Barredo v.

Garcia to his responsibility as employer where he

G.R. No. L-48006
Jul. 8, 1942
Bocobo, J.
Carlos Marin
Keywords: Malate Taxicab and carretela
collision
Facts:
- A traffic accident involving a cab of Malate
Taxicab driven by Pedro Fontanilla and a
carretela resulted in the death of Faustino
Garcia, a passenger of the carretela.
- The parents of the deceased brought forth
separate legal actions against Fontanilla
(criminal) and Fausto Barredo (civil) who was
the sole proprietor of Malate Taxicab.
- Barredo contested the lawsuit filed against
him by claiming that his liability as the employer
of Fontanilla should only be subsidiary since the
nature of such was governed by the RPC. In
addition, Barredo asserts that he cannot be the
subject of any separate civil suit because no
such action has been filed against Fontanilla
who is criminally liable.
would be primarily liable.
- The second liability arises from the notion that
an employer has the duty to take great care in
hiring the employees of his company; should
any of those hired prove to be incompetent or
negligent as evidenced by any damage their
acts may cause, the employer is necessarily
presumed to be negligent insofar as hiring
inadequate workers is concerned. Such failure is
cause for civil liability under Art. 1903.
- The choice of which liability to hold the
employer accountable for rests solely upon
those filing the suit, and in this case, the
plaintiffs chose the second option.
- With regard to this choice, the Court is of the
opinion that this is the more expedient and
favorable recourse for the parents of the
deceased because of the obvious fact that the
owner of the taxi company would be much
more capable of paying civil liabilities than the
taxi driver himself.

Issue/s:
WON the plaintiffs may bring this separate civil
action against Barredo which would effectively
make him primarily liable for damages under
Art. 1903

Ruling:
Yes. Barredo could be held primarily liable for
the actions of his employee under Art. 1903.

Ratio:
- A civil liability may exist that does not carry
with it any criminal liability. Thus, Barredo may
be rightfully sued in his capacity as the
employer of Fontanilla under Art. 1903 of the
CC.
- As a result, he faces two possible liabilities: the
first with regard to the criminal action filed
against Fontanilla where he would be
subsidiarily liable, and the second with regard

Obligations and Contracts 1 291

 Mendoza v. Arrieta
G.R. No. L-32599
Jun. 29, 1979
Melencio-Herrera, J.
Michael Trance Nuez
Keywords: Three-way collision between truck,
jeepney and Mercedes Benz at McArthur
Highway
Facts:
- A three-way vehicular accident occurred
along McArthur Highway between a gravel
and sand truck, a jeepney and a privately
owned Mercedes Benz.
- Two cases of reckless imprudence were filed in
the Court, one is by the owner of the jeep
Salazar against the driver of the truck Montoya;
the other was instituted by the Benz owner
Mendoza against the jeepney driver Salazar.
- The court found Montoya guilty while Salazar
was acquitted.
- Mendoza then filed a civil suit against the
owner of the truck Timbol and the jeepney
driver Salazar.
- Judge Arrieta dismissed the case against
Timbol based on the principle of res judicata,
while the case against Salazar was dismissed
based on Rule 111 of the New Rules of Court,
which required an express reservation in order
to file a civil action independent of the criminal
suit.
Issue/s:
1. WoN a civil action filed against Timbol was
barred by res judicata
2. WoN Judge Arrieta was correct in
dismissing the case against Salazar for lack
of express reservation to file a separate civil
action
Ruling:
The Court reversed the decision for the case
against Timbol but upheld it in the case against
Salazar.
Ratio:
Obligations and Contracts
1. In the case against Timbol, the court found
that three of the requirements for res judicata
were present. However, the fourth requirement,
the identity of the cause of action, was not
present.
- In the first case against Montoya, he was not
charged for damage to the car but for damage
to the jeep. There was also no identity of the
parties involved since Mendoza and Timbol
were not parties to the previous case against
Montoya.
- The case against Timbol is also independent
of the criminal action filed against Montoya
because while the latter was based on culpa
criminal the case at hand was based on culpa
aquilana.
- Timbol, being the employer of Montoya, can
be held liable for quasi-delict for the reckless
actions by Montoya, which led to the damage
to the jeep and the car. The liability arising from
a quasi-delict, a separate action, may be filed
independent of the criminal case and regardless
of the result of the
other.
2. As for the case against Salazar, the Court
disagreed with the opinion of Judge Arrieta.
They believed that there was no need for
Mendoza to make an express reservation
because the civil liability of Salazar was imputed
in the criminal case.
- Nevertheless, the Court opted to uphold the
dismissal of the case against Salazar based on
the acquittal from the criminal charges issued
by the Trial Court. They also cited Rule 111 of
the Rules of Court, which stated that "Extinction
of the penal action does not carry with it
extinction of the civil, unless the extinction
proceeds from a declaration in a final judgment
that the fact from which the civil night arise did
not exist."
- With the acquittal of Salazar, the fact from
which the civil action might arise is deemed to
have not existed.
2 291
 PSBA v. CA
G.R. No. 84698
Feb. 4, 1992
Padilla, J.
Justin Ordoyo
Keywords: PSBA student stabbed to death by
outsiders inside school
Facts:
- Carlitos Bautista was stabbed to death on the
second floor balcony of PSBA. Bautista was a
student in said school, a junior commerce major.
It was established that the assailants were
outsiders, not enrolled nor affiliated with the
school.
- His parents filed suit for damages against the
school and the following school officials: Juan D.
Lim (President), Benjamin P. Paulino (Vice-
President), Antonio M. Magtalas
(Treasurer/Cashier), Col. Pedro Sacro (Chief of
Security) and Lt. M. Soriano (Assistant Chief of
Security). The last, during the proceedings,
resigned from his position.
- The respondent Manila RTC, having overruled
instant petitioners contentions, denies their
motion to dismiss the case. The CA affirmed this
ruling by the Manila RTC.
Issue/s:
WON the CA was correct in affirming the Manila
RTCs decision not to dismiss the case against
PSBA
Ruling:
The SC affirmed the CAs ruling but it disagreed
with the CAs basis for the decision being
anchored on Arts. 2176 and 2180 of the NCC
Thus, the case was remanded to the Manila RTC.
Ratio:
-The SC agrees with the CA that the case must
be remanded to the RTC for trial on its merits.
But the reason provided by the CA, which is that
in light of previous jurisprudence and the fact
that Art. 180 is a holdover from the Spanish era,
the school administrators should be made liable
for damages until they prove themselves
Obligations and Contracts
absolved of liability in trial by merits, is
erroneous.
- The SC points out that Arts. 2180 and 2176
establish the rule of in loco parentis (in place
of the parents) and that in the discussions
provided in the cases cited by the CA, it was
clear that the liability of the school exists only
for the acts performed by students while in
school custody, something which was
established to have not been the case here.
Thus the rule on quasi-delicts does not apply.
- However, despite the inapplicability of the rule
on quasi-delicts, the school is still liable because
all academic institutions enter into a contract
with all its enrollees. Part of the obligations of
this contract is the providence of an adequate
atmosphere of safety for its students (x x x no
student can absorb the intricacies of physics or
higher mathematics or explore the realm of the
arts and other sciences when bullets are flying
or grenades exploding in the air or where there
looms around the school premises a constant
threat to life and limb.).
- Obligations from quasi-delict or tort do not
govern, since these are extra-contractual and a
contract has been made here. However, in Air
France vs. Carroscoso, it was established that
liability from tort may still exist even if there is a
contract, because the act that breaks the
contract may also be a tort. This rule obeys Art.
21.
- The SC here dictates that a trial is necessary in
order to determine whether such willful
negligence really lies, in order that liability
should be properly determined.
3 291
 Amadora v. CA
G.R. No. L-47745
Apr. 15, 1988
Cruz, J.
Carlos Pagdanganan
Keywords: Student shot by classmate in school;
teachers : pupils and students, heads of
establishments of arts and trades : apprentices
Facts:
- Alfredo Amadora, a graduating student of the
Colegio de San Jose-Recoletos, was shot to
death in the campus auditorium by his
classmate Pablito Daffon.
- Amadoras parents filed a civil action for
damages under Art. 2180 of the Civil
Code against the school, its rector, the high
school principal, the dean of boys, and the
physics teacher .
- The CFI ruled in their (the parents) favor,
holding the defendants liable for the sum of
P294,984.
- On appeal to the respondent court, the
decision was reversed and the defendants
completely absolved.
Issue/s:
WON Art. 2180, may be applied to the case on
hand
Ruling:
Yes. The provision in question should apply to
all schools, whether academic or non-academic.
However, for the reasons stated below, the
petition of the parents is denied.
Ratio:
- The Court does not see any plausible reason as
to why vigilance should be relaxed for schools
academic in nature and increased for non-
academic ones. Moreover, the student is
considered in the custody of the school
authorities as long as he is under the
control and influence and within its premises,
whether the semester has not yet begun or has
already ended.
Obligations and Contracts
- In cases as such, the teachers-in-charge are
held liable for any damage done by the students.
The responsibility of the school authorities over
the student continues as long as it can be
shown that the student is in the school
premises in pursuance of a legitimate student
objective, in the exercise of a legitimate student
right.
- The responsibility ceases when such persons
prove that they exercised all the diligence of a
good father of a family to prevent damages.
- HOWEVER, even if the court held that the
provision may be applied to the case on hand,
the petition was nonetheless denied because
the facts disclosed that NONE of the
respondents was liable for the injury inflicted by
Daffon, which led to Amadoras death.
- The rector, high school principal, and dean of
boys could not be held liable because none of
them was the teacher-in-charge as defined by
the provision. Further, the mere fact that
Amadora was going to school to submit his
Physics project did not automatically designate
his physics teacher, Celestino Dicon, as teacher-
in-charge, so he too was
not held liable.
- Moreover, respondents proved that they had
exercised due diligence ensuring that the tort
committed was not a product of their failure to
enforce school rules and regulations.
- Finally, though the dean of boys may have
been negligent in his failure to take disciplinary
action against a student from whom he
confiscated a gun, or to report the incident to
higher authorities, it was not proven that the
confiscated gun was the same gun which was
used to shoot Amadora to death.
4 291
 Air France v. Carrascoso treated by the carriers employees with
G.R. No. L-21438 kindness and respect. Therefore, his wrongful
Sept. 28, 1966 expulsion is a violation of public duty by Air
Sanchez, J. France, which is a case of quasi-delict.

Carlos Poblador Notes:

- This case teaches us the nuance of identifying
Keywords: Air France crew refuses to grant first two separate sources of obligations existing in
class seat to Filipino passenger because white one transaction. Here, there is a contract of
man had better right carriage between the parties and such contract
was breached by Air France when it wrongfully
Facts: forced Carrascoso to vacate the first class seat
- Plaintiff Carrascoso bought a first class which he paid for. The wrongful expulsion is
airplane ticket from Manila to Rome from Air independent of the breach since even without
France. the contract, such wrongful expulsion may still
- However, in his flight from Manila to Bangkok, make Air France liable for damages. Thus, the
he was forced to vacate his seat by the manager wrongful expulsion is in itself a tort.
of the airline because a white man had a
better right to the first class seat.
- He refused and caused a commotion but was
eventually persuaded by the other Filipino
passengers in the plane.
- Carrascoso files for moral damages, which is
granted by the lower court.
- Air France contends that Carrascosos action is
predicated upon breach of contract, and that
for moral damages to be authorized there must
be fraud or bad faith. They claim that the CA
failed to make a finding of bad faith.

Issue/s:
WON Carrascoso can claim moral damages due
to Air Frances actions

Ruling:
Yes. The CAs judgment is affirmed.

Ratio:
- The following are established: first, that there
was a contract to furnish a first class seat to
Carrascoso; second, that this contract was
breached because Air France failed to give him
a first class seat; and third, there was bad faith
when Air France forced him to move after he
was already seated. Here, there is an inference
of bad faith even if it wasnt specifically
mentioned in the complaint.
- Passengers do not contract merely for
transportation. They also have the right to be

Obligations and Contracts 5 291

 Song Fo v. Hawaiian Philippine Co.
G.R. No. 23769
Sept. 16, 1925
Malcolm, J.
Laurie Quiambao
Keywords: Molasses; slight v. substantial
breach
Facts:
- Song Fo & Company (plaintiff) presented a
complaint for breach of contract against
Hawaiian Philippine Co. (defendant).
- Defendant said that the plaintiff defaulted
in the payment for the molasses the defendant
delivered to it so the latter was compelled to
cancel and rescind the said contract.
- In a letter by Hawaiian to Song Fo, it was
established that Song Fo agreed to the 300k
gallons of molasses but requested for another
100k gallons to which Hawaiian said that, we
believe that this is possible and we will do our
best to let you have these extra 100k gallons
during the next year the same to be taken by
you before Nov. 1, 1923, along with the 300k,
making 400k gallons in all. Regarding the
payment for our molasses, Mr. Song Fo gave
us to understand that you would pay us at the
end of each month for molasses delivered to
you.
- Song Fo confirmed the arrangements in its
reply, With reference to the contents of your
letter dated the 13th inst. we confirm all the
arrangements you have stated.
- The CFI ruled in favour of Song Fo, hence this
appeal by Hawaiian.
Issue/s:
1. WON the defendant agreed in the contract to
sell to the plaintiff 400,000 gallons of molasses
(rather than 300,000 gallons)
2. WON Hawaiian had the right to rescind the
contract of sale made with Song Fo because the
latter failed to pay for the molasses within the
time agreed upon
Ruling:
Obligations and Contracts
The court ruled that the agreement was for
300k gallons of molasses only, and that there is
only slight breach and therefore Hawaiian had
no right to rescind the sale.
Ratio:
1. There was only one interpretation of the
letter by Hawaiian regarding the amount of
molasses that the agreed amount by both
parties was for 300k gallons only. The language
used by Hawaiian in the letter did not entail a
definite promise for an extra 100k gallons and
thus, cannot be construed as an obligation.
2. The letters indicate that Song Fo was to pay
for the molasses delivered at the end of each
month. However, it only paid on February 20
(for the December delivery) when it should
have paid not later than January 31 (as the
accounts were received on Jan 5).
- But the general rule is that rescission will not
be permitted for a slight or casual breach of the
contract and will only be allowed when such
breaches are so substantial and fundamental as
to defeat the object of the parties in making the
agreement.
- A delay In payment for a small quantity of
molasses for about 20 days isnt such a grave
violation of an essential condition of the
contract that would warrant rescission
for nonperformance.
- Also, Hawaiian waived this condition when it
arose by accepting payment of the overdue
accounts and continuing with the contract.
6 291
 Velarde v. CA
G.R. No. 108346
Jul. 11, 2001
Panganiban, J.
Paolo Quilala
Keywords: Land sold; condition of assumption
of mortgage not fulfilled; resolution
Facts:
- David Raymundo sold a parcel of land to
Avelina Velarde under the following conditions:
Velarde to pay Raymundo P800K
Raymundo to transfer to Velarde
complete ownership of the land, together
with the house and other improvements
thereon
Velarde to assume paying the mortgage
amounting to P1.8M
Raymundo to pay the capital gains tax
and documentary stamps
Velarde to pay registration fees and
transfer tax
- Pending the approval of the application for the
assumption of the mortgage obligations on the
property, Velarde agreed to pay the mortgage
obligations on the property with BPI in the
name of Raymundo, in accordance with
the terms and conditions of the said Deed of
Real Estate Mortgage. In violation of which,
Velarde agreed that payments made (800k
downpayment + payments on mortgage loans)
shall be forfeited and David Raymundo shall
resume ownership of property.
- Velarde continued to pay three installments to
BPI until she was notified that that the
assumption of mortgage was not approved.
Because of this, Velarde ceased to pay the
mortgage and only agreed to continue if
Raymundo agrees to three additional conditions:
Raymundo to deliver actual possession of
the property to Velarde for immediate
occupancy
Release of the title and mortgage from
BPI
Raymundo to make title available and
free from any liens and encumbrances
Obligations and Contracts
Raymundo to execute an absolute deed
of sale in Velardes favor free from any
liens or encumbrances
- Subsequently, Raymundo sent a notarial
notice of cancellation/rescission of the intended
sale of the property due to Velardes failure to
comply with the terms and conditions of the
Deed of Sale with Assumption of Mortgage and
the Undertaking.
Issue/s:
1. WON non-payment of the mortgage
obligation resulted in a breach of the contract
2. WON the rescission (resolution) of the
contract by private respondents was justified
Ruling:
The court affirmed the assailed decision,
holding as justified Raymundos act of
rescinding the contract, but ordered the
restitution to Velarde of P874,150, which the
latter paid as a consequence of the contract
until it was rescinded.
Ratio:
1. Yes. This is breach. Petitioners did not merely
stop paying the mortgage obligations; they also
failed to pay the balance of the purchase price.
- When Velarde received notice of the banks
disapproval of their application to assume
respondents mortgage, they should have paid
the balance of the P1.8M.
- In a contract of sale, the seller obligates itself
to transfer the ownership of and deliver
a determinate thing, and the buyer to pay
therefor a price certain in money or its
equivalent. Petitioners did not perform their
correlative obligation of paying the contract
price in the manner agreed upon. Worse, they
wanted private respondents to perform
obligations beyond those stipulated in the
contract before fulfilling their own
obligation to pay the full purchase price.
2. Yes. Rescission (resolution) in this case was
justified.
- The right of rescission of a party to an
obligation under Art. 1191 is predicated on a
7 291
 breach of faith by the other party who violates
the reciprocity between them.
- Raymundo validly exercised his right to rescind
the contract, because of the failure of
petitioners to comply with their obligation to
pay the balance of the purchase price.
Meanwhile, Velarde violated the very essence
of reciprocity in the contract of sale, a violation
that consequently gave rise to private
respondents right to rescind the same in
accordance with law.
- Mutual Restitution Required in Rescission: The
corresponding mortgage payments in the
amounts of P27,225, P23,000 and P23,925
(totaling P874,150.00) advanced by petitioners
should be returned by the private respondents,
lest the latter unjustly enrich themselves at the
expense of the former.

Obligations and Contracts 8 291

 Angeles v. Calasanz
G.R. No. L-42283
Mar. 18, 1985
Gutierrez, Jr., J.
Alex Ramos
Keywords: Delayed payments but over principal;
slight breach
Facts:
- Ursula Torres Calasanz and Tomas Calasanz
(defendants) and Buenaventura Angeles and
Teofila Juani (petitioners) executed a contract
where the Calasanz's are selling land to the
Angeles and Juani. Land was sold at P39,200.00
plus 7% interest per annum.
- Petitioners made a downpayment of P392.00
when the contract was executed and promised
to pay P41.20 monthly (every 19th) to
defendants until fully paid.
- July 1966: They have already paid an
aggregate amount of P4,533.38. Sometimes,
the defendants accepted delayed payments.
- December 7, 1966: Defendants wrote to
petitioners asking to settle past due accounts.
- January 28, 1967: Defendants cancelled said
contract due to non-payment.
- Plaintiffs filed to compel defendants to issue a
final deed of sale after computing and noticing
that they have already paid them P4,533.38,
which already included interests, realty taxes
and other expenses
- Defendants, on the other hand, alleged that
petitioners violated paragraph (6) of the
contract when they failed to pay their monthly
(4 months) instalments
- LC rendered judgment in favor of the
petitioners. CA upheld the decision.
Issue/s:
WON cancellation by the defendants of the
contract was valid
Ruling:
No. The petition is denied, and the decision
appealed from is affirmed, with the
modification that the plaintiffs-appellees should
pay the balance of P671.67 w/o any interest
Obligations and Contracts
Ratio:
- Art. 1191 is explicit. In reciprocal obligations,
either party 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.
- However, it is not always necessary for the
injured party to resort to court for rescission of
the contract when the contract itself provides
that it may be rescinded for violation of its
terms and conditions. (UP v. De los Angeles)
- The right to rescind the contract for non-
performance of one of its stipulations, therefore,
is not absolute. (Universal Food Corp. v. Court
of Appeals)
- 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)
- With regard to the non-payment of the 4
monthly installments: Although the principal
obligation was only P 3,920.00 excluding the 7
percent interests, the plaintiffs had already paid
an aggregate amount of P 4,533.38. To sanction
the rescission made by the defendants will work
injustice to the plaintiffs.
- Art. 1234 of the Civil Code provides that: If
the obligation has 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.
- Also, when the defendants, instead of availing
of their alleged right to rescind, have accepted
and received delayed payments of installments,
though the plaintiffs have been in arrears
beyond the grace period mentioned in
paragraph 6 of the contract, the defendants
9 291
 have waived and are now estopped from
exercising their alleged right of rescission as
provided in paragraph 9 of their agreement.
- The Court dismissed the defendants
contention that although they have already
been paid P4,533.38, there is still a balance of
P671.67 due them (hence, they cannot be
compelled). It said that the contract to sell
entered into by the parties has some
characteristics of a contract of adhesion. The
defendants drafted and prepared the contract.
Hence, the contract to sell is construed against
the party causing it. The plaintiffs should pay
the balance of P671.67 but it does not mean
that the defendants have the right to cancel the
contract. Thereafter, the final deed of sale shall
be executed.

Obligations and Contracts 10 291

 Delta Motor Corporation v. Genuino & CA
G.R. No. L-55665
Feb. 8, 1989
Cortes, J.
Dean Reposar
Keywords: Black iron pipes; slight v. substantial
breach
Facts:
- Respondents Genuino entered into a contract
with DMC for the purchase of black iron pipes.
- DMC gave 2 letter quotations to Genuino
regarding the selling price and terms of
payment for the said pipes. Both letter
quotations contained stipulations that stated
that the price offer shall remain firm within a
period of 30 days from the date thereof.
- Genuino agreed to the offers and signed the
contract.
- The delivery of the black iron pipes was
unsuccessful however, for the area of
installation for the said pipes was not yet
finished.
- 3 years later, Genuino asked DMC to deliver
the iron pipes, manifesting at the same time
their preparedness to pay the second
installments on both contracts.
- DMC refused to deliver on the grounds that
the prices quoted as of 1972 were only good
within 30 days from the date of offer. They sent
new price quotations based on the current price
of black iron pipes.
- The Genuinos rejected this and filed a
complaint for specific performance with
damages seeking to compel DMC to deliver the
pipes.
- DMC now argues that its obligation to deliver
the goods is subject to conditions required of
the Genuinos as vendees. When the Genuinos
refused to accept the delivery of the goods, and
when it took them 3 years before they
demanded delivery, fluctuation in market prices
have occurred. Thus Delta is entitled under Art.
1191 to rescind the contracts.
Issue/s:
WON the contracts may be rescinded
Obligations and Contracts
Ruling:
No it may not. The decision of the CA is
affirmed.
Ratio:
- Since DMC was the one who prepared the
contracts and had knowledge of the
circumstances that prevented the Genuinos
from accepting the delivery, they should have
included a deadline for delivery but did not.
Requiring the Genuinos to pay a higher price
than previously quoted would mean an
amendment of contracts and would be too
unfair.
- In construing Art 1191, rescission will be
ordered only where the breach complained of is
substantial as to defeat the object of the parties
in entering into the agreement. It will not be
granted where the breach is slight or casual.
Further, the question of whether a breach of
contract is substantial depends upon the
attendant circumstances.
- The reactions of DMC did not suggest that the
Genuinos non-performance of the obligation
was a substantial breach that would warrant
rescission. Case in point: when the Genuinos
refused to accept the delivery, DMC did nothing
and 3 years later only asked for a price increase
so that they may facilitate the delivery.
- Lastly, DMC cannot assert the 30-day
stipulation because the offer was accepted
within the said period. Acceptance of the offer
gives rise to a contract between the parties;
hence, DMC cannot demand a price change.
11 291
 Vermen Realty v. CA
G.R. No. 101762
Jul. 6, 1993
Bidin, J.
Gianella Reyes
Keywords: Offsetting between construction
materials and condo units
Facts:
- Under the conditions of the so-called
Offsetting Agreement, Vermen Realty and
Seneca Hardware agreed upon a reciprocal
obligation.
- Seneca Hardware shall deliver to Vermen
Realty construction materials worth
P552,000.00. Meanwhile, Vermen Realty's
obligation under the agreement is threefold:
Pay Seneca Hardware P276,000.00 in
cash;
Deliver possession of units 601 and 602,
Phase I, Vermen Pines Condominiums
(with total value of P276,000.00) to
Seneca Hardware;
Upon completion of Vermen Pines
Condominiums Phase II, Seneca Hardware
shall be given option to transfer to similar
units therein
- As found by the appellate court and
admitted by both parties, Seneca Hardware
had paid Vermen Realty the amount of
P110,151.75, and at the same time delivered
construction materials worth P219,727.00.
- Pending completion of Phase II of the
Vermen Pines Condominiums, Vermen Realty
delivered to Seneca Hardware units 601 and
602 at Phase I of the Vermen Pines
Condominiums.
- In 1982, Vermen Realty repossessed unit
602. As a consequence of the repossession,
the officers of the Seneca Hardware
corporation had to rent another unit for their
use when they went to Baguio on April 8,
1982.
- In its reply, Vermen averred that Room 602
was leased to another tenant because Seneca
Hardware corporation had not paid anything
for purchase of the condominium unit.
Obligations and Contracts
Vermen demanded payment of P27,848.25
representing the balance of the purchase
price of Room 601.
- Seneca Hardware filed a complaint with
Quezon City RTC for rescission of the
Offsetting Agreement with damages. In said
complaint, Seneca Hardware alleged that
Vermen Realty had stopped issuing purchase
orders of construction materials after April,
1982, without valid reason, thus resulting in
the stoppage of deliveries of construction
materials on its (Seneca Hardware) part, in
violation of the Offsetting Agreement.
- After conducting hearings, the trial court
rendered a decision dismissing the complaint
and ordering Seneca Hardware to pay Vermen
Realty on its counterclaim in the amount of
P27,848.25 representing the balance due on
the purchase price of condominium unit 601.
- On appeal, respondent court reversed the
trial court's decision.
Issue/s:
WON the circumstances of the case warrant
rescission of the Offsetting Agreement as
prayed for by Seneca Hardware
Ruling:
Yes. The Court ruled in favor of Seneca
Hardware.
Ratio:
- There is no controversy that the provisions of
the Offsetting Agreement are reciprocal in
nature. Reciprocal obligations are those created
or established at the same time, out of the
same cause, and which results in a mutual
relationship of creditor and debtor between
parties. In reciprocal obligations, the
performance of one is conditioned on the
simultaneous fulfillment of the other
obligation.
- Art. 1191 of the Civil Code provides the
remedy of rescission in (more appropriately, the
term is "resolution") in case of reciprocal
obligations, where one of the obligors fails to
comply with what is incumbent upon him.
- It is evident from the facts of the case that
Seneca Hardware did not fail to fulfill its
12 291
 obligation in the Offsetting Agreement. The
discontinuance of delivery of construction
materials to Vermen Realty stemmed from the
failure of Vermen Realty to send purchase
orders to Seneca Hardware.
- The impossibility of fulfillment of the
obligation on the part of Vermen Realty
necessitates resolution of the contract for
indeed, the non-fulfillment of the obligation
aforementioned constitutes substantial breach
of the Offsetting Agreement.

Obligations and Contracts 13 291

 Woodhouse v. Halili
G.R. No. L-4811
Jul. 31, 1953
Labrador, J.
Nasha Reyes
Keywords: Mission bottles; causal v. incidental
fraud
Facts:
- Woodhouse and Halili had an agreement
where:
They shall organize a partnership for the
bottling and distribution of Mission soft
drinks (Woodhouse to act as industrial
partner/manager and Halili as capitalist)
Halili was to decide on matters of general
policy regarding the business, while
Woodhouse was to attend to the
operation and development of the
bottling plant
Plaintiff was to secure the Mission Soft
Drinks franchise for and in behalf of the
proposed partnership
Plaintiff was to receive 30% of the net
profits of the business
- Prior to entering this agreement, Woodhouse
informed the Mission Dry Corp. USA that he had
caught the interest of a prominent financier
(Halili) in the business, who was willing to invest
half a million dollars in the bottling and
distribution of the said beverages.
- Thus, Woodhouse requested from Mission, in
order that he may close the deal with Halili, that
the right to bottle and distribute Missions soft
drinks be granted to him for a limited time ,
under the condition that it will finally be
transferred to the corporation. Hence, he was
given a thirty-day option on exclusive bottling
and distribution rights for the Philippines"
- Woodhouse and Halili signed the contract, and
days after went to US where they entered into a
franchise agreement with Mission Dry
Corporation, which granted Halili the exclusive
right, license, and authority to produce, bottle,
distribute, and sell Mission beverages in the
Philippines.
Obligations and Contracts
- When the bottling plant was already in
operation, Woodhouse demanded of Halili that
the partnership papers be executed. Halili gave
excuses and refused to give Woodhouse further
allowances. No settlement could be arrived at,
hence this petition.
- Halili argues that Woodhouse misrepresented
himself as the owner of an exclusive bottling
franchise, when in fact he did not secure it.
Issue/s:
1. WON Woodhouse had falsely represented
that he had an exclusive franchise to bottle
Mission beverages
2. WON this false representation or fraud, if it
existed, annuls the agreement to form the
partnership
Ruling:
Ratio:
1. Yes there is false misrepresentation by
Woodhouse.
- Halili would not have gone to California and
incurred expenses for the trip, unless he
believed that Woodhouse did have that
exclusive privilege, and that the latter would be
able to get the same from the Mission Dry
Corporation itself. Halili believed, or was made
to believe, that Woodhouse was the grantee of
an exclusive franchise.
- The trial judges reason in his decision that the
assistance of counsel in the making of the
contract made fraud improbable is untenable
because the misrepresentation took place
before the conferences were held, hence Halili
already believed in the existence of
Woodhouses exclusive franchise right, and they
were assisted by their lawyers only when the
formal negotiations actually took place.
2. NO, it does not annul the agreement to form
a partnership, however.
- Article 1270 of the Spanish Civil Code
distinguishes two kinds of (civil) fraud: causal
fraud, which may be a ground for the
annulment of a contract; and incidental fraud,
14 291
 which only renders the party who employs it
liable for damages.
- In order that fraud may vitiate consent, and
thus annul a contract, it must be the causal and
not merely the incidental inducement to the
making of the contract.
- In Woodhouses acts of pretending that he
had the exclusive franchise and promising to
transfer it to Halili, he obtained the consent of
the latter to give him (Woodhouse) a 30% share
in the net profits. This is the dolo incidente
defined in Art 1270 of the Spanish Civil Code,
because it was used to get the other party's
consent to a big share in the profits, a matter
that is only incidental to the main agreement to
form a partnership.

Obligations and Contracts 15 291

 Geraldez v. CA & Kenstar Travel Corporation
G.R. No. 108253
Feb. 23, 1994
Regalado, J.
Miguel Sevilla
Keywords: European tour gone awry
Facts:
- Lydia Geraldez came to know about
Kenstars European tour packages from
numerous advertisements. She availed one of
their packages and paid P190,000 for it.
- Once in Europe, Geraldez was not able to avail
of all the amenities that were promised in the
package; there was no European tour manager
for their group of tourists, the hotels they
stayed in were not first class, they did not visit
the UGC Leather Factory which was specifically
added as a highlight of the tour, and the Filipino
lady tour guide was a first-timer.
- Upon returning to the Philippines, Geraldez
filed a complaint against Kenstar, on the ground
that the travel company committed fraud in the
performance of its obligation.
- The RTC ordered Kenstar to pay petitioner
moral, nominal damages and exemplary
damages. On appeal, the CA deleted the award
for moral and exemplary damages because the
CA ruled that there was no malice or bad
faith on the part of the respondent, and
thus, no justification in the award of moral and
exemplary damages.
Issue/s:
WON Kenstar acted in bad faith in its fulfillment
of its obligation
Ruling:
Yes. This is evident in the selection of the tour
guide, the absence of the European Tour
Manager, and the selection of the hotels. SC
reinstated the award of moral and exemplary
damages.
Ratio:
- On the tour guide: Rowena Zapanta was a
first-timer. The court did not accept Kenstars
Obligations and Contracts
reason for assigning her to the tour, namely, to
give her experience as a tour guide. The court
cited that the travel agency could have allowed
Zapanta to go merely as an understudy under
the guidance of a competent tour guide. The
tour guide plays an essential role in making sure
that the tourists are well attended to. However,
due to her inexperience, it caused the agitation
of the group. This was a deliberate choice of the
travel agency, showing clear disregard to the
wellbeing of the tourist group.
- On the absence of the European Tour
Manager: The brochure promised and misled
the tourists to believe that an actual European
tour manager will be with them during the stay.
This is predicated by the pronoun he in the
brochure (the brochure stating that He will
accompany you through Europe). However,
what the travel agency had in mind is a juridical
person to be prepared by Kuoni Travel. Upon
plain reading, it is reasonable to assume that
what the tourists had in mind is a real person
and not a juridical person.
- On the fact that the hotels where the tourists
stayed did not have the basic commodities of a
first-class hotel comparable in Manila: This is
another promise of the travel agency that was
broken. The hotels did not have a hot and cold
option for the shower, no soap, water or towels,
and the toilet was not clean. The travel agency
reasoned out that given the limited funds for
the tour ($2900 per person), it had to find the
most cost-efficient option available. The court
did not appreciate this argument. The court is of
the opinion that the travel agency could have
simply raised the prices and be able to deliver
to its promise. It did not have resort to
committing a grave misrepresentation of what
the tour package had to offer.
16 291
 Gutierrez v. Gutierrez
G.R. No. 34840
Sept. 23, 1931
Malcolm, J.
Jechel Tan de Guzman
Keywords: Collision involving a truck, private
car and a bus
Facts:
A private car driven by 18 year-old Bonifacio
Gutierrez (at the time 18 was not the age of
majority), and a truck driven by chauffeur
Abelardo Velasco collided. The private car is
owned by Gutierrezs parents, while the truck is
owned by Saturnino Cortez. This collision also
involved an autobus, and caused Narciso
Gutierrez, a passenger in the bus, to suffer a
fractured leg. Narciso now seeks to recover
damages from both the drivers and owners of
the private car and the truck.
Issue/s:
1. WON both the private car and truck drivers
are liable for negligence
2. WON the father of the private cars driver as
well as the owner of the truck are liable
who maintains it for the general use of his
family is liable for its negligent operation by one
of his children, whom he designates or permits
to run it, where the car is occupied and being
used at the time of the injury for the pleasure of
other members of the owner's family than the
child driving it.
The theory of the law is that the running of the
machine by a child to carry other members of
the family is within the scope of the owner's
business, so that he is liable for the negligence
of the child because of the relationship of
master and servant
- With regard to the liability of the truck driver
and owner: The liability of Saturnino Cortez, the
owner of the truck, and of his chauffeur
Abelardo Velasco rests on a different basis,
namely, that of contract which, has been
sufficiently demonstrated by the allegations of
the complaint, not controverted, and the
evidence. The reason for this conclusion reaches
to the findings of the trial court concerning the
position of the truck on the bridge, the speed in
operating the machine, and the lack of care
employed by the chauffeur

Ruling:
Yes, the father is liable for the act of his minor
son. The truck driver and owner are also liable.

Ratio:
- With regard to the father: The guaranty given
by the father at the time the son was granted a
license to operate motor vehicles made the
father responsible for the acts of his son. Based
on these facts, pursuant to the provisions of Art.
1903 of the Civil Code, the father alone and not
the minor or the mother, would be liable for the
damages caused by the minor.
- This is a case of civil law liability of parties for
obligations which arise from fault or negligence.
At the same time, the Court took cognizance of
the common law rule on the same subject. In
the United States, it is uniformly held that the
head of a house, the owner of an automobile,

Obligations and Contracts 17 291

 Vasquez v. de Borja
G.R. No. L-48930
Feb. 23, 1944
Ozaeta, J.
Victoria Tiangco
Keywords: Palay; culpa contractual v. culpa
aquilana
Facts:
- Vasquez (acting manager of Natividad-Vasquez
Sabani Development Co., Inc at the time the
transaction took place) and Busuego (treasurer
of the said corporation) jointly and severally
obligated themselves to sell to De Borja
(plaintiff) 4,000 cavans of palay at P2.10 per
cavan, to be delivered during the month of
February, 1932.
- However, the said defendants, having
subsequently received from the plaintiff in
virtue of said agreement the sum of P8, 400,
delivered only 2,488 cavans of palay and
refused to deliver the balance of 1,512 cavans,
notwithstanding repeated demands.
- Plaintiff argued that refusal to deliver said
1,512 cavans of palay within the period
mentioned, cost him to suffered damages in the
sum of P1,000.
- Also, on account of the said agreement, the
plaintiff delivered to the defendants 4,000
empty sacks, of which they returned to the
plaintiff only 2,490 and refused to deliver to the
plaintiff the balance of 1,510 sacks or to pay
their value amounting to P377.50; and that on
account of such refusal the plaintiff suffered
damages in the sum of P150.
- Defendant argued that he did not enter the
contract in his own individual and personal
capacity and such agreement was entered with
and to the Natividad-Vasquez Sabani
Development Co.
- RTC found Vasquez guilty, Busuego acquitted.
CA affirmed with modification to the damages
but later set aside its own ruling and remanded
the case to the lower court.
Issue/s:
Obligations and Contracts
WON the plaintiff entered into the contract
with the defendant Antonio Vazquez in his
personal capacity or as manager of the
Natividad-Vazquez Sabani Development Co., Inc
Ruling:
CA reversed and complaint dismissed. Vasquez
was not liable as he entered the contract in his
capacity as manager of the corporation
Ratio:
- The party liable on the contract is Natividad-
Vazquez Sabani Development Co., Inc., and not
Vazquez himself. It is well known that a
corporation is an artificial being invested by law
with a personality of its own, separate and
distinct from that of its stockholders and from
that of its officers who manage and run its
affairs. Also, since the corporation was not a
party in the case, the complaint should have
been dismissed.
- The mere fact that its personality is owing to a
legal fiction and that it necessarily has to act
thru its agents, does not make the latter
personally liable on a contract duly entered into,
or for an act lawfully performed, by them for an
in its behalf. Such legal fiction may be
disregarded only when an attempt is made to
use it as a cloak to hide an unlawful or
fraudulent purpose. No such thing has been
alleged or proven in this case. It has not been
alleged nor even intimated that Vazquez
personally benefited by the contract of sale in
question and that he is merely invoking the legal
fiction to avoid personal liability. Neither is it
contended that he entered into said contract for
the corporation in bad faith and with intent to
defraud the plaintiff
- The fact that the corporation, acting thru
Vazquez as its manager, was guilty of negligence
in the fulfillment of the contract, did not make
Vazquez principally or even subsidiarily liable for
such negligence. Since it was the corporations
contract, its nonfulfillment, whether due to
negligence or fault or to any other cause, made
the corporation and not its agent liable.
- Trial Court and CA have manifestly failed to
distinguish between a contractual and an
18 291
 extracontractual obligation, or between an
obligation arising from a contract and an
obligation arising from culpa aquiliana. If
independently of the contract, Vazquez by his
fault or negligence cause damaged to the
plaintiff, he would be liable to the latter under
Art. 1902 of the Civil Code. However, the
plaintiff's cause of action should be based on
culpa aquiliana and not on the contract alleged
in his complaint herein; and Vazquez' liability
would be principal and not merely subsidiary.
(Since no such cause of action was alleged, the
trial court has no jurisdiction to adjudicate it).

