OBLIGATIONS AND CONTRACTS

ALVAREZ vs PEOPLE 677 SCRA 673 (2012)

FACTS: Petitioner Efren L. Alvarez, at the time of the subject transaction, was the Mayor of the
Municipality (now Science City) of Muoz, Nueva Ecija. In July 1995, the Sangguniang Bayan (SB)
of Muoz under Resolution No. 136, S-95 invited Mr. Jess Garcia, President of the AustralianProfessional, Inc. (API) in connection with the municipal governments plan to construct a fourstorey shopping mall (Wag-wag Shopping Mall), a project included in its Multi-Development Plan.
Subsequently, it approved the adoption of the project under the Build-Operate-Transfer (BOT)
arrangement in the amount of P240 million, to be constructed on a 4,000-square-meter property of
the municipal government which is located at the back of the Municipal Hall. API submitted its
proposal on November 7, 1995.
Subsequently the contract was awarded to API in which it is stated that the project will be
completed within 730 calendar days. However, few months after the ground-breaking, no mall was
constructed.
On August 10, 2006, Alvarez was charged before the Sandiganbayan for violation of
Section 3(e) of R.A. No. 3019 (Anti- Graft and Corrupt Practices Act).
On November 16, 2009, the Sandiganbayan rendered judgment convicting the petitioner
after finding that: (1) petitioner railroaded the project; (2) there was no competitive bidding; (3) the
contractor was totally unqualified to undertake the project; and (4) the provisions of the BOT law
and relevant rules and regulations were disregarded and not followed. The said court also found
that the municipal government suffered damage and prejudice with the resulting loss of several of
its buildings and offices, and having deployed its resources including equipment, personnel and
financial outlay for fuel and repairs in the demolition of the said structures. Damage suffered by the
municipal government was quantified at P4.8 million, or 2% of the total project cost of P240 million,
representing the amount of liquidated damages due under the performance security had the same
been posted by the contractor as required by law.
ISSUES:
1.
Whether or not the Honorable Sandiganbayan failed to observe the requirement of
proof beyond reasonable doubt in convicting the Accused-Petitioner;
2.
Whether or not the Honorable Sandiganbayan failed to appreciate the legal intent of
the BOT project;
3.
Whether or not the Honorable Sandiganbayan utterly failed to appreciate that the
BOT was a lawful project of the Sangguniang Bayan and not the project of the Mayor AccusedPetitioner herein; and
4.
Whether or not the Honorable Sandiganbayan utterly failed to appreciate that there
was no damage on the then Municipality of Muoz as contemplated by law, to warrant the conviction
of the Accused-Petitioner.
5.
Whether or not the petitioners contention that the Sandiganbayan in not
considering the previous dismissal of the criminal complaint filed by Alberto Castaeda against
petitioner also involving the Wag-Wag Shopping Mall project and Res judicata may be applied.

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HELD: Efren L. Alvarez is found guilty beyond reasonable doubt for violation of Section 3 (e) of
Republic Act No. 3019 and is sentenced to suffer in prison the penalty of 6 years and 1 month to 10
years. He also has to suffer perpetual disqualification from holding any public office and to
indemnify the City Government of Muoz (now Science), Nueva Ecija the amount of Four Million
Eight Hundred Thousand Pesos (Php 4,800,000.00) less the Five Hundred Thousand Pesos (Php
500,000.00) API earlier paid the municipality as damages.
In this case, the information alleged that while being a public official and in the discharge
of his official functions and taking advantage of such position, petitioner acting with evident bad
faith or gross inexcusable negligence or manifest partiality unlawfully gave API unwarranted
benefits, advantage or preference by awarding to it the contract for the construction of the WagWag Shopping Mall under the BOT scheme despite the fact that it was not a licensed contractor
and does not have the experience and financial qualifications to undertake such costly project,
among others, to the damage and prejudice of the public service.
Res judicata is a doctrine of civil law and thus has no bearing on criminal proceedings. As
to the propriety of damages awarded by the Sandiganbayan, The court finds that the same is
proper and justified. The term undue injury in the context of Section 3(e) of the Anti-Graft and
Corrupt Practices Act punishing the act of causing undue injury to any party, has a meaning akin to
that civil law concept of actual damage. Actual damage, in the context of these definitions, is akin to
that in civil law.

G.R. No. 133179 March 27, 2008

ALLIED BANKING CORPORATIONVS LIM SIO WAN, METROPOLITAN
BANK AND TRUST CO., and PRODUCERS BANK,
Facts: On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied Banking
Corporation (Allied) a money market placement of PhP 1,152,597.35 for a term of 31 days to
mature on December 15, 1983, as evidenced by Provisional Receipt No. 1356 dated November 14,
1983.
On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an
officer of Allied, and instructed the latter to pre-terminate Lim Sio Wan's money market placement,
to issue a manager's check representing the proceeds of the placement, and to give the check to
one Deborah Dee Santos who would pick up the check. Lim Sio Wan described the appearance of
Santos so that So could easily identify her.
Later, Santos arrived at the bank and signed the application form for a manager's check to
be issued. The bank issued Manager's Check No. 035669 for PhP 1,158,648.49, representing the
proceeds of Lim Sio Wan's money market placement in the name of Lim Sio Wan, as payee. The
check was cross-checked "For Payee's Account Only" and given to Santos.
Thereafter, the manager's check was deposited in the account of Filipinas Cement Corporation
(FCC) at respondent Metropolitan Bank and Trust Co. (Metrobank), with the forged signature of Lim
Sio Wan as indorser.
Earlier, on September 21, 1983, FCC had deposited a money market placement for PhP 2
million with respondent Producers Bank. Santos was the money market trader assigned to handle

OBLIGATIONS AND CONTRACTS

FCC's account. Such deposit is evidenced by Official Receipt No. 317568 and a Letter dated
September 21, 1983 of Santos addressed to Angie Lazo of FCC, acknowledging receipt of the
placement. The placement matured on October 25, 1983 and was rolled-over until December 5,
1983 as evidenced by a Letter dated October 25, 1983. When the placement matured, FCC
demanded the payment of the proceeds of the placement. On December 5, 1983, the same date
that So received the phone call instructing her to pre-terminate Lim Sio Wan's placement, the
manager's check in the name of Lim Sio Wan was deposited in the account of FCC, purportedly
representing the proceeds of FCC's money market placement with Producers Bank. In other words,
the Allied check was deposited with Metrobank in the account of FCC as Producers Bank's
payment of its obligation. The check was sent to Allied through the PCHC. Upon the presentment of
the check, Allied funded the check even without checking the authenticity of Lim Sio Wan's
purported indorsement. Thus, the amount on the face of the check was credited to the account of
FCC.
On December 14, 1983, upon the maturity date of the first money market placement, Lim
Sio Wan went to Allied to withdraw it. She was then informed that the placement had been preterminated upon her instructions. She denied giving any instructions and receiving the proceeds
thereof.
Consequently, Lim Sio Wan filed with the RTC a Complaint against Allied to recover the
proceeds of her first money market placement.
On May 15, 1984, or more than six (6) months after funding the check, Allied informed Metrobank
that the signature on the check was forged. Thus, Metrobank withheld the amount represented by
the check from FCC. Later on, Metrobank agreed to release the amount to FCC after the latter
executed an Undertaking, promising to indemnify Metrobank in case it was made to reimburse the
amount.
After trial, the RTC issued its Decision holding Allied solely liable to Lim Sio Wan Allied
appealed to the CA which ruled that Allied shall be liable for the 60% of the amount of the money
and 40% shall be borne by MetrobankHence, Allied filed the instant petition.

Further, we defined a money market in Cebu International Finance Corporation v. Court of Appeals,
as follows:
[A] money market is a market dealing in standardized short-term credit instruments
(involving large amounts) where lenders and borrowers do not deal directly with each other but
through a middle man or dealer in open market. In a money market transaction, the investor is a
lender who loans his money to a borrower through a middleman or dealer.
In the case at bar, the money market transaction between the petitioner and the private
respondent is in the nature of a loan.
Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to
payment upon her request, or upon maturity of the placement, or until the bank is released from its
obligation as debtor. Until any such event, the obligation of Allied to Lim Sio Wan remains
unextinguished.
Since there was no effective payment of Lim Sio Wan's money market placement, the bank still has
an obligation to pay her at six percent (6%) interest from March 16, 1984 until the payment thereof.
To reiterate, had Allied exercised the diligence due from a financial institution, the check would not
have been issued and no loss of funds would have resulted. In fact, there would have been no
issuance of indorsement had there been no check in the first place.
Given the relative participation of Allied and Metrobank to the instant case, both banks
cannot be adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and
Metrobank, as ruled by the CA, must be upheld.
WHEREFORE, the petition is PARTLY GRANTED

LO V. KJS FORMWORK SYSTEM PHILS. INC.

