for a false and fictitious
consideration.

Defendant filed a motion to dismiss the complaint on the ground that the plaintiff is not a party to the
deed of sale executed by Perpetua Concepcion in favor of the defendant. Even in the assumption that
the consideration of the contract is fictitious, the plaintiff has no right of action against the defendant.
CFI granted the Motion to Dismiss.

On this appeal, he plaintiff contends that as an heir of the deceased contracting party can bring action
to annul the contract of sale under consideration.

ISSUE:
May the plaintiff file an action for the rescission of the contract?

RULING:
No. As the deceased had no forced heir, she was free to dispose of all her properties as absolute
owner thereof, without further limitation than those established by law. The only limitation established
by law on her right to convey said properties to the defendant without any consideration is, that she
could not dispose of or transfer her property to another in fraud of her creditors.

Even a forced heir of the deceased Perpetua Concepcion would have no right to institute, as
representative of the decedent, an action of nullity of a contract made by the decedent to defraud his
creditors because such a contract being considered illicit under Article 1306 of the Civil Code,
Perpetua Concepcion herself had no right of action to annul it and recover the properties she had
conveyed to the defendant. But a forced heir could in such case bring an action to rescind the contract
under article 1291(3) of the Civil Code. The reason why a forced heir has the right to institute an action
of rescission is that the right to the legitime is similar to a credit of a creditor.

Therefore, as the plaintiff in the present case, not being a forced heir of the late Perpetua Concepcion
who is his sister, cannot institute an action to annul under Article 1300 or to rescind under Article
1291(3) of the Civil Code the contract under consideration entered into by the deceased with the
defendant.

149
 CONTRACTS
Rescissible Contracts

IN AN ACTION TO SET ASIDE A CONVEYANCE ON THE GROUND THAT IT IS MADE IN FRAUD

OF CREDITORS, IT IS NECESSARY TO SHOW CLEARLY THAT THE VENDOR HAS NO
PROPERTY WITH WHICH TO PAY THE SUING CREDITOR

127. ORIA v. MCMICKING

G.R. No. L-7003; January 18, 1912
Moreland, J.

FACTS:
Gutierrez Hermanos brought an action against Oria Hermanos & Co. (company) for the recovery of
sum of money.

Upon the commencement of the actions, the members of the company dissolved their relations and
entered into liquidation on account of the expiration of the time stated in their agreement. Tomas
Balbas, as managing partner in liquidation entered a contract with Manuel Oria (plaintiff) for the
purpose of selling and transferring to the latter all of the property which the company owned, among
the goods stated therein was the steamer which is the subject of litigation.

After the lower court ruled in favor of Hermanos which was affirmed by the Supreme Court, execution
was issued thereon and placed in the hands of the sheriff of Manila. The sheriff demanded that Tomas
Balbas make payment of the said judgment but the latter said that there were no funds to pay the
same. The sheriff levied upon the said steamer and announced it for sale at public auction.

The plaintiff instituted the present action for the declaration that the plaintiff is the owner of said
steamship by virtue of the selling of the properties of the company and is entitled to the possession of
the same. Gutierrez Hermanos contends that said sale is fraudulent as against the creditors of the
company. The plaintiff, on the other hand, contends that aside from the property included in the sale
referred to, the company had other property to pay Gutierrez Hermanos.

ISSUE:
Was sale between Oria Hermanos & Co. and Oria valid as against the creditors of the company?

RULING:
No, the sale between the company and the plaintiff was void as against the creditors of the former. The
courts have laid down certain rules by which the fraudulent character of the transaction may be
determined: 1) consideration of conveyance is fictitious; 2) transfer was made while the suit against
him was pending; 3) sale by insolvent debtor; 4) evidence of insolvency; 5) transfer of all properties; 6)
the sale was made between father and son; 7) and the failure of the vendee to take exclusive
possession of the property.

At the time of said sale the value of the assets of Oria Hermanos & Co., as stated by the partners
themselves, was P274,000. The vendee of said sale was a son of Tomas Oria y Balbas and a nephew
of the other two persons heretofore mentioned which said three brothers together constituted all of the
members of said company. The plaintiff is a young man of 25 years old and has no property before the
said selling. The case at bar presents every one of the badges of fraud above enumerated.

Hence, the sale in question was fraudulent and void as to Gutierrez Hermanos in so far as was
necessary to permit the collection of its judgment.

150
 CONTRACTS
Voidable Contracts

MINORS HAVE NO JURIDICAL DUTY TO DISCLOSE THEIR INABILITY TO CONTRACT

128. BRAGANZA v. VILLA

G.R. No. L-12471, April 13, 1959
Bengzon, J.

FACTS:
In a petition for review, Rosario L. de Braganza and her sons Rodolfo and Guillermo challenge the
CA's decision whereby they were required solidarily to pay Fernando F. de Villa Abrille the sum of
P10,000 plus 2 % interest from October 30, 1944.

Rosario Braganza and her two sons loaned from De Villa Abrille P70,000 in Japanese war notes and
in consideration thereof, promised in writing to pay him P10,000 + 2% per annum in legal currency of
the Philippines 2 years after the cessation of the war. Because payment had not been made, Abrille
sued them in March 1949. Defendants claimed to have received P40,000 only — instead of P70,000
as plaintiff asserted. They also averred that Guillermo and Rodolfo were minors when they signed the
promissory note.