Obligations and Contracts 19 291

 De Guia v. Manila Electric Co.
G.R. No. L-14335
Jan. 28, 1920
Street, J.
Kaks Alampay
Keywords: Derailed train causes injury to
passenger
Facts:
- The plaintiff Manuel de Guia boarded a car at
the end of the line with the intention of coming
to the city.
- At about 30 meters from the starting point,
the car entered a switch, the plaintiff remaining
on the back platform holding the handle of the
right-hand door. Upon coming out of the switch,
the small wheels of the rear truck left the track,
ran for a short distance along the macadam
filling, which was flush with the rails, and struck
a concrete post at the left of the tract. The post
was shattered; and as the car stopped the
plaintiff was thrown against the door with some
violence, receiving bruises and possibly certain
internal injuries, the extent of which is a subject
of dispute.
- The trial court found the motorman of the
derailed car negligent for having maintained
too rapid speed. The defendant company
claimed the derailment was due to a goose-egg-
sized stone, thus the derailment of the car was
due to casus fortuitos, and not chargeable to
negligence of the motorman.
Issue/s:
WON the motorman was negligent in his
operation of the car and therefore liable
Ruling:
Yes, but the court decreased the amount
recoverable by the plaintiff.
Ratio:
- If the law or contract does not state the
diligence which is to be observed in the
performance of an obligation, that which is
Obligations and Contracts
expected of a good father of a family shall be
required. (Art. 1173, par. 2)
- The motorman says that upon approaching the
switch he reduced the electrical energy to the
point that the car barely entered the switch
under its own momentum, and this operation
was repeated as he passed out. Upon getting
again on the straight tract he put the control
successively at points one, two, three and lastly
at point four. At the moment when the control
was placed at point four he perceived that the
rear wheels were derailed and applied the brake;
but at the same instant the car struck the post,
some 40 meters distant from the exit of the
switch.
- Testimony by a witness and other evidence
shows the car was behind schedule and nearly
empty, leading to a tenable inference that the
car was allowed to run for too long with the
front wheels of the rear truck derailed, leading
to the accident. There was negligence on the
part of the motorman.
- As a consequence of that negligence, the
defendant company is liable for the resulting
damage.
- When the plaintiff boarded the car, the
company undertook to convey him to Manila;
the relation between plaintiff and defendant
was a of a contractual nature with the
defendant bound to carry the plaintiff safely to
destination with a degree of care. Failure to
carry out this obligation incurs liability.
20 291
 US v. Barrias
G.R. No. L-7567
Nov. 12, 1912
Carson, J.
Norlegen Bayona
Keywords: 3-year old boy run over by train
Facts:
- Segundo Barrias, a motorman, was convicted
by the CFI of homicide resulting from reckless
negligence for the death of Fermina Jose (3yrs
old).
- Undisputed are the facts that the incident
occurred in a public street in a densely
populated part of the city at a time when the
residents of such street begin to move about,
and that he started his car from a standstill w/o
looking over the track immediately in front of
the car to satisfy himself that it was clear.
- Evidence shows that had Barrias inclined his
body slightly forward to make sure that the
track immediately in front of the streetcar was
clear, he would have seen the child which would
have prevented the incident causing the death
of the child. He did not exercise the most
ordinary prudence required when starting from
a standstill.
- Negligence is the failure to observe, for the
protection of the interests of another person,
that degree of care, precaution and vigilance
which the circumstances justly demand,
whereby such other persons suffer injury.

Issue/s:
WON the evidence shows such carelessness
or want of ordinary care on the part of the
defendant as to amount to reckless negligence

Ruling:
Yes. Therefore he is liable.

Ratio:
- Given the conditions mentioned in the facts
[location and time of incident], Barrias was
clearly charged with high degree of diligence in
the performance of his duties. It was his duty to
satisfy himself of the fact that by keeping a
sharp lookout, and to do everything in his
power to avoid the danger which is necessarily
incident to the operation of heavy street cars on
public thoroughfares in populous sections of the
city.
- By reason of public policy, extraordinary care
and diligence is expected upon carriers to
ensure the safety of passengers as well as to
avoid infliction of injuries upon pedestrians and
others on public streets and thoroughfares over
w/c these companies are authorized to run their
cars. This diligence he did not exercise.

Obligations and Contracts 21 291

 Sarmiento v. Sps. Cabrido
G.R. No. 141258
Apr. 9, 2003
Corona, J.
Dianne Cadorna
Keywords: Diamond earrings to two gold rings
Facts:
- Petitioner Sarmiento, through Tita Payag,
contracted with Dingdings Jewelry Shop, owned
by the respondent spouses, to have a pair of
diamond earrings reset into two gold rings.
- The shop accepted the job, prompting Payag
to deliver to them one of the diamond earrings.
- Respondent Sun attempted to dismount the
diamond from its setting but upon failure to do
so, she asked Santos, their goldsmith, to do it.
Santos used pliers to remove the diamond by
twisting the setting, breaking the gem in the
process.
- Respondents refused to replace the gem; thus,
petitioner shelled out money for a replacement.
- Respondent Cabrido denied having entered
into any transaction with Payag, but later on
admitted it upon realizing the futility of their
claim. Sun, on the other hand, acknowledged
her but along with the Cabrido couple, denied
that it was in the scope of their obligation to
dismount the diamond. Meanwhile, Santos
denied being an employee of Dingdings.
- Thus, petitioner filed a complaint with the
MTC, which ruled in favour of petitioner.
However, this ruling was later on reversed by
the RTC, which reversal was affirmed by the CA.
Issue/s:
1. WON dismounting of the diamond from its
original setting was part of the respondents
obligation
2. WON Dingdings Jewelry Shop was liable for
the negligence of Santos
Ruling:
The petition was granted, and the ruling of the
CA was reversed and set aside.
Obligations and Contracts
Ratio:
1. That the dismounting of the diamond was
covered by their obligations was evident from
the actuations of Sun, who expressed no
reservation when Payag asked her to dismount
the diamonds. If it were otherwise, Sun should
have instructed Payag to have the diamonds
dismounted first and spared the jewelry shop
from the task. Instead, she accepted the job and
charged Payag for it.
- At that moment, a perfected contract to reset
the diamonds arose between the petitioner,
through Payag, and the jewelry shop, through
Sun.
- Further, Suns subsequent actions, those of
attempting to dismount the diamonds
themselves and asking Santos to do so when
she could not do it, preclude her from denying
their obligation.
2. Those who, in the performance of their
obligations, are guilty of negligence are liable
for damages. The fault or negligence of the
obligor consists in the omission of that diligence
which is required by the nature of the obligation
and corresponds with the circumstances of the
persons, of the time and of the place.
- In the case at bar, Santos acted negligently in
dismounting the diamond. Being a goldsmith of
40 years, he should have been aware of the
practice to use a miniature wire saw in
dismounting gems from their settings. Instead,
he chose to employ a pair of pliers to disastrous
results.
- Having established Santos negligence, private
respondents cannot seek to avoid liability by
imputing all the blame to Santos, who claimed
to be an independent worker. Neither can they
claim that Sun simply happened to drop by the
shop.
- Facts show that Santos has been working for
the shop as goldsmith for 6 months, whereas
Payags testimony reveals that in her multiple
transactions with the shop, it was always Sun
who attended to her, belying the spouses
claims that the two are not their workers.
22 291
 Crisostomo v. CA & Caravan Travel and Tours
G.R. No. 138334
Aug. 25, 2003
Ynares-Santiago, J.
Maye Cristobal
Keywords: The traveller who failed to check
her calendar
Facts:
- Petitioner Crisostomo availed of the services of
respondent travel agency for the Jewels of
Europe tour.
- The tour package was arranged and the travel
documents delivered to petitioner.
- Petitioners niece Menor, the agencys
ticketing manager, informed the petitioner of
the date of the flight.
- Petitioner did not check her travel documents
and on the day of the supposed flight, she found
out that the flight had already left the day
before.
- Menor then asked Crisostomo to avail of a
different tour, the British Pageant instead.
- Upon arrival from the cheaper tour, petitioner
asked for reimbursement of the difference
between the sum she paid for the original tour
and the substitute tour.
- The travel agency refused to comply despite
several demands, prompting the petitioner to
sue.
- RTC ruled in favor of the petitioner, CA
reversed the RTC, hence this petition.
Issue/s:
1. WON petitioner is entitled to a refund given
that it was the private respondents fault that
she missed her flight in the original tour
2. WON petitioner should be deemed more
negligent given that it was required of a
common carrier to exercise extraordinary
diligence
Ruling:
The CA decision is affirmed. Petitioner is
ordered to pay respondent P12,901, the
Obligations and Contracts
balance of the price of the British Pageant
Package tour.
Ratio:
1. No. The petitioner is not entitled to a refund
because she was negligent.
- She was not able to prove that Menor had
been negligent and the fact that the private
respondent did not produce Menor as a witness
should not be used against it because the
burden of proving the allegations rests on the
petitioner, and also because Menor is abroad.
- The Court found that respondent company
performed its duty diligently, hence the
petitioner cannot recover damages.
- Fault or negligence consists in failure to
exercise due care and prudence in the
performance of an obligation. There is no fixed
standard of diligence applicable to each and
every contractual obligation.
2. Yes. She is more negligent and the
respondent is not a common carrier.
- The Court cited Art. 1732 which defines
common carrier as persons, corporations, firms
or associations engaged in the business of
carrying or transporting passengers or goods or
both by land, water or air, for compensation,
offering their services to the public.
- The Court held that the respondent is not a
common carrier since it is only engaged in
making the travel arrangements for customers,
acting merely as an agent for the airlines.
23 291
 Cetus Development Corp. v. CA
G.R. No. 77648
Aug. 7, 1989
Medialdea, J.
Robylene Cruz
Keywords: No collector arrived so lessees
incurred arrears
Facts:
- Private respondents were lessees of land
owned by Susana Realty.
- The payments of the rentals were paid by the
lessees to a collector of the Susana Realty who
went to the premises monthly.
- Sometime in March 1984, the Susana Realty
sold the leased premises to Cetus
Development, Inc.
- From April-June 1984, the private
respondents continued to pay their monthly
rentals to a collector sent by Cetus. They
however failed to pay their monthly individual
rentals for the months of July-September 1984
as no collector came.
- On October 9, 1984, Cetus sent a letter to
each of the private respondents demanding
that they vacate the subject premises and to
pay the back rentals within 15 days from the
receipt of the letter. Immediately upon the
receipt of the said demand, the private
respondents paid their respective arrearages in
rent which were accepted by Cetus subject to
the unilateral condition that the acceptance
was without prejudice to the filing of an
ejectment suit.
- For failure of the private respondents to
vacate the premises as demanded in the letter,
Cetus filed with the Manila MTC complaints for
ejectment.
- As common defense, respondents claimed
that since the occupancy of the premises they
paid their monthly rental regularly through a
collector of the lessor and that their non-
payment of the rentals for the months of July-
September 1984 was due to the failure of Cetus
to send its collector, even after inquiring to
Cetus office as to where payments would be
Obligations and Contracts
made and being assured that a collector will
visit them (which never happened).
- The trial court dismissed the cases as there
were no rental arrears and Cetus acceptance
of the back payments removed its cause of
action in an unlawful detainer case. Cetus
appealed to the RTC and CA, but appeals were
dismissed for lack of merit.
Issue/s:
1. WON there exists a cause of action when the
complaints for unlawful detainer were filed
considering the fact that upon demand by
Cetus from private respondents for payment of
their back rentals, the latter immediately
tendered payment which it accepted
2. WON CA committed a grave abuse of
discretion in dismissing the cases
Ruling:
The petition was denied for lack of merit and
the CA decision was affirmed.
Ratio:
1. No. No cause of action for ejectment has
accrued. There was no failure yet on the part of
private respondents to pay rents for three
consecutive months.
- As the terms of the individual verbal leases
which were on a month-to-month basis were
not alleged and proved, the general rule on
necessity of demand applies: there is default in
the fulfillment of an obligation when the
creditor demands payment at the maturity of
the obligation or at anytime thereafter. This is
explicit in Art.1169 NCC which provides that
"(t)hose obliged to deliver or to do something
incur in delay from the time the obligee
judicially or extrajudicially demands from them
the fulfillment of their obligation."
- Petitioner has not shown that its case falls on
any of the following exceptions where demand
is not required: (a) when the obligation or the
law so declares; (b) when from the nature and
circumstances of the obligation it can be
inferred that time is of the essence of the
contract; and (c) when demand would be
useless, as when the obligor has rendered it
beyond his power to perform.
24 291
 - The demand required in Art.1169 NCC may be
in any form, provided that it can be proved.
The proof of this demand lies upon the
creditor. Without such demand, oral or written,
the effects of default do not arise.
- The facts on record fail to show proof that
Cetus demanded the payment of the rentals
when the obligation matured. Coupled with the
fact that no collector was sent as previously
done in the past, the private respondents
cannot be held guilty of mora solvendi or delay
in the payment of rentals.
- Thus, when Cetus first demanded the
payment of the 3-month arrearages and
private respondents lost no time in making
tender and payment, which it accepted, no
cause of action for ejectment accrued. Hence,
its demand to vacate was premature as it was
an exercise of a non-existing right to rescind.
- In addition to this, Art.1257 NCC also provides
that where no agreement has been designated
for the payment of the rentals, the place of
payment is at the domicile of the defendants.
Hence, it could not be said that the
respondents were in default in the payment of
their rentals as the delay in paying the same
was not imputable to them. Rather, it was
attributable to Cetus omission or neglect to
collect.

2. No. The SC however does not agree with the

CAs reasons for dismissing the case.
- CA relied on Section 2, Rule 70 of the Rules of
Court, wherein the demand required (which is
to pay rent due) is a jurisdictional requirement
for the purpose of bringing an unlawful
detainer suit for failure to pay rent or comply
with the conditions of lease.
- The section also presupposes the existence of
a cause of action for unlawful detainer, which is
not true in this case.

Obligations and Contracts 25 291

 Aerospace Chemical Industries v. CA
G.R. No. 108129
Sept. 23, 1999
Quisumbing, J.
Hans Dantes
Keywords: Ship sank with sulfuric acid shipment
Facts:
- On June 27, 1986 petitioner bought 500
metric tons of sulfuric acid from respondent.
Petitioner must pay five days prior to shipment
and secure the transport. Shipment is to be
delivered as follows: 100 MT in Basay, Negros
Oriental, and 400 MT in Sangi, Cebu.
- Respondent sets amount of P2,000 as cost of
storage per day of delay, and asks Petitioner to
take the Basay goods.
- On October 3, petitoner pays P550K for the
500 MT of sulfuric acid.
- Petitioner hires Sultan Kayumanggi to pick up
the goods; Sultan picks up only 70 MT in Basay
- On December 12, respondent demands that
petitioner must take the remaining goods in
Basay on or before December 15, or they will
charge them for all the costs during the delay
- On December 18, SK retrieves 157.5 MT in
Sangi. Like in Basay, it tilted portside, and
loading was aborted.
- SK sinks with 227.5 MT of sulfuric acid; 272.5
MT left
- On January & March, 1987, petitioner asks for
additional orders of 227.5 MT to replace the
sunken goods
- Petitioner charters another ship, Don Victor,
with 500 MT capacity.
- Petitioner demands the 272.5 MT left or
P300K worth of the goods left
- Respondent replied that Petitioner must take
the 30 MT left at Basay or pay its storage costs
starting August 1986
- Petitioner demands the 272.5 MT left plus the
additional 227.5 MT
- Respondent rejects the additional order;
supplies unavailable due to problems
- Petitioner filed case for damages before Pasig
RTC
Obligations and Contracts
- RTC sides with Petitioner; the sinking of SK
was caused by force majeure; Respondent
breached contract by not accommodating the
replacement order
- Respondent appealed to CA; CA sides with
Respondent; Petitioner guilty of delay and
negligence
- SK was sent only on November 19; storage
cost P2000 per day of delay
- It was petitioners duty to get another
transport after SKs sinking, yet, petitioner
refused to get the 272.5 MT left but insisted on
the additional 227.5 MT.
Issue/s:
1. WON petitioner was liable for breach of
contract due to delay
2. WON the delay started on August 6, as the
CA decided
3. WON respondent bears the burden of
preserving sulfuric acid, which is a fungible
good
Ruling:
The CAs judgment is affirmed and modified,
such that the P270K worth of rentals was
deducted from the P300K advanced by
petitioner for the goods left; respondent is to
return the change to petitioner.
Ratio:
1. Yes. First, the sinking of the ship was not
caused by force majeure but by the ships
instability and unseaworthiness, as evidenced
by an SGS survey report.
- If SK cannot deliver, it is petitioners duty to
replace it and this it did not perform
seasonably. The entire 500 MT was ready for
lifting as early as August 1986.
- The respondent is not obliged to deliver the
additional 227.5 MT ordered by petitioner, nor
is it a justification for not lifting the 272.5 MT
left. Respondent warned petitioner since
December 12, 1986, but did not heed it, hence
the finding of delay.
2. No. When the buyer must remove the goods
but refuses to do so, the seller may sue for
damages under Art. 1170, CC. Delay begins
26 291
 from the time the obligee demands the
performance of the obligation from the obligor
as stated in Art. 1169, CC, meaning that (1)
the obligation is demandable and
liquidated, (2) the debtor delays the
performance of the obligation and (3) the
creditor demands said performance judicially
or extrajudicially
- The August 6 letter by respondent was not
considered a demand but merely a statement
of fact the fact that it costs them P2000 per
day to keep the acid in Basay. The Court noted
that the respondent even accepted the
October 3 payment without qualms.
- In contrast, the December 12 letter by
respondent was a categorical demand. The
court determined that an additional three days
should be added considering the records
showing at least three days travel from Basay
to Sangi would account for shipping delay.
- Furthermore, December 15 was when the
respondent was to vacate Basay; hence all their
expenses before that were necessary and
regular business expenses for which the
petitioner should not be obliged to pay.
Hence, the court concluded that the damages
will be counted from December 15, 1986

3. No. Under Art. 1504, since petitioner has

delayed in its performance of the obligation,
the respondent is exempted from the general
rule that goods remain at the sellers risk until
ownership is transferred to the buyer.

Obligations and Contracts 27 291

 Santos Ventura Hocorma Foundation v. Santos
G.R. No. 153004
Nov. 5, 2004
Quisumbing, J.
Michael de Castro
Keywords: Compromise agreement on cases;
delay
Facts:
- Ernesto Santos and Santos Ventura Hocorma
Foundation, Inc (SVHFI) were embroiled in
several civil cases, but they settled amicably
and executed a Compromise Agreement.
- The agreement stipulated that SVHFI should
pay Santos: P1.5mill upon execution of the
agreement; and P13mill, in 1 lump sum or in
installments, within 2 years from execution. If
SVHFI does not pay within 2 years, the balance
shall be paid from its real properties. In return,
Santos shall withdraw several civil cases against
SVHFI, which he did
- The agreement was executed on Oct. 26,
1990 and approved by the RTC on Sept. 30,
1991.
- On Oct. 28, 1992, Santos sent a letter
inquiring when the P13mill can be paid. There
was no reply.
- On Mar 10, 1993, the Sheriff levied SVHFI's
real properties pursuant to the RTC's grant of
the writ of execution of the compromise
agreement, which Santos prayed for. The real
properties were auctioned on Nov 22 1994 and
June 2, 1995, and Riverland, Inc won.
- Santos and Riverland, Inc prayed that SVHFI
should pay legal interest on the obligation
because of the delay.
- SVHFI argues that there was no cause of
action because it had already fully paid its
obligation and that the alleged delay in the
payment was due to its valid exercise of its
rights to protect its interests.
- TC sided with SVHFI, ordering Santos and
Riverland to pay attorney's fees and exemplary
damages. CA reversed, ordering SVHFI to pay
P13mill + legal interest of 12% per annum from
the date of execution.
Obligations and Contracts
Issue/s:
WON Santos and Riverland, Inc are entitled to
legal interest because of the delay
Ruling:
S VHFI is liable to pay for legal interest for the
delay.
Ratio:
-Art. 1169 CC provides that those obliged to
deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially
demands from them the fulfillment of the
obligation. Delay, as used in this article, is
synonymous with default or mora which means
delay in the fulfillment of obligations. It is the
non-fulfillment of the obligation with respect to
time.
- There are 3 requisites for the debtor to be in
default: 1) the obligation be demandable and
already liquidated; 2) the debtor delays the
performance; and 3) the creditor requires the
performance judicially or extrajudicially.
- 1st Requisite: The obligation was already
demandable because the 2-year period had
already lapsed (Executed on Oct 26, 1990, Due
on Oct 26, 1992). The obligation is already
liquidated because the debtor knows precisely
how much he should pay and when he should
pay it.
- 2nd Requisite: SVHFI also delayed the
performance of the obligation because it only
settled its obligation on Feb. 8, 1995.
Moreover, it also filed several motions and
elevated several adverse resolutions to the
appellate court to hinder the execution of the
final and executory judgement, thus delaying
further the fulfillment of its obligation.
- 3rd Requisite: Santos required the
extrajudicial performance of the obligation by
sending the letter on Oct. 28, 1992. Therefore,
SVHFI is liable for damages in the delay of the
performance of its obligation, pursuant to Art
1170 CC, which provides that those who in the
performance of their obligations are guilty of
fraud, negligence, or delay, and those who in
any manner contravene the tenor thereof, are
liable for damages.
28 291
 Vasquez v. Ayala
G.R. No. 149734
Nov. 19, 2004
Tinga, J.
Jocs Dilag
Keywords: Dispute on completion of Ayala
Alabang lots
Facts:
- On April 1981 Sps. Vasquez and Ayala Corp.
entered into a MOA for the latter to acquire all
of the formers shares in Conduit Development
Inc., which owns a 49.9 hectare property in
Ayala Alabang. This property was being
developed by GP Construction and Development
Corp for Conduit
- The MOA stated that:
Ayala was to develop the whole area as a
firstclass subdivision, with its Phase 1 to
be completed in 3 years
The spouses will retain a 18,736 sqm.
area with a firstoption to purchase 4
developed adjacent lots at the prevailing
price at the time. (The development plan
mentioned is not by Conduit but by Ayala,
which was still pending during the MOA
signing.)
Sellers would disclose any liability the
property may have (Inclusion of the
Audited Financial Statements in the
documents handed over)
Buyer would be responsible for all
liabilities of Conduits contractor GP and
the advances made by Dr. Vasquez
Conduit has no other liabilities whether
accrued, absolute, contingent or
otherwise
- After the MOA was executed, Mr. del Rosario
of Lancer General Builder Corporation, the
subcontractor of GP, sent a letter to Ayala,
claiming 1.5M+ (Both Lancer and GP filed suits
in order to enjoin Ayala but the latter entered
into a settlement to dismiss the petitions -
19821987)
- The spouses sent Reminder letters to
Ayala within the first 3 years but no
Obligations and Contracts
Demand Letter was sent to Ayala by April
1984, when the 3 year period will end
- The whole project was completed in 1990,
when Ayala offered the lots to the spouses
but the latter wanted the lots to be priced at
1984 market prices.
Issue/s:
WON there was default/delay in the
fulfillment of the obligation by Ayala to the
Vasquez spouses as stipulated in the MOA
(promise to offer the lots after 3 years from
signing)
Ruling:
No, as all of the requisites for mora solvendi
were not present in the case.
Ratio:
- Requisites for mora solvendi: 1) the obligation
be demandable and already liquidated; 2) the
debtor delays performance; and 3) the Creditor
requires the performance judicially or
extrajudicially.
- Demandable and Liquidated:Under Art. 1193 of
the Civil Code, obligations for whose fulfillment
a day certain has been fixed shall be
demandable only when that day comes. In the
present case, there was no day certain fixed in
the MOA in the development of the subject lots.
The period only covered the development of the
1st phase, which did not include the subject lots.
Therefore, the petitioners cannot demand the
performance of the same without having asked
the courts to fix the period in accordance with
Art. 1197
- Demand by Petitioner: Assuming that the
subject lots were fixed to be delivered after 3
years, demand from the petitioners were still
not made in order to say that Ayala defaulted.
The letters that the spouses and their heirs sent
to Ayala did not constitute a demand as these
did not categorically demand the specific
performance but only articulated their desire to
exercise their option.
29 291
 Abella v. Francisco
G.R. No. L-32336
Dec. 20, 1930
Avancea, CJ.
Diane Dolot
Keywords: Seller considered contract rescinded
upon failure of buyer to pay upon period set
Facts:
- Guillermo Francisco purchased lots from the
government on installment but was in arrears
on payments.
- Hence, on Oct. 31, 1928, he signed a
document stating that he received P500 from
Julio Abella for an area of about 221 hectares
(P100/hectare), the balance being due
on/before Dec. 15, 1928, extendible up to 15
days after. Abella also paid P415.31 in
November upon demand from Francisco.
- On Dec. 27, 1928, defendant, who was in
Cebu, gave a power of attorney to Roman
Mabanta and instructed him to inform the
plaintiff that upon failure of paying the
remainder of the selling price, the option
would be considered cancelled and the
amount of P915.31 would be returned to
Abella.
- Mabanta notified the plaintiff on Jan. 3, 1929
that he was willing to execute the proper deed
of sale upon payment of the balance due.
Plaintiff asked for a few days time but
Mabanta, following instructions given to him
by the defendant only gave him until Jan. 5.
- Plaintiff failed to pay remaining balance on
Jan. 5 but attempted to do so on Jan. 9.
Mabanta refused to accept it and instead
returned by check the sum of P915.31.
- Abella brought this action to compel the
defendant to execute the deed of sale of the
lots in question upon receipt of the balance of
the price.
- Lower court absolved the defendant.
Issue/s:
WON Francisco may rescind the contract in
view of the delay in payment of Abella?
Obligations and Contracts
Ruling:
Yes he may rescind it. Judgment appealed from
is affirmed.
Ratio:
- The trial court considered that the contract in
question was an option for the purchase of the
lots; thus, it ruled that in an agreement of this
nature the period is deemed essential.
- The opinion of the court is divided upon the
question of whether the agreement was an
option or a sale, but even supposing it was a
sale, the court holds that time was an essential
element in the transaction. The defendant
wanted to sell those lots to the plaintiff in
order to pay off certain obligations which fell
due in the month of December, 1928.
- The time fixed for the payment of the price
was therefore essential for the defendant, and
this view is borne out by his letter to his
representative Mabanta instructing him to
consider the contract rescinded if the price
was not completed in time.
- In accordance with Art. 1124 of the Civil
Code, the defendant is entitled to resolve the
contract for failure to pay the price within the
time specified.
Notes:
- Art. 1124 is the equivalent of Art. 1191 in the
NCC.
30 291
 Dela Cruz v. Legaspi & Samperoy
G.R. No. L-8024
Nov. 29, 1955
Bengzon, J.
Julie Enad
Keywords: Lack of consideration not lack of
payment voids contract
Facts:
- Dela Cruz sued Legaspi and his wife, to
compel delivery of the parcel of land they sold
to him in December 1949, and for refusing to
accept his payment of P450 as purchase price
for the said land.
- The defendants retort that although there is a
sale and price, Legaspi failed and refused to
pay the defendants the amount right after the
execution of the document of sale, which
Legaspi and the couple agreed upon.
- The defendants assert that for lack of
consideration and for deceit, the document of
sale should be annulled.
- CFI ruled in favour of plaintiff, ordering
defendants to accept the purchase price and to
deliver possession of the land to plaintiff.
Defendants appealed.
pursuant to Art. 1503 (3) of the CC, or to
demand rescission in court. Such failure did
not ipso facto resolve the contract, there being
no stipulation to that effect having been
alleged.
- But even if the contract expressly provided
for automatic rescission upon failure to pay
the price, the trial judge could still allow Dela
Cruz to enforce the contract, because the
defendants had not made a previous demand
on him, by suit or notarial act.
- In the sale of real property, even though it
may have been stipulated that in default of the
price within the time agreed upon, the
resolution of the contract shall take place ipso
facto, the vendee may pay even after the
expiration of the period, at any time before
demand has been made upon him either by
suit or by notarial act. After such demand has
been made the judge cannot grant him further
time. (Art. 1504 Civil Code.).

Issue/s:
WON the contract became void for lack of
consideration

Ruling:
The appealed judgment is affirmed.

Ratio:
- No. When the document was signed, it is
undisputable that the cause or consideration
existed, the purchase price of P450, which is
specifically stated in the document and
agreement.
- Subsequent non-payment of the price at the
time agreed upon DID NOT convert the
contract into one without cause or
consideration: a nudum pactum. The situation
was rather one in which there is failure to pay
the consideration, and the defendants right
was to demand legal interest for the delay,

Obligations and Contracts 31 291

 Vda. de Villaruel v. Manila Motor Co.
G.R. No. L-10394
Dec. 13, 1958
Reyes, J.B.L., J.
Apo Espaola
Keywords: Japanese military occupation causes
lease dispute
Facts:
- Plaintiffs Villaruel and defendant Manila
Motor Co. entered into a contract in which the
former would lease to the latter three
premises: one for an automobile showroom,
offices and storeroom; another for an
automobile repair shop; and a 5- bedroom
house for the Branch Manager.
- The term of the lease was 5 years, with the
option to renew for an additional 5 years.
- The premises were conveyed to the lessee in
1940, and were enjoyed by the lessee until the
Japanese military occupied Bacolod in
1941.The enemy forces ousted the lessee and
used the properties as part of their quarters
from 1942 to
1945. No payments for rentals were made by
the lessee during that time.
- Upon Bacolods liberation in 1945, American
forces occupied the buildings, paying rent to
the plaintiff.
- After the Americans left, Manila Motor Co.
decided to renew the contract for 5 years, and
the parties agreed that the occupancy by the
US Army would not be counted as part of the
said term.
- The lessors however demanded payment
from the lessees for the time that the Japanese
had occupied the premises. The lessors were
refused, prompting them to demand that the
contract be rescinded.
- Since the parties could not come to a
settlement, they instituted a case with the CFI
of Negros Occidental.
- During the pendency of the case, however, a
fire completely razed the properties. The
Villaruels thus demanded reimbursement from
Manila Motor Co.
Obligations and Contracts
- The court below held that the lessee was not
exempted from paying the rent, because the
Japanese armys occupancy was a mere act of
trespass.
Issue/s:
WON Manila Motor Co. should be made to pay
rentals during the time the premises were
occupied by the Japanese army
Ruling:
No. They are not liable for such rentals.
Ratio:
- The occupation by the Japanese army was
not a mere act of trespass, but a dispossession
recognized by international and domestic law,
for which the lessors Villaruel were liable.
- A lessor does not usually answer for a mere
act of trespass. However, in occupying the
premises, the Japanese had not merely
trespassed, but had exercised the right to use
buildings as shelter for troops, the sick, the
wounded, etc.a right recognized by
international and domestic law as part of the
strict necessities of war.
- Liability thus falls upon the lessors Villaruel,
because the lessee had been denied the
peaceful use and enjoyment of the premises.
The lessees obligation to pay rentals thus also
ceased during the period.
- Thus, the lessors refusal to accept rentals
was without justification, constituting mora
accipiendi.
- After the liberation, the lessors agreed to
renew the contract for another 5 years without
insisting on the payment of rentals during the
Japanese occupancy. This was deemed a verbal
waiver of their right to the rentals. Since the
lessee was exempted from the obligation to
pay rentals, the lessors refusal was without
just cause.
- This therefore placed the lessors in default, or
mora accipiendi, which is defined as default
when the debtor tenders payment or
performance, but the creditor refuses to accept
it without just cause (via Tolentino).
32 291
 - Furthermore, the lessors continued demand
for the rentals was contrary to moratorium
order EO No. 32.
- By refusing to accept the rentals, the lessors
Villaruel had been placed in default, so they
have to bear all supervening risks of injury or
destruction to the premises. Thus, they must
shoulder the accidental loss of the premises
due to the fire.

Obligations and Contracts 33 291

 Central Bank v. CA
G.R. No. L-45710
Oct. 3, 1985
Makasiar, CJ.
Pia Falcone
Keywords: Bank has liquidity problems and
cant provide full loan
Facts:
- On April 1965, Island Savings Bank (ISB)
approved the P80,000 loan application of
Sulpicio M. Tolentino, who, as a security for
the loan, executed a real estate mortgage over
his 100-heactare land in Agusan
- Almost a month later, the Bank made a
partial release of P17,000, to which Sulpicio
and his wife Edita signed a promissory note for
P17,000, at 12% interest, payable within 3
years.
- The remaining balance of P63,000 wasnt
released as the Bank had no more funds
available.
- On August 1965, the Monetary Board of the
Central Bank issued Resolution No. 1049 after
finding out that Island Savings Bank was
suffering from liquidity problems. This
resolution prohibited the bank from making
new loans and investments.
- Three years later, on June 1968, the
Monetary Board issued another resolution,
Resolution No. 967, after finding out that
Island Savings Bank failed to put up the
required capital to restore its solvency. ISB was
prohibited from doing all businesses in the
Philippines and the Acting Superintendent of
Banks was instructed to take charge of their
assets.
- On August 1968, in view of Tolentinos non-
payment of the P17,000 that was covered by
the promissory note, ISB filed an application
for the extra-judicial foreclosure of his real-
estate mortgage.
- This prompted Tolentino to file a petition
with the Court of First Instance for injunction,
specific performance or rescission and
damages with preliminary injunction, alleging
that since ISB failed to deliver the remaining
Obligations and Contracts
P63,000 of his loan, hes entitled to specific
performance by ordering ISB to deliver the
P63,000 with 12% interest, and, if it cannot be
delivered, to rescind the real estate mortgage.
Issue/s:
1. WON Tolentinos petition for specific
performance will prosper
2. WON he is liable to pay the P17,000 debt
covered by the promissory note
3. If the liability exists, WON his real estate
mortgage can be foreclosed to satisfy that said
amount
Ruling:
The Court ordered Tolentino to pay the
petitioners the sum of P17.000.00 plus
interests, and in the event he fails to pay, his
real estate mortgage covering 21.25 hectares
shall be foreclosed. Meanwhile, the remaining
78.75 hectares of the property is declared
unenforceable and released to Tolentino.
Ratio:
1. No, rescission is the only remedy left.
- When Tolentino entered into a loan
agreement with Island Savings Bank, they both
undertook reciprocal obligations: him to pay
P80,000 and the bank to furnish that loan,
starting from April 1965.
- Since the Central Bank Monetary Board
prohibited ISB from doing further businesses, it
was impossible for them to supply the balance
of the said loan, and since they were the one in
default in fulfilling their obligation, Tolentino,
under Art. 1191 may choose between specific
performance or rescission with damages.
However, due to the banks prohibition from
doing further businesses, specific performance
cannot be granted.
- This remedy of rescission only applies to the
P63,000 balance, since the partial release of
the P17,000 loan is already considered as a
compliance of their reciprocal obligation.
2. Yes, he is still liable to pay his P17,000 debt.
In fact, his failure to pay the overdue
amortizations under the promissory note
34 291
 makes him partly in default, causing him NOT
to be entitled to rescission.
- The right to rescind the promissory note
belongs to the aggrieved party, which, in this
case, is the Island Savings Bank.
- If he hadnt signed a promissory note stating
that hell pay within 3 years, he would have
still be entitled to ask for rescission of the
entire loan, as there was no date for him to
perform his reciprocal obligation to pay.
- Since it has ended up with both parties being
in default, both are liable for damages. Art.
1192 provides: In case both parties have
committed a breach of their reciprocal
obligations, the liability of the first infractor
shall be equitably tempered by the courts.
- The court held that the ISBs liability for
damages in not furnishing the entire loan is
offset by Tolentinos liability for damages, in
the form of penalties, surcharges, and his
overdue debt of P17,000, without interest.

3. No, his real estate mortgage cannot be

entirely foreclosed to satisfy his P17,000 debt.
Since the bank failed to furnish P63,000, his
real estate mortgage covering 100 hectares is
unenforceable to such extent, as P63,000 is
78.75% of P80,000. The remaining 21.25
hectares (100 hectares minus 78.75 hectares)
subsists as a more sufficient security for his
P17,000 debt.

Notes:
The rule of indivisibility of real estate mortgage
provided for by Art. 2089 is inapplicable
because it presupposes several heirs of the
debtor or creditor which doesnt obtain in this
case.

