GOLANGCO V.

PCIB
Facts: In 1989, William Golangco Construction Corporation (WGCC)
and the Philippine Commercial International Bank (PCIB) entered into
a contract for the construction of the extension of PCIB Tower II. The
project included, among others, the application of a granitite washout finish on the exterior walls of the building.
In a letter, PCIB, with the concurrence of its consultant TCGI
Engineers (TCGI), accepted the turnover of the completed work by
WGCC. To answer for any defect arising within a period of one year,
WGCC submitted a guarantee bond dated July 1, 1992 in compliance
with the construction contract (Defects liability period).

The controversy pivots on a provision in the construction contract

referred to as the defects liability period. Article XI of the
construction contract provides:
xxx
the CONTRACTOR hereby guarantees the work stipulated in this
Contract, and shall make good any defect in materials and
workmanship which becomes evident within one (1) year after the
final acceptance of the work.
Article 1306 of the Civil Code enunciates the autonomous nature of
contracts.

The controversy between the parties arose when portions of the

granitite wash-out finish of the exterior of the building began peeling
off and falling from the walls in 1993. WGCC made minor repairs after
PCIB requested it to rectify the construction defects.

Article 1306. The contracting parties may establish such

stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.

In 1994, PCIB entered into another contract with Brains and Brawn
Construction and Development Corporation to re-do the entire
granitite wash-out finish after WGCC manifested that it was "not in a
position to do the new finishing work," though it was willing to share
part of the cost. PCIB incurred expenses amounting to P11, 665,000
for the repair work.

Obligations arising from contracts have the force of law between

the parties and should be complied with in good faith. In
characterizing the contract as having the force of law between the
parties, the law stresses the obligatory nature of a binding and
valid agreement.

PCIB filed a request for arbitration with the Construction Industry

Arbitration Commission (CIAC) for the reimbursement of its expenses
for the repairs made by another contractor. It complained of WGCCs
alleged non-compliance with their contractual terms on materials and
workmanship.
The CIAC declared WGCC liable for the construction defects in the
project.
On appeal, the CA affirmed the CIAC decision.
Hence, this present petition.
Issue: Whether or not petitioner WGCC is liable for defects in the
granitite wash-out finish that occurred after the lapse of the one-year
defects liability period provided in Art. XI of the construction contract.

In the present case, the provision in the construction contract

providing for a defects liability period was not shown as contrary to
law, morals, good customs, pubic order or public policy. By the
nature of the obligation in such contract, the provision limiting
liability for defects and fixing specific guaranty periods was not
only fair and equitable; it was also necessary. Without such
limitation, the contractor would be expected to make a perpetual
guarantee on all materials and workmanship.
The contract further did not specify a different period for defects in
the granitite wash-out finish; hence, any defect therein should have
been brought to WGCCs attention within the one-year defects
liability period in the contract.
We cannot countenance an interpretation that undermines a
contractual stipulation freely and validly agreed upon. The courts
will not relieve a party from the effects of an unwise or unfavorable
contract freely entered into.

Held: No.

Further, it must be noted that this kind of stipulation is of particular

importance to the contractor, for as a general rule, after the lapse of
the period agreed upon therein, he may no longer be held
accountable for whatever defects, deficiencies or imperfections that
may be discovered in the work executed by him.
PNB V. CA
Facts:

April 7, 1982- private respondents, as owners of a NACIDAregistered enterprise, obtained a loan under the Cottage Industry
Guaranty Loan Fund (CIGLF) from petitioner, PNB, in the amount of
P50,000 as evidenced by a Credit Agreement. The loan was to be
amortized over a period of 3 years to end on March 20, 1985 at 12%
interest annually. The said loan was secured by a Real Estate
Mortgage over an agricultural land and Chattel Mortgage over a
thermo plastic-forming machine.

The credit agreement provided that:

o
The BANK reserves the right to increase the interest rate
within the limits allowed by law at any time depending on whatever
policy it may adopt in the future; Provided, that the interest rate on
this accommodation shall be correspondingly decreased in the event
that the applicable maximum interest is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase
or decrease in the maximum interest rate.

The promissory note, in turn, authorized PNB to raise the

interest, at any time without notice, beyond the stipulated rate of
12% but only within the limits allowed by law.

February 17, 183- private respondents were granted an

additional NACIDA loan of P50,000. PNB executed another promissory
note which is to mature on April 1, 1985. It contained the same terms
specified in the previous note. The parties also executed a new Credit
Agreement, changing the amount from P50,000 to P100,000, with the
same stipulations as the previous one.

August 1, 1984- petitioner sent a letter to respondents

informing them that the interest rate of their CIGLF loan account was
raised to 25% per annum plus a penalty of 6% per annum on past
dues. PNB further increased the interest rate to 30% and 42 % a few
months later.

Thereafter, private respondents exerted efforts to get PNB to

re-adopt the 12% interest and to condone the present interest and
penalties due, but to no avail.

December 15, 1987- private respondents filed a suit for

specific performance against petitioner PNB and NACIDA praying to
release the mortgage; pay damages and other relief which the
court may find just and equitable.

The trial court dismissed the case. CA reversed the decision

in favor of private respondents and disallowed the increases in
interest rates.
Petitioners Contention: The increase in interest rates is authorized
by the escalation clause specified in the Credit Agreement.
Issue: Whether or not the increase in interest rates made by
petitioner is valid.
Held: No. The increase in interest rates made by petitioner is
invalid.
It is basic that there can be no contract in the true sense in the
absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of the one who
contracts, his act has no more efficacy than if it had been done
under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to
the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it
can make or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any binding effect.
The Court disagrees with petitioners argument that the escalation
clause gives it the unbridled right to unilaterally upwardly adjust
the interest on private respondents' loan. That would completely
take away from private respondents the right to assent to an
important modification in their agreement, and would negate the
element of mutuality in contracts. In Philippine National Bank v.
Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) the Court
held
. . . The unilateral action of the PNB in increasing the interest rate
on the private respondent's loan violated the mutuality of contracts
ordained in Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force or
law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void . . . . Hence,
even assuming that the . . . loan agreement between the PNB and
the private respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the term of the
loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the
weaker party's (the debtor) participation being reduced to the
alternative "to take it or leave it" . . . . Such a contract is a veritable
trap for the weaker party whom the courts of justice must protect
against abuse and imposition. (Citation omitted.)
Private respondents are not also estopped from assailing the
unilateral increases in interest rate made by petitioner bank. No one
receiving a proposal to change a contract to which he is a party, is
obliged to answer the proposal, and his silence per se cannot be
construed as an acceptance. In the case at bench, the circumstances
do not show that private respondents implicitly agreed to the
proposed increases in interest rate which by any standard were too
sudden and too stiff.
ALLIED BANKING V. CA
FACTS:
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a
512-square meter lot located at No. 2 Sarmiento Street corner
Quirino Highway, Novaliches, Quezon City, covered by TCT No.
136779 in their name. On 30 June 1978 they leased the property to
petitioner Allied Banking Corporation (ALLIED) for a monthly rental of
P1,000.00 for the first three (3) years, adjustable by 25% every three
(3) years thereafter. 1 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."
Pursuant to their lease agreement, ALLIED introduced an
improvement on the property consisting of a concrete building with a

floor area of 340-square meters which it used as a branch office. As

stipulated, the ownership of the building would be transferred to
the lessors upon the expiration of the original term of the lease.
Sometime in February 1988 the Tanqueco spouses executed a deed
of donation over the subject property in favor of their four (4)
children, namely, private respondents herein Oscar D. Tanqueco,
Lucia Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco,
who accepted the donation in the same public instrument.
On 13 February 1991, a year before the expiration of the contract
of lease, the Tanquecos notified petitioner ALLIED that they were no
longer interested in renewing the lease. 2 ALLIED replied that it was
exercising its option to renew their lease under the same terms
with additional proposals. 3 Respondent Ruben D. Tanqueco, acting
in behalf of all the donee-lessors, made a counterproposal. 4 ALLIED however rejected the counter-proposal and
insisted on Provision No. 1 of their lease contract.
When the lease contract expired in 1992 private respondents
demanded that ALLIED vacate the premises. But the latter asserted
its sole option to renew the lease and enclosed in its reply letter a
cashier's check in the amount of P68,400.00 representing the
advance rental payments for six (6) months taking into account the
escalation clause. Private respondents however returned the check
to ALLIED, prompting the latter to consign the amount in court.
An action for ejectment was commenced before the Metropolitan
Trial Court of Quezon City. After trial, the MeTC-Br. 33 declared
Provision No. 1 of the lease contract void for being violative of Art.
1308 of the Civil Code
On appeal to the Regional Trial Court, and later to the Court of
Appeals, the assailed decision was affirmed. 5
On 20 February 1993, while the case was pending in the Court of
Appeals ALLIED vacated the leased premises by reason of the
controversy. 6
ALLIED insists before us that Provision No. 1 of the lease contract
was mutually agreed upon hence valid and binding on both parties,
and the exercise by petitioner of its option to renew the contract
was part of their agreement and in pursuance thereof.
ISSUE:
Whether a stipulation in a contract of lease to the effect that the
contract "may be renewed for a like term 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?
Rule:
No. Decision of the Court of Appeals is REVERSED and SET ASIDE.

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." This binding effect of a
contract on both parties is based on the principle that the obligations
arising from the contracts have the force of law between the
contracting parties, and there must be mutuality between them
based essentially on their equality under which it is repugnant to
have one party bound by the contract while leaving the other free
therefrom. 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.
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.
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. And while the lessee has a right to elect whether to
continue with the lease or not, once he exercises his option to
continue and the lessor accepts, both parties are thereafter bound by
the new lease agreement. Their rights and obligations become
mutually fixed, and the lessee is entitled to retain possession of the
property for the duration of the new lease, and the lessor may hold
him liable for the rent therefor. The lessee cannot thereafter escape
liability even if he should subsequently decide to abandon the
premises. Mutuality obtains in such a contract and equality exists
between the lessor and the lessee since they remain with the same
faculties in respect to fulfillment.
Fortunately for respondent lessors, 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, computed from the expiration of the
original term of the contract on 31 March 1992 to the time it actually
left the premises on 20 February 1993, deducting therefrom the
amount of P68,400.00 consigned in court by ALLIED and any other

amount which it may have deposited or advanced in connection

with the lease. Since the old lease contract was deemed renewed
under the same terms and conditions upon the exercise by ALLIED
of its option, the basis of the computation of rentals should be the
rental rate provided for in the existing contract.
Considering that petitioner ALLIED BANKING CORPORATION already
vacated the leased premises as of 20 February 1993, the renewed
lease contract is deemed terminated as of that date. However,
petitioner is required to pay rentals to respondent lessors at the
rate provided in their existing contract, subject to computation in
view of the consignment in court of P68,400.00 by petitioner, and
of such other amounts it may have deposited or advanced in
connection with the lease.
What is the meaning of the clause maybe renewed for a like term
at the option of 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. The subject contract simply provides that "the term of
this lease shall be fourteen (14) years and may be renewed for a
like term at the option of the lessee." As we see it, the only term on
which there has been a clear agreement is the period of the new
contract, i.e., fourteen (14) years, which is evident from the clause
"may be renewed for a like term at the option of the lessee," the
phrase "for a like term"referring to the period. It is silent as to what
the specific terms and conditions of the renewed lease shall be.
Shall it be the same terms and conditions as in the original
contract, or shall it be under the terms and conditions as may be
mutually agreed upon by the parties after the expiration of the
existing lease?
BALUYOT V. CA
FACTS:
Petitioners in this case are residents and members of Cruz-naLigas Homesite Association, Inc. at Diliman, Quezon City.
Petitioners were contending that they have been in open,
peaceful, adverse and continuous possession in the concept of an
owner, for the rest of the land in Barrio Cruz-na-Ligas, consisting at
least 42 hectares.
Since Oct. 1972, the said land is actually subject of quasijudicial proceedings and administrative investigations by different