RTC ruled found Rosario Braganza liable but not the minors. CA, however, found them liable pursuant
to the following reasoning: “...Perhaps defendants in their desire to acquire much needed money, they
readily and willingly signed the promissory note, without disclosing the legal impediment with respect
to Guillermo and Rodolfo. When minor, like in the instant case, pretended to be of legal age, in fact
they were not, they will not later on be permitted to excuse themselves from the fulfillment of the
obligation contracted by them or to have it annulled.”

ISSUE:
Were the minor boys, 16 and 18 respectively bound by the contract of loan they signed?

RULING:
No. The SC reversed the decision of the CA which found the minors similarly liable due to their failure
to disclose their minority. From the minors' failure to disclose their minority in the same promissory
note they signed, it does not follow as a legal proposition, that they will not be permitted thereafter to
assert it. They had no juridical duty to disclose their inability.

Jurisprudence provides that “in order to hold the infant liable, the fraud must be actual and not
constructive. It has been held that his mere silence when making a contract as to his age does not
constitute a fraud which can be made the basis of an action of deceit.” Furthermore, the contention
that the 4-year period under Article 1301 within which minority may be used to avoid the obligation is
doubtful. While it is true that the minors shall annul the contract within 4 years after they have reached
the age of majority, it does not apply herein because the minority was invoked by them as a defense,
and not to seek positive relief.

The boys, though not bound by the provisions of the contract, are still liable to pay the actual amount
they have profited from the loan. Art. 1340 states that even if the written contract is unenforceable
because of their non-age, they shall make restitution to the extent that they may have profited by the
money received. In this case, 2/3 of P70,00, which is P46,666.66, which when converted to Philippine
money is equivalent to P1,166.67, is the joint liability of the sons.

151
 CONTRACTS
Voidable Contracts

A PERSON WHOSE RIGHT IS PREJUDICED MAY ANNUL THE CONTRACT EVEN IF NOT A
PARTY

129. TEVES v. THE PEOPLE HOMESITE AND HOUSING CORPORATION

G.R. No. L-21498, June 27, 1968
Zaldivar, J.

FACTS:
This is an appeal from the order of the CFI-Quezon City dismissing plaintiff Encarnacion Teves’
complaint against defendants People's Homesite and Housing Corporation and spouses Melisenda L.
Santos and Cesar L. Santos.

Since October 1950 the herein plaintiff and her deceased husband continuously occupied the subject
land and constructed thereon their residential house. After the death of the plaintiff's husband, plaintiff
filed an application in her own name to purchase said lot.

On February 23, 1961, the defendant Melisenda L. Santos filed with defendant PHHC her application
to purchase the subject land. By reason of the negligent acts and deliberate refusal of PHHC to act
accordingly on the plaintiff's application, Santos secured the approval of her application and the
execution in her favor of the deed of sale and issuance of TCT.

Plaintiff alleged that the deed of sale and TCT are null and void because they were secured by means
of fraud and misrepresentations, and political influence, aside from the fact that said sale was made in
violation of the established policy, rules and regulations of the defendant PHHC. The lower court
dismissed the complaint as plaintiff was not a party to the deed of sale executed between the PHHC
and defendant Melisenda L. Santos, she cannot maintain an action to annul the same. Thus, the
appeal.

ISSUE:
Can plaintiff maintain an action to annul the contract despite not being a party to the deed of sale?

RULING:
Yes. The SC held that a person who is not a party obliged principally or subsidiarily in a contract may
exercise an action for nullity of the contract if he is prejudice in his rights with respect to one of the
contracting parties, and can show the detriment which would positively result to him from the contract
in which he had no intervention.

It can be said that at least, the complaint alleges facts which show violation of plaintiff's rights under
the provisions of Chapter 2 of the Preliminary Title of the Civil Code, on the subject of human relations.
It is alleged in the complaint that the defendants had not acted in good faith; that the employees of the
defendant PHHC, in the performance of their duties, had not given the plaintiff her due; that the
defendants had willfully caused injury to the plaintiff in violation of a policy of the PHHC which is a
government instrumentality; and that the plaintiff, in her dealings with defendant PHHC, found herself
at a disadvantage because she was up against defendant Melisenda L. Santos who had availed of the
help of an influential politician — a circumstance which may justify a recourse to the court for the
protection of her right.

152
 CONTRACTS
Voidable Contracts

FRAUD COMMITTED BY THE AGENT GIVES THE PRINCIPAL THE RIGHT TO ANNUL THE
CONTRACT

130. CADWALLER & CO. v. SMITH AND BELL

G.R. No. 3246 February 9, 1907
Tracey, J.

FACTS:
Pacific Export Lumber Company (Pacific), as assignee, seeks the recovery of the differences between
the amount turned over to the company on account of a cargo consigned to the defendants and the
amount actually received upon sale thereof.

In May 1902, the Pacific Export Lumber Company of Portland shipped upon the steamer Quito 581
piles to the defendant, Henry W. Peabody & Company, at Manila, on the sale of which before storage
the consignees were to receive a commission of one half of whatever sum was obtained over $15 for
each pile and 5 per cent of the price of the piles sold after storage. After the arrival of the steamer on
August 2, Peabody and Company wrote the agent of the Pacific Company at Shanghai that for lack of
a demand the piles would have to be sold at considerably less than $15 apiece; whereupon the
company’s agent directed them to make the best possible offer for the piles, in response to which on
August 5 they telegraphed him an offer of $12 apiece. It was accepted by him on August 6, in
consequence of which the defendant paid the Pacific Company $6,972. On July 9 Peabody &
Company had entered into negotiations with the Insular Purchasing Agent for the sale for the piles at
$20 a piece, resulting of August 4 in the sale to the Government of 213 piles at $19 each. More of
them were afterwards sold to the Government at the same figure and the remainder to other parties at
carrying prices, the whole realizing to the defendants $10,41.66, amounting to $3,445.66 above the
amount paid by the defendant to the plaintiff therefor. Thus it is clear that at the time when the agents
were buying from their principal these piles at $12 apiece on the strength of their representation that
no better price was obtainable, they had already sold a substantial part of them at $19.