Obligations and Contracts 35 291

 Chaves v. Gonzales
G.R. No. L-27454
Apr. 30, 1970
Reyes, J.B.L., J.
Christopher Hermosisima
Keywords: Busted typewriter
Facts:
- Plaintiff delivered to defendant, a typewriter
repairer, a portable typewriter for routine
cleaning and servicing. Service wasn't finished
on time, with defendant merely giving
assurances despite repeated reminders made
by plaintiff
- Defendant asked from plaintiff P6 for
purchase of spare parts
- Upon request of plaintiff, defendant returned
said typewriter in shambles with the interior
cover and some parts missing. On Oct, 29,
plaintiff sent a letter to defendant formally
demanding the return of missing parts, the
interior cover and the P6. Defendant returned
some of the parts, interior cover and P6
- Plaintiff had his typewriter repaired by
another person, costing him a total of P89.95
- The following year, plaintiff commenced
action in CFI Manila, demanding payment of
P90 as actual and compensatory damages,
P100 for temperate damages, P500 for moral
damages and P500 as attorney's fees from
defendant. RTC ordered defendant to pay
plaintiff P31 (for missing parts)
- Plaintiff argues that the whole cost of labor
and materials that went into the repair should
be awarded. (Art. 1167)
- Defendant contends that the contract with
plaintiff did not contain a period., and thus the
plaintiff should have first filed a petition for
the court to fix period. (Art. 1197)
Issue/s:
1. WON defendant is liable for the whole cost
of repair (material + labor)
2. WON plaintiff may claim moral and
temperate damages
Obligations and Contracts
Ruling:
Judgment is modified, ordering defendant to
pay for labor + missing parts (P89.85).
Ratio:
1. It can be inferred that there was a perfected
contract between the parties for cleaning and
servicing a typewriter where it was intended
that the defendant finish it at some future
time though not specified.
- Though it wasn't specified, such time had
already passed without work being
accomplished since defendant returned said
typewriter in shambles. Since there was
already a breach of contract from defendant,
there is no point for the plaintiff to ask the
court for a period for the performance of the
contract. Doing so will be a mere formality and
would serve no purpose
- Further, defendant contravened the tenor of
his obligation because not only did he not
repair the typewriter (which could only lead to
the 1st paragraph of Art. 1167) he also
returned it in shambles. Thus, he is liable
under Art. 1167 for the cost of executing the
obligation in a proper manner (Labor P58.75 +
Missing parts P31.10= P89.85)
2. As for moral and temperate damages, these
were not alleged in the complaint. No findings
of fact were made on the claims for damages.
Thus, appellant is bound by judgment of the
trial court regarding those issues since he
resorted directly to the SC on questions of law.
36 291
 Telefast v. Castro
G.R. No. 73867
Feb. 29, 1988
Padilla, J.
Paolo Macariola
Keywords: Unsent telegram about mothers
death
Facts:
- Consolacion, wife of plaintiff Ignacio Castro
Sr. and mother of other plaintiffs passed away
in Pangasinan while plaintiff-husband was
residing in the Indiana, USA.
- Plaintiff- daughter Sofia, who was then
vacationing in the Philippines, sent a telegram
to his father. The telegram was accepted by
Telefast Communications (defendant) after
payment of fees amounting to P31.92.
- The telegram never reached the addressee.
The deceased was interred with only her
daughter Sofia in attendance. Neither the
husband nor any of the children of the
deceased, all residing in the US, returned for
the burial.
- Upon returning to the US, she discovered that
the telegram she sent never reached his
father.
- She, along with plaintiff-husband and other
relatives brought action against defendant for
damages arising from breach of contract.
- Defendant argued that it was unable to
transmit the telegram because of "technical
and atmospheric factors beyond its control."
However, no evidence appears on record that
defendant ever made any attempt to advise
the plaintiff as to why it could not transmit the
telegram.
- CFI Pangasinan ordered defendant to pay
plaintiffs compensatory, moral and exemplary
damages.
- The IAC removed moral damages of 1,000 to
each plaintiff as well as eliminated
compensatory damages.
- Defendants appealed, saying that the award
for moral damages should be eliminated as the
negligent act was not motivated by fraud,
malice or recklessness
Obligations and Contracts
Issue/s:
WON defendant is liable for moral damages
Ruling:
Yes. Petitioner was guilty of contravening its
obligation to said private respondent and is
thus liable for damages.
Ratio:
- Art. 1170s of the CC provides that those
who in any manner contravene the tenor
thereof covers any act which impairs the
fulfilment of the obligation or every kind of
defective performance. Thus, failure to send
the telegram, despite Sofias payment of the
requisite fees, gives rise to liability
for damages.
- The plaintiff-daughter and defendant entered
into a contract, for a fee, to send the message
by telegram. The defendant did not do its duty,
despite performance by said private
respondent of her obligation by paying the
required charges. Defendant was therefore
guilty of contravening its obligation to said
plaintiff and is thus liable for damages
- Art. 2217 (provision for moral damages) is
also applicable, as the anguish experienced by
the plaintiffs in their failure to pay his/their
wife/mother their last respects was precisely
the result of the defendants act or omission.
- Sofia is also entitled to the 16,000 in
compensatory damages representing the
expenses she incurred when she came to the
Phil. from the US to testify. Had defendant not
been remiss in performing its obligation, there
would have been no need for this suit or for
the plaintiff-daughters testimony.
Notes:
Contravention of tenor is any illicit act which
impairs the strict and faithful fulfilment of the
obligation, or any kind of defective
performance.
37 291
 Arrieta v. NARIC
G.R. No. L-15645
Jan. 31, 1964
Regala, J.
Carlos Marin
Keywords: Burmese rice
Facts:
- On May 19, 1952, NARIC conducted a public
bidding for the procurement of 20,000 metric
tons of Burmese rice. Paz Arrieta, with the
lowest bid of $203.00 per metric ton was
awarded the contract with the NARIC.
- The latter committed to paying the plaintiff
through an irrevocable, confirmed and
assignable letter of credit in U.S. currency.
However, upon its filing for said letter of
credit a month with PNB it became
apparent that the NARIC did not have enough
credits to cover the agreed- upon amount.
- Taking this into consideration, the bank
agreed to issue the letter of credit only upon
the deposit of half of the total sum requested
by the NARIC.
- At this point, Arrieta informed the defendant
that she needed the letter of credit
immediately because she had made an initial
payment of 5% that was subject to forfeiture if
no such letter was presented before August 4,
1952.
- The NARIC was unable to meet this
requirement and the deposit made by Arrieta
was consequently confiscated.
- When it became clear that re-acquiring the
deposit made was not possible, Arrieta offered
to provide the NARIC with Thai rice in the same
quantity instead.
- The NARIC rejected the offer and later
contended that it amounted to a waiver of
rights with regard to the original contract.
Issue/s:
1. WON the NARIC is liable for its failure to
perform its contractual obligations with
respect to Art. 1170
Obligations and Contracts
2. WON the plaintiffs subsequent offer of
providing Thai rice instead amounted to a
waiver
Ruling:
The NARIC is liable under Art. 1170 and the
plaintiffs second offer did not waive her rights
to the first contract.
Ratio:
1. The Court discerned that the only reason
that the contract did not push through was
because the NARIC failed to provide the
plaintiff with the letter of credit necessary to
further her transaction with the rice supplier.
As such, the responsibility with regard to the
non-fulfillment of the contract was solely
the NARICs.
- The defendant- appellant had no business
entering into a contract whose terms it knew it
could not satisfy (in this case, having sufficient
credit to sustain the purchase of rice through
Arrieta).
- In addition, the Court said that the amount
owed the plaintiff for loss of profit and
damages incurred ought to be expressed in
Philippines peso; $286,000.00 was owed the
plaintiff.
2. The Court also ruled that the plaintiffs offer
to provide Thai rice instead did not amount to
a waiver of rights because waivers are not
presumed. They must be clearly and
convincingly shown, either by express
stipulation or acts admitting no other
reasonable explanation.
- These conditions were not met in the case.
38 291
 Magat v. Medialdea and Guerrero
G.R. No. L-37120
Apr. 20, 1983
Escolin, J.
Michael Trance Nuez
Keywords: Taxicab radio transceivers
Facts:
- Defendant Medialdea acquired a contract in
Subic to operate a fleet of taxicabs.
- Since he needed to import taxi meters and
radio transceivers, he entered into a contract
with plaintiff Magat to import the said devices
through his agent Isidro Agilada.
- Another contract of sale of the devices were
made between the two parties, as shown by a
conformity in which the devices will be
delivered 60-90 days after a radio frequency has
been assigned by the authorities.
- Plaintiff, however, contacted the Japanese
manufacturer saying that the contract has been
perfected.
- Another letter to the plaintiff was sent saying
that the goods should be delivered as soon as a
letter of credit has been sent to the foreign
supplier, a common practice. Defendant,
however, has failed to open the letter of credit.
- Plaintiff found out that the defendant has
been operating the taxicabs without the radio
transceivers. When the authorities asked
defendant to comply, he blamed the plaintiff
for the delay.
- Thus, plaintiff now sues the defendant for
damages, since he believed that the defendant
entered into a contract without the intention of
fulfilling it.
- Defendant filed a motion to dismiss, citing a
lack of cause of action, which was granted.
Ratio:
- The court found that there is a cause of action
based on the presence of its elements: 1)
existence of a legal right; 2) correlative duty;
and 3) act or omission in violation of that right.
- Petitioner has fulfilled his part of the bargain,
but the defendant has failed to do his, by failing
to open the letter of credit, which led to the
loss of plaintiffs profits and moral and
exemplary damages.
- As businessmen, the two men entered into the
contract with the expectation to reap profits.
The loss of profit becomes apparent at the
moment of breach, and is thus recoverable
under the law.
- The Court also cited Art. 1170. By in any
manner contravene the tenor thereof, it
includes any illicit act or omission which impairs
the strict and faithful fulfilment of the
obligation and every kind of defective
performance.
- The obligor is liable not only for the loss the
plaintiff suffered, but also the profits that the
plaintiff failed to gain.

Issue/s:
WON Magat had a cause of action and he was
not merely anticipating the damages

Ruling:
There is a cause of action. Thus the dismissal is
set aside and the case is remanded for further
proceedings.

Obligations and Contracts 39 291

 Chaves v. Gonzales
G.R. No. L-27454
Apr. 30, 1970
Reyes, J.B.L., J.
Christopher Hermosisima
Keywords: Busted typewriter
Facts:
- Plaintiff delivered to defendant, a typewriter
repairer, a portable typewriter for routine
cleaning and servicing. Service wasn't finished
on time, with defendant merely giving
assurances despite repeated reminders made
by plaintiff
- Defendant asked from plaintiff P6 for
purchase of spare parts
- Upon request of plaintiff, defendant returned
said typewriter in shambles with the interior
cover and some parts missing. On Oct, 29,
plaintiff sent a letter to defendant formally
demanding the return of missing parts, the
interior cover and the P6. Defendant returned
some of the parts, interior cover and P6
- Plaintiff had his typewriter repaired by
another person, costing him a total of P89.95
- The following year, plaintiff commenced
action in CFI Manila, demanding payment of
P90 as actual and compensatory damages,
P100 for temperate damages, P500 for moral
damages and P500 as attorney's fees from
defendant. RTC ordered defendant to pay
plaintiff P31 (for missing parts)
- Plaintiff argues that the whole cost of labor
and materials that went into the repair should
be awarded. (Art. 1167)
- Defendant contends that the contract with
plaintiff did not contain a period., and thus the
plaintiff should have first filed a petition for
the court to fix period. (Art. 1197)
Issue/s:
1. WON defendant is liable for the whole cost
of repair (material + labor)
2. WON plaintiff may claim moral and
temperate damages
Obligations and Contracts
Ruling:
Judgment is modified, ordering defendant to
pay for labor + missing parts (P89.85).
Ratio:
1. It can be inferred that there was a perfected
contract between the parties for cleaning and
servicing a typewriter where it was intended
that the defendant finish it at some future
time though not specified.
- Though it wasn't specified, such time had
already passed without work being
accomplished since defendant returned said
typewriter in shambles. Since there was
already a breach of contract from defendant,
there is no point for the plaintiff to ask the
court for a period for the performance of the
contract. Doing so will be a mere formality and
would serve no purpose
- Further, defendant contravened the tenor of
his obligation because not only did he not
repair the typewriter (which could only lead to
the 1st paragraph of Art. 1167) he also
returned it in shambles. Thus, he is liable
under Art. 1167 for the cost of executing the
obligation in a proper manner (Labor P58.75 +
Missing parts P31.10= P89.85)
2. As for moral and temperate damages, these
were not alleged in the complaint. No findings
of fact were made on the claims for damages.
Thus, appellant is bound by judgment of the
trial court regarding those issues since he
resorted directly to the SC on questions of law.
40 291
 Tanguilig v. CA
G.R. No. 117190
Jan. 2, 1997
Bellosillo, J.
Justin Ordoyo
Keywords: Windmill system
Facts:
- In April 1987, Jacinto Tanguilig (petitioner) of
JMT Engineering and General Merchandising
proposed to construct a windmill system for
Vicente Herce (respondent) for a
consideration of PHP 60k with one-year
guarantee from date of completion and
acceptance.
- Respondent paid PHP 30k as down payment
and PHP 15k as instalment, leaving a balance of
PHP 15k.
- In March 1988, petitioner filed a complaint
to collect the amount of PHP 15k which
respondent refuses and fails to pay.
- Respondent contends that the PHP 15k was
already paid to San Pedro General
Merchandising Inc. (SPGMI) which constructed
a deep well to which the windmill system was
to be connected. He claimed that since the
deep well formed part of the system, Tanguilig
should credit the amount to Herces account.
Moreover, assuming that Herce owed Tanguilig,
this should be offset by defects in the windmill
system which caused the structure to collapse
after it was hit by strong wind.
- Petitioner replied that the deep well was not
included in the agreement. It claimed that the
windmill system was delivered in good and
working condition, and that the respondent
accepted it without protest. Moreover, since
the collapse was attributable to a typhoon, a
force majeure, he believed he is relieved from
liability.
- The trial court ruled that the deep well was
not part of the windmill project as evidenced by
the proposal letters .It said that if such was the
intention of the parties, it should have been
included. With respect to the repair of the
windmill, there was no clear and convincing
Obligations and Contracts
proof that it fell down due to defect of
construction.
- The CA reversed the trial courts ruling
reversed, saying that the construction of the
deep well was part of the windmill system.
Credence was given to the testimony of
Guillermo Pili of SPGMI that Tanguilig told him
that the deep well construction cost would be
deducted from the contract price of PHP 60k.
Moreover, Tanguiligs claim of force majeure is
rejected. Petitioner is ordered to reconstruct
the windmill as per the one-year guarantee.
Issue/s:
1. WON the agreement to construct the
windmill included the installation of a deep well
2. WON the petitioner is under obligation to
reconstruct the collapsed windmill
Ruling:
Herce is directed to pay Tanguilig the balance
of PHP 15k with interest, and Tanguilig is
ordered to reconstruct the defective windmill in
accordance with the guarantee
Ratio:
1. No. Although the words deep well and
deep well pump appear in the proposal, they
are preceded by the prepositions for and
suitable for which were meant only to convey
the idea that the proposed windmill would be
appropriate for a deep well pump of a specific
size. If the real intent was to include the deep
well, and or with would have been used.
- In case of doubt in the interpretation of
contracts, contemporaneous and subsequent
acts shall be principally considered. An
examination of such acts of respondent as well
as the attendant circumstances does not
persuade the court to uphold respondent.
- Herce insists that Tanguilig verbally
agreed that the contract price covered the
installation of a deep well and that since
petitioner didnt have the capacity to do so,
SPGMI was hired to do the work, the cost of
which was to be deducted from the contract
price. Such agreement is unsubstantiated since
no evidence of such agreement was presented
to the court. Moreover, it was Herce who paid
41 291
 PHP 15k to Pili, indicating that the contract for
the deep well was not part of the windmill
project but a separate agreement between
Herce and Pili.
- Neither can Herce claim that Pili accepted his
payment on behalf of Tanguilig as per NCC,
Art.1240 since it does not appear that Pili was
authorized to do so.
- Art. 1236 and 1237 dont apply because no
creditor-debtor relationship between
Tanguilig and Pili has been established
regarding the deep well construction.

2. Yes. In order for a party to claim exemption

from liability by reason of fortuitous event, the
event should be the sole and proximate cause
of the loss or destruction of the object of the
contract.
- According to Nakpil vs. CA, four requisites
must concur: 1) the cause of the breach must
be independent of the will of the debtor; 2) the
event must be unforeseeable or unavoidable; 3)
the event must such as to render it impossible
for the debtor to fulfill his obligation in a normal
manner; and 4) the debtor must be free from
any participation in or aggravation of the injury
to the creditor.
- Petitioner failed to show that the collapse of
the windmill was due solely to a fortuitous
event. The evidence does not disclose that
there was actually a typhoon on the day the
windmill collapsed. Petitioner merely stated
that there was a "strong wind." But a strong
wind in this case cannot be fortuitous
unforeseeable nor unavoidable. On the contrary,
a strong wind should be present in places where
windmills are constructed; otherwise the
windmills will not turn.
- Petitioners argument that respondent was
already in default and hence should bear his
own loss is untenable. Respondent cannot be
said to have incurred delay. Instead, it is
petitioner who should bear the expenses for the
reconstruction of the windmill.

Obligations and Contracts 42 291

 Khe Hong Cheng v. CA
G.R. No. 144169
Mar. 28, 2001
Kapunan, J.
Justin Ordoyo
Keywords: Insurance company runs after
Cheng after ship containing copra sank;
fraudulent donation
Facts:
- Khe Hong Cheng is the owner of Butuan
Shipping Lines.
- Phil. Agricultural Trading Corp. shipped
onboard M/V Prince Eric, a vessel owned by Khe
Hong Cheng, 3400 bags of copra from Masbate
to Zamboanga. The said shipment of copra was
covered by a marine insurance American Home
Insurance (Philam). However, somewhere in
Negros, the ship sank resulting to total loss of
the shipment.
- Because of the loss, American Home Insurance
paid the amount of 354,000 to the consignee,
Phil. Agricultural Trading Corporation.
- Later, American Home, having been
subrogated into the rights of the consignee,
filed in the RTC of Makati an action for recovery
of money against Khe Hong Cheng.
- Pending the case, or on Dec. 20, 1989, Khe
Hong Cheng executed a deed of donations of
parcels of land in favor of his children Sandra
Joy and Ray Stevens and new TCTs were issued
in their names.
- The trial court rendered a favourable
judgement to Philam and ordered Cheng to pay
the amount of 354k representing the amount
paid by Philam to Phil. Agri. After the decision
became final, a writ of execution was issued
and despite earnest efforts of the sheriff he
could not find any property under the name of
Butuan Shipping Lines or Cheng.
- The sheriff with Philams counsel went to
Butuan and thereon discovered that Cheng had
no more property left and that he had conveyed
the subject properties to his children.
- Thus, Philam filed for a rescission of the deeds
of donation and for the nullification of the TCTs
in the name of petitioners kids.
Obligations and Contracts
- Petitioner contends that Philams action
already prescribed and that the registration of
the TCTs on Dec. 1989 in the name of his
children constituted a constructive notice to
Philam, and that the action of the latter was
filed only on Feb 1997, way beyond 4 years.
Issue/s:
WON the action for rescission has prescribed
and when did the 4 year prescriptive period to
file an action commenced to run
Ruling:
The petition is denied. The action has not yet
prescribed.
Ratio:
- As Art. 1389 provides, an action of rescission
must be commenced w/in 4 years. Since the
provision is silent as to when the prescriptive
period shall commence, Art. 1150 is instructive:
The time for prescription for all kinds of actions,
when there is no special provision which ordains
otherwise, shall be counted from the day they
may be brought.
- The Court enunciated the principle that it is
the legal possibility of bringing the action which
determines the starting point for the
computation of the prescriptive period for the
action.
- An action to rescind or an accion pauliana
must be of last resort, availed of only after all
other legal remedies have been exhausted and
have been proven futile. For an accion pauliana
to accrue, the following requisites must concur:
1) that the plaintiff asking for rescission has a
credit prior to, the alienation, although
demandable later; 2) that the debtor has made
a subsequent contract conveying a patrimonial
benefit to a third person; 3) that the creditor
has no other legal remedy to satisfy his claim,
but would benefit by rescission of the
conveyance to the third person; 4) that the act
being impugned is fraudulent; 5) that the third
person who received the property conveyed, if
by onerous title, has been an accomplice in the
fraud.
43 291
 - Petitioners contention that the cause of him, its action for rescission of the subject
action of respondent Philam against them for deeds clearly had not yet prescribed.
the rescission of the deeds of donation accrued
as early as December 27, 1989, when petitioner
Khe Hong Cheng registered the subject
conveyances with the Register of Deeds is
unmeritorious. Even if respondent Philam was
aware, as of December 27, 1989, that petitioner
Khe Hong Cheng had executed the deeds of
donation in favor of his children, the complaint
against Butuan Shipping Lines and/or
petitioner Khe Hong Cheng was still pending
before the trial court. Thus, respondent Philam
had no inkling, at the time, that the trial courts
judgment would be in its favor and further,
that such judgment would not be satisfied due
to the deeds of donation executed by petitioner
Khe Hong Cheng during the pendency of the
case. Had respondent Philam filed his
complaint on December 27, 1989, such
complaint would have been dismissed for being
premature. Not only were all other legal
remedies for the enforcement of respondent
Philam's claims not yet exhausted at the time
the needs of donation were executed and
registered, respondent Philam would also not
have been able to prove then that petitioner
Khe Hong Cheng had no more property other
than those covered by the subject deeds to
satisfy a favorable judgment by the trial court.
- As mentioned earlier, respondent Philam
only learned about the unlawful conveyances
made by petitioner Khe Hong Cheng in January
1997 when its counsel accompanied the sheriff
to Butuan City to attach the properties of
petitioner Khe Hong Cheng. There
they found that he no longer had any
properties in his name. It was only then that
respondent Philam's action for rescission of the
deeds of donation accrued because then it
could be said that respondent Philam had
exhausted all legal means to satisfy the trial
court's judgment in its favor.
Since respondent Philam filed its complaint for
accion pauliana against petitioners on February
25, 1997, barely a month from its discovery that
petitioner Khe Hong Cheng had no other
property to satisfy the judgment award against

Obligations and Contracts 44 291

 Siguan v. Lim
G.R. No. 134685
Nov. 19, 1999
Davide, Jr., CJ.
Carlos Pagdanganan
Keywords: Creditor seeks to rescind donation
made by debtor to her children
Facts:
- Maria Antonia Siguan filed an accion pauliana
against Rosa Lim and her children to rescind the
deed of donation of lots executed by the
respondent in favor of her children, claiming
that said donation was done in bad faith and in
fraud of her creditors.
- The donation was registered on July 2, 1991,
but it was purportedly executed on August 10,
1989.
- Lims indebtedness was incurred in 1990.
- RTC ordered the rescission of the questioned
deed of donation. CA reversed the decision of
the RTC and dismissed the petitioners accion
pauliana, claiming that two requisites of the
accion were absent. Said requisites are: 1) there
must be a credit existing prior to the
celebration of the contract; and 2) there must
be fraud, or at least the intent to commit fraud
to the prejudice of the creditor seeking
rescission.
Issue/s:
WON deed of donation was done in fraud of
petitioner and therefore, rescissible
Ruling:
No. The petition is dismissed, and the
challenged decision of the CA is affirmed.
Ratio:
- The general rule is that rescission requires the
existence of creditors at the time of the alleged
fraudulent transaction, and must be proved as
one of the bases of judicial pronouncement
setting aside a contract.
- The questioned deed of donation was proven
NOT to be antedated to make it appear that it
was made prior to the credit (In other words, it
Obligations and Contracts
was validly done prior to the accruement of the
debt).
- The deed was a public document,
acknowledged before a notary public, thus the
first two requisites for accion pauliana namely,
that the plaintiff asking for rescission has a
credit prior to alienation and that the debtor
has made a subsequent contract conveying a
patrimonial benefit to a third person were not
met.
- Notarial documents are evidence of the facts
that gave rise to their execution and of their
date.
- Assuming it WAS antedated and that the
petitioner became a creditor prior to the
rescission, her action would still not prosper
because the third requisite for the accion
pauliana, the creditor having no other legal
remedy to satisfy his claim, was also absent.
- The fourth requisite was not present as well,
because petitioner never proved that Lim no
longer had sufficient property to cover her
(Lims) debts existing before the donation was
made. In fact, evidence was disclosed that Lim
had a handful of properties, aside from those
she donated to her children.
- The fact that Lim actually had another creditor
prior to her execution of the deed of donation
cannot be invoked by the petitioner in her
action for rescission of contract because Art.
1384 of the Civil Code provides that rescission
shall only be to the extent necessary to cover
the damages caused. Suarez was considered a
stranger to the petition, hence she could not
benefit from the action brought by petitioner.
45 291
 Nakpil & Sons v. CA
G.R. No. L-47851
Oct. 3, 1986
Paras, J.
Carlos Poblador
Keywords: Earthquake destroys building;
defendants claim no liability because of
fortuitous event
Facts:
- The Philippine Bar Association (PBA) decided
to construct an office building. This construction
was undertaken by the United Construction Inc
(UCI). The plans and specifications for the
building were prepared by Juan F. Nakpil and
Sons (Nakpil).
- On August of 1968, an earthquake hit Manila
and the said building received major damage.
- The PBA then filed an action for recovery of
damages against UCI. They allege that the
collapse was due to defects in the construction.
- UCI then filed a case against Nakpil alleging
the collapse was due to defects in the plans and
specifications.
- The Trial Court ruled in favor of the PBA,
stating that the damages were due to the faulty
construction and plans of UCI and Nakpil.
- In their defense, they say that the damages
were due to the earthquake, which was an act
of God, and therefore they should not be liable.
reasonably to have been expected, could have
been prevented. In this case, the earthquake
was clearly an act of God.
- However, for one to be exempt under this
provision, the following must concur: (a) the
cause of the breach of the obligation must be
independent of the will of the debtor; (b) the
event must be either unforeseeable or
unavoidable; (c) the event must be such as to
render it impossible for the debtor to fulfill his
obligation in a normal manner; and (d) the
debtor must be free from any participation in,
or aggravation of the injury to the creditor.
- Thus, if there is fraud, negligence, delay, or
contravention of tenor as provided for in Art.
1170, liability cannot be escaped.
- In this case, both defendants showed
negligence. UCI was found to have made
substantial deviations from the plans and
specifications. Nakpil was found to have
inadequacies and defects in the plans they
prepared. Also, several buildings in the same
area withstood the earthquake, showing how
badly constructed the building was.

Issue/s:
WON defendants UCI and Nakpil should be
exempt from liability because the earthquake
was an act of God

Ruling:
No, they should be held liable for damages.

Ratio:
- Art. 1174 of the NCC states that no person
shall be responsible for events which could not
be foreseen or which though foreseen, were
inevitable. An act of God has been defined as an
accident, due directly and exclusively to natural
causes without human intervention, which by
no amount of foresight, pains or care,

Obligations and Contracts 46 291

 Republic v. Luzon Stevedoring Co. not be foreseen, or which, though foreseen,
G.R. No. L-21749 were inevitable.
Sept. 29, 1967 - LSCs argument that it took extraordinary
Reyes, J.B.L., J. precaution showed that the possibility of
danger was not only foreseeable but was
Laurie Quiambao actually foreseen, and thus, not caso fortuito.
They knew of the danger and still took the risk.
Keywords: Barge rammed against Nagtahan The fact that the precautions they took were
bailey bridge not enough doesnt exempt them from liability.

Facts: 2. No. The trial Judge has discretion to allow the

- Barge L-1892 owned by Luzon Stevedoring
Corp. was being towed by two tugboats (owned
by the same).
- The barge rammed against one of the wooden
piles of Nagtahan bailey bridge, smashing the
posts and causing the bridge to list. At the time,
the rivers current was swift and the water was
high due to heavy rains.
- The Republic sued the company for the actual
and consequential damages caused (P200,000).
- LSCs defense was that it had taken due
precaution and that the ramming of the barge
was due to force majeure.
- CFI ruled in favor of the Republic
(P192,561,72+legal interest). LSC appealed to
the SC.
Issue/s:
1. WON the collision of LSCs barge with the
supports of the Nagtahan bridge was in
law caused by a fortuitous event of force
majeure
2. WON the court erred in allowing the Republic
to introduce additional evidence of damages
after the said party had rested its case
presentation of further evidence and it is only
when there is a clear showing of abuse of the
same will there be review done by the Court.
- The additional evidence presented by the
Republic were vouchers and papers to support
an item of P1558 spent for the reinforcement of
the panel of the bailey bridge which already
appeared in Exhibit G.
Notes:
Res ipsa loquitur The think speaks for itself;
a rebuttable presumption or inference that the
defendant was negligent, which arises upon
proof that the instrumentality or condition
causing the injury was in the defendant's
exclusive control and that the accident was one
that ordinarily does not occur in the absence of
negligence.

Ruling:
The lower courts decision is affirmed.

Ratio:
1. No. The Court applied the res ipsa loquitur
rule.
- The unusual event of the barge ramming into
the bridge raises a presumption of negligence
on the part of the LSC or its employees manning
the tugboats.
- Caso fortutio/force majeure are events not
foreseeable or avoidable - events that could

Obligations and Contracts 47 291

 Dioquino v. Laureano It is a fortuitous event, thus Dioquino as owner
G.R. No. L-25906 of the car shall bear the damage.
May 28, 1970
Fernando, J. Ratio:
- What happened was clearly unforeseen. It was
Paolo Quilala a fortuitous event resulting in a loss, which
must be borne by the owner of the car.
Keywords: Car windshield broken by stone - An element of reasonableness in the law
thrown at it would be manifestly lacking if, on the
circumstances as thus disclosed, legal
Facts: responsibility could be imputed to an individual
- Attorney Pedro Dioquino, a practicing lawyer in the situation of defendant Laureano. Art.
of Masbate, is the owner of a car. 1174 of the Civil Code guards against the
- On March 31, 1964, he went to the office of possibility of its being visited with such a
the MVO, Masbate, to register the same. reproach.
- He met the defendant Federico Laureano, a - Compared with Luzon Stevedoring, the risk in
patrol officer of said MVO office, who was that case was quite evident and the nature of
waiting for a jeepney to take him to the office the obligation was such that a party could
of the Provincial Commander, PC, Masbate. rightfully be deemed as having assumed the
- Attorney Dioquino requested the defendant risks accompanying it. Such is not the case at
Federico Laureano to introduce him to one of hand.
the clerks in the MVO Office, who could
facilitate the registration of his car and the
request was graciously attended to.
- Defendant Laureano rode on the car of Atty.
Dioquino on his way to the P.C. Barracks at
Masbate. While about to reach their destination,
the car driven by plaintiff's driver and with
defendant Federico Laureano as the sole
passenger was stoned by some 'mischievous
boys,' and its windshield was broken. Defendant
Federico Laureano chased the boys and he was
able to catch one of them.
- The boy was taken to Atty. Dioquino and
admitted having thrown the stone that broke
the car's windshield. The plaintiff and the
defendant Federico Laureano with the boy
returned to the P.C. barracks and the father of
the boy was called, but no satisfactory
arrangements were made about the damage to
the windshield.

Issue/s:
WON the damage caused by the minors stone
throwing resulting to a broken windshield is a
fortuitous event and who should shoulder the
damage

Ruling:

Obligations and Contracts 48 291

 Austria v. CA
G.R. No. L-29640
Jun. 10, 1971
Reyes, J.B.L., J.
Alex Ramos
Keywords: Diamonds to be sold on commission
taken by robbers
Facts:
- Maria Abad (private respondent) received
from Guillermo Austria (petitioner) one pendant
with diamonds valued at P4500 to be sold on a
commission basis
- Abad was accosted by two men while she was
on her way home and the jewelry she received
from Austria was taken from her
- Austria, upon failure of Abad to return the
jewelry, filed an action against her for its return
and also for damages
- Abad claimed that the alleged robbery
already extinguished her obligation
- TC rendered judgment against the defendant,
finding him guilty for negligence for she went
home without any companion; CA overruled the
decision for they found it to be a fortuitous
event.
Issue/s:
WON robbery falls under the category of a
fortuitous event and as a results relieves the
defendants of their obligation to return (or pay
for) the jewelry
Ruling:
Yes. The petition is dismissed.
Ratio:
- To constitute a caso fortuito that would
exempt a person from responsibility, three
conditions must be satisfied: (1) the event must
be independent of the human will (or rather, of
the debtor's or obligor's); (2) the occurrence
must render it impossible for the debtor to
fulfill the obligation in a normal manner; and (3)
the obligor must be free of participation in or
aggravation of the injury to the creditor.
Obligations and Contracts
- Art. 1174 of the new Civil Code reads as
follows: Except in cases expressly specified by
law, or when it is otherwise declared by
stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall
be responsible for those events which could not
be foreseen, or which, though foreseen, were
inevitable.
- To avail of the exemption granted by the law,
it is not necessary that the persons responsible
for the occurrence should be found or punished;
it would be sufficient to establish that the
fortuitous event, the robbery in this case, did
take place without any concurrent fault on the
debtor's part, and this can be done by
preponderant evidence. To require in the
present action for recovery the prior conviction
of the culprits in the criminal case, in order to
establish the robbery as a fact, would be to
demand proof beyond reasonable doubt to
prove a fact in a civil case.
- Art. 1170 of the Civil Code provides that:
Those who in the performance of their
obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene
the tenor thereof, are liable for damages.
- Petitioners argument that private respondent
should have been more cautious given the high
incidence of crimes in Manila and is therefore
negligent in returning alone to her house in the
evening was held untenable by the court, which
said that in 1961, when the robbery in question
took place, criminality had not by far reached
the levels attained in the present day (1971).
49 291
 NPC v. CA
G.R. No. L-47379
May 16, 1988
Gutierrez, Jr., J.
Dean Reposar
Keywords: Typhoon wrecks tunnel construction
site in Norzagaray
Facts:
- Engineering Construction Inc. (ECI) executed a
contract with NAWASA to furnish all the tools,
labor, equipment, and materials (not furnished
by the owner) and to construct the proposed
tunnel and structures near Norzaragay, Bulacan
within 800 calendar days.
- The tunnel would be passing through the
mountain, from the Ipo river, a part of
Norzaragay where the Ipo Dam of the
defendant National Power Corporation is
located.
- By September 1967, the plaintiff company
already completed the tunnel excavation work.
All the equipment not needed at the Bicti site
were then transferred to the Ipo site, where
some projects were not yet completed.
- On November 4, 1967, typhoon Welming hit
Central Luzon, passing through the defendant's
Angat Hydro- electric project and Dam at Ipo,
Norzaragay, Bulacan. Due to the heavy
downpour, the water in the reservoir of the
Angat Dam, was rising perilously at the rate of
sixty (60) centimeters per hour. To prevent an
overflow of water from the dam since the water
level has reached danger heights, the defendant
corporation caused the opening of the spillway
gates.
- Engineering Construction filed a case against
NPC.
- The trial court established the fact that due to
the negligent manner with which the spillway
gates of the dam were opened, an
extraordinary large volume of water rushed out
of the gates, and hit the installations and
constructions of ECI at the Ipo Site, as a result of
which, the latter's stockpile of materials and
supplies, camp facilities and permanent
Obligations and Contracts
structures and accessories were washed away,
lost or destroyed.
- NPC's defense is that the rapid rise of water in
the reservoir of the dam due to heavy rains
brought about by the typhoon was an
extraordinary occurrence that could not have
been foreseen.
Issue/s:
WON the loss and destruction of ECI's
equipment and facilities is due to force majeure
Ruling:
No. Even though the typhoon was an act of God,
NPC cannot escape liability because its
negligence was the proximate cause of the loss
and the damages.
Ratio:
- NPC opened the spillway gates during the
height of the storm when they could have
opened it gradually and earlier. They had
undeniable knowledge that the typhoon would
hit four days prior to the event.
- Art. 1170 of the Civil Code provides that if
upon the happening of a fortuitous event, or an
act of God, there concurs a corresponding fraud,
negligence, delay or violation or contravention
in any manner of the tenor of the obligation
which results in loss or damage, the obligor
cannot escape liability.
- To be exempt from liability for loss because of
an act of God, he must be free from any
previous negligence or misconduct by which the
loss or damage may have been occasioned.
50 291
 Yobido v. CA
G.R. No. 113003
Oct. 17, 1997
Romero, J.
Gianella Reyes
Keywords: Tire blowout of Yobido bus causes
death and injuries to passengers
Facts:
- Spouses Tito and Leny Tumboy and their
minor children named Ardee and Jasmin,
boarded at Mangagoy, Surigao del Sur, a Yobido
Liner bur bound for Davao City.
- Along Picop Road in Km. 17, the left front tire
of the bus exploded. The bus fell into a ravine
and struck a tree.
- The incident resulted in the death of Tito
Tumboy and physical injuries to other
passengers.
- The winding road was not cemented and was
wet due to the rain; it was rough with crushed
rocks.
- The bus which was full of passengers had
cargoes on top.
- Leny testified that it was running fast and she
cautioned the driver to slow down but he
merely stared at her through the mirror.
However, Salce, the bus conductor, testified
that the bus was running for only 50-60 kmh.
- The left front tire that exploded was a brand
new Goodyear tire that he mounted on the bus
only 5 days before the incident. She stated that
all driver applicants in Yobido Liner underwent
actual driving tests before they were employed.
- The defendant is invoking that the tire
blowout was a caso fortuito
Issue/s:
1. WON the tire blowout was purely caso
fotuito
2. WON the defendant bus liner is liable for
damages resulting from the death of Tito
Ruling:
The CAs decision in favor of the plaintiffs is
affirmed with the modification that the
Obligations and Contracts
defendant-petitioners shal also be liable for
exemplary damages.
Ratio:
1. No. The explosion of the tire is not in itself a
fortuitous event. The cause of the blowout, if
due to a factory defect, improper mounting,
excessive tire pressure, is not an unavoidable
event.
- On the other hand, there may have been
adverse conditions on the road that were
unforeseeable and/or inevitable, which could
make the blow-out a caso fortuito. The fact that
the cause of the blow-out was not known does
not relieve the carrier of liability.
- There are human factors involved in the
situation. The fact that the tire was new did not
imply that it was entirely free from
manufacturing defects or that it was properly
mounted on the vehicle. Neither may the fact
that the tire bought and used in the vehicle is of
a brand name noted for quality, resulting in the
conclusion that it could not explode within five
days use.
- Be that as it may, it is settled that an accident
caused either by defects in the automobile or
through the negligence of its
driver is not a caso fortuito that would exempt
the carrier from liability for damages.
2. A common carrier may not be absolved from
liability in case of force majeure or fortuitous
event alone. The common carrier must still
prove that it was not negligent in causing the
death or injury resulting from an accident.
- Having failed to discharge its duty to
overthrow the presumption of negligence with
clear and convincing evidence, petitioners are
held liable for damages.
- Moral damages are generally not recoverable
in culpa contractual except when bad faith had
been proven. However, the same damages may
be recovered when breach of contract of
carriage results in the death of a passenger.
- Because petitioners failed to exercise the
extraordinary diligence required of a common
carrier, which resulted in the death of Tito
Tumboy, it is deemed to have acted recklessly
(Art. 756).
51 291
 Bacolod-Marcia Milling v. CA and Gatuslao
G.R. Nos. 81100-01
Feb. 7, 1990
Paras, J.
Nasha Reyes
Keywords: Sugar plant; dispute arising from
stoppage of right-of-way
Facts:
- BMMC is the owner and operator of the sugar
central in Bacolod City, Philippines.
- Alonso Gatuslao is a registered planter of the
Bacolod-Murcia Mill District.
- BMMC constructed a railroad track system to
transport sugar cane from the plantation to the
milling station for a period of 45 years
beginning the years 1920-1921.
- When the Hacienda Helvetia owners milling
contracts with BMMC expired at the end of the
1964-1965 crop years, the corresponding right-
of-way granted to the Central also expired.
Hence, the BMMC was unable to use its railroad
facilities during the crop year 1968-1969 due to
the closure in 1968 of the portion of the railway
traversing the hacienda Helvetia as per decision
of the Court.
- Through the mediation of the President of the
Philippines the writ of preliminary injunction on
the use of the tracks was lifted, and the Angela
Estate and the Gonzaga Estate agreed with the
Central to allow the use of the railroad tracks
passing through the hacienda Helvetia during
the 1967-1968 milling season only.
- Due the non-renewal of the right-of-way
contract with Angela Estates, BMMC was
unable to transport the sugar canes of Alonso
Gatuslao or of AIDSISA beginning 1968.
Gatuslao on various dates requested
transportation facilities from BMMC to no avail.
- Gatuslao filed for breach of contract against
BMMC and asks for rescission of contract and
damages.
- BMMC argues that the inability to use its
railways system is due to force majeure. In
order to comply they hired private trucks as
movers of to haul the sugar canes.
Obligations and Contracts
- Gatuslao/AIDSISA, seriously believing that
BMMC is particularly unable to transport and
mill their sugar canes, opted to use trucks
provided by Bacolod-Murcia Agricultural
Cooperative Marketing Association, Inc. (BM-
ACMA). Further, its inability to do so in effect
rescinds the milling contract.
- BMMC also filed a complaint against
AIDSISA and BM-ACMA seeking specific
performance of milling contract. It alleges that
Gatuslao/AIDSISA violated the contract by
hiring the services of BM-ACMA.
- The 2 complaints were consolidated and the
lower court rendered judgment rescinding the
milling contract. CA affirmed the CFI decision.
Issue/s:
WON the inability of BMMC to comply with
milling contract due to the closure of the
railroad lines constitutes force majeure, hence
exempting them from the fulfilment of its
contractual obligations
Ruling:
No. The closure of the railroad lines does not
constitute force majeure.
Ratio:
- The Court has consistently ruled that when an
obligor is exempted from liability under Art.
1174 of the Civil Code, for a breach of an
obligation due to an act of God, the following
elements must concur: (a) the cause of the
breach of the obligation must be independent
of the wig of the debtor; (b) the event must be
either unforeseeable or unavoidable; (c) the
event must be such as to render it impossible
for the debtor to fulfill his obligation in a normal
manner; (d) the debtor must be free from any
participation in, or aggravation of the injury to
the creditor.
- Based on the criteria abovementioned, the
closure of the tracks does not constitute force
majeure.
- The terms of the milling contract were clear.
Also, the closure of any portion of the railroad
track was foreseeable and inevitable.
- BMMC should have anticipated and should
have provided for the eventuality before
52 291
 committing itself. Under the circumstances, it - As admitted by BMMC itself, in its
has no one to blame but itself and cannot now communications with the planters, it is not in a
claim exemption from liability. position to provide adequate transportation
- In the language of the law, the event must for the canes in compliance with its
have been impossible to foresee, or if it could commitment under the milling contract. They
be foreseen, must have been impossible to They failed to provide adequate transportation
avoid. There must be an entire exclusion of facilities to Gatuslao and other adherent
human agency from the cause of the injury or planters under the milling contract.
loss. - The B-M ACMA cannot also be faulted for
- BMMC took a calculated risk that all the organizing itself to take care of the needs of its
landowners would renew their contracts. members. Definitely, it was organized at that
Unfortunately, the sugar plantation of Angela time when petitioner could not assure the
Estate, Inc. which is located at the entrance of planters that it could definitely haul and mill
the mill was the one which refused to renew its their canes.
milling contract. As a result, the closure of the - BMMC cannot claim enforcement of the
railway located inside said plantation paralyzed contract. By virtue of the violations of the terms
the entire transportation system. Thus, the of the contract, the offending party has
closure of the railway lines was not an act of forfeited any right to its enforcement.
God nor does it constitute force majeure. It was - There is also no evidence of bad faith.
due to the termination of the contractual
relationships of the parties, for which petitioner
is charged with knowledge.
- The Angela Estate, Inc. notified BMMC as far
back as August or September 1965 of its
intention not to allow the passage of the
railway system thru its land after the aforesaid
crop year. Adequate measures should have
been adopted by BMMC to forestall such
paralyzation but the records show none.
- The contract in question involves reciprocal
obligations; as such party is a debtor and
creditor of the other, such that the obligation of
one is dependent upon the obligation of the
other. Under Art. 1191 of the Civil Code, the
power to rescind obligations is implied in
reciprocal ones in case one of the obligors
should not comply with what is incumbent upon
him. In fact, it is well established that the party
who deems the contract violated may consider
it revoked or rescinded pursuant to their
agreement and act accordingly, even without
previous court action. It is the general rule that
rescission of a contract will not be permitted for
a slight or casual breach.
- BMMC is guilty of breach of the conditions of
the milling contract and Gatuslao is the injured
party. The latter has the right to rescind the
contract.