branches of government. In fact the Bureau of land and the President

of the RP issued endorsements confirming the rights of the bona fide
residents of barrio Cruz-na-Ligas to the parcel of land.
In 1979, UP Board of Regents approved the donation of 9.2
hectares of the site that was endorsed by the President of RP. But
after several negotiations with the residents, the area was increased
to 15.8 hectares.
Due to the unreasonable demand of the residents for an area
bigger than 15.8 hectares, the execution of the legal instrument to
formalize the donation failed.
Later on, the association proposed to accept the offer of the UP to
donate 15.8 hectares. UP manifested in writing its consent to the
intended donation in favor with the association provided that they
will agree and comply with the terms and conditions of the donation.
Defendant UP backed-out from the arrangement to donate
directly to the Association the said land, instead, the former decided
to negotiate the donation thru the Quezon City Govt under the terms
and conditions not favorable to the residents of the said barrio.
The Association added to its cause of action in its petition the
specific performance aside from the exclusion from the technical
description of Certificate of Title of Defendant UP the 42 hectares
covering Barrio Cruz-na-Ligas.
The said association also filed a petition for writ of preliminary
injunction to restraint defendant UP from donating the area to the
Quezon City Government.
After the TCs decision, UP assured the residents through motion
of reconsideration that the donation of the 15.8 hectares to the
Quezon City Govt will be for the benefit of the residents of the said
barrio.
As the Quezon City Governments willing to comply with the
terms and conditions of the donation made by UP, President Jose
Abueva (UP), failed to deliver the certificate of title of the said land
which enabled the QC government to register the deed of donation.
It reached the expiration period of 18 months, for the noncompliance of the QC govt under par.16 of the terms and conditions
of the said donation.
President Abueva issued Administrative order No. 21 declaring
the deed of donation revoked.
RTC ordered that petitioners are not parties to the said deed of
donation.
CA set aside the TCs order and dismissed the case.

ISSUE: WON the petitioners has the cause of action and right to
seek the enforcement of the deed of donation though they were not
parties of such deed?
HELD: SC said Yes.
SC said that even if petitioners were not parties to the deed of
donation, they have the right to seek its enforcement upon their
allegation that they are intended beneficiaries of the donation to
the Quezon City Government.
Art. 1311 provides, 2nd par. of the CC provides that: If a contract
should contain some 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 contracting parties must
have clearly and deliberately conferred a favor upon a third person.
Following requisites must be present in order to have a
stipulation POUR AUTRUI:
There must be a stipulation in favor of a 3rd person.
The stipulation must be a part, not the whole of the contract.
The contracting parties must have clearly and deliberately
conferred a favor upon a 3rd person, not a mere incidental benefit or
interest.
The 3rd person must have communicated his acceptance to the
obligor before its revocation.
Neither of the contracting parties bears the legal representation
of the 3rd party.
There was stipulation in the said deed of donation that QC govt
as the donee, is required to transfer to qualified residents, said lots
by way of donation.
The stipulation is part of the conditions imposed by UP.
Par. 15 and 16 that the intent of the parties to the deed of
donation was to favor petitioner by transferring the latter the lots
occupied by them.
Through conferences, petitioners accepted the said donation
and private respondents were aware of such acceptance.
Neither of private respondents acted in representation of the
other. Each of the private respondents had its own obligations, in
view of conferring a favor upon petitioners.
The trial courts decision about the donation has been revoked
and petitioner had no clear and legal right to be protected was still
tentative.
The SC ordered the decision of the CA be reversed and the case
was remanded to the RTC.

INTEGRATED PACKAGING V. CA
Nature of the case: This is a petition to review the decision of the
Court of Appeals rendered on April 20, 1994 reversing the judgment
of the Regional Trial Court of Caloocan City in an action for recovery
of sum of money filed by private respondent against petitioner.
FACTS:
Petitioner and private respondent executed on May 5, 1978, an
order agreement whereby private respondent bound itself to deliver
to petitioner reams of printing paper, coated, 2 sides basis, short
grain in the following schedules: May and June 1978, August and
September 1978, January 1979, March 1979, July 1979 and March
1979.
In accordance with the standard operating practice of the parties,
the materials were to be paid within a minimum of thirty days and
maximum of ninety days from delivery.
Later, on June 7, 1978, petitioner entered into a contract with
Philippine Appliance Corporation (Philacor) to print three volumes of
"Philacor Cultural Books"
Petitioner alleged it wrote private respondent to immediately
deliver the balance because further delay would greatly prejudice
petitioner.
From June 5, 1980 and until July 23, 1981, private respondent
delivered again to petitioner various quantities of printing paper
amounting to P766,101.70.
However, petitioner encountered difficulties paying private
respondent said amount.
Accordingly, private respondent made a formal demand upon
petitioner to settle the outstanding account.
Meanwhile, petitioner entered into an additional printing contract
with Philacor. Unfortunately, petitioner failed to fully comply with its
contract with Philacor for the printing of books VIII, IX, X and XI.
Philacor demanded compensation from petitioner for the delay
and damage it suffered on account of petitioners failure.
On July 5, 1990, the trial court rendered judgment declaring that
petitioner should pay private respondent the sum of P763,101.70
representing the value of printing paper delivered by private
respondent from June 5, 1980 to July 23, 1981.
On appeal, the respondent Court of Appeals reversed and set
aside the judgment of the trial court.

Petitioner filed this instant petition contending that the

appellate courts judgment is based on erroneous conclusions of
facts and law.
ISSUE: WON private respondent is liable for petitioners breach of
contract with Philacor
HELD:
Petitioners contention lacks factual and legal basis, hence,
bereft of merit.
The transaction between the parties is a contract of sale
whereby private respondent (seller) obligates itself to deliver
printing paper to petitioner (buyer) which, in turn, binds itself to
pay therefore a sum of money or its equivalent (price).
Clearly, petitioner did not fulfill its side of the contract as its last
payment in August 1981 could cover only materials covered by
delivery invoices dated September and October 1980.
There is no dispute that the agreement provides for the delivery
of printing paper on different dates and a separate price has been
agreed upon for each delivery.
As correctly held by the appellate court, private respondent
cannot be held liable under the contracts entered into by petitioner
with Philacor.
Private respondent is not a party to said agreements.
It is also not a contract pour autrui.
Aforesaid contracts could not affect third persons like private
respondent because of the basic civil law principle of relativity of
contracts which provides that contracts can only bind the parties
who entered into it, and it cannot favor or prejudice a third person,
even if he is aware of such contract and has acted with knowledge
thereof.
Indeed, the order agreement entered into by petitioner and
private respondent has not been shown as having a direct bearing
on the contracts of petitioner with Philacor.
As pointed out by private respondent and not refuted by
petitioner, the paper specified in the order agreement between
petitioner and private respondent are markedly different from the
paper involved in the contracts of petitioner with Philacor.
Instant petition is DENIED.
A&C MINIMART V. VILLAREAL

FACTS: Petitioner leased the six stalls of the one-storey commercial

building from spouses Bonifacio under a lease agreement.
However, the ownership of the subject property is under dispute
between respondents Villareal and spouses Bonifacio. Spouses
Bonifacio claimed to have purchased the property from spouses
Sevilla, original owners of the disputed property.
On the other hand Respondents Villareal claimed ownership of
the same alleging that in a separate case, the said property is sold to
them at a public auction and they were adjudged as the sole and
highest bidder. The said property was sold to satisfy the damages
awarded to respondents Villareal against spouses Sevilla, original
owners of the disputed property, arising from the murder of Jose
Villareal.
Upon learning that the spouses Bonifacios claim of ownership
over the subject property had been seriously denied by the Makati
RTC, petitioner stopped paying its rentals on the subject property on
March 2, 1999, in violation of the renewed Lease Contract.
The appellate court ordered petitioner A & C Minimart to pay
respondents Villareal, a monthly interest of 3% on the total amount
of rental and other charges not paid on time, in addition to the
unpaid rental and other charges which the trial court ordered
petitioner to pay.

Contract in question. Respondents claim ownership over the

subject property, but not as a successor-in-interest of the
spouses Bonifacios. They purchased the property in an execution
sale from the spouses Sevilla. Thus, respondents cannot
succeed to any contractual rights which may accrue to the
spouses Bonifacio.
Although the respondents were adjudged to be entitled to
rentals accruing from March 2, 1999, until the time the petitioner
vacated the premises, the obligation to pay rent was not
derived from the Lease Contract, but from a quasi-contract.
In the present case, the spouses Bonifacio, who were named as the
lessors in the Lease Contracts, are already adjudged not to be the
real owners of the subject property. In Civil Case, the Makati RTC
declared that the Deed of Sale, between the spouses Bonifacio and
the spouses Sevilla was a forgery and, hence, did not validly
transfer ownership to the spouses Bonifacio.
Since the spouses Bonifacio are not the owners of the
subject property, they cannot unjustly benefit from it by collecting
rent which should accrue to the rightful owners of the same. Hence,
the Makati RTC had set up a bank account where the rent due on
the subject property should be deposited and kept in trust for the
real owners thereto.

ISSUE: Whether or not petitioner Minimart is obligated to pay the

penalty interest of 3% per month to respondents Villareal pursuant to
the Contract of Lease.

LLENADO V. LLENADO

HELD: No. Petitioner Minimart is not obligated to pay the penalty

interest because the Lease Contract, including the stipulation for the
3% penalty interest, was bilateral between petitioner and
Teresita Bonifacio. So respondents cannot succeed to any
contractual rights which may accrue to the spouses Bonifacio.
Contracts produce an effect only between the parties who execute
them. A contract cannot be binding upon and cannot be enforced by
one who is not party to it.
Article 1311 of the Civil Code: Contracts take effect only
between the parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law.
The heir is not liable beyond the value of the property he received
from the decedent.
Here, the Lease Contract was executed between the spouses
Bonifacio and petitioner. None of the respondents had taken part in
the contract in question nor entered into a contract with either the
lessee or the lessor, as to an assignment of any right under the Lease

Facts:
The subject of this controversy is a parcel of land consisting of
1,554 sq. m. located in Barrio Malinta, Valenzula, Matro Manila and
registered under the names of Eduardo and Jorge LLenado. The
subject lot once formed part, owned by, and registered under the
name of their father Cornelio Llenado.
On Dec. 2, 1975, Cornelio leased the subject lot to his nephew
Romeo Llenado for a period of 5 yrs, renewable for another 5 yrs at
the option of Cornelio.
On march 31, 1978, Cornelio, Romeo, and the latters father
Orlando executed an agreement whereby Romeo assigned all his
rights to his father Orlando over the unexpired portion of the
aforesaid leased contract, and further agreed that Orlando shall
have the option to renew the contract for 3 yrs commencing from
Dec. 3, 1980- 1983, renewable for another 4 yrs up to 1987. That
during that period the property cannot be sold, transferred,
alienated or conveyed in whatever manner to any 3rd party.


