Oblicon Digest

Obligations and Contracts 1
Case Notes/Digests
San Ildefonso Lines vs. CA
FACTS: At around 3:30 in the afternoon of June 24, 1991, a Toyota Lite Ace Van
being driven by its owner Annie U. Jao and a passenger bus of herein petitioner San
Ildefonso Lines, Inc. (hereafter, SILI) figured in a vehicular mishap at the intersection
of Julia Vargas Avenue and Rodriguez Lanuza Avenue in Pasig, Metro Manila, totally
wrecking the Toyota van and injuring Ms. Jao and her two (2) passengers in the
process.
A criminal case was thereafter filed with the Regional Trial Court of Pasig on
September 18, 1991 charging the driver of the bus, herein petitioner Eduardo Javier,
with reckless imprudence resulting in damage to property with multiple physical
injuries.
About four (4) months later, or on January 13, 1992, herein private respondent
Pioneer Insurance and Surety Corporation (PISC), as insurer of the van and
subrogee, filed a case for damages against petitioner SILI with the Regional Trial
Court of Manila, seeking to recover the sums it paid the assured under a motor
vehicle insurance policy as well as other damages, totaling P564,500.00
(P454,000.00 as actual/compensatory damages; P50,000.00 as exemplary
damages; P50,000.00 as attorney's fees; P10,000.00 as litigation expenses; and
P500.00
as
appearance
fees.)
ISSUEs: 1) If a criminal case was filed, can an independent civil action based on
quasi-delict under Article 2176 of the Civil Code be filed if no reservation was made
in
the
said
criminal
case?
2) Can a subrogee of an offended party maintain an independent civil action during
the pendency of a criminal action when no reservation of the right to file an
independent civil action was made in the criminal action and despite the fact that
the private complainant is actively participating through a private prosecutor in the
aforementioned
criminal
case?
RULING: WHEREFORE, premises considered, the assailed decision of the Court of
Appeals dated February 24, 1995 and the Resolution dated April 3, 1995 denying
the motion for reconsideration thereof are hereby REVERSED and SET ASIDE. The
"MANIFESTATION AND MOTION TO SUSPEND CIVIL PROCEEDINGS" filed by
petitioners
is
GRANTED.
RATIO: Now that the necessity of a prior reservation is the standing rule that shall
govern the institution of the independent civil actions referred to in Rule 111 of the
Rules of Court, past pronouncements that view the reservation requirement as an
"unauthorized amendment" to substantive law - i.e., the Civil Code, should no
longer be controlling. There must be a renewed adherence to the time-honored
dictum that procedural rules are designed, not to defeat, but to safeguard the ends
of substantial justice. And for this noble reason, no less than the Constitution itself
has mandated this Court to promulgate rules concerning the enforcement of rights
Christian Arbiol
1A San Beda College Alabang School of Law

Case Notes/Digests
with the end in view of providing a simplified and inexpensive procedure for the
speedy disposition of cases which should not diminish, increase or modify
substantive rights. Far from altering substantive rights, the primary purpose of the
reservation is, to borrow the words of the Court in "Caos v. Peralta"
Clearly then, private respondent PISC, as subrogee under Article 2207 of the Civil
Code, is not exempt from the reservation requirement with respect to its damages
suit based on quasi-delict arising from the same act or omission of petitioner Javier
complained of in the criminal case. As private respondent PISC merely stepped into
the shoes of Ms. Jao (as owner of the insured Toyota van), then it is bound to
observe the procedural requirements which Ms. Jao ought to follow had she herself
instituted the civil case.
Rafael Reyes Trucking vs. People
Facts:
In the early morning of June 20, 1989, the White Truck driven by Dunca left
Tuguegarao, Cagayan bound to San Fernando, Pampanga loaded with 2,000 cases of
empty beer Grande bottles. Seated at the front right seat beside him was
Ferdinand Domingo, his truck helper. At around 4:00 oclock that same morning
while the truck was descending at a slight downgrade along the national road at
Tagaran, Cauayan, Isabela, it approached a damaged portion of the road covering
the full width of the trucks right lane going south and about six meters in length.
These made the surface of the road uneven because the potholes were about five to
six inches deep. The left lane parallel to this damaged portion is smooth. As
narrated by Ferdinand Domingo, before approaching the potholes, he and Dunca
saw the Nissan with its headlights on coming from the opposite direction. They used
to evade this damaged road by taking the left lance but at that particular moment,
because of the incoming vehicle, they had to run over it. This caused the truck to
bounce wildly. Dunca lost control of the wheels and the truck swerved to the left
invading the lane of the Nissan. As a result, Duncas vehicle rammed the incoming
Nissan dragging it to the left shoulder of the road and climbed a ridge above said
shoulder where it finally stopped. The Nissan was severely damaged and its two
passengers, namely, Feliciano Balcita and Francisco Dy, Jr. died instantly. On
October 10, 1989, Provincial Prosecutor Durian filed with the RTC an amended
information charging Dunca with reckless imprudence resulting in double homicide
and damage to property. On November 29, 1989, the offended parties filed with the
RTC a complaint against petitioner Rafael Reyes Trucking Corporation, as employer
of driver Dunca, based on quasi delict. Respondents opted to pursue the criminal
action but did not withdraw the civil case quasi ex delicto they filed against
petitioner. On December 15, 1989, respondents withdrew the reservation to file a
separate civil action against the accused and manifested that they would prosecute
the civil aspect ex delicto in the criminal action. However, they did not withdraw the
separate civil action based on quasi delict against petitioner as employer arising
from the same act or omission of the accused driver. The RTC held that the driver
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Case Notes/Digests
was guilty. Respondents moved for amendment of the dispositive portion of the joint
decision so as to hold petitioner subsidiarily liable for the damages awarded to the
private respondents in the event of insolvency of the accused, which the lower court
granted.
Issues:
(1) Whether or not petitioner as owner of the truck involved in the accident may be
held subsidiarily liable for the damages awarded to the offended parties in the
criminal action against the truck driver despite the filing of a separate civil action by
the offended parties against the employer of the truck driver; and
(2) Whether or not the Court may award damages to the offended parties in the
criminal case despite the filing of a civil action against the employer of the truck
driver.
Held:
(1) No. In negligence cases, the aggrieved party has the choice between (1) an
action to enforce civil liability arising from crime under Article 100 of the Revised
Penal Code; and (2) a separate action for quasi delict under Article 2176 of the Civil
Code of the Philippines. Once the choice is made, the injured party can not avail
himself of any other remedy because he may not recover damages twice for the
same negligent act or omission of the accused. This is the rule against
double recovery.In other words, the same act or omission can create two kinds of
liability on the part of the offender, that is, civil liability ex delicto, and civil liability
quasi delicto either of which may be enforced against the culprit, subject to the
caveat under Article 2177 of the Civil Code that the offended party can not recover
damages under both types of liability. In the instant case, the offended parties
elected to file a separate civil action for damages against petitioner as employer of
the accused, based on quasi delict, under Article 2176 of the Civil Code of the
Philippines. Petitioner, as employer of the accused who has been adjudged guilty in
the criminal case for reckless imprudence, cannot be held subsidiarily liable
because of the filing of the separate civil action based on quasi delict against it. In
view of the reservation to file, and the subsequent filing of the civil action for
recovery of civil liability, the same was not instituted with the criminal action. Such
separate civil action was for recovery of damages under Article 2176 of the Civil
Code,
arising
from
the
same
act
or
omission
of
the
accused.
(2) No. The award of damages in the criminal case was improper because the civil
action for the recovery of civil liability was waived in the criminal action by the filing
of a separate civil action against the employer. The only issue brought before the
trial court in the criminal action is whether accused Dunca is guilty of reckless
imprudence resulting in homicide and damage to property. The action for recovery
of civil liability is not included therein, but is covered by the separate civil action
filed against the petitioner as employer of the accused truck-driver. The policy
against double recovery requires that only one action be maintained for the same
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Case Notes/Digests
act or omission whether the action is brought against the employee or against his
employer. The injured party must choose which of the available causes of action for
damages he will bring.
LRT vs. Navidad

FACTS:
Navidad was drunk when he entered the boarding platform of the LRT. He got into an
altercation with the SG Escartin. They had a fistfight and Navidad fell onto the tracks and
was killed when a train came and ran over him.
The Heirs of Navidad filed a complaint for damages against Escartin, the train driver,
(Roman) the LRTA, the Metro Transit Organization and Prudent Security Agency (Prudent).
The trial court found Prudent and Escartin jointly and severally liable for damages to the
heirs. The CA exonerated Prudent and instead held the LRTA and the train driver Romero
jointly and severally liable as well as removing the award for compensatory damages and
replacing it with nominal damages.
The reasoning of the CA was that a contract of carriage already existed between Navidad
and LRTA (by virtue of his havA ing purchased train tickets and the liability was caused by
the mere fact of Navidad's death after being hit by the train being managed by the LRTA
and operated by Roman. The CA also blamed LRTA for not having presented expert evidence
showing that the emergency brakes could not have stopped the train on time.
ISSUES:
(1) Whether or not LRTA and/or Roman is liable for the death.
(2)
Whether
or
not
Escartin
and/or
Prudent
are
(3) Whether or not nominal damages may coexist with compensatory damages.
liable.
HELD:
(1) Yes. The foundation of LRTA's liability is the contract of carriage and its obligation to
indemnify the victim arising from the breach of that contract by reason of its failure to
exercise the high diligence required of a common carrier.
(2) Fault was not established. Liability will be based on Tort under Art. 2176 of the New Civil
Code.
(3) No. It is an established rule that nominal damages cannot co-exist with compensatory
damages.
RATIO:
Liability of LRTA Read Arts. 1755,1756, 1759 and 1763 of the New Civil Code
A common carrier is required by these above statutory provisions to use utmost diligence in
carrying passengers with due regard for all circumstances. This obligation exists not only
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Case Notes/Digests
during the course of the trip but for so long as the passengers are within its premises where
they ought to be in pursuance to then contract of carriage.
Art. 1763 renders a common carrier liable for death of or injury to passengers (a) through
the negligence or wilful acts of its employees or (b) on account of willful acts or negligence
of other passengers or of strangers if the common carriers employees through theexercise
of due diligence could have prevented or stopped the act or omission. In case of such death
or injury, a carrier is presumed to have been at fault or been negligent, and by simple proof
of injury, the passenger is relieved of the duty to still establish the fault or negligence of the
carrier or of its employees and the burden shifts upon the carrier to prove that the injury is
due to an unforeseen event or to force majeure.
Liability of Security Agency If Prudent is to be held liable, it would be for a tort under
Art. 2176 in conjunction with Art. 2180. Once the fault of the employee Escartin is
established, the employer, Prudent, would be held liable on the presumption that it did not
exercise the diligence of a good father of the family in the selection and supervision of its
employees.
Relationship between contractual and non-contractual breach How then must the
liability of the common carrier, on the one hand, and an independent contractor, on the
other hand, be described? It would be solidary. A contractual obligation can be breached by
tort and when the same act or omission causes the injury, one resulting in culpa
contractual and the other in culpa aquiliana, Article 2194 of the Civil Code can well apply. In
fine, a liability for tort may arise even under a contract, where tort is that which breaches
the contract. Stated differently, when an act which constitutes a breach of ontract would
have itself constituted the source of a quasi-delictual liability had no contract existed
between the parties, the contract can be said to have been breached by tort, thereby
allowing
the
rules
on
tort
to
apply.
Nominal Damages - The award of nominal damages in addition to actual damages
is untenable. Nominal damages are adjudicated in order that a right of the plaintiff, which
has been violated or invaded by the defendant, may be vindicated or recognized, and not
for the purpose of indemnifying the plaintiff for any loss suffered by him. It is an established
rule that nominal damages cannot co-exist with compensatory damages. The award was
deleted/\.
Liga vs. Allegro Resources

Facts:
Ortigas & Company, Limited Partnership entered into a lease agreement with La Paz
Investment & Realty Corporation wherein the former leased to the latter its parcel of land
located in San Juan. La Paz constructed the Greenhills Shopping Arcade and divided it into
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Case Notes/Digests
several stalls and subleased them to other people. One of the sub-lessees was Edsel Liga
(Liga), who obtained the leasehold right to Unit No. 26, Level A of the GSA.
As the lease expired, the stallholders made several attempts to have their leasehold rights
extended.
Allegro Resources became the new lessee. As the new lessee, Allegro offered to sublease
Unit No. 26, Level A to Liga. They entered into a lease agreement dubbed Rental Information
in which Liga agreed to pay rental of P40K monthly. She also agreed to pay the back rentals
due Ortigas. Liga also gave P40K as one month advance rental and another P40K as one
month security deposit as provided in the agreement.
Liga failed to pay the subsequent due rent. Despite repeated demands from Allegro, Liga
had failed to pay her rentals for the subleased property, as well as the back rentals from
January to August 2001 due Ortigas.
Issues:
WON Liga should pay to Ortigas back rentals covering the period 1 January 2001 to 31
August
2001?
NO
WON Liga should pay to Allegro back rentals in the amount of P40K a month starting from 1
September
2001
until
such
time
as
she
vacates
the
leased
property?
YES
WON Liga should pay to Allegro the amount of P20K as attorneys fees and the costs of suit?
YES
Held:
(1) Ortigas is not a party to this case, whether as plaintiff or otherwise. It is basic that no
relief can be extended in a judgment to a stranger or one who is not a party to a case. (2)
Allegro cannot justify the award as a legal representative by virtue of a provision in its lease
agreement with Ortigas. Allegro did not aver in its complaint that it was acting as Ortigass
legal representative and seeking the back rentals due Ortigas. (3) There is no allegation or
prayer in the complaint that Allegro was seeking the collection of the back rentals due
Ortigas.
The Court cannot countenance the obstinate refusal of Liga to pay P40K a month to Allegro
since she had already acquiesced to pay such rental rate when she signed the Rental
Information. It is fundamental that a contract is the law between the parties. Obligations
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Case Notes/Digests
arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.
It is a general principle of law that no one may be permitted to change his mind or disavow
and go back upon his own acts, or to proceed contrary thereto, to the prejudice of the other
party.
Likewise, it is settled that if the terms of the contract clearly express the intention of the
contracting parties, the literal meaning of the stipulations would be controlling.
Law and jurisprudence support the award of attorneys fees and costs of suit in favor of
Allegro. Attorneys fees and costs of litigation are awarded in instances where the
defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly
valid, just and demandable claim. Having delivered possession over the leased property to
Liga, Allegro had already performed its obligation under the lease agreement. Liga should
have exercised fairness and good judgment in dealing with Allegro by religiously paying the
agreed monthly rental of P40,000.00.
Makati Stock Exchange vs. Campos

Facts: SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent
Miguel V. Campos, who filed with the Securities, Investigation and Clearing
Department (SICD) of the Securities and Exchange Commission (SEC), a Petition
against herein petitioners Makati Stock Exchange, Inc. (MKSE) and MKSE directors.
Respondent, in said Petition, sought: (1) the nullification of the Resolution dated 3
June 1993 of the MKSE Board of Directors, which allegedly deprived him of his right
to participate equally in the allocation of Initial Public Offerings (IPO) of corporations
registered with MKSE; (2) the delivery of the IPO shares he was allegedly deprived
of, for which he would pay IPO prices; and (3) the payment of P2 million as moral
damages, P1 million as exemplary damages, and P500,000.00 as attorney's fees
and litigation expenses.
On 14 February 1994, the SICD issued an Order granting respondent's prayer for the
issuance of a Temporary Restraining Order to enjoin petitioners from implementing
or enforcing the 3 June 1993 Resolution of the MKSE Board of Directors.
On 11 March 1994, petitioners filed a Motion to Dismiss respondent's Petition in SEC
Case No. 02-94-4678, based on the following grounds: (1) the Petition became moot
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Case Notes/Digests
due to the cancellation of the license of MKSE; (2) the SICD had no jurisdiction over
the Petition; and (3) the Petition failed to state a cause of action.
In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10
March 1994 Order of SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary
Injunction in favor of respondent. Likewise, in an Order dated 14 August 1995 in
SEC-EB No. 403, the SEC en banc annulled the 4 May 1994 Order of SICD in SEC
Case No. 02-94-4678 denying petitioners' Motion to Dismiss, and accordingly
ordered the dismissal of respondent's Petition before the SICD. Respondent filed a
Petition for Certiorari with the Court of Appeals assailing the Orders of the SEC en
banc, but to no avail. An MR was filed, but it was subsequently denied by the CA.
Now this petition.
Issue: Whether or not the respondent has a cause of action against the petitioner.
Held: A cause of action is the act or omission by which a party violates a right of
another. A complaint states a cause of action where it contains three essential
elements of a cause of action, namely: (1) the legal right of the plaintiff, (2) the
correlative obligation of the defendant, and (3) the act or omission of the defendant
in violation of said legal right. If these elements are absent, the complaint becomes
vulnerable to dismissal on the ground of failure to state a cause of action.
The test of sufficiency of the facts found in a complaint as constituting a cause of
action is whether or not admitting the facts alleged, the court can render a valid
judgment upon the same in accordance with the prayer thereof. While, by filing the
motion to dismiss, the defendant hypothetically admits the averments stated in the
complaint.
There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in
favor of respondent, particularly, respondent's alleged right to subscribe to the IPOs
of corporations listed in the stock market at their offering prices; and stipulates the
correlative obligation of petitioners to respect respondent's right, specifically, by
continuing to allow respondent to subscribe to the IPOs of corporations listed in
the stockmarket at their offering prices.
However, the terms right and obligation in respondent's Petition are not magic
words that would automatically lead to the conclusion that such Petition sufficiently
states a cause of action. Right and obligation are legal terms with specific legal
meaning. A right is a claim or title to an interest in anything whatsoever that is
enforceable by law. An obligation is defined in the Civil Code as a juridical necessity
to give, to do or not to do. For every right enjoyed by any person, there is a
corresponding obligation on the part of another person to respect such right.
However, an obligation imposed upon a person must be one of the sources
enumerated under Art. 1157 of the Civil Code. The mere assertion of a right and
claim of an obligation in an initiatory pleading, whether a Complaint or Petition,
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Case Notes/Digests
without identifying the basis or source thereof, is merely a conclusion of fact and
law.
The complaint on its face relies on the right of the respondent in a customary
manner, which is not among those provided under Art. 1157 of the NCC. Although a
custom is not one of those provided under Art. 1157, there are some instances
wherein customs are a source of right such as in International Law, which is
ultimately limited under it; even in Labor Code where it is customary for the
employer to grant additional benefits to the employee, but such benefits cannot be
diminished because it is prohibited by law and that there is no such law in this case
that converts the practice of allocating IPO shares to MKSE members, for
subscription at their offering prices, into an enforceable or demandable right. Thus,
even if it is hypothetically admitted that normally, twenty five percent (25%) of the
IPOs are divided equally between the two stock exchanges which, in turn, divide
their respective allocation equally among their members, including the Chairman
Emeritus, who pay for IPO shares at the offering price the Court cannot grant
respondent's prayer for damages which allegedly resulted from the MKSE Board
Resolution dated 3 June 1993 deviating from said practice by no longer allocating
any shares to respondent.
Chavez vs. Reyes

Facts: In the early part of July, 1963, the plaintiff delivered to the defendant, who is
a typewriter repairer, a portable typewriter for routine cleaning and servicing. The
defendant was not able to finish the job after some time despite repeated reminders
made by the plaintiff. The defendant merely gave assurances, but failed to comply
with the same. In October, 1963, the defendant asked from the plaintiff the sum of
P6.00 for the purchase of spare parts, which amount the plaintiff gave to the
defendant. On October 26, 1963, after getting exasperated with the delay of the
repair of the typewriter, the plaintiff went to the house of the defendant and asked
for the return of the typewriter. The defendant delivered the typewriter in a wrapped
package. On reaching home, the plaintiff examined the typewriter returned to him
by the defendant and found out that the same was in shambles, with the interior
cover and some parts and screws missing. On October 29, 1963. the plaintiff sent a
letter to the defendant formally demanding the return of the missing parts, the
interior cover and the sum of P6.00 (Exhibit D). The following day, the defendant
returned to the plaintiff some of the missing parts, the interior cover and the P6.00.
On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business
Machines, and the repair job cost him a total of P89.85, including labor and
materials.
The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves,
is that it awarded only the value of the missing parts of the typewriter, instead of
the whole cost of labor and materials that went into the repair of the machine, as
provided for in Article 1167 of the Civil Code.
On the other hand, the position of the defendant-appellee, Fructuoso Gonzales, is
that he is not liable at all, not even for the sum of P31.10, because his contract with
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Case Notes/Digests
plaintiff-appellant did not contain a period, so that plaintiff-appellant should have
first filed a petition for the court to fix the period, under Article 1197 of the Civil
Code, within which the defendant appellee was to comply with the contract before
said defendant-appellee could be held liable for breach of contract.
Issue: Whether the respondent should be held liable for the contract of labor and
services as well as for the materials which the plaintiff spent for the entire repair of
the typewriter.
Held: The appealed judgment states that the "plaintiff delivered to the
defendant . . . a portable typewriter for routine cleaning and servicing"; that the
made by the plaintiff"; that the "defendant merely gave assurances, but failed to
comply with the same"; and that "after getting exasperated with the delay of the
repair of the typewriter", the plaintiff went to the house of the defendant and asked
for its return, which was done. The inferences derivable from these findings of fact
are that the appellant and the appellee had a perfected contract for cleaning and
servicing a typewriter; that they intended that the defendant was to finish it at
some future time although such time was not specified; and that such time had
passed without the work having been accomplished, far the defendant returned the
typewriter cannibalized and unrepaired, which in itself is a breach of his obligation,
without demanding that he should be given more time to finish the job, or
compensation for the work he had already done. (That the defendant is
already liable for the breach of contract, so there is no more need for imposing the
period for compliance.) The time for compliance having evidently expired, and there
being a breach of contract by non-performance, it was academic for the plaintiff to
have first petitioned the court to fix a period for the performance of the contract
before filing his complaint in this case. Defendant cannot invoke Article 1197 of the
Civil Code for he virtually admitted non-performance by returning the typewriter
that he was obliged to repair in a non-working condition, with essential parts
missing. The fixing of a period would thus be a mere formality and would serve no
purpose than to delay (cf. Tiglao. et al. V. Manila Railroad Co. 98 Phil. 181).
It is clear that the defendant-appellee contravened the tenor of his obligation
because he not only did not repair the typewriter but returned it "in shambles",
according to the appealed decision. For such contravention, as appellant contends,
he is liable under Article 1167 of the Civil Code. jam quot, for the cost of executing
the obligation in a proper manner. The cost of the execution of the obligation in this
case should be the cost of the labor or service expended in the repair of the
typewriter, which is in the amount of P58.75. because the obligation or contract was
to repair it.
In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code,
for the cost of the missing parts, in the amount of P31.10, for in his obligation to
repair the typewriter he was bound, but failed or neglected, to return it in the same
condition it was when he received it.
As to damages, there is no sufficient quantum of proof that would support, since it
was not alleged by the plaintiff in his complaint.
Christian Arbiol