Obligations and Contracts 53 291

 Philcomsat v. Globe Telecom
G.R. No. 147324
May 25, 2004
Tinga, J.
Miguel Sevilla
Keywords: Contract on communication facility
for US Military Base
Facts:
- Globe had been engaged in the coordination
of the provision of various communication
facilities for the US Military Bases in Pampanga
and Zambales. The communication facilities
were for the exclusive use of the US Defense
Communications Agency (USDCA) and can only
be operated by it or American companies
contracted by it to operate the facilities.
- Involved American companies contracted with
Globe to provide the communication facilities,
and Globe contracted with PHILCOMSAT for the
provision of these facilities.
- On May 7, 1991, PHILCOMSAT and Globe
entered into an agreement: PHILCOMSAT will
establish, operate and provide an Earth Station
for USDCA for five years while Globe will pay for
the monthly rentals of the leased circuit
involved.
- The RP-US MBA was about to expire in that
year and on September 16, 1991, Senate passed
a resolution expressing its decision not to
concur in the ratification of an extension of the
RP-US MBA.
- On December 31, 1991, the PH government
sent a Note Verbale to the US government of
the termination of the RP-US MBA on
December 31, 1992, and that all US military
forces should complete its withdrawal by that
date.
- On August 6, 1992, Globe notified
PHILCOMSAT of its intention to discontinue the
use of the earth station effective November 8,
1992. It used the basis of Section 8 of the
agreement between Globe and PHILCOMSAT:
Neither party shall be held liable or deemed to
be in default for any failure to perform its
obligation under this Agreement if such failure
results directly or indirectly from force majeure
Obligations and Contracts
or fortuitous event. force majeure shall mean
circumstances beyond the control of the party
involved including, but not limited to, any law,
order, regulation, direction or request of the
Government of the Philippines...
- PHILCOMSAT replied by referring to Section 7
of the agreement:
Notwithstanding the non-use of the earth
station, [Globe] shall continue to pay
PHILCOMSAT for the rental of the actual
number of T1 circuits in use, but in no case shall
be less than the first two T1 circuits, for the
remaining life of the agreement.
- What PHILCOMSAT wants: for Globe to pay
them for the outstanding rentals, including that
of 1993 (since the term of the contract is for
five years) currently amounting to
4,910,136USD
- What Globe wants: for Globe to be exempted
from the obligation due to force majeure. It also
wants that it not be held liable for the rentals
covering the month of December 1992.
Issue/s:
1. WON the termination of the RP-US MBA and
non-ratification of its extension constitutes as
force majeure
2. WON Globe is liable to pay rentals under the
agreement for December 1992
Ruling:
The petition is denied and the CAs decision is
affirmed.
Ratio:
1. Yes. The definitions under Section 8 of their
agreement are either unforeseeable, or
foreseeable but beyond the control of the
parties.
- Standard of being exempt from the obligation
under force majeure: event must be
independent of the human will, the occurrence
must render it impossible for the debtor to
fulfill the obligation in a normal manner, and
the obligor must be free from participation in,
or aggravation of, the injury to the creditor.
- The Court held that non-ratification by the
Senate of the extension of the RP-US MBA is
54 291
 beyond the control of the parties since the
prerogative lies in the Senate.
- Since the event constitutes as force majeure,
Globe is exempted to pay the rentals of the
facilities for the remaining term of the contract.

2. Yes. USDCA still had control over the area and

had the option of using the facilities until
December 31, 1992. PHILCOMSAT could not
have removed or rendered ineffective the
facilities because the area was only accessible
to US naval personnel up to that time.

Obligations and Contracts 55 291

 Eastern Shipping Lines v. CA
G.R. No. 97412
Jul. 12, 1994
Vitug, J.
Jechel Tan de Guzman
Keywords: Damaged drums lead to dispute on
legal interest
Facts:
- Eastern Shipping Lines shipped 2 drums of
riboflavin, and handed custody over to
Metroport with 1 drum damaged.
- Metroport handed custody over to Allied
Brokerage Corp with 1 drum opened and the
other w/o seal, and in turn, Allied delivered it to
te consignee.
- Due to the drums bad order, damages were
paid by Mercantile Insurance whose rights were
then subrogated to the rights of the consignee.
Mercantile now claims damages against
Eastern.
Issue/s:
WON the applicable interest rate is 6% or 12%
Ruling:
The applicable legal interest is 6%
Ratio:
- The SC differentiated between the 12%
interest per annum (under the Central Bank
Circular), which applies only to loans or
forbearance of money, goods or credits, as well
as to judgments involving such loan or
forbearance of money, goods or credits, and the
6% interest under the Civil Code, which governs
when the transaction involves the payment of
indemnities in the concept of damage arising
from the breach or a delay in the performance
of obligations in general.
- Guidelines:
I. When an obligation, regardless of its source,
i.e., law, contracts, quasi- contracts, delicts
or quasidelicts is breached, the contravenor
can be held liable for damages. The
provisions under Title XVIII on "Damages" of
Obligations and Contracts
the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of
interest in the concept of actual and
compensatory damages, the rate of interest,
as well as the accrual thereof, is imposed, as
follows:
A. When the obligation is breached, and it
consists in the payment of a sum of
money, i.e., a loan or forbearance of
money, the interest due should be that
which may have been stipulated in
writing. Furthermore, the interest due
shall itself earn legal interest from the
time it is judicially demanded. In the
absence of stipulation, the rate of
interest shall be 12% per annum to be
computed from default, i.e., from
judicial or extrajudicial demand under
and subject to the provisions of Article
1169 of the Civil Code.
B. When an obligation, not constituting a
loan or forbearance of money, is
breached, an interest on the amount of
damages awarded may be imposed at
the discretion of the court at the rate
of 6% per annum. No interest, however,
shall be adjudged on unliquidated
claims or damages except when or until
the demand can be established with
reasonable certainty. Accordingly,
where the demand is established with
reasonable certainty, the interest shall
begin to run from the time the claim is
made judicially or extrajudicially (Art.
1169, Civil Code) but when such
certainty cannot be so reasonably
established at the time the demand is
made, the interest shall begin to run
only from the date the judgment of the
court is made (at which time the
quantification of damages may be
deemed to have been reasonably
ascertained). The actual base for the
computation of legal interest shall, in
any case, be on the amount finally
adjudged.
C. When the judgment of the court
awarding a sum of money becomes
56 291
 final and executory, the rate of legal
interest, whether the case falls under
paragraph 1 or paragraph 2, above,
shall be 12% per annum from such
finality until its satisfaction, this interim
period being deemed to be by then an
equivalent to a forbearance of credit.

Obligations and Contracts 57 291

 Crismina Garments v. CA
G.R. No. 128721
Mar. 9, 1999
Panganiban, J.
Victoria Tiangco
Keywords: Girls denim pants; legal interest
Facts:
- Petitioner, engaged in the export of girls
denim pants, contracted the services of Norma
Siapno, the owner of DWilmar Garments, for
the sewing of 20,762 pieces of assorted girls
denims for P76,410.
- The pants were delivered in good condition
but petitioner told her that some were
defective.
- She offered to take them back but petitioner
said that the pants were already good.
- The petitioner did not pay her the amount
upon her demand because of the 6,164
defective pairs which cost P49,925.51 for
refund.
-The trial court and CA rendered judgment in
favor of Norma Siapno, ordering Crismina
Garments to pay the former P76,140 with
interest of 12% per annum, to be counted from
the filing of the complaint until fully paid.
Issue/s:
WON the imposition of a 12% interest for an
obligation that involves a contract for a piece of
work is proper
Ruling:
No. The decision of the CA is modified with the
interest rate of 6% per annum, computed from
the time of the filing of the complaint until the
finality of the judgment. However, if it is still
unpaid thereafter, the interest rate shall be 12%
computed from the time judgment becomes
final and executory until fully satisfied.
Ratio:
- Pursuant to Art. 2209 of the CC, in obligations
consisting of payment of money and the debtor
incurs in delay, absent a stipulation on the
payment of interest, the legal interest is 6%.
Obligations and Contracts
- The contention of the respondent is that the
applicable law is the Central Bank Circular No.
416 (Usury Law) that pegs the interest rate at
12% for money in the form of forbearance.
However, forbearance is defined as a
contractual obligation of a lender or creditor to
refrain during a given period of time, from
requiring the debtor to repay a loan or debt
then due and payable. Using this standard, the
contract is not in a form of forbearance, but a
contract for a piece of work, to which Art. 2209
governs.
- In the case of Reformina v. Tomol, Jr., the
circular is only applicable for loans, forbearance
of money, goods or credits. For cases beyond
the scope of the circular, Art. 2209 of the CC
is applicable, where the interest rate is a form
of indemnity for the delay in the performance
of obligation.
- The case of Eastern Shipping Lines, Inc. v. CA, a
breach in obligation not constituting a loan or
forbearance of money, an interest for the
amount of damages is at 6% per annum.
- Furthermore, if the demand could be
established with certainty, its computation
starts from the filing of the complaint. In the
case of Keng Hua Paper Products Co., Inc. v CA,
the monetary award shall earn interest at 12%
per annum from the date of finality of the
judgment until its satisfaction regardless of the
nature of the obligation because the interim
period is deemed to be equivalent to that of a
forbearance.
58 291
 Keng Hua Products v. CA
G.R. No. 116863
Feb. 12, 1998
Panganiban, J.
Kaks Alampay
Keywords: Waste paper; bill of lading
Facts:
- June 1982: Sea-land Service Inc. received a
sealed container of 76 bales of unsorted waste
paper or 20 metric tons for shipment to Keng
Hua Paper Products. Sea-land issued a bill of
lading to cover the shipment.
- July 1982: the shipment was discharged at
Manila International Container Port but for 481
days, Keng Hua failed to discharge shipment
from the container.
- Demurrage charges accrued.
- Sea-land sent Keng Hua letters demanding
payment
- Keng Hua refused to settle obligations which
eventually amounted to P67,340
- Sea-land filed civil action for collection and
damages
- Keng Huas defense: Under the letter of credit,
they had purchased only 50 tons of waste paper
from Hong Kong shipper Ho Kee; the remaining
balance of shipment was only 10 metric tons,
but that Sea- Land was asking Keng Hua to
accept all 20 metric tons of shipment, which
would violate central bank rules and regulations
and constitute smuggling.
- RTC found Keng Hua liable. CA denied Keng
Huas appeal and affirmed the RTC judgment.
- Hence, Keng Huas petition with the Supreme
Court.
Issue/s:
WON Keng Hua was bound by the bill of lading
Ruling:
Yes, the bill of lading is binding on Keng Hua.
Ratio:
- The bill of lading delivered and accepted
constitutes the CONTRACT OF CARRIAGE even
though not signed, because ACCEPTANCE of a
Obligations and Contracts
paper containing the terms of a contract
generally constitutes an acceptance of the
contract and all of its terms and conditions of
which the acceptor has ACTUAL or
CONSTRUCTIVE notice. Acceptance of a bill of
lading by shipper and consignee, with full
knowledge of its contents, gives rise to the
presumption that the bill of lading was a
perfected and binding contract.
- Having these in mind, the bill of lading is a
valid and perfected contract between shipper
(Ho Kee), consignee (Keng Hua) and carrier
(Sea-Land).
Sec. 17 of the bill of lading provided that
Ho Kee and Keng Hua were LIABLE FOR
PAYMENT OF DEMURRAGE CHARGES for
failure to discharge containerized
shipment beyond the grace period
allowed by tariff rules. Hence, Keng Hua
is LIABLE.
When Keng Hua received the bill of
lading immediately after the arrival of
the shipment, they did not immediately
object; they sent a letter of non-
acceptance of the shipment only SIX
MONTHS LATER, and the long period of
inaction conveys intention of clear
acceptance of the terms of the bill of
lading
Keng Huas letter only mentioned their
inability to PICK UP CARGO; a refusal to
pick up cargo is NOT a rejection of the
bill of lading
Acceptance by Keng Hua of the bill of
lading (through receipt of copy, and non-
objection to its contents for 6 months)
raises the presumption of Keng Hua
agreeing to the bill of ladings stipulations.
Absent a clear demonstration of how
taking the delivery of shipment would
violate central bank laws, failure to pick
up cargo violates the contractual
obligation under the bill of lading,
rendering Keng Hua liable.
- A contract of carriage as stipulated in the bill
of lading must be treated INDEPENDENTLY of
the contract of sale between seller and buyer,
and the contract for issuance of letter of
credit between buyer and issuing bank.
59 291
 Three distinct and independent contracts certainty. Where demand is established,
in a letter of credit: interest shall begin to run from the time
o contract of sale between buyer and the CLAIM IS MADE JUDICIALLY OR
seller EXTRAJUDICIALLY; if certainty is not
o contract of buyer with the issuing reasonably established, interest shall run
bank (of letter of credit) only from date of judgment of court
o letter of credit proper in which bank Since the case does not arise from loan or
promises to pay the seller pursuant forbearance of money, Art. 2209 applies,
to the terms and conditions stated with rate of 6% from annum; the bill of
therein lading did not specify an amount of
Any discrepancy between the amount of demurrage and the sum claimed by Sea-
goods in the commercial invoice in the land increased as the days went by, so the
contract of sale, and the amount allowed total amount demanded cannot be
in the letter of credit will NOT affect the established with reasonable certainty.
validity and enforceability of the contract Interest should thus run only from the
of carriage embodied in the bill of lading. trial courts rendered judgment.
Sea-land had no knowledge of the
contents of the container; the shipper Ho
Kee is solely responsible for loading the
container while the carrier, Sea-land, is
oblivious to its contents; the remedy of
Keng Hua concerning overshipment of an
extra 10 metric tons of paper lies with Ho
Kee (shipper) and NOT the carrier (Sea-
Land)
Keng Hua, upon violating the terms in the
bill of lading, is liable to pay demurrage
(an allowance or compensation for the
delay or detention of a vessel) for the
unclaimed cargo, regardless of the
discrepancy between the amount in the
bill of lading/contract of carriage and the
amount in the commercial invoice of the
bill of sale.
- Regarding the payment of interest, interest
should run only from first knowledge of the
demurrage claim. Thus, interest runs not from
Sea-Lands extrajudicial demands on March
1983 or April 1983, since in both cases, there
was no demand for interest.
Jurisprudence on Interest: when an
obligation does not constitute a loan or
forbearance of money but is breached, an
interest on the amount of damages
awarded may be imposed at the
DISCRETION OF THE COURT at the rate of
6% per annum. No interest shall be
adjudged except when or until demand
can be established with reasonable

Obligations and Contracts 60 291

 Security Bank v. RTC Makati they may deem convenient, provided they are
G.R. No. 113926 not contrary to law, morals, good customs,
Oct. 23, 1996 public order, or public policy.
Hermosisima, Jr., J.

Norlegen Bayona

Keywords: Usurious interest in promissory

notes

Facts:
- Magtanggol Eusebio executed 3 promissory
notes in favour of Security Bank and Trust Co.
(SBTC) in 1983.
- All promissory notes stipulated a 23% interest
rate per annum.
- Upon maturity, Eusebio failed and refused to
pay the balance; thus SBTC filed a collection
case in RTC Makati.
- Said Court decided in favour of SBTC but
ordered Eusebio to pay the balance w/ 12%
interest per annum.

Issue/s:
WON the 23% rate of interest per annum
agreed upon by petitioner bank and
respondents is allowable and not against the
Usury Law

Ruling:
The decision of the respondent court a quo is
affirmed with the modification that the rate of
interest that should be imposed be 23% per
annum.

Ratio:
- No. CB Circular 9051 suspended the Usury Law,
thereby removing the ceiling on interest rates
for loans and forbearances.
- Lenders and borrowers agree and stipulate
interest rate. Only in the absence of such
stipulation is the Court allowed to impose the
12% interest rate.
- Since all the promissory notes were signed in
1983, then theyre all covered by CB Circular
905 (1982).
- Also, Art. 1386 of the Civil Code provides
that contracting parties may establish such
stipulations, clauses, terms and conditions as

Obligations and Contracts 61 291

 Almeda v. CA
G.R. No. 113412
Apr. 17, 1996
Kapunan, J.
Dianne Cadorna
Keywords: Unilateral increase of interest rates
by PNB
Facts:
- Petitioner spouses Ponciano Almeda and
Eufemia Almeda acquired several loan/credit
accommodations totalling P18,000,000 from
PNB, at an interest rate of 21% per annum. To
secure the loan, spouses executed a Real Estate
Mortgage Contract covering a parcel of their
land and the building erected thereon.
- A pertinent term in their credit agreement is
that the the Bank reserves the right to increase
the interest rate within the limits allowed by law
at any timeprovided, that the interest rate on
this/these accommodations shall be
correspondingly decreased in the event that the
applicable maximum interest rate is reduced by
law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon
shall take effect on the effectivity date of the
increase or decrease of the maximum interest
rate.
- Petitioners made several partial payments on
the loan, a substantial portion of which was
applied to accrued interest.
- Then, over petitioners protests, PNB raised
the interest rate to 28% pursuant to their credit
agreement, and thereafter increased it to a high
of 68% before the loan matured.
- Thus, the spouses filed a petition for
declaratory relief with prayer for a writ of
preliminary injunction and TRO to enjoin PNB
from unilaterally raising the interest rates on
the loan, pursuant to the credit agreements
escalation clause.
- The lower court issued the TRO, but by this
time the spouses were already in default of
their loan obligations.
- Thus, invoking the law on Mandatory
Foreclosure (Act 3135 and PD385),
Obligations and Contracts
PNB countered by ordering the extrajudicial
foreclosure of petitioners mortgaged
properties.
- The spouses tendered to PNB the amount of
P40,142,518, which covered the remaining
principal amount of the loan plus interest at
21%, but PNB refused to accept it.
- This led to the spouses formal consignment of
the amount with the RTC, which enjoined PNB
from foreclosing the spouses mortgaged
property.
- PNB appealed to the CA, which set aside the
trial courts decision and upheld respondents
right to foreclosure.
Issue/s:
1. WON PNB was authorized to raise its interest
rates from 21% to as high as 68% under the
credit agreement
2. WON PNB can foreclose the spouses
property under the mandatory foreclosure
provisions of PD385
Ruling:
The court granted the petition and set aside the
CAs ruling, remanding the case to the trial
court for further proceedings.
Ratio:
1. No. Any contract which appears to be heavily
weighed in favor of one of the parties so as to
lead to an unconscionable result is void.
Likewise, any stipulation regarding the validity
or compliance of the contract which is left
solely to the will of one of the parties is invalid.
- The binding effect of any agreement between
parties to a contract is premised on two settled
principles: that any obligation arising from
contract has the force of law between the
parties; and that there must be mutuality
between the parties based on their essential
equality.
- In this case, PNB unilaterally altered the terms
of its contract with petitioners by increasing the
interest rates on the loan without prior assent
of the latter, in violation of the mutuality
principle of contracts expressed in Art.1308 of
the CC: the contract must bind both
62 291
 contracting parties; its validity or compliance - The fact that the spouses offered to pay the
cannot be left to the will of one of them. P40,142,518 and thereafter consigned it to the
- Further, while interest escalation clauses in court upon PNBs refusal to accept the same
credit agreements are perfectly valid and do not refutes PNBs claim that there was no honest-
contravene public policy, they are still subject to-goodness attempt on the part of the spouses
to laws and provisions. to settle their obligations.
- The stipulation in the credit agreement, which
requires that the increase be within the limits
allowed by law refers to legislative enactments
not administration circulars, otherwise the
same credit agreement would not have made
the distinction between law and the Monetary
Board in the phrase that the interest rate on
this/these accommodations shall be
correspondingly decreased in the event that the
applicable maximum interest rate is reduced by
law or by the Monetary Board.
- Finally, the increased interest rates, to which
the Almedas never assented, thereby resulting
to PNBs contravention of their credit
agreement by implementing the same, are
patently unconscionable and excessive, unjustly
disabling the spouses from fulfilling their
obligation due to the new amount of the loan
that is way above the original amount of the old
interest rate.

2. No. PD 385 was issued principally to

guarantee that government financial
institutions would not be denied substantial
cash inflows necessary to finance the
governments development projects by large
borrowers who resort to litigation to prevent or
delay the governments collection of their debts
or loans.
- In facilitating collection of debts through its
automatic foreclosure provisions, the
government is however, not exempted from
observing basic principles of law, and ordinary
fairness and decency under the due process
clause of the Constitution.
- Here, the dispute regarding the interest rate
increases was never settled so that the exact
amount of petitioners obligations could not yet
be determined. Thus, the foreclosure provisions
could validly be invoked by PNB only after
settlement of this issue, and only after the
spouses refused to meet their obligations
following such determination.

Obligations and Contracts 63 291

 Angel Warehousing v. Chelda
G.R. No. L-25704
Apr. 24, 1968
Bengzon, J.
Maye Cristobal
Keywords: Refusal to pay principal due to
usurious interest
Facts:
- Angel Warehousing corporation sued Chelda
Enterprises and David Syjueco for P20,880 in
unpaid laons and attorneys fees of P5,000,
alleging that post dated checks they issued
were dishonored.
- Defendants countered that plaintiff charged
usurious interests of 2% and 2.5% per month
and consequently, plaintiffs should not be
permitted to recover under law.
- RTC ordered the defendant partnership to pay
the plaintiff the amount of P19,247.35 [Unpaid
principal of P20,287.50 - Usurious interest of
P1,048.15 = P19,247.35]
- There is no conflict between the Usury Law
and the Civil Code. The Usury Law says that any
person who for a loan shall have paid a higher
rate or greater sum or value than is allowed in
said law, may recover the whole interest paid.
Meanwhile, the New Civil Code, in Art. 1413
states: "Interest paid in excess of the interest
allowed by the usury laws may be recovered by
the debtor, with interest thereon from the date
of payment."
- The principal debt remaining without
stipulation for payment of interest can be
recovered by judicial action, and if it incurs
delay, earns interest from the date of the
demand. Hence the trial court was correct in
ordering the payment of the principal after the
usurious interest was deducted.
2. No. The general rule is that attorneys fees
are not recoverable in the absence of
stipulation.

Issue/s:
1. WON the creditor may recover the principal
in a loan with usurious interest
2. WON attorneys fees should be awarded in
plaintiffs favor

Ruling:
With the modification that the award of
attorney's fees in plaintiff's favor is deleted, and
the correction of the clerical error as to the
principal still recoverable, the appealed
judgment is affirmed.

Ratio:
1. Yes. A contract of loan with usurious interest
consists of principal stipulationto pay the
loan and accessory stipulationto pay the
interest. These are divisible.
- Art. 1420 CC provides that in case of a
divisible contract, if the illegal terms can be
separated from the legal ones, the latter may be
enforced.

Obligations and Contracts 64 291

 First Metro Investment v. Este del Sol
G.R. No. 141811
Nov. 15, 2001
De Leon, Jr, J.
Robylene Cruz
Keywords: Resort construction; camouflaged
usurious interest
Facts:
- January 31, 1978: FMIC loaned Este del Sol
P7.3M for the construction of a resort in
Montalban, Rizal for 16% interest per annum,
subject to the a onetime penalty of 20% of the
amount due, liquidated damages at 2% per
month compounded quarterly for all unpaid
balances and penalties, and 25% in attorneys
fees for the sum sought to be recovered. The
loans were released on a staggered basis.
- On the same day, as provided in the loan
agreement, the parties also entered into an
Underwriting agreement, providing for an
underwriting fee of P200K and, for four years,
an annual supervision fee of P200K, and a
Consultancy agreement, where Este del Sol
must pay P332.5K per year for four years.
- February 22: FMIC billed Este del Sol for the
underwriting and supervision fees, as well as
P1.3M worth of consultancy fees for a period of
4 years, all deducted from the first release of
the loan.
- June 23, 1980: Este del Sol failed to meet the
payment schedules, incurring P12.6M due to
FMIC.
- FMIC caused the foreclosure of P7.5M worth
of properties mortgaged by Este del Sol as
sureties.
- Of the P9M from the foreclosure and auction,
P3.1M was deducted for attorneys fees and
P5.8M for interests and penalties, and partly on
the principal.
- November 11: FMIC initiated a collection suit
for the remaining P6.8M owed by Este del Sol.
- Este del Sols defense was that the
Underwriting and Consultancy Agreements
were integral parts of the Loan Agreement and
were merely subterfuges to camouflage the
usurious interest charged by FMIC.
Obligations and Contracts
- FMIC argues that the Underwriting and
Consultancy Agreements were separate and
independent of the Loan agreement.
- The trial court sided with FMIC. The Appellate
Court sided with Este del Sol and decreed that
the one time 20% penalty and 10% attorneys
fees would suffice, and the underwriting,
supervision and consultancy fees be returned to
Este del Sol, hence this case.
Issue/s:
WON the Underwriting and Consultancy
Agreements were merely camouflages for
usurious interest
Ruling:
Yes. The Court sided with Este del Sol and
affirmed the appellate court.
Ratio:
- First, the agreements were dated the same as
the loan agreement and the supervision and
consultancy fees were to be paid within four
years in both cases coinciding with the
payment for the loan. The other agreements
were merely done as provided for by the loan
agreement, so these excesses were, in fact,
part and parcel of the agreement.
- The P1.3M for four years worth of consultancy
fees was charged in February 1978 when the
agreement is for P332.5K for every year, and
this, along with the underwriting and
supervision fees, were charged from the first
release of the loan. Thus, P1.73M reverted to
FMIC as part of the loan to Este del Sol.
- Furthermore, the Court found that the FMIC
failed to comply with its underwriting and
consultancy obligations, notwithstanding the
fact that these were not necessary since Este
del Sols officers were more than capable.
- The underwriting and consultancy agreements
were essential conditions for the grant of the
loan. The Court said that an apparently
lawful loan is usurious when it is intended
that additional compensation for the loan be
disguised by an ostensibly unrelated contract
providing for payment by the borrower for the
65 291
 lenders services which are of little value or
which are not in fact to be rendered.

- Art. 1957 states that contracts and

stipulations, under any cloak or device
whatever, intended to circumvent the laws
against usury shall be void. The borrower may
recover in accordance with the laws on usury.

This does not mean that the usurious loan is

void because of the usurious interest; the
principal still stands for Este del Sol to pay but
the usurious interest becomes void. The Court
agrees with the appellate court as to the
excessive nature of the penalties, liquidated
damages and attorneys fees.

Obligations and Contracts 66 291

 Gaite v. Fonacier
G.R. No. L-11827
Jul. 31, 1961
Reyes, J.
Hans Dantes
Keywords: Mining; period v. suspensive
condition
Facts:
- Fonacier owned 11 lode iron mineral claims,
known as Dawahan Group, in Jose Panganiban,
Camarines Norte. He appointed Gaite as his
attorney- in-fact in the exploration and
development of said mineral claims on a royalty
basis of P0.50/ton of ore extracted therein.
- Gaite assigned conveyance of the same to his
solely-owned company Larap Iron Mines,
subject to the same royalty basis required by
Fonacier. With the said venture, plaintiff caused
development of the mining claims (e.g.
construction of roads, mining facilities), and
extracted ore.
- Fonacier then decided to rescind the power of
attorney given to Gaite, which the latter agreed
to subject to P20,000 plus 10% royalties that
Fonacier would receive for the mining claims.
- Gaite then transferred all his interests and
rights over Larap Iron Mines, including all
records and documents. In addition, plaintiff
transferred to defendant all his rights and
interests over the 24,000 tons of iron ore,
more or less in exchange for P75,000, P10,000
of which was paid upon signing of the
Revocation of Power of Attorney, with the
balance of P65,000 to be paid from the first
letter of credit covering the first shipment of
iron ores and from the first amount derived
from the local sale or iron ore made by Larap
Mines.
- For the remaining P65,000, defendant
presented plaintiff a surety bond with the
former (Fonacier) as principal and Larap Mines
and its stockholders as sureties. But plaintiff
sought an additional bond underwritten by a
bonding company. Thus defendant put up
another bond with Far Eastern Surety and
Insurance Co., but it provided that the liability
Obligations and Contracts
of the surety company would only have effect if
there had been actual sale of iron ore for an
amount not less than P65,000, and that this
liability would expire after one year, that is on
December 8, 1955.
- On December 8, 1955, bond with Far Eastern
had expired and was not renewed, none of the
24,000 tons of iron ore had been sold and
Fonacier and the other sureties were unable to
pay Gaite P65,000 upon his demand. Gaite then
brought action for the payment of P65,000.
- Defendants countered that payment of the
P65,000 was conditioned on sale of iron ore by
the company, which had not happened,
rendering their obligation to pay not yet
demandable and that only 7,573 tons of the
estimated 24,000 was actually delivered to
them. Lower court ruled in favor of plaintiff.
Issue/s:
1. WON the obligation of appellant Fonacier to
pay appellee Gaite the P65,000.00 is one with a
period or term and not one with a suspensive
condition, and that the term expired on
December 8, 1955
2. WON there were really 24,000 tons of iron
ore in the stockpiles sold by appellee Gaite to
appellant Fonacier
Ruling:
The lower courts decision is affirmed.
Ratio:
1. Yes. Shipment or sale of iron ore by the
company was not a suspensive condition for the
obligation to pay Gaite to arise, but was only a
suspensive period or term. A conditional
obligation is the fact that its efficacy or
obligatory force (as distinguished from its
demandability) is subordinated to the
happening of a future and uncertain event; so
that if the suspensive condition does not take
place, the parties would stand as if the
conditional obligation had never existed.
- The parties to the contract in this case did not
intend any such state of things to prevail.
Words of the contract express no uncertainty in
the existence of the obligation to pay. Only the
67 291
 maturity and demandability is deferred, not the estimated number of cubic meters of ore
existence. multiplied by the average tonnage factor per
- While obligations to pay may legally be cubic meter. The price of P75,000 agreed upon
subjected to a suspensive condition, that is not was not derived from any such measurement.
the case here. It is clear from Gaites insistence - The subject matter of the sale is therefore a
on surety bonds that he desired not to run the determinate object, the mass or mound or heap
risk of not being paid anything. Also, that of ore, and not the actual number of units or
defendants put up such bonds is admittance of tons contained therein. All that was required of
the existence of the obligation to pay. the seller Gaite was to deliver in good faith to
- To subordinate the obligation to pay to the his buyer all the ore found in the mass,
sale of shipment or ore as suspensive condition notwithstanding the quantity.
would be tantamount to leaving the payment at
the discretion of the defendant (as then
obligation would not arise if defendants did not
make steps to sell the ore, thus allowing them
to postpone payment indefinitely).
- By operation of Art. 1198, defendants
forfeited the right to make Gaite wait for the
payment upon failure to renew the surety bond
with Far Eastern or replace it with an equivalent
guaranty. Said failure impaired Gaites securities
as creditor.
- Art. 1198. provides that: The debtor shall lose
every right to make use of the period:
1. x x x
2. when he does not furnish to the creditor the
guaranties which he has promised
3. when by his own acts he has impaired said
guaranties or securities after their
establishment, and when through fortuitous
event they disappear, unless he immediately
gives new ones equally satisfactory
Gaite therefore acted within his rights in
demanding payment and instituting this action
one year from and after the contract was
executed, eithervbecause the appellant debtors
had impaired the securities originally given and
thereby forfeited any further time within which
to pay; or becausevthe term of payment was
originally of no more than one year, and the
balance of P65,000.00 became due and payable
thereafter.

2. Yes. The figure was mere estimate, and

neither of the parties tried to accurately
determine the figure.
- There is no provision in the contract for
measuring or weighing the ore. Both parties
predicate their respective claims only upon an

Obligations and Contracts 68 291

 Gonzales v. Heirs of Thomas
G.R. No. 131784
Sept. 16, 1999
Panganiban, J.