ISSUE:
Is the principal entitled to annul the contract for the fraud committed by his agent?

RULING:
Yes. It is plaint that in concealing from their principal the negotiations with the Government, resulting in
a sale of the piles at $19 a piece and in misrepresenting the condition of the market, the agents
committed a breach of duty from which they should benefit. The contract of sale thereby induced was
founded on their fraud and was subject to annulment by the aggrieved party. Upon annulment, the
parties should be restored to their original position by mutual restitution. Therefore the defendants are
not entitled to retain their commission realized upon the piles included under the contract so annulled.
In respect of the 213 piles, which at the time of the making of this contract they had already sold under
the original agency, their commission should be allowed.

153
 CONTRACTS
Unforceable Contracts

RIGHT OF FIRST REFUSAL NEED NOT BE WRITTEN TO BE ENFORCEABLE AND MAY BE

PROVEN BY ORAL EVIDENCE; VIOLATION OF SUCH MAKES THE CONTRACT RESCISSIBLE,
UNLESS THERE IS A PURCHASER IN GOOD FAITH

131. ROSENCOR DEVELOPMENT CORP v. INQUING

G.R. No. 140479; March 8, 2001
Gonzaga-Reyes, J.

FACTS:
This is a Petition for Review on Certiorari seeking reversal of the decision of CA as to a case filed by
Paterno Inquing et al. for the rescission of absolute deed of sale.

Plaintiffs and plaintiffs-intervenors averred that they are the lessees since 1971 of a two-story
residential apartment owned by spouses Faustino and Cresencia Tiangco. Upon the death of the
spouses Tiangcos in 1975, the management of the property was adjudicated to their heirs who were
represented by Eufrocina de Leon. The lessees were allegedly promised the same pre-emptive right
by the heirs of Tiangcos since the latter had knowledge that this right was extended to the former by
the late spouses Tiangcos. The lessees received a letter from Atty. Erlinda Aguila demanding that they
vacate the premises so that the demolition of the building be undertaken. They refused to leave the
premises. Thereafter, they received a letter from Eufrocina de Leon offering to sell to them the property
they were leasing. The lessees requested from de Leon why she had disregarded the pre-emptive
right and that they asked for a copy of the Deed of Sale, but de Leon refused the request. When the
lessees offered to tender their rental payment, de Leon refused such.

Before the demolition, the barangay interceded between the parties. It is only then that they were
furnished with a copy of the deed and discovered that the sale between de Leon and Rosencor took
place while an offer to them was made thereafter. They filed an action for: 1) the rescission of the
Deed of Absolute Sale between de Leon and Rosencor; 2) the reconveyance of the property to de
Leon; and 3) the reimbursement of the parties. RTC dismissed the case, saying that the right of
redemption on which the complaint was based was merely an oral one and as such, is unenforceable
under the law. CA reversed the decision.

ISSUE:
Is the right of first refusal covered by the provisions of the New Civil Code on the statute of frauds?

RULING:
No. A right of first refusal is not among those listed as unenforceable under the statute of frauds.
Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code presupposes the
existence of a perfected, albeit unwritten, contract of sale. A right of first refusal, such as the one
involved in the instant case, is not an agreement for the leasing of a longer period than one year, or a
sale of real property. At best, it is a contractual grant of the right of first refusal over the property
sought to be sold. Not all agreements affecting land must be put into writing to attain effectivity. It is
thus evident that the statute of frauds does not contemplate cases involving a right of first refusal.

Furthermore, a contract of sale entered into in violation of a right of first refusal of another person,
while valid, is rescissible. The rationale for this is found in the provisions of the New Civil Code on
rescissible contracts. Under Article 1381 of the New Civil Code, paragraph 3, a contract validly agreed
upon may be rescinded if it is "undertaken in fraud of creditors when the latter cannot in any manner
collect the claim due them." Moreover, under Article 1385, rescission shall not take place "when the
things which are the object of the contract are legally in the possession of third persons who did not act
in bad faith." Here, the right of first refusal was oral and it cannot be proven that the purchaser was in
bad faith because it cannot be determined that he had knowledge of the right of first refusal. Hence,
rescission cannot be had where there is a purchaser in good faith.

154
 CONTRACTS
Unforceable Contracts

STATUTE OF FRAUDS NOT APPLICABLE WHEN THERE HAS BEEN PARTIAL PERFORMANCE

132. CARBONNEL v. PONCIO

G.R. No. L-11231; May 12, 1958
Concepcion, J.

FACTS:
This is an appeal of an order from the CFI of Rizal.

Plaintiff Rosario Carbonnel alleges in her complaint that she purchased from defendant Jose Poncio a
parcel of land. She further alleges in her complaint, among others, that plaintiff paid P247.26 on
account of the price and assumed Poncio's obligation with the Republic Savings Bank amounting to
P1,177.48, with the understanding that the balance would be payable upon execution of the
corresponding deed of conveyance; that one of the conditions of the sale was that Poncio would
continue staying in said land for one year; that Poncio refuses to execute the corresponding deed of
sale, despite repeated demand; that Poncio has conveyed the same property to defendants Ramon R.
Infante and Emma L. Infante, who knew, of the first sale to plaintiff. Plaintiff took the stand and gave
her account regarding the circumstances surrounding the sale. She also presented witnesses to
support her claim. The defense counsel moved to strike out the statement of the witness, invoking, in
support of the motion, the Statute of Frauds.