Case Notes/Digests
Diesel vs. UPSI Holdings
Facts: Before the Court are these petitions for review under Rule 45 separately
interposed by Diesel Construction Co., Inc. (Diesel) and UPSI Property Holdings, Inc.
(UPSI) to set aside the Decision dated April 16, 2002 as partly modified in a
Resolution of August 21, 2002, both rendered by the Court of Appeals. The CA
Decision modified the Decision dated December 14, 2001 of the Arbitral Tribunal of
the Construction Industry Arbitration Commission (CIAC)
On August 26, 1995, Diesel, as Contractor, and UPSI, as Owner, entered into
a Construction Agreement (Agreement)
for
the
interior
architectural construction works for the 14th to 16th floors of the UPSI Building 3
Meditel/Condotel Project (Project) located on Gen. Luna St., Ermita, Manila. Under
the Agreement, as amended, Diesel, for PhP12,739,099, agreed to undertake the
Project, payable by progress billing. As stipulated, Diesel posted, through FGU
Insurance Corp. (FGU), a performance bond in favor of UPSI.
Inter alia, the Agreement contained provisions on contract works and Project
completion, extensions of contract period, change/extra works orders, delays, and
damages for negative slippage. Under the Agreement, the Project prosecution
proper was to start on August 2, 1999, to run for a period of 90 days or until
November 8, 1999. The parties later agreed to move the commencement date to
August 21, 1999, a development necessitating the corresponding movement of the
completion date to November 20, 1999.
Of particular relevance to this case is the section obliging the contractor, in case of
unjustifiable delay, to pay the owner liquidated damages in the amount equivalent
to one-fifth (1/5) of one (1) percent of the total Project cost for each calendar day of
delay. (100[assuming]x1%= P1x.20 = P.20 per day of delay)
In the course of the Project implementation, change orders were effected and
extensions sought. At one time or another, Diesel requested for extension owing to
the following causes or delaying factors: (1) manual hauling of materials from the
14th to 16th floors; (2) delayed supply of marble; (3) various change orders; and (4)
delay in the installation of shower assembly. (In short, certain circumstances
warranted the asking of extensions, due to difficulty/impossibility on the part of
diesel to comply)
UPSI, it would appear, disapproved the desired extensions on the basis of the
foregoing causes, thus putting Diesel in a state of default for a given contract work.
And for every default situation, UPSI assessed Diesel for liquidated damages in the
form of deductions from Diesel's progress payments, as stipulated in the
Agreement.
Apparently irked by and excepting from the actions taken by UPSI, Diesel, thru its
Project manager, sent, on March 16, 2000 (technically, they finished the project
on a date beyond what is contemplated in their agreement, which is November), a
letter notice to UPSI stating that the Project has been completed as of that date.
UPSI, however, disregarded the notice, and refused to accept delivery of the
contracted premises, claiming that Diesel had abandoned the Project unfinished.
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Case Notes/Digests
Apart therefrom, UPSI withheld Diesel's 10% "retention money" and refused
to pay the unpaid balance of the contract price.
It is upon the foregoing factual backdrop that Diesel filed a complaint before the
CIAC, praying that UPSI be compelled to pay the unpaid balance of the contract
price, plus damages and attorney's fees. In an answer with counterclaim, UPSI
denied liability, accused Diesel of abandoning a project yet to be finished, and
prayed for repayment of expenses it allegedly incurred for completing the Project
and for a declaration that the deductions it made for liquidated damages were
proper. UPSI also sought payment of attorney's fees.
After due hearing following a protracted legal sparring, the Arbitral Tribunal of the
CIAC, on December 14, 2001, in CIAC Case No. 18-2001, rendered judgment
for Diesel, albeit for an amount lesser than its original demand. To be precise, the
CIAC ordered UPSI to pay Diesel the total amount of PhP4,027,861.60, broken down
as follows: PhP3,661,692.60, representing the unpaid balance of the contract price;
and PhP366,169 as attorney's fees. Therefrom, Diesel and UPSI each sought
reconsideration. On August 21, 2002, the CA issued its equally assailed Resolution
denying reconsideration to UPSI, but partially granting Diesel's motion.
Issue:
1. Whether the delay incurred by the petitioner is excusable or not.
2. Whether the petitioner is entitled to the payment of the unpaid balance
withheld by the respondent.
Held:
1. Therefore, We hold that the delays occasioned by Diesel's inability to install
its hoisting machine . . . [were] attributable solely to Diesel, and thus the
resultant delay cannot be charged against the ninety-day period for the
termination of the construction.
Hence, as correctly held by the CIAC, UPSI, no less, effectively moved the
completion date, through the various COs, to April 7, 2000.
Moreover, as evidenced by UPSI's Progress Report No. 19 for the period
ending March 22, 2000, Diesel's scope of work, as of that date, was already
97.56% complete. Such level of work accomplishment would, by any rational
norm, be considered as substantial to warrant full payment of the contract
amount, less actual damages suffered by UPSI. Article 1234 of the Civil Code
says as much, "If the obligation had been substantially performed in good
faith, the obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee."
The fact that the laborers of Diesel were still at the work site as of March 22,
2000 is a reflection of its honest intention to keep its part of the bargain and
complete the Project. Thus, when Diesel attempted to turn over the premises
to UPSI, claiming it had completed the Project on March 15,
2000, Diesel could no longer be considered to be in delay. In
all, Diesel cannot be considered as in delay and, hence, is not amenable
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Case Notes/Digests
under the Agreement for liquidated damages. (Since there were previous
change orders incurred by the respondent which justified the alleged delay
by the petitioner in their contract, hence, Diesel is not in any way, delayed in
their performance of the obligation.)
2. Yes, moreover, as evidenced by UPSI's Progress Report No. 19 for the period
ending March 22, 2000, Diesel's scope of work, as of that date, was already
97.56% complete. Such level of work accomplishment would, by any rational
norm, be considered as substantial to warrant full payment of the contract
amount, less actual damages suffered by UPSI. Article 1234 of the Civil Code
says as much, "If the obligation had been substantially performed in good
faith, the obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee."
Given the 97.56% work accomplishment tendered by Diesel, UPSI's theory of
abandonment and of its having spent a sum to complete the work must fall
on its face. We can concede hypothetically that UPSI undertook what it
characterized as "additional or rectification" works on the Project. But as both
the CIAC and CA held, UPSI failed to show that such "additional or
rectification" works, if there be any, were the necessary result of the faulty
workmanship of Diesel. The foregoing notwithstanding and considering
that Diesel may only be credited for 97.56% work accomplishment, UPSI
ought to be compensated, by way of damages, in the amount corresponding
to the value of the 2.44% unfinished portion (100% - 97.56% = 2.44%). In
absolute terms, 2.44% of the total Project cost translates to PhP310,834.01.
This disposition is no more than adhering to the command of Art. 1234 of the
Civil Code.
Pantaleon vs. American Express Inc. (Main Case)
Facts: The petitioner, lawyer Polo Pantaleon, his wife Julialinda, daughter Anna
Regina and son Adrian Roberto, joined an escorted tour of Western Europe
organized by Trafalgar Tours of Europe, Ltd., in October of 1991. The tour group
arrived in Amsterdam in the afternoon of 25 October 1991, the second to the last
day of the tour. As the group had arrived late in the city, they failed to engage in
any sight-seeing. Instead, it was agreed upon that they would start early the next
day to see the entire city before ending the tour.
The following day, the last day of the tour, the group arrived at the Coster Diamond
House in Amsterdam around 10 minutes before 9:00 a.m. The group had agreed
that the visit to Coster should end by 9:30 a.m. to allow enough time to take in a
guided city tour of Amsterdam. The group was ushered into Coster shortly before
9:00 a.m., and listened to a lecture on the art of diamond polishing that lasted for
around ten minutes. Afterwards, the group was led to the store's showroom to allow
them to select items for purchase. Mrs. Pantaleon had already planned to purchase
even before the tour began a 2.5 karat diamond brilliant cut, and she found a
diamond
close
enough
in
approximation
that
she
decided
to
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Case Notes/Digests
buy. Mrs. Pantaleon also selected for purchase a pendant and a chain, all of which
totaled U.S. $13,826.00.
To pay for these purchases, Pantaleon presented his American Express credit card
together with his passport to the Coster sales clerk. This occurred at around 9:15
a.m., or 15 minutes before the tour group was slated to depart from the store. The
sales clerk took the card's imprint, and asked Pantaleon to sign the charge slip. The
charge purchase was then referred electronically to respondent's Amsterdam office
at 9:20 a.m.
Ten minutes later, the store clerk informed Pantaleon that his AmexCard had not yet
been approved. His son, who had already boarded the tour bus, soon returned to
Coster and informed the other members of the Pantaleon family that the entire tour
group was waiting for them. As it was already 9:40 a.m., and he was already
worried about further inconveniencing the tour group, Pantaleon asked the store
clerk to cancel the sale. The store manager though asked plaintiff to wait a few
more minutes. After 15 minutes, the store manager informed Pantaleon that
respondent had demanded bank references. Pantaleon supplied the names of his
depositary banks, then instructed his daughter to return to the bus and apologize to
the tour group for the delay.
At around 10:00 a.m., or around 45 minutes after Pantaleon had presented his
AmexCard, and 30 minutes after the tour group was supposed to have left the store,
Coster decided to release the items even without respondent's approval of the
purchase. The spousesPantaleon returned to the bus. It is alleged that their offers of
apology were met by their tourmates with stony silence. The tour group's visible
irritation was aggravated when the tour guide announced that the city tour of
Amsterdam was to be canceled due to lack of remaining time, as they had to catch
a 3:00 p.m. ferry at Calais, Belgium to London. Mrs. Pantaleon ended up weeping,
while her husband had to take a tranquilizer to calm his nerves.
It later emerged that Pantaleon's purchase was first transmitted for approval to
respondent's Amsterdam office at 9:20 a.m., Amsterdam time, then referred to
respondent's Manila office at 9:33 a.m., then finally approved at 10:19 a.m.,
Amsterdam time. The Approval Code was transmitted to respondent's Amsterdam
office at 10:38 a.m., several minutes after petitioner had already left Coster, and
78 minutes from the time the purchases were electronically transmitted by the
jewelry store to respondent's Amsterdam office.
While in the United States, Pantaleon continued to use his AmEx card,
Pantaleon purchased golf equipment amounting to US $1,475.00 using his AmEx
card, but he cancelled his credit card purchase and borrowed money instead from a
friend, after more than 30 minutes had transpired without the purchase having been
approved. On 3 November 1991, Pantaleon used the card to purchase children's
shoes worth $87.00 at a store in Boston, and it took 20 minutes before this
transaction was approved by respondent.
On 4 March 1992, after coming back to Manila, Pantaleon sent a letter through
counsel to the respondent, demanding an apology for the "inconvenience,
humiliation and embarrassment he and his family thereby suffered" for respondent's
refusal to provide credit authorization for the aforementioned purchases.
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Case Notes/Digests
In response, respondent sent a letter dated 24 March 1992, stating among others
that the delay in authorizing the purchase from Coster was attributable to the
circumstance that the charged purchase of US $13,826.00 "was out of the usual
charge purchase pattern established".
Since respondent refused to accede to Pantaleon's demand for an apology, the
aggrieved cardholder instituted an action for damages with the Regional Trial Court
(RTC) of Makati City, Branch 145.
On 18 August 2006, the Court of Appeals rendered a decision reversing the award
of damages in favor of Pantaleon, holding that respondent had not breached its
obligations to petitioner. Hence, this petition.
Issue: Whether the respondent committed a breach of its obligation
Held: On the premise that there was an obligation on the part of respondent "to
approve or disapprove with dispatch the charge purchase", petitioner argues that
the failure to timely approve or disapprove the purchase constituted mora
solvendi on the part of respondent in the performance of its obligation. For its part,
respondent characterizes the depiction by petitioner of its obligation to him as "to
approve purchases instantaneously or in a matter of seconds .
We can see the possible source of confusion as to which type of mora to appreciate.
Generally, the relationship between a credit card provider and its card holders is
that of creditor-debtor, with the card company as the creditor extending loans and
credit to the card holder, who as debtor is obliged to repay the creditor. This
relationship already takes exception to the general rule that as between a bank and
its depositors, the bank is deemed as the debtor while the depositor is considered
as the creditor. Petitioner is asking us, not baselessly, to again shift perspectives
and again see the credit card company as the debtor/obligor, insofar as it has the
obligation to the customer as creditor/obligee to act promptly on its
purchases on credit.
Notwithstanding the popular notion that credit card purchases are approved "within
seconds", there really is no strict, legally determinative point of demarcation on how
long must it take for a credit card company to approve or disapprove a customer's
purchase, much less one specifically contracted upon by the parties. Yet this is
one of those instances when "you'd know it when you'd see it", and one
hour appears to be an awfully long, patently unreasonable length of time
to approve or disapprove a credit card purchase. It is long enough time for
the customer to walk to a bank a kilometer away, withdraw money over the
counter, and return to the store.
Notably, petitioner frames the obligation of respondent as "to approve or
disapprove" the purchase "in timely dispatch", and not "to approve the purchase
instantaneously or within seconds". Certainly, had respondent disapproved
petitioner's purchase "within seconds" or within a timely manner, this particular
action would have never seen the light of day. Petitioner and his family would have
returned to the bus without delay internally humiliated perhaps over the rejection
of his card yet spared the shame of being held accountable by newly-made
friends for making them miss the chance to tour the city of Amsterdam.
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Case Notes/Digests
We do not wish to dispute that respondent has the right, if not the obligation, to
verify whether the credit it is extending upon on a particular purchase was indeed
contracted by the cardholder, and that the cardholder is within his means to make
such transaction. The culpable failure of respondent herein is not the failure to
timely approve petitioner's purchase, but the more elemental failure to timely
act on the same, whether favorably or unfavorably.
Pantaleon vs. American Express (Motion for Reconsideration)
Supplemental facts: AMEX is a resident foreign corporation engaged in the business
of providing credit services through the operation of a charge card
system. Pantaleon has been an AMEX cardholder since 1980.
While AMEX admits that it normally takes seconds to approve charge purchases, it
emphasizes that Pantaleon experienced delay in Amsterdam because his
transaction was not a normal one. To recall, Pantaleon sought to charge in a single
transaction jewelry items purchased from Coster in the total amount of
US$13,826.00 or P383,746.16. While the total amount of Pantaleon's previous
purchases using his AMEX credit card did exceed US$13,826.00, AMEX points out
that these purchases were made in a span of more than 10 years, not in a single
transaction.
Because this was the biggest single transaction that Pantaleon ever made using his
AMEX credit card, AMEX argues that the transaction necessarily required the credit
authorizer to carefully review Pantaleon's credit history and bank references. AMEX
maintains that it did this not only to ensure Pantaleon's protection (to
minimize the possibility that a third party was fraudulently using his
credit card), but also to protect itself from the risk that Pantaleon might
not be able to pay for his purchases on credit. This careful review, according
to AMEX, is also in keeping with the extraordinary degree of diligence
required of banks in handling its transactions. AMEX concluded that in these
lights, the thorough review of Pantaleon's credit record was motivated by legitimate
concerns and could not be evidence of any ill will, fraud, or negligence by AMEX.
Simply put, every credit card transaction involves three contracts, namely: (a)
the sales contract between the credit card holder and the merchant or the
business establishment which accepted the credit card; (b) the loan
agreement between the credit card issuer and the credit card holder; and lastly,
(c) the promise to pay between the credit card issuer and the merchant or
business establishment.
In our jurisdiction, we generally adhere to the Gray ruling, recognizing the
relationship between the credit card issuer and the credit card holder as a
contractual one that is governed by the terms and conditions found in the card
membership agreement. This contract provides the rights and liabilities of a credit
card company to its cardholders and vice versa.
Although we recognize the existence of a relationship between the credit card issuer
and the credit card holder upon the acceptance by the cardholder of the terms of
the card membership agreement (customarily signified by the act of the cardholder
in signing the back of the credit card), we have to distinguish this contractual
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Case Notes/Digests
relationship
from
the
creditor-debtor
relationship
which
only
arises after the credit card issuer has approved the cardholder's purchase
request. The first relates merely to an agreement providing for credit facility to the
cardholder. The latter involves the actual credit on loan agreement involving three
contracts, namely: the sales contract between the credit card holder and the
merchant or the business establishment which accepted the credit card; the loan
agreement between the credit card issuer and the credit card holder; and
the promise to pay between the credit card issuer and the merchant or business
establishment. From the loan agreement perspective, the contractual relationship
begins to exist only upon the meeting of the offer and acceptance of the parties
involved. In more concrete terms, when cardholders use their credit cards to pay for
their purchases, they merely offer to enter into loan agreements with the
credit card company. Only after the latter approves the purchase requests
that the parties enter into binding loan contracts, in keeping with Article
1319 of the Civil Code.
Issue: Whether the respondent is guilty of mora solvendi (delay by the debtor in
approving the credit transaction incurred by the petitioner.
Held:
I. As to whether AmEx is really guilty of default in their alleged obligation
to act promptly within a matter of seconds.
AmEx is not guilty of delay, from the viewpoint of the requisites provided by Art.
1169, that the obligation should be demandable at first; because it is stated in their
credit-agreement that AmEx is not obligated or whatsoever, to approve Pantaleons
purchase request. It means that it is not mandatory nor compulsory on the
part of AmEx to approve every purchase done by its customer, as it
reserves the right to deny authorization for any requested charge.
***Apart from the lack of any demandable obligation, we also find
that Pantaleon failed to make the demand required by Article 1169 of the
Civil Code.
***As previously established, the use of a credit card to pay for a purchase is
only an offer to the credit card company to enter a loan agreement with
the credit card holder. Before the credit card issuer accepts this offer, no
obligation relating to the loan agreement exists between them. On the
other hand, a demand is defined as the "assertion of a legal right; . . . an asking
with authority, claiming or challenging as due." A demand presupposes the
existence of an obligation between the parties; which is clearly absent in
this case, as there was no demandable obligation yet on the part of AmEx
to approve any transactions that will be incurred by the credit card holder.
***Thus, every time that Pantaleon used his AMEX credit card to pay for his
purchases, what the stores transmitted to AMEX were his offers to execute
loan contracts. These obviously could not be classified as the demand
required by law to make the debtor in default, given that no obligation could
arise on the part of AMEX until after AMEX transmitted its acceptance of Pantaleon's
offers. Pantaleon's act of "insisting on and waiting for the charge purchases to be
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Case Notes/Digests
approved by AMEX" is not the demand contemplated by Article 1169 of the Civil
Code.
A. AMEX acted in Good faith
Our recognition of these entitlements, however, does not give AMEX an
unlimited right to put off action on cardholders' purchase requests for
indefinite periods of time. In acting on cardholders' purchase requests, AMEX
must take care not to abuse its rights and cause injury to its clients and/or third
persons. We cite in this regard Article 19, in conjunction with Article 21, of the Civil
Code. (Which technically provides that the right of AMEX, although there is no
definite period in which the act, should be performed in a way that is not to be
abused to the prejudice of the cardholders.)
It is an elementary rule in our jurisdiction that good faith is presumed and that
the burden of proving bad faith rests upon the party alleging it. It is but
natural for AMEX to want to ensure that it will extend credit only to people who will
have sufficient means to pay for their purchases. AMEX, after all, is running a
business, not a charity, and it would simply be ludicrous to suggest that it would not
want to earn profit for its services. Thus, so long as AMEX exercises its rights,
performs its obligations, and generally acts with good faith, with no intent to cause
harm, even if it may occasionally inconvenience others, it cannot be held liable for
damages. As Edgardo Jaurigue clarified, the reason why Pantaleon had to wait for
AMEX's approval was because he had to go over Pantaleon's credit card history for
the past twelve months. It would certainly be unjust for us to penalize AMEX for
merely exercising its right to review Pantaleon's credit history meticulously.
II. As to the petitioners assertion that the respondent should act to
approve or disapprove the transaction within a matter of seconds.
Nevertheless, every time Pantaleon charges a purchase on his credit card,
the credit card company still has to determine whether it will allow this
charge, based on his past credit history. This right to review a card holder's
credit history, although not specifically set out in the card membership agreement,
is a necessary implication of AMEX's right to deny authorization for any requested
charge.
We next examine the credit card membership agreement, the contract that
primarily
governs
the
relationship
between
AMEX
and
Pantaleon.
Significantly, there is no provision in this agreement that obligates AMEX to
act on all cardholder purchase requests within a specifically defined period
of time. Thus, regardless of whether the obligation is worded was to "act in a
matter of seconds" or to "act in timely dispatch," the fact remains that no obligation
exists on the part of AMEX to act within a specific period of time.
Even Pantaleon admits in his testimony that he could not recall any provision in the
Agreement that guaranteed AMEX's approval of his charge requests within a matter
of minutes.
Nor can Pantaleon look to the law or government issuances as the source of AMEX's
alleged obligation to act upon his credit card purchases within a matter of seconds.
As the following survey of Philippine law on credit card transactions demonstrates,
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Case Notes/Digests
the State does not require credit card companies to act upon its cardholders'
purchase requests within a specific period of time.
Even if Pantaleon did prove that AMEX, as a matter of practice or custom, acted on
its customers' purchase requests in a matter of seconds, this would still not be
enough to establish a legally demandable right; as a general rule, a practice or
custom is not a source of a legally demandable or enforceable right.
(Because CUSTOM is not among those sources of obligations set forth by law, same
ruling as to MKSE vs. Campos.)
Angeles vs. Calasanz
Facts: On December 19, 1957, defendants-appellants Ursula Torres Calasanz and
Tomas Calasanz and plaintiffs-appellees Buenaventura Angeles and Teofila Juani
entered into a contract to sell a piece of land located in Cainta, Rizal for the amount
of P3,920.00 plus 7% interest per annum.
The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the
contract. They promised to pay the balance in monthly installments of P41.20 until
fully paid, the installments being due and payable on the 19th day of each
month. The plaintiffs-appellees paid the monthly installments until July 19661,
when their aggregate payment already amounted to P4,533.38. On numerous
occasions, the defendants-appellants accepted and received delayed installment
payments from the plaintiffs-appellees.
On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a
letter requesting the remittance of past due accounts.
On January 28, 19672, the defendants-appellants cancelled the said contract
because the plaintiffs-appellees failed to meet subsequent payments. The
plaintiffs' letter with their plea for reconsideration of the said cancellation was
denied by the defendants-appellants.
The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of
Rizal, Seventh Judicial District, Branch X to compel the defendants-appellants to
execute in their favor the final deed of sale alleging inter alia that after computing
all subsequent payments for the land in question, they found out that they have
already paid the total amount of P4,533.38 including interests, realty
taxes and incidental expenses for the registration and transfer of the
land.
1 9 years, to be exact.
2 From that time, the plaintiffs stopped payment until December, since the
respondent argued that the payment representing the month of August has been
delayed for more than 5 months.
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Case Notes/Digests
The defendants-appellants alleged in their answer that the complaint states no
cause of action and that the plaintiffs-appellees violated paragraph six (6) of
the contract to sell when they failed and refused to pay and/or offer to pay
the monthly installments corresponding to the month of August, 1966 for
more than five (5) months, thereby constraining the defendantsappellants to cancel the said contract.3
Issue: Whether or not the contract to sell has been automatically and validly
cancelled by the defendants-appellants.
Ruling: In reciprocal obligations, either party has the right to rescind the contract
upon the failure of the other to perform the obligation assumed thereunder.
Moreover, there is nothing in the law that prohibits the parties from
entering into an agreement that violation of the terms of the contract
would cause its cancellation even without court intervention.
University of the Philippines v. De los Angeles, (35 SCRA 102) where we explained
that:
"Of course, it must be understood that the act of a party in treating a
contract as cancelled or resolved on account of infractions by the
other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review
by the proper court4. If the other party denies that rescission is
justified, it is free to resort to judicial action in its own behalf,
and bring the matter to court. Then, should the court, after due
hearing, decide that the resolution of the contract was not warranted,
the responsible party will be sentenced to damages; in the contrary
case, the resolution will be affirmed, and the consequent indemnity
awarded to the party prejudiced.
"In other words, the party who deems the contract violated many
considers it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was
or was not correct in law . . .
"We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent declaring that
judicial action is necessary for the resolution of a reciprocal
obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil.
631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820)
3 The RTC rendered judgment in favor of plaintiffs. By holding that the contract was
NOT VALIDLY cancelled by the respondent.
4 Provisional in a sense, until and after the party had concurred with it, that the
recission/cancellation can be deemed to be fully in effect.
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Case Notes/Digests
since in every case where the extrajudicial resolution is
contested only the final award of the court of competent
jurisdiction can conclusively settle whether the resolution
was proper or not. It is in this sense that judicial action will be
necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation, unless attack
thereon should become barred by acquiescence, estoppel or
prescription."
The right to rescind the contract for non-performance of one of its stipulations,
therefore, is not absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1)
the Court stated that
"The general rule is that rescission of a contract will not be
permitted for a slight or casual breach, but only for such
substantial and fundamental breach as would defeat the very
object of the parties in making the agreement. (Song Fo &
Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of
whether a breach of a contract is substantial depends upon the
attendant circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 &
L-23720, Jan. 17, 1968).
The breach of the contract adverted to by the defendants-appellants is so
slight and casual when we consider that apart from the initial downpayment
of P392.00 the plaintiffs-appellees had already paid the monthly installments
for a period of almost nine (9) years. In other words, in only a short time, the
obligation would have been paid. Furthermore, although the principal
obligation was only P3,920.00 excluding the 7 percent interests, the plaintiffsappellees had already paid an aggregate amount of P4,533.38. To sanction
the rescission made by the defendants-appellants will work injustice to the
plaintiffs-appellees.5
The defendants, instead of rescinding the contract, received the payments
made by the plaintiffs considering the delay that they may have caused.
Now, they are barred from exercising their right to rescind, although it was
granted by the contract, nonetheless, they are already estopped from raising
such.
The defendants-appellants drafted and prepared the contract. The plaintiffsappellees, eager to acquire a lot upon which they could build a home, affixed
their signatures and assented to the terms and conditions of the contract.
They had no opportunity to question nor change any of the terms of the
agreement. It was offered to them on a "take it or leave it" basis.
The contract to sell, being a contract of adhesion, must be construed against
the party causing it. We agree with the observation of the plaintiffs-appellees
to the effect that "the terms of a contract must be interpreted against the
5 Correlate to Art. 1234 as to Substantial compliance made by a party in good faith.
(Same with Diesel case)
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Case Notes/Digests
party who drafted the same, especially where such interpretation will help
effect justice to buyers who, after having invested a big amount of money,
are now sought to be deprived of the same thru the prayed application of a
contract clever in its phraseology, condemnable in its lopsidedness and
injurious in its effect which, in essence, and in its entirety is most unfair to
the buyers.
After consideration of the nature of the contract of adhesion, the courts
should only order the payment of the few remaining installments but not
uphold the cancellation of the contract.
Roque vs. Lapuz