Michael de Castro (DIGEST MISSING IN

DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 69 291

 Coronel v. CA
G.R. No. 103577
Oct. 7, 1996
Melo, J.
Jocs Dilag
Keywords: Receipt of downpayment; contract
to sell v. contract of sale
Facts:
- Jan 19, 1985: Petitioners Coronel, et.al.
executed a Receipt of Down Payment in favor
of private respondent Alcaraz, after receiving
P50,000 as down payment for an inherited
house and lot to be sold for a total of
P1,240,000. The same document also stipulated
that the petitioners shall effect transfer in their
names the TCT from the name of their deceased
father. Upon presentation of the new TCT, it is
stipulated that they execute a deed of absolute
sale with Alcaraz, who shall immediately pay the
balance of P1,190,000.
- Feb 6, 1985: Title was successfully transferred
to names of petitioners.
- Feb 18, 1985: The Coronels instead sold the
property to one Catalina Mabanag for
P1,580,000, and cancelled the contract with
Alcaraz by depositing the P50,000 down
payment in trust for Alcaraz.
- Feb 22, 1985: Alcaraz filed a complaint for
specific performance against the Coronels and
caused the annotation of a notice lis pendens
(pending litigation) on the TCT.
- April 25, 1985: Coronels executed a Deed of
Absolute Sale with Mabanag, and a new title
with Mabanags name was issued subsequently
- April 14, 1988: TC ruled in favor of Alcaraz,
caused the delivery of the property to the
former, and cancelled the title with Mabanags
name.
- CA upheld the TC decision, hence this appeal.
Issue/s:
1. WON the receipt of down payment was a
contract of sale or a contract to sell
2. WON petitioners may validly dispose of the
property despite the same not being in their
name
Obligations and Contracts
3. WON the sale to Mabanag constituted a
double sale done in bad faith
Ruling:
The petition is dismissed. TC and CA decisions
are affirmed.
Ratio:
1. Receipt of down payment was a conditional
contract of sale, with the transfer of the title
from the deceased father to the petitioners as
the suspensive condition.
- It is not a contact to sell because there was no
express reservation of ownership or title to the
subject property, and because the circumstance
which prevented the sale pertained to the
sellers and not the full payment of the purchase
price.
- The word receipt manifests a clear intent to
transfer, such that had there been no problem
with the title, the sale could have been
consummated right there and then.
- They did not merely promise to sell, but
instead AGREED on a conditional contract of
sale, consummation of which is subject only to
the successful transfer of the title to the
petitioners names (suspensive condition).
Therefore, as soon as the titles were good to go,
petitioners were committed to execute the sale
(by Art. 1181).
- By operation of Art. 1187, the obligations of
the parties under the contract became mutually
due and demandable as of the time of
fulfilment of the suspensive condition on Feb 6,
1985.
- Alcaraz then has a better right to the property
than Mabanag because the formers contract of
sale was perfected before that of the latter
[Title transferred Feb 6 vs. Sale to Mabanag Feb
18]
2. Yes. Petitioners may validly dispose of the
property despite the same not being under
their names by virtue of succession.
- Upon death of the decedent, they were called
to succession, such that any rights or
obligations pertaining to the property became
binding and enforceable upon them
70 291
 - Thus, the receipt/contract entered into on
January 19, despite not yet being under their
name, was valid.
- Petitioners are estopped from raising their
lack of capacity after having represented
themselves as the true owners at the time of
the sale.

3. The sale to Mabanag constituted a double

sale done in bad faith.
- Art. 1544 says that ownership of a property
shall belong to the person who first recorded it
in the Register of Property in GOOD FAITH [if
she had no knowledge of the earlier sale].
- Mabanags recording, while done before that
of Alcaraz, was in BAD FAITH because prior to
this, Alcaraz caused the notation of her
claim/pending litigation on the TCT. At the time
of registration, therefore, the former knew of
the defect, which thus constituted bad faith.

Obligations and Contracts 71 291

 Parks v. Province of Tarlac
G.R. No. L-24190
Jul. 13, 1926
Avancea, CJ.
Diane Dolot
Keywords: Land donated to Tarlac for public
school and park conversion
Facts:
- Concepcion Ciller and James Hill are the
owners of a parcel of land. They donated said
land to the municipality of Tarlac in the
province of Tarlac under the condition that a
public school be erected and a public park be
made of the donated land, which work shall
commence within 6 months from the
ratification of the donation
- The donation was accepted by Mr. de Jesus on
behalf of the municipality as its president.
- Later on, Cirer and Hill sold the land to plaintiff
Parks.
- Subsequently, the municipality of Tarlac
transferred the parcel of land to the Province of
Tarlac, thereby issuing the title of the same to
the latter.
- Plaintiff now assails the validity of the
donation in view of the municipality's non-
compliance with the conditions. He alleges that
as the donation has not been perfected and the
land has been sold by the original owners in his
favor, he should be declared the rightful owner
of the land in question.
Issue/s:
1. WON plaintiff is the rightful owner of the
land
2. WON the conditions provided are condition
subsequent
Ruling:
The judgment appealed from is affirmed.
Ratio:
1. No. The plaintiff has no right of action.
- The sale is invalid and thus ineffective as the
land had been donated to the municipality prior
to the said sale.
Obligations and Contracts
- In view of the donation, the ownership of the
said land has already been vested to the
municipality; Ciller an d Hill, therefore, are no
longer the rightful owners of the land.
- Not being the rightful owners, they cannot
convey said land to plaintiff. The donation,
however, may be revoked in two ways: 1) the
donee, the municipality, consents to the
revocation; and 2) by virtue of a judicial decree.
None of these, however, existed.
2. Yes. The plaintiff asserts that the conditions
provided are condition precedent such that
non-compliance to which shall not commence
any obligation nor right.
- The characteristic of a condition precedent is
that the acquisition of the right is not effected
while said condition is not complied with or is
not deemed complied with. Meanwhile nothing
is acquired and there is only an expectancy of
right. Consequently, when a condition is
imposed, the compliance of which cannot be
effected except when the right is deemed
acquired, such condition cannot be a condition
precedent.
- In the present case the condition that a public
school be erected and a public park made of the
donated land, work on the same to commence
within six months from the date of the
ratification of the donation by the parties, could
not be complied with except after giving effect
to the donation. The donee could not do any
work on the donated land if the donation had
not really been effected, because it would be an
invasion of another's title, for the land would
have continued to belong to the donor so long
as the condition imposed was not complied
with.
- The appellant also contends that, in any event,
the condition not having been complied with,
even supposing that it was not a condition
precedent but subsequent, the non-compliance
thereof is sufficient cause for the revocation of
the donation. This is correct. But the period for
bringing an action for the revocation of the
donation has prescribed. That this action is
prescri ptible, there is no doubt. There is no
legal provision which excludes this class of
action from the statute of limitations. And not
72 291
 only this, the law itself recognizes the
prescriptibility of the action for the revocation
of a donation, providing a special period of five
years for the revocation by the subsequent
birth of children (Art. 646, Civil Code), and one
year for the revocation by reason of ingratitude.
If no special period is provided for the
prescription of the action for revocation for
noncompliance of the conditions of the do
nation (Art. 647, Civil Code), it is because in this
respect the donation is considered onerous and
is governed by the law of contra cts and the
general rules of prescription. Under the law in
force (Sec. 43, Code of Civ. Proc.) the period of
prescription of this class of action is ten years.
The action for the revocation of the donation
for this cause arose on April 19, 1911, that is six
months after the ratification of the instrument
of donation of October 18, 1910. The complaint
in this action was presented July 5, 1924, more
than ten years after this cause accrued.

Obligations and Contracts 73 291

 Central Philippine University v. CA
G.R. No. 112127
Jul. 17, 1995
Bellosillo, J.
Julie Enad
Keywords: Donation to Central Philippine
University
Facts:
- 1939: Don Ramon Lopez (now represented by
heirs) executed a deed of donation, with a
Transfer Certificate of Title in favour of CPU
with the following annotations written at the
back:
1) The land described shall be utilized by CPU
exclusively for the establishment and use of a
medical college with all its build ings as part
of the curriculum;
2) The said college shall not sell, transfer or
convey to any third party nor in any way
encumber said land;
3) The land should be called RAMON LOPEZ
CAMPUS, and the college shall be under
obligation to erect a cornerstone bearing that
name. Any net income from the land or any of
its parks shall be put in a fund to be known as
RAMON LOPEZ CAMPUS FUND to be used
for improvements of said campus and
erection of a building thereon.
- May 31, 1989: Heirs of Don Lopez filed an
action for annulment of donation, alleging that
CPU had not complied with the conditions of
the donation, and that CPU had negotiated with
the NHA to exchange the property with another
land.
- CPU retorts: that the right to file the action
has prescribed; that it did not violate any of the
conditions in the deed of donation because it
never used the donated property for any other
purpose than that for which it was intended;
and, that it did not sell, transfer or convey it to
any third party.
- RTC held that CPU failed to comply with
conditions of the donation and declared it null
and void, ordering CPU to execute a deed of
reconveyance of the property in favour of
respondents.
Obligations and Contracts
- CA ruled that the annotations were resolutory
conditions, whose breach should terminate the
rights of the done, thus making the donation
revocable. The CA pointed out that the donor
did not fix a period within which the condition
must be fulfilled, hence, until a period was fixed
for the fulfilment of the condition, petitioner
could not be considered as having failed to
comply with its part of the bargain.
- CA reversed the RTC decision and remanded
the case for the determination of the time
within which petitioner should comply with the
first condition in the certificate of title.
Issue/s:
WON the donation was onerous/resolutory
Ruling:
The RTC decision was reinstated and affirmed,
and CA decision modified. CPU was directed to
reconvey to respondents the lot donated.
Ratio:
- Yes. The court concluded that the donation
was onerous, one executed for a valuable
consideration which is considered the
equivalent of the donation itself.
- Under Art. 1181 of the CC, conditional
obligations, the acquisition of rights, as well as
the extinguishment or loss of those already
acquired, shall depend upon the happening of
the event which constitutes the condition. Thus,
the condition imposed in the donation (building
of school) was not a condition precedent or a
suspensive condition but a resolutory one.
- It would be wrong to say that the schoolhouse
had to be erected before the donation became
effective, because that would be invading the
property rights of the donor since the donee is
not the owner of the land yet. The donation had
to be valid before the fulfilment of the
condition.
- If there was no fulfilment/compliance with the
condition, such as in this case, the donation
may now be revoked and all rights which the
done may have acquired under it shall be
deemed lost and extinguished.
- The time from which the cause of action
accrued for the revocation of the donation and
74 291
 recovery of the property donated cannot be
specifically determined in the instant case. A
cause of action arises when that which should
have been done is not done, or that which
should not have been done is done. In this case,
the starting point begins with expiration of a
reasonable period and opportunity for
petitioner to fulfil what has been charged upon
it by the donor.
- Under Art. 1197 of the CC, when the obligation
does not fix a period but from its nature and
circumstances it can be inferred that a period
was intended, the courts may fix the duration
thereof because the fulfilment of the obligation
itself cannot be demanded until after the court
has fixed the period for compliance therewith
and such period has arrived. But this rule
CANNOT BE APPLIED in this case, because more
than a reasonable period of 50 years has
already passed for petitioner to comply with the
condition.
- Hence, there is no more need to fix the
duration of a term of the obligation when such
procedure would be a mere technicality and
formality and would serve no purpose than to
delay or lead to an unnecessary and expensive
multiplication of suits.

Obligations and Contracts 75 291

 Quijada v. CA
G.R. No. 126444
Dec. 4, 1998
Martinez, J.
Apo Espaola
Keywords: Donation of land for conversion to
Talacogon provincial high school
Facts:
- Trinidad vda. de Quijada inherited from Pedro
Corvera two hectares of land.
- She and her sisters Leonila and Paz and
brother Epapiadito executed a conditional deed
of donation of the land in favor of the
Municipality of Talacogon, Agusan del Sur.
- The condition was that the land shall be used
solely and exclusively as part of the campus of
the proposed Talacogon provincial high school.
- Trinidad, however, remained in possession of
the land despite the donation. She verbally sold
one hectare to Regalado Montejar, who later
sold the land to the other respondents.
- Meanwhile, the Sangguniang Bayan of
Talacogon enacted a resolution reverting the
two hectares of land back to the donors, due to
the failure of the municipality to build the
provincial high school.
- Petitioners allege that their deceased mother
never sold the property to any person and at
the time of the alleged sale to Mondejar, the
land belonged to the Municipality of Talacogon.
Issue/s:
WON the sale of the land donated was valid,
given that the condition for the donation had
not occurred
Ruling:
The assailed CA decision is affirmed.
Ratio:
- Yes. The Court explained its ruling hence:
- The condition imposed was resolutory. The
donation of land was subject to the condition
that the property shall be used solely as part of
the campus of the proposed provincial high
school. Should the construction of the high
Obligations and Contracts
school not occur or be discontinued, the
donated property was agreed upon to
automatically revert to the donor.
- As long as a resolutory condition exists and is
capable of fulfillment, the donation remains
effective, with the donee as the owner. No
period need be imposed, as long as the done
has tried to comply with the condition within a
reasonable period.
- The period, however, became irrelevant when
the Municipality manifested that it could not
comply with the condition of building a school.
- The donation and sale were both perfected,
but the consummation of the sale did not occur.
- A donation is perfected once the donees
acceptance is made known to the donor.
Ownership is immediately transferred to the
donee, and will only revert to the donor if the
resolutory condition is not fulfilled. The donor,
however, continues to have an inchoate
interest in the property, and this interest may
be the subject of contracts.
- Meanwhile, a sale is perfected by mere
consent of the parties as to the offer and
acceptance of the subject matter, the price and
the terms of payment. Ownership by the seller
at such time is not an element of perfection.
Consummation, however, occurs only upon
constructive or actual delivery of the object to
the buyer, after the seller or successors-in-
interest acquires ownership.
- So, when the land reverted to Trinidads heirs
and they became its owners, ownership was
consequently transferred also to Mondejar and
other respondents.
76 291
 Lao Lim v. CA
G.R. No. 87047
Oct. 31, 1990
Regalado, J.
Pia Falcone
Keywords: Perpetual lease
Facts:
- Benito Villavicencio, the respondent, entered
into a contract of lease with petitioner for a
period of 3 years.
- After the term expired, he refused to vacate,
which led to petitioner filing an ejectment suit. -
- The case terminated after a judicially
approved compromise agreement of the parties,
providing in part: 3. That the term of the lease
shall be renewed every three years retroacting
from October 1979 to October 1982; after
which the above named rental shall be raised
automatically by 20% every three years for as
long as defendant needed the premises and can
meet and pay the said increases, the defendant
to give notice of his intent to renew sixty (60)
days before the expiration of the term.
- The lease continued from 1979 to 1985. On
April 1985, petitioner advised respondent that
he would no longer be renewing the contract
effective October 1985.
- On August 1985, however, respondent
informed petitioner in writing his intention to
renew the contract for another term.
- Petitioner did not agree to renew, respondent
refused to vacate, petitioner filed another
ejectment suit.
Issue/s:
1. WON the lease is continuous that will expire
depending on the defendants need of the
premises
2. WON the compromise agreement constitutes
res judicata to the case before it
Ruling:
The CAs decision was reversed and set aside,
and the private respondent was ordered to
vacate and return the possession of the leased
premises and to pay the monthly rentals due
Obligations and Contracts
thereon in accordance with the compromise
agreement until he vacated the same.
Ratio:
1. No, the lease is not continuous. Contrary to
the ruling of the respondent court, for as long
as defendant needed the premises and can
meet and pay the said increases is a purely
potestative stipulation and not resolutory
because it leaves the effectivity and enjoyment
of leasehold rights to the sole and exclusive will
of the lessee. It is also a suspensive condition
because the renewal of the lease, which gives
rise to a new lease, depends upon said
condition.
- The continuance, effectivity, and fulfillment of
a contract of lease cannot be made to
completely deprive the owner of any say in the
matter. Says the Court, the lease is fixed at a
period of 3 years, although subject to renewal
upon agreement of the parties, and the clause
for as long as defendant needs the premises
and can meet and pay the rents is not an
independent stipulation but is controlled by
said fixed term and the option for renewal upon
agreement of the parties.
- Moreover, perpetual leases and covenants for
continued renewals tending to create
perpetuity arent favoured in law. A lease will
only be construed as such if the language
indicates clearly and unambiguously that it was
the intention and parties to do so.
2. No, because the doctrine doesnt apply to
this case. For a judgment to be a bar to a
subsequent case: a. it must be a final judgment;
b. the court which rendered it had jurisdiction
over the subject matter and the parties; c. it
must be a judgment on the merits; and d. there
must be identity between the two cases as to
parties, subject matter, and cause of action
NOT ALL REQUISITES ARE MET
No identity of subject matter. The lease
executed in 1978 is one thing; the lease
constituted in 1982 by the compromise
agreement is another.
No identity in the cases of action. The
delict/wrong in the first case was
respondents refusal to comply. In the
77 291
 present case, although similar refusal, its
with respect to the lease which expired in
October 1985 under the compromise
agreement. The compromise agreement
only settled the first case. It didnt cover
any cause of action that might arise
thereafter.

Obligations and Contracts 78 291

 NATELCO v. CA
G.R. No. 107112
Feb. 24, 1994
Nocon, J.
Christopher Hermosisima
Keywords: Telephone lines and electrical post
Facts:
- Natelco is a telephone company rendering
local/long distance telephone services in Naga,
while private respondent Casureco is a private
corporation established for purpose of
operating electric power service
- Nov. 1, 1977: The parties entered into a
contract for the use by Natelco of Casureco's
electric light posts in Naga City. In consideration,
petitioners agreed to install, free of charge, 10
telephone connections for the use by Casureco.
- Said contract also provided: "That the term or
period of this contract shall be as long as the
party of the 1st part (Natelco) has need for the
electric light posts of the party of the 2nd part
(Casureco) it being understood that this
contract shall terminate when for any reason
whatsoever, the party of the second part is
forced to stop, abandoned its operation as a
public service and it becomes necessary to
remove the electric lightpost."
- After the contract had been enforced for 10
years, Casureco filed on Jan. 1989 against
petitioners for reformation of contract with
damages, on the ground that said contract is
too one-sided for Natelco. Reasons:
Telephone cables strung by them on
electrical posts have become heavier as
subscribers increased
Linemen bore holes w/c caused them to
break during typhoons
Petitioners have used posts outside of
Naga City w/o any contract w/ it
Natelco has been providing poor servicing
for the 10 telephone units given to
Casureco w/c had caused it great
inconvenience
- RTC ruled in favor of Casureco. CA affirmed
but from a different angle: 1) Art. 1267 of NCC
is applicable; and 2) the contract was subject to
Obligations and Contracts
a potestative condition w/c rendered said
condition void.
Issue/s:
1. WON Art. 1267 applies
2. WON private respondent's action for
reformation of a contract already prescribed
3. WON the condition regarding the term of the
contract is potestative
Ruling:
Petition denied. CAs decision affirmed.
Ratio:
1. Art. 1267 provides: When the service has
become so difficult as to be manifestly beyond
the contemplation of the parties, the obligor
may also be released therefrom, in whole or in
part. This article speaks of services w/c have
become so difficult. Service here should be
understood as referring to performance of the
obligation.
- A bare reading of the article reveals that it is
not a requirement thereunder that the contract
be for future service w/ future unusual change.
It states the doctrine of unforeseen events,
based on the principle of rebus sic stantibus.
Under this theory, parties stipulate in light of
certain prevailing conditions, and once these
conditions cease to exist, the contract also
ceases to exist. Disappearance of the basis of a
contract gives rise to relief in favor of the party
prejudiced.
- Facts mentioned by Casureco have pointed
out that Art. 1267 is indeed applicable in this
case, resulting in releasing the parties from
their correlative obligations under the contract.
- However, the possible consequences of
merely releasing the parties from the contract
could lead to: 1) disruption in Natelco's
essential service to the public; and 2) causing
prejudice to Casureco's business if it returns the
telephone units
- Rather, the court orders: a) petitioners to pay
private respondent for the use of its posts in
Naga and in other towns at a sum of P10/month;
and b) private-respondents to pay petitioners
the monthly dues of all its telephones at the
same rate being paid by the public.
79 291
 - The court stated that it is "...not making a new
contract for the parties herein, but we find it
necessary to do so in order not to disrupt basic
and essential services being rendered by both
parties herein to the public and to avoid unjust
enrichment by the appellant..."

2. No. In reformation of contracts, what is

reformed isn't the contract itself, but the
instrument embodying the contract. It follows
that whether the contract is disadvantageous or
not is irrelevant to reformation.
- Art. 1144 provides that an action upon a
written contract must be brought w/in 10 years
from the time the right of action accrues.
Casureco's right of action arose sometime
during the latter part of 1982 or in 1983 when
the Board of Directors asked to study the said
contract.

3. No. The 1st part is potestative, but it must be

read with the 2nd part "xx it being understood
that this contract shall terminate when for any
reason whatsoever, the party to the second part
(Casureco) is forced to stop, abandoned its
operation as a public service and it becomes
necessary to remove the electric light post."
(Casual conditions since they depend on chance
hazard, or the will of a third person)
- The contract is subject to mixed conditions,
depending partly on the will of the debtor and
partly on chance, hazard or will of a third
person.

Obligations and Contracts 80 291

 Osmea v. Rama
G.R. No. 4437
Sept. 9, 1909
Johnson, J.

Paolo Macariola (DIGEST MISSING IN

DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 81 291

 Hermosa v. Longora
G.R. No. L-5267
Oct. 27, 1953
Labrador, J.

Carlos Marin (DIGEST MISSING IN DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 82 291

 Taylor v. Uy Tieng Piao
G.R. No. L-16109
Oct. 2, 1922
Street, J.

Michael Trance Nuez (DIGEST MISSING IN

DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 83 291

 Smith Bell v. Sotelo Matti
G.R. No. L-16570
Mar. 9, 1922
Romualdez, J.

Andrea Ocampo (DIGEST MISSING IN

DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 84 291

 Rustan Pulp and Paper Mills v. IAC
G.R. No. 70789
Oct. 19, 1992
Melo, J.

Justin Ordoyo (DIGEST MISSING IN DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 85 291

 Romero v. CA
G.R. No. 107207
Nov. 23, 1995
Vitug, J.
Carlos Pagdanganan
Keywords: Conditional sale predicated on
eviction of squatters
Facts:
- Petitioner Virgilio Romero executed a deed
of conditional sale with respondent
Enriqueta Chua vda. de Ongsiong for a 1,952
sqm. lot. Among the conditions for the sale
were:
P50,000 to be paid by petitioner to
respondent upon signing of contract
Balance of P1,511,600 to be paid 45 days
after removal of squatters from property
Upon full payment, deed of absolute sale
to be delivered to petitioner
If respondent is unable to remove
squatters from property 60 days after
signing of contract, P50,000 will be
returned to petitioner
If petitioner is unable to pay respondent
P1,511,600 45 days after removal of
squatters, P50,000 to be forfeited in favor
of respondent
- Respondent eventually sought to return the
P50,000 to petitioner because she could not
get rid of the squatters.
- Petitioner refused, even offering to take it
upon himself to have the squatters evicted.
- Respondent filed for rescission of the deed of
conditional sale before the Makati RTC, which
was dismissed. Appeal was filed and the CA
ruled for respondent.
purchase price, and the latter to execute the
deed of absolute sale in favor of petitioner.
Ratio:
- No. The Court first determined the nature of
the contract between the two parties, stating
that it was simply a contract of sale which once
perfected, would have the seller transferring
ownership of the lot to the buyer for an agreed
price. Once the said contract was perfected,
both parties were bound to fulfill what was
expressly stipulated in the contract in keeping
with good faith, usage, and law.
- Under the agreement, respondent was
obligated to evict the squatters, upon which
would set into motion the period of compliance
by the petitioner to pay for the lot.
- Since the respondent failed to remove the
squatters from the property within the
stipulated period, the right to refuse to proceed
with the agreement or waive that particular
condition belonged clearly to the petitioner in
consonance with Art. 1545 of the CC.
- Private respondents action for rescission was
not warranted because clearly, she was not the
injured party.

Issue/s:
WON respondent could validly rescind the
contract

Ruling:
The questioned decision of the CA is reversed
and set aside, and the court ordered petitioner
to pay private respondent the balance of the

Obligations and Contracts 86 291

 Roman Catholic Arch of Manila v. CA
G.R. Nos. 77425 & 77450
Jun. 19, 1991
Regalado, J.

Carlos Poblador (DIGEST MISSING IN DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 87 291

 Heirs of Timoteo Moreno v. Mactan-Cebu
International Airport Authority
G.R. No. 156273
Oct. 15, 2003
Bellosillo, J.

Laurie Quiambao (DIGEST MISSING IN

DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 88 291

 Taylor v. Uy Tieng Piao
G.R. No. L-16109
Oct. 2, 1922
Street, J.

Michael Trance Nuez (DIGEST MISSING IN

DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 89 291

 Herrera v. Leviste
G.R. No. L-55744
Feb. 28, 1985
Melencio-Herrera, J.

Paolo Quilala (DIGEST MISSING IN DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 90 291

 Song Fo v. Hawaiian Philippine Co.
G.R. No. 23769
Sept. 16, 1925
Malcolm, J.
Laurie Quiambao
Keywords: Molasses; slight v. substantial
breach
Facts:
- Song Fo & Company (plaintiff) presented a
complaint for breach of contract against
Hawaiian Philippine Co. (defendant).
- Defendant said that the plaintiff defaulted
in the payment for the molasses the defendant
delivered to it so the latter was compelled to
cancel and rescind the said contract.
- In a letter by Hawaiian to Song Fo, it was
established that Song Fo agreed to the 300k
gallons of molasses but requested for another
100k gallons to which Hawaiian said that, we
believe that this is possible and we will do our
best to let you have these extra 100k gallons
during the next year the same to be taken by
you before Nov. 1, 1923, along with the 300k,
making 400k gallons in all. Regarding the
payment for our molasses, Mr. Song Fo gave
us to understand that you would pay us at the
end of each month for molasses delivered to
you.
- Song Fo confirmed the arrangements in its
reply, With reference to the contents of your
letter dated the 13th inst. we confirm all the
arrangements you have stated.
- The CFI ruled in favour of Song Fo, hence this
appeal by Hawaiian.
Issue/s:
1. WON the defendant agreed in the contract to
sell to the plaintiff 400,000 gallons of molasses
(rather than 300,000 gallons)
2. WON Hawaiian had the right to rescind the
contract of sale made with Song Fo because the
latter failed to pay for the molasses within the
time agreed upon
Ruling:
Obligations and Contracts
The court ruled that the agreement was for
300k gallons of molasses only, and that there is
only slight breach and therefore Hawaiian had
no right to rescind the sale.
Ratio:
1. There was only one interpretation of the
letter by Hawaiian regarding the amount of
molasses that the agreed amount by both
parties was for 300k gallons only. The language
used by Hawaiian in the letter did not entail a
definite promise for an extra 100k gallons and
thus, cannot be construed as an obligation.
2. The letters indicate that Song Fo was to pay
for the molasses delivered at the end of each
month. However, it only paid on February 20
(for the December delivery) when it should
have paid not later than January 31 (as the
accounts were received on Jan 5).
- But the general rule is that rescission will not
be permitted for a slight or casual breach of the
contract and will only be allowed when such
breaches are so substantial and fundamental as
to defeat the object of the parties in making the
agreement.
- A delay In payment for a small quantity of
molasses for about 20 days isnt such a grave
violation of an essential condition of the
contract that would warrant rescission
for nonperformance.
- Also, Hawaiian waived this condition when it
arose by accepting payment of the overdue
accounts and continuing with the contract.
91 291
 Boysaw v. Interphil Promotions
G.R. No. L-22590
Mar. 20, 1987
Fernan, J.
Alex Ramos
Keywords: Dispute out of contract on boxing
match
Facts:
- On May 1, 1961, petitioner Solomon Boysaw
and his then Manager, Willie Ketchum, signed
with respondent Interphil Promotions, Inc.,
represented by Lope Sarreal, Sr., a contract to
engage Gabriel "Flash" Elorde in a boxing
contest for the junior lightweight championship
of the world.
- They stipulated that the fight will be held on
Sept. 30, 1961 or not later than thirty [30] days
thereafter, should a postponement be mutually
agreed upon. Also, Boysaw would not engage in
any other contest before the bout without
Interphil's consent.
- On May 3, 1961, the same contract was
entered into by Elorde
- On June 19,1961 Boysaw found Louis Avila and
won in Las Vegas
- On July 2, 1961 Ketchum assigned to J. Amado
Araneta his managerial rights over Boysaw
- On July 31, 1961 Boysaw arrived in the
Philippines
- On September 1, 1961, Araneta assigned his
managerial rights to Alfredo J. Yulo, Jr. GAB
(Games and Amusement Board) expressed
concerns on the switching of managers and
called on Boysaw to clarify the situation
- GAB decided to hold the Elorde-Boysaw bout
on November 4.
- Yulo Jr. refused. Sarreal offered to move the
date on October 26 (still within the 30 day
period) but he still refused.
- Yulo informed Besa that he was willing to
approve the fight date of November 4, 1961
provided the same was promoted by Besa.
- Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr.
and Manuel Nieto, Jr. for damages allegedly
occasioned by the refusal of Interphil and
Sarreal, aided and abetted by Nieto, Jr., then
Obligations and Contracts
GAB Chairman, to honor their commitments
under the boxing contract of May 1,1961.
- Boysaw left the country without informing the
court and, as alleged, his counsel. Boysaw was
called by court but he was not able to present
himself.
Issue/s:
1. WON there was a violation of the fight
contract of May 1, 1961, and if there was, who
was guilty of such violation
2. WON there was legal ground for the
postponement of the fight date from
September 1, 1961, as stipulated in the May 1,
1961 boxing contract, to November 4, 1961
Ruling:
The SC affirmed the lower courts decision but
deleted the award of moral damages.
Ratio:
1. Yes. Boysaw violated the contract. He fought
Avila without Interphil's consent.
- Art. 1170, Civil Code: Those who in the
performance of their obligations are guilty of
fraud, negligence or delay, and those who in any
manner contravene the terms thereof, are liable
for damages.
- Art. 1191, Civil Code: The power to rescind
obligations is implied, in reciprocal ones, in case
one of the obligors should not comply with what
is incumbent upon him.
- The power to rescind is given to the injured
party.
- Another violation: assignment and transfer,
first to J. Amado Araneta, and subsequently, to
appellant Yulo, Jr., of the managerial rights over
Boysaw without the knowledge or consent of
Interphil. The Court held this to be a novation of
the original contract which, to be valid, should
have been consented to by Interphil.
- Novation which consists in substituting a new
debtor in the place of the original one, may be
made even without the knowledge or against
the will of the latter, but not without the
consent of the creditor. [Art. 1293, Civil Code].
- Interphil's letter to GAB showing concern its
on transfer of management did not show that it
gave consent to such.
92 291
 - Under the law when a contract is unlawfully
novated by an applicable and unilateral
substitution of the obligor by another, the
aggrieved creditor is not bound to deal with the
substitute.

2. Yes, Appellees wanted to postpone the fight

because Elorde had an injury. It was neither
unlawful nor unreasonable.
- The Court upheld the appellees' contention
that since all the rights on the matter rested
with the appellees, and appellants' claims, if any,
to the enforcement of the contract hung
entirely upon the former's pleasure and
sufferance, the GAB did not act arbitrarily in
acceding to the appellee's request to reset the
fight date to November 4, 1961. It must be
noted that appellant Yulo had earlier agreed to
abide by the GAB ruling.
- The refusal of appellants to accept a
postponement (even if it was moved to an
earlier date) without any other reason but the
implementation of the terms of the original
boxing contract entirely overlooks the fact that
by virtue of the violations they have committed
of the terms thereof, they have forfeited any
right to its enforcement.
- Petitioners contention that only Manuel Nieto,
Jr. made the decision for postponement,
thereby arrogating to himself the prerogatives
of the whole GAB Board, was dismissed by the
Court, which said that Yulo himself admitted
that it was the GAB Board that set the
questioned fight date. There is also a
presumption of lawful duty.

Obligations and Contracts 93 291

 UP v. De los Angeles
G.R. No. L-28602
Sept. 29, 1970
Reyes, J.B.L., J.
Dean Reposar
Keywords: Logging concession by UP
Facts:
- UP and Associated Lumber Manufacturing
Company Inc (ALUMCO) entered into a logging
agreement from the date of agreement (Nov. 2,
1960) to Dec. 31, 1965, extendible by 5 years by
mutual agreement.
- ALUMCO would cut, collect and remove
timber from the Land Grant (situated at the
Lubayat areas in Laguna and Quezon), in
consideration of payment to UP of royalties.
- As of Dec. 8 1964, ALUMCO incurred an
unpaid account of P219 362.94 which it had
failed to pay despite repeated demands.
- After UP sent a notice of rescission or
termination of the logging agreement, ALUMCO
executed an instrument entitled
Acknowledgement of Debt and Proposed
Manner of Payments dated Dec. 9, 1964 which
was approved by the UP president. The
instrument stipulated the following:
3. In the event that the payments
called for in Nos. 1 and 2 of this
paragraph are not sufficient to liquidate
the foregoing indebtedness of the
DEBTOR in favor of the CREDITOR, the
balance outstanding after the said
payments have been applied shall be
paid by the DEBTOR in full no later than
June 30, 1965;
xxx xxx xxx
5. In the event that the DEBTOR fails to
comply with any of its promises or
undertakings in this document, the
DEBTOR agrees without reservation
that the CREDITOR shall have the right
and the power to consider the Logging
Agreement dated December 2, 1960 as
rescinded without the necessity of any
judicial suit, and the CREDITOR shall be
entitled as a matter of right to Fifty
Obligations and Contracts
Thousand Pesos (P50,000.00) by way of
and for liquidated damages;
- After ALUMCO again incurred an unpaid
account in the amount of P61 133.74, UP
informed ALUMCO on Jul 19, 1965 that the
logging agreement they had as been rescinded.
- UP filed a complaint in order to collect the
sums of money in accordance to the
stipulations in the instrument. UP also began to
look for other concessionaire take over the
logging operation by advertising an invitation to
bid.
- ALUMCO filed a petition to enjoin UP from
conducting the bidding which was granted by
the respondent judge.
- When UP had received the order, it had
already concluded its contract with Sta. Clara
Lumber Company.
- The court declared UP in contempt of court
and prohibited Sta. Clara Lumber Operation
from continuing logging operations.
Issue/s:
WON UP can treat its contract with ALUMCO
rescinded and disregard the same before any
judicial pronouncement to that effect
Ruling:
The court granted the writ of certiorari and set
aside the order granting the Associated Lumber
Company's petition for injunction.
Ratio:
- Yes, the stipulation between UP and
ALUMCOs instrument already gave UP the right
and power to render the Logging agreement as
rescinded without the necessity of a judicial suit.
- This stipulation is in connection with Art. 1191
of the Civil Code and the Supreme Courts ruling
in Froilan v. Pan Oriental Shipping Co which
stated: There is nothing in the law that
prohibits the parties from entering into
agreement that violation of the terms of the
contract would cause cancellation thereof, even
without court intervention. In other words, it is
not always necessary for the injured party to
resort to court for rescission of the contract.
- The Court however, stated that if one party
treats a contract as cancelled by virtue of
94 291
 infractions of the other must be made known to becomes plain that the acts of the court a quo
the latter. It is also provisional and can be in enjoining petitioner's measures to protect its
subject to scrutiny by the proper court. If the interest without first receiving evidence on the
other party denies that rescission is justified, it issues tendered by the parties, and in
is free to resort to judicial action in its own subsequently refusing to dissolve the injunction,
behalf, and bring the matter to court. were in grave abuse of discretion, correctible by
- In other words, the party who deems the certiorari.
contract violated may consider 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.
- But the law definitely does not require that
the contracting party who believes itself injured
must first file suit and wait for a judgment
before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the
other's breach will have to passively sit and
watch its damages accumulate during the
pendency of the suit until the final judgment of
rescission is rendered when the law itself
requires that he should exercise due diligence
to minimize its own damages (Art. 2203).
- In the light of the foregoing principles, and
considering that the complaint of petitioner
University made out a prima facie case of
breach of contract and defaults in payment by
respondent ALUMCO, to the extent that the
court below issued a writ of preliminary
injunction stopping ALUMCO's logging
operations, and repeatedly denied its motions
to lift the injunction; that it is not denied that
the respondent company had profited from its
operations previous to the agreement of 5
December 1964 ("Acknowledgment of Debt and
Proposed Manner of Payment"); that the
excuses offered in the second amended answer,
such as the misconduct of its former manager
Cesar Guy, and the rotten condition of the logs
in private respondent's pond, which said
respondent was in a better position to know
when it executed the acknowledgment of
indebtedness, do not constitute on their face
sufficient excuse for non-payment; and
considering that whatever prejudice may be
suffered by respondent ALUMCO is
susceptibility of compensation in damages, it

Obligations and Contracts 95 291

 De Erquiaga v. CA
G.R. No. 47206
Sept. 27, 1989
Grino-Aquino, J.
Gianella Reyes
Keywords: Shares of stock
Facts:
- Santiago de Erquiaga was the owner of 100%
or 3,100 paid-up shares of stock of the
Erquiaga Development Corporation which owns
the Hacienda San Jose in Irosin, Sorsogon.
- On November 4, 1968, he entered into an
Agreement with Jose L. Reynoso to sell to the
latter his 3,100 shares (or 100%) of Erquiaga
Development Corporation for P900,000,
payable in installments on definite dates fixed
in the contract but not later than November 30,
1968.
- Reynoso failed to pay the second and third
installments on time.
- The total price of the sale was later
increased to P971,371.70 payable on or
before December 17, 1969. The difference of
P71,371.70 represented brokers' commission
and interest.
- December 17, 1968: Reynoso was able to
pay the total sum of P410,000 to Erquiaga
who thereupon transferred all his shares
(3,100 paid-up shares) in Erquiaga
Development Corporation to Reynoso, as well
as the possession of the Hacienda San Jose, the
only asset of the corporation. However, as
provided in paragraph 3, subparagraph (c) of
the contract to sell, Reynoso pledged 1,500
shares in favor of Erquiaga as security for the
balance of his obligation.
- Reynoso failed to pay the balance of
P561,321.70 on or before December 17, 1969,
as provided in the promissory notes he
delivered to Erquiaga. So, on March 2, 1970,
Erquiaga, through counsel, formally informed
Reynoso that he was rescinding the sale of his
shares in the Erquiaga Development
Corporation.
- On April 26, 1973, defendant Jose L.
Reynoso died and he was substituted by his
Obligations and Contracts
surviving spouse Africa Valdez Vda. de Reynoso
and children, as party defendants.
Issue/s:
WON De Erquiaga may rescind their contract
due to non-payment of the balance by
Reynoso
Ruling:
Petition granted.
Ratio:
- Yes. The two had an agreement but Reynoso
was not still able to pay the balance of P561,
321.70 to De Erquiaga.
- The order of respondent Court directing De
Erquiaga to return the sum of P410,000 (or net
P348,000 after deducting P62,000 due from
Reynoso under the decision) as the price paid
by Reynoso for the shares of stock, with legal
rate of interest, and the return by Reynoso of
Erquiaga's 3,100 shares with the
fruits(construed to mean not only dividends
but also fruits of the corporation's Hacienda
San Jose) is in full accord with Art. 1385 of the
Civil Code which provides:
Rescission creates the obligation to return
the things which were the object of the
contract, together with their fruits, and the
price with its interest; consequently, it can be
carried out only when he who demands
rescission can return whatever he may be
obliged to restore.
Neither shall rescission take place when the
things which are the object of the contract
are legally in the possession of third persons
who did not act in bad faith.
In this case, indemnity for damages may be
demanded from the person causing the loss.
96 291
 Angeles v. Calasanz
G.R. No. L-42283
Mar. 18, 1985
Gutierrez, Jr., J.
Alex Ramos
Keywords: Delayed payments but over principal;
slight breach
Facts:
- Ursula Torres Calasanz and Tomas Calasanz
(defendants) and Buenaventura Angeles and
Teofila Juani (petitioners) executed a contract
where the Calasanz's are selling land to the
Angeles and Juani. Land was sold at P39,200.00
plus 7% interest per annum.
- Petitioners made a downpayment of P392.00
when the contract was executed and promised
to pay P41.20 monthly (every 19th) to
defendants until fully paid.
- July 1966: They have already paid an
aggregate amount of P4,533.38. Sometimes,
the defendants accepted delayed payments.
- December 7, 1966: Defendants wrote to
petitioners asking to settle past due accounts.
- January 28, 1967: Defendants cancelled said
contract due to non-payment.
- Plaintiffs filed to compel defendants to issue a
final deed of sale after computing and noticing
that they have already paid them P4,533.38,
which already included interests, realty taxes
and other expenses
- Defendants, on the other hand, alleged that
petitioners violated paragraph (6) of the
contract when they failed to pay their monthly
(4 months) instalments
- LC rendered judgment in favor of the
petitioners. CA upheld the decision.
Issue/s:
WON cancellation by the defendants of the
contract was valid
Ruling:
No. The petition is denied, and the decision
appealed from is affirmed, with the
modification that the plaintiffs-appellees should
pay the balance of P671.67 w/o any interest
Obligations and Contracts
Ratio:
- Art. 1191 is explicit. In reciprocal obligations,
either party 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.
- However, it is not always necessary for the
injured party to resort to court for rescission of
the contract when the contract itself provides
that it may be rescinded for violation of its
terms and conditions. (UP v. De los Angeles)
- The right to rescind the contract for non-
performance of one of its stipulations, therefore,
is not absolute. (Universal Food Corp. v. Court
of Appeals)
- 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)
- With regard to the non-payment of the 4
monthly installments: Although the principal
obligation was only P 3,920.00 excluding the 7
percent interests, the plaintiffs had already paid
an aggregate amount of P 4,533.38. To sanction
the rescission made by the defendants will work
injustice to the plaintiffs.
- Art. 1234 of the Civil Code provides that: If
the obligation has 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.
- Also, when the defendants, instead of availing
of their alleged right to rescind, have accepted
and received delayed payments of installments,
though the plaintiffs have been in arrears
beyond the grace period mentioned in
paragraph 6 of the contract, the defendants
97 291
 have waived and are now estopped from
exercising their alleged right of rescission as
provided in paragraph 9 of their agreement.
- The Court dismissed the defendants
contention that although they have already
been paid P4,533.38, there is still a balance of
P671.67 due them (hence, they cannot be
compelled). It said that the contract to sell
entered into by the parties has some
characteristics of a contract of adhesion. The
defendants drafted and prepared the contract.
Hence, the contract to sell is construed against
the party causing it. The plaintiffs should pay
the balance of P671.67 but it does not mean
that the defendants have the right to cancel the
contract. Thereafter, the final deed of sale shall
be executed.