Defendants moved to dismiss said complaint upon the ground that plaintiff's claim is unenforceable
under the Statute of Frauds. He also denies selling the property to the plaintiff for a price way below of
what he perceives as the real value of the land. The Infantes further raised the defense that they
purchased the land in question in good faith, for value, and without knowledge of the alleged sale to
plaintiff.

ISSUE:
Is the Statute of Frauds applicable to partially performed contracts?

RULING:
No. The Statute of Frauds is applicable only to executory contracts, not to contracts that are totally or
partially performed.

The reason is simple. In executory contracts there is a wide field for fraud because, unless they be in
writing there is no palpable evidence of the intention of the contracting parties. However, if a contract
has been totally or partially performed, the exclusion of parol evidence would promote fraud or bad
faith, for it would enable the defendant to keep the benefits already derived by him from the transaction
in litigation, and, at the same time, evade the obligations, responsibilities or liabilities assumed or
contracted by him thereby. So that when the party concerned has pleaded partial performance, such
party is entitled to a reasonable chance to establish by parol evidence the truth of this allegation, as
well as the contract itself. The recognition of the exceptional effect of part performance in taking an
oral contract out of the statute of frauds involves the principle that oral evidence is admissible in such
cases to prove both the contract and the part performance of the contract.

Without expressing any opinion on the merits of plaintiff's claim, it is clear, therefore, that she is
entitled, legally as well as from the viewpoint of equity, to an opportunity to introduce parol evidence in
support of the allegations.

Hence, the plaintiff is not barred by the Statute of Frauds to present her oral evidence supporting her
claim because of the partial performance which she had already made. The case was remanded back
to the lower court.

155
 CONTRACTS
Unforceable Contracts

A PROMISE TO PAY THE DEBT OF ANOTHER FALLS WITHIN THE STATUTE OF FRAUDS IF
THE PROMISE IS MERELY COLLATERAL

133. REISS v. MEMIJE

G.R. No. 5447, March 1, 1910
Carson, J.

FACTS:
This is an appeal from an order of the CFI of Manila. Defendant-appellant Jose Memije is an attorney
in Manila and the property owner of the house sought to be repaired.

Memije entered into a contract with Buenaventura Kabalsa for the repair of a house in Manila. The
contractor undertook to furnish the necessary materials. Being unable to secure credit therefor, he was
compelled to pay cash for all purchases. Having no money and no credit he was unable to continue
the purchase of the necessary lumber, the work on the house has been delayed. Memije accompanied
the contractor to Reiss’ lumber yard, and after satisfying Reiss as to his own financial responsibility,
and that he was good for the amount of lumber needed in the repair of his house, he entered into an
agreement with them whereby they were to deliver the necessary lumber to the contractor for use in
the repair of his house. In pursuance of the directions of the Memije, Reiss delivered to contractor
Kabalsa a considerable amount of lumber which was used in the repairs upon Memije’s house.

However, Memije contends that the evidence of record does not sustain a finding that the he did in fact
assume responsibility for the payment of the purchase price of the lumber, and that even if he did so,
the promise only constituted a guaranty that the lumber will be paid, and since it was not in writing,
proof thereof was inadmissible under section 335 of the Code of Civil Procedure (Statute of Frauds).

ISSUE:
Does the verbal promise of Memije to Reiss fall within the Stature of Frauds?

RULING:
No. The importance of determining whether the promise made is of original or collateral character lies
in the principle that if the promise is an original or an independent one, that is, if the promisor becomes
thereby primarily liable for the payment of the debt, the promise is not within the statute. On the other
hand, if the promise is collateral to the agreement of another and the promisor becomes thereby
merely a surety, the promise must be in writing.

The Court is satisfied that the credit for the lumber delivered by the plaintiffs to defendant's contractor
was extended solely and exclusively to Memije under the verbal agreement had with him, and
therefore, that the provisions of the statute did not require that it should be made in writing. From the
testimony of the contractor himself, it seems clear that when the agreement for the delivery of lumber
was made, the credit was extended not to the contractor but to Memije.

While under the provisions of Section 335 of the Code, a special promise to answer for the debt of
another is not enforceable by action unless such promise or some note or memorandum thereof be in
writing and subscribed by the party charged or by his authorized agent, taking into consideration all the
circumstances as set forth in the opinion, in this case, the credit for the lumber sold and delivered to
the defendant's contractor was extended solely and exclusively to the defendant himself, under the
verbal agreement, hence the case does not fall within the provisions of the statute requiring certain
agreements to be made in writing. Memije must pay for the proven amount of the unpaid balance of
the purchase price of this lumber.

156
 CONTRACTS
Unforceable Contracts

CONFIRMATION, RATIFICATION AND RECOGNITION DISTINGUISHED

134. LUNA v. LINATOC

G.R. No. L-48403; October 28, 1942
Bocobo, J.

FACTS:
This is a Petition for Certiorari seeking to annul the decision of the CA which ruled that there was no
deceit committed by Jose Linatoc against Agustin De Luna and as such, the sale remains to be valid
and binding as to the parties.