Facts:

Issue: Whether or not Allied is solely liable to Lim Sio Wan

Lo, doing business under the name Sans Enterprises, ordered scaffolding equipments from KJS
worth P540,425.80. Lo paid a downpayment of P150,000 and the balance was to be paid in 10
monthly installments.

Held: As to the liability of the parties, we find that Allied is liable to Lim Sio Wan. Fundamental and
familiar is the doctrine that the relationship between a bank and a client is one of debtor-creditor.
Articles 1953 and 1980 of the Civil Code provide:

KJS delivered the scaffoldings to Lo, who paid the first two installments. However, his business
encountered financial difficulties and he was unable to settle his obligation despite oral and written
demands.

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality.

Lo and KJS executed a Deed of Assignment, whereby Lo assigned to KJS his receivables in the
amount of P335,462.14 from Jomero Realty Corporation. The agreement also stipulated: The
ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs,
executors, administrators, or assigns, shall and will at times hereafter, at the request of said
ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said
ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance with the true
intent and meaning of these presents.

Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan.
Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan
or mutuum. More succinctly, in Citibank, N.A. (Formerly First National City Bank) v. Sabeniano, this
Court ruled that a money market placement is a simple loan or mutuum.

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When KJS tried to collect the said credit from Jomero, it refused to honor the Deed of Assignment
because it claimed that Lo was also indebted to it. KJS sent a letter to Lo demanding payment but

OBLIGATIONS AND CONTRACTS

he refused claiming that his obligation had been extinguished when they executed the Deed of
Assignment.
KJS filed an action for recovery of a sum of money against Lo with the RTC, which dismissed the
complaint on the ground that the assignment of credit extinguished the obligation. However, the CA
held that the Deed of Assignment did not extinguish the obligation of Lo.
Issue: W/N the Deed of Assignment extinguished Los obligation.
Held: NO, he failed to comply with his warranty. In dacion en pago as a special mode of payment,
the debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature of sale the creditor
is really buying the thing or property of the debtor, payment for which is to be charged against the
debtors debt.
The assignment of credit, which is in the nature of a sale of personal property, produced
the effects of a dation in payment, which may extinguish the obligation. However, as in any other
contract of sale, the vendor or assignor is bound by certain warranties. Paragraph 1 of Article 1628
of the Civil Code provides: The vendor in good faith shall be responsible for the existence and
legality of the credit at the time of the sale, unless it should have been sold as doubtful; but not for
the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was
prior to the sale and of common knowledge.
Lo, as assignor, is bound to warrant the existence and legality of the credit at the time of the sale or
assignment. When Jomero claimed that it was no longer indebted to Lo since the latter also had an
unpaid obligation to it, it essentially meant that its obligation to Lo has been extinguished by
compensation. As a result, KJS alleged the non-existence of the credit and asserted its claim to
Los warranty under the assignment. Lo was therefore required to make good its warranty and pay
the obligation.
Furthermore, Lo breached his obligation under the Deed of Assignment as he did not execute
and do all such further acts and deeds as shall be reasonably necessary to effectually
enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance
with the true intent and meaning of these presents. By warranting the existence of the credit,
Lo should have ensured its performance in case it is found to be inexistent. He should be held
liable to pay to KJS the amount of his indebtedness
Judgment Affirmed.

Felicidad and when the latter reneged on her promise, Agrifina filed a complaint in the office of the
barangay for the collection of P773,000.00. There was no settlement. RTC favored Agrifina. Court
of Appeals affirmed the decision with modification ordering defendant to pay the balance of total
indebtedness in the amount of P51,341,00 plus 6% per month.
ISSUE: Whether or not the deeds of assignment in favor of petitioner has the effect of payment of
the original obligation that would partially extinguish the same
RULING: Substitution of the person of the debtor may be affected by delegacion. Meaning, the
debtor offers, the creditor accepts a third person who consent of the substitution and assumes the
obligation. It is necessary that the old debtor be released from the obligation and the third person or
new debtor takes his place in the relation. Without such release, there is no novation. Court of
Appeals correctly found that the respondents obligation to pay the balance of their account with
petitioner was extinguished pro tanto by the deeds of credit. CA decision is affirmed with the
modification that the principal amount of the respondents is P33, 841.

DBP vs CA
FACTS: Lydia P. Cuba is a grantee of a Fishpond Lease Agreement from the Government. Cuba
obtained loans from DBP stated under promissory notes dated September 6, 1974; August 11,
1975; and April 4, 1977 executing 2 Deeds of Assignment of her Leasehold Rights as security.
Upon failure to pay, without foreclosure proceedings it was appropriated and DBP executed in turn
a Deed of Conditional Sale of the Leasehold Rights in her favor. Her offer to repurchase was
accepted and a new Fishpond Lease Agreement was issued by the Ministry of Agriculture and
Food in her favor alone excluding her husband. Failing to pay her amortizations, she entered into a
temporary agreement with DBP.
Soon, she was sent a Notice of Rescission and DBP took possession of the Leasehold
Rights of the fishpond
After the public bidding, DBP executed a Deed of Conditional Sale in favor of defendant Agripina
Caperal. Cuba filed against DBP since no foreclosure proceedings was done thus, contrary to
Article 2088 of the Civil Code.
RTC: favored Cuba, it being a pactum commissorium return leasehold rights to Cuba entitling
P1,067,500 actual damages, P100,000 moral and P50,000 exemplary damages and P100,000
attorneys fees
CA: leasehold rights to Caperal as valid but same damages

AQUINTEY V. TIBONG
FACTS: On May 6, 1999, petitioner Aquintey filed before RTC Baguio, a complaint for sum of
money and damages against respondents. Agrifina alleged that Felicidad secured loans from her
on several occasions at monthly interest rates of 6% to 7%. Despite demands, spouses Tibong
failed to pay their outstanding loans of P773,000,00 exclusive of interests. However, spouses Tiong
alleged that they had executed deeds of assignment in favor of Agrifina amounting to P546,459
and that their debtors had executed promissory notes in favor of Agrifina. Spouses insisted that by
virtue of these documents, Agrifina became the new collector of their debts. Agrifina was able to
collect the total amount of P301,000 from Felicdads debtors. She tried to collect the balance of

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ISSUE: W/N Cuba should be awarded with actual and compensatory damages
HELD: NO. CA reversed except the P50,000 as moral damages. REMANDED to the trial court for
the reception of the income statement of DBP, as well as the statement of the account of Lydia P.
Cuba, and for the determination of each partys financial obligation to one another assignment of
leasehold rights was a mortgage contract (Article 2087)
not novated, cession (Article 1255 of the Civil Code), dation in payment (Article 1245 of the civil

OBLIGATIONS AND CONTRACTS

Code), pactum commissorium condition no. 12 did not provide that CUBAs default would operate
to vest in DBP ownership of the said rights.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did
not estop her from questioning DBPs act of appropriation. Estoppel cannot give validity to an act
that is prohibited by law or against public policy alleged loss of personal belongings and equipment
was not proved by clear evidence. Other than the testimony of CUBA and her caretaker, there was
no proof as to the existence of those items before DBP took over the fishpond in question. Neither
was a single receipt or record of acquisition presented. dated 17 May 1985, CUBA included losses
of property as among the damages resulting from DBPs take-over of the fishpond. Yet, it was only
in September 1985 when her son and a caretaker went to the fishpond and the adjoining house
that she came to know of the alleged loss of several articles bangus which died also not duly
proved nor was it expressed in her later 7 months after DBP took over.
The award of actual damages should, therefore, be struck down for lack of sufficient basis.
Exemplary or corrective damages in the amount of P25,000 should likewise be awarded by way of
example or correction for the public good. There being an award of exemplary damages, attorneys
fees are also recoverable.

Issue: W/ON private respondent is guilty of abuse of right

Held: No. a creditor cannot be considered in delay if he refuses to accept partial performance
because, unless otherwise provided by law or stipulated by the parties, a creditor cannot be
compelled to accept partial performance; however, if good faith necessitates acceptance or if the
creditor abuses his right in not accepting, the creditor will incur in delay if he does not accept such
partial performance.
Article 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the prestation in which the obligation consists.
Neither may the debtor be required to make partial payments. However, when the debt is in
part liquidated and in part unliquidated, the creditor may demand and the debtor may effect
the payment of the former without waiting for the liquidation of the latter.