Facts: Sometime in 1954, prior to the approval by the National Planning
Commission of the consolidation and subdivision plan of plaintiff's property
known as the Rockville Subdivision, situated in Balintawak, Quezon City,
plaintiff and defendant entered into an agreement of sale covering Lots 1, 2
and 9, Block 1, of said property, with an aggregate area of 1,200 square
meters, payable in 120 equal monthly installments at the rate of P16.00,
P15.00 per square meter, respectively. In accordance with said agreement,
defendant paid to plaintiff the sum of P150.00 as deposit and the further
sum of P740.56 to complete the payment of four monthly
installments (120 4 = 116 payments are yet to be made, which was
not complied with by the respondent anymore) covering the months
of July, August, September, and October, 1954. (Exhibits A and B). When
the document Exhibit "A" was executed on June 25, 1954, the plan covering
plaintiff's property was merely tentative, and the plaintiff referred to the
proposed lots appearing in the tentative plan.
After the approval of the subdivision plan by the Bureau of Lands on January
24, 1955, defendant requested plaintiff that he be allowed to abandon and
substitute Lots 1, 2 and 9, the subject matter of their previous agreement,
with Lots 4 and 12, Block 2 of the approved subdivision plan, of the Rockville
Subdivision, with a total area of 725 square meters, which are corner lots , to
which request plaintiff graciously acceded.
The evidence discloses that defendant proposed to plaintiff modification
of their previous contract to sell because he found it quite difficult to
pay the monthly installments on the three lots, and besides the two lots
he had chosen were better lots, being corner lots. In addition, it was agreed
that the purchase price of these two lots would be at the uniform rate of
P17.00 per square (meter) payable in 120 equal monthly installments, with
interest at 8% annually on the balance unpaid. Pursuant to this new
agreement, defendant occupied and possessed Lots 4 and 12, Block
2 of the approved subdivision plan, and enclosed them, including the
portion where his house now stands, with barbed wires and adobe walls.
However, aside from the deposit of P150.00 and the amount of P740.56
which were paid under their previous agreement, defendant failed to
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Case Notes/Digests
make any further payment on account of the agreed monthly installments
for the two lots in dispute, under the new contract to sell. Plaintiff demanded
upon defendant not only to pay the stipulated monthly installments in
arrears, but also to make up-to-date his payments, but defendant, instead
of complying with the demands, kept on asking for extensions,
promising at first that he would pay not only the installments in
arrears but also make up-to-date his payment, but later on refused
altogether to comply with plaintiff's demands.
Defendant was likewise requested by the plaintiff to sign the corresponding
contract to sell in accordance with his previous commitment. Again,
defendant promised that he would sign the required contract to sell
when he shall have made up-to-date the stipulated monthly
installments on the lots in question, but subsequently backed out of his
promise and refused to sign any contract in non-compliance with what he had
represented on several occasions. And plaintiff relied on the good faith
of defendant to make good his promise because defendant is a
professional and had been rather good to him (plaintiff).
On or about November 3, 1957, in a formal letter, plaintiff demanded upon
defendant to vacate the lots in question and to pay the reasonable rentals
thereon at the rate of P60.00 per month from August, 1955. (Exhibit "B").
Notwithstanding the receipt of said letter, defendant did not deem it wise nor
proper to answer the same.
Both parties agreed that the period within which to pay the lots in
question is ten years. They however, disagree on the mode of
payment. While the appellant claims that he could pay the purchase price at
any time within a period of ten years with a gradual proportionate discount
on the price, the appellee maintains that the appellant was bound to pay
monthly installments.
On January 22, 1960, petitioner Felipe C. Roque (plaintiff below) filed the
complaint against defendant NicanorLapuz (private respondent herein) with
the Court of First Instance of Rizal, Quezon City Branch, for rescission and
cancellation of the agreement of sale between them involving the two lots in
question. Defendant filed a Motion to Dismiss on the ground that the
complaint states no cause of action, which was denied by the court.
As affirmative and special defenses, defendant alleges that the complaint
states no cause of action; that the present action for rescission has
prescribed; that no demand for payment of the balance was ever
made; and that the action being based on reciprocal obligations,
before one party may compel performance, he must first comply
what is incumbent upon him.6 (He alleged also that the plaintiff did not
comply with putting up the requisite facilities in the subdivision, thats why.)
6 The RTC rendered its decision in favor of plaintiff; afterwards, an appeal was made
but the CA affirmed in toto.
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Case Notes/Digests
Acting on the Motion for Reconsideration, the Court of Appeals sustained the
sixth ground raised by the appellant (Lapus), that assuming that a cause
of action for rescission exists, he should nevertheless be entitled to
the fixing of a period within which to comply with his obligation.7
The Court, however, concedes that plaintiff's failure to comply with his
obligation to put up the necessary facilities in the subdivision will not deter
him from asking for the rescission of the agreement since this obligation is
not correlative with defendant's obligation to buy the property.
Issue: Whether private respondent is entitled to the benefits of the
third paragraph of Article 1191, New Civil Code, for the fixing of a
period within which he should comply with what is incumbent upon
him.
Ruling: In a contract to sell, the full payment of the price through the
punctual performance of the monthly payments is a condition
precedent to the execution of the final sale and to the transfer of
the property from the owner to the proposed buyer; so that there will
be no actual sale until and unless full payment is made.
The decision also stressed that there can be no rescission or resolution
of an obligation as yet non-existent, because the suspensive
condition did not happen. Article 1592 of the New Civil Code (Art. 1504 of
Old Civil Code) requiring demand by suit or notarial act in case the vendor of
realty wants to rescind does not apply to a contract to sell or promise
to sell, where title remains with the vendor until fulfillment to a
positive condition, such as full payment of the price." (Manuel vs.
Rodriguez, 109 Phil. 9)
It is irrelevant whether a partys infringement of its contract was
casual or serious" for as pointed out in Manuel vs. Rodriguez, '(I)n contracts
to sell, whether ownership is retained by the seller and is not to pass until the
full payment of the price, such payment, as we said, is a positive
suspensive condition, the failure of which is not a breach, casual or
serious, but simply an event that prevented the obligation of the vendor to
convey title from acquiring binding force.
Petitioner (Lapus) contends that "(n)othing in the decision of the courts below
would show that ownership of the property remained with plaintiff for so long
as the installments have not been fully paid. Which yields the conclusion
that, by the delivery of the lots to defendant, ownership likewise
was transferred to the latter.
However, The Court held that the contract between the petitioner and the
respondent was a contract to sell where the ownership or title is retained by
the seller and is not to pass until the full payment of the price, such payment
being a positive suspensive condition and failure of which is not a breach,
7 On the basis that the property earned substantial improvements, to grant the
recission would be tantamount to injustice to the defendant.
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Case Notes/Digests
casual or serious, but simply an event that prevented the obligation of the
vendor to convey title from acquiring binding force.
There is no writing or document evidencing the agreement (as to the
intent to an absolute sale; or to the immediate transfer of the same)
This absence of a formal deed of conveyance is a very strong
indication that the parties did not intend immediate transfer of
ownership and title, but only a transfer after full payment of the
price
To allow and grant respondent an additional period for him to pay the balance
of the purchase price, which balance is about 92% of the agreed price,
would be tantamount to excusing his bad faith and sanctioning the
deliberate infringement of a contractual obligation that is repugnant
and contrary to the stability, security and obligatory force of
contracts.8 Moreover, respondent's failure to pay the succeeding 116
monthly installments after paying only 4 monthly installments is a substantial
and material breach on his part, not merely casual, which takes the case out
of the application of the benefits of paragraph 3, Art. 1191, N.C.C.
The equitable grounds or considerations which are the basis of the
respondent court in the fixing of an additional period because respondent had
constructed valuable improvements on the land, that he has built his house
on the property worth P45,000.00 and placed adobe stone walls with barbed
wires around, do not warrant the fixing of an additional period. We cannot
sanction this claim for equity of the respondent for to grant the
same would place the vendor at the mercy of the vendee who can
easily construct substantial improvements on the land but beyond
the capacity of the vendor to reimburse in case he elects to rescind
the contract by reason of the vendee's default or deliberate refusal
to pay or continue paying the purchase price of the land. Under this
design, strategem or scheme, the vendee can cleverly and easily
"improve out" the vendor of his land.9
In the case at bar, respondent has not acted in good faith. With malice and
deliberate intent, he has twisted the clear import of his agreement with the
petitioner in order to suit his ends and delay the fulfillment of his obligation to
pay the land he had enjoyed for the last 26 years, more than twice the
8 It was shown here in this case, that his act of not complying with the contract as
evidenced by his failure to pay for the installments, by arguing that he had the
option to pay it at anytime he desires for a period of 10 years, and his act of not
signing the new contract between them as to the 2 lots, is already an act indicative
of bad faith (fraud) on Lapuzs part.
9 One who comes to court, must do so with clean hands.
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Case Notes/Digests
period of ten years that he obliged himself to complete payment of the
price.10
Ayson-Simon vs. Adamos
Facts: On December 13, 1943, Nicolas Adamos and Vicente Feria, defendantsappellants herein, purchased two lots forming part of the Piedad Estate in
Quezon City, with an area of approximately 56,395 square meters, from Juan
Porciuncula. Sometime thereafter, the successors-in-interest of the latter filed
Civil Case No. 174 in the then Court of First Instance of Quezon City for
annulment of the sale and the cancellation of Transfer Certificate of Title No.
69475, which had been issued to defendants-appellants by virtue of the
disputed sale. On December 18, 1963, the Court rendered a Decision
annulling the sale, cancelling TCT 69475, and authorizing the issuance of a
new title in favor of Porciuncula's successors-in-interest. The said judgment
was affirmed by the Appellate Court and had attained finality.
In the meantime, on May 29, 1946, during the pendency of the abovementioned case, defendants-appellants sold to GENEROSAAyson Simon,
plaintiff-appellee herein, the two lots in question for P3,800.00 each, plus an
additional P800.00 paid subsequently for the purpose of facilitating the
issuance of new titles in GENEROSA's name. Due to the failure of defendantsappellants to comply with their commitment to have the subdivision plan of
the lots approved and to deliver the titles and possession to GENEROSA, the
latter filed suit for specific performance before the Court of First Instance of
Quezon City on September 4, 1963.
However, since execution of the foregoing Order was rendered
impossible because of the judgment in Civil Case No. 174, which
earlier declared the sale of the lots in question by Juan Porciuncula
to defendants-appellants to be null and void, GENEROSA filed, on
August 16, 1968, another suit in the Court of First Instance of Manila (Civil
Case No. 73942) for rescission of the sale with damages.
Hence, the appeal before the Appellate Court on the ground that GENEROSA's
action had prescribed, considering that she had only four years from May
29, 1946, the date of sale, within which to rescind said transaction, and that
her complaint for specific performance may be deemed as a waiver
of her right to rescission since the fulfillment and rescission of an
obligation are alternative and not cumulative remedies.
Issue: Whether or not the action had prescribed already.
Ruling: The rule that the injured party can only choose between fulfillment
and rescission of the obligation, and cannot have both, applies when the
obligation is possible of fulfillment. If, as in this case, the fulfillment has
10 It is quite clear that it is already too late in the day for respondent to claim an
additional period within which to comply with his obligation . (Said the court)
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Case Notes/Digests
become impossible, Article 1191 allows the injured party to seek
rescission even after he has chosen fulfillment.
True it is that in Civil Case No. 7275 the Court already rendered a Decision in
favor of plaintiff, but since defendants cannot fulfill their obligation to deliver
the titles to and possession of the lots to plaintiff, the portion of the
decision requiring them to fulfill their obligations is without force
and effect. Only that portion relative to the payment of damages
remains in the dispositive part of the decision, since in either case
(fulfillment or rescission) defendants may be required to pay
damages.
As to prescription:
The cause of action to claim rescission arises when the fulfillment of
the obligation became impossible when the Court of First Instance of
Quezon City in Civil Case No. 174 declared the sale of the land to
defendants by Juan Porciuncula a complete nullity and ordered the
cancellation of Transfer Certificate of Title No. 69475 issued to them.
Since the two lots sold to plaintiff by defendants form part of the land
involved in Civil Case No. 174, it became impossible for defendants to
secure and deliver the titles to and the possession of the lots to
plaintiff. But plaintiff had to wait for the finality of the decision
in Civil Case No. 174. According to the certification of the clerk of the
Court of First Instance of Quezon City (Exhibit 'E-2'), the decision in
Civil Case No. 174 became final and executory 'as per entry of
Judgment dated May 3, 1967 of the Court of Appeals.' The
action for rescission must be commenced within four years
from that date, May 3, 1967. Since the complaint for rescission
was filed on August 16, 1968, the four year period within
which the action must be commenced had not expired.
Christian Arbiol

Case Notes/Digests
Chavez vs. Reyes
Facts: In the early part of July, 1963, the plaintiff delivered to the defendant, who is
a typewriter repairer, a portable typewriter for routine cleaning and servicing. The
made by the plaintiff. The defendant merely gave assurances, but failed to comply
with the same. In October, 1963, the defendant asked from the plaintiff the sum of
P6.00 for the purchase of spare parts, which amount the plaintiff gave to the
defendant. On October 26, 1963, after getting exasperated with the delay of the
repair of the typewriter, the plaintiff went to the house of the defendant and asked
for the return of the typewriter. The defendant delivered the typewriter in a wrapped
package. On reaching home, the plaintiff examined the typewriter returned to him
by the defendant and found out that the same was in shambles, with the interior
cover and some parts and screws missing. On October 29, 1963. the plaintiff sent a
letter to the defendant formally demanding the return of the missing parts, the
interior cover and the sum of P6.00 (Exhibit D). The following day, the defendant
returned to the plaintiff some of the missing parts, the interior cover and the P6.00.
On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business
Machines, and the repair job cost him a total of P89.85, including labor and
materials.
The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves,
is that it awarded only the value of the missing parts of the typewriter, instead of
the whole cost of labor and materials that went into the repair of the machine, as
provided for in Article 1167 of the Civil Code.
On the other hand, the position of the defendant-appellee, Fructuoso Gonzales, is
that he is not liable at all, not even for the sum of P31.10, because his contract with
plaintiff-appellant did not contain a period, so that plaintiff-appellant should have
first filed a petition for the court to fix the period, under Article 1197 of the Civil
Code, within which the defendant appellee was to comply with the contract before
said defendant-appellee could be held liable for breach of contract.
Issue: Whether the respondent should be held liable for the contract of labor and
services as well as for the materials which the plaintiff spent for the entire repair of
the typewriter.
Held: The appealed judgment states that the "plaintiff delivered to the
defendant . . . a portable typewriter for routine cleaning and servicing"; that the
made by the plaintiff"; that the "defendant merely gave assurances, but failed to
comply with the same"; and that "after getting exasperated with the delay of the
repair of the typewriter", the plaintiff went to the house of the defendant and asked
for its return, which was done. The inferences derivable from these findings of fact
are that the appellant and the appellee had a perfected contract for cleaning and
servicing a typewriter; that they intended that the defendant was to finish it at
some future time although such time was not specified; and that such time had
passed without the work having been accomplished, far the defendant returned the
typewriter cannibalized and unrepaired, which in itself is a breach of his obligation,
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Case Notes/Digests
without demanding that he should be given more time to finish the job, or
compensation for the work he had already done. (That the defendant is
already liable for the breach of contract, so there is no more need for imposing the
period for compliance.) The time for compliance having evidently expired, and there
being a breach of contract by non-performance, it was academic for the plaintiff to
have first petitioned the court to fix a period for the performance of the contract
before filing his complaint in this case. Defendant cannot invoke Article 1197 of the
Civil Code for he virtually admitted non-performance by returning the typewriter
that he was obliged to repair in a non-working condition, with essential parts
missing. The fixing of a period would thus be a mere formality and would serve no
purpose than to delay (cf. Tiglao. et al. V. Manila Railroad Co. 98 Phil. 181).
It is clear that the defendant-appellee contravened the tenor of his obligation
because he not only did not repair the typewriter but returned it "in shambles",
according to the appealed decision. For such contravention, as appellant contends,
he is liable under Article 1167 of the Civil Code. jam quot, for the cost of executing
the obligation in a proper manner. The cost of the execution of the obligation in this
case should be the cost of the labor or service expended in the repair of the
typewriter, which is in the amount of P58.75. because the obligation or contract was
to repair it.
In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code,
for the cost of the missing parts, in the amount of P31.10, for in his obligation to
repair the typewriter he was bound, but failed or neglected, to return it in the same
condition it was when he received it.
As to damages, there is no sufficient quantum of proof that would support, since it
was not alleged by the plaintiff in his complaint.
Lim vs. People

Facts: Petitioner Lourdes Valerio Lim was found guilty of the crime of estafa and was
sentenced "to suffer an imprisonment of four (4) months and one (1) day as
minimum to two (2) years and four (4) months as maximum, to indemnify the
offended party in the amount of P559.50, with subsidiary imprisonment in case of
insolvency, and to pay the costs.
The appellant is a businesswoman. on January 10, 1966, the appellant went to the
house of Maria Ayroso and proposed to sell Ayroso's tobacco. Ayroso agreed to the
proposition of the appellant to sell her tobacco consisting of 615 kilos at P1.30 a
kilo. The appellant was to receive the overprice for which she could sell the tobacco.
This agreement was made in the presence of plaintiff's sister, Salud G. Bantug.
Salvador Bantug drew the document, Exh. A, dated January 10, 1966, which
reads: LibLex
'To Whom It May Concern:
Christian Arbiol

Case Notes/Digests
This is to certify that I have received from Mrs. Maria de Guzman Vda. de
Ayroso, of Gapan, Nueva Ecija, six hundred fifteen kilos of leaf tobacco to be
sold at P1.30 per kilo. The proceed in the amount of Seven Hundred Ninety
Nine Pesos and 50/100 (P799.50) will be given to her as soon as it was sold.'
This was signed by the appellant and witnessed by the complainant's sister, Salud
Bantug, and the latter's maid, Genoveva Ruiz. The appellant at that time was
bringing a jeep, and the tobacco was loaded in the jeep and brought by the
appellant. Of the total value of P799.50, the appellant had paid to Ayroso only
P240.00, and this was paid on three different times. Demands for the payment of
the balance of the value of the tobacco were made upon the appellant by Ayroso,
and particularly by her sister, Salud Bantug. Salud Bantug further testified that she
had gone to the house of the appellant several times, but the appellant often eluded
her; and that the 'camarin' of the appellant was empty. Although the appellant
denied that demands for payment were made upon her, it is a fact that on October
19, 1966, she wrote a letter to Salud Bantug which reads as follows:
'Dear Salud,
'Hindi ako nakapunta dian noon a 17 nitong nakaraan, dahil kokonte pa ang
nasisingil kong pera, magintay ka hanggang dito sa linggo ito at tiak na ako
ay magdadala sa iyo. Gosto ko Salud ay makapagbigay man lang ako ng
marami para hindi masiadong kahiyahiya sa iyo. Ngayon kung gosto mo ay
kahit konte muna ay bibigyan kita. Pupunta lang kami ni Mina sa Maynila
ngayon. Salud kuug talagang kailangan mo ay bukas ay dadalhan kita ng
pera.
'Medio mahirap ang maningil sa palengke ng Cabanatuan dahil nagsisilipat
ang mga suki ko ng puesto. Huwag kang mabahala at tiyak na babayaran
kita.
'Patnubayan tayo ng mahal na panginoon Dios. (Exh. B).
Ludy'
"Pursuant to this letter, the appellant sent a money order for P100.00 on October
24, 1967, Exh. 4, and another for P50.00 on March 8, 1967; and she paid P90.00 on
April 18, 1967 as evidenced by the receipt Exh. 2, dated April 18, 1967, or a total of
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Case Notes/Digests
P240.00. As no further amount was paid, the complainant filed a complaint against
the appellant for estafa.
Issue: Whether the Court of Appeals was legally right in holding that the foregoing
document (Exhibit "A") "fixed a period" and "the obligation was therefore,
immediately demandable as soon as the tobacco was sold" (Decision, p. 6) as
against the theory of the petitioner that the obligation does not fix a period, but
from its nature and the circumstances it can be inferred that a period was intended
in which case the only action that can be maintained is a petition to ask the court to
fix the duration thereof.
Held: It is clear in the agreement, Exhibit "A", that the proceeds of the sale of the
tobacco should be turned over to the complainant as soon as the same was sold, or,
that the obligation was immediately demandable as soon as the tobacco was
disposed of. Hence, Article 1197 of the New Civil Code, which provides that the
courts may fix the duration of the obligation if it does not fix a period, does not
apply.
Saure vs. Pentecostes

Ratio: A decision of respondent Municipal Judge Prudencio S. Pentecostes of Camiling, Tarlac ejecting
petitioner as lessee from the building owned by private respondents, the spouses Telesforo and Nieves
Galang, as well as his order denying a motion for relief from judgment. The point stressed, and rightly so,
is that respondent Judge disregarded the plain command of Presidential Decree No. 2011 which suspended
indefinitely the filing of ejectment cases except when the lease is for a definite period and which
prohibited the increase in rentals of dwelling units where the monthly rentals do not exceed P300.00 a
month. There is no evidence whatsoever that disproves the allegation that petitioner Saure is occupying
the premises in question as his residence. The fact that he has a small photography shop undoubtedly to
supplement his income does not transform it into a commercial establishment 12. Petitioner did not
deposit during the pendency of this litigation the monthly rental of P50.00 agreed upon. It could be
argued that in Salaria, there was at least a deposit of P200.00 during the pendency of the litigation; the
failure of petitioner to deposit the rental is mitigated by the fact that he did offer to pay the former
rental, but private respondents made it clear that they would not accept. Counsel for petitioner ought
11 Police power measures are retroactively applied, in order to facilitate the
purpose of such law. It may also apply to existing contracts upon its application.
Since the very purpose of the PD is to protect and to ease lessees whose rentals do
not exceed the amount of P300.00
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Case Notes/Digests
to have advised him to make the necessary consignation. This is one instance however where the client
should not be made to suffer for the omission of counsel. At any rate, it can be stated legally that the
action for ejectment not being allowable in law at all, and a clear case of jurisdictional infirmity
being apparent, such failure could be considered excusable. Petitioner, however, must pay all the back
rentals due and owing. In according him justice through law, no injustice should be visited on private
respondents.
WHEREFORE, the petition for certiorari is granted nullifying the decision of respondent Judge dated
November 17, 1976 and the writ of execution issued on December 15, 1976 by virtue thereof. The order
of March 10, 1977 of respondent Judge denying the petition for relief from the aforesaid decision is
likewise declared of no force and effect. The writ of prohibition is granted enjoining respondent Judge
and respondent Deputy Sheriff Vivencio Palancio or any person acting on their stead or behalf from
taking any further action in connection with Civil Case No. 3066 of the Municipal Court of Camiling
between the spouses Telesforo and Nieves Galang, now private respondents, as plaintiffs, and Francisco
Saure, now petitioner, as one of the defendants. The restraining order issued by this Court on July 18,1977
is hereby made permanent. Petitioner Francisco Saure is granted a period of ninety days within
which to pay the back rentals. No costs.
McLaughlin vs. CA
Facts: On February 28, 1977, petitioner Luisa F. McLaughlin and private respondent Ramon Flores
entered into a contract of conditional sale of real property. Paragraph one of the deed of conditional
sale fixed the total purchase price of P140,000.00 payable as follows: a) P26,550.00 upon the
execution of the deed; and b) the balance of P113,450.00 to be paid not later than May 31, 1977. The
parties also agreed that the balance shall bear interest at the rate of 1% per month to commence from
December 1, 1976, until the full purchase price was paid.
On June 19, 1979, petitioner filed a complaint in the then Court of First Instance of Rizal (Civil Case No.
33573) for the rescission of the deed of conditional sale due to the failure of private respondent to
pay the balance due on May 31, 1977.
On December 27, 1979, the parties submitted a Compromise Agreement on the basis of which
the court rendered a decision on January 22, 1980. In said compromise agreement, private respondent
acknowledged his indebtedness to petitioner under the deed of conditional sale in the
amount of P119,050.71, and the parties agreed that said amount would be payable as follows: a)
P50,000.00 upon signing of the agreement; and b) the balance of P69,059.71 in two equal installments
on June 30, 1980 and December 31, 1980.
As agreed upon, private respondent paid P50,000.00 upon the signing of the agreement and in addition he
also paid an "escalation cost" of P25,000.00. Under paragraph 3 of the Compromise Agreement, private
respondent agreed to pay one thousand (P1,000.00) pesos monthly rental beginning December 5, 1979
until the obligation is duly paid, for the use of the property subject matter of the deed of conditional
sale.13
12 The PD allowed any business attached to a residential lot, provided that it must
not exceed the capital amount of P5,000.00. in this case, the amount of the capital
was only P2,500.00 and it was not even operated by a stranger to their household.
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Case Notes/Digests
On October 15, 1980, petitioner wrote to private respondent demanding that the latter pay the
balance of P69,059.71 on or before October 31, 1980. This demand included not only the installment
due on June 30, 1980 but also the installment due on December 31, 1980. (In short, the petitioner is
asking for the compliance before the agreed date in their compromise)
On October 30, 1980, private respondent sent a letter to petitioner signifying his willingness and
intention to pay the full balance of P69,059.71, and at the same time demanding to see the
certificate of title of the property and the tax payment receipts.
Private respondent states on page 14 of his brief that on November 3, 1980, the first working
day of said month, he tendered payment to petitioner but this was refused acceptance by petitioner.
However, this does not appear in the decision of the Court of Appeals.
On November 14, 1980, the trial court granted the motion for writ of execution.14
On November 17, 1980, private respondent filed a motion for reconsideration tendering at the same
time a Pacific Banking Corporation CERTIFIED manager's check in the amount of P76,059.71,
payable to the order of petitioner and covering the entire obligation including the installment due on
December 31, 1980. However, the trial court denied the motion for reconsideration in an order dated
November 21, 1980 and issued the writ of execution on November 25, 1980. On November 28, 1980,
private respondent filed with the Court of Appeals.
Issues:
1. Whether the action for recission could be granted under the circumstances? No, there was no
substantial breach that warrants such.
2. Whether there was a valid tender of payment? Yes Presence of Certification of check
operates as cash.
Held: We agree with the appellate court that it would be inequitable to cancel the
contract of conditional sale and to have the amount ofP101,550.00 (P148,126.97 according to
private respondent in his brief) already paid by him under said contract, excluding the monthly
rentals paid, forfeited in favor of petitioner, particularly after private respondent had tendered the
amount of P76,059.71 in full payment of his obligation.
In the analogous case of De Guzman vs. Court of Appeals, this Court sustained the order of the
respondent judge denying the petitioners' motion for execution on the ground that the private respondent
had substantially complied with the terms and conditions of the compromise agreement, and
directing the petitioners to immediately execute the necessary documents transferring to the private
13 Of particular notice is that: In the compromise entered by them, it was stated
that the failure of a party to comply with such will automatically forfeit his right to
appeal and therefore, the writ of execution (as to recission of their contract) is
immediately enforced against him and all payments made are forfeited also in favor
of petitioner.
14 For his failure to comply on June 30, 1980 as evidenced by their agreement
above.
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Case Notes/Digests
respondent the title to the properties (July 23, 1985, 137 SCRA 730). In the case at bar, there was also
substantial compliance with the compromise agreement.
Section 4 of Republic Act No. 6552 which took effect on September 14, 1972 provides as follows:
"In case where less than two years of installments were paid, the seller shall give
the buyer a grace period of not less than sixty days from the date the installment
became due. If the buyer fails to pay the installments due at the expiration of the grace
period, the seller may cancel the contract after thirty days from receipt by the
buyer of the notice of the cancellation or the demand for rescission of the contract by a
notarial act."
Section 7 of said law provides as follows:
"Any stipulation in any contract hereafter entered into contrary to the
provisions of Sections 3, 4, 5 and 6, shall be null and void.
However, assuming that under the terms of said agreement the December 31, 1980 installment was due
and payable when on October 15, 1980, petitioner demanded payment of the balance of P69,059.71 on or
before October 31, 1980, petitioner could cancel the contract after thirty days from receipt by private
respondent of the notice of cancellation. Considering petitioner's motion for execution filed on November
7, 1980 as a notice of cancellation, petitioner could cancel the contract of conditional sale after thirty days
from receipt by private respondent of said motion. Private respondent's tender of payment of the
amount of P76,059.71 together with his motion for reconsideration on November 17, 1980 was,
therefore, well within the thirty-day period granted by law.
THE TENDER MADE BY PRIVATE RESPONDENT OF A CERTIFIED BANK MANAGER'S
CHECK PAYABLE TO PETITIONER WAS A VALID TENDER OF PAYMENT.15
Moreover, Section 49, Rule 130 of the Revised Rules of Court provides that:
"An offer in writing to pay a particular sum of money or to deliver a written instrument
or specific property is, if rejected, equivalent to the actual production and
tender of the money, instrument, or property.
As the Court held in the case of Soco vs. Militante, promulgated on June 28, 1983, after examining the
above-cited provisions of the law and the jurisprudence on the matter:
"Tender of payment must be distinguished from consignation. Tender is the
antecedent of consignation, that is, an act preparatory to the consignation, which is
15 Considering the case of Seneris as cited by J. Jurado in his book, that a certified
check can be used as a valid tender of payment of money. Since the presence of its
certification it is already treated as cash.
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Case Notes/Digests
the principal, and from which are derived the immediate consequences which the
debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the attempt to
make a private settlement before proceeding to the solemnities of consignation. (8
Manresa 325).
In the case at bar, although as above stated private respondent had preserved his rights as a vendee in the
contract of conditional sale of real property by a timely valid tender of payment of the balance of his
obligation which was not accepted by petitioner, he remains liable for the payment of his obligation
because of his failure to deposit the amount due with the court.
In his manifestation dated September 19, 1986, private respondent states that on September 16, 1980, he
purchased a Metrobank Cashier's Check No. CC 004233 in favor of petitioner Luisa F. McLaughlin in the
amount of P76,059.71, a photocopy of which was enclosed and marked as Annex "A-1;" but that he did
not continue paying the monthly rental of P1,000.00 because, pursuant to the decision of the
appellate court, petitioner herein was ordered to accept the aforesaid amount in full payment of herein
respondent's obligation under the contract subject matter thereof.
However, inasmuch as petitioner did not accept the aforesaid amount, it was incumbent on private
respondent to deposit the same with the court in order to be released from responsibility. Since
private respondent did not deposit said amount with the court, his obligation was not paid and he is liable
in addition for the payment of the monthly rental of P1,000.00 from January 1, 1981 until said obligation
is duly paid, in accordance with paragraph 3 of the Compromise Agreement. Upon full payment of the
amount ofP76,059.71 and the rentals in arrears, private respondent shall be entitled to a deed of absolute
sale in his favor of the real property in question.
Rural Bank of Caloocan City vs. CA

Facts: On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to
the Rural Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged
everything about the loan with the bank and who supplied to the latter the personal data required for
Castro's loan application. On December 11, 1959, after the bank approved the loan for the
amount ofP3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note
corresponding to her loan in favor of the bank.
On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal
amount of loan for P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their loan in
favor of the bank and had Castro affixed thereon her signature as co-maker.
Christian Arbiol