Shortly thereafter, Cornelio and Orlando entered into a
supplementary agreement. Orlando was given an additional option to
renew the contract for an aggregate period of 10 yrs at 5 yr intervals.
The provision was inserted in order to comply with the requirements
of Mobil Philippines Inc. for the operation of the gasoline station
subsequently built on the subject lot.
Upon the death of Orlando, his wife, Wenifreda, took over the
operation of the gasoline station. Meanwhile, Cornelio sold a lot to his
children through a deed of absolute sale denominated as Kasulatan
sa Ganap na Bilihan for 160,000. As earlier stated, the subject lot
was owned by Eduardo and Jorge. Several months thereafter,
Cornelio passed away.
Sometime in 1993, Eduardo informed Wenifreda of his desire to
take over the subject lot however the latter refused to vacate the
premises prompting Eduardo to file a complaint of unlawful detainer.
MTC rendered decision in favor of Eduardo however the RTC reversed
MTCs decision. On appeal, CA reinstated MTCs decision hence this
petition.
Issue: WON the sale of the subject lot by Cornelio is invalid for
violation the prohibitory clause.
Held: No.
Petitioner claims that when Cornelio sold the subject lot to
respondents Eduardo and Jorge, the Lease was in full force and effect
thus, the sale violated the prohibitory clause rendering it invalid.
The petition lacks merit.
Under Art. 1311 of CC, the heirs are bound by the contract
entered into by their predecessors-in-interest except when the rights
and obligations are not transmissible by their nature, by their
stipulation, or by provisions of law.
In the instant case, the lease subsisited at the time of the sale of
the subject lot but when Orlando died on Nov 7, 1983, the lease was
set to expire 26 days later or on Dec. 3, 1983, unless renewed by the
heirs of Orlando. While the option to renew is an enforceable right, it
must necessarily be first exercised to be given effect.
There is no dispute that the lessees were granted the option to
renew the lease for another 4yrs yet there was never any positive act
on the part of the petitioner before or after the termination of the
original period to show their exercise of such option. The silence of
the lessees cannot be taken to mean that they opted to renew the
contract. Neither can the exercise of the option to renew can be
inferred from their persistence to remain in the premises despite
respondents demand from them to vacate.

As a result, there was no obstacle to the sale of the subject lot by

Cornelio to respondents Eduardo and Jorge as the prohibitory
clause under the lease contract was no longer in force.

SOLER V. CA
FACTS:

1986, Soler, a professional interior designer, met with Nida

Lopez, manager of COMBANK Ermita, for plans to renovate
branch office

Soler agreed to render services, at a professional fee of

P10,000, assured by Lopez to be paid by the bank.

Soler asked for the blueprint of the building then paid a

draftsman, engineer, architects and suppliers for the layout,
quotation and measurements based on the design the bank
wanted.

Soler submitted the drawings and designs to Lopez on time.

Subsequently, Soler demanded payment but Lopez ignored.

Contentions by the parties:

a.
Lopez replied that she was not entitled to pay because the
designs did not conform to the banks standard.
b. COMBANK replied that there was no contract between Soler
and COMBANK since Lopez merely invited Soler to join a bid to
renovate, subject to the approval of the head office.
c. Soler contended that there was an offer and acceptance of
professional services.

Soler filed for collection of professional fees and

damages.

RTC ruled in favor of Soler but the CA ruled in favor of

Lopez, saying COMBANK did not give its consent under Art 1318.
ISSUE:

WON there was a perfected contract between Soler

and COMBANK & Lopez?
HELD:

YES. SC REVERSED CA decision and REINSTATED RTC.

There was a PERFECTED contract between Soler and

COMBANK.

a. Art 1305 states that a contract is a meeting of minds between

two persons whereby one binds himself, with respect to the other, to
give something or to render some service.
b. Art 1315 states that contracts are perfected by mere consent,
and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the
consequences, which according to their nature, may be in keeping
with good faith, usage and law.
c.
Art 1318 states that there is no contract unless the requisites
of consent, object and cause are all present.

The STAGES of contract were complete

The
contract
was
commenced,
perfected
and
consummated when Soler and Lopez met to discuss the details of
the work, agreed to the professional fee of P10,000 for the designs
before the December 1986 board meetings and submitted the
designs.
There was a perfected oral or consensual contract which
is the second stage of a contract, which happens the moment the
parties agree on the terms of the contract.
Soler believed that she would be paid P10,000 upon
submission of the designs in due time.

Lopez had AUTHORITY to engage the services of Soler.

a.
During their meeting in 1986, Lopez even gave Soler
specifications and blueprints of what were to be renovated in the
branch.
b.
Lopez also insisted that the designs be rushed to present to
the bank.
c.
COMBANK permitted Lopez to act within the scope of her
authority and is estopped from denying such authority when Soler,
in good faith, dealt with her as an officer of bank. (Art 1322)
d.
Lopez also refused to return the submitted designs, which
means that these were useful to her for the board meetings.

COLLECTION of professional fees and damages

Soler may be paid based on quantum meruit which recovers
the reasonable value of services rendered to prevent unjust
enrichment.
Aside from P10,000, Soler is entitled to actual, compensatory
and exemplary damages for her expenses in hiring other
professionals.

C.F. SHARP V. PIONEER INSURANCE

Facts:
On august 1990, Wilfredo and Hernando applied with CF
sharp for a job as sandblasters and painters in libya as
advertised in a newspaper.
After passing the interviews and submitting the
requirements, a Contract of Employment was executed
between them. After which, they were required to attends
seminars, open a bank account and were asked to return to
CF sharp to ascertain the date of their deployment.
After a month, wilfredo and hernando were yet to be
deployed, prompting them to request the release of the
documents which CF SHARP allegedly refused to do. This led
the private respondents to file a complaint before the POEA.
The poea issued an order finding the petitioner guilty for
violating the labor code when it withheld or denied travel
document to applicant workers before departure for
monetary and financial considerations other than those
authorized in the code. The POEA suspended the license of
CF sharp until the return of the documents.
On march 1995 filed a complaint for breach of contract
before the RTC. Pioneer insurance also filed a cross claim
againt CF sharp and its vice president, john rocha based on
an indemnity agreement that it would be jointly and
severally liable for all the damages, losses and costs that it
would suffer as surety.
RTC rendered a judgment favouring the respondents .The
trial court ruled that there was a violation of the contract
when C.F. Sharp failed to deploy and release the papers and
documents of respondents, hence, they are entitled to
damages. The trial court likewise upheld the cause of action
of respondents against Pioneer Insurance, the former being
the actual beneficiaries of the surety bond.
The CA held that there is no breach of contract because no
contract of employment was perfected. However, it found
petitioners liable for damages pursuant to art 21 of the civil
code. It also limited the liability of pioneer insurance to
150,000.
Issue: whether there was a perfected contract of employment?
Held: YES. SC sustained the RTCs ruling.

The contract of employment entered into by the plaintiffs and

the defendant C.F. Sharp is an actionable document, the same
contract having the essential requisites for its validity. It is
worthy to note that there are three stages of a contract: (1)
preparation, conception, or generation which is the period of
negotiation and bargaining ending at the moment of
agreement of the parties. (2) Perfection or birth of the
contract, which is the moment when the parties come to
agree on the terms of the contract. (3) Consummation or
death, which is the fulfillment or performance of the terms
agreed upon in the contract.
Under Article 1315 of the Civil Code, a contract is perfected by
mere consent and from that moment the parties are bound
not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according
to their nature, may be in keeping with good faith, usage and
law.10
An employment contract, like any other contract, is perfected
at the moment (1) the parties come to agree upon its terms;
and (2) concur in the essential elements thereof: (a) consent
of the contracting parties, (b) object certain which is the
subject matter of the contract and (c) cause of the obligation.
By the contract, C.F. Sharp, on behalf of its principal,
International Shipping Management, Inc., hired respondents
as Sandblaster/Painter for a 3-month contract, with a basic
monthly salary of US$450.00. Thus, the object of the contract
is the service to be rendered by respondents on board the
vessel while the cause of the contract is the monthly
compensation they expect to receive. These terms were
embodied in the Contract of Employment which was executed
by the parties. The agreement upon the terms of the contract
was manifested by the consent freely given by both parties
through their signatures in the contract. Neither parties
disavow the consent they both voluntarily gave. Thus, there is
a perfected contract of employment.

GARCIA V. THIO
FACTS
Sometime in February 1995, respondent Rica Marie S. Thio
received from petitioner Carolyn M. Garcia a crossed

check4 dated February 24, 1995 in the amount of

US$100,000 payable to the order of a certain Marilou
Santiago
Thereafter, petitioner received from respondent every
month (specifically, on March 24, April 26, June 26 and July
26, all in 1995) the amount of US$3,0006 and P76,5007 on
July 26,8 August 26, September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another
crossed check9 dated June 29, 1995 in the amount
ofP500,000, also payable to the order of Marilou Santiago.
Consequently, petitioner received from respondent the
amount of P20,000 every month on August 5, September 5,
October 5 and November 5, 1995
According to petitioner, respondent failed to pay the
principal amounts of the loans (US$100,000 and P500,000)
when they fell due.
Thus, on February 22, 1996, petitioner filed a complaint for
sum of money and damages in the RTC of Makati City,
against respondent, seeking to collect the sums of
US$100,000, with interest thereon at 3% a month from
October 26, 1995 and P500,000, with interest thereon at 4%
a month from November 5, 1995, plus attorneys fees and
actual damages.
For both loans, no promissory note was executed since
petitioner and respondent were close friends at the time.15
Respondent denied that she contracted the two loans with
petitioner and countered that it was Marilou Santiago to
whom petitioner lent the money.
She claimed she was merely asked by petitioner to give the
crossed checks to Santiago
She issued the checks for P76,000 and P20,000 not as
payment of interest but to accommodate petitioners
request that respondent use her own checks instead of
Santiagos.
February 28, 1997, the RTC ruled in favor of petitioner It
found that respondent borrowed from petitioner the
amounts of US$100,000 with monthly interest of 3%
and P500,000 at a monthly interest of 4%:20
On appeal, the CA reversed the decision of the RTC and
ruled that there was no contract of loan between the
parties:

10

A perusal of the record of the case shows that [petitioner]

failed to substantiate her claim that [respondent] indeed
borrowed money from her.
There is nothing in the record that shows that
[respondent] received money from [petitioner].
What is evident is the fact that [respondent] received a
MetroBank [crossed] check dated February 24, 1995 in the
sum of US$100,000.00, payable to the order of Marilou
Santiago and a CityTrust [crossed] check dated June 29, 1995
in the amount of P500,000.00, again payable to the order of
Marilou Santiago, both of which were issued by [petitioner]
The checks received by [respondent], being crossed,
may not be encashed but only deposited in the bank by
the payee thereof, that is, by Marilou Santiago herself.
Consequently, the receipt of the [crossed] check by
[respondent] is not the issuance and delivery to the payee in
contemplation of law since the latter is not the person who
could take the checks as a holder, i.e., as a payee or indorsee
thereof, with intent to transfer title thereto.
Neither could she be deemed as an agent of Marilou Santiago
with respect to the checks because she was merely facilitating
the transactions between the former and [petitioner].

ISSUE:Whether or not there were contracts of loan?

RULING:
A loan is a real contract, not consensual, and as such is
perfected only upon the delivery of the object of the contract
This is evident in Art. 1934 of the Civil Code which provides:

An accepted promise to deliver something by way of

commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the
object of the contract. (Emphasis supplied)

Upon delivery of the object of the contract of loan (in this case
the money received by the debtor when the checks were
encashed) the debtor acquires ownership of such money or
loan proceeds and is bound to pay the creditor an equal
amount.26
It is undisputed that the checks were delivered to respondent.
However, these checks were crossed and payable not to the

order of respondent but to the order of a certain Marilou

Santiago
Thus the main question to be answered is: who borrowed
money from petitioner respondent or Santiago?
Petitioner insists that it was upon respondents instruction
that both checks were made payable to Santiago
She maintains that it was also upon respondents instruction
that both checks were delivered to her (respondent) so that
she could, in turn, deliver the same to Santiago
Furthermore, she argues that once respondent received the
checks, the latter had possession and control of them such
that she had the choice to either forward them to Santiago
(who was already her debtor), to retain them or to return
them to petitioner
Delivery is the act by which the res or substance thereof is
placed within the actual or constructive possession or
control of another
Although respondent did not physically receive the proceeds
of the checks, these instruments were placed in her control
and possession under an arrangement.
Hence according to SC in agreeing with the contentions of
the petitioner that there is perfected contract of loan upon
the receipt of the respondent of the 2 crossed checks issued
and delivered by the petitioner.