Almeda vs. Bathala Marketing Industries,Inc.

Facts: In May 1997, respondent Bathala Marketing Industries, Inc. (lessee) entered into a contract
of lease with petitioners (lessors). Provisions of the contract of lease include:

Barons Marketing Corp vs Court of Appeals and Phelp Dodge Phils Inc

6th - Lessee shall pay an increased rent if there is any new tax imposed on the property

Facts: August 31, 1973. Phelps Dodge appointed Barons Marketing as one of its dealers of
electrical wires and cables effective Sept. 1, 1973. Defendant was given 60 days credit for its
purchases of Phelps Dodges electrical products. Barons Marketing purchased, on credit, from
Phelps Dodges electrical wires and cable in the total amount of P4,102,483.30. This was then sold
to MERALCO, Baron Mktg being the accredited supplier of the electrical requirements of
MERALCO.

7th - In case of supervening extraordinary inflation or devaluation of the PHP, the value of PHP at
the time of the establishment of the obligation shall be the basis of payment

Under the sales invoices issued by Phelps Dodge to Barons Mktg for the subject
purchases, it is stipulated that interest at 12% on the amount of attys fees and collection. Barons
Mktg paid P300,000 out of its total purchases leaving an unpaid account of P3,802,478.20. Phelps
Dodge wrote Barons Mktg demanding payment of its outstanding obligations due Phelps Dodge.
Baron Mktg responded by requesting if it could pay its outstanding account in monthly installments
of P500,000 plus 1%interest per month until full payment, this request was rejected and Phelps
Dodge demanded full payment. Phelps Dodge then filed a complaint before the Pasig Trial Court
for the recovery of P3,802,478.20 and it also prayed to be awarded with attorneys fee at the rate
of 25% of the amount demanded, exemplary damages in the amount of P100,000, the expenses of
litigation and the costs of suit. The court ruled in favor of Phelps Dodge with the exemplary
damages of P10,000 and recovery of P3,108,000
Both parties appealed. Phelps Dodge claimed that court should have awarded the sum of
P3,802,478.20. It also said that the amount awarded was a result of a typographical error.
Barons Mktg claimed that Phelps Dodges claim for damages is a result of creditors
abuse and it also claimed that Phelps Dodge failed to prove its cause of action against it. CoA
ruled in favor of Phelps Dodge with the correct amount but only with the 5% for the Attys fee. No
costs.
Barons Mktg then alleged that the Coa erred its decision

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Petitioners later demanded payment of VAT and 73% adjusted rentals pursuant to the foregoing
provisions. Respondent refused and filed an action for declaratory relief. Petitioners filed an action
for ejectment.
Issue: Whether or not declaratory relief is proper.
Held: YES. Petitioners insist that respondent was already in breach of the contract when the
petition was filed, thus, respondent is barred from filing an action for declaratory relief. However,
after petitioners demanded payment of adjusted rentals and in the months that followed,
respondent complied with the terms and conditions set forth in their contract of lease by paying the
rentals stipulated therein. Respondent religiously fulfilled its obligations to petitioners even during
the pendency of the present suit. There is no showing that respondent committed an act
constituting a breach of the subject contract of lease. Thus, respondent is not barred from
instituting before the trial court the petition for declaratory relief.
Petitioners further claim that the instant petition is not proper because a separate action for
rescission, ejectment and damages had been commenced before another court; thus, the
construction of the subject contractual provisions should be ventilated in the same forum.
As a rule, the petition for declaratory relief should be dismissed in view of the pendency of a
separate action for unlawful detainer. In this case, however, the trial court had not yet resolved the
rescission/ejectment case during the pendency of the declaratory relief petition. In fact, the trial
court, where the rescission case was on appeal, initiated the suspension of the proceedings
pending the resolution of the action for declaratory relief.

OBLIGATIONS AND CONTRACTS

Petitioner: Roman Catholic Bishop of Malolos, Inc.
Respondents: Intermediate Appellate Court and Robes-Francisco Realty and Dev. Corp.
Facts: The property subject matter of the contract consists of a parcel of land in the Province of
Bulacan, issued and registered in the name of the petitioner which is sold to the private respondent.
Their agreement was that there would be a downpayment of P23, 930.00 and the balance of P100,
000.00 plus 12% interest per annum to be paid within four (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.
Private respondent was then in default. Knowing that it was in its payment of the
installments, it requested for the restructuring of the installment payments but was denied by the
petitioner. It then asked for a grace period which the petitioner granted for a period of 5 days.
However, private respondent request an extension of 30 days and tendered payment. But such was
refused and the contract was cancelled by the petitioner.
Issue: Is an offer of a check a valid tender of payment of an obligation under a contract which
stipulates that the consideration of the sale is in Philippine currency?
Ruling: The court ruled that a certified personal check which is not legal tender or the currency
stipulated cannot constitute valid tender of payment. The first paragraph of Art. 1249 of the Civil
Code provides that 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.
The court en banc in the recent case of Phil. Airlines v. CA, stated thus: A check, whether a
managers check or ordinary check, is not legal tender, and an offer of a check in payment of a debt
is not a valid tender of payment and may be refused receipt by the oblige or creditor.
Hence, where the tender of payment by the private respondent was not valid for failure to comply
with the requisite payment in legal tender or currency stipulated within the grace period and as
such, was validly refused receipt by the petitioner, the subsequent consignation did not operate to
discharge the former from its obligation to the latter.
SOCO VS. MILITANTE
FACTS: Soco and Francisco entered into a contract of lease on January 17, 1973, whereby Soco
leased her commercial building and lot situated at Manalili Street, Cebu City, to Francisco for a
monthly rental of P 800.00 for a period of 10 years renewable for another 10 years at the option of
the lessee. It can readily be discerned from Exhibit A (from SOCO) that paragraphs 10 and 11
appear to have been cancelled while in Exhibit 2 (from FRANCISCO) only paragraph 10 has been
cancelled. Claiming that paragraph 11 of the Contract of Lease was in fact not part of the contract
because it was cancelled, Soco filed Civil Case No. R-16261 in the Court of First Instance of Cebu
seeking the annulment and/or reformation of the Contract of Lease.
Sometime before the filing of Civil Case No. R-16261 Francisco noticed that Soco did not
anymore send her collector for the payment of rentals and at times there were payments made but
no receipts were issued. This situation prompted Francisco to write Soco the letter dated February

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7, 1975 which the latter received. After writing this letter, Francisco sent his payment for rentals by
checks issued by the Commercial Bank and Trust Company.
The factual background setting of this case clearly indicates that soon after Soco learned
that Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more than
P3,000.00 which is definitely very much higher than what Francisco was paying to Soco under the
Contract of Lease, the latter felt that she was on the losing end of the lease agreement so she tried
to look for ways and means to terminate the contract.
In view of this alleged non-payment of rental of the leased premises beginning May, 1977,
Soco through her lawyer sent a letter dated November 23, 1978 to Francisco serving notice to the
latter to vacate the premises leased. In answer to this letter, Francisco through his lawyer informed
Soco and her lawyer that all payments of rental due her were in fact paid by Commercial Bank and
Trust Company through the Clerk of Court of the City Court of Cebu. Despite this explanation, Soco
filed this instant case of Illegal Detainer.
MTC and RTC have conflicting findings. The former found that the consignation was valid.
RTC reversed and ordered the eviction of the Francisco.
ISSUE: WON there was a valid consignation of payment of the rentals.
HELD: In order that consignation may be effective, the debtor must first comply with certain
requirements prescribed by law. The debtor must show (1) that there was a debt due; (2) that the
consignation of the obligation had been made because the creditor to whom tender of payment was
made refused to accept it, or because he was absent or incapacitated, or because several persons
claimed to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of
the consignation had been given to the person interested in the performance of the obligation (Art.
1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178, Civil
Code); and (5) that after the consignation had been made the person interested was notified
thereof (Art. 1178, Civil Code). Failure in any of these requirements is enough ground to render a
consignation ineffective. We hold that the respondent lessee has utterly failed to prove the following
requisites of a valid consignation: First, tender of payment of the monthly rentals to the lessor.
Second, respondent lessee also failed to prove the first notice to the lessor prior to consignation,
Evidently, from this arrangement, it was the lessees duty to send someone to get the
cashiers check from the bank and logically, the lessee has the obligation to make and tender the
check to the lessor. This the lessee failed to do, which is fatal to his defense.
Third, respondent lessee likewise failed to prove the second notice, that is after consignation has
been made, to the lessor. And the fourth requisite that respondent lessee failed to prove is the
actual deposit or consignation of the monthly rentals except the two cashiers checks referred to in
Exhibit 12. As indicated earlier, not a single copy of the official receipts issued by the Clerk of Court
was presented at the trial of the case to prove the actual deposit or consignation.
We, therefore, find and rule that the lessee has failed to prove tender of payment except
that in Exh. 10; he has failed to prove the first notice to the lessor prior to consignation except that
given in Exh. 10; he has failed to prove the second notice after consignation except the two made
in Exh. 12; and he has failed to pay the rentals for the months of July and August, 1977 as of the
time the complaint was filed for the eviction of the lessee. We hold that the evidence is clear,
competent and convincing showing that the lessee has violated the terms of the lease contract and
he may, therefore, be judicially ejected.