Obligations and Contracts 98 291

 James Ong v. CA
G.R. No. 97347
Jul. 6, 1999
Ynares-Santiago, J.
Nasha Reyes
Keywords: Ricemill; novation; contract to sell
Facts:
- May 10, 1983: Ong and the Robles spouses
executed an "Agreement of Purchase and Sale"
respecting two parcels of land situated at Barrio
Puri, San Antonio, Quezon with the agreed
purchase price of Php2 million.
- May 15, 1983: Ong took possession of the
subject parcels of land together with the
piggery, building, ricemill, residential house and
other improvements thereon.
- Petitioner (Ong) paid respondent spouses the
sum of P103, 499.91 by depositing it with the
United Coconut Planters Bank. He also
deposited sums of money with the Bank of
Philippine Islands (BPI) to pay the respondents
loan as stipulated in their contract.
- To answer for his balance of P1.4M
petitioner issued 4 post-dated checks
payable to respondent spouses ( P350k each).
However, the checks were dishonored due to
insufficient funds.
- In addition, out of the P496, 500.00 loan of
respondent spouses with BPI petitioner only
managed to dole out P393, 679.60.
- When the bank threatened to foreclose the
mortgage, they sold 3 transformers of the rice
mill worth P51, 411.00 to pay off their
outstanding obligation, with the knowledge and
conformity of petitioner.
- Since their demand letter was left unheeded
by the petitioner, they then filed a petition
for the rescission of the contract and recovery
of properties with damages with the Lucena
City RTC. They have also filed a writ of
preliminary injuction (which was granted by the
RTC) to enjoin Ong in introducing major
improvements in the properties.
Issue/s:
Obligations and Contracts
1. WON the contract entered into by the parties
may be validly rescinded under Art. 1191
2. WON the parties had novated their original
contract as to the time and manner of payment
3. WON petitioner can claim reimbursement for
the improvements he introduced to the
premises
Ruling:
The decision of the CA, setting aside the
agreement and ordering Ong to return the 2
parcels of land to the spouses, and the spouses
to return P497K to Ong, is affirmed.
Ratio:
1. No. There is only the failure of a condition to
render binding that obligation. There is NO
BREACH in this case. Petitioners failure to pay
brought about a situation which prevented
the obligation of respondents to convey title
from acquiring an obligatory force.
- The parties' "Agreement of Purchase and Sale"
shows that it is in the nature of a contract to
sell. The respondents bound themselves to
deliver a deed of absolute sale and clean title
covering the two parcels of land upon full
payment. Hence, it was subject to the
fulfillment of the suspensive condition of full
payment of the purchase price by the petitioner.
- Petitioner failed to complete payment of the
purchase price. The non-fulfillment of the
condition of full payment rendered the contract
to sell ineffective and without force and effect.
2. No. Novation is never presumed; it must be
proven as a fact either by express stipulation of
the parties or by implication derived from an
irreconcilable incompatibility between the old
and the new obligation. Its requisites are: (1)
there must be a previous valid obligation; (2)
there must be an agreement of the parties
concerned to a new contract; (3) there must be
the extinguishment of the old contract; and (4)
there must be the validity of the new contract.
3. No. He is a builder in bad faith. He introduced
the improvements on the premises knowing
fully well that he has not paid the consideration
of the contract in full and over the objections of
99 291
 respondent spouses. Moreover, petitioner
introduced major improvements on the
premises even while the case against him was
pending before the trial court.

Obligations and Contracts 100 291

 Iringan v. CA
G.R. No. 129107
Sept. 26, 2001
Quisumbing, J.
Miguel Sevilla
Keywords: Judicial confirmation of rescission
Facts:
- Antonio Palao sold an undivided portion of Lot
No. 992 of the Tuguegarao Cadastre to Alfonso
Iringan.
- The parties executed a Deed of Sale with the
purchase price payable as follows: P10,000
upon execution, P140,000 on or before April 30,
1985, and P145,000 on or before December 31,
1985.
- When the second payment was due, Iringan
only paid P40,000.
- On July 18, 1985, Palao sent a letter to Iringan
stating that he considers the contract as
rescinded and that he would not accept
payment from Iringan for failure to comply with
the second installment.
- Iringan replied and he did not object to the
rescission but rather he asked that he be
reimbursed with what he already paid along
with other fees and interest.
- Both parties did not come to an agreement.
- On July 1, 1991, Palao filed a complaint for
Judicial Confirmation of Rescission of Contract
and Damages against Iringan and his wife.
- Iringan alleges that since the contract of sale
was a consummated contract, the remedy of
Palao was for collection and not rescission and
that Iringan was ready to pay anyway.
- RTC decided in favor of Palao and the CA
affirmed.
Issue/s:
1. WON the contract was validly rescinded
2. WON the CA is correct in awarding moral and
exemplary damages
Ruling:
Petition denied. The assailed decision of the CA,
affirming the RTC and deleting the award of
attorney's fees is affirmed.
Obligations and Contracts
Ratio:
1. Yes. Art. 1592 provides that in the sale of
immovable property, even though it may have
been stipulated that upon failure to pay the
price at the time agreed upon the rescission of
the contract shall of right take place, the
vendee may pay, even after the expiration of
the period, as long as no demand for rescission
of the contract has been made upon him
judicially or by a notarial act. After the demand,
the court may grant him a new term.
- While the letter does not count as a
judicial or a notarial act to consider the
contract rescinded, Iringan was able to file the
Judicial Confirmation of Rescission of Contract
and Damages in order to comply with the
requirement.
- Both the RTC and CA relied on Art 1191
for their judgment. However, even if Art
1191 were applicable in the present case,
the right to resolve reciprocal obligations is
deemed implied in the case one of the obligors
shall fail to comply with what is incumbent
upon him. Even if the right to rescind is made
available to the injured party, the obligation is
not ipso facto erased by the failure of the other
party to comply with what is incumbent upon
him. The right cannot be exercised solely on a
partys own judgment that the other has
committed a breach of the obligation. The
operative act, which produces the resolution of
the contract, is the decree of the court and not
a mere act of the vendor.
- The filing for rescission was within the
prescriptive period set by Art. 1144 (10 years)
since the case was filed 6 years after the default.
2. Yes. No proof was shown that Iringan was
indeed ready to pay Palao. He was not also able
to overcome the finding of the CA of holding
that there was indeed bad faith when Iringan
resisted the rescission.
101 291
 Visayan Saw Mill v. CA and RJ Trading
G.R. No. 83851
Mar. 3, 1993
Davide, Jr., J.
Jechel Tan de Guzman
Keywords: Scrap iron; letter of credit
Facts:
- Plaintiff-appellee (Visayan) and defendants-
appellants (RJ) entered into a sale involving
scrap iron subject to the condition that RJ will
open a letter of credit in the amount of
P250,000 in favor of Visayan on or before May
15, 1983.
- In the agreement in question, entitled
PURCHASE AND SALE OF SCRAP IRON, the seller
bound and promised itself to sell the scrap iron
upon the fulfillment by the private respondent
of his obligation to make or indorse an
irrevocable and unconditional letter of credit in
payment of the purchase price.
- RJ failed to open, make or indorse an
irrevocable and unconditional letter of
credit on or before 15 May 1983 and when the
letter of credit was finally made, it was not
irrevocable and unconditional, was not opened
with the bank agreed upon and not endorsed by
respondent.
but simply an event that prevented the
obligation of petitioner corporation to convey
title from acquiring binding force.
- Art. 1597 provides: Where the goods have not
been delivered to the buyer, and the buyer has
repudiated the contract of sale, or has
manifested his inability to perform his
obligations, thereunder, or has committed a
breach thereof, the seller may totally rescind the
contract of sale by giving notice of his election
so to do to the buyer."
2. No. The permission of Visayan was not a
transfer of ownership, it was a mere
accommodation to expedite the weighing and
hauling of the iron in the event that the sale
would materialize. The private respondent was
not thereby placed in possession of and control
over the scrap iron.
- It cannot even be assumed that the conversion
of the initial contract or promise to sell into a
contract of sale by the petitioner corporation's
alleged implied delivery of the scrap iron
because its action and conduct in the premises
do not support this conclusion. Indeed,
petitioners demanded the fulfillment of the
suspensive condition and eventually cancelled
the contract.

Issue/s:
1. WON Visayan could rescind said contract due
to failure of RJ to fulfill the condition of opening
an unconditional letter of credit for Visayan
2. WON there was implied delivery

Ruling:
Petition granted. The CAs decision is reversed.

Ratio:
1. Yes. There was to be no actual sale until the
opening, making or indorsing of the irrevocable
and unconditional letter of credit.
- Since what obtains in the case at bar is a mere
promise to sell, not a contract of sale, the
failure of the private respondent to comply with
the positive suspensive condition cannot even
be considered a breach casual or serious

Obligations and Contracts 102 291

 Deiparine v. CA and Trinidad
G.R. No. 96643
Apr. 23, 1993
Cruz, J.
Victoria Tiangco
Keywords: Dorm construction; plan deviation
Facts:
- The spouses Cesario and Teresita Carungay
entered into an agreement with Ernesto
Deiparine to build a three-story dormitory in
Cebu for P970, 000 in strict accordance to
plans and specifications. Nicanor Trinidad, Jr.
was designated with powers of inspection and
coordination with the contractor.
- The plans were sent on Nov. 1982, 2 months
after construction started.
- The General Conditions and Specifications
prescribed 3,000 psi as the minimum
acceptable compressive strength of the building.
However, Deiparine had been deviating from
the plan and specifications. - The structural
defects were evident in the cylinder and core
tests. In view of this finding, sps Carungay filed
a petition for rescission of the construction
contract and for damages.
Issue/s:
1. WON Court has jurisdiction
2. WON there had been a breach of obligation
3. WON there was valid rescission of contract
Ruling:
The challenged decision is affirmed.
Ratio:
1. Yes, the petitioners reliance on PD 1746
creating the Construction Industry Authority
of the Philippines (CIAP) is untenable. This
institution has jurisdiction to adjudicate and
settle claims and disputes for public
construction contracts and recommend rules
and procedures for adjudication and
settlement procedures in implementation of
contracts in private construction.
Obligations and Contracts
2. Yes. There were two sets of specifications,
the first is a general summary of the
construction materials for the loan application
of the Carungays. The second laid down the
specifications and requirements of the
construction of the building. He admitted the
first and denied the second. However, the 3,000
psi requirement was specifically stated in the
second specifications.
- From the testimony of Eduardo Logarta,
petitioners project engineer, Deiparine told
them to ignore the specific orders or
instructions of the respondents.
- Furthermore, Deiparine is not an engineer
nor an architect but a master mariner, the
supervising engineer Logarta was only a 3rd
year student of civil engineer, and his
understudy had not passed the board yet.
- Petitioners reluctance to conduct the core
test could only mean that he was not sure
whether the results would be favorable to
him.
-All these constitute a substantial violation of
the contract correctible by judicial rescission.
3. Yes. Petitioner insists that Arts. 1725 and
1385 are applicable in his case. However the
contract of construction between the parties is
not included in the enumeration of rescissible
contracts found in Art. 1381.
- The applicable provision is Art. 1191 which
involves rescission of reciprocal obligations. It is
predicated on the breach of faith wherein one
of the parties violates the reciprocity between
them.
- The failure of Deiparine to follow the
stipulated plans and specifications has given
the Carungay sps the right to rescind the
contract.
- Art 1725 is not applicable because it
involves a voluntary withdrawal without fault of
the contractor. It is true that the stress test was
not required in any of the contract documents
but it is the only way wherein the owner could
determine compliance to the specifications.
Furthermore, both parties agreed in writing
that the core test should be conducted. There is
no other recourse but to rescind their contract.
103 291
 Grace Park Engineering v. Dimaporo
G.R. No. L-27482
Sept. 10, 1981
De Castro, J.
Kaks Alampay
Keywords: Cassava flour and starch processing
machinery; liability if both are infractors
Facts:
- Dimaporo appealed from the CFI decisions
order for him to return the sale of Cassava Flour
and Starch Processing Machinery and
Equipment and payment with Interest to Grace
Park Engineering Corp. He contends that the
instalment of equipment was not complied with
because it didnt allow processing of at least 6
tons of flour in 24 hours.
- Dimaporo had executed a contract of sale with
Grace Park Engineering Corp with the for
cassava flour and starch processing machinery
and equipment, on the following terms:
52k for the sale and installation of said
equipment
Dimaporo would pay the initial 5,670
upon signing the contract, pay an addition
10k within 30 days of signing the contract,
and pay the remaining balance in 12
monthly installments
- Dimaporo was able to pay 15,570 but for lack
of funds, he could not supply Grace Park with
the necessary materials and labor they had
agreed upon for the installation process. As a
result, Grace Park installed the equipment only
a year and 3 months later, upon completion of
which it demanded payment.
- The lower court ruled for rescission of contract
for reason of both parties failing to comply with
contract obligations, but in as far as the first
infractor could not be identified, Art 1191 of the
New Civil Code will apply and each party would
bear its own damages.
- Dimaporo did not want to pay the remaining
balance and alleged that Grace Park had failed
to comply with contract obligations by not
installing the equipment within the period and
place stated in the contract. He claimed
because Grace Park had breached the contract,
Obligations and Contracts
Dimaporo did not have to return the machinery
delivered (since it was not considered fully
delivered until installed, which Grace Park failed
to do) nor did have to pay the 19,628 which
Grace Park for materials and labor for
installment.
Issue/s:
1. WON Dimaporo was in breach of contract,
and thus had to return the machinery and
equipment.
2. WON Dimaporo had to pay Grace Park 19,628,
with interest, and was liable for damages.
Ruling:
With the only modification that the sum of
P19,628.93 be paid by appellant Dimaporo to
appellee Grace Park Engineering, Inc., without
interest, the judgment appealed from is
affirmed in all other respects.
Ratio:
1. Yes, Dimaporo was in breach of Contract.
- Dimaporo claims that the machinery he
ordered may be considered delivered only
once they have been installed by Grace Park
Corp and are working to the standard of
producing at least 6 tons of Cassava flour per 24
hours of operations, as stated in the warranty
clause of the contract. He claims that because
Grace Park failed to install the machinery, no
delivery occurred, and he is thus not liable to
return said equipment or to pay the
transportation expenses of said equipment
from the Cotabato port.
- The Court held that the warranty of the
capacity of the machinery rests on the condition
(as stipulated in the contract) that it be
properly coordinated to the necessary manual
labor required for the purpose. Furthermore,
the delay of completion of installment as well as
the mills incapacity to produce the amount of
flour were attributable to Dimaporos non-
compliance with his obligation to furnish food,
materials and water system, as well as labor, to
Grace Park Corp, in breach of contract.
Rescission is thus in order.
- Rescission creates the obligation to return the
things which were the object of the contract,
104 291
 together with their fruits, and the price with its
interest; consequently, it can be carried out
only when he who demands rescission can
return whatever he may be obliged to restore.
In this case, Dimaporo is obliged to restore to
Grace Park the machinery and equipment that
was not completely installed, at Dimaporos
fault.
- As per rescission, Grace Park must likewise
return 15,570 representing the partial payment
of the purchase price of the machinery and
equipment.

2. Yes, he is required to pay the 19, 628 to

Grace Park, but he is not liable to pay interest
thereon at a 6% per annum rate, because Art.
1192 states that each party must bear his own
damages if it cannot be determined who had
first violated the contract.

Obligations and Contracts 105 291

 Roque v. Lapuz
G.R. No. L-32811
Mar. 31, 1980
Guerrero, J.
Norlegen Bayona
Keywords: Rockville subdivision; losing right to
have period fixed by court
Facts:
- Sometime in 1964, plaintiff and defendant
entered into an agreement of sale covering Lots
1, 2 and 9, Block 1, of said property, 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 covering
the months of July, August, September, and
October, 1954.
- On January 24, 1955, defendant requested
plaintiff that he be allowed to abandon and
substitute Lots 1, 2 and 9, the subject with Lots
4 and 12, Block 2 of the Rockville Subdivision,
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, 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 make any further payment
on account of the agreed monthly installments
Obligations and Contracts
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 refused to comply
with plaintiff's demands.
- On or about November 3, 1957, 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.
- On January 22, 1960, petitioner Felipe C,
Roque filed the complaint against defendant
Nicanor Lapuz for rescission and cancellation of
the agreement of sale between them involving
the two lots in question and prayed that
judgment be rendered ordering the rescission
and cancellation of the agreement of sale, the
defendant to vacate the two parcels of land and
remove his house therefrom and to pay to the
plaintiff the reasonable rental thereof at the
rate of P60.00 a month from August 1955 until
such time as he shall have vacated the premises,
and to pay the sum of P2,000.00 as attorney's
fees, costs of the suit and award
such other relief or remedy as may be deemed
just and equitable in the premises.
- The Court of Appeals rendered its decision
that the defendant Nicanor Lapuz is granted a
period of ninety (90) days from entry [as a
matter of justice and equity considering
improvements i.e house made] hereof within
which to pay the balance. Petitioner invokes Art.
1592 w/c covers sale of immovable property.
Issue/s:
WON private respondent is entitled to the
benefits of the third paragraph of Art. 1191,
New Civil Code, for the fixing of period within
which he should comply with what is incumbent
upon him [obligation: pay the balance of
P11,434,44 with interest thereon at the rate of 8%
1et annum from August 17, 1955 until fully paid]
Ruling:
Art. 1191 is applicable. Rescission granted.
Lapuz being in bad faith is not entitled to
another period fixed by court.
106 291
 merely casual, which takes the case out of the
Ratio: application of the benefits of paragraph 3, Art.
- No. The Court cited the controlling 1191, NCC.
jurisprudence [Luzon Brokerage Co., Inc. vs. - Petitioners failure to put up the necessary
Maritime Building Co., Inc. and Myers Building facilities in Rockville Subdivision
Co] where it stated that in a contract to sell, is also not sufficient to justify the 90 day
the full payment of the price through the extension.
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. Thus, upon non-payment,
the repossession of property is an act enforcing
the contract to sell and not rescission.
- In the case at bar, the contract is clearly a
contract to sell there being no written deed of
conveyance thus Arts. 1592 and 1475 are not
applicable.
- 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,
casual or serious, but simply an event that
prevented the obligation of the vendor to
convey title from acquiring binding force.
- Respondent as obligor is not entitled to the
benefits of paragraph 3 of Art. 1191, NCC
Having been in default and acted in bad faith,
he is not entitled to the new period of 90 days
from entry of judgment within which to pay
petitioner the balance of P11,434.44 with
interest due on the purchase price of
P12,325.00 for the two lots.
- 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.
- 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

Obligations and Contracts 107 291

 Suria v. IAC
G.R. No. 73893
Jun. 30, 1987
Gutierrez, Jr., J.
Dianne Cadorna
Keywords: Rescission v. resolution; rescission as
subsidiary remedy
Facts:
- Private-respondent spouses entered into a
contract of Deed of Sale with Mortgage with
petitioners Suria and Joven for a parcel of land
owned by the spouses.
- Allegedly, the petitioners failed to fulfill the
terms and conditions of the contract
by failing to pay the stipulated installments,
having paid only one of them.
- Private-respondents made repeated verbal
and written demands but to no avail, hence,
they filed a complaint before the RTC of Laguna
for rescission of contract and damages.
- To this petitioners filed a motion to dismiss
complaint on the ground that respondents were
not entitled to the subsidiary remedy of
rescission because of the presence of the
remedy of foreclosure in their contract. Further,
they contended that assuming arguendo that
rescission was the proper remedy, it is apparent
in the face of the Complaint that the plaintiffs
failed to comply with the requirements of law,
hence the rescission was ineffective, illegal, null
and void, and invalid.
- While the case was pending, petitioners
offered to pay the private-respondents all the
outstanding balance under the Deed of Sale
with Mortgage, which offer was rejected by the
latter.
- The respondent court ruled in favor of the
private-respondents, relying on Art. 1191 of the
Civil Code, which provides for the remedy upon
breach in reciprocal obligations, as well as in
the concurring opinion of Justice J.B.L. Reyes in
Universal Food Corp. v. Court of Appeals ,
where he said that rescission on account of
breach of stipulations is not predicated on injury
to economic interests of the party plaintiff but
on the breach of faith by the defendant, that
Obligations and Contracts
violates the reciprocity between the parties. It is
not a subsidiary actionbut a principal action
retaliatory in character, it being unjust that a
party be held bound to fulfill his promises when
the other violates his.
- Thus, petitioners elevated the case to the SC.
Issue/s:
WON the subsidiary remedy of rescission can be
sought in the presence of a remedy of
foreclosure in light of Art. 1383 of the Civil Code,
which latter remedy is expressly stipulated the
contract of the parties
Ruling:
The Court granted the petition and set sside the
CAs decision, ordering petitioners to pay the
balance of their indebtedness with legal
interests until fully paid, failing which the
respondents may resort to foreclosure.
Ratio:
- No. Respondent courts reliance on Art. 1191
and Justice Reyess opinion is misplaced
because here, petitioners' breach of obligations
is not with respect to the perfected contract of
sale but in the obligations created by the
mortgage contract. This is because the contract,
not a contract to sell but a contract of sale, was
perfected and consummated by virtue of the
respondents compliance, in the form of
executing a transfer certificate title in the
petitioners name, as well as petitioners, albeit
not in the form of paying the full purchase price
but in subjecting themselves to pay on
installment, secured by mortgage. In other
words, the payments on an installment basis
secured by the execution of a mortgage took
the place of a cash payment.
- Thus, the relationship between the parties is
no longer one of buyer and seller, but one of a
mortgagor and a mortgagee. Hence, it is not
Art. 1191 that governs in this case but Art. 1383.
- Thus, the principal remedy not having been
pursued and proven impossible to fulfill,
respondents reliance on the remedy of
rescission is premature and cannot be granted.
108 291
 Lachica v. Araneta
47 OG No. 11, 5699
Aug. 4, 1949
Paredes, J.
Maye Cristobal
Keywords: On or before; dispute arising from
enforcement of installment payments
Facts:
- Gregorio Araneta Inc. and Esteban Sadang and
his wife Maria Lachica entered into a contract of
sale for a parcel of land, providing that the price
was P20,000, of which P8,000 was the
downpayment and the P12,000 balance is to be
paid in installments of:
P1,000 on or before Dec. 31, 1943
P1,000 on or before Dec. 31, 1944
P10,000 on or before Dec. 31, 1945
and further stipulated that the property will be
mortgaged to Araneta to guarantee the unpaid
balance with 8% annual interest.
- However, when the parties executed the
mortgage contract, the or before was deleted.
- The plaintiffs paid the P8,000 downpayment
and the interest monthly.
- When the plaintiffs paid P5,000 on April 10,
1944, the defendant refused to accept it, saying
that the payment was not in accordance with
the mortgage, which provided that they can
only pay P1,000 ON Dec. 31, 1944 and the
P10,000 balance ON Dec. 31, 1945.
- After an exchange of letters, the defendant
accepted the P5,000.
- Plaintiff then paid the remaining P6,000 on
Sept. 14, 1944, which defendant refused to
accept because it was not in accordance with
the mortgage contract.
Issue/s:
WON the plaintiffs had a right to pay the
remaining principal of P6,000 before Dec. 31,
1945
Ruling:
Appealed judgment is affirmed.
Obligations and Contracts
Ratio:
- Yes. The Court found that while the phrase or
before appeared on the initial contract, the
subsequent mortgage contract which merged
the previous contracts did not have the same,
which the plaintiffs did not realize would
prejudice their right to pay their obligation
before the specified dates and the defendant
did not call their attention to it.
- The Court held that when the terms of an
agreement have been intended in a different
sense by the different parties to it, that sense is
to prevail against either party in which he
supposed the other understood it. (Sec. 64,
Rule 123, Rules of Court).
- The only impediment to the acceptance of the
payment was the loss of the benefits of the
interest that would have accrued by the reason
of the fixed term. This impediment is not
enough to overturn the conclusion that the
plaintiffs could pay before the fixed date. The
law should not be interpreted as to compel a
debtor to remain so when he is in a position to
release himself.
- Defendant invokes the fact that the Japanese
notes have lower value at the time of the
payment and that they anticipated the increase
after the war. The Court held that the fact that
the Americans came back before Dec. 31, 1945
and the placing of that as the maturity date of
the balance was a mere coincidence.
109 291
 Ponce de Leon v. Syjuco
G.R. No. L-3316
Oct. 31, 1951
Bautista Angelo, J.
Robylene Cruz
Keywords: Presumption on who benefits from
period
Facts:
- On March 9, 1936, PNB executed a contract to
sell 2 parcels of land in Negros Oriental to
Ponce de Leon for the total price of P26,300,
payable as follows: (a) P2,630 upon the
execution of the said deed; and (b) the balance
P23,670 in ten (10) annual amortizations, the
first amortization to fall due one year after the
execution of the said contract.
- Ponce de Leon obtained a loan from Santiago
Syjuco, Inc. amounting to P200,000 in Japanese
Military notes, payable within one year from
May 5, 1948.
- It was provided in the promissory note that
the promisor (Ponce de Leon) could not pay,
and the payee (Syjuco) could not demand, the
payment of said note except within the
aforementioned period.
- To secure the payment of said obligation,
Ponce de Leon mortgaged in favor of Syjuco the
parcels of land purchased from PNB.
- On May 6, 1944, Ponce de Leon paid PNB the
balance of the purchase price amounting to
P23,670 in Japanese Military notes and, on the
same date, PNB executed in favor of Ponce de
Leon a deed of absolute sale of the
aforementioned parcels of land, with TCT
reflecting Ponce de Leons name and the
mortgage in favor of Syjuco annotated on the
back of said certificates.
- On July 31, 1944 Ponce de Leon obtained an
additional loan from Syjuco in the amount of
P16,000 in Japanese Military notes and
executed in the latters favor a promissory note
of the same tenor as the one he had previously
executed.
- On several occasions in October 1944, Ponce
de Leon tendered to Syjuco the amount of
P254,880 in Japanese Military notes in full
Obligations and Contracts
payment of his indebtedness to Syjuco. Ponce
de Leon also wrote to Syjuco a letter tendering
the payment of indebtedness, including
interests up to May 5, 1948. Syjuco, however,
refused to accept such repeated tenders.
- In view of Syjucos refusal to accept the
payment tendered by Ponce de Leon, the latter
deposited with the Clerk of Court of CFI of
Manila the amount of P254,880 and on
November 4, 1944, he filed a complaint
consigning the amount so deposited to Syjuco.
- Consignation and land title records were
however destroyed during the war.
- After the liberation, Ponce de Leon then filed
for the reconstitution of the TCTs, but mortgage
in favor of Syjuco was not annotated in the said
certificates.
- He then used the parcels of land as security in
obtaining an overdraft account from PNB in an
amount not exceeding P135,000. Unaware of
the prevailing mortgage encumbrances, PNB
granted the overdraft.
- Syjuco prays that overdraft grant with PNB be
null and void in violation of conditions Ponce de
Leon executed in his favor with Syjuco during
the Japanese occupation.
- The lower court rendered a decision absolving
Syjuco from Ponce de Leons complaint and
condemning Ponce de Leon to pay Syjuco the
total amount of P23,130 (court used Ballantyne
schedule due to deflation in Japanese military
notes value at prevailing time) with interest at
the legal rate from May 6, 1949, until fully paid.
Both Ponce de Leon and Syjuco file their appeal
from this decision.
Issue/s:
1. WON the lower court erred in not giving
validity to the consignation made by the
plaintiff of the principal and interest of his two
promissory notes with the clerk of court
2. WON lower court erred in reducing the
principal and interest of said promissory notes
to their just proportions using as a pattern the
Ballantyne schedule in effecting the reduction
3. WON lower court erred in disregarding the
defense of moratorium set up by the plaintiff
against the counterclaim of defendant Syjuco
110 291
 4. WON court erred in not passing on the
question of priority between the mortgage
claim of defendant Syjuco and that of the
Philippine National Bank on the same set of
properties on the ground that they are situated
in a province different from that in which this
action was brought
Ruling:
Decision appealed from modified in the sense
of ordering the plaintiff to pay the defendant
Syjuco the sum of P216,000, Philippine currency,
value of two promissory notes, with interest
thereon at the rate of 6% per annum from May
6, 1949, until said amount is paid in full. It is
further ordered that should said amount,
together with the corresponding interests, be
not paid within 90 days from the date this
judgment in accordance with law, with costs
against the plaintiff.
Ratio:
1. No. The consignation made by the plaintiff is
invalid and, therefore, did not have the effect of
relieving him of his obligations.
- In order that consignation may be effective,
the debtor must first comply with certain
requirements prescribed by law. The debtor
must show: (1) that there was a debt due; (2)
that the consignation of the obligation had
been made because the creditor to whom
tender of payment was made refused to accept
it, or because he was absent for incapacitated,
or because several persons claimed to be
entitled to receive the amount due (Art. 1176,
Civil Code); (3) that previous notice of the
consignation have been given to the person
interested in the performance of the obligation
(Art. 1177, Civil Code); (4) that the amount due
was placed at the disposal of the court (Art
1178, Civil Code); and (5) that after the
consignation had been made the person
interested was notified thereof (Art. 1178, Civil
Code).
- At least two of the above requirements have
not been complied with: (1) plaintiff, before
making the consignation with the clerk of the
court, failed to give previous notice thereof to
the person interested in the performance of the
Obligations and Contracts
obligation and (2) the obligation was not yet
due and demandable when the money was
consigned. The failure of these two
requirements is enough ground to render the
consignation ineffective.
- In said promissory notes. it was expressly
agreed upon that plaintiff shall pay the loans
within one year from May 5, 1948 xxx with
interest at the rate of 6% per annum, payable in
advance for the first year, and semi-annually in
advance during the succeeding years, and that,
the period set forth having been established for
the mutual benefit of the debtor and the
creditor, the former binds himself to pay, and
the latter not to demand the payment of, the
loans except within the period above
mentioned.
- The facts show that on November 15, 1944,
contrary to the stipulation, plaintiff offered to
pay to the defendant not only the principal due
but also all the interests which said principal
may earn up to the date of maturity of the
promissory notes.
- Under the law, in a monetary obligation
contracted with a period, the presumption is
that the same is deemed constituted in favor of
both the creditor and the debtor unless from its
tenor or from other circumstances it appears
that the period has been established for the
benefit of either one of them (Article 1127, Civil
Code).
- All available authorities on the matter are
agreed that, unless the creditor consents, the
debtor has no right to accelerate the time of
payment even if the premature tender
included an offer to pay principal and interest
in full.
2. Yes. Court has already previously ruled that
when the creditor and the debtor have agreed
on a term within which payment of the
obligation should be paid and on the currency in
which payment should be made, that
stipulation should be given force and effect
unless it appears contrary to law, moral or
public order.
- In this particular case, the terms agreed upon
are clearer and more conclusive than the earlier
cases because the plaintiff agreed not only to
111 291
 pay the obligation within one year from May 5,
1948, but also to pay peso for peso in the coin
or currency of the Government that at the time
of payment it is the legal tender for public and
private debts. This stipulation is permitted by
law because there is nothing immoral or
improper in it.

3. Yes. The lower court erred in disregarding the

defense of moratorium set up by the plaintiff
against the counterclaim of the defendant on
the sole ground that this defense was not raised
by the plaintiff in his pleadings.
- An examination of the record shows that the
plaintiff raised this question in his pleadings.
- The lower court, therefore, should have
passed upon this defense in the light of
Executive Order No. 32, which suspended
payment of all obligations contracted before
March 10, 1945.
- However, said moratorium orders have
already been modified by Republic Act No. 342
in the sense of limiting the ban on obligations
contracted before the outbreak of the war to
creditors who have filed claims for reparations
with the Philippine War Damage Commission,
leaving them open to obligations contracted
during the Japanese occupation.

4. Yes. Mortgage claim of Syjuco is entitled to

priority over that of PNB, as it was executed
earlier in point of time and in point of
registration. PNB should have taken the
necessary precaution to inquire into the
existence of any hidden transaction or
encumbrance that might affect the property
that was being offered in security such as the
one existing in favor of Syjuco, and when it
accepted as security the titles offered by Ponce
de Leon.

Obligations and Contracts 112 291

 Buce v. CA
G.R. No. 136913
May 12, 2000
Davide, Jr., CJ.
Hans Dantes
Keywords: Automatic renewal of lease contract
Facts:
- Anite Buce leased a 56 sqm. of land in
Pandacan, Manila from the Tiongcos for a
period of fifteen years from June 19791994
"subject to renewal for another ten (10) years,
under the same terms and conditions."
- She constructed a grocery store and paid P200
for rent, P400 by 1985 and P1000 by
JulyAugust 1991. She paid the P1000 rent.
- By December 6, the Tiongcos informed her of
the increase to P1576.58 by January 1992
thanks to the Rent Control Law (RA 877).
- However, she only paid P400 in checks
monthly until January 1993. The Tiongcos did
not accept the payment.
- In August 1993, Buce prayed for specific
performance, asking the RTC to order the
Tiongcos to accept the payments and respect
the lease contract for 15 years and its
automatic renewal for another 10 years at P200
per month.
- The Tiongcos answered that since she paid the
P1000 rent on JulyAugust 1991, and since RA
877 set the new rent rate at P1576.58 anyway,
they were justified in refusing to accept the
P400 rent. Furthermore, the 10 year renewal
was not automatic but subject to the parties
mutual agreement.
- The contract expired on June 1994, and the
Tiongcos demanded P33,000 rent payment in
arrears.
- On August 1995, RTC sided with Buce, citing
the construction of the building and Buces
filing of complaint 1 year before the expiration
date as evidence that the renewal was
automatic. The CA sided with the Tiongcos
because the 10year phrase did not specify
which party had the option to renew. Without
such stipulation, the renewal of the lease
contract must be upon the agreement of both
Obligations and Contracts
parties. Thus, the CA ordered Buce to vacate
the place and pay the remaining rent at P1000.
Issue/s:
1. WON the renewal of the lease contract,
without stipulation as to who has the option
to renew, was automatic
2. WON Buce was properly evicted
Ruling:
The petition was partly granted, such that the
petitioner was ordered to vacate the leased
premises, without prejudice, however, to the
filing by the private respondents of an action for
the recovery of possession of the subject
property.
Ratio:
1. No. The Court distinguished between a
renewal of the lease contract and an extension,
the former obliging the creation of a new
contract different from the old, with its new
term, while the latter adds to the term on the
force of the old contract.
- The contract did not say who had the option
to renew nor did it say for whose party would
the renewal be of benefit. Therefore, the
previous ruling in Fernandez v. CA and Art. 1196
CC applies, and the contract was presumed to
be for the benefit of both parties.
- Since the Tiongcos did not want a renewal, the
contract expired in June 1994.
2. No. The Tiongcos did not pray for the
restoration of the premises in their
Counterclaim, nor did they file an unlawful
detainer suit. Rather, they limited the issue to
the interpretation of the contract.
- The CA went beyond the bounds of its
authority, but this does not preclude the
Tiongcos from filing an action to recover the
possession of the property.
113 291
 Araneta v. Philippine Sugar Estate Devt Co. - If the reasonable time had elapsed, there is
G.R. No. L-22558 breach of contract; if not, then the action is
May 31, 1967 premature.
Reyes, J.B.L., J. - CA set the period at 2 years after finality of
the judgement.; SC: there is no legal
Michael de Castro justification for this. The period cannot be set
arbitrarily.
Keywords: Street construction halted by - Art. 1197 CC: the Court shall determine
inability to evict squatters such period as may under the circumstances
been probably contemplated by the parties.
Facts: - What is reasonable time? SC: reasonable
- JM Tuason & Co. (owned by Araneta) sold a time = date when all the squatters on the
43km2 track of land to Phil Sugar for P430k affected areas are finally evicted. This can be
- Stipulations: Phil Sugar will build a church and deduced from the fact that the parties were
a convent; JM Tuason will construct streets on fully aware of the squatters when they entered
the NE, NW and SW sides of the land; JM the contract.
Tuason is given a reasonable time within w/c
to comply with the obligation to construct and
complete the streets.
- Phil Sugar built the church & convent, but JM
Tuason failed to finish the NE street because of
a squatter who refused to vacate.
- Phil Sugar sued JM Tuason, seeking specific
performance, and to pay damages in case JM
Tuason failed
- JM Tuason defense: action is premature since
the obligation to construct the streets was w/o
a definite period; a period has to be fixed
before the complaint for specific performance
will prosper.