During their marriage, the wife of De Luna sold a parcel of land in the name of her husband where
such land is part of the conjugal partnership. Thus, a partition was effected without judicial authority of
the Court in violation of Art. 1432 of the Civil Code. De Luna now asks the Court to annul the deed of
sale in favour of Linatoc. To cure the purported defect of the sale, Linatoc presented Exhibit I where
De Luna allegedly executed a deed of recognition.

The CA upheld the validity of the sale as supported by the deed of recognition issued by De Luna
himself. Hence, this case.

ISSUE:
Did the deed of recognition cure the defect of the sale?

RULING:
No. Confirmation tends to cure a vice of nullity, and ratification is for the purpose of giving authority to
a person who previously acted in the name of another without authority. Recognition, on the other
hand, is merely to cure a defect of proof. In recognition, there is no vice to be remedied, such as fraud,
violence or mistake, as the case is distinguished from confirmation. In recognition, the person acting
on behalf of another is duly authorized to do so, so the situation is different from ratification.

The instant case is one of recognition because the husband was not trying to cleanse the sales of all
taint, such as fraud, violence or mistake, nor was it his purpose to confer authority to his wife, because
he stated in Exhibit I: "when my wife sold said lands to J. L. she did so with my knowledge and
consent.” Thus the requirement in the statute of frauds that in a sale of real property the authority of
the agent should be in writing, has been complied with. Therefore, she was only acting as his agent.
However, as such agent, the wife could not sell her portions of those lands in the name of her
husband, because the partition was illegal and void, as it was made during the marriage and there was
no judicial order authorizing separation of property between the husband and the wife (Art. 1432, Civil
Code).

No man can take advantage of his own wrong. To repudiate the sales in question, petitioners are
setting up their own wrongful act of partitioning their conjugal property, which violated article 1432 of
the Civil Code. The prohibition in said article affects public policy, as it is designed to protect creditors
of the conjugal partnership and other third persons. Petitioners shall not, therefore, be allowed thus to
rest their cause of action to recover the lands sold, upon the illegality of the partition which they
attempted to make. Otherwise, they would profit by their own unlawful act.

Finally, the CA found no deceit committed by Linatoc against De Luna. Hence, the deed of recognition
cured the defect of the sale there being no deceit on the part of Linatoc.

157
 CONTRACTS
Void or Inexistent Contracts

IN AN ILLEGAL CONTRACT THE IN PARI DELICTO RULE CANNOT BE PLEADED BY THE

PARTIES AS A SOURCE OF A CAUSE OF ACTION NOR A DEFENSE

135. CONCHITA LIGUEZ v. CA, ET.AL.

G.R. No. L-11240, December 18, 1957
REYES, J.B.L., J.

FACTS:
This is a petition for certiorari filed by Conchita Liguez (Liguez), assailing the ruling of the CA which
affirmed the earlier ruling of the CFI of Davao annulling the deed of donation executed by Salvador
Lopez in her favor.

Lopez donated a parcel of land, belonging to the conjugal partnership with his wife Ngo, in favor of
Liguez. The donation was prepared by the Justice of the Peace of Mati, Davao, before whom it was
signed and ratified. At that time, Liguez was a minor, only 16 years of age. That the donation was
made in view of the desire of Lopez, a man of mature years, to have sexual relations with Liguez.

Upon the death of Lopez, his heirs filed a complaint against Liguez for annulment of the donation,
alleging the illegality of the consideration for the donation.

Liguez argued that under Article 1274 of the Civil Code of 1889 (which was the governing law in 1948,
when the donation was executed), "in contracts of pure beneficence the consideration is the liberality
of the donor", and that liberality per se can never be illegal, since it is neither against law or morals or
public policy.

ISSUE:
Can the heirs of Lopez cite illicit consideration as a cause for annulling the donation?

RULING:
No, the heirs cannot cite an illicit consideration as a cause for annulling the donation since the contract
is illegal.

The rule that parties to an illegal contract, if equally guilty, will not be aided by the law but will both be
left where it finds them, has been interpreted by the Court as barring the party from pleading the
illegality of the bargain either as a cause of action or as a defense.

The heirs of Lopez seek recovery of the disputed land on the strength of a donation regular on its face.
To defeat its effect, the heirs must plead and prove that the same is illegal. However, such plea on the
part of the heirs is not receivable, since Lopez himself, if living, as a party to the illegal contract would
be barred from setting up that plea; and his heirs, as his privies and successors in interest, can have
no better rights than Lopez himself.

Therefore, the heirs, as successors of the late donor, are precluded from raising the illegality of the
consideration of the donation.

158
 CONTRACTS
Void or Inexistent Contracts

CONTRACTS WITHOUT CAUSE OR CONSIDERATION PRODUCE NO EFFECT

136. MAPALO, ET AL. v. MAPALO, ET AL.

G.R. No. L-21489 and L-21628, May 19, 1966
Bengzon, J.P., J.

FACTS:
This is an appeal from the decision of the CA reversing the judgment of the CFI declaring that the deed
of sale of 1936 having been obtained by fraud, the same was voidable, not void ab initio, and had long
prescribed.

Spouses Miguel Mapalo and Candida Quimba (Spouses), simple illiterate farmers were registered
owners of a residential land. Said spouses decided to donate the eastern half of the land to Maximo
Mapalo (Maximo), brother of Miguel. However the spouses were deceived into signing a deed of
absolute sale over the entire land in Maximo’s favor. The document of sale stated a consideration of
P500 but the spouses did not receive anything of value. The spouses continued to be in possession of
the western part of the land up to the present. Unknown to the spouses, Maximo registered the deed of
sale in his favor and obtained at TCT in his name. Thereafter, he sold for P2,500 said entire land in
favor of the Narcisos. Then the Narcisos took possession of the land and filed a suit to be declared
owners of the entire land against the spouses.