OBLIGATIONS AND CONTRACTS

G.R. No. L-32116 April 21, 1981
RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., vs. THE COURT OF
APPEALS and MAXIMA CASTRO, respondents.
FACTS: Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan
to apply for a loan. Valencia arranged everything about the loan with the bank. He supplied to the
latter the personal data required for Castro's loan application. After the bank approved the loan for
the amount of P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note
corresponding to her loan in favor of the bank. On the same day, the Valencia spouses obtained
from the bank an equal amount of loan for P3,000.00. They signed another promissory note
(Exhibit "2") corresponding to their loan in favor of the bank and had Castro affixed thereon her
signature as co-maker. Both loans were secured by a real-estate mortgage on Castro's house and
lot. Later, the sheriff of Manila sent a notice to Castro, saying that her property would be sold at
public auction to satisfy the obligation covering the two promissory notes plus interest and
attorney's fees. Upon request by Castro and the Valencias and with conformity of the bank, the
auction sale was postponed, but was nevertheless auctioned at a later date. Castro claimed that
she is a 70-year old widow who cannot read and write in English. According to her, she has only
finished second grade. She needed money in the amount of P3,000.00 to invest in the business of
the defendant spouses Valencia, who accompanied her to the bank to secure a loan of P3,000.00.
While at the bank, an employee handed to her several forms already prepared which she was
asked to sign, with no one explaining to her the nature and contents of the documents. She also
alleged that it was only when she received the letter from the sheriff that she learned that the
mortgage contract which was an encumbrance on her property was for P6.000.00 and not for
P3,000.00 and that she was made to sign as co-maker of the promissory note without her being
informed. Castro filed a suit against petitioners contending that thru mistake on her part or fraud on
the part of Valencias she was induced to sign as co-maker of a promissory note and to constitute a
mortgage on her house and lot to secure the questioned note. At the time of filing her complaint,
respondent Castro deposited the amount of P3,383.00 with the court a quo in full payment of her
personal loan plus interest. Castro prayed for:
1

the annulment as far as she is concerned of the promissory note (Exhibit "2")and
mortgage (Exhibit "6") insofar as it exceeds P3,000.00; and

for the discharge of her personal obligation with the bank by reason of a deposit of
P3,383.00 with the court a quo upon the filing of her complaint.

ISSUE: Whether or not respondent court correctly affirmed the lower court in declaring the
promissory note (Exhibit 2) invalid insofar as they affect respondent Castro vis--vis petitioner
bank, and the mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only.
HELD: Yes.
RATIO: While the Valencias defrauded Castro by making her sign the promissory note and the
mortgage contract, they also misrepresented to the bank Castro's personal qualifications in order to
secure its consent to the loan. Thus, as a result of the fraud upon Castro and the misrepresentation
to the bank inflicted by the Valencias both Castro and the bank committed mistake in giving their
consents to the contracts. In other words, substantial mistake vitiated their consents given. For if

6 | Page

Castro had been aware of what she signed and the bank of the true qualifications of the loan
applicants, it is evident that they would not have given their consents to the contracts.
Article 1342 of the Civil Code which provides:
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual.
We cannot declare the promissory note valid between the bank and Castro and the
mortgage contract binding on Castro beyond the amount of P3,000.00, for while the contracts may
not be invalidated insofar as they affect the bank and Castro on the ground of fraud because the
bank was not a participant thereto, such may however be invalidated on the ground of substantial
mistake mutually committed by them as a consequence of the fraud and misrepresentation inflicted
by the Valencias. Thus, in the case of Hill vs. Veloso, this Court declared that a contract may be
annulled on the ground of vitiated consent if deceit by a third person, even without connivance or
complicity with one of the contracting parties, resulted in mutual error on the part of the parties to
the contract. The fraud particularly averred in the complaint, having been proven, is deemed
sufficient basis for the declaration of the promissory note invalid insofar as it affects Castro vis-a-vis
the bank, and the mortgage contract valid only up to the amount of P3,000.00.

PNCC vs. NLRC

FACTS: On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a
Temporary Use Permit 2 for the proposed rock crushing project. The permit was to be valid for two
years unless sooner revoked by the Ministry. On 16 January 1986, private respondents wrote
petitioner requesting payment of the first annual rental in the amount of P240,000 which was due
and payable upon the execution of the contract.
They also assured the latter that they had already stopped considering the proposals of other
aggregates plants to lease the property because of the existing contract with petitioner. In its replyletter, petitioner argued that under paragraph 1 of the lease contract, payment of rental would
commence on the date of the issuance of an industrial clearance by the Ministry of Human
Settlements, and not from the date of signing of the contract. It then expressed its intention to
terminate the contract, as it had decided to cancel or discontinue with the rock crushing project
"due to financial, as well as technical, difficulties." Private respondents refused to accede to
petitioner's request for the pretermination of the lease contract. They insisted on the performance of
petitioner's obligation and reiterated their demand for the payment of the first annual rental.
ISSUE:
Whether provisions of Article 1266 and the principle of rebus sic stantibus is applicable in the case
at bar?
RULING:
Article 1266 of the Civil Code, which reads: "The debtor in obligations to do shall
also be released when the prestation becomes legally or physically impossible without the
fault of the obligor." Petitioner cannot, however, successfully take refuge in the said article, since
it is applicable only to obligations "to do," and not to obligations "to give." An obligation "to do"

OBLIGATIONS AND CONTRACTS

includes all kinds of work or service; while an obligation "to give" is a prestation which consists in
the delivery of a movable or an immovable thing in order to create a real right, or for the use of the
recipient, or for its simple possession, or in order to return it to its owner.
The obligation to pay rentals or deliver the thing in a contract oflease falls within the
prestation "to give"; hence, it is not covered within the scope of Article 1266. At any rate, the
unforeseen event and causes mentioned by petitioner are not the legal or physical impossibilities
contemplated in the said article. Besides, petitioner failed to state specifically the circumstances
brought about by "the abrupt change in the political climate in the country" except the alleged
prevailing uncertainties in government policies on infrastructure projects. The principle of rebus sic
stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate in the light
of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases
to exist.