Case Notes/Digests
The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and
lot of 150 square meters, covered by Transfer Certificate of Title No. 7419 of the Office of the
Register of Deeds of Manila.
On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a
notice of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419
would be sold at public auction on March 10, 1961 to satisfy the obligation covering the two promissory
notes plus interest and attorney's fees.16
Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on
February 13, 1961, when she learned for the first time that the mortgage contract (Exhibit "6")
which was an encumbrance on her property was for P6,000.00 and not for P3,000.00 and that she
was made to sign as co-maker of the promissory note (Exhibit "2") without her being
informed of this. (Because she was ignorant of such, she had mistakenly took the mortgage due to
misrepresentation of the Valencias. She thought that it will only cover her original loan of 3k. Also, taking
into consideration that Castro was an illiterate person who cannot read nor write in English; as she only
finished second Grade in Elementary School)
That in December 1959, she needed money in the amount of P3,000.00 to invest in the business
(drugstore business) of the defendant spouses Valencia, who accompanied her to the
defendant bank for the purpose of securing a loan of P3,000.00; that while at the defendant bank, an
employee handed to her several forms already prepared which she was asked to sign on the places
indicated, with no one explaining to her the nature and contents of the documents; that she did not even
receive a copy thereof; that she was given a check in the amount of P2,882.85 which she delivered to
defendant spouses.
Castro prayed, amongst other, for the annulment as far as she is concerned of the promissory note
(Exhibit "2") and mortgage contract (Exhibit "6") insofar as it exceeds P3,000.00; for the
discharge of her personal obligation with the bank by reason of a deposit of P3,383.00 with the
court a quo upon the filing of her complaint; for the annulment of the foreclosure sale of her property.
Issue: Whether the CA is correct in affirming the judgment of the RTC in favor of Castro.
Held: We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias.
For, one, no claim was made on this in the lower court. For another, petitioners did not submit
proof to support its contention.17
16 Acting on the request of Castro and the Valencias, it was rescheduled, however
when that day arrived, it was subsequently declared as a holiday, therefore it was
made the following business day.
Christian Arbiol

Case Notes/Digests
At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory
note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's
personal qualifications in order to secure its consent to the loan. This must be the reason which
prompted the bank to contend that it was defrauded by the Valencias. But to reiterate, We cannot agree
with the contention for reasons above-mentioned. However, if the contention deserves any consideration
at all, it is in indicating the admission of petitioners that the bank committed mistake in giving its consent
to the contracts.
Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias,
both Castro and the bankcommitted mistake in giving their consents to the contracts. In other words,
substantial mistake vitiated their consents given. For if Castro had been aware of what she signed
and the bank of the true qualifications of the loan applicants, it is evident that they would not have
given their consents to the contracts. A contract may be annulled on the ground of vitiated consent, if
deceit by a third person, even without connivance or complicity with one of the contracting parties,
resulted in mutual error on the part of the parties to the contract.
Moreover, considering Castro's personal circumstances her lack of education, ignorance and old
age she cannot be considered utterly neglectful for having been defrauded. On the contrary, it is
demanded of petitioners to exercise the highest order of care and prudence in its business dealings
with the Valencias considering that it is engaged in a banking business a business affected with
public interest. It should have ascertained Castro's awareness of what she was signing or made her
understand what obligations she was assuming, considering that she was giving accommodation to,
without any consideration from, the Valencia spouses.
Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe that
they were authorized to speak and bind her. She cannot now be permitted to deny the authority of the
Valencias to act as her agent for one who clothes another with apparent authority as her agent is not
permitted to deny such authority. Cdpr
The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were
not authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to sign
the promissory note for her loan of P3,000.00. If her act had been understood by the Bank to be a
grant of an authority to the Valencias to borrow in her behalf, it should have required a special
power of attorney executed by Castro in their favor. Since the bank did not, We can rightly assume that it
did not entertain the notion, that the Valencia spouses were in any manner acting as an agent of Castro.
The Bank should have exercised due care and prudence by making proper inquiry if Castro's
consent to the mortgage was without any taint or defect.
17 The fraudulent act committed by the Spouses Valencia was proven with sufficient
evidence before the RTC, and no claim was made by the petitioners as to the fraud
committed against them by the sps.
Christian Arbiol

Case Notes/Digests
As to the effect of Consignation made by Castro for the full amount of her obligation
It is contended that the consignation was made without prior offer of tender of payment to the Bank, and
is therefore, not valid. In holding that there is a substantial compliance with the provision of Article
1256 of the Civil Code, respondent court considered the fact that the Bank was holding Castro liable for
the sum of P6,000.00 plus 12% interest per annum, while the amount consigned was only P3,000.00 plus
12% interest; that at the time of consignation, the Bank had long foreclosed the mortgage extrajudicially
and the sale of the mortgaged property had already been scheduled for April 10, 1961 for nonpayment of the obligation, and that despite the fact that the Bank already knew of the deposit made by
Castro because of receipt of the deposit was attached to the record of the case, said Bank had not made
any claim of such deposit, and that therefore, Castro was right in thinking that it was futile and useless
for her to make previous offer and tender of payment directly to the Bank only in the aforesaid
amount of P3,000.00 plus 12% interest. Under the foregoing circumstances, the consignation made
by Castro was valid, IF NOT UNDER THE STRICT PROVISION OF THE LAW, UNDER THE
MORE LIBERAL CONSIDERATIONS OF EQUITY. (Emphasis supplied)
Equitable PCI Bank vs. Ng Sheung Ngor or Ken Business Mktg.

Ratio: On October 7, 2001, respondents Ng Sheung Ngor, Ken Appliance Division, Inc. and Benjamin E.
Go filed an action for annulment and/or reformation of documents and contracts against
petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the
Regional Trial Court (RTC), Branch 16 of Cebu City. They claimed that Equitable induced them to avail
of its peso and dollar credit facilities by offering low interest rates so they accepted Equitable's proposal
and signed the bank's pre-printed18 promissory notes on various dates beginning 1996. They, however,
were
unaware
that
the
documents
contained
identical
escalation
clauses
granting Equitable authority to increase interest rates without their consent.
Equitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions
contained in the promissory notes. 9 In fact, they continuously availed of and benefited
from Equitable's credit facilities for five years.
The trial court, however, invalidated the escalation clause contained therein because it violated the
principle of mutuality of contracts.
18 The notes were declared by the Court as contracts of adhesion.

Christian Arbiol

Case Notes/Digests
Nevertheless, it took judicial notice of the steep depreciation of the peso during the intervening period and
declared the existence of extraordinary deflation. 19 Consequently, the RTC ordered the use of the 1996
dollar exchange rate in computing respondents' dollar-denominated loans.
The RTC upheld the validity of the promissory notes despite respondents' assertion that those documents
were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted by one party. The
participation of the other party is limited to affixing his signature or his "adhesion" to the contract. For
this reason, contracts of adhesion are strictly construed against the party who drafted it.
It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the
contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes advantage of the weakness of the other party,
completely depriving the latter of the opportunity to bargain on equal footing.
As the trial court noted, if the terms and conditions offered by Equitable had been truly prejudicial to
respondents, they would have walked out and negotiated with another bank at the first available instance.
But they did not. Instead, they continuously availed ofEquitable's credit facilities for five long years.
**While the RTC categorically found that respondents had outstanding dollar- and peso-denominated
loans with Equitable, IT, HOWEVER, FAILED TO ASCERTAIN THE TOTAL AMOUNT DUE
(principal, interest and penalties, if any) as of July 9, 2001. The trial court did not explain how it arrived
at the amounts of US$228,200 and P1,000,000.
HENCE, WE ORDERED THE PARTIAL REMAND OF THE CASE FOR THE SOLE PURPOSE
OF DETERMINING THE AMOUNT OF ACTUAL DAMAGES.
**Escalation clauses are not void per se. However, one "which grants the creditor an unbridled right
to adjust the interest independently and upwardly, completely depriving the debtor of the right to
assent to an important modification in the agreement" is void.
For this reason, we have consistently held that a valid escalation clause provides:
1. That the rate of interest will only be increased if the applicable maximum rate of
interest is increased by law or by the Monetary Board; and
19 The RTC took judicial notice that at the time it was decided, the cost of
purchasing dollars in the year 1998 was only 26.50, 5 years thereafter, the price
increased to as much as 200% or to 55.00 per $1 at 2001. The RTC concluded
extraordinary inflation therein.
Christian Arbiol

Case Notes/Digests
2. That the stipulated rate of interest will be reduced if the applicable maximum rate
of interest is reduced by law or by the Monetary Board (de-escalation
clause).
Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended.
Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil Code.
Furthermore, the assailed escalation clause did not contain the necessary provisions for validity, that is, it
neither provided that the rate of interest would be increased only if allowed by law or the Monetary
Board, nor allowed de-escalation. For these reasons, the escalation clause was void. Upon maturity, the
amount due was subject to legal interest at the rate of 12% per annum. (Since the escalation clause was
declared as void, therefore, only the legal interests will be applied in this case)
As to the issue of Extraordinary Inflation
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be proven:
1. that there was an official declaration of extraordinary inflation or deflation from
the Bangko Sentral ng Pilipinas (BSP);
2. that the obligation was contractual in nature; and
3. that the parties EXPRESSLY agreed to consider the effects of the extraordinary
inflation or deflation.
Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation.
Moreover, although the obligation in this instance arose out of a contract, the parties did not agree to
recognize the effects of extraordinary inflation (or deflation). The RTC never mentioned that there was
a such stipulation either in the promissory note or loan agreement. Therefore, respondents should
pay their dollar-denominated loans at the exchange rate fixed by the BSP ON THE DATE OF
MATURITY.
Christian Arbiol

Case Notes/Digests
Ayala Life vs. Burton

Facts: On March 20, 1984, Karamfil Import-Export Company Ltd. (KARAMFIL) bought from AYALA a
piece of land identified as Lot 26, Block 2 consisting of 1,188 square meters, located at what is now
known as H.V. de la Costa Street, Salcedo Village, Makati City.
The transaction was documented in a Deed of Sale of even date, which provides, among others, that the
vendee would comply with certain special conditions and restrictions on the use or occupancy of the
land, among which areDeed Restrictions:
a) The total height of the building to be constructed on the lot shall not be more than forty-two (42)
meters, nor shall it have a total gross floor area of more than five(5) times the lot area; and
b) The sewage disposal must be by means of connection into the sewerage system servicing the area.
Special Conditions:
a) The vendee must obtain final approval from AYALA of the building plans and specifications of the
proposed structures that shall be constructed on the land;
b) The lot shall not be sold without the building having been completed; and
c) Any breach of the stipulations and restrictions entitles AYALA to rescission of the contract.
On February 18, 1988, KARAMFIL sold the lot to Palmcrest Development and Realty Corporation
(PALMCREST) under a Deed of Absolute Sale of even date. This deed was submitted to AYALA for
approval in order to obtain the latter's waiver of the special condition prohibiting the resale of the lot until
after KARAMFIL shall have constructed a building thereon. AYALA gave its written conformity to the
sale but reflecting in its approval the same special conditions/restrictions as in the previous sale.
Christian Arbiol

Case Notes/Digests
PALMCREST in turn sold the lot to Ray Burton Development Corporation (RBDC), now respondent, on
April 11, 1988, with the agreement that AYALA retains possession of the Owner's Duplicate copy of the
title until a building is erected on said parcel of land in accordance with the requirements and/or
restrictions of AYALA; AYALA gave its conformity to the sale, subject to RBDC's compliance with the
special conditions/restrictions which were annotated in the deed of sale.
Sometime in June of 1989, RBDC submitted to AYALA for approval a set of architectural plans for the
construction of a 5-storey office building on the subject lot. The building was to be known as "Trafalgar
Tower" but later renamed "Trafalgar Plaza." Since the building was well within the 42-meter height
restriction, AYALA approved the architectural plans.
Meanwhile, on November 28, 1989, RBDC, together with the Makati Developers Association, Inc.
(MADAI), of which RBDC is a member, and other lot owners, filed a complaint against AYALA before
the Housing and Land Use Regulatory Board. The complaint sought the nullification of the very same
Deed Restrictions incorporated in the deeds of sale of the lots purchased by the complainants
from AYALA. To wit:
A. (It) places unreasonable control over the lots sold by AYALA, thereby depriving the vendees of
the full enjoyment of the lots they bought.
B. They are contracts of adhesion since AYALA would not sell the lots unless the buyers agree to
the deed restrictions.
Early in June of 1990, RBDC made another set of building plans for "Trafalgar Plaza" and submitted the
same for approval, this time to the Building Official of the Makati City Engineer's Office, not to AYALA.
After having obtained the necessary building permits from the City Engineer's Office, RBDC began to
construct "Trafalgar Plaza" in accordance with these new plans.
On July 11, 1990, the majority of the lot owners in the Makati City area, including the Salcedo and
Legaspi Village areas, in a general assembly of the Makati Commercial Estate Association, Inc.
(MACEA), approved the revision of the Deed Restrictions, wherein direct height restrictions were
abolished in favor of floor area limits computed on the basis of "floor area ratios. RBDC did not vote
for the approval of the Revised Deed Restrictions and, therefore, it continued to be bound by the
original Deed Restrictions.
While the appeal was pending before the Office of the President, the September 21, 1990 issue of
the Business World magazine featured the "Trafalgar Plaza" as a modern 27-storey structure which
will soon rise in Salcedo Village, Makati City. Stunned by this information, AYALA, through counsel,
then sent a letter to RBDC demanding the latter to cease the construction of the building which
dimensions do not conform to the previous plans it earlier approved.20
20 For RBDCs failure to heed the demand, AYALA filed an action for specific
performance of the contract or for recission of the same. Since the 27 storey unit
building permit acquired by RBDC from the MEO contravened their original
agreement.
Christian Arbiol

Case Notes/Digests
RBDC alleged in essence that even if said deed restrictions exist, the same are not economically viable
and should not be enforced because they constitute unreasonable restrictions on its property rights
and are, therefore, contrary to law, morals, good customs, public order or public policy.21
Issue: Whether a contract of adhesion is invalid per se.
Held: A contract of adhesion in itself is not an invalid agreement. This type of contract is as binding as a
mutually executed transaction. We have emphatically ruled in the case of Ong Yiu vs. Court of
Appeals, et. al. that "contracts of adhesion wherein one party imposes a ready-made form of contract on
the other . . . are contracts not entirely prohibited. The one who adheres to the contract is in reality
free to reject it entirely; if he adheres he gives his consent." This ruling was reiterated in Philippine
American General Insurance Co., Inc. vs. Sweet Lines, Inc., et. al., 51 wherein we further declared
through Justice Florenz Regalado that "not even an allegation of ignorance of a party excuses noncompliance with the contractual stipulations since the responsibility for ensuring full
comprehension of the provisions of a contract of carriage (a contract of adhesion) devolves not on
the carrier but on the owner, shipper, or consignee as the case may be.
Contracts of adhesion, however, stand out from other contracts (which are bilaterally drafted by the
parties) in that the former is accorded inordinate vigilance and scrutiny by the courts in order to
shield the unwary from deceptive schemes contained in ready-made covenants. The stringent treatment
towards contracts of adhesion which the courts are enjoined to observe is in pursuance of the mandate
in Article 24 of the New Civil Code that "(i)n all contractual, property or other relations, when one of the
parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness,
tender age or other handicap, the courts must be vigilant for his protection.
The Court ruled against RBDC for violating the stipulations of their contract.
Obiter: The fact that RBDC was issued by the MEO the authority to construct its own building even if it
was beyond the agreement made by the parties is not a justifiable reason for the former to violate their
agreement, which includes the special restrictions imposed by AYALA in their agreement. To rule
otherwise would violate the very tranquility of contracts, As Art. 1159 provides that it should be the law
between the parties which also requires that both of them should comply with their agreements in good
faith.
Navarra vs. Planters Development Bank

Facts: On July 5, 1982, the Navarras obtained a loan of P1,200,000.00 from Planters Bank and, by way of
security therefor, executed a deed of mortgage over their aforementioned five (5) parcels of land.
Unfortunately, the couple failed to pay their loan obligation. Hence, Planters Bank foreclosed on the
21 The RTC ruled in favor of RBDC emphasizing on the fact that the contract was
illegal because of the mere fact that it is a contract of adhesion. (For purposes of
relating the case to the subject) AYALA appealed, but the CA affirmed in toto the
judgment of the RTC.
Christian Arbiol

Case Notes/Digests
mortgage and the mortgaged assets were sold to it for P1,341,850.00, it being the highest bidder in the
auction sale conducted on May 16, 1984. The one-year redemption period expired without the Navarras
having redeemed the foreclosed properties.
In the meantime, Jorge Navarra sent a letter to Planters Bank, proposing to repurchase the five (5) lots
earlier auctioned to the Bank, with a request that he be given until August 31, 1985 to pay the down
payment of P300,000.00. which was subsequently agreed by the respondents.
Because the amount of P300,000.00 was sourced from a different transaction between RRRC
and Planters Bank and involved different debtors, the Bank required Navarra to submit a board
resolution from RRRC authorizing him to negotiate for and its behalf and empowering him to apply the
excess amount of P300,000.00 in RRRC's redemption payment as down payment for the repurchase of the
Navarras' foreclosed properties.22
Accordingly, Jorge Navarra went to the Office of Mr. Rene Castillo on August 20, 1985, bringing with
him a letter requesting that the excess payment of P300,000.00 in connection with the redemption made
by the RRRC be applied as down payment for the Navarras' repurchase of their foreclosed properties.
Then, on January 21, 1987, Planters Bank sent a letter to Jorge Navarra informing him that it could not
proceed with the documentation of the proposed repurchase of the foreclosed properties on account of
his non-compliance with the Bank's request for the submission of the needed board resolution of
RRRC.
In his reply-letter of January 28, 1987, Navarra claimed having already delivered copies of the required
board resolution to the Bank. The Bank, however, did not receive said copies. Thus, on February 19,
1987, the Bank sent a notice to the Navarras demanding that they surrender and vacate the properties in
question for their failure to exercise their right of redemption.
The Navarras filed their complaint for Specific Performance with Injunction against Planters Bank. In
their complaint docketed in said court as Civil Case No. 16917 and raffled to Branch 66 thereof, the
Navarras, as plaintiffs, alleged that a perfected contract of sale was made between them and Planters
Bank whereby they would repurchase the subject properties for P1,800,000.00 with a down
payment of P300,000.00.
In its Answer, Planters Bank asserted that there was no perfected contract of sale because the terms and
conditions for the repurchase have not yet been agreed upon. 23
22 Since there was 2 transactions that took place, (1) Navarras (whose redemption
has expired) and (2) the RRRC (A corporation owned by the parents of Carmelita
Navarra (one of the parties); however, RRRC retained its right to redeem the
property.
23 The RTC ruled in favor of the spouses that there was already a perfected contract
of sale, on appeal, however, the CA reversed the ruling made by the RTC which is
the subject matter of the dispute.
Christian Arbiol

Case Notes/Digests
Issue: Whether there was a perfected contract of sale between the parties.
Held: In general, contracts undergo three distinct stages, to wit: negotiation, perfection or birth, and
consummation. Negotiation begins from the time the prospective contracting parties manifest their
interest in the contract and ends at the moment of their agreement. Perfection or birth of the contract
takes place when the parties agree upon the essential elements of the contract, i.e., consent, object and
price. Consummation occurs when the parties fulfill or perform the terms agreed upon in the contract,
culminating in the extinguishment thereof.
A negotiation is formally initiated by an offer which should be certain with respect to both the object and
the cause or consideration of the envisioned contract. In order to produce a contract, there must
be acceptance, which may be express or implied, but it must not qualify the terms of the offer. The
acceptance of an offer must be unqualified and absolute to perfect the contract. In other words, it
must be identical in all respects with that of the offer so as to produce consent or meeting of the minds.
This Court held that before a valid and binding contract of sale can exist, the manner of payment of the
purchase price must first be established since the agreement on the manner of payment goes into
the price such that a disagreement on the manner of payment is tantamount to a failure to agree on
the price.
Clearly, then, the lack of a definite offer on the part of the spouses could not possibly serve as the basis of
their claim that the sale/repurchase of their foreclosed properties was perfected. The reason is obvious:
one essential element of a contract of sale is wanting: the price certain. There can be no contract of sale
unless the following elements concur: (a) consent or meeting of the minds; (b) determinate subject matter;
and (c) price certain in money or its equivalent. Such contract is born or perfected from the moment there
is a meeting of minds upon the thing which is the object of the contract and upon the price. Here, what is
dramatically clear is that there was no meeting of minds vis-a-vis the price, expressly or impliedly,
directly or indirectly.
The letter specifically stated that there is a need to negotiate on the other details of the transaction before
the sale may be formalized. Such statement in the Bank's letter clearly manifests lack of agreement
between the parties as to the terms of the purported contract of sale/repurchase, particularly the
mode of payment of the purchase price and the period for its payment.
Evidently, what transpired between the parties was only a prolonged negotiation to buy and to sell, and, at
the most, an offer and a counter-offer with no definite agreement having been reached by them. With the
hard reality that no perfected contract of sale/repurchase exists in this case, any independent transaction
between the Planters Bank and a third-party, like the one involving the Gatchalian Realty, cannot be
affected.
Mendezona vs. Ozamis
Civil Case No. CEB-10766 is a suit for quieting of title. It was instituted on September 25,
1991 by petitioner spouses Mario J. Mendezona and Teresita M. Mendezona as initial plaintiffs
and in the amended complaint filed on October 7, 1991, herein co-petitioner spouses Luis
Christian Arbiol

Case Notes/Digests
J. Mendezona and Maricar L. Mendezona and Teresita Adad Vda. De Mendezonajoined as coplaintiffs.
In their complaint, the petitioners, as plaintiffs therein, alleged that petitioner spouses Mario
J. Mendezona and Teresita M. Mendezona,
petitioner
spouses
Luis
J. Mendezona andMaricar L. Mendezona,
and
petitioner Teresita Adad Vda.
De Mendezona own a parcel of land each in the Banilad Estate, Lahug, Cebu City.
The petitioners ultimately traced their titles of ownership over their respective properties
from a notarized Deed of Absolute Sale[7] dated April 28, 1989 executed in their favor by
Carmen Ozamiz for and in consideration of the sum of One Million Forty Thousand Pesos
(P1,040,000.00).
The petitioners initiated the suit to remove a cloud on their said respective titles caused
by the inscription thereon of a notice of lis pendens, which came about as a result of an
incident in Special Proceeding No. 1250 of the RTC of Oroquieta City. Special Proceeding
No. 1250 is a proceeding for guardianship over the person and properties of
Carmen Ozamiz initiated by the respondents Julio H. Ozamiz, Jose Ma. Ozamiz, Carmen
H. Ozamiz, Paz O. Montalvan, Ma. Teresa O.F. Zarraga, Carlos O. Fortich, Jose Luis
O. Ros, Paulita O. Rodriguez andLourdes O. Lon.
It appears that on January 15, 1991, the respondents instituted the petition for guardianship with
the Regional Trial Court of Oroquieta City, alleging therein that Carmen Ozamiz, then 86 years
old, after an illness in July 1987, had become disoriented and could not recognize most of
her friends; that she could no longer take care of herself nor manage her properties by
reason of her failing health, weak mind and absent-mindedness. Mario Mendezona and
Luis Mendezona,
herein
petitioners
who
are
nephews
of
Carmen Ozamiz,
and Pilar Mendezona, a sister of Carmen Ozamiz, filed an opposition to the guardianship
petition.
In the course of the guardianship proceeding, the petitioners and the oppositors thereto agreed
that Carmen Ozamiz needed a guardian over her person and her properties, and thus
respondent Paz O. Montalvan was designated as guardian over the person of
Carmen Ozamiz while petitioner Mario J. Mendezona, respondents Roberto J. Montalvan and
Julio H. Ozamizwere designated as joint guardians over the properties of the said ward.
In their Answer[12] in Civil Case No. CEB-10766 the respondents opposed the petitioners claim of
ownership of the Lahug property and alleged that the titles issued in the petitioners names are
defective and illegal, and the ownership of the said property was acquired in bad faith and
without value inasmuch as the consideration for the sale is grossly inadequate and
unconscionable. Respondents further alleged that at the time of the sale on April 28,
1989 Carmen Ozamiz was already ailing and not in full possession of her mental
faculties; and that her properties having been placed in administration, she was in effect
incapacitated to contract with petitioners.
Christian Arbiol

Case Notes/Digests
The petitioners as well as the notary public who notarized the documents testified that on the
day of execution of the said contract that Carmen Ozamiz was of sound mind and that she
voluntarily and knowingly executed the said deed of sale.
On appeal to the Court of Appeals, the appellate court reversed the factual findings of the trial
court and ruled that the Deed of Absolute Sale dated April 28, 1989 was a simulated contract
since the petitioners failed to prove that the consideration was actually paid, and,
furthermore, that at the time of the execution of the contract the mental faculties of
CarmenOzamiz were already seriously impaired. Thus, the appellate court declared that the
Deed of Absolute Sale of April 28, 1989 is null and void. It ordered the cancellation of the
certificates of title issued in the petitioners names and directed the issuance of new certificates
of title in favor of Carmen Ozamiz or her estate.
Issue: Whether the contract involved is a simulated contract.
Held: Simulation is defined as the declaration of a fictitious will, deliberately made by agreement
of the parties, in order to produce, for the purposes of deception, the appearances of a juridical
act which does not exist or is different from what that which was really executed.
The requisites of simulation are: (a) an outward declaration of will different from the will of the
parties; (b) the false appearance must have been intended by mutual agreement; and (c) the
purpose is to deceive third persons.
Contrary to the erroneous conclusions of the appellate court, a simulated contract cannot be
inferred from the mere non-production of the checks. It was not the burden of the
petitioners to prove so. It is significant to note that the Deed of Absolute Sale dated April 28,
1989 is a notarized document duly acknowledged before a notary public. As such, it has in its
favor the presumption of regularity, and it carries the evidentiary weight conferred upon it
with respect to its due execution. It is admissible in evidence without further proof of its
authenticity and is entitled to full faith and credit upon its face.
Payment is not merely presumed from the fact that the notarized Deed of Absolute Sale
dated April 28, 1989 has gone through the regular procedure as evidenced by the
transfer certificates of title issued in petitioners names by the Register of Deeds. In other
words, whosoever alleges the fraud or invalidity of a notarized document has the burden of
proving the same by evidence that is clear, convincing, and more than merely preponderant.
Considering that Carmen Ozamiz acknowledged, on the face of the notarized deed, that she
received the consideration at One Million Forty Thousand Pesos (P1,040,000.00), the appellate
court should not have placed too much emphasis on the checks, the presentation of
which is not really necessary. Besides, the burden to prove alleged non-payment of the
consideration of the sale was on the respondents, not on the petitioners. Also, between its
conclusion based on inconsistent oral testimonies and a duly notarized document that enjoys
presumption of regularity, the appellate court should have given more weight to the latter.
Spoken words could be notoriously unreliable as against a written document that speaks a
uniform language.
Christian Arbiol