Issue/s:
WON A period has to be fixed before JM Tuason
can be compelled to construct the street

Ruling:
No, the period was already stipulated as a
reasonable time w/in w/c to comply with the
obligation to construct and complete the
streets. Reasonable time refers to when all the
squatters are evicted.

Ratio:
- TC and CA need not fix the period because the
real issue is NOT whether a period was absent
and therefore one has to be fixed, but whether
the reasonable time stipulated had already
elapsed.

Obligations and Contracts 114 291

 Central Philippine University v. CA
G.R. No. 112127
Jul. 17, 1995
Bellosillo, J.
Julie Enad
Keywords: Donation to Central Philippine
University
Facts:
- 1939: Don Ramon Lopez (now represented by
heirs) executed a deed of donation, with a
Transfer Certificate of Title in favour of CPU
with the following annotations written at the
back:
1) The land described shall be utilized by CPU
exclusively for the establishment and use of a
medical college with all its build ings as part
of the curriculum;
2) The said college shall not sell, transfer or
convey to any third party nor in any way
encumber said land;
3) The land should be called RAMON LOPEZ
CAMPUS, and the college shall be under
obligation to erect a cornerstone bearing that
name. Any net income from the land or any of
its parks shall be put in a fund to be known as
RAMON LOPEZ CAMPUS FUND to be used
for improvements of said campus and
erection of a building thereon.
- May 31, 1989: Heirs of Don Lopez filed an
action for annulment of donation, alleging that
CPU had not complied with the conditions of
the donation, and that CPU had negotiated with
the NHA to exchange the property with another
land.
- CPU retorts: that the right to file the action
has prescribed; that it did not violate any of the
conditions in the deed of donation because it
never used the donated property for any other
purpose than that for which it was intended;
and, that it did not sell, transfer or convey it to
any third party.
- RTC held that CPU failed to comply with
conditions of the donation and declared it null
and void, ordering CPU to execute a deed of
reconveyance of the property in favour of
respondents.
Obligations and Contracts
- CA ruled that the annotations were resolutory
conditions, whose breach should terminate the
rights of the done, thus making the donation
revocable. The CA pointed out that the donor
did not fix a period within which the condition
must be fulfilled, hence, until a period was fixed
for the fulfilment of the condition, petitioner
could not be considered as having failed to
comply with its part of the bargain.
- CA reversed the RTC decision and remanded
the case for the determination of the time
within which petitioner should comply with the
first condition in the certificate of title.
Issue/s:
WON the donation was onerous/resolutory
Ruling:
The RTC decision was reinstated and affirmed,
and CA decision modified. CPU was directed to
reconvey to respondents the lot donated.
Ratio:
- Yes. The court concluded that the donation
was onerous, one executed for a valuable
consideration which is considered the
equivalent of the donation itself.
- Under Art. 1181 of the CC, conditional
obligations, the acquisition of rights, as well as
the extinguishment or loss of those already
acquired, shall depend upon the happening of
the event which constitutes the condition. Thus,
the condition imposed in the donation (building
of school) was not a condition precedent or a
suspensive condition but a resolutory one.
- It would be wrong to say that the schoolhouse
had to be erected before the donation became
effective, because that would be invading the
property rights of the donor since the donee is
not the owner of the land yet. The donation had
to be valid before the fulfilment of the
condition.
- If there was no fulfilment/compliance with the
condition, such as in this case, the donation
may now be revoked and all rights which the
done may have acquired under it shall be
deemed lost and extinguished.
- The time from which the cause of action
accrued for the revocation of the donation and
115 291
 recovery of the property donated cannot be
specifically determined in the instant case. A
cause of action arises when that which should
have been done is not done, or that which
should not have been done is done. In this case,
the starting point begins with expiration of a
reasonable period and opportunity for
petitioner to fulfil what has been charged upon
it by the donor.
- Under Art. 1197 of the CC, when the obligation
does not fix a period but from its nature and
circumstances it can be inferred that a period
was intended, the courts may fix the duration
thereof because the fulfilment of the obligation
itself cannot be demanded until after the court
has fixed the period for compliance therewith
and such period has arrived. But this rule
CANNOT BE APPLIED in this case, because more
than a reasonable period of 50 years has
already passed for petitioner to comply with the
condition.
- Hence, there is no more need to fix the
duration of a term of the obligation when such
procedure would be a mere technicality and
formality and would serve no purpose than to
delay or lead to an unnecessary and expensive
multiplication of suits.

Obligations and Contracts 116 291

 Deudor v. JM Tuason
G.R. No. L-13768
May 30, 1961
Concepcion, J.
Jocs Dilag
Keywords: Quinones; when no period is fixed
but parties intended it
Facts:
- The Deudors claimed a parcel of land of about
50 quinones in Tatalon, Quezon City.
- JM Tuason asserted ownership under the Land
Registration Act by virtue of an original
certificate of title, issued way back in 1914
- The Deudors caused the aforementioned land
to be subdivided into lots and some of the lots
were sold to several persons.
- The parties entered into a Compromise
Agreement stating that: (1) the Deudors shall
cede all their interest and ownership to JM
Tuason; and (2) JM Tuason shall pay Php 1.2M
(500k would be deducted for certain purposes,
700k to be paid in the manner under the ff.
conditions (Clause 8, Sec.6):
100k shall be paid within 60 days from
the date the decision on the compromise
agreement becomes final, PROVIDED that
within said period the Deudors shall have
effected the delivery to the owners (JM) of at
least 20 quinonesthat if the Deudors fail to
deliver said 20 quinones, as above specified,
then the first payment of 100k mentioned in
this paragraph shall not be made until after
the delivery is effected.
- The decision was finalized on April 10, 1953
(they had until June to comply).
- The portion of 20 quinones was not delivered
until Jan. 14, 1956.
- JM Tuason filed a motion because of the
increasing number of illegal transactions in the
said lots
- On Feb. 1957, the court ordered the Deudors
to deliver the remaining 30 quinones to JM
Tuason within 4 months. The Deudors
complained that the 4 months was too short.
- JM Tuason filed another motion because of
the failure of the Deudors to convey the
Obligations and Contracts
remaining 30 quinones. An increase in the
number of squatters in the said area bothered
JM Tuason.
- The Deudors offered to give them separate
lots that would aggregate into 30 quinones, but
JM Tuason refused.
- Te Deudors contend that the Feb 1957 and Jan
1958 orders were tantamount to an
amendment of their previous compromise
agreement, and therefore the fixing of a 4-
month period of delivery was done without the
consent of the parties and should be void.
Issue/s:
WON the lower court may fix a period on the
part of the Compromise Agreement regarding
the delivery of the remaining 30 quinones
Ruling:
The Court affirmed the CAs decision to release
JM Tuason from further obligations to pay the
Deudors insofar as the unimplemented part of
the Compromise Agreement is concerned.
Ratio:
- Yes, since the contract did not specify a period
but the parties intended to have one, the courts
may fix a reasonable time for the delivery.
- Appellants admit that the Compromise
Agreement failed to specify a period for the
delivery; however, it is clear from the nature of
said agreement that a period was intended.
- JM Tuason would not consider to pay
600k+ to the Deudors if they did not expect
the latter to deliver the said lands without
unreasonable delay.
- Art. 1197 provides that: If the obligation does
not fix a period, but from its nature and the
circumstances it can be inferred that a period
was intended, the courts may fix the duration
thereof. The courts shall also fix the duration of
the period when it depends upon the will of the
debtor. In every case, the courts shall determine
such period as may under the circumstances
have been probably contemplated by the parties.
Once fixed by the courts, the period cannot be
changed by them.
117 291
 - When the authority granted by the above
provision is exercised by the courts, the same
does not amend or modify the obligation
concerned. Whenever a period is fixed, the
court merely enforces or carries out an implied
stipulation in the contract in question. In other
words, the court merely ascertains the will of
the parties and gives effect thereto.
- The delivery of the 30 quinones is a suspensive
condition for the obligation of JM Tuason to pay
the remaining 600k to arise.

Obligations and Contracts 118 291

 Inchausti v. Yulo
G.R. No. L-7721
Mar. 25, 1914
Arellano, CJ.
Diane Dolot
Keywords: Sibling wars; defenses available to
solidary debtors
Facts:
- Teodoro Yulo, a property owner in Iloilo, had
been borrowing money from the firm of
Inchausti & Co. under specific conditions.
- He died intestate. Later his wife also died. Yulo
Siblings are Pedro, Francisco, Teodoro (mentally
incompetent), Manuel, Gregorio, Mariano,
Carmen, Concepcion (minor), and Jose (minor).
- The properties left by the couple were held by
their children in common, under the name of
Hijos de T. Yulo continuing their current account
with Inchausti & Co. until their balance
amounted to two hundred thousand pesos.
- The creditor firm tried to obtain security for
the payment of the disbursement of money it
had been making in favor of the Yulos.
- On June 26, 1908, Gregorio, in behalf of the
siblings, executed a notarial document whereby
all (except Teodoro the incompetent, and
minors Concepcion and Jose) submitted their
indebtedness to Inchausti and Co. the sum of
P203,221.27 with interest of 10% per annum,
mortgaging sixth-ninth of their undivided 38
rural properties, urban properties, lorchas and
family credits.
- On January 11, 1909, the balance amounted to
P271, 863.12, to which Hijos de T. Yulo
conformed with.
- On July 17, 1909 Inchausti Co. reduced the
balance to P253, 445.42. Hijos de T. Yulo
conformed with such.
- On August 12, 1909 Gregorio Yulo, Manuel,
Pedro, Francisco, Carmen, and Concepcion
ratified the documents of June 26, 1908,
severally and jointly acknowledged and
admitted their indebtedness to Inchausti Co. for
the amount of P253, 445.42. Terms: 5
installments; interest 10% per annum;
Obligations and Contracts
beginning June 30, 1910; payment every 30th of
June until June 30, 1914.
- The default in payment of any of the
installment will result in the maturity of all the
installments.
- It was stipulated in the notarial document that
the siblings contracted in solidum, and that
Mariano Yulo will confirm and ratify the
instrument in all parts, otherwise it will not be
binding to Inchausti and Co. who can make use
of their right to demand and obtain the
immediate payment of their credit.
- Mariano neither ratified nor confirmed the
instrument.
- On March 27, 1911 Inchausti & Co. filed an
action against Gregorio Yulo for the payment of
the balance due of P253, 445.42.
- On May 12, 1911 Francisco, Manuel, and
Carmen, executed another notarial document
in favor of Inchausti & Co. in recognition of the
debt and obligation of payment in the terms:
debt reduced to P225, 000; interest reduced to
6% per annnum; installment increased to 8;
beginning June 30, 1911; payment every 30th
June until June 30, 1919.
- Source of conflict:
First Instrument
Parties: Gregorio, Manuel, Pedro, Francisco, Carmen,
and Concepcion
1st installment due: June 30, 1910
Principal: P253,445.42
Case filed against Gregorio: March 27, 1911 (after the
1st nstallment of the 1st instrument was due but
before the 1st installment of the 2nd instrument)
Second Instrument
Parties: Francisco, Manuel, and Carmen
1st installment due: June 30, 1912
Principal: P225,000
Issue/s:
1. WON plaintiff can sue Gregorio Yulo alone,
there being other obligors
2. If yes to the 1st, WON Inchausti lost such
right by the fact of its having agreed with the
terms of May 12, 1911 notarial document of
Francisco, Manuel and Carmen
119 291
 3. WON the contract of May 12, 1911
constitutes novation of the Aug. 12, 1909
document
4. WON the instrument of May 12, 1911 has any
effect in the action brought against Gregorio
Yulo
Ruling:
Judgment reversed. Gregorio Yulo was ordered
to pay Inchausti & Company P112,500, with the
interest stipulated in the instrument of May 12,
1911, from March 15, 1911, and the legal
interest on this interest due, from the time that
it was claimed judicially in accordance with Art.
1109 of the Civil Code.
Ratio:
1. Yes. According to the Civil Code when an
obligation is constituted as a conjoint and
solidary obligations each one of the debtors is
bound to perform in full the undertaking which
is the subject matter of such obligations,
therefore, the debtors having obligated
themselves in solidum, the creditor can bring its
action in toto against anyone of them.
2. No. Even if the creditor has agreed with some
of the solidary debtors on different installments
and conditions, as in the case of Francisco,
Manuel, and Carmen through the instrument of
May 12, 1911, it does not lead to the conclusion
that the solidarity stipulated in the instrument
of August 12, 1909, is broken. The Civil Code
provides Solidarity may exist even though the
debtors are not bound in the same manner and
for the same periods and under the same
conditions.
3. No. The contract of May 12, 1911 does not
constitute a novation of the former August 12,
1909, with respect to defendant Gregorio Yulo
- Under the Civil Code In order that an
obligation may be extinguished by another
which substitutes it, it is necessary that it
should be so expressly declared or that the old
and the new be incompatible in all points.
- There exists no incompatibility with the old
and the new obligation as the new contract
stipulated that the suit against Gregorio Yulo
Obligations and Contracts
must continue and the three who executed the
new document would cooperate in order for
the action to prosper.
- Further, an obligation to pay a sum of money
is not novated in a new instrument where the
old is ratified by changing only the term of
payment and adding other obligations not
incompatible with the old one.
4. Yes. The effects are:
- The defendant has a right to enjoy the benefits
of partial remission of the debt granted by the
creditor to the defendants co-solidary debtors.
- Under the Art. 1215 NCC, the amount stated in
the contract of August 12, 1909,cannot be
recovered but only that stated in the contract of
May 12, 1911, which amounts to P225,000.
- Further, under Art. 1222 NCC, the solidary
debtor may utilize against the claims of the
creditor all the defenses arising from the
nature of the obligation and those which are
personal to him. Those personally pertaining to
the others may be employed by him only
with regard to the share of the debt for
which the latter may be liable. Not all of the
P225, 000 can be demanded of him, for that
part of Francisco, Manuel and Carmen are not
yet due. (refer to the difference of 1st payment
due of the two contracts)
- Thus, Gregorio Yulo shall pay the amount of
P112, 500 the three-sixths part which fell due
on the first contract, with interest stipulated in
the May 12, 1911 contract.
Three-sixths part was computed as those
pertaining to his share (Gregorio), Pedro
and Concepcion. The share of the latter
two may be demanded by Gregorio, the
paying solidary debtor.
P112,500 was based on the new principal
of 225,000 since the solidary debtors shall
benefit from the remission made to their
co-solidary debtors.
Take note that Gregorio is liable for the
entire amount of 225,000 BUT only
112,500 of which is due.
The amount is already due because
Gregorio cannot take advantage of the
due date for Francisco, Manuel, and
Carmen. This defense is personal to them.
120 291
 Inciong v. CA
G.R. No. 96405
Jun. 26, 1996
Romero, J.
Julie Enad
Keywords: Bank sues only one of 3 solidary
debtors
Facts:
- Petitioner along with 2 other people (Naybe &
Pantanosas), were sued by respondent bank for
not paying P50k, which was written and signed
by them in a promissory note.
- The bank dropped the charges on the other
three, leaving only the petitioner.
- Petitioners defense was that he was only
persuaded by his friend, Campos, to act as a co-
maker in a loan for a falcate logs business, and
that he affixed his signature to 5 copies of blank
promissory notes, but in one note he indicated
that he was only bound for the amount of P5k.
Thus it was through trickery, fraud, and
misrepresentation that he was made liable for
P50k.
Issue/s:
WON Inciong should still be held liable when his
other co-makers charge has been dismissed,
based on Art. 2080. (Bank dropped charges for
Pantanosas, Naybe was in UAE)
Ruling:
Petition denied and CA decision affirmed.
Ratio:
- Yes. Petitioner signed the promissory note as a
solidary co-maker and not as a guarantor,
evidenced by this: "Ninety one (91) days after
date, for value received, I/we, JOINTLY and
SEVERALLY promise to pay to the PHILIPPINE
BANK OF COMMUNICATIONS at its office in the
City of Cagayan de Oro, Philippines the sum of
FIFTY THOUSAND ONLY (P50,000. 00) Pesos,
Philippine Currency, together with interest x x x
at the rate of SIXTEEN (16) per cent per annum
until fully paid."
Obligations and Contracts
- Art. 2047 states that a guarantor binds himself
to fulfil the obligation of the principal debtor in
case the latter should fail to do so, and if a
person binds himself solidarily with the
principal debtor, the contract is a suretyship.
But a guarantor and a solidary debtor is
different. Tolentino explains: "A guarantor who
binds himself in solidum with the principal
debtor under the provisions of the second
paragraph does not become a solidary co-
debtor to all intents and purposes. There is a
difference between a solidary co-debtor, and a
fiador in solidum (surety). The later, 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."
- Under Art. 1207, when there are 2 or more
debtors in one obligation, there is a
presumption that the obligation is joint so that
each of the debtors is liable only for a
proportionate part of the debt, unless the
obligation expressly states, or when the law
provides, or when the nature of the obligation
so requires, that there be solidarity liability.
- In this case, the promissory note expressly
states that the three signatories therein are
jointly and severally liable, which entails that
any one, some or all of them may be proceeded
against for the entire obligation. It is the
creditors choice to determine against whom he
will enforce collection.
121 291
 RCBC v. CA
G.R. No. 85396
Oct. 27, 1989
Melencio-Herrera, J.
Apo Espaola
Keywords: Surety liability under financial
rehabilitation of debtor
Facts:
- Alfredo Ching signed a 'Comprehensive Surety
Agreement' with RCBC, binding himself to
jointly and severally guarantee the prompt
payment of all PBM obligations owing RCBC in
the aggregate sum of P40,000,000.00.
- PBM filed several applications for letters of
credit with RCBC. Through said applications,
PBM obligated itself, among other things, to pay
on demand for all drafts drawn under or
purporting to be drawn under the credits.
Everything being in order, RCBC opened the
corresponding letters of credit and imported
various goods for PBM's account.
- Less than a year later, RCBC filed a complaint
for collection of said sum against respondents
PBM and Alfredo Ching with the CFI.
- Meanwhile, PBM filed a Petition for
Suspension of Payments with the SEC seeking at
the same time its rehabilitation. SEC issued an
injunctive order suspending all actions for
claims against PBM pending before any Court or
tribunal in order to give the Commission the
opportunity to pass upon the feasibility of any
rehabilitation plans. Consequently, SEC
approved the revised rehabilitation plan and
ordered its implementation.
- CFI: judgment against the defendants (PBM
and Ching) ordering them to pay plaintiff jointly
and severally. CA: reversed. CFI and ordered it
to hold proceedings pending the SEC case.
- Defendant claim that the liabilities incurred by
PBM were corporate in character and, hence,
as a corporate officer, Alfredo Ching cannot
be held liable therefor; that the pendency of
the SEC case and the rendition of an injunctive
order implementing respondent PBM's
rehabilitation plan must necessarily benefit the
surety Ching.
Obligations and Contracts
Issue/s:
WON an SEC Order suspending, during the
pendency of a rehabilitation proceeding,
payment of all claims against the principal
debtor bar or preclude the creditor from
recovering from the surety
Ruling:
No. The SEC injunctive Order is of no effect as
far as the respondent Surety, Alfredo Ching is
concerned. CA decision set aside. CFI judgment
reinstated.
Ratio:
- Where an obligation expressly states a
solidary liability, the concurrence of two or more
creditors or two or more debtors in one and the
same obligation implies that each one of the
former has a right to demand, or that each one
of the latter is bound to render, entire
compliance with the prestation. (Art. 1207).
The creditor may proceed against any one of
the solidary debtors or some or all of them
simultaneously. (Art. 1216)
- That there exists a Comprehensive Surety
Agreement between RCBC and respondent
Ching is admitted. There is no escaping the
attendant liability that binds respondent Ching,
as Surety. He is charged as an original promissor
by virtue of his primary obligation under the
Suretyship Agreement. That Agreement is bare
of words imputing to respondent Ching any
liability other than that of a Surety who binds
himself to insure a debt in his personal capacity.
- That respondent Ching acted for and on behalf
of respondent PBM as part of its usual
corporate procedure is not supported by the
evidence nor the pleadings on record, nor the
Agreement itself. The Court cannot give any
additional meaning to the plain language of the
subject agreement.
- The extent of a surety's liability is determined
only by the clause of the contract of suretyship.
It cannot be extended by implication, beyond
the terms of the contract. Conversely, liability
therefor may not be restricted unless expressly
so stated.
122 291
 - Neither can respondent Ching seek refuge
behind the SEC injunctive Order. The SEC
injunctive Order cannot effect a suspension of
payment of respondent Surety's due and
demandable obligation, it being clear therefrom
that the rehabilitation receivers were limited
"to taking custody and control over all the
existing assets and property of PBM." Nothing
in said Order puts respondent Ching within its
scope.
- In fine, the SEC injunctive Order is of no effect
as far as the respondent Surety, Alfredo Ching,
is concerned. He can be sued separately to
enforce his liability as Surety for PBM.

Obligations and Contracts 123 291

 Lafarge Cement v. Continental Cement
G.R. No. 155173
Nov. 23, 2004
Panganiban, J.
Pia Falcone
Keywords: Compulsory counterclaim
Facts:
- Lafarge Cement Philippines, Inc. agreed to
purchase the cement business of Continental
Cement Corporation (CCC). They entered into a
Sale and Purchase Agreement (SPA) on October
21, 1998.
- At the time of the transactions, petitioners
were aware that CCC had a case pending with
the Supreme Court entitled Asset Privatization
Trust (ATP), so in anticipation of the liability
that might be adjudged against CCC, the parties,
under Clause 2 (c) of the SPA, allegedly agreed
to retain from the purchase price a portion of
the contract price in the amount of
P117,020,846.84. This was to be deposited in an
interest-bearing account for payment to ATP.
- However, petitioners allegedly refused to
apply the sum to the payment to ATP.
- Fearful that non-payment would lead to
foreclosure of properties, CCC filed a complaint
against petitioners, directing them to pay the
APT Retained Amount.
- In response, petitioners moved to dismiss the
complaint and additionally filed their Answer
and Compulsory Counterclaims against CCC, its
majority stockholder and president Gregory Lim,
and its corporate secretary Anthony Mariano,
praying for damages. Petitioners alleged that
CCC, through Lim and Mariano, had filed a
baseless complaint and procured the Writ of
Attachment in bad faith. Petitioners pray that
both Lim and Mariano be held jointly and
solidarily liable with respondent CCC.
Issue/s:
WON respondent CCC has personality to move
to dismiss petitioners compulsory counterclaim
on Lim and Marianos behalf.
Ruling:
Obligations and Contracts
The petition is granted. The court of origin is
ordered to take cognizance of the
counterclaims pleaded in petitioners Answer
with Compulsory Counterclaims and to cause
the service of summons on Respondents
Gregory T. Lim and Anthony A. Mariano.
Ratio:
- No. First, the Court finds petitioners usage of
the term joint and solidary confusing and
ambiguous because obligations may be
classified as either joint/jointly/conjoint or
solidary/joint and several/several. But even so,
according to Art. 1207, obligations are generally
considered joint, except when otherwise
expressly stated or when the law or the nature
of the obligation requires solidarity. However,
obligations arising from tort are, by their nature,
always solidary.
- The fact that the liability sought against the
CCC is for specific performance and tort, while
that sought against the individual respondents
is based solely on tort doesnt negate the
solidary nature of their liability for tortuous acts
alleged in the counterclaims. Citing Art. 1211,
solidarity may exist although the creditors and
the debtors may not be bound in the same
manner and by the same periods and
conditions.
- In cases filed by the creditor, a solidary debtor
may invoke defenses arising from the nature of
the obligation, from circumstances personal to
it, or even from those personal to its co-debtors.
- The act of CCC as solidary debtorthat of
filing a motion to dismiss the counterclaim on
the grounds that pertain only to its individual
co-debtorsis therefore allowed.
- However, CCCs filing of motion on behalf of
Lim and Mariano isnt allowed because it lacks
the requisite authority to do so. A corporation
has a legal personality entirely separate and
distinct from that of its officers and cannot act
for and on their behalf, without being so
authorized. Thus, unless expressly adopted by
Lim and Mariano, the Motion to Dismiss the
compulsory counterclaim filed by CCC has no
force and effect as to them.
- Respondent CCC or any of the three solidary
debtors [CCC, Lim, Mariano] may include, in a
124 291
 Motion to Dismiss, defenses available to their
co-defendants; nevertheless, the same Motion
cannot be deemed to have been filed on behalf
of the said co- defendants.

Notes:
- Joint Obligation: each obligor answers only for
a part of the whole liability.
- Solidary or Joint and Several Obligation: the
relationship between the active and passive
subjects is so close that each of them must
comply with or demand the fulfilment of the
whole obligation.

Obligations and Contracts 125 291

 Jaucian v. Querol
G.R. No. L-11307
Oct. 5, 1918
Street, J.

Christopher Hermosisima (DIGEST MISSING IN

DROPBOX)

Keywords:

Facts:

Issue/s:

Ruling:

Ratio:

Obligations and Contracts 126 291

 RFC v. CA
G.R. No. L-5942
May 14, 1954
Concepcion, J.
Paolo Macariola
Keywords: Payment by third person
Facts:
- Jesus de Anduiza and Quintana Cano
borrowed money from RFC, formerly the
Agricultural and Industrial Bank. They executed
a promissory note promising to pay P13,800
with 6% interest per annum on or before Oct.
31, 1951. Payments were to be made in 10
equal annual installments, according to the
amortization schedule.
- However, Anduiza and Cano failed to pay the
amortizations due on Oct. 31, 1942 and 1943.
- Estelito Madrid, who was temporarily living in
Anduizas house, offered to pay Anduizas
indebtedness, paying the full amount on Oct. 30,
1944.
- In 1948, Madrid instituted the present action,
asking the court to: a. declare as paid the
P16,425.17 which Anduiza owed to RFC; b.
order RFC to cancel the mortgage and release
the properties; and c. condemn Anduiza to pay
Madrid the abovementioned amount, with legal
interest.
- RFC, on the other hand, argued that the
payments were not fully due and demandable
yet when Madrid made the payments. Further,
the payments by Madrid were made against
Anduizas will, and over RFCs objection. Hence,
these payments were not valid.
- The trial court decided in RFCs favor, while
the Court of Appeals reversed, directing RFC to
cancel the mortgage and ordering Anduiza to
pay Madrid the aforesaid amount.
Issue/s:
WON payment by a third person was valid
Ruling:
Yes. The Court affirmed the CAs decision.
Ratio:
Obligations and Contracts
- Madrid was entitled to pay Anduizas
obligation, irrespective of the latters will or
RFCs, and even over the objection of either or
both.
- Art. 1236 (formerly Art. 1158) provides: The
creditor is not bound to accept payment or
performance by a third person who has no
interest in the fulfillment of the obligation,
unless there is a stipulation to the contrary.
Whoever pays for another may demand from
the debtor what he has paid, except that if he
paid without the knowledge or against the will
of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.
However, the Court said that the payments
were not made against Anduizas or RFCs
objections.
- Anduiza, though impliedly, had clearly
accepted the validity of the payments when he
joined Madrid in appealing the decision of the
trial court. Meanwhile, RFC issued receipts
acknowledging payment without qualification,
and demanded a signed statement of Anduiza
sanctioning said payments. This signed
statement was a condition precedent to the
execution of the deed of cancellation of the
mortgage, and not to the acceptance of the
paymentthe acceptance had already been
made.
- But this condition was null and void. The
bank had no right other than to exact payment,
and because the payment had been made, the
obligation, as well as RFCs status and rights as
creditor, had become automatically
extinguished.
- Thus, the good or bad faith of the payor is
immaterial. The exercise of a right, vested by
law without any qualification, cannot be legally
considered as tainted with bad faith.
- Also, RFC cannot invoke the provision that the
payor may only recover from the debtor insofar
as the payment has been beneficial to him. This
defense may be availed of only by the debtor,
and not the Bank, for it affects solely the rights
of the former.
127 291
 Quiombing v. CA
G.R. No. 93010
Aug. 30, 1990
Cruz, J.
Carlos Marin
Keywords: Suit by one solidary creditor without
his solidary co-creditor
Facts:
- Nicencio Quiombing and Dante Biscocho
jointly and severally bound themselves to
construct a house for the Saligos for the price of
137,940.00php on August 30, 1983.
- On October 10, 1984, petitioner and the
Saligos entered into another written agreement
that signified the completion of the house and
the collection of payment.
- In lieu of such acknowledgment, the spouses
Saligo signed a promissory note acknowledging
the balance of their payment still due the
petitioner.
- Due to the failure of the Saligos to settle their
balance after almost two years since the date of
the promissory notes execution, petitioner filed
a complaint for the recovery of the unpaid
portion plus charges and interests.
- As defense, the Saligos averred that Biscocho
was an indispensable party and that, as such, no
complaint could be filed against him without
including him as co-petitioner.
entire obligation upon any of the solidary
debtors.
- Also, they defined active solidarity which was
the authority of each creditor to claim and
enforce the rights of all mutual
representation.
- The Court also provided Art. 1212 of the Civil
Code that provides that each of the solidary
creditors may do whatever may be useful to the
others.
- In the case at bar, demand of payment due to
them is clearly something useful to all the
creditors and could thus be demanded by
Quiombing without involving Biscocho.
- Lastly, the Court cited Justice Feria in deducing
that in the case of solidarity between parties,
either one is an indispensable party while the
others are not even necessary because
complete relief may be obtained from either.
The reverse is true in case of solidary creditors
in that complete relief may be obtained by
either.

Issue/s:
WON a solidary creditor can sue the debtor
without involving his fellow solidary co-
creditors

Ruling:
The petition is granted. Quiombing may validly
enforce the collection of the construction
costs due to him and Biscocho without
involving the latter in his action against the
Saligos

Ratio:
- Yes. The court defined what solidary
obligations were, particularly stressing the point
that each solidary creditor may enforce the

Obligations and Contracts 128 291

 Alipio v. CA
G.R. No. 134100
Sept. 29, 2000
Mendoza, J.
Michael Trance Nuez
Keywords: Fishpond sublease; debt chargeable
to conjugal partnership dissolved upon
husbands death
Facts:
- Respondent Jaring was a lessee of a 14.5-
hectare fishpond in Bataan.
- He entered into a sub lease contract with the
spouses Alipio and spouses Manuel with an
amount of rent at 485,600 pesos payable in
two installments of 300,000 pesos and
185,600 pesos, the latter was due on June 30,
1989. The two pairs signed the contract.
- Near the end of the sub lease in 1989 the
second installment remained unpaid, with an
outstanding balance of 50,600 pesos.
- A year prior, Placido Alipio passed away.
Jaring filed a case for the collection of the
unpaid rent against all of the sub lessees.
- The widow Purita Alipio moved to dismiss the
case on the ground that her husband had died,
pursuant to Rule 3, section 21 of the Rules of
Court that "when the defendant dies before
final judgment, it shall be dismissed to be
prosecuted in the manner especially provided in
these rules."
- Alipio's motion was denied by the trial court,
stating that the death of her husband merely
resulted in his exclusion from the case.
Meanwhile, the Manuels were declared in
default for failing to reply.
- The trial court eventually rendered judgment
in favor of Jaring, ordering Alipio to pay the
remaining balance. Alipio lost on appeal as well,
citing the case of Climaco and Imperial, saying
the said rule does not apply when there are
other defendants against whom an action can
be maintained.
Issue/s:
WON Jaring is barred from suing Alipio, despite
being a signatory to the sub lease, in an
Obligations and Contracts
ordinary proceeding due to the death of her
husband
Ruling:
NO. Jaring cannot sue for the collection of a
sum of money chargeable against the conjugal
partnership. He must file a claim in the
settlement of the estate of the decedent.
Ratio:
- When petitioner Alipio's husband died, the
conjugal partnership was automatically
dissolved and debts against it were chargeable
are to be paid in the settlement of the estate
proceedings in accordance with Rule 73, Section
2.
- Thus, in accordance with the case of Calma, no
complaint for the collection of indebtedness
chargeable against the conjugal partnership can
be brought. An alternative remedy, however,
laid down in the case of Ventura says that the
creditor may apply in court for letters of
administration.
- Contrary to the ruling in Climaco, an obligation
entered into by the husband and the wife is
chargeable against their conjugal partnership
and it is the partnership which is primarily
bound for its repayment. The spouses are
impleaded in their capacity as representatives
of the conjugal partnership and not as
independent debtors.
- On whether the obligation entered into by the
spouses Alipio and spouses Manuel was joint or
solidary, the court held that the basis of their
solidary liability was not the contract of sub
lease but the fact that they have become joint
tortfeasors; PROVIDED, that they stayed in the
property beyond the contract of lease. The
contract of lease has not yet expired, therefore
with the absence of stipulation, their obligation
is deemed to be joint.
129 291
 Makati Development v. Empire Insurance
G.R. No. L-21780
Jun. 30, 1967
Castro, J.
Justin Ordoyo
Keywords: Unfulfilled condition to construct
residence on sold lot; partial performance;
penalty
Facts:
- On March 31, 1959, MDC sold to Rodolfo P.
Andal a lot, with an area of 1,589 square meters,
in the Urdaneta Village, Makati, Rizal, for
P55,615.
- A so-called "special condition" contained in
the deed of sale provides that:
"[T]he VENDEE/S (Andal) shall commence the
construction and complete at least 50% of
his/her/their/its residence on the property
within two (2) years from March 31, 1959 to
the satisfaction of the VENDOR (MDC) and, in
the event of failure to do so, the bond which
the VENDEE/S has delivered to the VENDOR
in the sum of P11,123.00 and evidenced by a
cash bond receipt dated April 10, 1959 will be
forfeited in favor of the VENDOR by the mere
fact of failure of the VENDEE/S to comply
with this special condition."
- To ensure faithful compliance with this
"condition," Andal gave a surety bond
wherein he (as principal) and EIC (as surety)
jointly and severally, undertook to pay MDC the
sum of P12,000 in case Andal failed to comply
with his obligation under the deed of sale.
- Andal did not build his house; instead he sold
the lot to Juan Carlos on January 18, 1960.
- As neither of them built a house on the lot
within the stipulated period, the MDC sent a
notice of claim to EIC advising it of Andal's
failure to comply with his undertaking.
- EIC refused to pay P12,000 prompting MDC to
file a complaint in the CFI of Rizal on May 22,
1961 against EIC to recover the same, plus
attorney's fees.
- EIC filed its answer with a third-party
complaint against Andal. It asked that the
complaint be dismissed or, in the event of a
Obligations and Contracts
judgment in favor of MDC, that judgment be
rendered ordering Andal to pay EIC whatever
amount it may be ordered to pay MDC, plus
interest, and legal fees.
- Andal admitted the execution of the bond but
alleged that the "special condition" was
contrary to law, morals and public policy. He
averred that, at any rate, Juan Carlos had
started construction of a house on the lot.
- The lower court sentenced EIC to pay P1500 to
MDC, plus interest, and costs. It directed that in
case it was paid by EIC, Andal should in turn pay
the same to the former. MDC appealed.
- In reducing Andal's liability for breach of his
undertaking from P12000 to P1500, the court
noted that while no building has actually been
constructed before March 31, 1961, the area
was already fenced and building materials were
stocked in the premises which are clear indicia
of the owner's desire to construct his house. By
the end of April 1961, Juan Carlos had finished
much more than the required 50%. In short
there was only really a little delay.
Issue/s:
1. WON the special condition was in reality an
obligation
2. WON the trial court was justified in reducing
the penalty
3. WON Carlos' construction of a house on the
lot sold can be considered a partial
performance of Andal's obligation given that
Carlos has no contractual relation with MDC
Ruling:
The decision appealed from is affirmed.
Ratio:
1. Yes. The so-called special condition in the
deed of sale is in reality an obligation to build
a house at least 50 per cent of which must
be finished within two years. It was to secure
the performance of this obligation that the
following penal clause was inserted: the bond
in the sum of P11,123.00 will be forfeited in
favor of the VENDOR (MDC) by the mere fact of
failure of the VENDEE/S (Andal) to comply with
this special condition.
130 291
 2. Yes. While it is true that in obligations with a
penal sanction the penalty takes the place of
"damages and the payment of interest in case
of non-compliance and that the obligee is
entitled to recover upon the breach of the
obligation without the need of proving damages,
it is nonetheless true that in certain instances a
mitigation of the obligor's liability is allowed.
- Here, there was therefore a partial
performance of the obligation (Juan Carlos
finishing more than 50% of the house) within
the meaning and intendment of Art. 1229.
- The penal clause in this case was inserted NOT
to indemnify MDC for any damage it might
suffer as a result of a breach of the contract
BUT to compel performance of the so-called
"special condition" and thus encourage home
building among lot owners in the Urdaneta
Village.
- Considering that a house had been built
shortly after the period stipulated, the tardy but
substantial performance of the obligation,
having in view the purpose of the penal clause,
fully justified the trial court in reducing the
penalty.

3. Yes. In Insular Gov't. vs. Amechazurra (1908),

the defendant gave a bond to guarantee the
return to the plaintiff of four firearms. Three of
the firearms were stolen from the defendant so
that on demand he was able to produce only
one. Subsequently, the constabulary recovered
two of them. Was defendant entitled to a
mitigation of liability even if recovery of the
firearms was made possible through the efforts
of third parties (the Constabulary)? The Court
said yes.
- Indeed the stipulation to complete at least 50%
of the vendee's house within two years cannot
be construed as imposing a strictly personal
obligation on Andal. To adopt such a
construction would be to limit his right to
dispose of the lot.
- There is nothing in the deed of sale restricting
Andal's right to sell the lot at least within the
two-year period.