The Mapalo spouses press the contention that the document purporting to sell the entire land in favor
of Maximo is void, not merely voidable, as to the western portion of the land for being absolutely
simulated or fictitious.The Narcisos averred that since the consent of the Mapalo spouses to the deed
of sale of 1936 having been obtained by fraud, the same was voidable, not void ab initio, and,
therefore, the action to annul the same, within four years from notice of the fraud, had long prescribed.

ISSUE:
Is the document purporting to sell the entire land void, for being absolutely simulated or fictitious?

RULING:
Yes, the document is void for being absolutely simulated due to lack of a cause or consideration.

The rule under the Civil Code is that contracts without a cause or consideration produce no effect
whatsoever where the same is without cause or consideration in that the purchase price which
appears thereon as paid has in fact never been paid by the purchaser to the vendor. Nonetheless,
under the Old Civil Code, the statement of a false consideration renders the contract voidable, unless it
is proven that it is supported by another real and licit consideration. And it is further provided that the
action for annulment of a contract on the ground of falsity of consideration shall last four years, the
term to run from the date of the consummation of the contract.

Accordingly, since the deed of sale of 1936 is governed by the Old Civil Code, it should be asked
whether its case is one wherein there is no consideration, or one with a statement of a false
consideration. If the former, it is void and inexistent; if the latter, only voidable. As observed earlier, the
deed of sale of 1936 stated that it had for its consideration P500 when in fact; however, said
consideration was totally absent. There was in fact no consideration, the statement of one in the deed
will not suffice to bring it under the rule of Article 1276 of the Old Civil Code as stating a false
consideration.

Therefore the document in issue is inexistent as regards the western portion of the land. Needless to
add, the inexistence of a contract is permanent and incurable and cannot be the subject of
prescription.

159
 CONTRACTS
Void or Inexistent Contracts

SIMULATED CONTRACTS ARE NOT INTENDED TO PRODUCE LEGAL EFFECTS

137. RODRIGUEZ v. RODRIGUEZ

G.R. No. L-23002, July 31, 1967
Reyes, J.B.L., J.

FACTS:
This is an appeal by appellant Concepcion Felix Vda. de Rodriguez, from the decision of the CFI
upholding the validity of the deeds of transfer of her properties to the conjugal partnership.

Appellant Concepcion appeared to have executed a deed of sale conveying ownership of 2 fish ponds
to her daughter, Concepcion Calderon, for the sum of P2,500.00, which the latter in turn appeared to
have transferred to her mother, appellant Concepcion and stepfather Domingo Rodriguez. When
Domingo Rodriguez died intestate, he was survived by the widow, appellant Concepcion, his children
(Rodriguez children). Appellant Concepcion leased from the Rodriguez children and grandchildren the
fishpond. Rodriguez children sent a letter of demand to the widow for payment of the earnings of the
fishpond. However, appellant Concepcion filed the an action to declare null and void the deeds of
transfer of plaintiff's properties to the conjugal partnership was based on the alleged employment or
exercise by plaintiff's deceased husband of force and pressure on her; that the conveyances of the
properties — from plaintiff to her daughter and then to the conjugal partnership of plaintiff and her
husband — are both without consideration.

Thus, plaintiff prayed that the deeds of transfer mentioned in the complaint be declared fictitious and
simulated since the conveyances in issue were obtained through duress, and were inexistent. Appellee
Rodriguez children not only denied the material allegations of the complaint, but also set up as
affirmative defenses lack of cause of action, prescription, estoppel and laches
ISSUE:
Were the conveyances to appellants daughter thereafter to the partnership of appellant and the
deceased Rodriguez simulated?

RULING:
No, there were no simulated of contracts of sale. The charge of simulation is untenable, for the
characteristic of simulation is the fact that the apparent contract is not really desired or intended to
produce legal effects or in way alter the juridical situation of the parties. Thus, where a person, in order
to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does
not really intend to divest himself of his title and control of the property; hence, the deed of transfer is
but a sham.

Here, appellant contends that the sale by her to her daughter, and the subsequent sale by the latter to
appellant and her husband, the late Domingo Rodriguez, were done for the purpose of converting the
property from paraphernal to conjugal, thereby vesting a half interest in Rodriguez, and evading the
prohibition against donations from one spouse to another during coverture (Civil Code of 1889, Art.
1334). If this is true, then the appellant and her daughter must have intended the two conveyance to
be real and effective; for appellant could not intend to keep the ownership of the fishponds and at the
same time vest half of them in her husband. The two contracts of sale then could not have been
simulated, but were real and intended to be fully operative, being the means to achieve the result
desired. Therefore, there were no simulated of contracts of sale.

160
 CONTRACTS
Void or Inexistent Contracts

ACTION TO RECOVER HOMESTEAD ILLEGALLY SOLD DOES NOT PRESCRIBE

138. ANGELES v. COURT OF APPEALS

GR No. L-11024, Jan 31, 1958
Labrador, J.

FACTS:

This is an appeal by certiorari filed by petitioners Alfonso Angeles, et al. from the decision of the CA
that by principle of in pari delicto, none of the parties should be given any remedy.