Case Notes/Digests
It has been held that a person is not incapacitated to contract merely because of advanced
years or by reason of physical infirmities. Only when such age or infirmities impair her mental
faculties to such extent as to prevent her from properly, intelligently, and fairly protecting her
property rights, is she considered incapacitated.
We note that the respondents sought to impugn only one document, namely, the Deed of
Absolute Sale dated April 28, 1989, executed by Carmen Ozamiz. However, there are nine (9)
other important documents that were, signed by Carmen Ozamiz either before or after April 28,
1989 which were not assailed by the respondents.[31] Such is contrary to their assertion of
complete incapacity of Carmen Ozamiz to handle her affairs since 1987. We agree with the trial
courts assessment that it is unfair for the [respondents] to claim soundness of mind of
Carmen Ozamiz when it benefits them and otherwise when it disadvantages them. [32] A person is
presumed to be of sound mind at any particular time and the condition is presumed to continue
to exist, in the absence of proof to the contrary
Manila Banking v. Silverio
Purificacion Ver was the registered owner of two parcels of land located at La Huerta, Paraaque
City, covered by Transfer Certificates of Title (TCTs) No. 31444 (452448) and No. 45926
(452452) of the Registry of Deeds of Paraaque City.
On 16 April 1979, Purificacion Ver sold the properties to Ricardo C. Silverio, Sr. (Ricardo, Sr.)
for P1,036,475.00.[4] The absolute deed of sale evidencing the transaction was not
registered; hence, title remained with the seller, Purificacion Ver.
On 22 February 1990, herein petitioner, The Manila Banking Corporation (TMBC), filed a
complaint with the RTC of Makati City for the collection of a sum of money with application for
the issuance of a writ of preliminary attachment against Ricardo, Sr.
On 29 March 1993, the trial court rendered its Decision in favor of TMBC and against Ricardo,
Sr. and the Delta Motors Corporation. [7] The Decision was brought up to the Court of Appeals for
review.[8]
In the meantime, on 22 July 1993, herein private respondent, Edmundo S. Silverio (Edmundo),
the nephew[9] of judgment debtor Ricardo, Sr., requested TMBC to have the annotations on
the subject properties cancelled as the properties were no longer owned by Ricardo, Sr.
[10]
This letter was referred to the Bangko Sentral Ng Pilipinas, TMBCs statutory receiver.[11] No
steps were taken to have the annotations cancelled.
In his petition, Edmundo alleged that as early as 11 September 1989, the properties, subject
matter of the case, were already sold to him by Ricardo, Sr. As such, these properties could
not be levied upon on 02 July 1990 to answer for the debt of Ricardo, Sr. who was no longer the
owner thereof. In its Answer with Compulsory Counterclaim, TMBC alleged, among other
things, that the sale in favor of Edmundo was void, therefore, the properties levied upon
were still owned by Ricardo, Sr., the debtor in Civil Case No. 90-513.
The RTC ruled in favor of the petitioner:
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Case Notes/Digests
The Court is inclined to agree with the contention of oppositor that

the supposed deed of sale in favor of herein petitioner is fictitious and
simulated and thus void ab initio. The all-important factor that what
appears in the notarial register of the notary public, albeit in loose
form, is not a deed of sale but a mere affidavit of a different
person Maria J. Segismundo --, as shown in Exhibit 10-A, is sufficient
to prove that no effective, valid and legal sale of the properties in
question was executed between the Silverio uncle and nephew.
Issue: Whether the alleged contract of sale executed between Ricardo and
Edmundo (respondent) is a simulated contract.
Held: An absolutely simulated contract, under Article 1346 of the Civil Code, is void. It takes
[23]
place when the parties do not intend to be bound at all. The characteristic of simulation is
the fact that the apparent contract is not really desired or intended to produce legal effects or in
any way alter the juridical situation of the parties. [25] Thus, where a person, in order to place
his property beyond the reach of his creditors, simulates a transfer of it to another, he
does not really intend to divest himself of his title and control of the property; hence, the
deed of transfer is but a sham.[26] Lacking, therefore, in a fictitious and simulated contract is
consent which is essential to a valid and enforceable contract.[27] In herein case, badges of fraud
and simulation permeate the whole transaction, thus, we cannot but refuse to give the sale
validity and legitimacy.
[24]
There is no proof that the said sale took place prior to the date of the attachment. The notarized
deed of sale, which would have served as the best evidence of the transaction, did not
materialize until 22 July 1993, or three (3) years after TMBC caused the annotation of its lien on
the titles subject matter of the alleged sale.
***The fact that the assailed deed of sale is not one of those submitted by Atty. Lacanilao to the
Clerk of Court of the RTC of Makati City [34] renders it virtually worthless in the absence of
corroboration as to its due execution other than petitioner (now private respondent) Edmundos
self-serving statements. This being the case, Edmundo could simply have presented the
witnesses to the transaction (his wife and his lawyer), Atty. Lacanilao or the seller himself,
Ricardo Sr., to testify as to the execution of the contract of sale on 11 September 1989. This he
did not do, thus lending more credence to the theory of TMBC that the sale was entered into
only as an afterthought, hatched to prevent the transfer of the properties to TMBC after the latter
had already annotated its lien thereon.
Edmundo, to say the least, was very evasive when questioned regarding details of the alleged
sale. The deed of sale mentioned Three Million One Hundred Nine Thousand and Four Hundred
Twenty-Five pesos (P3,109,425.00) as the contract price paid by hand during the execution of
the contract, yet, when asked on cross-examination, Edmundo could not remember if he paid
directly to Ricardo, Sr.[35] Worse, he could not remember where Ricardo, Sr. was at the time of
the sale.
Christian Arbiol

Case Notes/Digests
The only logical conclusion is that there was actually no consideration for the said sale. Verily, a
deed of sale in which the stated consideration has not in fact been paid is a false contract that
is void ab initio.[39] Likewise, a contract of purchase and sale is null and void and produces no
effect whatsoever where it appears that [the] same is without cause or consideration which
should have been the motive thereof, or the purchase price appears thereon as paid but which
in fact has never been paid by the purchaser to the vendor.
The most protuberant index of simulation is the complete absence of an attempt in any manner
on the part of the [ostensible buyer] to assert his rights of ownership over the [properties] in
question. The supposed buyers failure to take exclusive possession of the property allegedly
sold or, in the alternative, to collect rentals, is contrary to the principle of ownership. [50] Such
failure is a clear badge of simulation that renders the whole transaction void pursuant to Article
1409 of the Civil Code.
Absolute simulation implies that there is no existing contract, no real act

executed; while fraudulent alienation means that there is a true and existing
transfer or contract. The former can be attacked by any creditor, including
one subsequent to the contract; while the latter can be assailed only by the
creditors before the alienation. In absolute simulation, the insolvency of the
debtor making the simulated transfer is not a prerequisite to the nullity of
the contract; while in fraudulent alienation, the action to rescind, or accion
pauliana, requires that the creditor cannot recover in any other manner what
is due him. Finally, the action to declare a contract absolutely simulated does
not prescribe (articles 1409 and 1410); while the accion pauliana to rescind a
fraudulent alienation prescribes in four years (article 1389).
Dela Cruz v. Dela Cruz

This petition seeks to annul and set aside the decision 1 of the Court of Appeals, promulgated on
September 14, 2000, in CA-G.R. CV No. 53679, affirming the decision 2 of the Regional Trial Court
(RTC) of Malolos, Bulacan, Branch 17, dated December 14, 1995, in Civil Case No. 37-M-89. The trial
court dismissed the complaint in Civil Case No. 37-M-89 and held that herein respondents Clark and
Divina Gutierrez are the lawful owners of the property in dispute. Petitioners also seek to annul the
appellate court's resolution, 3 dated November 28, 2000, denying their motion for reconsideration.
Paciencia dela Cruz, the original plaintiff in Civil Case No. 37-M-89, was the owner of a parcel of land
with an area of two (2) ares 4 and ninety (90)centares, 5 located at Lolomboy, Bocaue, Bulacan. Said
parcel was registered in her name under Transfer Certificate of Title (TCT) No. T-14.585 (M). A flea
market (talipapa) with fifty or so vendors was located on the property and Paciencia collected from them
their daily stall rentals. Paciencia had six (6) children, namely Priscilla, Erlinda, Fortunato, Flora,
Angelita and Zenaida, all surnamed dela Cruz.
Christian Arbiol

Case Notes/Digests
**On September 25, 1980, Paciencia allegedly executed a Deed of Sale whereby for and in
consideration of P21,000, she conveyed said parcel in favor of her son, Fortunato dela Cruz. 6 On
November 26, 1980, the Register of Deeds of Bulacan issued TCT No. T-34.723 (M) in Fortunato's
name. 7 Fortunato declared the property for taxation purposes and paid realty taxes due
thereon. 8 Sometime between August 1985 to September 1988, Fortunato mortgaged the property
three (3) times to one Erlinda de Guzman for the sums of P25,000, P50,000 and
P100,000. 9 Fortunato was unable to pay these loans.
***On January 11, 1989, Fortunato executed a "Kasulatan ng Bilihang Patuluyan" 10 in favor of Clark
and Divina Gutierrez, the children of Claudio and Adoracion Gutierrez, to whom he earlier offered to
sell the property. The Kasulatan alleged the purchase price to be P58,000 only but the amount actually
paid by the Gutierrezes to Fortunato was P600,000 as evidenced by a receipt showing the true
consideration for the sale. 11 That same day, the sale was registered, leading to the cancellation of TCT
No. T-34.723 (M) in the name of Fortunato. Seven days later, a new certificate of title, TCT No. T-101011
(M) was issued in the name of Clark and Divina Gutierrez. Thereafter, the Gutierrezes took possession of
the property, had the talipapa repaired, and collected the daily stall rentals from the vendors.
***In her Complaint, Paciencia alleged that sometime in 1980, her son Fortunato, took advantage of his
close ties with her to induce her to sign an instrument which appeared to be a Deed of Sale .
Paciencia alleged that Fortunato assured her that she would remain the owner thereof while
Fortunato would hold the property in trust for her and upon her death, all her children would
share in the property. Fortunato allegedly did not pay her any consideration for such sale. She also
claimed that she continued to collect the daily stall rentals from the talipapa tenants until sometime in
1986 when she fell ill and had to be hospitalized. As a result, Fortunato took over the collection of the
rentals. After Paciencia had recovered, she sought to resume collecting the daily rentals but upon the plea
of Fortunato who had no means of income at that time, Paciencia allowed him to continue collecting the
stall rentals. Fortunato, however, was remiss in remitting the daily collections to Paciencia.
***Sometime in December 1988, Paciencia was shocked to learn that Fortunato was offering the property
for sale. She then demanded that the property be reconveyed to her but Fortunato refused to do so.
Meanwhile upon learning that Fortunato was negotiating the sale of the land with the Gutierrez
spouses, Paciencia sent her daughter, Erlinda dela Cruz, to warn them that Paciencia owned the
property, and not Fortunato. However, the Gutierrez couple insisted on buying the property and
registered the same in favor of their children, Divina and Clark Gutierrez. Consequently, the Gutierrezes
took over the collection of stall rentals from the tenants of the subject property.
They fault the court a quo for failing to appreciate the fact that the Deed was entirely and completely
written in English, a language neither known nor understood by his mother, Paciencia. Hence, the
appellate court went against the dictates of Articles 1330 and 1332 of the Civil Code. 15 Petitioners stress
that there is no showing that the terms of the Deed had been fully explained to Paciencia who allegedly
executed the document.
Respondents, for their part, maintain that the Court of Appeals did not err in affirming the trial court's
ruling that Paciencia dela Cruz voluntarily executed the Deed of Sale in Fortunato's favor. They aver
there was nothing amiss in said Deed. The Gutierrezes were innocent purchasers in good faith
entitled to the full protection of the law. In order that the purchaser of land with a Torrens title may be
Christian Arbiol

Case Notes/Digests
considered in good faith, according to respondents, it is enough that he examined the latest certificate of
title, which was issued in the name of the immediate transferor. This the Gutierrezes did. Moreover,
they had reason to believe that respondent Fortunato dela Cruz's title was free from flaws and
defects upon learning that the latter was the one collecting the daily stall rentals from the tenants
and the fact that respondent Fortunato had mortgaged the said property three (3) times and was
then selling the property to pay off his loans.
Issue: Whether the Contract is a Simulated Sale
Held: In the present case, it is not disputed that Paciencia dela Cruz executed a Deed of Sale in favor of
her son, respondent Fortunato dela Cruz. However, petitioners insist that the said document does not
reflect the true intention and agreement of the parties. According to petitioners, Fortunato was to merely
hold the property in trust for their mother and that ownership thereof would remain with the mother.
Petitioners, however, failed to produce even one credible witness who could categorically testify that
such was the intent of Paciencia and Fortunato. There is nothing on record to support sufficiently
petitioners' contention. Instead, the evidence is unclear on whether Paciencia in her lifetime, or later the
petitioners themselves, actually asserted or attempted to assert rights of ownership over the subject
property after the alleged sale thereof to Fortunato.
***The lot in dispute was thrice mortgaged by Fortunato with nary a protest or complaint from
petitioners. When they learned that Fortunato mortgaged the property to Erlinda de Guzman on
three occasions: August 26, 1985, April 6, 1987 and September 7, 1988, they refused to redeem the
property. They reasoned that if they would redeem the property and pay the debts of Fortunato, the
property would merely return to him. 18 Indeed, how could Fortunato have thrice obtained a mortgage
over the property, without having dominion over it? Fortunato declared the property in his name for
taxation purposes and paid the realty taxes, without any protest from Paciencia or petitioners. His
actions are contrary to petitioners' allegation that the parties never intended to be bound by the assailed
contract. Tax receipts and declaration of ownership for taxation purposes are strong evidence of
ownership.
For Article 1332 to apply, it must first be convincingly established that the illiterate or disadvantaged
party could not read or understand the language in which the contract was written, 21 or that the contract
was left unexplained to said party. Petitioners failed to discharge this burden.
The Deed of Absolute Sale dated September 25, 1980 was duly acknowledged before a notary public. As
a notarized document, it has in its favor the presumption of regularity and it carries the evidentiary weight
conferred upon it with respect to its due execution. It is admissible in evidence without further proof of its
authenticity and is entitled to full faith and credit upon its face. This Kasulatan was duly executed and
acknowledged before a notary public. At the time of its execution, there was no annotation on Fortunato's
certificate of title to indicate any adverse claim of any third person.
***We note, furthermore, that the Gutierrezes did not simply rely upon the face of Fortunato's Certificate
of Title to the property. They also employed the services of counsel Atty. Crisanta Abarrientos, who
verified the title with the Registry of Deeds. Thus, they took all the necessary precautions to ascertain the
true ownership of the property, even engaging the services of legal counsel for that specific purpose, and
it was only after said counsel assured them that everything was in order did they finalize the arrangements
Christian Arbiol

Case Notes/Digests
to purchase the property. Hence, we entertain no doubt that the respondent Gutierrezes were purchasers
for value and in good faith.
Arrogante v. Deliarte
Facts: It appears that the lot in controversy, Lot No. 472-A (subject lot), is situated
in Poblacion Daanbantayan, Cebu, and was originally conjugal property of the spouses
Bernabe Deliarte, Sr. and Gregoria Placencia who had nine children, including herein respondent
Beethoven Deliarte and petitioner Fe DeliarteArrogante. The other petitioners, Lordito, Johnston, and
Arme, Jr., all surnamed Arrogante, are the children of Fe and, thus, nephews of Beethoven. Respondent
Leonora Duenas is the wife of Beethoven.
A series of misfortunes struck the Deliarte family. The first tragedy occurred when a brother of Beethoven
and Fe was hospitalized and eventually died in Davao. Beethoven shouldered the hospitalization and
other related expenses, including the transport of the body from Davao to Cebu and then to
Daanbantayan.
The next occurrence took place a year after, when Gregoria was likewise hospitalized and subsequently
died on July 29, 1978. Once again, Beethoven paid for all necessary expenses. Soon thereafter, it was
Bernabe, the parties' ailing father, who died on November 7, 1980. Not surprisingly, it was Beethoven
who spent for their father's hospitalization and burial.
In between the deaths of Gregoria and Bernabe, on November 16, 1978, the Deliarte siblings agreed to
waive and convey in favor of Beethoven all their rights, interests, and claims to the subject lot in
consideration of P15,000.00. 3 At the signing of the deed of absolute sale, the siblings who failed to
attend the family gathering, either because they were dead or were simply unable to, were represented by
their respective spouses who signed the document on their behalf. 4 Bernabe, who was already blind
at that time, was likewise present and knew of the sale that took place among his children.
Thus, from then on, Beethoven occupied and possessed the subject lot openly, peacefully, and in the
concept of owner. He exercised full ownership and control over the subject lot without any objection from
all his siblings, or their heirs, until 1993 when the controversy arose. 5 In fact, on March 26, 1986, all of
Beethoven's siblings, except Fe, signed a deed of confirmation of sale in favor of Beethoven to ratify the
1978 private deed of sale.
Sometime in August 1993, petitioner Lordito Arrogante installed placards on the fence erected by
respondents, claiming that the subject lot was illegally acquired by the latter. 6 The placards depicted
Beethoven as a land grabber who had unconscionably taken the subject lot from Lordito who
claimed that the lot is a devise from his grandfather. 7 Allegedly, the bequeathal was made in
Bernabe's last will and testament which was, unfortunately, torn up and destroyed by Beethoven.
In their answer, the petitioners averred that Beethoven does not own the whole of the subject lot because
Bernabe was still alive in 1978 when Beethoven's siblings sold to him all their rights and claims to and
interests in that lot. Thus, the siblings could sell only their respective inheritance from one-half of the
subject lot, representing Gregoria's share in the conjugal property. Corollarily, the petitioners claimed that
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Case Notes/Digests
Fe continues to own 1/9 of one-half of the subject lot, comprising Bernabe's share of the property,
which allegedly was not contemplated in the conveyance in 1978. According to petitioners, this
contention is supported by Fe's failure to sign the deed of confirmation of sale in 1986.
***On appeal, the CA affirmed the trial court's decision but deleted the award of attorney's fees and
litigation expenses. In ruling for the respondents, both the trial and appellate courts upheld the
validity of the 1978 sale as between the parties. Considering that petitioner Fe signed the document
and consented to the transaction, she is now barred from repudiating the terms thereof. In this
regard, the RTC and the CA applied the parole evidence rule and allowed the introduction of evidence on
the additional consideration for the conveyance, namely, the expenses incurred by Beethoven during the
three tragedies that had befallen the Deliarte family. Both courts found that the sale was already
completely executed, thus removing it from the ambit of the Statute of Frauds.
Issue: Whether the waiver of their future inheritance is a valid object of a contract.
Held: Article 1347, paragraph 2 of the Civil Code characterizes a contract entered into upon future
inheritance as void. 10 The law applies when the following requisites concur: (1) the succession has not
yet been opened; (2) the object of the contract forms part of the inheritance; and (3) the promissor has,
with respect to the object, an expectancy of a right which is purely hereditary in nature.
True, the prohibition on contracts respecting future inheritance admits of exceptions, as when a person
partitions his estate by an act inter vivos under Article 1080 of the Civil Code. 12 However, the private
deed of sale does not purport to be a partition of Bernabe's estate as would exempt it from the application
of Article 1347. Nowhere in the said document does Bernabe separate, divide, and assign to his children
his share in the subject lot effective only upon his death. 13 Indeed, the document does not even bear the
signature of Bernabe.
Christian Arbiol

Case Notes/Digests
Londres v. CA
Facts: The present case stemmed from a battle of ownership over Lots 1320 and 1333 both located in
Barrio Baybay, Roxas City, Capiz. Paulina Arcenas ("Paulina" for brevity) originally owned these two
parcels of land. After Paulina's death, ownership of the lots passed to her daughter, Filomena Vidal
("Filomena" for brevity). The surviving children of Filomena, namely, Sonia Fuentes Londres ("Sonia"
for brevity), Armando V. Fuentes, Chi-Chita Fuentes Quintia, Roberto V. Fuentes, Leopoldo V. Fuentes
and Marilou Fuentes Esplana ("petitioners" for brevity) now claim ownership over Lots 1320 and 1333.
On the other hand, private respondents Consolacion Alivio Alovera ("Consolacion" for brevity) and Elena
Alovera Santos ("Elena" for brevity) anchor their right of ownership over Lots 1320 and 1333 on the
Absolute Sale executed by Filomena on April 24, 1959 ("Absolute Sale" for brevity). Filomena sold the
two lots in favor of Consolacion and her husband, Julian Alovera ("Julian" for brevity). Elena is the
daughter of Consolacion and Julian (deceased).
On March 30, 1989, petitioners filed a complaint for the declaration of nullity of contract, damages
and just compensation. Petitioners sought to nullify the Absolute Sale conveying Lots 1320 and 1333 and
to recover just compensation from public respondents Department of Public Works and Highways
("DPWH" for brevity) and Department of Transportation and Communication ("DOTC" for brevity). The
case was raffled to the Regional Trial Court, Branch 18, Roxas City, Capiz and docketed as Civil Case
No. V-5668.
Christian Arbiol

Case Notes/Digests
Petitioners claimed that these two lots were never sold to Julian. Petitioners doubt the validity of the
Absolute Sale because it was tampered. The cadastral lot number of the second lot mentioned in the
Absolute Sale was altered to read Lot 1333 when it was originally written as Lot 2034. Petitioners pointed
out that Lot 2034, situated in Barrio Culasi, Roxas City, Capiz, was also owned by their grandmother,
Paulina.
Upon further inquiry, petitioners discovered that there exists a notarized Absolute Sale executed on
April 24, 1959 registered only on September 22, 1982 in the Office of the Register of Deeds of Roxas
City. The private respondents' copy of the Absolute Sale was tampered so that the second parcel oflot
sold, Lot 2034 would read as Lot 1333. However, the Records Management and Archives Office kept an
unaltered copy of the Absolute Sale. This other copy shows that the objects of the sale were Lots 1320
and 2034.
***In their Answer, private respondents maintained that they are the legal owners of Lots 1333 and 1320.
Julian purchased the lots from Filomena in good faith and for a valid consideration. Private
respondents explained that Julian was deaf and dumb and as such, was placed in a disadvantageous
position compared to Filomena. Julian had to rely on the representation of other persons in his
business transactions. After the sale, Julian and Consolacion took possession of the lots. Up to now, the
spouses' successors-in-interest are in possession of the lots in the concept of owners. Private respondents
claimed that the alteration in the Absolute Sale was made by Filomena to make it conform to the
description of the lot in the Absolute Sale. Private respondents filed a counterclaim with damages.
***The cross-claim of petitioners against public respondents was for the recovery of just
compensation. Petitioners claimed that during the lifetime of Paulina, public respondents took a 3,200square meter portion of Lot 1320. The land was used as part of the Arnaldo Boulevard in Roxas
City without any payment of just compensation. In 1988, public respondents also appropriated a
1,786-square meter portion of Lot 1333 as a vehicular parking area for the Roxas City Airport.
Sonia, one of the petitioners, executed a deed of absolute sale in favor of the Republic of the Philippines
over this portion ofLot 1333. According to petitioners, the vendee agreed to pay petitioners P214,320.00.
Despite demands, the vendee failed to pay the stipulated amount. 24
Ruling of the Trial Court
The trial court further noted that while petitioners and private respondents claimed that Lots 1320 and
1333 are titled, both failed to account for the certificates of title. The trial court then concluded that
there is merely a disputable presumption that Lots 1320 and 1333 are titled and covered by
certificates of title. The trial court further declared that ownership over the two lots can still be acquired
by ordinary prescription as in this case.
24 The RTC ruled in favor of the respondents declaring Julian Alovera as the owner
of the disputed lots which was subsequently affirmed by the CA, as the disputed
resolution.
Christian Arbiol