TORIBIO REYES, Plaintiff-Appellant, v. CALTEX (PHILIPPINES) INC

FACTS: A contract was executed on the 23rd day of December, 1940, whereby Toribio Reyes, the
plaintiff, leased to Caltex (Philippines) Inc., the now defendant, two parcels of land situated in the
barrio of Baclaran, municipality of Paraaque, Province of Rizal, for a period of 10 years renewable
for another 10 years at the option of the lessee, at the agreed monthly rental of P120 during the
first 10 years and P150 a month for the subsequent period should the lease be extended, said
monthly rental to be paid in advance within the first 10 days of each month. The contract further
provides in paragraph 6 that, "Should the structures on said premises be destroyed by fire or storm,
or should lessee, for any reason, be prevented from establishing or continuing the business of
distributing petroleum products on said premises, or should said business, for any reason, in
lessees judgment, become unduly burdensome, lessee may terminate this lease upon 30 days
written notice, in which event the rental shall be prorated to the date of such termination."cralaw
virtua1aw library
Upon the entry of Japanese troops, in December, 1941, these seized the premises and
used them throughout the period of occupation as a sentry post. The officers of the lessee
corporation, being American citizens, were interned by the invaders and the said company was
closed throughout that period. After liberation the lessee again took over the premises but tendered
payment for rent from February, 1945, only; it had not paid rent from January, 1942. This
nonpayment is the basis of the present suit.
ISSUE: WON defendant is excused to pay the rent from January 1942.
HELD: The court straighten out the apparent confusion that exists regarding the influence of
fortuitous events in contracts; when they excuse performance and when not.
In considering the effect of impossibility of performance on the rights of the parties, it is
necessary to keep in mind the distinction between: (1) Natural impossibility, preventing
performance from the nature of the thing; and (2) impossibility in fact, in the absence of inherent
impossibility in the nature of the thing stipulated to be performed. (17 C. J. S., 951.) In the words of
one court, impossibility must consist in the nature of thing to be done and not in the inability of the
party to do it. (City of Montpelier v. National Surety Co., 122 A. 484; 97 Vt., III. 33 A. L. R., 489.) As
others have put it, to bring the case within the rule of impossibility, it must appear that the thing to

7 | Page

be done cannot by any means be accomplished, for if it is only improbable or out of the power of
the obligor, it is not in law deemed impossible. (17 C. J. S., 442.) The first class of impossibility
goes to the consideration and renders the contract void. The second, which is the class of
impossibility that we have to do here, does not. (17 C. J. S., 951, 952.)
For the illustration, where the entire product of a manufacturer was taken by the
government under orders pursuant to a commandeering statute during the World War, it was held
that such action excused nonperformance of a contract to supply civilian trade. (40 S. Ct., 5; 253 U.
S., 498; 64 Law. ed., 1031.) Another example: where a party obligates himself to deliver certain
things and the things perish through war or in a shipwreck, performance is excused, the destruction
operating as a rescission or dissolution of the covenant. But if the promisor is unable to deliver the
goods promised and his inability arises, not from their destruction but from, say, his inability to raise
money to buy them due to sickness, typhoon, or the like, his liability is not discharged. In the first
case, the doing of the thing which the obligor finds impossible is the foundation of the undertaking.
(C. J. S., 951, note.) In the second, the impossibility partakes of the nature of the risk which the
promisor took within the limits of his undertaking of being able to perform. (C. J. S. supra, 946,
note,) It is a contingency which he could have taken due precaution to guard against in the
contract.
Summoning the above principles to our aid, and by way of hypothesis, the defendantappellee here would be relieved from the obligation to pay rent if the subject matter of the lease,
were this possible, had disappeared, for the personal occupation of the premises is the foundation
of the contract, the consideration that induced it (lessee) to enter into the agreement. But a mere
trespass with which the landlord had nothing to do is a casual disturbance not going to the essence
of the undertaking. It is a collateral incident which might have been provided for by a proper
stipulation.
---------------SYLLABUS
1. LANDLORD AND TENANT; WHEN ACT OF TRESPASS ON LEASED PREMISES IS A TRESPASS IN
FACT. If the act of trespass is not accompanied or preceded by anything which reveals a really
juridic intention on the part of the trespasser, in such wise that the lessee can only distinguish the
material fact, stripped of all legal form or reasons we understand it to be trespass in fact only (de
mero hecho). Doctrine in Goldstein v. Roces (34 Phil., 562), reiterated.
2. ID.; CONTRACTS; ABSENCE OF STIPULATION FOR NONPERFORMANCE IN CASE OF
CONTINGENCIES. Where a person by his contract charges himself with an obligation possible to
be performed, he must perform it, unless its performance is rendered impossible by the act of
God, by the law, or by the other party, it being the rule that in case the party desires to be
excused from performance in the event of contingencies arising, it is his duty to provide therefor
in his contract.
3. WAR; CONTRACTS; EXCUSE FOR NONPERFORMANCE; RULE. In the absence of a statute to
the contrary, conditions arising from a state of war in which the country is engaged, will not
ordinarily constitute an excuse for nonperformance of contract; and impossibility of performance
arising from the acts of the legislature and the executive branch of government in war time does
not, without more, constitute an excuse for non-performance.
4. LANDLORD AND TENANT; LESSEE IS NOT RELIEVED FROM OBLIGATION TO PAY RENTS DUE TO

OBLIGATIONS AND CONTRACTS

MERE TRESPASS IN FACT. The lessee would be relieved from the obligation to pay rent if the
subject matter of the lease, were this possible, had disappeared, for the personal occupation of
the premises is the foundation of the contract, the consideration that induced it (lessee) to enter
into the agreement. But a mere trespass with which the landlord had nothing to do is a casual
disturbance not going to the essence of the undertaking. It is a collateral incident which might
have been provided for by a proper stipulation.
5. ID.; NONPAYMENT OF RENT IS NOT A CAUSE TO RESCIND CONTRACT; CASE AT BAR. The
failure of the defendant to pay rent during the war was due to impossibility inherent in the nature
of the thing to be performed. In this aspect of the contract the payment was the very thing
promised by the lessee, the very foundation, the sole consideration of the contract for the lessor,
and the lessees failure to make good the promise was due to causes over which it had no control
and for which it was in no manner at fault.

CITIBANK V. SABENIANO
Facts: This is a case involving Citibank, N.A., a banking corporation duly registered under US
Laws and is licensed to do commercial banking and trust functions in the Philippines and Investor's
Finance Corporation (aka FNCB Finance), and affiliate company of Citibank, mainly handling
money market placements(MMPs are short term debt instruments that give the owner an
unconditional right to receive a stated, fixed sum of money on a specified date).
Modesta R. Sabeniano was a client of both petitioners Citibank and FNCB
Finance.Unfortunately, the business relations among the parties subsequently went awry.
Subsequently, Sabeniano filed a complaint with the RTC against petitioners as she claims to have
substantial deposits and money market placements with the petitioners and other investment
companies, the proceeds of which were supposedly deposited automatically and directly to her
account with Citibank. Sabeniano alleged that Citibank et al refused to return her deposits and the
proceeds of her money market placements despite her repeated demands, thus, the civil case for
"Accounting, Sum of Money and Damages.
In their reply, Citibank et al admitted that Sabeniano had deposits and money market
placements with them, including dollar accounts in other Citibank branches. However, they also
alleged that respondent later obtained several loans from Citibank, executed through Promissory
Notes and secured by a pledge on her dollar accounts, and a deed of assignment against her
MMPS with FNCB Finance. When Sabeniano defaulted, Citibank exercised its right to off-set or
compensate respondent's outstanding loans with her deposits and money market placements,
pursuant to securities she executed. Citibank supposedly informed Sabeniano of the foregoing
compensation through letters, thus, Citibank et al were surprised when six years later, Sabeniano
and her counsel made repeated requests for the withdrawal of respondent's deposits and MMPs
with Citibank, including her dollar accounts with Citibank-Geneva and her money market
placements with petitioner FNCB Finance. Thus, petitioners prayed for the dismissal of the
Complaint and for the award of actual, moral, and exemplary damages, and attorney's fees.
The case was eventually decided after 10 years with the Judge declaring the offsetting done as
illegal and the return of the amount with legal interest, while Sabeniano was ordered to pay her
loans to Citibank. The ruling was then appealed. The CA modified the decision but only to the

8 | Page

extent of Sabenianos loans which it ruled that Citibank failed to establish the indebtedness and is
also without legal and factual basis. The case was thus appealed to the SC.
Issue: Whether or not there was a valid off setting/compensation of loan vis a vis the a.)Deposits
and b.) MMPs.
Held: General Requirement of Compensation:
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary;
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
1.

Yes. As already found by this Court, petitioner Citibank was the creditor of respondent for
her outstanding loans. At the same time, respondent was the creditor of petitioner
Citibank, as far as her deposit account was concerned, since bank deposits, whether
fixed, savings, or current, should be considered as simple loan or mutuum by the
depositor to the banking institution.122 Both debts consist in sums of money. By June
1979, all of respondent's PNs in the second set had matured and became demandable,
while respondent's savings account was demandable anytime. Neither was there any
retention or controversy over the PNs and the deposit account commenced by a third
person and communicated in due time to the debtor concerned. Compensation takes
place by operation of law.

2.

Yes, but technically speaking Citibank did not effect a legal compensation or off-set under
Article 1278 of the Civil Code, but rather, it partly extinguished respondent's obligations
through the application of the security given by the respondent for her loans.