PANGAN V. PERRERAS (Essential Requisites)

FACTS:
Spouses Pangan were the owners of the lot and two-door
apartment (subject properties)
On 1989, Consuelo agreed to sell to the respondents the subject
properties for the price of P540, 000.00. On the same day,
Consuelo received P20,000.00 from the respondents as earnest
money, evidenced by a receipt that also included the terms of the
parties agreement.
Three days later, or on June 5, 1989, the parties agreed to
increase the purchase price from P540, 000.00 to P580, 000.00.

In compliance with the agreement, the respondents issued two

Far East Bank and Trust Company checks payable to Consuelo in the
amounts of P200, 000.00 and P250, 000.00.
On June 15, 1989. Consuelo, however, refused to accept
the checks. She justified her refusal by saying that her children

11

(the petitioners-heirs) co-owners of the subject properties did not

want to sell the subject properties. For the same reason,
Consuelo offered to return the P20,000.00 earnest money she
received from the respondents, but the latter rejected it. Thus,
Consuelo filed a complaint for consignation against the respondents.
FOR THE RESPONDENTS: They insisted on enforcing the
agreement. They sought to compel Consuelo and the petitioners-heirs
(who were subsequently impleaded as co-defendants) to execute a
Deed of Absolute Sale over the subject properties.
FOR CONSUELO: She was justified in backing out from the
agreement on the ground that the sale was subject to the consent
of the petitioners-heirs who became co-owners of the property upon
the death of her husband, Cayetano. Since the petitioners-heirs
disapproved of the sale, Consuelo claimed that the contract became
ineffective for lack of the requisite consent.
ISSUE:
Whether or not there was s perfected contract between the
parties.
HELD:
YES. There was a perfected contract between the parties. That a
thing is sold without the consent of all the co-owners does not
invalidate the sale or render it void.
Article 1318 of the Civil Code declares that no contract exists
unless the following requisites concur:
consent of the contracting parties; (Which is the requisite
involved in this case)
object certain which is the subject matter of the contract; and
cause of the obligation established.
Article 493 of the Civil Code recognizes the absolute right of a coowner to freely dispose of his pro indiviso share as well as the fruits
and other benefits arising from that share, independently of the other
co-owners. Also, The explicit terms of the June 8, 1989
receipt provide no occasion for any reading that the agreement is
subject to the petitioners-heirs favorable consent to the sale.
Thus, when Consuelo agreed to sell to the respondents the
subject properties, what she in fact sold was her undivided interest
that, as quantified by the RTC, consisted of one-half interest,
representing her conjugal share, and one-sixth interest, representing
her hereditary share.
The presence of Consuelos consent and, corollarily, the existence
of a perfected contract between the parties are further evidenced by
the payment and receipt of P20,000.00, an earnest money by the

contracting parties common usage. The law on sales, specifically

Article 1482 of the Civil Code, provides that whenever earnest
money is given in a contract of sale, it shall be considered
as part of the price and proof of the perfection of the
contract. Although the presumption is not conclusive, as the
parties may treat the earnest money differently, there is nothing
alleged in the present case that would give rise to a contrary
presumption.
In sum, the case contains no element, factual or legal, that
negates the existence of a perfected contract between the parties.
JARDINE DAVIS V. CA
Facts:
In 1992, when the country was at the height of the power crisis,
petitioner Purefoods Corporation decided to install two (2) 1500 KW
generators in its food processing plant in San Roque, Marikina City
to remedy and curtail further losses due to the series of power
failures.
A bidding for the supply and installation of the generators was held
wherein only three (3) bidders submitted bid proposals and gave
bid bonds equivalent to 5% of their respective bids, as required.
They are respondent FAR EAST MILLS SUPPLY CORPORATION
(FEMSCO), MONARK and ADVANCE POWER. Purefoods, in a letter
addressed to FEMSCO, confirmed the award of the contract to it.
Immediately, FEMSCO submitted the required performance bond
and contractors all-risk insurance policy which PUREFOODS
through its Vice President acknowledged in a letter. FEMSCO also
made arrangements with its principal and started the PUREFOODS
project by purchasing the necessary materials. PUREFOODS, on the
other hand, returned FEMSCOs Bidders Bond.
Later, however, PUREFOODS unilaterally canceled the award as
"significant factors were uncovered and brought to their attention
which dictate the cancellation and warrant a total review and re-bid
of the project." Consequently, FEMSCO protested the cancellation
of the award and sought a meeting with PUREFOODS. However,
before the matter could be resolved, PUREFOODS already awarded
the project and entered into a contract with JARDINE NELL, a
division of Jardine Davies, Inc. (JARDINE), which incidentally was not
one of the bidders.
FEMSCO thus wrote PUREFOODS to honor its contract with the
former, and to JARDINE to cease and desist from delivering and
installing the two (2) generators at PUREFOODS. Its demand letters
unheeded, FEMSCO sued both PUREFOODS and JARDINE:

12

PUREFOODS for reneging on its contract, and JARDINE for its

unwarranted interference and inducement.
The trial court rendered a decision ordering PUREFOODS to indemnify
FEMSCO. The Court of Appeals affirmed the decision of the trial court.
It also ordered JARDINE to pay FEMSCO damages for inducing
PUREFOODS to violate the latters contract with FEMSCO.
PUREFOODS argues that its letter to FEMSCO was not an acceptance
of the latter's bid proposal and award of the project but more of a
qualified acceptance constituting a counter-offer which required
FEMSCO's express acceptance. Since PUREFOODS never received
FEMSCOs acceptance, PUREFOODS was very well within reason to
revoke its qualified acceptance or counter-offer. Hence, no contract
was perfected between PUREFOODS and FEMSCO.
JARDINE asserts that the records are bereft of any showing that it had
prior knowledge of the supposed contract between PUREFOODS and
FEMSCO, and that it induced PUREFOODS to violate the latters
alleged contract with FEMSCO.
ISSUE:
WON there existed a perfected contract between PUREFOODS
and FEMSCO
WON there is any showing that JARDINE induced or connived with
PUREFOODS to violate the latter's contract with FEMSCO.
HELD:
Issue 1 and 2.
There was a perfected contract between the parties and the
acceptance of the offer was communicated which perfected the
contract.
There can be no contract unless the following requisites concur: (a)
consent of the contracting parties; (b) object certain which is the
subject matter of the contract; and, (c) cause of the obligation which
is established. A contract binds both contracting parties and has the
force of law between them.
Contracts are perfected by mere consent, upon the acceptance by
the offeree of the offer made by the offeror. From that moment, the
parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage
and law. To produce a contract, the acceptance must not qualify the
terms of the offer. However, the acceptance may be express or
implied. For a contract to arise, the acceptance must be made known
to the offeror. Accordingly, the acceptance can be withdrawn or
revoked before it is made known to the offeror.

To resolve the dispute, there is a need to determine what

constituted the offer and the acceptance. Since petitioner
PUREFOODS started the process of entering into the contract by
conducting a bidding, Art. 1326 of the Civil Code, which provides
that "advertisements for bidders are simply invitations to make
proposals," applies. Accordingly, the Terms and Conditions of the
Bidding disseminated by petitioner PUREFOODS constitutes the
"advertisement" to bid on the project. The bid proposals or
quotations submitted by the prospective suppliers including
respondent FEMSCO, are the offers. And, the reply of petitioner
PUREFOODS, the acceptance or rejection of the respective offers.
Quite obviously, the letter of petitioner PUREFOODS to FEMSCO
constituted acceptance of respondent FEMSCOs offer as
contemplated by law. The tenor of the letter, i.e.,"This will confirm
that Pure Foods has awarded to your firm (FEMSCO) the project,"
could not be more categorical. While the same letter enumerated
certain "basic terms and conditions," these conditions were
imposed on the performance of the obligation rather than on the
perfection of the contract. In fine, the enumerated "basic terms and
conditions" were prescriptions on how the obligation was to be
performed and implemented. They were far from being conditions
imposed on the perfection of the contract.
The decision to award the contract has already been made. The
letter only serves as a confirmation of such decision. Hence, to the
Courts mind, there is already an acceptance made of the offer
received by Purefoods.
But even granting arguendo that the letter of petitioner
PUREFOODS constituted a "conditional counter-offer," respondent
FEMCO's submission of the performance bond and contractor's allrisk insurance was an implied acceptance, if not a clear indication
of its acquiescence to, the "conditional counter-offer," which
expressly stated that the performance bond and the contractor's
all-risk insurance should be given upon the commencement of the
contract.
Even the tenor of the subsequent letter of petitioner
PUREFOODS, i.e., "Pure Foods Corporation is hereby canceling the
award to your company of the project," presupposes that the
contract has been perfected. For, there can be no cancellation if the
contract was not perfected in the first place.
Issue 3.
While it may seem that petitioners PUREFOODS and JARDINE
connived to deceive respondent FEMSCO, the court finds no specific
evidence on record to support such perception. Likewise, there is
no showing whatsoever that petitioner JARDINE induced petitioner
PUREFOODS. The similarity in the design submitted to petitioner

13

PUREFOODS by both petitioner JARDINE and respondent FEMSCO,

and the tender of a lower quotation by petitioner JARDINE are
insufficient to show that petitioner JARDINE indeed induced petitioner
PUREFOODS to violate its contract with respondent FEMSCO.
SAN MIGUEL PROPERTIES V. HUANG
FACTS:
Petitioner offered two of its properties for P52,140,000.00 in cash.
The offer was made to Atty. Helena M. Dauz who was acting for
respondent spouses as undisclosed principals. Atty. Dauz signified
her clients interest in purchasing the properties for the amount for
which they were offered by petitioner, under the following terms: the
sum of P500,000.00 would be given as earnest money and the
balance would be paid in eight equal monthly installments from May
to December, 1994. However, petitioner refused the counter-offer.
On March 29, 1994, Atty. Dauz wrote another letter[3] proposing the
following terms for the purchase of the properties, viz:
This is to express our interest to buy your-above-mentioned property
with an area of 1, 738 sq. meters. For this purpose, we are enclosing
herewith the sum of P1,000,000.00 representing earnest-deposit
money, subject to the following conditions.
1. We will be given the exclusive option to purchase the property
within the 30 days from date of your acceptance of this offer.
2. During said period, we will negotiate on the terms and conditions
of the purchase; SMPPI will secure the necessary Management and
Board approvals; and we initiate the documentation if there is mutual
agreement between us.
3. In the event that we do not come to an agreement on this
transaction, the said amount of P1,000,000.00 shall be refundable to
us in full upon demand. . . .
Isidro A. Sobrecarey, petitioners vice-president and operations
manager for corporate real estate, indicated his conformity to the
offer by affixing his signature to the letter and accepted the "earnestdeposit" of P1 million. Upon request of respondent spouses,
Sobrecarey ordered the removal of the "FOR SALE" sign from the
properties.
Atty. Dauz and Sobrecarey then commenced negotiations. During
their meeting on April 8, 1994, Sobrecarey informed Atty. Dauz that
petitioner was willing to sell the subject properties on a 90-day term.
Atty. Dauz countered with an offer of six months within which to pay.
On April 14, 1994, the parties again met during which Sobrecarey
informed Atty. Dauz that petitioner had not yet acted on her counter-

offer. This prompted Atty. Dauz to propose a four-month period of

amortization.
On April 25, 1994, Atty. Dauz asked for an extension of 45 days
from April 29, 1994 to June 13, 1994 within which to exercise her
option to purchase the property, adding that within that period,
"[we] hope to finalize [our] agreement on the matter." [4] Her
request was granted.
On July 7, 1994, petitioner, through its president and chief
executive officer, Federico Gonzales, wrote Atty. Dauz informing her
that because the parties failed to agree on the terms and
conditions of the sale despite the extension granted by petitioner,
the latter was returning the amount of P1 million given as "earnestdeposit."[5]
On July 20, 1994, respondent spouses, through counsel, wrote
petitioner demanding the execution within five days of a deed of
sale covering the properties. Respondents attempted to return the
"earnest-deposit" but petitioner refused on the ground that
respondents option to purchase had already expired.
On August 16, 1994, respondent spouses filed a complaint for
specific performance against .
Trial Court ruled in favor of petitioner. CA reversed the decision
contending that there was a perfected contract.
Issue : WON there was a perfected contract. NO
RULING: In holding that there is a perfected contract of sale, the
Court of Appeals relied on the following findings: (1) earnest money
was allegedly given by respondents and accepted by petitioner
through its vice-president and operations manager, Isidro A.
Sobrecarey; and (2) the documentary evidence in the records show
that there was a perfected contract of sale.
With regard to the alleged payment and acceptance of earnest
money, the Court holds that respondents did not give the P1 million
as "earnest money" as provided by Art. 1482 of the Civil Code.
They presented the amount merely as a deposit of what would
eventually become the earnest money or downpayment should a
contract of sale be made by them. The amount was thus given not
as a part of the purchase price and as proof of the perfection of the
contract of sale but only as a guarantee that respondents would not
back out of the sale.
The first condition for an option period of 30 days sufficiently shows
that a sale was never perfected. As petitioner correctly points out,
acceptance of this condition did not give rise to a perfected sale
but merely to an option or an accepted unilateral promise on the
part of respondents to buy the subject properties within 30 days