A homestead patent No. 31613 was issued for a parcel of land to the patentee Juan Angeles (Juan).
Thereafter, Juan sold the above land to defendants Gregorio Santa Ines and Anastacia Divino, who
thereupon took possession thereof. Juan died and thereafter his heirs, the petitioners Alfonso Angeles,
et. al., sought to recover the land from the defendants on the ground that the sale was null and void
(Sec. 116, Act No. 2874). The defendants refused to return the land, so said heirs, petitioners herein,
brought this action in the CFI.

Petitioners contended that defendants' possession of the land was by virtue of a sale which is against
the law and therefore did not convey title to them. Defendants answered that the plaintiff's right of
action had prescribed.

ISSUE:
Does prescription run for the recovery of a homestead illegally sold which is in violation of the law?

RULING:

No, an action to recover a homestead illegally sold does not prescribe since the homestead is null and
void. Where the sale of a homestead is null and void, the action to recover the same does not
prescribe because mere lapse of the time cannot give efficacy to the contracts that are null and void
and inexistent Where a homestead was illegally sold in violation of the homestead law, the principle of
in pari delicto is not applicable. Reason for the rule is that the policy of the law is to give land to a
family for home and cultivation and the law allows the homesteader to reacquire the land even if it has
been sold; hence the right may not be waived.

In the case at bar, the sale of the homestead by the deceased homesteader within five years from the
issuance of the patent was null and void and his heir have the right to recover the homestead illegally
disposed.

Therefore, prescription does not apply to void contracts.

161
 CONTRACTS
Estoppel

ESTOPPEL BY LACHES MAY PRECLUDE A PARTY FROM RASING THE QUESTION OF LACK
OF JURISDICTION ON APPEAL

139. TIJAM, ET. AL. v. SIBONGHANOY

G.R. No. L-21450, April 15, 1968
Dizon, J.

FACTS:
This case is certified by the CA to the Supreme Court setting aside its own decision where defendant
and appellant Manila Surety and Fidelity Co., Inc. (Surety) questions the writ of execution granted in
favor of spouses Serafin Tijam and Felicitas Tagalog on the ground of lack of jurisdiction.

The spouses Tijam instituted a case against spouses Sibonghanoy for the recovery of a sum of money
in the amount of P1,908.00 before the CFI. They filed the case barely one month after the effectivity of
RA 296, which deprived the CFI of original jurisdiction over cases where demand, exclusive of interest,
amounted to not more than P2,000.00. The court eventually issued a writ of attachment against
defendants’ properties, but the same was dissolved upon the filing of a counter-bond by defendants
and Manila Surety and Fidelity Co, Inc. (Surety). The CFI ruled in favor of plaintiffs, and moved for the
issuance of a writ of execution against the Surety’s bond. Eventually, the CFI granted a motion for
execution and the writ was issued. The Surety then later moved to quash the writ, but was denied so it
appealed to the CA. The CA ruled in favor of the plaintiffs. Five days after the Surety received notice of
the decision, it filed a motion for extension to file a motion for reconsideration, which the CA granted.
Two days later, the Surety filed, instead, a Motion to Dismiss on the ground that the CFI had no
jurisdiction, since the amount being claimed was only P1,908.00, an amount that was no longer within
the CFI’s jurisdiction in view of the effectivity of RA 296.

ISSUE:
Can the Surety can raise lack of jurisdiction for the first time on appeal in this case even after the lapse
of almost 15 years since the action was commenced?

RULING:
No, the Surety can no longer raise lack of jurisdiction in this case, as it is already estopped from doing
so.

A party may be estopped or barred from raising a question in different ways and for different reasons.
Thus we speak of estoppel in pais, or estoppel by deed or by record, and of estoppel by laches. It has
been held that a party can not invoke the jurisdiction of a court to sure affirmative relief against his
opponent and, after obtaining or failing to obtain such relief, repudiate or question that same
jurisdiction. By way of explaining the rule, it was further said that the question whether the court had
jurisdiction either of the subject-matter of the action or of the parties was not important in such cases
because the party is barred from such conduct not because the judgment or order of the court is valid
and conclusive as an adjudication, but for the reason that such a practice can not be tolerated
obviously for reasons of public policy.

The facts of this case show that from the time the Surety became a quasi-party on July 31, 1948, it
could have raised the question of the lack of jurisdiction of the Court of First Instance of Cebu to take
cognizance of the present action by reason of the sum of money involved which, according to the law
then in force, was within the original exclusive jurisdiction of inferior courts. It failed to do so. Instead,
at several stages of the proceedings in the court a quo as well as in the Court of Appeals, it invoked
the jurisdiction of said courts to obtain affirmative relief and submitted its case for a final adjudication
on the merits. It was only after an adverse decision was rendered by the Court of Appeals that it finally
woke up to raise the question of jurisdiction. Were we to sanction such conduct on its part, We would
in effect be declaring as useless all the proceedings had in the present case since it was commenced
on July 19, 1948 and compel the judgment creditors to go up their Calvary once more. The inequity
and unfairness of this is not only patent but revolting.

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 Considering the facts and circumstances of the present case, We are of the opinion that the
Surety is now barred by laches from invoking this plea at this late hour for the purpose of annulling
everything done heretofore in the case with its active participation.

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 CONTRACTS
Estoppel

PASSIVITY AND INACTION FOR MORE THAN 34 YEARS JUSTIFIES THE EQUITABLE
DEFENSE OF LACHES.

140. MIGUEL, ET. AL. v. CATALINO

G.R. No. L-23072, November 29, 1968
Reyes, JBL, J.