Case Notes/Digests
Private respondents and their predecessors-in-interest have been in continuous possession of Lots
1320 and 1333 for nearly 30 years in good faith and with just title. The tax declarations issued in the
name of Consolacion and the real estate taxes paid by private respondents are strong evidence of
ownership over Lots 1320 and 1333. Petitioners' late filing of the complaint, 30 years after the
execution of the Absolute Sale or seven years after the registration of the same, was considered by
the trial court as laches.
***The trial court gave more credence to the explanation of private respondents as to why the Absolute
Sale was altered. Consolacion noticed that the lot number of the second parcel of land sold to them by
Filomena under the Absolute Sale appeared to be "Lot 2034" and not "Lot 1333." Together with her
husband, Julian, Consolacion went to Filomena. It was Filomena who erased "Lot 2034" in the
deed of sale and changed it to "Lot 1333." However, the copies of the document in the
custody of the Notary Public were not correspondingly corrected. Consequently, the copies kept by
the Records Management and Archives Office still referred to the second parcel of land sold as "Lot
2034.
Ruling of the CA
The Court of Appeals sustained the factual findings of the trial court, specifically the six points
enumerated by the trial court establishing Lots 1320 and 1333 as the objects of the Absolute Sale.
Applying Article 1370 of the Civil Code, 9 the Court of Appeals agreed with the trial court that there
could be no room for interpretation as to the intention of the parties on the objects of their contract.
There was nothing in the records to indicate that petitioners had actual or constructive knowledge of the
sale of the two lots to Julian. The document on file with the Records Management Archives Office
alluded to a parcel of land denominated as Lot 2034 which is different from the property in question, Lot
1333. It was only during the hearing of the case that it was made clear through the
presentation of evidence that the lot referred to in the Absolute Sale was Lot 1333, not Lot 2034, in
addition to Lot 1320.
Issue: Whether the deed of absolute sale can be declared as void since there was no certainty as to
the object of the sale.25
Ruling of the SC
The Absolute Sale is clear as to the first parcel of lot sold, which is Lot 1320. What raises some doubt is
the identity of the second parcel of lot sold. Is it Lot 2034 as indicated in the registered copy of the
Absolute Sale? Or is it Lot 1333 as made to appear in the copy of the Absolute Sale of private
respondents?
We are not persuaded. Petitioners rely on the technical descriptions of Lots 1320 and 1333 that were
issued by the Bureau of Lands on November 8, 1988. It must be pointed out that when private
25 The lot in question was Lot 2034, instead of the real lot which is Lot 1333
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Case Notes/Digests
respondents and Filomena executed the sale in 1959, they based the description of the two lots on the tax
declarations of Filomena. Early tax declarations are, more often than not, based on approximation or
estimation rather than on computation. 19 This is understandably so because of the absence
then of technical knowledge in the accurate measurement of lands. 20 What really defines a piece of land
is not the area mentioned in its description, but the boundaries therein laid down, as enclosing the land
and indicating its limits. 21 In this case, the boundaries of the two lots are sufficiently designated in
the Absolute Sale, leaving no room to doubt the identity of the objects of the sale.
Proof of the conveyance of ownership is the fact that from the time of the sale, or after more than 30
years, private respondents have been in possession of Lots 1320 and 1333. Petitioners on the other hand
have never been in possession of the two lots.
In the first place, Lot 2034 could not have been contemplated by the parties since this parcel of land
was never owned by Filomena, or by her mother, Paulina. Secondly, Lot 2034 does not fit the
description of the second parcel of lot mentioned in the Absolute Sale. The Absolute Sale describes the
second lot as located in Barangay Baybay, Roxas City. Lot 2034 is situated in Barangay Culasi, Roxas
City.
In resolving the similar case of Atilano vs. Atilano, 24 where there was also a mistake in the
designation of the lot number sold, the Court took into account facts and circumstances to uncover the
true intentions of the parties. The Court held that when one sells or buys real property, one sells or
buys the property as he sees it, in its actual setting and by its physical metes and bounds , and not by
the mere lot number assigned to it in the certificate oftitle. As long as the true intentions of the parties
are evident, the mistake will not vitiate the consent of the parties, or affect the validity and binding
effect of the contract between them. In this case, the evidence shows that the designation of the second
parcel of land sold as Lot 2034 was merely an oversight or a typographical error. The intention of the
parties to the Absolute Sale became unmistakably clear when private respondents, as vendees, took
possession of Lots 1320 and 1333 in the concept of owners without the objection of Filomena, the vendor.
Petitioners harp on the fact that the notarized and registered copy of the Absolute Sale should have
been correspondingly corrected. Petitioners believe that the notarized and archived copy should
prevail. We disagree. A contract of sale is perfected at the moment there is a meeting of the minds upon
the thing which is the object of the contract and upon the price. 25 Being consensual, a contract of sale
has the force of law between the contracting parties and they are expected to abide in good faith with their
respective contractual commitments. 26 Article 1358 of the Civil Code, which requires certain
contracts to be embodied in a public instrument, is only for convenience, and registration of the
instrument is needed only to adversely affect third parties. 27 Formal requirements are, therefore, for
the purpose of binding or informing third parties. 28 Non-compliance with formal requirements does not
adversely affect the validity of the contract or the contractual rights and obligations of the parties.
Almira v. CA
Before us is a petition for review on certiorari assailing the decision rendered by the Court of Appeals in
C.A. G.R. CV No. 40954 1 which reversed the decision of the Regional Trial Court, Branch 32, of San
Pedro, Laguna that rescinded the Kasunduan ng Pagbibilihan 2 entered into between petitioners and
private respondent over a portion of a parcel of land situated in Sta. Rosa, Laguna.
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Case Notes/Digests
Petitioners are the wife and the children of the late Julio Garcia who inherited from his mother, Maria
Alibudbud, a portion of a 90,655 square-meter property denominated as Lot 1642 of the Sta. Rosa Estate
in Barangay Caingin, Sta. Rosa, Laguna and covered by TCT No. RT-1076. Lot 1642 was co-owned and
registered in the names of three persons with the following shares: Vicente de Guzman (1/2), Enrique
Hemedes (1/4), and Francisco Alibudbud, the father of Maria Alibudbud (1/4). Although there was no
separate title in the name of Julio Garcia, there were tax declarations in his name to the
extent of his grandfather's share covering an area of 21,460 square meters. On July 5, 1984, petitioners,
as heirs of Julio Garcia, and respondent Federico Briones entered into a Kasunduan ng
Pagbibilihan (Kasunduan for brevity) over the 21,460 square-meter portion for the
sum of P150,000.00. Respondent paid P65,000.00 upon execution of the contract while the
balance of P85,000.00 was made payable within six (6) months from the date of the execution of the
instrument. At the time of the execution of the Kasunduan, petitioners allegedly informed respondent
that TCT No. RT-1076 was in the possession of their cousin, Conchalina Alibudbud, who having
bought Vicente de Guzman's 1/2 share, owned the bigger portion of Lot 1642. This notwithstanding,
respondent willingly entered into the Kasunduan provided that the full payment of the purchase
price will be made upon delivery to him of the title.
Respondent took possession of the property subject of the Kasunduan and made various payments to
petitioners amounting to P58,500.00. However, upon failure of petitioners to deliver to him a separate
title to the property in the name of Julio Garcia, he refused to make further payments, prompting
petitioners to file a civil action before the Regional Trial Court of San Pedro, Laguna, Branch 32, on
May 13, 1991 for (a) rescission of the Kasunduan; (b) return by respondent to petitioners of the
possession of the subject parcel of land; and (c) payment by respondent of damages in
favor of petitioners.
Petitioners claimed that they approached respondent several times to deliver TCT No. RT-1076 but
respondent told them that he did not have money to pay the balance of the purchase
price. 4 Respondent, on the other hand, filed a counterclaim for damages and averred that he refused to
make further payments because of petitioners' failure to deliver to him a separate title in the name of Julio
Garcia.
The trial court In its decision, the trial court noted that proceedings for the issuance of a separate title
covering the property subject of sale entail time and the parties could not have intended delivery by
petitioners to respondent of a separate title in the name of Julio Garcia as a condition for
respondent's payment of the full purchase price within six months from the time of the
execution of the Kasunduan. Said court observed that even if petitioners were obliged to deliver a
separate title in the name of Julio Garcia to respondent, the latter appeared to have insufficient funds to
settle his obligation as indicated by the fact that his payments amounting to P58,500.00 were made in
"trickles," having been given on thirty-nine occasions within a span of two years from the time of the
execution of the Kasunduan. It concluded that respondent refused to complete payment of the full
purchase price not because of the failure of petitioners to deliver a separate title in the
name of Julio Garcia but because respondent simply did not have sufficient funds at hand.
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Case Notes/Digests
The appellate court26 opined that the parties intended to refer to a separate title over the 21,460 square
meter lot when the Kasunduan mentioned a "kaukulang titulo ng lupang nabanggit" since it was the
portion which was covered by a separate tax declaration in the name of Julio Garcia and it was the portion
that petitioners could sell. The appellate court noted that the actuations of the parties subsequent to
the execution of the Kasunduan confirmed respondent's claim that a separate title to the property
subject of the Kasunduan should be delivered to him. Nevertheless, respondent's counterclaim for
damages was dismissed on the ground that the filing of the complaint for rescission was not attended by
malice, there being an honest difference of opinion between the parties as to the
interpretation of the Kasunduan.
***Petitioners allege that the kaukulang titulo ng lupang nabanggit refers to TCT No. RT-1076 and not to
a separate title in the name of Julio Garcia. Petitioners stress the implausibility of delivering the separate
title to respondent within six (6) months from the time of the execution of the Kasunduan27 considering
that issuance of the title required prior settlement of the estates of Francisco Alibudbud, Vicente de
Guzman and Enrique Hemedes; partition of Lot 1642; and segregation of the portion pertaining to the
share acquired by Julio Garcia. Respondent, for his part, insists that the kaukulang titulo ng lupang
nabanggit refers to a separate title in the name of Julio Garcia. He argues that he only acceded to
the Kasunduan upon having been assured by petitioners that they would be able to deliver to him a
separate title in the name of Julio Garcia. Petitioners allegedly told respondent that there was a pending
petition in the court of Bian for the issuance of a separate title to the subject property.
It is basic in the interpretation and construction of contracts that the literal meaning of the stipulations
shall control if the terms of the contract are clear and leave no doubt on the intention of the
contracting parties. However, if the terms of the agreement are ambiguous, resort is made to contract
interpretation which is the determination of the meaning attached to written or spoken words that make
the contract. 10 To ascertain the true intention of the parties, their subsequent or contemporaneous actions
must be principally considered.
***Had the parties intended that petitioners deliver TCT No. RT-1076 instead of a separate title in
the name of Julio Garcia to respondent, then there would have been no need for petitioners to ask
for partial sums on the ground that this would be used to pay for the processing of the title to the
property. Petitioners had only to present the existing title, TCT No. RT-1076, to respondent and demand
the balance of the purchase price. This, petitioners did not do. Instead, they were content to ask small
sums from respondent on thirty-nine occasions for two years before filing an action in court for
rescission ofthe Kasunduan another five years later.
That the parties agreed on delivery of a separate title in the name of Julio Garcia as a condition for
respondent's payment of the balance of the purchase price is bolstered by the fact that there was
already an approved subdivision plan of the 21,460 square-meter lot years before petitioners filed an
action in court for rescission.
26 It reversed the ruling of the RTC.
27 Since it would be impossible to have the separate title issued in his favor within
the time stipulated (6 mos.)
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Case Notes/Digests
Finally, we note that, as quoted earlier, the Kasunduan itself in its opening paragraph refers to the subject
property being sold as "buong lawak na 21,640 metrong parisukat, . . . at sa kasalukuyan may
nabibinbing kahilingan sa hukuman upang magkaroon ng sariling titulo; . . . ." The next
paragraphof the Kasunduan, therefore, which speaks of "ang kaukulang titulo sa lupang nabanggit,"
clearly refers to the separate title being applied for, even without resort to extraneous evidence.
Petitioners, however, insist that it was respondent's counsel who prepared the Kasunduan and any
ambiguity therein should be construed against respondent pursuant to Article 1377 of the Civil Code
which states that the interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.
We find no reason to apply Article 1377 of the Civil Code in this case where the evident intention of the
parties can be readily discerned by their subsequent and contemporaneous acts. While it is true that
the Kasunduan was prepared by the counsel of respondent, there is no indication that respondent took
unfair advantage of petitioners when he had the terms of the Kasunduan drawn by his counsel. Petitioners
freely assented to the Kasunduan which is written entirely in a language spoken and understood by both
parties. That petitioners were fully aware of the terms of the Kasunduan is evidenced by their attempts to
comply with their obligation by securing a subdivision plan and technical description 16 of the property
subject of sale.
As to Rescission
There is nothing in the Kasunduan which expressly provides that petitioners retain title or
ownership of the property, until full payment of the purchase price. The absence of such stipulation in
the Kasunduan coupled with the fact that respondent took possession of the property upon the
execution ofthe Kasunduan indicate that the parties have contemplated a contract of absolute sale.
Ownership was effectively conveyed by petitioners to respondent, who was given possession of the
property. The delivery of a separate title in the name of Julio Garcia was a condition imposed on
respondent's obligation to pay the balance of the purchase price. It was not a condition imposed on
the perfection of the contract of sale. It was not a condition imposed on the perfection of the
contract of sale.
The power to rescind is only given to the injured party. The injured party is the party who has
faithfully fulfilled his obligation or is ready and willing to perform with his obligation. In the case at
bar, petitioners were not ready, willing and able to comply with their obligation to deliver a separate title
in the name of Julio Garcia to respondent. Therefore, they are not in a position to ask for
rescission of the Kasunduan. Moreover, respondent's obligation to pay the balance of the purchase price
was made subject to delivery by petitioners of a separate title in the name of Julio Garcia within six (6)
months from the time of the execution of the Kasunduan, a condition with which petitioners failed to
comply. Hence, it is the respondent who has the option either to refuse to proceed with the sale or to
Christian Arbiol

Case Notes/Digests
waive the performance of the condition imposed on his obligation to pay the balance of the purchase
price.
Constantino v. Sandiganbayan
Before us are two (2) consolidated petitions, the determination of both rests ultimately on whether Felipe
K. Constantino (Constantino), mayor of Malungon, Sarangani Province, was indeed guilty beyond
reasonable doubt of violating Section 3 (e) of Republic Act No. 3019 (R.A. No. 3019), otherwise known
as The Anti-Graft and Corrupt Practices Act.
The complaint against him is read:
That on or about February 28, 1996, in Davao City, Philippines, and within the jurisdiction of this
Honorable Court, accused Felipe K. Constantino, a public officer, being then the Mayor of the
Municipality of Malungon, Sarangani Province, committing the crime herein-charged in relation to,
while in the performance and taking advantage of his official functions, with evident bad faith,
manifest partiality or through gross inexcusable negligence, and conspiring and confederating with
accused Norberto N. Lindong, President and Chairman of the Board of the Norlovanian Corporation,
Davao City, did then and there wil[l]fully, unlawfully and criminally enter into a Lease Agreement for
the rental of various heavy equipments (sic) for a period of six (6) years for and in consideration of the
sum of PESOS: TWO HUNDRED FIFTY-SEVEN THOUSAND ONE HUNDRED ELEVEN and 11/100
(P257,111.11) per month or a total consideration of PESOS: EIGHTEEN MILLION FIVE HUNDRED
ELEVEN THOUSAND NINE HUNDRED NINETY-NINE and 92/100 (P18,511,999.92) and a guaranty
deposit of PESOS: ONE MILLION SEVEN HUNDRED EIGHTY THOUSAND (P1,780,000.00)
contrary to the express mandate of Resolution No. 2, series of 1995, of the Municipal Planning and
Development Council implementing Sangguniang Bayan Resolution No. 198, series of 1995 and
Sangguniang Bayan Resolution No. 21 dated February 22, 1996 authorizing the Municipal Mayor of
Malungon to enter into an agreement for the purchase of heavy equipments (sic) on a five-year term basis
for and in consideration of the amount of PESOS: TWO MILLION TWO HUNDRED THOUSAND
(P2,200,000.00) per year or a total consideration of only PESOS: ELEVEN MILLION (P11,000,000.00),
thus, giving said Norlovanian Corporation, which was fully paid for the Guaranty Deposit and was
actually paid heavy equipment rentals for the period March 5 to May 6, 1996 in the aggregate sum
of PESOS: TWO MILLION ONE HUNDRED SEVENTY-SEVEN THOUSAND NINETY and 91/100
(P2,177,090.91), unwarranted benefits and advantage and causing undue injury to the government.
The Municipality of Malungon listed as one of its priority programs, the acquisition of a fleet of heavy
equipment needed by the municipality in its development projects. 5 For this purpose, it appropriated an
amount of P2.2 Million per annum for a period of five (5) years beginning in 1996 for the amortization of
such purchase. 6 Pursuant thereto, the municipality conducted two (2) public biddings for suppliers of
the required fleet of heavy equipment. Both attempts, however, failed. Hence, the Sangguniang
Bayan instead passed Resolution No. 21 on 22 February 1996, authorizing petitioner Constantino to enter
into a negotiated contract for the lease/purchase of the needed fleet of heavy equipment.
On 28 February 1996, Constantino entered into a Lease Agreement 8 with Norlovanian Corporation,
represented by Lindong. The agreement required, among others, the municipality to provide
Norlovanian Corporation with a guaranty deposit. The following day, Lindong appeared before
theSangguniang Bayan to discuss the Lease Agreement. Not one of the members of
the Sanggunian questioned the legality of the agreement.
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Case Notes/Digests
Thereafter, on 18 April 1996, the Sangguniang Bayan unanimously passed Resolution No.
38 12 requesting petitioner to operate the newly acquired fleet of heavy equipment. The municipality
subsequently utilized the fleet. 13
However, only five (5) days later, or on 23 April 1996, Sanggunian members Benjamin C. Asgapo, Rafael
J. Suson, Sr. (Suson), Leo G. Ingay (Ingay), Pablo V. Octavio (Octavio) and Wilfredo P. Espinosa
(Espinosa), and Vice Mayor Primitiva L. Espinosa (Vice Mayor Espinosa) filed a formal complaint
against petitioners Constantino and Lindong for violation of R.A. No. 3019.
On 6 June 1996, the Sangguniang Bayan passed Resolution No. 47, urging the municipality to "stop all
forms of unauthorized payment/expenditure relative to the illegally acquired pool of heavy equipment by
the Municipality of Malungon.
***In January 1997, Tomanan28 submitted his report detailing the following adverse findings relative to
the purchase of the subject fleet of heavy equipment: (a) the lease/purchase contract was
disadvantageous to the municipal government because of the rigid terms and conditions therein
required of the municipality before the latter could acquire ownership over the pool of heavy
equipment; (b) Norlovanian Corporation had no proof of ownership of the fleet of equipment as the
audit revealed that title to the equipment was in the name of Lindong 29; (c) the lease/purchase
procedure violated Sections 27 and 28 of the Rules and Regulations on Supply and Property
Management in Local Governments; 16 and (d) the lease/purchase procedure utilized by the
municipality was uneconomical and resulted to a wastage of P9,658,000.00 of government funds
The defense presented Lindong as its sole witness. According to Lindong, after negotiations between
himself and petitioner Constantino, together with some members of the Sanggunian, the parties agreed to
a lease/purchase scheme in accordance with the mandate of Resolution No. 21. They agreed that since the
municipality did not have sufficient funds to buy the fleet of heavy equipment outright at P8.9 Million,
the latter would purchase the subject equipment on installment basis but with allowance for Norlovanian
Corporation to recover some incremental cost. Thus, on the very same day, 28 February 1996,
Lindong as representative of Norlovanian Corporation and Constantino as representative of the
municipality entered into the lease/purchase agreement. They contemporaneously executed the
28 An officer of the Commission of Audit/Provincial auditor

29 Co-accused of the petioner
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Case Notes/Digests
Lease Agreement and Undertaking in the presence of the members of the Sanggunian who
accompanied the mayor.
Lindong further testified that he attended the municipal council meeting on 29 February 1996 to provide
the members thereof with a copy of the lease contract and to explain the transaction. Moreover, he
explained that notwithstanding the fact that the main agreement was captioned only as a "Lease
Agreement," the same being a standard pre-printed form of his corporation, the intent of the
parties was to enter into a lease/purchase agreement. Hence, he clarified that the Undertaking he
executed bound him to convey ownership over the fleet of heavy equipment to the municipality
upon the full payment thereof.
With the demise of Constantino during the pendency of his appeal, the same should normally be
regarded as moot and academic following the norm that the death of the accused marks the
extinction of his criminal liability. 26 However, the present two petitions are so intertwined that the
absolution of Constantino is ultimately determinative of the absolution of Lindong. Indeed, the
exoneration of Constantino will necessarily signify the injustice of carrying out the penalty imposed
on Lindong. Thus, the Court in this instance has to ascertain the merits of Constantino's appeal to prevent
a developing miscarriage of justice against Lindong.
The "moot and academic" principle is not a magical formula that can automatically dissuade the courts in
resolving a case. In the instant case, the exceptional character of the appeals of Constantino and Lindong
in relation to each other, as well as the higher interest of justice, requires that the Court determine the
merits of the petition and not dismiss the same outright on the ground of mootness.
As to the finding of Sandiganbayan
However, the respondent court found that Constantino's act of entering into a purportedly pure lease
agreement instead of a lease/purchase agreement was a flagrant violation of Resolution No. 21. In
view of the rigid terms of the subject contract to which Constantino assented, coupled by his failure to
secure the concurrence of the Sangguniang Bayan before entering into the agreement,
the Sandiganbayan found that his conduct constituted gross inexcusable negligence. 42 Likewise, the antigraft court ruled that Constantino's acts resulted in undue injury to the Municipality of
Malungon. 43 Notably, in the course of trial, the prosecution admitted that it had no proof that
unwarranted benefits and advantage had been given to Norlovanian Corporation.
Ruling of the Court
Petitioner Constantino impugned his conviction and asserted that the Sandiganbayan erred in convicting
him based on its finding that he violated Resolution No. 21 by entering into a "Lease Agreement" with the
Norlovanian Corporation and for his failure to sign the accompanying "Undertaking." Likewise, he
argued that the evidence adduced by the prosecution was insufficient to overcome the constitutional
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Case Notes/Digests
presumption of innocence in his favor. Finally, Constantino contended that it was error for
the Sandiganbayan to disregard the findings of the Supreme Court en banc in the earlier case
ofConstantino v. Hon. Ombudsman Desierto.
Undoubtedly, the standard of culpability imposed by Section 3 of R.A. No. 3019 is quite high which, in
this case, was not hurdled by the evidence presented against Constantino. Verily, the prosecution
failed to satisfy the requisite proof to demonstrate Constantino's guilt beyond reasonable doubt.
While Constantino should have exercised more prudence when he transacted with Norlovanian
Corporation, he could not however be held liable for "gross inexcusable negligence" as contemplated
in R.A. No. 3019. Indeed, in the earlier case of Constantino v. Desierto, 45 the Court had already made an
express finding that petitioner Constantino did not violate the mandate of Resolution No. 21 but
instead merely carried out its directive:
It is difficult to see how the transaction between the Mayor and Norlovanian Corporation entered
into pursuant to Resolution No. 21 and tacitly accepted and approved by the town Council
through its Resolution No. 38 could be deemed an infringement of the same Resolution No. 21. In
truth, an examination of the pertinent writings (the resolution, the two (2) instruments constituting
the negotiated contract, and the certificate of delivery) unavoidably confirms their integrity and
congruity. It is in fine, difficult to see how those pertinent written instrument, could establish a prima
facie case to warrant the preventive suspension of Mayor Constantino. A person with the most
elementary grasp of the English language would, from merely scanning those material documents, at
once realize that the Mayor had done nothing but carry out the expressed wishes of the Sangguniang
Bayan.
The investigator also opined that Resolution No. 21 should be interpreted in light of other official
documents, executed a year earlier. He [Graft Prosecutor Buena] does not explain why he did not adopt the
more obvious construction of Resolution No. 21 indicated by the elementary doctrine that it is within the
power and prerogative of the town council to repeal its prior acts, either expressly, or by the passage of
essentially inconsistent resolutions. When the town council passed Resolution No. 21 without any
mention whatever of those prior official documents respecting the acquisition to heavy equipment,
the evident intention was to supersede them and to have such acquisition governed solely by
Resolution No. 21. This conclusion is strongly supported by the fact that the Sanggunian expressly
admitted in the Second Whereas Clause of its Resolution No. 21 that there had been a "failure
of bidders to submit bids despite of two biddings . . . public announcement" [sic] the two biddings
being obviously related to said earlier official acts of the town council. The conclusion is further
bolstered by the fact that the Council (with full awareness of said "negotiated contract,") and of the
delivery of equipment thereunder, had requested the Mayor to put the equipment into operation for
the town projects. The Court is thus satisfied that it was in fact the Council's intention, which it
expressed in clear language, to confer on the Mayor ample discretion to execute a "negotiated
contract" with any interested party, without regard to any official acts of the Council prior to
Resolution No. 21.
It is also difficult to see why the patent inaccuracies in the affidavit-complaint and Resolution No. 47
were ignored as difficult to understand how the execution of two writings (the contract and the
attached undertaking) to embody one contract of "lease/purchase" could be regarded as fatally defective,
and even indicative of a criminal conspiracy, or why said two writings should be interpreted in such a way
as to magnify their seeming inconsistencies. The fundamental and familiar legal principle which
the Office of the Ombudsman ignored is that it is perfectly legitimate for a bilateral contract to
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Case Notes/Digests
be embodied in two or more separate writings, and that in such an event the writings should be
read and interpreted together in such a way as to eliminate seeming inconsistencies and render the
parties' intention effectual.
It may be true that the basis of administrative liability differs from criminal liability as the purpose of
administrative proceedings on the one hand is mainly to protect the public service, based on the timehonored principle that a public office is a public trust. On the other hand, the purpose of the criminal
prosecution is the punishment of crime. 50 However, the dismissal by the Court of the administrative case
against Constantino based on the same subject matter and after examining the same crucial evidence
operates to dismiss the criminal case because of the precise finding that the act from which liability is
anchored does not exist.
It is likewise clear from the decision of the Court in Constantino that the level of proof required in
administrative cases which is substantial evidence was not mustered therein. The same evidence is again
before the Court in connection with the appeal in the criminal case. Ineluctably, the same evidence
cannot with greater reason satisfy the higher standard in criminal cases such as the present case
which is evidence beyond reasonable doubt.
The elementary principle is that it is perfectly legitimate for a bilateral contract 30 to be embodied in
two or more separate writings, and that in such an event the writings should be read and
interpreted together in such a way as to eliminate seeming inconsistencies and render the intention of
the parties effectual. In construing a written contract, the reason behind and the circumstances
surrounding its execution are of paramount importance to place the interpreter in the situation occupied
by the parties concerned at the time the writing was executed. Construction of the terms of a contract,
which would amount to impairment or loss of right, is not favored. Conservation and preservation, not
waiver, abandonment or forfeiture of a right, is the rule. In case of doubts in contracts, the same should be
settled in favor of the greatest reciprocity of interests.
Escano v. Ortigas
The main contention raised in this petition is that petitioners are not under obligation to reimburse
respondent, a claim that can be easily debunked. The more perplexing question is whether this obligation
to repay is solidary, as contended by respondent and the lower courts, or merely joint as argued by
petitioners.
30 The one referred to is the lease/purchase agreement as well as the attached