14

from the date of acceptance of the offer. Such option giving

respondents the exclusive right to buy the properties within the
period agreed upon is separate and distinct from the contract of sale
which the parties may enter. All that respondents had was just the
option to buy the properties which privilege was not, however,
exercised by them because there was a failure to agree on the terms
of payment. No contract of sale may thus be enforced by
respondents.
Furthermore, even the option secured by respondents from petitioner
was fatally defective. Under the second paragraph of Art. 1479, an
accepted unilateral promise to buy or sell a determinate thing for a
price certain is binding upon the promisor only if the promise is
supported by a distinct consideration. Consideration in an option
contract may be anything of value, unlike in sale where it must be
the price certain in money or its equivalent. There is no showing here
of any consideration for the option. Lacking any proof of such
consideration, the option is unenforceable.
The parties never got past the negotiation stage. The alleged
"indubitable evidence" of a perfected sale was nothing more than
offers and counter-offers which did not amount to any final
arrangement containing the essential elements of a contract of sale.
While the parties already agreed on the real properties which were
the objects of the sale and on the purchase price, the fact remains
that they failed to arrive at mutually acceptable terms of payment,
despite the 45-day extension given by petitioner.
The manner of payment of the purchase price is an essential element
before a valid and binding contract of sale can exist. Although the
Civil Code does not expressly state that the minds of the parties must
also meet on the terms or manner of payment of the price, the same
is needed, otherwise there is no sale.
Thus, it is not the giving of earnest money, but the proof of the
concurrence of all the essential elements of the contract of sale
which establishes the existence of a perfected sale.
Case is
Dismissed.

LIMSON V. CA
FACTS:

Petitioner Lourdes Limson filed a complaint before the RTC

alleging that in July 1978, respondent spouses De Vera, through their
agent Marcosa Sanchez, offered to sell to petitioner a parcel of land
in Barrio San Dionisio, Paraaque.

Respondent spouses informed her that they were the

owners of the property.

On July 31, 1978, petitioner agreed to buy the property and

gave P20,000 as earnest money.

Respondent spouses signed a receipt and gave her a 10-day

option period to purchase the property.

Respondent informed her that the subject property was

mortgaged to Emilio and Isidro Ramos and asked her to pay the
purchase price.

On Aug. 5, 1978, petitioner agreed to meet the Ramoses to

consummate the transaction, but due to failure of respondent and
Ramoses to appear, no transaction was formalized.

On Aug. 11, 1978, she claimed that she was willing and
ready to pay the balance of the purchase price, but the transaction
did not materialize as the spouses failed to pay the back taxes of
the property.

On Sept. 5, 1978, she was surprised to learn from the agent

of the spouses that the property was the subject of a negotiation
for the sale to Sunvar Realty Development Corporation.

In their answer, respondent spouses maintained that the

option to buy the property had long expired and that there was no
perfected contract to sell between them. They insisted that they
negotiated with Sunvar only after the expiration of the period given
to petitioner and her failure with her commitments thereunder.

RTC ruled in favor of petitioner.

On appeal, CA reversed the decision of the RTC; hence, the

present appeal.
ISSUE: WON there was a perfected contract to sell between
petitioner Limson and respondent De Vera Spouses.
HELD:

No.

A scrutiny of facts as well as the evidence of the

parties overwhelmingly leads to the conclusion that the
agreement between the parties was a CONTRACT of OPTION
and not contract to sell.

An option is a continuing offer or contract by which the

owner stipulates with another that the latter shall have the right to
buy the property within a time certain or under, or in compliance
with certain terms and conditions or which gives to the owner of
the property the right to sell or demand a sale. It is sometimes

15

called unaccepted offer. An option is not itself a purchase, but

merely secures the privilege to buy.

A contract, like contract to sell, involves the meeting of minds

between 2 persons whereby one binds himself, with respect to the
other to give something or to render some service.

The Receipt provides:

Received from Lourdes Limson the sum of P20,000 xxx as earnest
money to purchase a parcel of land owned by Lorenzo de Vera xxx at
the price of 34.00 cash subject to condition and stipulation that have
been agreed upon by the buyer and me which will form part of the
receipt. Should transaction of the property not materialize not on
fault of the buyer, I obligate myself to return the full amount of
P20,000 earnest money with option to buy or forfeit on the fault of
the buyer. Xxx. This option to buy is good within 10 days xxx.

The receipt readily shows that the respondent and

petitioner only entered into a contract of option; a contract by
which respondent agreed with petitioner that the latter shall have the
right to buy the formers property at a fixed price of P34.00/m2 within
10 days from July 31, 1978.

The consideration of P20,000 paid b petition was

referred as earnest money. However, a careful examination
of words used indicated that the money is not earnest money
but OPTION MONEY.

EARNEST MONEY is part of the purchase price, while OPTION

MONEY is the money given as a distinct consideration for an option
contract.

EARNEST MONEY given only when there is already sale, while

OPTION MONEY applies to a sale not yet perfected.

When the EARNEST MONEY is given, the buyer is bound to pay

the balance, while when the would-be buyer gives OPTION MONEY,
he is not required to buy, but may even forfeit it depending on the
terms of the option.

There is nothing in the receipt which indicates that the

P20,000 was part of the purchase price. Moreover, it was not
shown that there was a perfected sale between the parties
where earnest money was given.

Finally, when the petitioner gave the earnest money,

the receipt did not reveal that she was bound to pay the
balance of the purchase price.

The rule is that except where a formal acceptance is required,

although the acceptance must be affirmatively and clearly made and
evidenced by some acts or conduct communicated to the offeror, it
may be made either in a formal or informal manner.

On or before Aug. 10, 1978, the last day of the option

period, no affirmative or clear manifestation was made by
petitioner to accept the offer. Certainly, there was no
concurrence of respondent spouses offer and petitioners
acceptance within the option period. Consequently, there
was no perfected contract to sell.

On Aug. 11, 1978, the option period expired and the

exclusive right to buy the property of the respondent spouses
ceased.

According to petitioner: Respondent extended the option

period until Aug. 31, 1978 UNTENABLE because the extension
must not be implied, but categorical and must show the clear
intention of the parties.

According to petitioner: When the respondent spouses sent

her telegram demanding full payment of the purchase price, it was
an acknowledgement of their contract to sell UNTENABLE because
there was no contract to sell between the petitioner and
respondent spouses to speak of.

The option period having expired and acceptance was not

effectively made by petitioner, the purchase of subject property by
SUNVAR was perfectly valid and entered into in good faith.

TAYAG V. LACSON
Nature: Petition for review on certiorari of the Decision and the
Resolution of respondent Court of Appeals in CA-G.R. SP No. 44883.
Facts:
Respondents Angelica Tiotuyco Vda. de Lacson and her children
were the registered owners of three parcels of land located in
Mabalacat, Pampanga registered in the Register of Deeds of San
Fernando, Pampanga. The properties, which were tenanted
agricultural lands, were administered by Renato Espinosa for the
owner.
Mar. 17, 1996: A group of original farmers/tillers individually
executed in favor of the petitioner separate Deeds of Assignment in
which the assignees assigned to the petitioner their respective
rights as tenants/tillers of the landholdings possessed and tilled by
them for and in consideration of P50.00 per square meter. The said
amount was made payable "when the legal impediments to the
sale of the property to the petitioner no longer existed." The
petitioner was also granted the exclusive right to buy the property
if and when the respondents, with the concurrence of the

16

defendants-tenants, agreed to sell the property. In the interim, the

petitioner gave varied sums of money to the tenants as partial
payments, and the latter issued receipts for the said amounts.
July 24, 1996: Petitioner called a meeting of the defendantstenants to work out the implementation of the terms of their
separate agreements. However the defendants-tenants, through
Joven Mariano, wrote the petitioner stating that they were not
attending the meeting and instead gave notice of their collective
decision to sell all their rights and interests, as tenants/lessees, over
the landholding to the respondents.
Aug. 19, 1996: Petitioner filed a complaint with the RTC of San
Fernando, Pampanga, against the defendants-tenants, as well as the
respondents, for the court to fix a period within which to pay the
agreed purchase price of P50.00 per square meter to the defendants,
as provided for in the Deeds of Assignment. The petitioner also
prayed for a writ of preliminary injunction against the defendants and
the respondents therein.
Issue: WON there is a perfected Option Contract.
Held: No
SC does not agree with the contention of the petitioner that the
deeds of assignment executed by the defendants-tenants are
perfected option contracts.
An option is a contract by which the owner of the property agrees
with another person that he shall have the right to buy his property
at a fixed price within a certain time. It is a condition offered or
contract by which the owner stipulates with another that the latter
shall have the right to buy the property at a fixed price within a
certain time, or under, or in compliance with certain terms and
conditions, or which gives to the owner of the property the right to
sell or demand a sale. It imposes no binding obligation on the person
holding the option, aside from the consideration for the offer. Until
accepted, it is not, properly speaking, treated as a contract. The
second party gets in praesenti, not lands, not an agreement that he
shall have the lands, but the right to call for and receive lands if he
elects. An option contract is a separate and distinct contract from
which the parties may enter into upon the conjunction of the option.
In this case, the defendants-tenants-subtenants, under the deeds
of assignment, granted to the petitioner not only an option but the
exclusive right to buy the landholding. But the grantors were merely
the defendants-tenants, and not the respondents, the registered
owners of the property. Not being the registered owners of the
property, the defendants-tenants could not legally grant to the
petitioner the option, much less the "exclusive right" to buy the
property. As the Latin saying goes, "NEMO DAT QUOD NON HABET."

Petition is PARTIALLY GRANTED. Decision of the CA nullifying the

Orders of the RTC is AFFIRMED. The writ of injunction issued by the
CA permanently enjoining the RTC from further proceeding with
Civil Case No. 10910 is hereby LIFTED and SET ASIDE.
Note:
In praesenti at the present time
NEMO DAT QUOD NON HABET - "no one can give what he does
not have
FONTANA RESORT V. TAN
Facts:
In March 1997, respondent spouses Tan bought from petitioner
RN Development Corp. (RNDC) two class D shares of stock in
petitioner Fontana Resort and Country petitioner Fontana Resort
and Country Club, Inc. worth P387,300.
-

These bought stocks entail a promise that Fontana Resort would

construct a park with first-class leisure facilities in Clark Field,
Pampanga, to be called Fontana Leisure Park (FLP).

It was also promised that FLP would be fully developed and

operational by the first quarter of 1998 and that Fontana Resort
Class D shareholders would be admitted to one membership in
the country club, which entitled them to use park facilities and
stay at a two-bedroom villa for five (5) ordinary weekdays and
two (2) weekends every year for free.