FACTS:
This is a direct appeal from the judgment of the CFI of Baguio, dismissing the Simeon Miguel, et. al.
plaintiffs’ complaint for recovery of possession of a parcel of land in the name one Bacaquio, and
declaring defendant as the true owner thereof.

Simeon, Emilia, and Marcelina Miguel, along with Grace Ventura, brought suit against Florendo
Catalino for the recovery of a parcel of land, the former claiming to be children and heirs of the original
registered owner. Plaintiffs aver that defendant had unlawfully taken possession of the land, excluding
plaintiffs therefrom. Defendant contended that he was the owner, claiming adverse possession for 30
years.

It was found that such parcel of land was covered by OCT No. 31 in the name of Bacaquio,. Bacaquio
acquired the land with his second wife (with whom he had no children), and which land was sold to
Catalino Agyapao, the father of defendant Florendo Catalino. No formal deed of sale was executed,
but since the sale in 1928, or for more than 30 years, vendee Catalino Agyapao and his son, Florendo,
had been in possession of the land, in the concept of owner, paying the taxes thereon and introducing
improvements.

ISSUE:
Has laches set in to bar plaintiff-appellants from recovering the parcel of land herein?

RULING:
Yes, laches had already set in to bar said plaintiffs from recovering the said parcel of land.
Even granting appellants' proposition that no prescription lies against their father's recorded title, their
passivity and inaction for more than 34 years (1928-1962) justifies the defendant-appellee in setting up
the equitable defense of laches in his own behalf.

As in the Gamponia case, the four elements of laches are present in the case at bar, namely: (a)
conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of
which complaint is made and for which the complaint seeks a remedy; (b) delay in asserting the
complainant's rights, the complainant having had knowledge or notice, of the defendant's conduct and
having been afforded an opportunity to institute a suit; (c) lack of knowledge or notice on the part of the
defendant that the complainant would assert the right on which he bases his suit; and (d) injury or
prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held to
be barred.

In the case at bar, Bacaquio sold the land in 1928 but the sale is void for lack of the governor's
approval. The vendor, and also his heirs after him, could have instituted an action to annul the sale
from that time, since they knew of the invalidity of the sale, which is a matter of law; they did not have
to wait for 34 years to institute suit. The defendant was made to feel secure in the belief that no action
would be filed against him by such passivity, and also because he "bought" again the land in 1949
from Grace Ventura who alone tried to question his ownership; so that the defendant will be plainly
prejudiced in the event the present action is not held to be barred. Hence, laches apply in this case.

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 CONTRACTS
Estoppel

CHARACTER OF AN ESTOPPEL BY MATTER OF RECORD

141. PHILIPPINE NATIONAL BANK v. BARRETO

G.R. No. L-30073, February 21, 1929
Villamor, J.

FACTS:
In this appeal from the judgment rendered by the Court of First Instance of Leyte, appellant Gabino
Barreto (Barreto) challenges the decision finding him liable to pay the balance of the judgment in Civil
Case No. 25280 in favor of Philippine National Bank (PNB).

Barreto executed a mortgage on a property situated in the city of Manila in favor of the plaintiff in order
to secure any sum which he or the partnership Gabino Barreto & Co., Ltd., owe the plaintiff. The debt
of the partnership Gabino Barreto & Co., Ltd., and of defendants Gabino Barreto Po E. Jap, and Po E.
Soon not having been paid in due time, said plaintiff-appellee filed a complaint with the Court of First
Instance of Manila for the foreclosure of the mortgage. The Court of First Instance of Manila in ordered
the defendants to pay the plaintiff jointly and severally. On the other hand, the objects of the instant
action is to collect the amount of P319,813.05, which is the balance of the judgment rendered jointly
and severally against Barreto and his solidary codefendants in civil case No. 25280 of the CFI of
Manila out of the realty situated in Tacloban, Leyte mortgaged by the defendant Gabino Barreto Po E.
Jap to the National Bank. CFI of Leyte ruled in favor of the appellant which was reversed by this Court
in an appeal filed by the plaintiff PNB. Hence, this appeal by the appellant.

Appellant Barreto contended by way of special defense that the judgment against him and his solidary
codebtors in civil case No. 25280 of the Court of First Instance of Manila, has been fully paid by virtue
of several payments made to the plaintiff and not credited to the defendant-appellant.

ISSUE:
Can the appellant still raise this special defense of payment to the plaintiff after the judgment in the
case?

RULING:
No. He cannot raise the special defense of payment anymore.

The existence of the debt of the defendant-appellant in favor of the plaintiff-appellee claimed in this
case is res judicata in civil case No. 25280 of the Court of First Instance of Manila, and cannot be the
subject of controversy. It is considered that a judgment presents evidence of the facts of so high a
nature that nothing which could be proved by evidence aliunde would be sufficient to overcome it; and
therefore it would be useless for a party against whom it can be properly applied to adduce any such
evidence, and accordingly he is estopped or precluded by law from doing so. Such is the character of
an estoppel by matter of record, as in case of issue on a question of fact, judicially tried and decided.

There is no doubt, therefore, that by virtue of the judgment of the Court of First Instance of Manila, the
defendant is indepted to the plaintiff in the sum of P319,813.05, which has been reduced to
P310,013.05 by crediting the defendant with the value of 90 shares which he had deposited in the
National Bank, and the price of three of the defendant's sampanes which were sold to the firm "Viuda e
Hijos de E. Escano."

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