Respondent's money market placements were with petitioner FNCB Finance, and after several
roll-overs, they were ultimately covered by PNs No. 20138 and 20139, which, by 3 September
1979, the date the check for the proceeds of the said PNs were issued, amounted
to P1,022,916.66, inclusive of the principal amounts and interests. As to these money market
placements, respondent was the creditor and petitioner FNCB Finance the debtor (thereby
implying that money market placement is a simple loan or mutuum); while, as to the
outstanding loans, petitioner Citibank was the creditor and respondent the debtor.
Consequently, legal compensation, under Article 1278 of the Civil Code, would not apply since the

OBLIGATIONS AND CONTRACTS

first requirement for a valid compensation, that each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other, was not met.
What petitioner Citibank actually did was to exercise its rights to the proceeds of respondent's
money market placements with petitioner FNCB Finance by virtue of the Deeds of Assignment
executed by respondent in its favor. Petitioner Citibank was only acting upon the authority granted
to it under the foregoing Deeds when it finally used the proceeds of PNs No. 20138 and 20139,
paid by petitioner FNCB Finance, to partly pay for respondent's outstanding loans. Strictly
speaking, it did not effect a legal compensation or off-set under Article 1278 of the Civil Code, but
rather, it partly extinguished respondent's obligations through the application of the security given
by the respondent for her loans. Although the pertinent documents were entitled Deeds of
Assignment, they were, in reality, more of a pledge by respondent to petitioner Citibank of her credit
due from petitioner FNCB Finance by virtue of her money market placements with the latter.
According to Article 2118 of the Civil Code

ART. 2118. If a credit has been pledged becomes due before it is redeemed, the pledgee may
collect and receive the amount due. He shall apply the same to the payment of his claim,
and deliver the surplus, should there be any, to the pledgor.

Domingo vs. Garlitos

Facts: This is a petition for certiorari and mandamus against the Judge of the Court of First
Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court
and for an order in this Court directing the respondent court below to execute the judgment in favor
of the Government against the estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674,
January 30, 1960, this Court declared as final and executory the order for the payment by the
estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued
by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the
Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the estate the
fiscal presented a petition dated June 21, 1961, to the court below for the execution of the
judgment. The petition was, however, denied by the court which held that the execution is not
justifiable as the Government is indebted to the estate under administration in the amount of
P262,200.
Issue: Whether a tax and a debt may be compensated.
HELD: The court having jurisdiction of the Estate had found that the claim of the Estate against the
Government has been recognized and an amount of P262,200 has already been appropriated by a
corresponding law (RA 2700). Under the circumstances, both the claim of the Government for
inheritance taxes and the claim of the intestate for services rendered have already become
overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by
operation of law, in accordance with Article 1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount.

9 | Page

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation
takes effect by operation of law, and extinguished both debts to the concurrent amount,
even though the creditors and debtors are not aware of the compensation.

Philex Mining Corp vs CIR

Facts: Petitioner Philex entered into an agreement with Baguio Gold Mining Corporation for the
former to manage the latters mining claim known as the Sto. Mine. The parties agreement was
denominated as Power of Attorney. The mine suffered continuing losses over the years, which
resulted in petitioners withdrawal as manager of the mine. The parties executed a Compromise
Dation in Payment, wherein the debt of Baguio amounted to P 112,136,000.00. Petitioner
deducted said amount from its gross income in its annual tax income return as loss on the
settlement of receivables from Baguio Gold against reserves and allowances. BIR disallowed the
amount as deduction for bad debt. Petitioner claims that it entered a contract of agency evidenced
by the power of attorney executed by them and the advances made by petitioners is in the nature
of a loan and thus can be deducted from its gross income. Court of Tax Appeals (CTA) rejected the
claim and held that it is a partnership rather than an agency. CA affirmed CTA.
Issue: Whether or not it is an agency.
Held: No. The lower courts correctly held that the Power of Attorney (PA) is the instrument
material that is material in determining the true nature of the business relationship between
petitioner and Baguio. An examination of the said PA reveals that a partnership or joint venture
was indeed intended by the parties. While a corporation like the petitioner cannot generally enter
into a contract of partnership unless authorized by law or its charter, it has been held that it may
enter into a joint venture, which is akin to a particular partnership.
The PA indicates that the parties had intended to create a PAT and establish a common fund for the
purpose. They also had a joint interest in the profits of the business as shown by the 50-50 sharing
of income of the mine. Moreover, in an agency coupled with interest, it is the agency that cannot be
revoked or withdrawn by the principal due to an interest of a third party that depends upon it or the
mutual interest of both principal and agent. In this case the non-revocation or non-withdrawal under
the PA applies to the advances made by the petitioner who is the agent and not the principal under
the contract. Thus, it cannot be inferred from the stipulation that it is an agency.

SOUTH AFRICAN AIRWAYS V. CIR

Facts: Petitioner South African Airways is a foreign corporation organized and existing under and
by virtue of the laws of the Republic of South Africa. Its principal office is located at Airways Park,
Jones Road, Johannesburg International Airport, South Africa. In the Philippines, it is an internal air
carrier having no landing rights in the country. Petitioner has a general sales agent in the
Philippines, Aerotel Limited Corporation(Aerotel). Aerotel sells passage documents for
compensation or commission for petitioners off-line flights for the carriage of passengers and cargo
between ports or points outside the territorial jurisdiction of the Philippines. Petitioner is not
registered with the Securities and Exchange Commission as a corporation, branch office, or

OBLIGATIONS AND CONTRACTS

partnership. It is not licensed to do business in the Philippines. It paid a corporate tax in the rate of
32% of its gross billings. However, it subsequently claim for refund contending that its income
should be taxed at the rate of 2 1/2% of its gross billings.
Issues: whether or not petitioners income is sourced within the Philippines and is to be taxed at
32% of the gross billings?

Held: Yes. In the instant case, the general rule is that resident foreign corporations shall be liable
for a 32% income tax on their income from within the Philippines, except for resident foreign
corporations that are international carriers that derive income from carriage of persons, excess
baggage, cargo and mail originating from the Philippines which shall be taxed at 2 1/2% of their
Gross Philippine Billings. Petitioner, being an international carrier with no flights originating from the
Philippines, does not fall under the exception. As such, petitioner must fall under the general rule.
This principle is embodied in the Latin maxim, exception firmat regulam in casibus non exceptis,
which means, a thing not being excepted must be regarded as coming within the purview of the
general rule.
To reiterate, the correct interpretation of the above provisions is that, if an international air
carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its
Gross Philippine Billings, while international air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other activities in the country will be taxed at the rate
of 32% of such income.

declared null and void, and that defendant be ordered to refund to plaintiff said amounts of P273.41
and P172.87 it paid as exchange tax.
On January 3, 1958, defendant filed a motion to dismiss on the grounds that (1) the court
has no jurisdiction over the subject matter of the action; (2) the complaint states no cause of action;
and (3) the cause of action, if any, is barred by the statute of limitations. On January 10, 1958,
plaintiff filed an opposition to said motion, to which, defendant filed a reply on January 17, 1958.
The lower court ruled in favor of the Plaintiff on the ground that Exchange tax is erroneous
and without any legal basis because the plaintiff on these dates did not purchase any foreign
exchange from the Bank but merely liquidated its existing accounts under the Credits.
HELD: In the decision of this Court promulgated May 30, 1960, we held that plaintiff-appellee's
action for the refund of payments made on April 26 and May 4, 1951 for exchange tax, filed and
instituted on December 20, 1957, had already prescribed and, consequently, we reversed the lower
court's decision directing the refund, with costs against the appellee.
Plaintiff-appellee has filed a motion for reconsideration urging that his action was still timely
because, it is argued, the period of prescription applicable to the case is ten (10) years from date of
payment. To support this contention, Article 1144, paragraph (2) is cited, which provides:
ARTICLE 1144. The following actions must be brought within ten years from the time the right of
action accrues:
(1) ....;
(2) Upon an obligation created by law;

BELMAN COMPAIA INCORPORADA, plaintiff-appellee, vs. CENTRAL BANK OF THE

PHILIPPINES, defendant-appellant.