Two years later, respondents filed before the Securities and

Exchange Commission a complaint for the refund of purchase
price of the bought stocks from the petitioners.

Respondents alleged that they had been deceived into buying

Fontana Resorts shares because of petitioners fraudulent
misrepresentations. That construction of FLP turned out to be
still unfinished and the policies, rules, and regulations of the
country club were obscure. But FLP said, at that time, most of
the amenities are operational.

The spouses narrated that they were able to book and avail
themselves of free accommodations at an FLP villa on a
Saturday in the month of September. They requested that an
FLP Villa again be reserved for their free use on another

17

Saturday in October for their daughters 18 th Birthday, but were

refused by the petitioners saying that the petitioners could only
avail of 5 ORDINARY DAYS, 1 SATURDAY and 1 SUNDAY, annually,
and that respondents had consumed their free Saturday pass for
the said year.
-

Article 1191. The power to rescind obligations is implied in

reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.

In this case respondents, in their complaint, cannot just simply

pray for refund of the purchase price they had paid for their
shares without specifically mentioning the annulment or
recisision of the sale of said shares.

In January 1999, respondents attempted once more to book and

reserve an FLP villa for their free use on April 1, 1999, a Thursday.
Their reservation was confirmed by a certain Murphy Magtoto,
and that later, another employee called them that the said
reservation was cancelled because the FLP was already fully
booked.

There is fraud when one party is induced by the other to enter

into a contract, through and solely because of the latters
insidious words or machinations. But not all forms of fraud can
vitiate consent. Under Article 1330, fraud refers to dolo
causante or causal fraud, in which, prior to or simultaneous with
the execution of a contract, one party secures the consent of
the other by using deception, without which such consent would
not have been given. In simple words, the fraud must be the
determining cause of the contract, or must have cause the
consent to be given.

FLP countered the said allegation by saying that there was no

confirmation to speak of because as early as the start of the year,
FLP is already fully booked, and that there was no reservation
number issued in favor of the Spouses Tan.

The general rule is that he who alleges fraud or mistake in a

transaction must substantiate his allegation with full, creal, and
convincing evidence because the presumption is the contract is
has been entered into fairly and regularly.

In the case at bar, Spouses Tan have miserably failed to prove

how petitioners employed fraud to induce them to buy the
subject shares. It can only be expected that petitioners will
advertise FLP in the most positive light in order to attract
investor-members. There is no showing that in their sales talk to
respondents, petitioner actually used insidious words or
machination which led the respondents to buy the said shares.
They appeared to be literate could no be easily deceived into
parting with a substantial amount of money.

What is apparent to us is that respondents knowingly and

willingly consented to buying the shares and were later on
disappointed with the actual facilities and club membership
benefits.

Similarly, we find no evidence on record that petitioners

defaulted on any of their obligations that would have called for
the rescission of the sale of the FRCCI shares to respondents.

Spouses Tan, on the other hand, said that they were not informed
of said rule regarding their free accommodation at FLP, and had
they known about it, they would not have availed themselves of
the free accommodations during Saturday last September. But
this was countered by Fontana Resort saying that
the
respondents were duly informed of the privileges givent to them
as seen in the propmotional materials for the country club, the
Articles of Incorporation, and the By-Laws of FRCCI.

Hearing officer Bacalla of SEC ruled in favor of Spouses Tan by

stating that the respondents were induced to buy shares which
actually are empty promises. CA ruled by ordering Fontana Resort
to provide for a refund to the spouses, hence, this petition before
the SC.

Issue: WON there Fontana Resort committed fraud during the selling
of stocks which would warrant the annulment or recission of the
contract which the parties entered into?
RULING:
Article 1390 of the Civil Code states that contracts are voidable
and annullable when the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
However, they are
susceptible of ratification.

18

As to the issue of cancellation of the alleged confirmed

reservation, the SC concluded that there is mix-up in the
reservation process of petitioners. This demonstrates mere
negligence on the part of the petitioners but not willful intention
to deprive the spouses of their benefits. More so, it does not
constitute default on the part of FLP to warrant recission of the
contract. At most, Spouses Tan can only be awarded Nominal
Damages as to the mix-up in the reservation process.

Respondents complaint sufficiently alleged a cause of action for

the annulment of the contract. However, it was dismissed for lack
of merit since they were not able to establish by preponderance
of evidence that they are entitled to such annulment.

THE ROMAN CATHOLIC CHURCH V. PANTE (Sema)

FELICIANO V. ZALDIVAR (Duran)
SWIFT FOODS V. MATEO, JR.
Nature: Petition for Review of the CA Nov. 15 Decision
Facts:
Petitioner Swift Foods, Inc., a corporation engaged in the
manufacture, sale, and distribution of animal feeds entered a
Trucking Agreement in 1984 with spouse respondents Jose and Irene
Mateo, businessmen engaged in dealership in poultry and supply and
trucking business in San Jose Del Monte, Bulacan.
The trucking agreement stipulates that respondents trucks
hauled Swift feeds from its central office in Mandaluyong City to its
various warehouses in Luzon wherein respondents are to deposit
cash bonds of P100,000.00 per truck.
Several years after, only one truck remained in contract but still
petitioner maintained respondents case bond which the latter
requested the return of the excess but petitioner denied.
In 1995, same parties entered into a warehousing agreement
wherein petitioners feeds are to be stored in respondents
warehouses for a period of 2years. The agreement required
respondents to post bond to secure compliance with the obligation,
however, both parties proceeded with the enforcement of the

contract on July of same year without compliance of such

requirement.
For documenting and monitoring movements of the stocks, two
documents were issued: the Daily Warehouse Stock Report (DSWD)
for inventory of incoming stocks and Warehouse Issue Slip (WIS)
which serves as the receipt of released stocks. WIS contains
signature of the sales personnel as proof of receiving said stocks
according to the stipulation of such agreement. Petitioners
National Sales Manager would sometimes inspect the warehouses
and such documents.
By February 1996, respondents delivered three land titles to
petitioner as compliance of the warehousing agreement.
An inventory conducted by Swift personnels on May 9, 1996
revealed one missing bag which respondents paid on the same day.
On May 20, 1996 petitioner informed respondents that it was
terminating the contract effective May 13, 1996 due to the
apparent violations of the respondents of the warehousing
agreement.
Under paragraph V of the Warehousing Agreement, petitioner
should only release stocks to Swifts sales personnel after they
present a clearance to withdraw said stocks to ensure that stocks
would only be released to authorized individuals and for payments
to be collected accordingly.
Contrary to said provisions, Petitioner released stocks without
necessary clearance as evidenced by the WIS which did not contain
signatures of said personnels. Absence of said clearance, petitioner
alleged that respondents have violated the contract. Said
unauthorized release cost Swift a shortage of 2Million which
respondents should be held accountable. Swift retained
respondents 3 land titles pending full compliance citing paragraph
XII of the agreement which states that the bond shall answer for
whatever obligation the warehouse operator may have.
Respondents denied having violated the terms of the
agreement as proof they presented a hand written letter from the
sales rep of swift which instructed that the stocks be released
directly to customers. Respondents maintained that the sales rep
should answer for the cash shortages thereby demanding swift to
return their three land titles which swift denied causing the former
to file a complaint against the latter for the surrender of the
certificates of title with damages and alleged that the cash
shortage is attributable to petitioners own negligence in the
supervision of its sales personnel.

19

 Petitioner answered that it falls upon the respondents to be aware

that the sales personnels acted violative of the procedure set in the
agreement.
RTC ruled in favour of petitioner and ordered respondents to
return the tittles and held that there was no breach as they merely
followed instructions of the sales rep and that as respondents were
first time warehouse operators, hence they could not have presumed
knowledge of the warehouse operating procedures and that it is
incumbent upon swift to conduct trainings and seminars for
respondents. Further, RTC ruled the payment of 100k as attys fees
and 200k as moral damages as well as costs of suit.
CA ruled no basis for the termination of the agreement and found
basis for the 200k but deleted the Attys fess for lack of basis.
ISSUE: WON there was a breach of the contract committed by the
respondents.
HELD:
The contract stated that the petitioner to pay a monthly 18k
rental fee and in turn respondents are accountable for all the stocks
duly received and released by them. Further, it provided procedures
that respondents to observe. The contract is clear and having
respondents acted to the contrary is a clear violation of the contract.
Respondents admitted that there were times when they released
stocks directly to customers and not to the sales rep, when asked
why, it further admitted that it did not read much less understand the
warehouse agreement and simply followed all the verbal instructions
given to him by the sales rep. such admittance clearly is a violation.
The court further ruled that ones newness to the business is not
an excuse to violate clear terms of ones contract. A seasoned
businessman such as the respondents should have been alert to the
dangers of contravening the clear terms of a contract. Respondents
should not have deviated from the from the procedure provided in
the contract in the absence of any amendment therein as ordinary
diligence required him to inquire with the head office whether
changes being introduced were proper or authorized.
Respondents total reliance on the work of the petitioners sales
personnel, contrary to the contrary to the contract is a clear act of
negligence. The ruled reiterated that a contract is the law between
the parties and those who are guilty of negligence in the
performance of their obligations are liable for damages.
the reasoning of the respondents that it did not read nor
understand the contract is a total ignorance of the obligations under
the warehousing agreement and an abdication of his duties.
The court further stated that unless a contracting party cannot
read or dos not understand the language in which the agreement was

written, he is presumed to know the import of his contract and is

bound thereby. Not having alleged any of the foregoing, respondent
has no excuse for his actions. It was his nonchalance to his
contractual duties and obligations, which facilitated the
malfeasance of petitioners personnel and exposed petitioner to
undue risks.
Ruled that respondents are liable for 150k as nominal damages
payable to petitioner, 1ook be returned with interest, and moral
damages awarded to respondents in the amount of 50k.
VILLEGAS V. RURAL BANK OF TANJAY
Facts:
Sometime in June, 1982, [petitioners], spouses Joaquin and
Emma Villegas, obtained an agricultural loan of P350T from
[respondent] Rural Bank of Tanjay, Inc. The loan was secured by a
real estate mortgage
For failure of [petitioners] to pay the loan upon maturity, the
mortgage was extrajudicially foreclosed. At the foreclosure sale,
[respondent], being the highest bidder, purchased the foreclosed
properties for P367,596.16. Thereafter, the Sheriff executed in
favor of [respondent] a certificate of sale, which was subsequently
registered with the Registry of Deeds of Dumaguete City.
[Petitioners] failed to redeem the properties within the one-year
redemption period.
In May, 1987, [respondent] and [petitioner] Joaquin Villegas,
through his attorney-in-fact Marilen Victoriano, entered into an
agreement denominated as Promise to Sell, whereby
[respondent] promised to sell to [petitioners] the foreclosed
properties for a total price of P713,312.72, payable within a period
of five (5) years.
Upon the signing of the agreement, [petitioners] gave
[respondent] the sum of P250,000.00 as down payment.
[Petitioners], however, failed to pay the first yearly installment,
prompting [respondent] to consolidate its ownership over the
properties. Accordingly, old TCT was cancelled and a new one was
issued in [respondents name. Thereafter, [respondent] took
possession of the properties. Hence, the action by [petitioners for
declaration of nullity of loan and mortgage contracts, recovery of
possession of real property, accounting and damages and, in the
alternative, repurchase of real estate] commenced on January 15,
1990.