undertaking.
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Case Notes/Digests
On 28 April 1980, Private Development Corporation of the Philippines (PDCP) 1 entered into a loan
agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to
Falcon the amount of US$320,000.00, for specific purposes and subject to certain terms and
conditions. 2 On the same day, three stockholders-officers of Falcon, namely: respondent Rafael Ortigas,
Jr. (Ortigas), George A. Scholey and George T. Scholey executed an Assumption of Solidary Liability
whereby they agreed "to assume in [their] individual capacity, solidary liability with [Falcon] for the
due and punctual payment" of the loan contracted by Falcon with PDCP. 3 In the meantime, two separate
guaranties were executed to guarantee the payment of the same loan by other stockholders and
officers of Falcon, acting in their personal and individual capacities. One Guaranty 4 was executed by
petitioner Salvador Escao (Escao), while the other 5 by petitioner Mario M. Silos (Silos), Ricardo C.
Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M. Matti
(Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of
then already deceased George T. Scholey assigned their shares of stock in Falcon to Escao, Silos and
Matti. 6 Part of the consideration that induced the sale of stock was a desire by Ortigas, et al., to
relieve themselves of all liability arising from their previous joint and several undertakings with
Falcon, including those related to the loan with PDCP.
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It would
also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan. However,
Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there
remained a subsisting deficiency of P5,031,004.07, which Falcon did not satisfy despite demand. On 28
April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of money with the
Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos, Silverio and Inductivo.
The cross-claim lodged against Escao and Silos was predicated on the 1982 Undertaking, wherein
they agreed to assume the liabilities of Ortigas with respect to the PDCP loan. 31 Escao, Ortigas and
Silos each sought to seek a settlement with PDCP. The first to come to terms with PDCP was Escao, who
in December of 1993, entered into a compromise agreement whereby he agreed to pay the bank
P1,000,000.00. In exchange, PDCP waived or assigned in favor of Escao one-third (1/3) of its entire
claim in the complaint against all of the other defendants in the case. 11 The compromise agreement
was approved by the RTC in a Judgment 12 dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own compromise agreement 13 with PDCP, allegedly
without the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay PDCP
P1,300,000.00 as "full satisfaction of the PDCP's claim against Ortigas," 14 in exchange for PDCP's
31 They executed an undertaking whereby the guarantors (petitioner) will assume
all liabilities of the defendant, provided it is made with prompt and due notice.
Obiter: The cross-claim is sufficient notice pursuant to their agreement.
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release of Ortigas from any liability or claim arising from the Falcon loan agreement, and a renunciation
of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to pay
P500,000.00 in exchange for PDCP's waiver of its claims against him.
In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao, Silos and
Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and
Silos, 16 while he maintained his cross-claim against Escao. In 1995, Ortigas filed a motion for
Summary Judgment in his favor against Escao, Silos and Matti. On 5 October 1995, the RTC issued the
Summary Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly and severally, the amount
of P1,300,000.00, as well as P20,000.00 in attorney's fees. The appellate court found that the RTC did
not err in rendering the Summary Judgment since the three appellants did not effectively deny their
execution of the 1982 Undertaking.
Issue: Whether petitioners are liable to the defendant according to the 1982 undertaking executed by them
as surety; to wit:
Par. 3 - That whether or not SURETIES are able to immediately cause PDCP and PAIC to release
OBLIGORS from their said guarantees [sic], SURETIES32 hereby irrevocably agree and undertake to
assume all of OBLIGORs33' said guarantees [sic] to PDCP and PAIC under the following terms and
conditions.
a.
b.
Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for the payment
of FALCON's obligations with it, any of [the] OBLIGORS SHALL IMMEDIATELY INFORM
SURETIES THEREOF SO THAT THE LATTER CAN TIMELY TAKE APPROPRIATE
MEASURES;
Should suit be impleaded by PDCP and/or PAIC against any and/or all of OBLIGORS for
collection of said loans and/or credit facilities, SURETIES agree to defend OBLIGORS at their
own expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES therein
for contribution, indemnity, subrogation or other relief in respect to any of the claims of PDCP
and/or PAIC; and
32 petitioner
33 respondent
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c.
In the event that any of [the] OBLIGORS IS FOR ANY REASON MADE TO PAY any amount
to PDCP and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment;
Held: As pointed out by Ortigas, the phrase "for any reason" reasonably includes any extra-judicial
settlement of obligation such as what Ortigas had undertaken to pay to PDCP, as it is indeed obvious that
the phrase was incorporated in the clause to render the eventual payment adverted to therein unlimited
and unqualified.
The interpretation posed by petitioners would have held water had the Undertaking made clear that the
right of Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as a
consequence of a final and executory judgment. On the contrary, the clear intent of the
Undertaking was for petitioners and Matti to relieve the burden on Ortigas and his fellow
"OBLIGORS" as soon as possible, and not only after Ortigas had been subjected to a final and
executory adverse judgment.
There is no argument to support petitioners' position on the import of the phrase "made to pay" in the
Undertaking, other than an unduly literalist reading that is clearly inconsistent with the thrust of the
document. Under the Civil Code, 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. 30 Likewise
applicable is the provision that if some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most adequate to render it
effectual.31 As a means to effect the general intent of the document to relieve Ortigas from liability to
PDCP, it is his interpretation, not that of petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in paragraph 3,
as they claim. Following the general assertion in the petition that Ortigas violated the terms of the
Undertaking, petitioners add that Ortigas "paid PDCP BANK the amount of P1.3 million without
petitioners ESCANO and SILOS's knowledge and consent." 32 Paragraph 3 (a) of the Undertaking does
impose a requirement that any of the "OBLIGORS" shall immediately inform "SURETIES" if they
received any demand for payment of FALCON's obligations to PDCP, but that requirement is reasoned
"so that the [SURETIES] can timely take appropriate measures" 33 presumably to settle the obligation
without having to burden the "OBLIGORS." This notice requirement in paragraph 3 (a) is markedly way
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off from the suggestion of petitioners that Ortigas, after already having been impleaded as a defendant in
the collection suit, was obliged under the 1982 Undertaking to notify them before settling with PDCP.
***At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a
settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that "nothing
herein shall prevent OBLIGORS, or any one of them, from themselves negotiating with PDCP . . . for the
release of their said guarantees [sic]." 36 Simply put, the Undertaking did not bar Ortigas from
pursuing his own settlement with PDCP. Neither did the Undertaking bar Ortigas from recovering
from petitioners whatever amount he may have paid PDCP through his own settlement. The
stipulation that if Ortigas was "for any reason made to pay any amount to PDCP[,] . . . SURETIES shall
reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment" 37 makes it
clear that petitioners remain liable to reimburse Ortigas for the sums he paid PDCP.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming that the
Undertaking did not provide for express solidarity. They cite Article 1207 of the New Civil Code, which
states in part that "[t]here is a solidary liability only when the obligation expressly so states, or when the
law or the nature of the obligation requires solidarity.
These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or
more debtors in one and the same obligation, and in the absence of express and indubitable terms
characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus
becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove
such fact with a preponderance of evidence.
***The Undertaking does not contain any express stipulation that the petitioners agreed "to bind
themselves jointly and severally" in their obligations to the Ortigas group, or any such terms to that effect.
Hence, such obligation established in the Undertaking is presumed only to be joint. Ortigas, as the
party alleging that the obligation is in fact solidary, bears the burden to overcome the presumption of
jointness of obligations. We rule and so hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the
Undertaking as "SURETIES", a term repeated no less than thirteen (13) times in the document. Ortigas
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claims that such manner of identification sufficiently establishes that the obligation of petitioners to him
was solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article 2047 provides the statutory
definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called
a suretyship
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is
solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the
principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter
is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the
principal debtor for the same obligation. 41 At the same time, there is also a legal tie created between
the surety and the principal debtor to which the creditor is not privy or party to. The moment the
surety fully answers to the creditor for the obligation created by the principal debtor, such
obligation is extinguished. (Art. 1217 NCC) At the same time, the surety may seek reimbursement
from the principal debtor for the amount paid, for the surety does in fact "become subrogated to all the
rights and remedies of the creditor
There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter,
outside of the liability he assumes to pay the debt before the property of the principal debtor has
been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of
the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section
4, Chapter 3, Title I, Book IV of the Civil Code
In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the
payment to the creditor "may claim from his co-debtors only the share which corresponds to each, with
the interest for the payment already made." Such solidary debtor will not be able to recover from the codebtors the full amount already paid to the creditor, because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to the particular proportional share of the solidary
debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the
creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just
any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within
the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation
assumed by the surety.
What is the source of this right to full reimbursement by the surety? We find the right under Article 2066
of the Civil Code, which assures that "[t]he guarantor who pays for a debtor must be indemnified by the
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latter," such indemnity comprising of, among others, "the total amount of the debt." 47Further, Article
2067 of the Civil Code likewise establishes that "[t]he guarantor who pays is subrogated by virtue thereof
to all the rights which the creditor had against the debtor.
Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by
Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to
the surety who pays materially differ from those granted under Article 1217 to the solidary debtor who
pays, since the "indemnification" that pertains to the latter extends "only [to] the share which corresponds
to each [co-debtor]." It is for this reason that the Court cannot accord the conclusion that because
petitioners are identified in the Undertaking as "SURETIES," they are consequently joint and severally
liable to Ortigas.
If the Court were to give full fruition to the use of the term "SURETIES" as conclusive indication of the
existence of a surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the
necessary implication would be to lay down a corresponding set of rights and obligations as between the
"SURETIES" which petitioners and Matti did not clearly intend.
We do not doubt that a finding of solidary liability among the petitioners works to the benefit of Ortigas
in the facilitation of these goals, yet the Undertaking itself contains no stipulation or clause that
establishes petitioners' obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not
by themselves establish that the nature of the obligation requires solidarity. Even if the liability of
petitioners and Matti were adjudged as merely joint, the full relief and reimbursement of Ortigas arising
from his payment to PDCP would still be accomplished through the complete execution of such a
judgment.
Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the rate of
interest thereon shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand. The interest rate imposed by the RTC is thus proper. However, the computation should be
reckoned from judicial or extrajudicial demand. Per records, there is no indication that Ortigas made any
extrajudicial demand to petitioners and Matti after he paid PDCP, but on 14 March 1994, Ortigas made a
judicial demand when he filed a Third-Party Complaint praying that petitioners and Matti be made to
reimburse him for the payments made to PDCP. It is the filing of this Third-Party Complaint on 14 March
1994 that should be considered as the date of judicial demand from which the computation of interest
should be reckoned. 53 Since the RTC held that interest should be computed from 28 February 1994, the
appropriate redefinition should be made.
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Case Notes/Digests
Department of Health v. C.V Canchela

The Department of Health assails, via petition for review on certiorari, 1 the consolidated June 28, 2000
decision of the Court of Appeals affirming that of the Sole Arbitrator of the Construction Industry
Arbitration Commission (CIAC) 2 which granted the monetary claim of herein private respondents.
The following facts are not undisputed.
Petitioner entered into THREE Owner-Consultant Agreements (Agreements) with private respondents
covering infrastructure projects for the Baguio General Hospital and Medical Center (Baguio Project), the
Batangas Regional Hospital (Batangas Project) and the Corazon L. Montelibano Memorial Regional
Hospital in Bacolod City (Bacolod Project).
The Agreements, which contained almost identical language, required the preparation by private
respondents of the following documents: detailed architectural and engineering design plans; technical
specifications and detailed estimates of cost of construction of the hospital, including the preparation of
bid documents and requirements; and construction supervision until completion of hand-over and
issuance of final certificate.34
The Agreements contained a common provision stating that private respondents' consultancy or
professional fees would be 7.5% of the project fund allocation, broken down into detailed architectural
and engineering services (6%), and full-time construction supervision (1.5%)
While the Agreements were witnessed by the respective chief accountants of the hospitals and were duly
approved by the Secretary of Health, 10 the former did not issue corresponding certificates of
availability of funds to cover the professional or consultancy fees. Petitioner, acting through its
representative Architect Ma. Rebecca M. Peafiel, by separate letters 12 to the respective chiefs of
hospitals, all dated October 15, 1996, confirmed its acceptance of private respondents' complete
Contract or Bid Documents.
Full-time construction supervision having been excluded 35 from private respondents' scope of work, their
professional fee was correspondingly reduced from 7.5% of the project fund allocation to 6% of
the project contract cost.
During the construction of the projects, various deficiencies in the performance of the agreed scope of
private respondents' work were allegedly discovered 17 which were not, however, communicated to
private respondents. 18 Due to such deficiencies, PETITIONER WITHHELD payment of the
34 To summarize: it was divided into 2 projects, namely: Architectural and
Engineering and Construction SUPERVISION.
35 The petitioners amended the 3 agreements instead of having full Supervision,
they indicated PERIODIC VISITS.
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Case Notes/Digests
consultancy fees due to private respondents. And petitioner did not return the documents, plans,
specifications and estimates submitted by private respondents.
The demands for payment remained unheeded, prompting private respondents to file on September 21,
1998 with the CIAC their request for adjudication of their claim for payment of professional fees,
escalation costs, attorney's fees and costs of arbitration.
*Petitioner alleged, inter alia, that payment was withheld because the hospitals concerned were not
satisfied with the performance of private respondents who did not fulfill the terms and conditions of the
contracts; The Respondent, however, maintains that the 6% payment must be based upon the actual
project contract cost of each building which is defined as the cost of the winning bid price of the
contractor which performed the work.36
Petitioner asserts that the CIAC should have dismissed the petition on the ground that the State is
immune from suits, the Agreements, BEING TO PROMOTE THE HEALTH AND WELL-BEING
OF THE CITIZENS, HAVING BEEN ENTERED INTO PURSUANT TO THE STATE'S
SOVEREIGN AND GOVERNMENTAL POWER.
Petitioner filed its Memorandum RAISING FOR THE VERY FIRST TIME the argument that the
Agreements are void from the beginning for failure to include therein a certification of availability of
funds which is required under existing law. As such, petitioner concludes that the consultancy fees
cannot be based on the project fund allocation but on the basis of the reasonable value or on the principle
of quantum meruit.
Ruling of the Court
The paramount and overriding public policy is that no money shall be paid out of the Treasury except
UPON AN APPROPRIATION MADE BY LAW. That public funds are involved in the present
controversy thus justifies a relaxation of technical rules of procedure in order to serve the demands of
substantial justice.
The Agreements, it bears noting, expressly stated that payments arising therefrom shall be "subject to the
usual accounting and auditing rules and regulations." 48 Being government contracts, THEY ARE
GOVERNED AND REGULATED BY SPECIAL LAWS, failure to comply with which renders them
void.
The certificate signed by the proper accounting official and the auditor who verified it shall be attached
to and become an integral part of the proposed contract. 50 Any contract entered into contrary to the
foregoing requirements is void. (Both Auditing and Administrative Code impose such requirement)
***The formalities expressly required by the Auditing Code of the Philippines and The Administrative
Code of 1987 not having been complied with, the subject three Agreements ARE NULL AND VOID
FROM THE VERY BEGINNING. The signatures of the chief accountants as instrumental
witnesses do not constitute substantial compliance with the explicit requirements of said Codes.
36 The CIAC ruled in favor of respondents. The CA reaffirmed the judgment made by
the former.
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Case Notes/Digests
As Melchor v. Commission on Audit 54 teaches, the certification, not the accountant's signature as
contract witness, is "the basic and more important validating document," and "the more reliable indicium
of fund availability.
The illegality of the subject Agreements proceeds, it bears emphasis, from an express declaration or
prohibition by law, not from any intrinsic illegality. 37As such, the Agreements are not illegal per
se and the party claiming thereunder may recover what had been paid or delivered.
The same patently38 contravenes Section 525 of the Government Accounting and Auditing (GAA) Manual
directing that fees for architectural, engineering design, and similar professional services should
be FIXED IN MONETARY OR PESO AMOUNTS, instead of as percentage of the project cost.
As the immediately-quoted provisions of law mandate, the issuance of a certification that funds are
available is a legal duty imposed on the chief accountant or the head of the accounting unit. And
ascertainment that such certification exists prior to entering into any government contract or incurring any
obligation chargeable against public funds is a responsibility which devolves on the officer concerned. 39
In the case at bar then, the nullity of the herein Agreements notwithstanding, the ends of substantial
justice and equity will be better served if payment to private respondents for their consultancy services is
allowed on a quantum meruit basis.
The measure of recovery under the principle of quantum meruit should relate to the reasonable value of
the services performed, 69 taking into account the standard of practice in the profession, the architectural
and engineering skills of private respondents, and their professional expertise and standing.70
Respecting petitioner's argument that the State is immune from suit, the same deserves scant
consideration. To sustain the argument would not only perpetuate a grave injustice on private respondents
who performed their services in good faith and were given the run-around for over eight years, but
would sanction as well unjust enrichment on the part of the State.
Menchavez v. Teves
On February 28, 1986, a "Contract of Lease" was executed by Jose S. Menchavez, Juan
S. Menchavez Sr.,
Juan
S. Menchavez Jr.,
Rodolfo Menchavez,
Simeon Menchavez,
Reynaldo Menchavez, Cesar Menchavez, Charito M. Maga, Fe M. Potot, Thelma R. Reroma, Myrna
37 Par. 7 of Art. 1409 tells us that the contract is valid were it not for the declaration
of law that the same is void.
38 The percentage (7.5 to 6%) imposed to Consultancy fees is declared invalid as
against the provision of law.
39 For their failure, the SC held that they are liable for the Government & the
respondent in their contract.
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Case Notes/Digests
Ybaez, Sonia S. Menchavez, Sarah Villaver, Alma S. Menchavez, and Elma S. Menchavez, as lessors;
and Florentino Teves Jr. as lessee.
On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and Arturo Cabigon demolished the fishpond
dikes constructed by respondent and delivered possession of the subject property to other parties. In his
Complaint, he alleged that the lessors had violated their Contract of Lease, SPECIFICALLY THE
PEACEFUL AND ADEQUATE ENJOYMENT OF THE PROPERTY for the entire duration of the
Contract. He claimed P157,184.40 as consequential damages for the demolition of the fishpond dikes,
P395,390.00 as unearned income, and an amount not less than P100,000.00 for rentals paid.
Ruling of the RTC.

As a consequence of these provisions, and the declared public policy of the State under the Regalian
Doctrine, the lease contract between Florentino Teves, Jr. and Juan Menchavez Sr. and his family is a
patent nullity. Being a patent nullity, [petitioners] could not give any rights to Florentino Teves, Jr. under
the principle: 'NEMO DAT QUOD NON HABET' meaning ONE CANNOT GIVE WHAT HE DOES
NOT HAVE, considering that this property in litigation belongs to the State and not to [petitioners].
Therefore, the first issue is resolved in the negative, as the court declares the contract of lease as invalid
and void ab-initio.
"On the issue of whether [respondent] and [petitioners] are guilty of mutual fraud, the court rules that
the [respondent] and [petitioners] are in pari-delicto. As a consequence of this, the court must leave them
where they are found.
Why? Because the defendants ought to have known that they cannot lease what does not belong to them
for as a matter of fact, they themselves are still applying for a lease of the same property under litigation
from the government.
"On the other hand, Florentino Teves, being fully aware that [petitioners were] not yet the owner[s], had
assumed the risks and under the principle of VOLENTI NON FIT INJURIA NEQUES DOLUS He
who voluntarily assumes a risk, does not suffer damage[s] thereby. As a consequence, when Teves leased
the fishpond area from [petitioners] who were mere holders or possessors thereof, he took the risk that
it may turn out later that his application for lease may not be approved.
"Unfortunately however, even granting that the lease of [petitioners] and [their] application in 1972 were
to be approved, still [they] could not sublease the same. In view therefore of these, the parties must be left
in the same situation in which the court finds them, under the principle IN PARI DELICTO NON
ORITOR ACTIO, meaning[:] Where both are at fault, no one can found a claim. 40
CA Ruling
It contended that while there was negligence on the part of respondent for failing to verify the ownership
of the subject property, there was no evidence that he had knowledge of petitioners' lack of ownership.
40 The disputed resolution of the CA reversed the findings and decision of the RTC.
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Case Notes/Digests
Issue: In Pari Delicto and Void Contracts
Ruling of the Court
The parties do not dispute the finding of the trial and the appellate courts that the Contract of Lease was
void. 17 Indeed, the RTC correctly held that it was the State, not petitioners that owned the fishpond.
The 1987 Constitution specifically declares that all lands of the public domain, waters, fisheries and other
natural resources belong to the State. 18 Included here are fishponds, which may not be alienated but
only leased. 19 Possession thereof, no matter how long, cannot ripen into ownership.
Being merely applicants for the lease of the fishponds, petitioners had no transferable right over them.
And even if the State were to grant their application, the law41 expressly disallowed sublease of the
fishponds to respondent. 21 Void are all contracts in which the cause, object or purpose is contrary to law,
public order or public policy.
A void contract is equivalent to nothing; it produces no civil effect. 23 It does not create, modify or
extinguish a juridical relation. 24 Parties to a void agreement cannot expect the aid of the law; the courts
leave them as they are, because they are deemed in pari delicto or "in equal fault." 25 To this rule,
however, there are exceptions that permit the return of that which may have been given under a void
contract.
Unquestionably, petitioners leased out a property that did not belong to them, one that they had no
authority to sublease. The trial court correctly observed that petitioners still had a pending lease
application with the State at the time they entered into the Contract with respondent.
Respondent, on the other hand, claims that petitioners misled him into executing the Contract. 34 He
insists that he relied on their assertions regarding their ownership of the property. His own evidence,
however, rebuts his contention that he did not know that they lacked ownership. At the very least, he had
notice of their doubtful ownership of the fishpond.
Respondent himself admitted that he was aware that the petitioners' lease application for the fishpond
had not yet been approved. 35 Thus, he knowingly entered into the Contract with the risk that the
application might be disapproved. Noteworthy is the fact that the existence of a fishpond lease
application necessarily contradicts a claim of ownership. That respondent did not know of petitioners'
lack of ownership is therefore incredible.
The evidence of respondent himself shows that he negotiated the lease of the fishpond with both
Juan Menchavez Sr. and Juan Menchavez Jr. in the office of his lawyer, Atty. Jorge Esparagoza. 36 His
counsel's presence during the negotiations, prior to the parties' meeting of minds, further debunks his
claim of lack of knowledge. Lawyers are expected to know that fishponds belong to the State and are
inalienable. It was reasonably expected of the counsel herein to advise his client regarding the
matter of ownership.
Indeed, the evidence presented by respondent demonstrates the contradictory claims of petitioners
regarding their alleged ownership of the fishpond. On the one hand, they claimed ownership and, on the
41 PD.704 at that time prohibited the SUBLEASE of the fishpond.
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other, they assured him that their fishpond lease application would be approved. 37 This circumstance
should have been sufficient to place him on notice. It should have compelled him to determine their right
over the fishpond, including their right to lease it.
The Contract itself stated that the area was still covered by a fishpond application. 38 Nonetheless,
although petitioners declared in the Contract that they co-owned the property, their erroneous declaration
should not be used against them. A cursory examination of the Contract suggests that it was drafted to
favor the lessee. It can readily be presumed that it was he or his counsel who prepared it a matter
supported by petitioners' evidence. 39 The ambiguity should therefore be resolved against him, being the
one who primarily caused it.
As to the issue of damages
In the present case, it was stipulated that the party responsible for the violation of the terms, conditions
and warranties of the Contract would pay not less than P50,000 as liquidated damages. Since the principal
obligation was void, there was no contract that could have been breached by petitioners; thus, the
stipulation on liquidated damages was inexistent. The nullity of the principal obligation carried with it the
nullity of the accessory obligation of liquidated damages. As explained earlier, the applicable law in the
present factual milieu is Article 1412 of the Civil Code. This law merely allows innocent parties to
recover what they have given without any obligation to comply with their prestation. No damages may be
recovered on the basis of a void contract; being nonexistent, the agreement produces no juridical tie
between the parties involved. Since there is no contract, the injured party may only recover through other
sources of obligations such as a law or a quasi-contract. 47 A party recovering through these other sources
of obligations may not claim liquidated damages, which is an obligation arising from a contract.
Tanay Recreation v. Fausto