Two issues both legal, are presented in this appeal; (a) whether the action has already
prescribed, and (b) whether defendant Central Bank can be compelled to make the refund after the
amounts involved had already been turned over to the National Treasury of the Government. We
take up only the first question because it is decisive.
On April 26, 1951 and May 4, 1951, plaintiff paid to the Philippine National Bank its
obligations for foreign exchange obtained under Credits Nos. 43729 (PNB I/B 36747) and 41347
(PNB I/B 37605), respectively. On the same dates, defendant Central Bank collected from plaintiff,
as exchange tax,1 the amounts of P273.41 (CBP O. R. No. 002801 dated April 26, (1951) and
P172.87 (CBP O. R. No 002928 dated May 4, 1951) Plaintiff paid said amounts to defendant, under
protest.
On November 8, 1951, plaintiff requested defendant to refund to it both amounts, but
defendant refused to do so. Plaintiff reiterated said request for the refund of P273.41 on September
2, 1957, and of P172.87 on October 7, 1957; and for both amounts, on December 2, 1957.
Defendant, however, likewise refused to comply with plaintiff's request2 .
Plaintiff, therefore, on December 20, 1957, filed with the above-mentioned court a complaint
praying, inter alia, that defendant's Monetary Board Resolution No. 286, series of 1951, be

10 | P a g e

Since, it is claimed, the payment here was made by reason of a mistake in the
interpretation of Republic Act 601, the obligation to return arises by virtue of Article 2155, in relation
to Article 2154 of the New Civil Code and is, therefore, one created by law.

Movant-appellee is partly correct. However, Articles 2154 and 2155 relied upon,
specifically refer to obligations of the nature of solutio indebiti which are expressly classified as
quasi-contracts under Section 2, Chapter 1 of Title XVII of the New Civil Code. Consequently, the
law regarding prescription applicable to the action herein involved is not.
Article 1144-(2) cited by movant, but Article 1145(2) of the New Civil Code providing:
Article 1145. The following actions must be commenced within six years:
(1) ...;
(2) Upon a quasi-contract.
In this case, the first payment was made on April 26, 1951. Extrajudicial written demand
for refund was made on November 8, 1951 (after a lapse of 6 months and 12 days). The demand
was denied November 14, 1951. The second demand was on September 2, 1957, or after a lapse
of 5 years, 9 months and 18 days from November 14, 1951. Granting the interruption provided in
Article 1155,1 the period or prescription that had elapse totals to 6 years and 4 months.
Consequently, the complaint filed on December 20, 1957 is clearly barred.

OBLIGATIONS AND CONTRACTS

The second payment was made on May 4, 1951. From said date to November 8, 1951,
when the first demand was made, 6 months and 4 days had elapsed. From November 14, 1951
(date of denial of the demand) to October 7, 1957 when the second demand on this payment was
made, 5 years, 10 months and 23 days had elapsed. Adding up the two periods will sum up to 6
years, 4 months and 27 days. Again, the complaint based on the second payment is beyond the six
(6) years provided for the prescription of this kind of action.
The plea is made that inasmuch as the collection of the Exchange tax by the defendant
was clearly illegal or erroneous, movant should not be made to pay the costs for filing the case for
the refund of the payments made. This would be true if the action was timely instituted before it was
barred by the statute of limitations. But if, as in this case, plaintiff files its claim after it has already
been lost and; therefore, had no longer any enforceable cause of action against the defendant,
certainly the latter is entitled to have his costs. For the reasons above set forth, the motion for
reconsideration is denied. So ordered.

METRO BANK v. TONDA

FACTS: Tonda applies for commercial LC's with MBTC to import raw materials for HTAC. The term
of the letters was 8 months. The Tonda's execute 11 trust receipts in favor of MBTC to facilitate the
release of the raw materials. Upon the maturity of the debt, the Tonda's fail to pay of the obligation.
A few months later, the Tonda's propose a compromise payment to the offering to pay the 2.8M
principal immediately and to restructure the rest of the balance. Metrobank does not agree but the
Tonda's nevertheless open a bank account in Metrobank (jointly with a certain Wang Tien En) in the
amount of 2.8m which was received by a teller thru written acknowledgement (such
acknowledgement however, not in any way referrgin to the trust receipts), such deposit to be
placed at the disposal of Metrobank upon the reaching of a compromise. Metrobank makes
repeated demands for payment...and finally files a criminal case against the Tonda's. The CA sides
with the Tonda's holding that the Tonda's had already placed the payment at the disposal of the
bank which the bank should have offset against the old obligation.
ISSUE: WON Obligations from Criminal offences can be offset.
HELD: No. Article 1288 provides that obligations arising from criminal offences cannot be
offset. Furthermore, the deposit cannot be presumed to be a payment since it was not made out in
the name of petitioner but rather deposited into the account of Wang Tien En and Pvt. Respondents
and was furthermore, subject to the condition that it would only be at the disposal of the bank upon
the reaching of a compromise which did not in fact occur. The lower court may proceed with the
criminal case.

AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO TAN, ELISA TAN, TAN YEE,
and SPS. MARCIAL SEE and LILIAN TAN, petitioners, vs. HON. COURT OF APPEALS,
METROPOLITAN BANK AND TRUST COMPANY, and THE SHERIFF OF MANILA,
respondents.
Facts: It is not disputed that Ylang-Ylang Merchandising Company, a partnership between Angelita
Rodriguez and Antonio Tan, obtained a loan in the amount of P250,000.00 from the Metropolitan

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Bank and Trust Company, and to secure payment of the same, spouses Marcial See and Lilian Tan
constituted a real estate mortgage in favor of said bank over their property in the District of Paco,
Manila, covered by TCT No. 105233 of the Registry of Deeds of Manila. The mortgage was
annotated at the back of the title.
Subsequently, after the partnership had changed its name to Ajax Marketing Company
albeit without changing its composition, it obtained a loan in the sum of P150,000.00 from
Metropolitan Bank and Trust Company. Again to secure the loan, spouses Marcial See and Lilian
Tan executed in favor of said bank a second real estate mortgage over the same property. As in the
first instance, the mortgage was duly annotated at the back of TCT No. 105233.
On February 19, 1979, the partnership (Ajax Marketing Company) was converted into a
corporation denominated as Ajax Marketing and Development Corporation, with the original
partners (Angelita Rodriguez and Antonio Tan) as incorporators and three (3) additional
incorporators, namely, Elisa Tan, the wife of Antonio Tan, and Jose San Diego and Tessie San
Diego. Ajax Marketing and Development Corporation obtained from Metropolitan Bank and Trust
Company a loan of P600,000.00, the payment of which was secured by another real estate
mortgage executed by spouses Marcial See and Lilian Tan in favor of said bank over the same
realty located in the District of Paco, Manila. Again, the third real estate mortgage was annotated at
the back of TCT No. 105233.
In December 1980, the three (3) loans with an aggregate amount of P1,000,000.00 were
re-structured and consolidated into one (1) loan and Ajax Marketing and Development Corporation,
represented by Antonio Tan as Board Chairman/President and in his personal capacity as solidary
co-obligor, and Elisa Tan as Vice-President/Treasurer and in her personal capacity as solidary coobligor, executed a Promissory Note (PN) No. BDS-3605.
Issue: Whether or not there is novation.
Ruling: The well settled rule is that novation is never presumed. Novation will not be allowed
unless it is clearly shown by express agreement, or by acts of equal import. Thus, to effect an
objective novation it is imperative that the new obligation expressly declare that the old obligation is
thereby extinguished, or that the new obligation be on every point incompatible with the new one. In
the same vein, to effect a subjective novation by a change in the person of the debtor it is
necessary that the old debtor be released expressly from the obligation, and the third person or
new debtor assumes his place in the relation. There is no novation without such release as the third
person who has assumed the debtor's obligation becomes merely a co-debtor or surety.
The attendant facts herein do not make a case of novation. There is nothing in the records
to show the unequivocal intent of the parties to novate the three loan agreements through the
execution of PN No. BDS-3065. The provisions of PN No. BDS-3065 yield no indication of the
extinguishment of, or an incompatibility with, the three loan agreements secured by the real estate
mortgages over TCT No. 105233. On its face, PN No. BDS-3065 has these words typewritten:
"secured by REM" and " COLLATERAL. This is wholly/partly secured by: (x) "real estate", which
strongly negate petitioners' asseveration that the consolidation of the three loans effected the
discharge of the mortgaged real estate property.
The facts shows that petitioners agreed to apply the real estate property to secure obligations that
they may thereafter obtain including their renewals or extensions with the principals fixed at
P600,000.00, P150,000.00, and P250,000.00 which when added have an aggregate sum of P1.0