20

 RTC dismissed the petition and CA affirmed with modifications

that the down payment of 250,000 be returned to the petitioners.
Petitioners insist on the nullity of the loan and mortgage
contracts. Unabashedly, petitioners admit that the loan (and
mortgage) contracts were made to appear as several sugar crop
loans not exceeding P50,000.00 each even if they were not just so
the respondent rural bank could grant and approve the same
pursuant to Republic Act (R.A.) No. 720, the Rural Banks Act. In short,
petitioners aver that the sugar crop loans were merely simulated
contracts and, therefore, without any force and effect.
Issue: WON petitioners may recover possession of the mortgaged
properties. NO
Held:
Articles 1345 and 1346 of the Civil Code are the applicable laws,
and they unmistakably provide:
Art. 1345. Simulation of a contract may be absolute or relative.
The former takes place when the parties do not intend to be bound at
all; the latter, when the parties conceal their true agreement.
Art. 1346. An absolutely simulated or fictitious contract is
void. A relative simulation, when it does not prejudice a third person
and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy binds the parties to their real
agreement.
Given the factual antecedents of this case, it is obvious that the
sugar crop loans were relatively simulated contracts and that both
parties intended to be bound thereby. There are two juridical acts
involved in relative simulation the ostensible act and the hidden
act. The ostensible act is the contract that the parties pretend to
have executed while the hidden act is the true agreement between
the parties. To determine the enforceability of the actual agreement
between the parties, we must discern whether the concealed or
hidden act is lawful and the essential requisites of a valid contract
are present.
In this case, the juridical act which binds the parties is the loan
and mortgage contracts, i.e., petitioners procurement of a loan from
respondent. Although these loan and mortgage contracts were
concealed and made to appear as sugar crop loans to make them fall
within the purview of the Rural Banks Act, all the essential requisites
of a contract were present. However, the purpose thereof is illicit,

intended to circumvent the Rural Banks Act requirement in the

procurement of loans. Consequently, while the parties intended to
be bound thereby, the agreement is void and inexistent under
Article 1409 of the Civil Code.
In arguing that the loan and mortgage contracts are null and
void, petitioners would impute all fault therefor to respondent. Yet,
petitioners averments evince an obvious knowledge and
voluntariness on their part to enter into the simulated
contracts. We find that fault for the nullity of the contract does not
lie at respondents feet alone, but at petitioners as well.
Accordingly, neither party can maintain an action against the other,
as provided in Article 1412 of the Civil Code:
Petitioners did not come to court with clean hands. They admit
that they never planted sugarcane on any property, much less on
the mortgaged property. Yet, they eagerly accepted the proceeds of
the simulated sugar crop loans. Petitioners readily participated in
the ploy to circumvent the Rural Banks Act and offered no objection
when their original loan of P350,000.00 was divided into small
separate loans not exceeding P50,000.00 each. Clearly, both
petitioners and respondent are in pari delicto, and neither should
be accorded affirmative relief as against the other.

In all, petitioners explicitly recognized respondents ownership

over the subject property and merely resorted to the void contract
argument after they had failed to reacquire the property and a new
title thereto in respondents name was issued.
We are not unmindful of the fact that the Promise to Sell
ultimately allows petitioners to recover the subject property which
they were estopped from recovering under the void loan and
mortgage contracts. However, the Promise to Sell, although it
involves the same parties and subject matter, is a separate and
independent contract from that of the void loan and mortgage
contracts.

To reiterate, under the void loan and mortgage contracts, the

parties, being in pari delicto, cannot recover what they each has
given by virtue of the contract. Neither can the parties demand
performance of the contract. No remedy or affirmative relief can be
afforded the parties because of their presumptive knowledge that
the transaction was tainted with illegality. The courts will not aid
either party to an illegal agreement and will instead leave the
parties where they find them.

Consequently, the parties having no cause of action against the

other based on a void contract, and possession and ownership of
the subject property being ultimately vested in respondent, the
latter can enter into a separate and distinct contract for its

21

alienation. Petitioners recognized respondents ownership of the

subject property by entering into a Promise to Sell, which expressly
designates respondent as the vendor and petitioners as the vendees.
At this point, petitioners, originally co-owners and mortgagors of the
subject property, unequivocally acquiesced to their new status as
buyers thereof. In fact, the Promise to Sell makes no reference
whatsoever to petitioners previous ownership of the subject property
and to the void loan and mortgage contracts. On the whole, the
Promise to Sell, an independent contract, did not purport to ratify the
void loan and mortgage contracts.
By its very terms, the Promise to Sell simply intended to alienate
to petitioners the subject property according to the terms and
conditions contained therein. Article 1370 of the Civil Code reads:
Art. 1370. If the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties,
the
literal
meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of
the parties, the latter shall prevail over the
former.
Thus, the terms and conditions of the Promise to Sell are
controlling.
Paragraph 5 of the Promise to Sell provides:
5) Provided further, that in case of a delay in any yearly
installment for a period of ninety (90) days, this sale
will become
null and void [without] further effect or validity; and provided further,
that payments made shall be reimbursed (returned to the VENDEE
less interest on the account plus additional 15% liquidated
damages and charges.
As stipulated in the Promise to Sell, petitioners are entitled to
reimbursement of the P250,000.00 down payment. We agree with
the CAs holding on this score:
WHEREFORE,
premises
considered,
the
petition
is
hereby DENIED. The Decision of the Court of Appeals in CA-G.R. CV
No. 40613 is hereby AFFIRMED. Costs against petitioners.

VILLACERAN V. DE GUZMAN (Yaphockun)

MARTINEZ V. CA
Facts:

1. Feb 1981: private respondents Godofredo and his sister Manuela

De la Paz, entered into an oral contract with petitioner Rev. Fr.
Dante Martinez for the sale of a lot at the Villa Fe Subdivision in
Cabanatuan City for the sum of P15T.
2. After giving the P3T downpayment, Fr. Martinez started the
construction of a house and began paying the real estate taxes on
said property.
3. Jan 1983: Fr. Martinez completed payment of the lot for which
private respondents De la Paz executed two documents but the
latter never delivered the Deed of Sale they promised to petitioner.
4. Oct 1981: a Deed of Absolute Sale with Right to Repurchase was
executed by private respondents De la Paz who sold 3 lots with
right to repurchase the same within 1 year to spouses Reynaldo
and Susan Veneracion for the sum of P150T. One of the lots sold
was the lot previously sold to Fr. Martinez. Spouses Veneracion
never took actual possession of any of these lots during the period
of redemption, but all titles to the lots were given to him.
5. June1983: a Deed of Absolute Sale in favour of spouses
Veneracion was executed over the two lots.
6. Jan 1984: private respondent Reynaldo V. asked a certain Reyes
(Fr. Martinez neighbour), who the owner of the building erected on
the subject lot was. Reyes told him that it was Feliza, petitioners
mother, who was in possession of the property. Reynaldo told
respondent Godofredo about the matter and was assured that
Godofredo would talk to Feliza. Based on that assurance, spouses
Veneracion registered the lots with the Register of Deeds of
Cabanatuan on Mar 1984.
7. Mar 1986: Fr. Martinez discovered that the lot he was occupying
with his family had been sold to the spouses Veneracion after
receiving a letter from private respondent Reynaldo claiming
ownership of the land and demanding that they vacate the property
and remove their improvements thereon.
8. MTC rendered a decision: Fr. Dante Martinez and his mother are
the rightful possessors and in good faith and in concept of owner,
thus cannot be ejected from the land in question.
9. RTC rendered its decision finding spouses Veneracion as the true
owners of the lot in dispute by virtue of their prior registration with
the Register of Deeds.
10. On appeal, CA affirmed the RTC decision and declared spouses
Veneracion to be owners of the lot in dispute as they were the first
registrants in good faith, in accordance with Art. 1544, CC. CA held
that Fr. Martinez failed to overcome the presumption of good faith
for the following reasons: (1) when private respondent Veneracion
discovered the construction on the lot, he immediately informed
private respondent Godofredo about it and relied on the latters

22

assurance that he will take care of the matter and (2) the sale
between Fr. Martinez and De la Paz was not notarized, as required by
Arts. 1357 and 1358, CC, thus it cannot be said that the private
respondents Veneracion had knowledge of the first sale.
Issue: Whether or not notarization is an indispensable requirement
in the execution of a deed of sale.
Ruling:
On Double Sale
1. This case involved a double sale and Art. 1544,CC provides that
where immovable property is the subject of a double sale, ownership
shall be transferred (1) to the person acquiring it who in good faith
first recorded it to the Registry of Property; (2) in default thereof, to
the person who in good faith was first in possession; and (3) in
default thereof, to the person who presents the oldest title.
2. The requirement of the law, where title to the property is recorded
in the Register of Deeds, is two-fold: acquisition in good faith and
recording in good faith.
To be entitled to priority, the second
purchaser must not only prove prior recording of his title but that he
acted in good faith, i.e., without knowledge or notice of a prior sale to
another. The presence of good faith should be ascertained from the
circumstances surrounding the purchase of the land.
3. With regard to the first sale to them, Reynaldo Veneracion testified
that 18 days before the execution of the first Deed of Sale with Right
to Repurchase, he inspected the premises and found it vacant.
However, this was belied by the testimony of Engr. Minor, then DPWH
building inspector, that he conducted on Oct 6, 81 an ocular
inspection of the lot in dispute in the performance of his duties as a
building inspector to monitor the progress of the construction of the
building subject of the building permit issued in favor of petitioner,
and that he found it 100 % completed. In the absence of contrary
evidence, he is to be presumed to have regularly performed his
official duty. Thus, as early as Oct 1981, spouses Veneracion already
knew that there was construction being made on the property they
purchased.
Equitable Mortgage
4. CA overlooked the fact that the first contract of sale between the
private respondents showed that it was in fact an equitable
mortgage.The requisites for considering a contract of sale with a
right of repurchase as an equitable mortgage are (1) that the parties
entered into a contract denominated as a contract of sale and (2)
that their intention was to secure an existing debt by way of

mortgage. In case of doubt, a contract purporting to be a sale with

right to repurchase shall be construed as an equitable mortgage.
5. In this case, the following circumstances indicate that the private
respondents intended the transaction to be an equitable mortgage
and not a contract of sale:
(1) Private respondents Veneracion never took actual possession of
the 3 lots;
(2) Private respondents De la Paz remained in possession of the
Melencio lot which was co-owned by them and where they resided;
(3) During the period between the first sale and the second sale to
private respondents Veneracion, they never made any effort to take
possession of the properties; and
(4) when the period of redemption had expired and private
respondents Veneracion were informed by the De la Pazes that they
are offering the lots for sale to another person for P200T, they
never objected. To the contrary, they offered to purchase the two
lots for P180T when they found that a certain Mr. Tecson was
prepared to purchase it for the same amount.
Second sale:
6. With regard to the second sale, which was the true contract of
sale between the parties, it should be noted that the SC in several
cases, has ruled that a purchaser who is aware of facts which
should put a reasonable man upon his guard cannot turn a blind
eye and later claim that he acted in good faith. Veneracion merely
relied on the assurance of private respondent Godofredo, who was
not even the owner of the lot in question, that he would take care
of the matter. This did not meet the standard of good faith.
Articles 1357 and 1358
7. CAs reliance on Articles 1357 and 1358, CC to determine
spouses Veneracions lack of knowledge of petitioners
ownership of the disputed lot is erroneous.
+Articles 1357 and 1358, in relation to Art. 1403(2), CC
require that the sale of real property must be in writing for
it to be enforceable.
+It need not be notarized.
+If the sale has not been put in writing, either of the
contracting parties can compel the other to observe such
requirement. This is what petitioner Fr. Martinez did when
he repeatedly demanded that a Deed of Absolute Sale be
executed in his favor by private respondents De la Paz.