Petitioner Tanay Recreation Center and Development Corp. (TRCDC) is the lessee of a 3,090-square
meter property located in Sitio Gayas, Tanay, Rizal, owned by Catalina Matienzo Fausto, 1 under a
Contract of Lease executed on August 1, 1971. On this property stands the Tanay Coliseum Cockpit
operated by petitioner. The lease contract provided for a 20-year term, subject to renewal within sixty
days prior to its expiration. The contract also provided that should Fausto decide to sell the property,
petitioner shall have the "priority right" to purchase the same.
On June 17, 1991, petitioner wrote Fausto informing her of its intention to renew the lease. 3 However, it
was Fausto's daughter, respondent Anunciacion F. Pacunayen, who replied, asking that petitioner remove
the improvements built thereon, as she is now the absolute owner of the property. 4 It appears that Fausto
had earlier sold the property to Pacunayen on August 8, 1990, for the sum of P10,000.00 under a
"Kasulatan ng Bilihan Patuluyan ng Lupa," 5and title has already been transferred in her name under
Transfer Certificate of Title (TCT) No. M-35468.
In her Answer, respondent claimed that petitioner is estopped from assailing the validity of the deed
of sale as the latter acknowledged her ownership when it merely asked for a renewal of the lease.
According to respondent, when they met to discuss the matter, petitioner did not demand for the exercise
of its option to purchase the property, and it even asked for grace period to vacate the premises.
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Case Notes/Digests
After trial on the merits, the Regional Trial Court of Morong, Rizal (Branch 78), rendered judgment
extending the period of the lease for another seven years from August 1, 1991 at a monthly rental of
P10,000.00, and dismissed petitioner's claim for damages. 9
On appeal, docketed as CA-G.R. CV No. 43770, the Court of Appeals (CA) affirmed with modifications
the trial court's judgment per its Decision dated June 14, 1999.
In arriving at the assailed decision, the CA acknowledged the priority right of TRCDC to purchase the
property in question. However, the CA interpreted such right to mean that it shall be applicable only
in case the property is sold to strangers and not to Fausto's relative. The CA stated that "(T)o
interpret it otherwise as to comprehend all sales including those made to relatives and to the compulsory
heirs of the seller at that would be an absurdity," and "her (Fausto's) only motive for such transfer was
precisely one of preserving the property within her bloodline and that someone administer the
property." 12 The CA also ruled that petitioner already acknowledged the transfer of ownership and is
deemed to have waived its right to purchase the property. 13 The CA even further went on to rule that
even if the sale is annulled, petitioner could not achieve anything because the property will be eventually
transferred to Pacunayen after Fausto's death.
When a lease contract contains a right of first refusal, the lessor is under a legal duty to the lessee not to
sell to anybody at any price until after he has made an offer to sell to the latter at a certain price and the
lessee has failed to accept it. The lessee has a right that the lessor's first offer shall be in his
favor. 18 Petitioner's right of first refusal is an integral and indivisible part of the contract of lease and is
inseparable from the whole contract. The consideration for the lease includes the consideration for the
right of first refusal 19 and is built into the reciprocal obligations of the parties.
In this case, the wording of the stipulation giving petitioner the right of first refusal is plain and
unambiguous, and leaves no room for interpretation. It simply means that should Fausto decide to sell the
leased property during the term of the lease, such sale should first be offered to petitioner. The stipulation
does not provide for the qualification that such right may be exercised only when the sale is made to
strangers or persons other than Fausto's kin. Thus, under the terms of petitioner's right of first refusal,
FAUSTO HAS THE LEGAL DUTY TO PETITIONER NOT TO SELL THE PROPERTY TO
ANYBODY, EVEN HER RELATIVES, AT ANY PRICE UNTIL AFTER SHE HAS MADE AN
OFFER TO SELL TO PETITIONER AT A CERTAIN PRICE AND SAID OFFER WAS
REJECTED BY PETITIONER. Pursuant to their contract, it was essential that Fausto should have first
offered the property to petitioner before she sold it to respondent. It was only after petitioner failed to
exercise its right of first priority could Fausto then lawfully sell the property to respondent.
The rule is that a sale made in violation of a right of first refusal is VALID. However, it may be
rescinded, or, as in this case, may be the subject of an action for specific performance.
Guzman, Bocaling & Co. v. Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater,
Inc., held that in order to have full compliance with the contractual right granting petitioner the first
option to purchase, the sale of the properties for the price for which they were finally sold to a third
person should have likewise been first offered to the former. Further, there should be identity of terms
and conditions to be offered to the buyer holding a right of first refusal if such right is not to be
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Case Notes/Digests
rendered illusory. Lastly, the basis of the right of first refusal must be the current offer to sell of the seller
or offer to purchase of any prospective buyer.
The prevailing doctrine therefore, is that a right of first refusal means identity of terms and conditions to
be offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of
a right of first refusal of another person, while valid, is rescissible.
It was also incorrect for the CA to rule that it would be useless to annul the sale between Fausto and
respondent because the property would still remain with respondent after the death of her mother by
virtue of succession, as in fact, Fausto died in March 1996, and the property now belongs to respondent,
being Fausto's heir. 25
For one, Fausto was bound by the terms and conditions of the lease contract. Under the right of first
refusal clause, she was obligated to offer the property first to petitioner before selling it to anybody else.
When she sold the property to respondent without offering it to petitioner, the sale while valid is
rescissible so that petitioner may exercise its option under the contract.
With the death of Fausto, whatever rights and obligations she had over the property, including her
obligation under the lease contract, were transmitted to her heirs by way of succession, a mode of
acquiring the property, rights and obligation of the decedent to the extent of the value of the inheritance of
the heirs. (Article 1311 of the Civil Code) A lease contract is not essentially personal in character. 42 Thus,
the rights and obligations therein are transmissible to the heirs.
As to Estoppel
Petitioner cannot be faulted for merely seeking a renewal of the lease contract because obviously, it was
working on the assumption that title to the property is still in Fausto's name and the latter has the sole
authority to decide on the fate of the property. Instead, it was respondent who replied, advising petitioner
to remove all the improvements on the property, as the lease is to expire on the 1st of August 1991.
Respondent also informed petitioner that her mother has already sold the property to her. 35 In order to
resolve the matter, a meeting was called among petitioner's stockholders, including respondent, on July
27, 1991, where petitioner, again, proposed that the lease be renewed. Respondent, however, declined.
While petitioner may have sought the renewal of the lease, it cannot be construed as a relinquishment of
its right of first refusal. ESTOPPEL MUST BE INTENTIONAL AND UNEQUIVOCAL.
Also, in the excerpts from the minutes of the special meeting, it was further stated that the possibility of a
sale was likewise considered. 37 But respondent also refused to sell the land, while the improvements,
"if for sale shall be subject for appraisal." 38 After respondent refused to sell the land, it was then that
petitioner filed the complaint for annulment of sale, specific performance and damages. 39 Petitioner's
acts of seeking all possible avenues for the amenable resolution of the conflict do not amount to an
intentional and unequivocal abandonment of its right of first refusal.
The circumstances of this case, however, dictate the application of a different ruling. An offer of the
property to petitioner under identical terms and conditions of the offer previously given to
respondent Pacunayen would be inequitable. The subject property was sold in 1990 to respondent
42 Neither there was a stipulation nor a provision of a law provide otherwise
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Pacunayen for a measly sum of P10,000.00. Obviously, the value IS IN A SMALL AMOUNT
BECAUSE THE SALE WAS BETWEEN A MOTHER AND DAUGHTER. As admitted by said
respondent, "the sale made in her favor by her mother was just a formality so that she may have the
proper representation with TRCDC in the absence of her parents. . . " 42 Consequently, the offer to
be made to petitioner in this case should be under reasonable terms and conditions, taking into account
the fair market value of the property at the time it was sold to respondent.
(To consider the hereditary rights of Pacunayen and to avoid unnecessary proceedings) Sound
reason therefore dictates that title should remain in the name of respondent Pacunayen, for and in behalf
of the other heirs, if any, to be cancelled only when petitioner successfully exercises its right of first
refusal and purchases the subject property.
Riviera Filipina v. CA
Civil Case No. Q-89-3371 is a suit instituted by Riviera Filipina, Inc. (Riviera) on August 31, 1989 4 to
compel the defendants therein Juan L. Reyes, now deceased, Philippine Cypress Construction &
Development Corporation (Cypress), Cornhill Trading Corporation (Cornhill) and Urban Development
Bank to transfer the title covering a 1,018 square meter parcel of land located along EDSA, Quezon City
for alleged violation of Riviera's right of first refusal.
It appears that on November 23, 1982, respondent Juan L. Reyes (Reyes, for brevity) executed a Contract
of Lease with Riviera. The ten-year (10) renewable lease of Riviera, which started on August 1, 1982,
involved a 1,018 square meter parcel of land located along Edsa, Quezon City, covered and described in
Transfer Certificate of Title No. 186326 of the Registry of Deeds of Quezon City in the name of Juan L.
Reyes.
The said parcel of land was subject of a Real Estate Mortgage executed by Reyes in favor of Prudential
Bank. Since the loan with Prudential Bank remained unpaid upon maturity, the mortgagee bank
extrajudicially foreclosed the mortgage thereon. At the public auction sale, the mortgagee bank emerged
as the highest bidder. The redemption period was set to expire on March 7, 1989. Realizing that he could
not possibly raise in time the money needed to redeem the subject property, Reyes decided to sell the
same.
Since paragraph 11 of the lease contract expressly provided that the "LESSEE shall have the right of first
refusal should the LESSOR decide to sell the property during the term of the lease," 7 Reyes offered to
sell the subject property to Riviera, through its President Vicente C. Angeles, for Five Thousand Pesos
(P5,000.00) per square meter. However, Angeles bargained for Three Thousand Five Hundred Pesos
(P3,500.00) per square meter. Since Reyes was not amenable to the said price and insisted on Five
Thousand Pesos (P5,000.00) per square meter, Angeles requested Reyes to allow him to consult the other
members of the Board of Directors of Riviera. 8
Seven (7) months later, or sometime in October 1988, Angeles communicated with Reyes Riviera's offer
to purchase the subject property for Four Thousand Pesos (P4,000.00) per square meter. However, Reyes
did not accept the offer. This time he asked for Six Thousand Pesos (P6,000.00) per square meter since
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Case Notes/Digests
the value of the property in the area had appreciated in view of the plans of Araneta to develop the
vicinity.43
To answer the foregoing letter and confirm their telephone conversation on the matter, Riviera sent a letter
dated November 22, 1988 to Atty. Juan, counsel for Reyes, expressing Riviera's interest to purchase the
subject property and that Riviera is already negotiating with Reyes which will take a couple of days to
formalize. 11 Riviera increased its offer to Five Thousand Pesos (P5,000.00) per square meter but Reyes
did not accede to said price as it was still lower than his quoted price of Six Thousand Pesos (P6,000.00)
per square meter. 12 Angeles asked Reyes to give him until the end of November 1988 for Riviera's final
decision.
In a letter dated December 2, 1988, Angeles wrote Reyes confirming Riviera's intent to purchase the
subject property for the fixed and final 13 price of Five Thousand Pesos (P5,000.00) per square meter,
complete payment within sixty (60) to ninety (90) days which "offer is what we feel should be the market
price of your property." Angeles asked that the decision of Reyes and his written reply to the offer be
given within fifteen (15) days since there are also other properties being offered to them at the moment. In
response to the foregoing letter, Atty. Juan sent a letter to Riviera dated December 5, 1988
informing Riviera that Riviera's offer is not acceptable to his client.
After considering the reasons44 cited by Traballo for his quoted price, Reyes accepted the same. However,
since Traballo did not have the amount with which to pay Reyes, he told the latter that he will look for a
partner for that purpose. 17 Reyes told Traballo that he had already afforded Riviera its right of first
refusal but they cannot agree because Riviera's final offer was for Five Thousand Pesos (P5,000.00) per
square meter.
Atty. Alinea45 conveyed to Reyes Riviera's offer of Five Thousand Pesos (P5,000.00) per square meter but
Reyes did not agree. Consequently, Atty. Alinea contacted again Angeles and asked him if he can increase
his price. Angeles, however, said he cannot add anymore. 22 Reyes did not expressly offer his subject
property to Riviera at the price of Five Thousand Three Hundred Pesos (P5,300.00) per square meter.
Sometime in February 1989, Cypress and its partner in the venture, Cornhill Trading Corporation, were
able to come up with the amount sufficient to cover the redemption money, with which Reyes paid to the
Prudential Bank to redeem the subject property. 24 On May 1, 1989, a Deed of Absolute Sale covering the
subject property was executed by Reyes in favor of Cypress and Cornhill for the consideration of Five
Million Three Hundred Ninety-Five Thousand Four Hundred Pesos (P5,395,400.00). 25 On the same
date, Cypress and Cornhill mortgaged the subject property to Urban Development Bank for Three Million
Pesos (P3,000,000.00).
43 From the initial offer of 5,000.00 to 6k
44 He met with Traballo, president of Cypress.
45 His nephew who tried to negotiate again with petitioner, as the latter was really
persistent in his final offer of 5k.
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Case Notes/Digests
The trial court dismissed the complaint of Riviera as well as the counterclaims and cross-claims of the
other parties. However, the appellate court, through its Special Seventh Division, rendered a Decision
dated June 6, 1994 which affirmed the decision of the trial court in its entirety.
Ruling of the Court
Thus, the prevailing doctrine is that a right of first refusal means identity of terms and conditions to be
offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a
right of first refusal of another person, while valid, is rescissible.
Rather, laws are interpreted in the context of the peculiar factual situation of each proceeding. Each case
has its own flesh and blood and cannot be ruled upon on the basis of isolated clinical classroom
principles. 41 Analysis and construction should not be limited to the words used in the contract, as they
may not accurately reflect the parties' true intent. 42 The court must read a contract as the average person
would read it and should not give it a strained or forced construction.
In the case at bar, the Court finds relevant and significant the cardinal rule in the interpretation of
contracts that the intention of the parties shall be accorded primordial consideration and in case of doubt,
their contemporaneous and subsequent acts shall be principally considered. 44 Where the parties to a
contract have given it a practical construction by their conduct as by acts in partial performance, such
construction may be considered by the court in construing the contract, determining its meaning and
ascertaining the mutual intention of the parties at the time for contracting. The parties' practical
construction of their contract has been characterized as a clue or index to, or as evidence of, their
intention or meaning and as an important, significant, convincing, persuasive, or influential factor in
determining the proper construction of the contract.
As clearly shown by the records and transcripts of the case, the actions of the parties to the contract of
lease, Reyes and Riviera, shaped their understanding and interpretation of the lease provision "right of
first refusal" to mean simply that should the lessor Reyes decide to sell the leased property during the
term of the lease, such sale should first be offered to the lessee Riviera. And that is what exactly ensued
between Reyes and Riviera, a series of negotiations on the price per square meter of the subject property
with neither party, especially Riviera, unwilling to budge from his offer, as evidenced by the exchange of
letters between the two contenders.
Riviera was so intractable in its position and TOOK OBVIOUS ADVANTAGE OF THE KNOWLEDGE
OF THE TIME ELEMENT IN ITS NEGOTIATIONS with Reyes as the redemption period of the subject
foreclosed property drew near. Riviera strongly exhibited a "take-it or leave-it" attitude in its negotiations
with Reyes. It quoted its "fixed and final" price as Five Thousand Pesos (P5,000.00) and not any peso
more. It voiced out that it had other properties to consider so Reyes should decide and make known its
decision "within fifteen days." Riviera, in its letter dated February 4, 1989, admittedly, even downgraded
its offer when Reyes offered anew the property to it, such that whatever amount Reyes initially receives
from Riviera would absolutely be insufficient to pay off the redemption price of the subject property.
Naturally, Reyes had to disagree with Riviera's highly disadvantageous offer.
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Case Notes/Digests
Its stubborn approach in its negotiations with Reyes showed crystal-clear that there was never any need to
disclose such information46 and doing so would be just a futile effort on the part of Reyes. Reyes was
under no obligation to disclose the same. Pursuant to Article 1339 46 of the New Civil Code, silence or
concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or
unless according to good faith and the usages of commerce the communication should be made. 47 We
apply the general rule in the case at bar since Riviera failed to convincingly show that either of the
exceptions are relevant to the case at bar.
Sps. Cannu v. Sps. Galang

A complaint 3 for Specific Performance and Damages was filed by petitioners-spouses Felipe and
Leticia Cannu against respondents-spouses Gil and Fernandina Galang and the National Home Mortgage
Finance Corporation (NHMFC) before Branch 135 of the RTC of Makati, on 24 June 1993. The case was
docketed as Civil Case No. 93-2069.
Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings & Loan
Association for P173,800.00 to purchase a house and lot located at Pulang Lupa, Las Pias, with an area
of 150 square meters covered by Transfer Certificate of Title (TCT) No. T-8505 in the names of
respondents-spouses. To secure payment, a real estate mortgage was constituted on the said house and lot
in favor of Fortune Savings & Loan Association. In early 1990, NHMFC purchased the mortgage loan of
respondents-spouses from Fortune Savings & Loan Association for P173,800.00.
Respondent Fernandina Galang authorized 4 her attorney-in-fact, Adelina R. Timbang, to sell the subject
house and lot.
Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the balance of the
mortgage obligations with the NHMFC and with CERF Realty 5 (the Developer of the property).
A Deed of Sale with Assumption of Mortgage Obligation 10 dated 20 August 1990 was made and entered
into by and between spouses Fernandina and Gil Galang (vendors) and spouses Leticia and
Felipe Cannu (vendees) over the house and lot in question.
Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of P45,000.00 47 or
in the alternative to vacate the property in question, petitioners refused to do so.
In a letter 18 dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T. Arzaga, Vice
President, Fund Management Group of the NHMFC, that the ownership rights over the land covered by
TCT No. T-8505 in the names of respondents-spouses had been ceded and transferred to her and her
husband per Deed of Sale with Assumption of Mortgage, and that they were obligated to assume the
mortgage and pay the remaining unpaid loan balance. Petitioners' formal assumption of mortgage was not
46 The negotiations ensued between Reyes and Cypress and Cornhill
47 The amount which represents the unpaid balance of the mortgage.
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Case Notes/Digests
approved by the NHMFC. Because the Cannus failed to fully comply with their obligations, respondent
Fernandina Galang, on 21 May 1993, paid P233,957.64 as full payment of her remaining mortgage loan
with NHMFC.
Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses insisting that the
subject property had already been sold to them. Consequently, the NHMFC held in abeyance the release
of said TCT.
Thereupon, a Complaint for Specific Performance and Damages was filed asking, among other things,
that petitioners (plaintiffs therein) be declared the owners of the property involved subject to
reimbursements of the amount made by respondents-spouses (defendants therein) in preterminating the
mortgage loan with NHMFC.
In their Answer, 22 respondents-spouses alleged that because of petitioners-spouses' failure to fully pay
the consideration and to update the monthly amortizations with the NHMFC, they paid in full the existing
obligations with NHMFC as an initial step in the rescission and annulment of the Deed of Sale with
Assumption of Mortgage. In their counterclaim, THEY MAINTAIN THAT THE ACTS OF
PETITIONERS IN NOT FULLY COMPLYING WITH THEIR OBLIGATIONS GIVE RISE TO
RESCISSION OF THE DEED OF SALE WITH ASSUMPTION OF MORTGAGE WITH THE
CORRESPONDING DAMAGES.48
Ruling of the Court
However, after going over the record of the case, more particularly the Answer of respondents-spouses,
the evidence shows the consideration therefore is P120,000.00, plus the payment of the outstanding loan
mortgage with NHMFC, and of the "equity" or second mortgage with CERF Realty (Developer of the
property).
Settled is the rule that rescission or, more accurately, resolution, 33 of a party to an obligation
under Article 1191 34 is predicated on a breach of faith by the other party that violates the reciprocity
between them.
Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had only
for such breaches that are substantial and fundamental as to defeat the object of the parties in making the
agreement. 36 The question of whether a breach of contract is substantial depends upon the attending
circumstances 37 and not merely on the percentage of the amount not paid.
In the case at bar, we find petitioners' failure to pay the remaining balance of P45,000.00 to be substantial.
Even assuming arguendo that only said amount was left out of the supposed consideration of
P250,000.00, or eighteen (18%) percent thereof, this percentage is still substantial. Taken together with
the fact that the last payment made was on 28 November 1991, eighteen months before the respondent
48 Both the RTC and CA decided in favor of respondents and holding that the breach
committed by the petitioner in making only six (6) payments from 1990-1993
constitutes substantial breach of contract justifying the rescission granted.
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Case Notes/Digests
Fernandina Galang paid the outstanding balance of the mortgage loan with NHMFC, the intention of
petitioners to renege on their obligation is utterly clear.
The fact that petitioners tendered a Manager's Check to respondents-spouses Galang in the amount of
P278,957.00 seven months after the filing of this case is of no moment. Tender of payment does not by
itself produce legal payment, UNLESS IT IS COMPLETED BY CONSIGNATION. 40 Their failure to
fulfill their obligation gave the respondents-spouses Galang the right to rescission.
Anent the second assigned error, we find that petitioners were not religious in paying the amortization
with the NHMFC. As admitted by them, in the span of three years from 1990 to 1993, their payments
covered only thirty months. 41 This, indeed, constitutes another breach or violation of the Deed of Sale
with Assumption of Mortgage. ON TOP OF THIS, THERE WAS NO FORMAL ASSUMPTION OF THE
MORTGAGE OBLIGATION WITH NHMFC BECAUSE OF THE LACK OF APPROVAL BY THE
NHMFC ON ACCOUNT OF PETITIONERS' NON-SUBMISSION OF REQUIREMENTS IN ORDER
TO BE CONSIDERED AS ASSIGNEES/SUCCESSORS-IN-INTEREST OVER THE PROPERTY
COVERED BY THE MORTGAGE OBLIGATION.
On the third assigned error, petitioners claim there was no clear evidence to show that respondentsspouses Galang demanded from them a strict and/or faithful compliance of the Deed of Sale with
Assumption of Mortgage.
We do not agree.
There is sufficient evidence showing that demands were made from petitioners to comply with their
obligation. Adelina R. Timbang, attorney-in-fact of respondents-spouses, per instruction of respondent
Fernandina Galang, made constant follow-ups after the last payment made on 28 November 1991, but
petitioners did not pay. 44 Respondent Fernandina Galang stated in her Answer 45 that upon her arrival
from America in October 1992, she demanded from petitioners the complete compliance of their
obligation by paying the full amount of the consideration (P120,000.00) or in the alternative to vacate the
property in question, but still, petitioners refused to fulfill their obligations under the Deed of Sale with
Assumption of Mortgage. Sometime in March 1993, due to the fact that full payment has not been paid
and that the monthly amortizations with the NHMFC have not been fully updated, she made her
intentions clear with petitioner Leticia Cannu that she will rescind or annul the Deed of Sale with
Assumption of Mortgage.
We likewise rule that there was no waiver on the part of petitioners to demand the rescission of the Deed
of Sale with Assumption of Mortgage. The fact that respondents-spouses accepted, through their attorneyin-fact, payments in installments DOES NOT CONSTITUTE WAIVER on their part to exercise their
right to rescind the Deed of Sale with Assumption of Mortgage. Adelina Timbang merely accepted the
installment payments as an accommodation to petitioners since they kept on promising they would pay.
However, after the lapse of considerable time (18 months from last payment) and the purchase price was
not yet fully paid, respondents-spouses exercised their right of rescission when they paid the outstanding
balance of the mortgage loan with NHMFC. It was only after petitioners stopped paying that respondentsspouses moved to exercise their right of rescission.
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Case Notes/Digests
Petitioners cite the case of Angeles v. Calasanz 46 to support their claim that respondents-spouses waived
their right to rescind. We cannot apply this case since it is not on all fours with the case before us. First,
in Angeles, the breach was only slight and casual which is not true in the case before us. Second,
in Angeles, the buyer had already paid more than the principal obligation, while in the instant case, the
buyers (petitioners) did not pay P45,000.00 of the P120,000.00 they were obligated to pay.
If one party has complied or fulfilled his obligation, and the other has not, then the former can exercise
his right to rescind. In this case, respondents-spouses complied with their obligation when they gave the
possession of the property in question to petitioners. Thus, they have the right to ask for the rescission of
the Deed of Sale with Assumption of Mortgage.
On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code, maintain that the
Court of Appeals erred when it failed to consider that the action for rescission is subsidiary.
Their reliance on Article 1383 is misplaced.
The subsidiary character of the action for rescission applies to contracts enumerated in Article 1381 48 of
the Civil Code. The contract involved in the case before us is not one of those mentioned therein. The
provision that applies in the case at bar is Article 1191.
It is evident that THE CONTRACT UNDER CONSIDERATION DOES NOT CONTAIN A PROVISION
AUTHORIZING ITS EXTRAJUDICIAL RESCISSION IN CASE ONE OF THE PARTIES FAILS TO
COMPLY with what is incumbent upon him. This being the case, respondents-spouses should have asked
for judicial intervention to obtain a judicial declaration of rescission. Be that as it may, and considering
that respondents-spouses' Answer (with affirmative defenses) with Counterclaim seeks for the rescission
of the Deed of Sale with Assumption of Mortgage, it behooves the court to settle the matter once and for
all than to have the case re-litigated again on an issue already heard on the merits and which this court has
already taken cognizance of. Having found that petitioners seriously breached the contract, we, therefore,
declare the same is rescinded in favor of respondents-spouses.
MWSS v. CA
Sometime in 1965, petitioner MWSS (then known as NAWASA) leased around one hundred twenty eight
(128) hectares of its land (hereafter, subject property) to respondent CHGCCI (formerly the International
Sports Development Corporation) for twenty five (25) years and renewable for another fifteen (15) years
or until the year 2005, with the stipulation allowing the latter to exercise a right of first refusal should the
subject property be made open for sale. The terms and conditions of respondent CHGCCI's purchase
thereof shall nonetheless be subject to presidential approval.
Pursuant to Letter of Instruction (LOI) No. 440 issued on July 29, 1976 by then President Ferdinand E.
Marcos directing petitioner MWSS to negotiate the cancellation of the MWSS-CHGCCI lease agreement
for the disposition of the subject property, Oscar Ilustre, then General Manager of petitioner MWSS,
sometime in November of 1980 informed respondent CHGCCI, through its president herein respondent
Pablo Roman, Jr., of its preferential right to buy the subject property which was up for sale. Valuation
thereof was to be made by an appraisal company of petitioner MWSS' choice, the Asian Appraisal Co.,
Inc. which, on January 30, 1981, pegged a fair market value of P40.00 per square meter or a total of
P53,800,000.00 for the subject property.
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Case Notes/Digests
Upon being informed that petitioner MWSS and respondent CHGCCI had already agreed in principle on
the purchase of the subject property, President Marcos expressed his approval of the sale as shown in his
marginal note on the letter sent by respondents Jose Roxas and Pablo Roman, Jr. dated December 20,
1982; The Board of Trustees of petitioner MWSS thereafter passed Resolution 36-83, approving the sale
of the subject property in favor of respondent SILHOUETTE, as assignee of respondent CHGCCI, at the
appraised value given by Asian Appraisal Co., Inc.
The MWSS-SILHOUETTE sales agreement eventually pushed through. Per the Agreement dated May
11, 1983 covering said purchase, the total price for the subject property is P50,925,200, P25 Million of
which was to be paid upon President Marcos' approval of the contract and the balance to be paid within
one (1) year from the transfer of the title to respondent SILHOUETTE as vendee with interest at 12% per
annum. The balance was also secured by an irrevocable letter of credit. A Supplemental Agreement was
forged between petitioner MWSS and respondent SILHOUETTE on August 11, 1983 to accurately
identify the subject property.49
Subsequently, respondent SILHOUETTE, under a deed of sale dated July 26, 1984, sold to respondent
AYALA about sixty-seven (67) hectares of the subject property at P110.00 per square meter. Of the total
price of around P74 Million, P25 Million was to be paid by respondent AYALA directly to petitioner
MWSS for respondent SILHOUETTE's account and P2 Million directly to respondent SILHOUETTE.
P11,600,000 was to be paid upon the issuance of title in favor of respondent AYALA, and the remaining
balance to be payable within one (1) year with 12% per annum interest.
Respondent AYALA developed the land it purchased into a prime residential area now known as the Ayala
Heights Subdivision.
Almost a decade later, petitioner MWSS on March 26, 1993 filed an action against all herein named
respondents before the Regional Trial Court of Quezon City seeking for the declaration of nullity of the
MWSS-SILHOUETTE sales agreement and all subsequent conveyances involving the subject property,
and for the recovery thereof with damages.50
Petitioner MWSS appealed to this Court that portion of the respondent Court's decision affirming the trial
court's dismissal of its complaint against respondent AYALA, docketed as G.R. No. 126000. The portion
dismissing the petition for certiorari (CA-GR Nos. 34605, 347718 and 35065) of respondents Roman,
CHGCCI and SILHOUETTE, however, became final and executory for their failure to appeal therefrom.
Nonetheless, these respondents were able to thereafter file before the trial court another motion to dismiss
grounded, again, on prescription which the trial court in an Order of October 1996 granted.
Ruling of the Court
49 25M as initial payment upon the sales approval and the remaining is to be paid
within 1 year.
50 Both RTC and CA dismissed the complaint.
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Case Notes/Digests
Petitioner MWSS claims as erroneous both the lower courts' uniform finding that the action has
prescribed, arguing that its complaint is one to declare the MWSS-SILHOUETTE sale, and all subsequent
conveyances of the subject property, void which is imprescriptible.
The very allegations in petitioner MWSS' complaint show that the subject property was sold through
contracts which, at most, can be considered only as voidable, and not void. 51
The three elements of a contract consent, the object, and the cause of obligation 1 are all present. It
cannot be otherwise argued that the contract had for its object the sale of the property and the cause or
consideration thereof was the price to be paid (on the part of respondents CHGCCI/SILHOUETTE) and
the land to be sold (on the part of petitioner MWSS). Likewise, petitioner MWSS' consent to the May 11,
1983 and August 11, 1983 Agreements is patent on the face of these documents and on its own resolution
No. 36-83.
As noted by both lower courts, petitioner MWSS admits that it consented to the sale of the property,
WITH THE QUALIFICATION THAT SUCH CONSENT WAS ALLEGEDLY UNDULY INFLUENCED
BY THE PRESIDENT MARCOS. Taking such allegation to be hypothetically true, such would have
resulted in only voidable contracts because all three elements of a contract, still obtained nonetheless. The
alleged vitiation of MWSS' consent did not make the sale null and voidab initio. Thus, "a contract where
consent is given through mistake, violence, intimidation, undue influence or fraud, is voidable" 2 .
Contracts "where consent is vitiated by mistake, violence, intimidation, undue influence or fraud" are
voidable or annullable.
Hypothetically admitting that President Marcos unduly influenced the sale, the prescriptive period to
annul the same would have begun on February 26, 1986 which this Court takes judicial notice of as the
date President Marcos was deposed. Prescription would have set in by February 26, 1990 or more than
three years before petitioner MWSS' complaint was failed.
Vitiation of Consent through Fraud/Undue Influence as alleged:
However, if petitioner MWSS' consent was vitiated by fraud, then the prescriptive period commenced
upon discovery. Discovery commenced from THE DATE OF THE EXECUTION of the sale documents
as petitioner was party thereto. At the least, discovery is deemed to have taken place on the DATE OF
REGISTRATION of the deeds with the register of Deeds as registration is constructive notice to the
world. 5 Given these two principles on discovery, the prescriptive period commenced in 1983 as
petitioner MWSS actually knew of the sale, or, in 1984 when the agreements were registered and titles
thereafter were issued to respondent SILHOUETTE. At the latest, the action would have prescribed by
1988, or about five years before the complaint was instituted.
Petitioner MWSS further contends that prescription does not apply as its complaint prayed not for the
nullification of voidable contracts but for the declaration of nullity of void ab initio contracts which are
imprescriptible. This is incorrect, as the prayers in a complaint are not determinative of what legal
51 That there was an alleged inducement on the part of Respondents that induced
the approval of Pres. Marcos and the subsequent resolution issued; thereby causing
unwarranted benefits on their part to the prejudice of the government.
Christian Arbiol

Case Notes/Digests
principles will operate based on the factual allegations of the complaint. And these factual allegations,
assuming their truth, show that MWSS consented to the sale, only that such consent was purportedly
vitiated by undue influence or fraud. Therefore, the rules on prescription will operate. Even if petitioner
MWSS asked for the declaration of nullity of these contracts, the prayers will not be controlling as only
the factual allegations in the complaint determine relief. "(I)t is the material allegations of fact in the
complaint, not the legal conclusion made therein or the prayer that determines the relief to which the
plaintiff is entitled.
Petitioner MWSS also theorizes that the May 11, 1983 MWSS-SILHOUETTE Agreement and the August
11, 1983 Supplemental Agreement were void ab initio because the "initial agreement" from which these
agreements emanated was executed "without the knowledge, much less the approval" of petitioner MWSS
through its Board of Trustees. The "initial agreement" referred to in petitioner MWSS' argument is the
December 20, 1982 letter of respondents Roxas and Roman, Jr. to President Marcos where the authors
mentioned that they had reached an agreement with petitioner's then general manager, Mr. Oscar Ilustre.
Petitioner MWSS maintains that Mr. Ilustre was not authorized to enter into such "initial agreement",
contrary to Art. 1874 of the New Civil Code which provides that "when a sale of a parcel of land or any
interest therein is through an agent, the authority of the latter shall be in writing otherwise the sale shall
be void." It then concludes that since its Res. No. 36-83 and the May 11, 1983 and August 11, 1983
Agreements are "fruits" of the "initial agreement" (for which Mr. Ilustre was allegedly not authorized in
writing), all of these would have been also void under Art. 1422 of NCC, which provides that a contract
which is the direct result of a pronounced illegal contract, is also void and inexistent."
The argument does not impress. The "initial agreement" reflected in the December 20, 1982 letter of
respondent Roman to Pres. Marcos, is not a sale under Art. 1874.
The foregoing does not document a sale, but at most, only the conditions proposed by respondent Roman
to enter into one. By the terms thereof, it refers only to an "agreement in principle". Reflecting a future
consummation, the letter mentions "negotiations with MWSS (which) with your (Marcos') kind approval,
will finally be concluded". It must likewise be noted that presidential approval had yet to be obtained.
Thus, the "initial agreement" was not a sale as it did not in any way transfer ownership over the property.
The proposed terms had yet to be approved by the President and the agreement in principle still had to be
formalized in a deed of sale. Written authority as is required under Art. 1834 of the New Civil Code, was
not needed at the point of the "initial agreement".
Christian Arbiol

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