OBLIGATIONS AND CONTRACTS

million. PN No. BDS-3605 merely restructured and renewed the three previous loans to expediently
make the loans current. There was no change in the object of the prior obligations. The
consolidation of the three loans, contrary to petitioners' contention, did not release the mortgaged
real estate property from any liability because the mortgage annotations at the back of TCT No.
105233, in fact, all remained uncancelled, thus indicating the continuing subsistence of the real
estate mortgages.
Azolla Farms vs. Court of Appeals
G.R. No. 138085; November 11, 2004

FACTS: In 1982, Azolla Farms undertook to participate in the National Azolla Production Program.
To finance its participation, petitioners applied for a loan with Credit Manila, Inc., which the latter
endorsed to its sister company, respondent Savings Bank.
The BOD of Azolla Farms passed a board resolution authorizing Yuseco, the Chairman,
President and Chief Operating Officer, to borrow from Savings Bank in an amount not exceeding
P2, 200, 000.00. Yuseco executed a promissory note promising to pay Savings Bank the sum of
P1,400,000.00. The net proceed of P1,225,443.31 was released to FNCB Finance, the mortgagee
of a residential house owned by Yuseco.
FNCB Finance released the mortgage and, in turn, the property was mortgaged to
Savings Bank as collateral for the loan. Yuseco and Francisco Bargas also executed an
assignment of their shares of stocks in Azolla Farms as additional security Yuseco then executed
two other promissory note both for the amount of P300,000.00. Azolla project collapsed.
Petitioners Yuseco and Azolla Farms filed with RTC a complaint for damages against
Savings Bank. Petitioners alleged that Savings Bank unjustifiably refused to promptly release the
remaining P300,000.00 which impaired the timetable of the project which affects its viability and
resulting in its collapse. Respondent Savings Bank contends that there was evidence that Yuseco
was using the loan proceeds for expenses totally unrelated to the project and they decided to
withhold the remaining amount until Yuseco gave the assurance that the diversion of the funds will
be stopped. They also claimed that 90-day interval could not impaired the operation of the project.
Petitioners filed a Motion to Admit Amended Complaint alleging that the testimony of
defense witness Jesus Ventura raised the issue of the invalidity of the promissory notes and the
real estate mortgage. Petitioners seek that the promissory notes and real estate mortgage be
declare NOVATED, invalid and unenforceable.

In order for novation to take place, the concurrence of the following requisites is indispensable:
1

Previous valid obligation

Agreement of the parties concerned to a new contract

Extinguishment of the old contract

Validity of the new contract

In the case at bar, there is no new obligation that supposedly novated the promissory notes or
the real estate mortgage, or a pre-existing obligation that was novated by the promissory notes and
the real estate mortgage. In fact, there is only one agreement between the parties in this case, i.e.,
petitioners P2,000,000.00 loan with respondent as evidenced by the 3 promissory notes.
As the Court of Appeals held:
There was only one single loan agreement in the amount of P2 million between the
parties as evidenced by the promissory notes and real estate mortgage how can it be possibly
claimed by plaintiff that these notes and mortgage were novated when no previous notes or
mortgage or loan agreement had been executed?
Only upon banks approval of the loan application in the amount and under such terms it
deems viable and acceptable, that a binding and effective loan agreement comes into existence.
Without any such first or original loan agreement as approved in the amount and under specified
terms by the bank, there can be nothing whatsoever that can be subsequently novated.
This case is an attempt by petitioners to extricate themselves from their obligations; but
they cannot be allowed to have their cake and eat it, too.

Integrated Construction Services Inc. vs, Relova

146 SCRA 360 [1986]
Facts: Petitioners on July 17, 1970 sued the respondent Metropolitan Waterworks and Sewerage
System (MWSS) in the Court of First Instance of Manila for breach of contract.
The decision-award ordered MWSS to pay petitioners P15,518,383.61-less P2,329,433.41, to be
set aside as a trust fund to pay creditors of the joint venture in connection with the projector a net
award of P13,188,950.20 with interest thereon from the filing of the complaint until fully paid.

Issue: WON there was NOVATION

Subsequently, however, petitioners agreed to give MWSS some discounts in consideration

of an early payment of the award. Thus, on September 21, 1972, MWSS sent a letter-agreement to
petitioners granting MWSS some discounts from the amount payable under the decision award
provided that MWSS would pay the judgment, less the said discounts, within fifteen days therefrom
or up to October 17, 1972.

Held: No. Novation is the extinguishment of an obligation by the substitution or change of

the obligation by subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or, by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor.

Upon MWSS' request, the petitioners signed their "Conforme" to the said letteragreement, and extended the period to pay the judgment less the discounts aforesaid to October
31, 1972. MWSS, however, paid only on December 22, 1972, the amount stated in the decision but
less the reductions provided for in the October 2, 1972 letter-agreement.

Trial Court rendered its decision annulling the promissory notes and real estate mortgage,
and awarding damages to petitioners. Court of Appeals reversed and set aside the trial courts
decision

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OBLIGATIONS AND CONTRACTS

Three years thereafter, or on June, 1975, after the last balance of the trust fund had been released
and used to satisfy creditors' claims, the petitioners filed a motion for execution in said civil case
against MWSS for the balance due under the decision-award. Respondent MWSS opposed
execution setting forth the defenses of payment and estoppel.
On July 10, 1975, respondent judge denied the motion for execution on the ground that
the parties had novated the award by their subsequent letter-agreement. Petitioners moved for
reconsideration but respondent judge, likewise, denied the same in his Order dated July 24, 1975.
Hence, this Petition for Mandamus, alleging that respondent judge unlawfully refused to
comply with his mandatory duty-to order the execution of the unsatisfied portion of the final and
executory award.
At the hearing on petitioners' Second Motion for Reconsideration, however, respondent
MWSS asserted new matters, (p. 186, Rollo) arguing that: the delay in effecting payment was
caused by an unforeseen circumstance the declaration of martial law, thus, placing MWSS under
the management of the Secretary of National Defense, which impelled MWSS to refer the matter of
payment to the Auditor General and/or the Secretary of National Defense; and that the 15-day
period was merely intended to pressure MWSS officials to process the voucher. Petitioners,
however, vehemently deny these matters which are not supported by the records.

Issue: Whether or not petitioners are entitled to full payment as stated in decision-award and do
away with the letter agreement granting MWSS early payment discount.

Ruling: We agree with the petitioners.

While the tenor of the subsequent letter-agreement in a sense novates the judgment
award there being a shortening of the period within which to, the suspensive and conditional nature
of the said agreement (making the novation conditional) is expressly acknowledged and stipulated
in the letter agreement.
MWSS' failure to pay within the stipulated period removed the very cause and reason for
the agreement, rendering some ineffective. Petitioners, therefore, were remitted to their original
rights under the judgment award.
The placing of MWSS under the control and management of the Secretary of National
Defense thru Letter of Instruction No. 2, dated September 22, 1972 was not an unforeseen

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supervening factor because when MWSS forwarded the letter-agreement to the petitioners on
October 2, 1972, the MWSS was already aware of LOI No. 2.
MWSS' contention that the stipulated period was intended to pressure MWSS officials to
process the voucher is untenable. As aforestated, it is apparent from the terms of the agreement
that the 15-day period was intended to be a suspensive condition. MWSS, admittedly, was aware of
this, as shown by the internal memorandum of a responsible MWSS official, stating that necessary
steps should be taken to effect payment within 15 days, for otherwise, MWSS would forego the
advantages of the discount. "
WHEREFORE, We hereby set aside the assailed orders, and issue the writ of mandamus directing
the present Regional Trial Judge of the Branch that handled this case originally to grant the writ of
execution for the balance due under the award.
SO ORDERED.
LORENZO SHIPPING CORPORATION V. CHUBB AND SONS
FACTS: Petitioner Lorenzo Shipping Corporation is a domestic corporation engaged in coast wise
shipping of steel pipes. This case is on appeal in CA which favored the respondent Chubb and
Sons Corporation, a foreign corporation not licensed to do business in the Philippines. they
complaint about the rust information, thinning, and several holes at different places of pipes on
board after shipment made by Lorenzo Shipping to Davao City. The court found the petitioner guilty
to pay all the damages and attorneys fees.
ISSUE: Whether or not Chubb and Sons can validly claim the damages?
HELD: No, foreign corporations transacting business in the Philippines without license or its
successor or assigns shall be permitted to maintain or intervene any action, suit or proceedings in
any court or administrative agency of the Philippines; but such corporation maybe sued or proceed
against before the Philippine courts or administrative tribunals or any valid cause recognized under
Philippine laws. The decision of the lower court was affirmed. Cost against petitioners.