23

+There is nothing in the above provisions which require that

a contract of sale of realty must be executed in a public
document.
Decision
8. The decision of the CA was reversed and a new one was rendered:
(1) declaring as null and void the deed of sale executed by private
respondents De la Paz in favor of spouses Veneracion;
(2) ordering private respondents De la Paz to execute a deed of
absolute sale in favor of petitioner Rev. Fr. Dante Martinez;
(3) ordering private respondents De la Paz to reimburse spouses
Veneracion the amount the latter may have paid to the former;
(4) ordering the Register of Deeds of Cabanatuan City to cancel TCT
No. T-44612 and issue a new one in the name of petitioner Rev. Fr.
Dante Martinez; and
(5)
ordering private respondents to pay petitioner jointly and
severally the sum of P20T as attorneys fees and to pay the costs of
the suit.
TEOCO V. METROBANK (Delicana)
MENESES V. VENTUROZO (Degamo)
VILLEGAS V. ARJONA (Tomawis)

SECURITY BANK V. CA
Facts:
petitioner Security Bank Corporation (SBC) and Philippine Industrial
Security Agency Corporation (PISA) entered into a "Contract of
Security Services" (CSS) wherein PISA undertook to secure, guard,
and protect the personnel and property of SBC. A part of paragraph 9
of the CSS provides that PISA shall be liable for any loss, damage or
injury suffered by [SBC] where such loss, damage or injury is due to
the negligence or willful act of the guards or representatives of
[PISA].
On March 12, 1992, the Taytay Branch Office of SBC was robbed
PHP12,927,628.01. Among the suspects in the robbery were two
regular security guards of PISA.

At the time, SBC Taytay Branch was covered by a "Money,

Securities and Payroll Robbery Policy" with Liberty Insurance
Corporation (LIC), wherein the latter endeavored to indemnify the
former against "loss of money, payroll and securities that may
result from robbery or any attempt thereof within the premises of
SBC's Taytay Branch Office, up to the maximum amount of
PHP9,900,000.00." The insurance policy provided, however, that
LIC would not be liable if the loss was caused by any dishonest,
fraudulent or criminal act of SBC officers, employees or by its
authorized representative
Subsequently, SBC and PISA entered into a Post-Robbery
Agreement (PRA) whereby PISA paid PHP3,027,728.01, which was
the difference between the total amount lost and the maximum
amount insured. Paragraph 5 of the PRA specifically states that
PISA's payment was subject to express terms and conditions, one of
which was (e) The parties hereto further agree that this agreement
and/or payment of the whole amount of P3,027,728.01, shall not
affect or prejudice, directly or indirectly, whatever cause of action
SBC may have against PISA and whatever claim or defense the
latter may have against SBC, if the maximum recoverable proceeds
of the insurance covering the loss suffered by SBC could not be
recovered from the insurer. Further, it is agreed that should
Security Guards Wilson Taca and Ernesto Mariano be absolved from
the charge of robbery in band and/or are found by the proper court
not to have been involved at all in the alleged conspiracy, and that
it is duly established through legal action before the competent
court that their failure to prevent the robbery was not due to their,
or their PISA co-guards' negligence and/or willful act, whatever
installments may have been paid by PISA under this Agreement
shall be reimbursed with legal interest.
SBC filed a claim with LIC. LIC denied the claim for indemnification,
on the ground that the loss suffered by SBC fell under the general
exceptions to the policy, in view of the alleged involvement of
PISA's two security guards.
SBC informed PISA of the denial of the former's insurance claim
with LIC and thereafter sought indemnification of the unrecovered
amount of PHP9,900,000.00. PISA denied the claim contending that
such claim is premature
SBC filed a complaint for a sum of money against LIC based on the
"Money, Securities and Payroll Robbery Policy," and against PISA as
an alternative defendant based on the CSS. SBC prayed that it be
indemnified by either one of the defendants for PHP9,900,000.00.
PISA filed a motion to dismiss, invoking paragraph 5(e) of the PRA
and claimed that SBC's right of action against PISA was subject to
at least two suspensive conditions. First, SBC could not recover the

24

PHP9.9-million from the insurer, defendant LIC; and second, the two
security guards facing criminal prosecution for robbery in band must
first be convicted and found to have been involved in the robbery or
otherwise found by a competent court to have been negligent.
According to PISA, SBC's complaint made no averment that (a) there
had been a final judgment rejecting SBC's claim against the insurer;
or (b) that the two PISA guards had been convicted of the charge of
robbery in band, or had been found by a competent court to have
been involved in the alleged conspiracy or to have been negligent in
connection with the robbery. Hence, PISA concluded that SBC's
complaint against it was premature and should be dismissed. SBC
opposed PISA's motion to dismiss, arguing that the latter's
interpretation of the PRA was erroneous.
The RTC granted PISA's motion, and dismissed the case. On appeal,
the Court of Appeals affirmed the dismissal.
Issue:
WON the condition could not be recovered from the insurer of the
PRA requires final judgment against SBCs claim against LIC.
Ruling:
No.
Contrary to the interpretation of PISA to the condition could not be
recovered from the insurer requires final judgment. The Supreme
Court held that reading the clause as requiring a final judgment is a
strained interpretation and contrary to settled rules of interpretation
of contracts. Paragraph 5(e) only requires that the proceeds "could
not be recovered from the insurer," and does not state that it should
be so declared by a court, or even with finality. In determining the
signification of terms, words are presumed to have been used in their
primary and general acceptance, and there was no evidence
presented to show that the words used signified a judicial
adjudication. Indeed, if the parties had intended the non-recovery to
be through a judicial and final adjudication, they should have stated
so. In its primary and general meaning, paragraph 5(e) would cover
LIC's extrajudicial denial of SBC's claim.
The supreme Court explained that In sustaining PISA, the Court of
Appeals relied on the argument that paragraph 5(e) of the PRA was
intended to benefit PISA. The appellate court held that the phrase
"could not be recovered from the insurer" gives rise to doubt as to
the intention of the parties, as it is capable of two interpretations:
either (1) the insurer rejects the written demand for indemnification
by the insured; or (2) a court adjudges that the insurer is not liable
under the policy. The Court of Appeals then interpreted the

antecedent circumstances prior to the institution of Civil Case

manifesting SBC's agreement to suspend the filing of the suit
against PISA until after the case against LIC has been decisively
terminated.
In contrary to the, CA interpretation, Events would show that SBC's
suit against LIC was not a mere afterthought after LIC had rejected
its claim. Rather, SBC exercised its right of action against PISA
pursuant to paragraph 5(e) of the PRA. This interpretation is
consistent with settled canons of contract interpretation, has the
import that would make SBC's right of action effectual, and would
yield the greatest reciprocity of interests. If some stipulations of
any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to
render it effectual. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly. When it is
impossible to settle doubts by the rules established in the
preceding articles, and the doubts refer to incidental circumstances
of an onerous contract, the doubt shall be settled in favor of the
greatest reciprocity of interests.
The Supreme Court hold that SBC's suit against PISA was not
premature, and the dismissal of the action as against PISA was
improper. the petition is GRANTED. The assailed Decision of the
Court of Appeals as well as its Resolution is REVERSED. The civil
case is REMANDED to the RTC, NCJR, Makati City for further
proceedings.

REDONDO V. JIMENEZ
FACTS:

Petitioner Adoracion Redondo, with her siblings, Vicente,

Celerina, and Efren Redondo, were the registered co-owners of a
282 square-meter residential lot situated in Bacoor, Cavite.

Adoracions interest in the lot consisting of a one-fourth pro

indiviso share, or about 70 square meters, appears in the title.

This had been sold and conveyed to herein respondent

Angelina Jimenez, the widow of Efren Redondo.

The sale was evidenced by a notarized Deed of Absolute

Sale of a Portion of Land showing a consideration of P3,000.

On November 27, 1992, Adoracion filed with the RTC a

Complaint for annulment of sale and recovery of ownership with

25

damages. She claimed that she was deceived into signing the deed
of sale when all she wanted was to borrow money from Angelina.

The trial court dismissed the complaint. On appeal, the Court

of Appeals affirmed the court a quo with modification that the
attorneys fees and litigation expenses awarded to the defendant are
deleted.

Hence, the present petition.

ISSUE:
The Court of Appeals committed glaring errors contrary to the clear
mandate of law and jurisprudence justifying reexamination of its
decision and resolution by this Honorable Tribunal.
(Is the transaction between Adoracion and Angelina an equitable
mortgage; Is the said sale nevertheless voidable on account of
alleged fraud)
HELD:

Petitioner Adoracion contends that the alleged sale was in fact

an equitable mortgage since
(1) the consideration was grossly inadequate;
(2) she paid the realty taxes on the property;
(3) she remained in possession of the property; and
(4) she was in financial distress at the time of the transaction.
She insists that the deed of sale was tainted with fraud and thus
voidable. She cites her low educational attainment, inability to speak
English, advanced age, and sickness, as reasons for her weakness of
mind. She also argues that the presumption of regularity of a public
document does not apply when the circumstances surrounding its
notarization are suspect.

Respondent Angelina, however, counters that Adoracion failed

to adduce convincing evidence to rebut the presumption of regularity
of the notarization of the deed of sale. Angelina further avers that
Adoracion failed to prove by competent evidence her alleged
weakness of mind, which supposedly vitiated her consent. Angelina
also maintains she was the one who had been paying the realty taxes
on the property.

Is the transaction between Adoracion and Angelina an

equitable mortgage?
ART. 1602. The contract shall be presumed to be an equitable
mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is unusually
inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase
another instrument extending the period of redemption or granting a
new period is executed;

(4) When the purchaser retains for himself a part of the purchase
price;
(5) When the vendor binds himself to pay the taxes on the thing
sold;
(6) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.
xxxx

In this case, none of the instances enumerated above

attended the assailed transaction between Adoracion and Angelina.

We are unable to sustain Adoracions claim that the

consideration of P3,000 for the absolute sale of a 70-square meter
residential lot in suburban Bacoor, Cavite was grossly inadequate.
Records show that the market value in 1981 of the entire property,
consisting of 282 square meters, was only P22,560. Thus, her onefourth share would have roughly amounted to a market value of
about P5,640, not exactly grossly disproportionate to the selling
price of P3,000. The sale should be viewed in light of Adoracions
own admission that she was in dire financial straits at the time of
the transaction. This explains why the selling price was below the
actual market value of the property.

Adoracion also claims that she paid the real estate taxes on
the property. However, the Tax Receipts on record clearly indicate
that it was Angelina who had been paying the realty taxes on the
property from the time of the sale until the filing by Adoracion of
the Complaint for its annulment. Adoracion, on the other hand,
failed to present any evidence to support her claim .

As to Adoracions bare allegation of continuous possession

of the disputed property it must be noted that Adoracion is a sisterin-law of Angelina. Adoracion was already advanced in age and
ailing, with no husband or children to look after her. Angelina, on
the other hand, already had a comfortable place to live in and was
faring better than Adoracion so this explains why Angelina opted
not to assert her superior right to possession of the said property.
Such mere tolerated possession is not enough to prove that the
transaction between the parties was an equitable mortgage.

In sum, we are convinced the transaction entered into by

Adoracion and Angelina in 1981 was indeed a sale, not an equitable
mortgage.

Is the said sale nevertheless voidable on account of alleged

fraud?
Article 1390 of the Civil Code provides:
ART. 1390. The following contracts are voidable or annullable, even
though there may have been no damage to the contracting parties:

26

xxxx
(2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a proper
action in court.

Based on the foregoing, when the consent of one of the

contracting parties is vitiated by fraud, the contract is voidable.

However, even granting that Adoracions consent to the sale

was indeed obtained through fraud, the action to annul the contract
is subject to a prescriptive period of four years from the time of the
discovery of the fraud. The time of discovery is the date when the
deed of sale was registered with the Register of Deeds because
registration constitutes constructive notice to the world.

In the instant case, records show that the deed of sale was
registered on July 5, 1988. Hence, Adoracions action to annul the
sale on the ground of fraud prescribed on July 5, 1992. Therefore,
when Adoracion filed on November 27, 1992 her Complaint for
annulment of the sale, the action had long prescribed.

With the effective prescription of the action to annul the sale

on the ground of fraud, it would now be futile to discuss the issue of
presumption of regularity of the execution of the notarized deed of
sale.

The petition is DENIED. Court of Appeals decision which

affirmed with modification the RTC decision AFFIRMED.

27