Obligations and Contracts 131 291

 Tan v. CA
G.R. No. 116285
Oct. 19, 2001
De Leon, Jr., J.
Carlos Pagdanganan
Keywords: Compounded interest on surcharges
Facts:
- Tan obtained two loans from respondent CCP
totaling to P4,000,000.00 with maturity dates
on May and July 1979 . Tan defaulted, but after
a few partial payments the load was
restructured.
- This time around, he had to pay P3, 411,
421.32 in 5 installments. He failed to pay any of
the installments as the last installment became
due December, 1980.
- In January 1982, Tan requested for the loan to
be restructured once more, yet no payment
was still made by him.
- CCP demanded full payment, and after failure
by Tan to pay, filed a complaint for collection of
a sum of money.
- RTC ruled for CCP, and the CA ruled for them
as well although deleting the award for
exemplary damages and reducing the amount
for attorneys fees.
- Tan does not question his liability for the loan,
but only the imposition of interest on the
surcharges of the loan. He contests the
compounding of interest on surcharges of the
loan. His defense is that there is no basis in the
law for the charging of interest on the
surcharges.
Issue/s:
1. WON there is a legal basis for the imposition
of penalty and interest charges on penalties for
defaulting in loan payments
2. WON interest may accrue on the penalty or
compensatory interest
Ruling:
Penalty charge was reduced by the court from 2%
monthly to 12% per annum, taking into
consideration petitioners partial payments and
his offers to work out a compromise for the
Obligations and Contracts
settlement of the debt by proposing payment
schemes to CCP. Other than that, the CAs
decision was affirmed.
Ratio:
1. Yes there is. Art. 1226 applies.
- The promissory note expressly provides for the
imposition of BOTH interest and penalties in
case of default on the part of the petitioner in
the payment of the subject restructured loan.
- In the case at bar, the 14%per annum interest
constitutes the monetary interest on the note
(allowed under Art 1956) while the 2% interest
per month penalty (IN CASE OF NON PAYMENT
AT MATURITY) is in the form of penalty charge
(also called penalty or compensatory interest)
WHICH IS SEPARATE AND DISTINCT from the
monetary interest on the principal of the loan.
2. Yes. Penalty clauses can be in the form of
penalty or compensatory interest. The
compounding of penalty or compensatory
interest is sanctioned by and allowed pursuant
to Art. 1959.
- In other words, by stipulation, parties may add
the interest due to the principal loan, thus
earning new interest.
- There is an express stipulation in the
promissory note that indeed permits the
compounding of the interest: Any interest
which may be due if not paid shall be added to
the total amount when due and shall become
part thereof, the whole amount to bear interest
at the maximum rate allowed by law.
132 291
 Country Bankers Insurance v. CA
G.R. No. 85161
Sept. 9, 1991
Medialdea, J.
Carlos Poblador
Keywords: Lease on theaters
Facts:
- Respondents Oscar Ventanilla Enterprises
Corporation (OVEC), as lessor, and the
petitioner Sy, as lessee, entered into a lease
agreement over land and three theaters in
Cabanatuan City for a span of six years.
- After two years, OVEC made demands for
repossession because Sy failed to pay his
monthly rent and amusement taxes. This led to
them entering into a supplementary agreement
where Sy was allowed to maintain possession of
the property.
- However, Sy still failed to pay and thus OVEC
eventually padlocked the gates of the three
theaters and repossessed the property.
- Sy alleged that the amount of deposit
P600,00.00 as agreed upon, P300,000.00of
which was to be paid on June 13, 1977 and the
balance on December 13, 1977was too big;
and OVEC assured him that said forfeiture will
not come to pass.
- Sy also prayed for the issuance of a restraining
order/ preliminary injunction to enjoin OVEC
from entering and taking possession of the
theaters upon Sys filing of a P500,000.00 bond
supplied by Country Bankers Insurance
Corporation (CBISCO)
- Lower court ruled that Sy is not entitled to
reformation of lease agreement and that the
repossession by OVEC was in accordance with
the stipulation of the parties in their agreement.
- Sy says that the forfeiture clause stipulated in
their lease agreement would unjustly enrich
OVEC.
Issue/s:
WON respondent is unjustly enriched at the
expense of the petitioners
Ruling:
Obligations and Contracts
Petition denied. CA decision affirmed.
Ratio:
- The forfeiture clause in the lease agreement
would not unjustly enrich OVEC at expense of
Sy and CBISCO. A penal clause is an accessory
obligation which the parties attach to a
principal obligation for the purpose of insuring
the performance thereof by imposing on the
debtor a special prestation (generally consisting
in the payment of a sum of money) in case the
obligation is not fulfilled or is irregularly or
inadequately fulfilled.
- As a general rule, in obligations with a penal
clause, the penalty shall substitute the
indemnity for damages and the payment of
interests in case of non-compliance. However,
there are exceptions: 1) When there is a
stipulation to the contrary 2) When the obligor
is sued fro refusal to pay the agreed penalty 3)
When the obligor is guilty of fraud (Article 1226)
- A provision which calls for the forfeiture of the
remaining deposit still in the possession of the
lessor by reason of the lessees violation of any
of the terms and conditions of the agreement is
a penal clause that may be validly entered into.
- In the case at bar, inasmuch as the forfeiture
clause provides that the deposit shall be
deemed forfeited, without prejudice to any
other obligation still owing by the lessee to the
lessor, the penalty cannot substitute for the
P100,000.00 supposed damage resulting from
the issuance of the injunction against the
P290,000.00 remaining cash deposit. It must be
applied against the injunction bond.
133 291
 Arrieta v. NARIC
G.R. No. L-15645
Jan. 31, 1964
Regala, J.
Carlos Marin
Keywords: Burmese rice
Facts:
- On May 19, 1952, NARIC conducted a public
bidding for the procurement of 20,000 metric
tons of Burmese rice. Paz Arrieta, with the
lowest bid of $203.00 per metric ton was
awarded the contract with the NARIC.
- The latter committed to paying the plaintiff
through an irrevocable, confirmed and
assignable letter of credit in U.S. currency.
However, upon its filing for said letter of
credit a month with PNB it became
apparent that the NARIC did not have enough
credits to cover the agreed- upon amount.
- Taking this into consideration, the bank
agreed to issue the letter of credit only upon
the deposit of half of the total sum requested
by the NARIC.
- At this point, Arrieta informed the defendant
that she needed the letter of credit
immediately because she had made an initial
payment of 5% that was subject to forfeiture if
no such letter was presented before August 4,
1952.
- The NARIC was unable to meet this
requirement and the deposit made by Arrieta
was consequently confiscated.
- When it became clear that re-acquiring the
deposit made was not possible, Arrieta offered
to provide the NARIC with Thai rice in the same
quantity instead.
- The NARIC rejected the offer and later
contended that it amounted to a waiver of
rights with regard to the original contract.
Issue/s:
1. WON the NARIC is liable for its failure to
perform its contractual obligations with
respect to Art. 1170
Obligations and Contracts
2. WON the plaintiffs subsequent offer of
providing Thai rice instead amounted to a
waiver
Ruling:
The NARIC is liable under Art. 1170 and the
plaintiffs second offer did not waive her rights
to the first contract.
Ratio:
1. The Court discerned that the only reason
that the contract did not push through was
because the NARIC failed to provide the
plaintiff with the letter of credit necessary to
further her transaction with the rice supplier.
As such, the responsibility with regard to the
non-fulfillment of the contract was solely
the NARICs.
- The defendant- appellant had no business
entering into a contract whose terms it knew it
could not satisfy (in this case, having sufficient
credit to sustain the purchase of rice through
Arrieta).
- In addition, the Court said that the amount
owed the plaintiff for loss of profit and
damages incurred ought to be expressed in
Philippines peso; $286,000.00 was owed the
plaintiff.
2. The Court also ruled that the plaintiffs offer
to provide Thai rice instead did not amount to
a waiver of rights because waivers are not
presumed. They must be clearly and
convincingly shown, either by express
stipulation or acts admitting no other
reasonable explanation.
- These conditions were not met in the case.
134 291
 Kalalo v. Luz
G.R. No. L-27782
Jul. 31, 1970
Zaldivar, J.
Laurie Quiambao
Keywords: Engineering service fee; estoppel
Facts:
- Nov. 17, 1959: Kalalo, a licensed civil
engineer, entered into an agreement with Luz,
a licensed architect.
- Kalalo was to render engineering design
services (design computation and sketches,
contract drawing and technical specifications
of all engineering phases of the project Kalalo
designed, bill of quantities and cost estimate,
and consultation and advice during the
construction relative to the work) to the latter
as stipulated in the agreement.
- The fees agreed upon were percentages of
the architect's fee, to wit: structural
engineering, 12-12%; electrical engineering, 2-
12%.
- December 11, 1961: Kalalo sent to Luz a
statement of account (Exhibit "1"), to which
was attached an itemized statement of Luz's
account (Exh. "1A"), according to which the
total engineering fee asked by Kalalo for
services rendered amounted to P116,565.00
from which sum was to be deducted the
previous payments made in the amount of
P57,000.00, thus leaving a balance due in the
amount of P59,565.00. On May 18, 1962
however, Luz sent Kalalo a resume of fees due
to the latter, which acc. to Luz, was
P10,861.08. Luz then sent a check with that
amount which Kalalo refused to accept.
- Aug.10,1962: Kalalo then filed a complaint
against Luz containing 4 causes of action. In
the first one, Kalalo alleged that for services
rendered in connection with the different
projects therein mentioned there was due him
fees in sums consisting of $28,000 (U.S.) and
P100,204.46, excluding interests, of which
sums only P69,323.21 had been paid, thus
leaving unpaid the $28,000.00 and the balance
of P30,881.25.
Obligations and Contracts
- Upon agreement of both parties, the Trial
Court assigned a Commissioner to hear the
case. At the hearing on the Report of the
Commissioner, the respective counsel of the
parties manifested to the court that they had
no objection to the findings of fact of the
Commissioner contained in the Report.
- Said Commissioner rendered a report which
stated that the amount due to Kalalo was $28k
(20% of $140k paid to Luz for the Int'l Research
Institute Project) and P51,539.91 for other
projects (minus P69,475.46 already paid by
Luz). He also recommended payment of P5k to
Kalalo as attorney's fees.
Issue/s:
1. WON the doctrine of estoppel will apply
2. WPN the recommendation in the Report
that the payment of the amount due to the
plaintiff in dollars was legally permissible, and
if not, at what rate of exchange it should be
paid in pesos
Ruling:
Decision of the Trial Court is affirmed. Luz is
ordered to pay Kalalo the sum of P51,539.91
and $28,000.00, the latter to be converted into
the Philippine currency on the basis of the
current rate of exchange at the time of the
payment of this judgment, as certified to by
the Central Bank of the Philippines, from which
shall be deducted the sum of P69,475.46,
which the defendant had paid the plaintiff.
Ratio:
1. No. Luz's contention that Exhibit 1-A
(statement of accounts which specified the
various projects for which Kalalo claimed
engineering fees), barred Kalalo from asserting
any claim contrary to what was stated in the
same, must fail.
- As found by the Commissioner, Exhibit 1-A
could not estop Kalalo because Luz didn't rely
on the same and instead, insisted that Kalalo
was only entitled to P10,861.08.
135 291
 - No estoppel based on a document can be
invoked by one who has not been misled by
the false statements contained therein.
- Also, Kalalo testified "that when he wrote
Exhibit 1 and prepared Exhibit 1-A, he had not
yet consulted the services of his counsel and it
was only upon advice of counsel that the terms
of the contract were interpreted to him
resulting in his subsequent letters to the
defendant demanding payments of his fees
pursuant to the contract Exhibit A." This finding
of the Commissioner was adopted by the trial
court. It is established, therefore, that Exhibit
1-A was written by Kalalo through ignorance or
mistake.
- It has been held that if an act, conduct or
misrepresentation of the party sought to be
estopped is due to ignorance founded on
innocent mistake, estoppel will not arise.
2. Luzs obligation to pay Kalalo became due
on Aug. 25, 1961. During this time, there were
two rates of exchange the preferred rate of
P2 to $1, and the free market rate.
- The amount of $140k received for the
International Rice Research Institute Project
does not fall under the scope of Circular No.
121 (March 2,1961) because Luz did not show
that 25% of said amount had to be
surrendered to the Central Bank at the
preferred rate because it was either export
proceeds, or U.S. Government expenditures, or
invisibles not included in sub-paragraph (b).
Hence, it cannot be said that the trial court
erred in presuming that appellant converted
said amount at the free market rate.
- It is hard to believe that a person possessing
dollars would exchange his dollars at the
preferred rate of P2.00 to $1.00, when he is
not obligated to do so, rather than at the free
market rate, which is much higher.
- Kalalo, however, cannot oblige the Luz to pay
him in dollars, even if Luz himself had received
his fee for the IRRI project in dollars. This
payment in dollars is prohibited by Republic
Act 5292, which was enacted on June 16,
1950.
Obligations and Contracts
- According to said RA, if the obligation was
incurred prior to the enactment of the Act and
requires payment in a particular kind of coin or
currency other than the Philippine currency,
the same shall be discharged in Philippine
currency measured at the prevailing rate of
exchange at the time the obligation was
incurred.
- Since the obligation accrued after the
enactment of RA 529, it follows that the
provision of Republic Act 529 which requires
payment at the prevailing rate of exchange
when the obligation was incurred cannot be
applied.
- Republic Act 529 does not provide for the
rate of exchange for the payment of obligation
incurred after the enactment of said Act. The
logical Conclusion, therefore, is that the rate of
exchange should be that prevailing at the time
of payment.
Notes:
- Elements of Estoppel:
- As related to the party to be estopped: (1)
conduct amounting to false representation or
concealment of material facts or at least
calculated to convey the impression that the
facts are otherwise than, and inconsistent
with, those which the party subsequently
attempts to assert; (2) intent, or at least
expectation that his conduct shall be acted
upon by, or at least influence, the other party;
and (3) knowledge, actual or constructive, of
the real facts.
- As related to the party claiming the estoppel:
(1) lack of knowledge and of the means of
knowledge of the truth as the facts in
questions; (2) (reliance, in good faith, upon the
conduct or statements of the party to be
estopped; and (3) action or inaction based
thereon of such character as to change the
position or status of the party claiming the
estoppel, to his injury, detriment or prejudice.
136 291
 St. Paul Fire v. Macondray
G.R. No. L-27796
Mar. 25, 1976
Antonio, J.
Paolo Quilala
Keywords: C.I.F. value; proper currency
exchange rate
Facts:
- June 29 1960: Winthrop Products, Inc. NY
shipped aboard the SS "Tai Ping", owned and
operated by Wilhelm Wilhelmsen (carrier) 218
cartons and drums of drugs and medicine, with
the freight prepaid, to Winthrop-Stearns Inc.
Manila (consignee).
- Barber Steamship Lines, Inc., agent of
Wilhelm Wilhelmsen issued Bill of Lading No.
34, in the name of Winthrop Products, Inc. as
shipper, with arrival notice in Manila to
consignee Winthrop Stearns, Inc., Manila,
Philippines.
- The shipment was insured by the shipper
against loss and/or damage with the St. Paul
Fire & Marine Insurance Company
- Aug 7, 1960: SS "Tai Ping" arrived at the Port
of Manila and discharged its aforesaid
shipment into the custody of Manila Port
Service. The said shipment was discharged
complete and in good order with the exception
of one (1) drum and several cartons which
were in bad order condition.
- Winthrop-Stearns filed the corresponding
claim in the amount of P1,109.67 representing
the C.I.F. value of the damaged drum and
cartons of medicine with the carrier,
Macondray and the Manila Port
Service. Both refused to pay.
- Consignee filed its claim with the insurer, St.
Paul Fire & Marine insurance Co. The insurance
company paid to the consignee the insured
value of the lost and damaged goods, including
other expenses in connection therewith, in the
total amount of $1,134.46 U.S. currency
- Aug 5, 1961: St. Paul Fire & Marine Insurance
Co., instituted with the CFI of Manila the
present action against the defendants for the
Obligations and Contracts
recovery of said amount of $1,134.46, plus
costs.
Issue/s:
1. WON in case of loss or damage, the liability
of the carrier to the consignee is limited to the
C.I.F. value of the goods which were lost or
damaged
2. WON the insurer who has paid the claim in
dollars to the consignee should be reimbursed
in its peso equivalent on the date of discharge
of the cargo or on the date of the decision
Ruling:
The appealed decision is affirmed.
Ratio:
1. Yes. A stipulation fixing or limiting the sum
that may be recovered from the carrier on the
loss or deterioration of the goods is valid,
provided it is: (1) reasonable and just under
the circumstances; and (2) has been fairly and
freely agreed upon.
- In the case at bar, the liabilities of the
defendants-appellees with respect to the lost
or damaged shipments are expressly limited to
the C.I.F. value of the goods as per contract of
sea carriage embodied in the bill of lading,
which reads: Whenever the value of the goods
is less than $500 per package or other freight
unit, their value in the calculation and
adjustment of claims for which the Carrier may
be liable shall for the purpose of avoiding
uncertainties and difficulties in fixing value be
deemed to be the invoice value, plus frieght
and insurance if paid, irrespective of whether
any other value is greater or less. The
limitation of liability and other provisions
herein shall inure not only to the benefit of the
carrier, its agents, servants and employees, but
also to the benefit of any independent
contractor performing services including
stevedoring in connection with the goods
covered hereunder. (Paragraph 17)
- The plaintiff-appellant, as insurer, after
paying the claim of the insured for damages
under the insurance, is subrogated merely to
the rights of the assured. As subrogee, it can
recover only the amount that is recoverable by
the latter. Since the right of the assured, in
137 291
 case of loss or damage to the goods, is limited
or restricted by the provisions in the bill of
lading.

2. It should be on the date of discharge.

- The obligation of the carrier to pay for the
damage commenced on the date it failed to
deliver the shipment in good condition to the
consignee.
- The C.I.F. Manila value of the goods, which
were lost or damaged, is $226.37 and $324.33
or P456.14 and P653.53, respectively, in
Philippine Currency. The peso equivalent was
based by the consignee on the exchange rate
of P2.015 to $1.00 which was the rate existing
at that time.

Obligations and Contracts 138 291

 Papa v. Valencia
G.R. No. 105188
Jan. 23, 1998
Kapunan, J.
Alex Ramos
Keywords: Presumption of check encashment;
when creditor impairs check
Facts:
- Private respondents A.U. Valencia and Co.,
Inc. and Felix Pearroyo filed with the Regional
Trial Court of Pasig, Branch 151, a complaint
for specific performance against herein
petitioner Myron C. Papa, in his capacity as
administrator of the Testate Estate of one
Angela M. Butte. The complaint alleged that 1)
petitioner Myron C. Papa, acting as attorney-
in-fact of Angela M. Butte, sold to respondent
Pearroyo, through respondent Valencia, a
parcel of land, consisting of 286.60 square
meters, located at corner Retiro and Cadiz
Streets, La Loma, Quezon City; 2) that prior to
the alleged sale, the said property, together
with several other parcels of land likewise
owned by Angela M. Butte, had been
mortgaged by her to the Associated Banking
Corporation; 3) that after sale but before title
of subject property had been released, Angela
M. Butte died; 4) that despite representations
made by herein respondents to the bank to
release the title to the property sold to
respondent Pearroyo, the bank refused to
release it unless and until all the mortgaged
properties of the late Angela M. Butte were
also redeemed; and 5) that in order to protect
his rights and interests over the property,
respondent Pearroyo caused the annotation
on the title of an adverse claim.
- It was further alleged that: 1) it was only
upon the release of the title to the property,
sometime in April 1977, that respondents
Valencia and Pearroyo discovered that the
mortgage rights of the bank had been assigned
to one Tomas L. Parpana (deceased), as special
administrator of the Estate of Ramon Papa, Jr.;
2) since then, herein petitioner (Myron Papa)
had been collecting monthly rentals in the
Obligations and Contracts
amount of P800.00 from the tenants of the
property, knowing that said property had
already been sold to private respondents on 15
June 1973; and 3) that despite repeated
demands from said respondents, petitioner
refused and failed to deliver the title to the
property.
- Respondents Valencia and Pearroyo filed a
complaint for specific performance, praying
that petitioner be ordered to deliver to
respondent Pearroyo the title to the subject
property, the sum of P72,000.00 as accrued
rentals as of April 1982, and the monthly rental
of P800.00 until the property is delivered to
respondent Pearroyo; to pay respondents the
sum of P20,000.00 as attorney's fees; and to
pay the costs of the suit.
- Petitioner admitted that the lot had been
mortgaged to the Associated Banking
Corporation. However, he contended that: 1)
the complaint did not state a cause of action; 2)
the real property in interest was the Testate
Estate of Angela M. Butte, which should have
been joined as a party defendant; 3) the case
amounted to a claim against the Estate of
Angela M. Butte and should have been filed in
Special Proceedings No. A-17910 before the
Probate Court in Quezon City; and 4), if as
alleged in the complaint, the property had
been assigned to Tomas L. Parpana, as special
administrator of the Estate of Ramon Papa, Jr.,
said estate should be impleaded. Likewise, he
said he could not recall in detail the
transaction which allegedly occurred in 1973;
that he did not have TCT No. 28993 in his
possession; and that he could not be held
personally liable as he signed the deed merely
as attorney-in-fact of said Angela M. Butte.
- Finally, petitioner asseverated that as a result
of the filing of the case, he was compelled to
hire the services of counsel for a fee of
P20,000.00 for which respondents should be
held liable.
- Delfine Jao intervened, alleging that the
subject lot which had been sold to respondent
Pearroyo through respondent Valencia was in
turn sold to him on 20 August 1973 for the
sum of P71,500.00. (He prayed that judgment
be rendered in favor of respondents, the latter
139 291
 in turn be ordered to execute in his favor the
appropriate deed of conveyance covering the
property in question and to turn over to him
the rentals. Also, he wanted moral damages;
and, additionally, the payment of attorney's
fees and costs.)
- Petitioner filed a third-party complaint
against herein private respondents, spouses
Arsenio B. Reyes and Amanda Santos. He
averred: 1) that the late Angela M. Butte was
the owner of the subject property; 2) that due
to non-payment of real estate tax said
property was sold at public auction the City
Treasurer of Quezon City to the respondent
Reyes spouses on 21 January 1980 for the sum
of P14,000.00; 3) that the one-year period of
redemption had expired; 4) that respondents
Valencia and Pearroyo had sued petitioner
Papa as administrator of the estate of Angela
M. Butte, for the delivery of the title to the
property; 5) that the same aforenamed
respondents had acknowledged that the price
paid by them was insufficient; 6) that they
were willing to add a reasonable amount or a
minimum of P55,000.00 to the price upon
delivery of the property, considering that the
same was estimated to be worth P143,000.00;
7) that petitioner was willing to reimburse
respondents Reyes spouses whatever amount
they might have paid for taxes and other
charges, since the subject property was still
registered in the name of the late Angela M.
Butte; and 8) that it was inequitable to allow
respondent Reyes spouses to acquire property
estimated to be worth P143,000.00, for a
measly sum of P14,000.00.
- Petitioner prayed that judgment be rendered
canceling the tax sale to respondent Reyes
spouses; restoring the subject property to him
upon payment by him to said respondent
Reyes spouses of the amount of P14,000.00,
plus legal interest; and, ordering respondents
Valencia and Pearroyo to pay him at least
P55,000.00 plus everything they might have to
pay the Reyes spouses in recovering the
property.
- Respondent Reyes defense: prescription to
redeem property
Obligations and Contracts
- Trial Court rendered a decision: 1) allowing
defendant to redeem from third-party
defendants and ordering the latter to allow the
former to redeem the property in question, by
paying the sum of P14,000.00 plus legal
interest of 12% thereon from January 21, 1980;
2) ordering defendant to execute a Deed of
Absolute Sale in favor of plaintiff Felix
Pearroyo covering the property in question
and to deliver peaceful possession and
enjoyment of the said property to the said
plaintiff, free from any liens and
encumbrances; should this not be possible, for
any reason not attributable to defendant, said
defendant is ordered to pay to plaintiff Felix
Pearroyo the sum of P45,000.00 plus legal
interest of 12% from June 15, 1973; 3) ordering
plaintiff Felix Pearroyo to execute and deliver
to intervenor a deed of absolute sale over the
same property, upon the latter's payment to
the former of the balance of the purchase
price of P71,500.00; should this not be
possible, plaintiff Felix Pearroyo is ordered to
pay intervenor the sum of P5,000.00 plus legal
interest of 12% from August 23, 1973; and 4)
ordering defendant to pay plaintiffs the
amount of P5,000.00 for and as attorney's fees
and litigation expenses.
- Petitioners contention: sale was never
"consummated" as he did not encash the
check (in the amount of P40,000.00) given by
respondents Valencia and Pearroyo in
payment of the full purchase price of the
subject lot. He maintained that what said
respondent had actually paid was only the
amount of P5,000.00 (in cash) as earnest
money.
- CA however affirmed the decision of the trial
court with modification ordering the
defendant-appellant to deliver to plaintiff-
appellees the owner's duplicate of TCT No.
28993 of Angela M. Butte and the peaceful
possession and enjoyment of the lot in
question.
- Basis of the respondent court: No evidence at
all that petitioner did not, in fact, encash said
check. On the other hand, respondent
Pearroyo testified in court that petitioner
Papa had received the amount of P45,000.00
140 291
 and issued receipts (presumption is that the
checks were encashed).
- Petitioner: he cannot be held personally
liable as he had acted merely as attorney-in-
fact of the owner, Angela M. Butte.
- Respondent court: Such contention is without
merit. This action was not brought against him
in his personal capacity, but in his capacity as
the administrator of the Testate Estate of
Angela M. Butte.
- Petitioner: Estate of Angela M. Butte should
have been joined in the action as the real party
in interest.
- Respondent court: Pursuant to Rule 3,
Section 3 of the Rules of Court, the estate of
Angela M. Butte does not have to be joined in
the action. Likewise, the estate of Ramon
Papa, Jr., is not an indispensable party under
Rule 3, Section 7 of the same Rules.
Issue/s:
WON alleged sale of the subject property had
been consummated
Ruling:
Petition denied. CA decision affirmed.
Ratio:
- Yes. Petitioner assails Art. 1249 of the Civil
Code, which provides, in part, that payment by
checks shall produce the effect of payment
only when they have been cashed or when
through the fault of the creditor they have
been impaired. According to him, receipt does
not prove payment.
- Also, he avers that, in fact, the consideration
for the sale was still in the hands of
respondents Valencia and Pearroyo, as
evidenced by a letter.
- HOWEVER, petitioner himself admits having
received payment of the purchase price of the
subject lot. His assertion that he never
encashed the aforesaid check is not
substantiated and is at odds with his
statement in his answer that "he can no longer
recall the transaction which is supposed to
have happened 10 years ago." The
Obligations and Contracts
presumption is that the check has been
encashed. And .even if he had never encashed
the check, his failure to do so for more than
ten (10) years undoubtedly resulted in the
impairment of the check through his
unreasonable and unexplained delay.
- While it is true that the delivery of a check
produces the effect of payment only when it is
cashed, pursuant to Art. 1249 of the Civil Code,
the rule is otherwise if the debtor is prejudiced
by the creditor's unreasonable delay in
presentment. The acceptance of a check
implies an undertaking of due diligence in
presenting it for payment, and if he from
whom it is received sustains loss by want of
such diligence, it will be held to operate as
actual payment of the debt or obligation for
which it was given. This is in harmony with
Article 1249 of the Civil Code under which
payment by way of check or other negotiable
instrument is conditioned on its being cashed,
except when through the fault of the creditor,
the instrument is impaired.
- Considering that respondents Valencia and
Pearroyo had fulfilled their part of the
contract of sale by delivering the payment of
the purchase price, said respondents,
therefore, had the right to compel petitioner
to deliver to them the owner's duplicate of TCT
No. 28993 of Angela M. Butte and the peaceful
possession and enjoyment of the lot in
question.
- With regard to the alleged assignment of
mortgage rights, the CA has found that the
conditions under which said mortgage rights of
the bank were assigned are not clear. Indeed, a
perusal of the original records of the case
would show that there is nothing there that
could shed light on the transactions leading to
the said assignment of rights; nor is there any
evidence on record of the conditions under
which said mortgage rights were assigned. The
only certain thing is that it remained in the
name of the late Butte.
- The estate of Angela M. Butte is not an
indispensable party. Under Section 3 of Rule 3
of the Rules of Court, an executor or
administrator may sue or be sued without
141 291
 joining the party for whose benefit the action
is presented or defended
- Neither is the estate of Ramon Papa, Jr. an
indispensable party without whom, no final
determination of the action can be had.
Whatever prior and subsisting mortgage rights
the estate of Ramon Papa, Jr. has over the
property may still be enforced regardless of
the change in ownership.

Obligations and Contracts 142 291

 PAL v. CA
G.R. No. L-49188
Jan. 30, 1990
Gutierrez, Jr., J.
Dean Reposar
Keywords: Check issued to sheriff who
absconded
Facts:
- This started from the Amelia Tan, et al v PAL
case where the trial court ruled in favor of
respondent (in current case) Amelia Tan and
ordered PAL to pay indemnities to respondent.
- Petitioner PAL appealed to the CA, which
affirmed with modification the amount of fees
PAL should pay respondent.
- No further appeals were made and the case
was remanded to the trial court for execution.
- Amelia Tan filed a motion for the issuance of
a writ of execution of the judgment. The trial
court issued the writ and was referred to
Deputy Sheriff Emilio Z. Reyes for
enforcement.
- 4 months later Amelia Tan moved for the
issuance of an alias writ of execution because
the judgment was still unsatisfied.
- PAL filed an opposition to the motion
because they had already paid its obligation
through Emilio Z. Reyes, evidenced by cash
vouchers properly signed and receipted.
- Court denied the writ for being premature
and asked Emilio Reyes to appear and explain
the reason why he failed to surrender the
payment. He however has absconded or
disappeared.
- Amelia Tan filed for a partial alias writ of
execution but withdrew it to substitute it with
a Substitute Motion for Alias Writ of Execution
which was granted by the courts. The money
was collected by a new Sheriff, over the
protest of PAL and hence this petition to the
SC.
- They allege among others that: 1. AN ALIAS
WRIT OF EXECUTION CANNOT BE ISSUED
WITHOUT PRIOR RETURN OF THE ORIGINAL
WRIT BY THE IMPLEMENTING OFFICER.; and 2.
PAYMENT OF JUDGMENT TO THE
Obligations and Contracts
IMPLEMENTING OFFICER AS DIRECTED IN THE
WRIT OF EXECUTION CONSTITUTES
SATISFACTION OF JUDGMENT.
Issue/s:
1. WON an alias writ of execution can be
issued without a prior return of the original
writ by the implementing officer
2. WON payment made to the name of an
absconding Sheriff satisfies the obligation to
pay
Ruling:
Petition denied.
Ratio:
1. Yes. A judgment cannot be rendered
nugatory by the unreasonable application of a
strict rule of procedure. Vested rights were
never intended to rest on the requirement of a
return, the office of which is merely to inform
the court and the parties, of any and all actions
taken under the writ of execution. Where such
information can be established in some other
manner, the absence of an executing officer's
return will not preclude a judgment from being
treated as discharged or being executed
through an alias writ of execution as the case
may be. Where the return cannot be expected
to be forthcoming, to require the same would
be to compel the enforcement of rights under
a judgment to rest on an impossibility, thereby
allowing the total avoidance of judgment
debts. So long as a judgment is not satisfied, a
plaintiff is entitled to other writs of execution.
2. It is a well known legal maxim that he who
cannot prosecute his judgment with effect,
sues his case vainly.
- Payment, to be effective, must be made to
the proper person to receive it according to
Art. 1240 of the CC. Payment must be made to
the obligee himself or to an agent having
authority, express or implied, to receive the
particular payment.
- Payment made to one having apparent
authority to receive the money will, as a rule,
be treated as though actual authority had been
143 291
 given for its receipt. Likewise, if payment is payee, without the latters agreement or
made to one who by law is authorized to act consent, are as many as the ways that an artful
for the creditor, it will work a discharge. The mind could concoct to get around the
receipt of money due on a judgment by an safeguards provided by the law on negotiable
officer authorized by law to accept it will, instruments.
therefore, satisfies the debt. - Execution is the process which carries into
- Under the circumstance of the case at bar effect a decree or judgment, whereas the
however, a different conclusion must be made. satisfaction of a judgment is the payment of
The payment was made to an absconding the amount of the writ, or a lawful tender
officer, not even through cash but through thereof, or the conversion by sale of the
checks which were not issued to the name of debtors property in an amount equal to that
the respondent Amila Tan but to the name of due, and it may be done otherwise than upon
the sheriff himself, Emilio Z. Reyes. an execution. Levy and delivery by an
- Art. 1249 of the Civil Code provides: execution officer are not prerequisites to the
The payment of debts in money shall be made satisfaction of a judgment when the same has
in the currency stipulated, and if it is not already been realized in fact.
possible to deliver such currency, then in the
currency which is legal tender in the
Philippines. The delivery of promissory notes
payable to order, or bills of exchange or other
mercantile documents shall produce the effect
of payment only when they have been cashed,
or when through the fault of the creditor they
have been impaired. In the meantime, the
action derived from the original obligation
shall be held in abeyance.
- Checks are not legal tender (addressed by
paragraph 2 of Art. 1249); if the checks
bounced, Tan could go after other properties
of PAL. Though in reality, payments made in
huge amounts of cash is not practical and
comes with certain risks. Checks are an
encouraged alternative but in this case PAL did
not do so in the proper manner. The fact
remains that the checks were not even named
to Tan, she therefore did not receive anything
of value, or anything at all.
- Payments made to public officers in order to
satisfy debts are only valid if there has been
authority vested in him by law or by judgment
or by consent of the obligee.
- In the case at bar, the officer was duly
authorized to do so but it was through the
fault of PAL, by signing the checks to the
absconding officer, that Tan was unable to
receive the satisfaction of payment.
The pernicious effects of issuing checks in the
name of a person other than the intended

Obligations and Contracts 144 291

 Reparations Commission v. Universal Deep Sea
Fishing
A.M. No. 21901-96
Jun. 27, 1978
Concepcion, Jr., J.
Gianella Reyes
Keywords: Trawl boats; dispute on installments
Facts:
- The Reparations Commission awarded six (6)
trawl boats to the Universal Deep-Sea Fishing
Corporation (Universal for short) which were
delivered two at a time, each delivery being
covered by a Contract of Condition Purchase
and Sale providing for identical schedules of
payments - the first installment representing
10% of the total cost was to be paid 24 months
after delivery and the balance of the total cost
to be paid in ten (10) equal installments,
which, in the schedule were numbered as "1",
"2", "3", etc., the first of which was due one
year after the first installment.
- To guarantee the faithful compliance with the
obligations under said contract, a performance
bond in the amount of P53, 643.00, with
UNIVERSAL as principal and Manila Surety &
Fidelity Co., Inc., as surety, was executed in
favor of the Reparations Commission.
- When the Reparations Commission sued
Universal and its surety to recover various
amounts of money due under the contracts,
they claimed that the amounts were not yet
due and demandable.
- Universal alleged that there was an obscurity
in the terms of the contracts in question which
was caused by the plaintiff as to the amounts
and due dates of the first installments which
should have been first fixed before the creditor
could demand its payment from the debtor,
specifically referring to the schedule of
payments which allegedly indicated two (2)
due dates for the payment of the first
installment.
Issue/s:
Obligations and Contracts
1. WON the first installments of the 3 contracts
were due and demandable when the
complaint was filed
2. WON Universal is liable for payment of
premiums on the bonds executed by Manila
Surety
2. WON the P10,000 down payment made by
Universal to the Rep.Com for UNIFISH 1 and 2
can be applied to the first installment
guaranteed by the surety
Ruling:
Judgment appealed from is affirmed with
modification that Universal is to pay Manila
Surety & Fidelity the amount of P7,251.42 for
premiums and documentary stamps on
performance bonds.
Ratio:
1. Yes. First installments were already due:
- Universal contends that the wording is
confusing, as the contract states that the first
installment is due only in 1962.
- The payments contemplated by the date
1962 are the first of the 10 equal yearly
payments covering the balance after the First
Installment of 10% has been paid, which
became due and demandable in May, July and
October 1961.
- The first installments for the 3 contracts were
thus due and demandable at the time the
action was commenced on August 1962.
- Also due and demandable were the first of
the 10 equal payments for UNIFISH 1 to 4.
2. No. Universal is liable to pay Manila Surety
the premiums on the bonds it issued in the
formers favour.
- The premium is the consideration for
furnishing the bonds. The obligation to pay the
same subsists for as long as the liability exists.
- Universal should pay P7,251.42 to Manila
Surety.
3. No. The P10,000 down payment cannot be
applied to just the first installment for which
the surety is liable.
145 291
 - Manila Surety contends that the down
payment of P10,000 made by Universal can be
applied to the first installment for UNIFISH 1
and 2 (an indebtedness guaranteed by Manila
Surety), thus reducing its liability from
P53,643.00 to P43,642.00, because Art 1254
stipulates that where the creditor or debtor
does not specify to which liability a payment
shall be applied, it shall be deemed to apply to
the most onerous debt [in this case, the most
immediate, which is the first installment for
UNIFISH 1 and 2].
- The Court held that Arts. 1252 to 1254 apply
to persons owing several debts to one creditor,
not to sureties whose obligation is both
contingent and singular.
The standing obligation of Universal is not
just the first installment, but also the 10 equal
yearly installments. Thus, given that both the
first installment and the first of the 10
installments have both accrued, the P10,000
down payment cannot be applied to just one
of them.
- The Supreme Court found the terms of the
contracts clear and left no doubt as to the
intent of the contracting parties that the first
installment due 24 months after delivery was
different from the first of the ten (10) equal
yearly installments of the balance of the
purchase price (which are not designated as
"first", "second", "third", etc., installments).

Obligations and Contracts 146 291

 Paculdo v. Regalado
G.R. No. 123855
Nov. 20, 2000
Pardo, J.
Nasha Reyes
Keywords: Fairview properties; application of
payment
Facts:
- Dec 27, 1990: Paculdo and Regalado entered
into a contract of lease over a 16, 478 sqm.
parcel of land with a wet market building in
Fairview Park.
- Contract details were as follows: (1) Contract
of lease was for 25 years, from January 1, 1991
until December 31, 2015; (2) First 5 years, pay
a monthly rental of P450, 000.00 beginning
December 27, 1990; and (3) Payable within the
first 5 days of each month, with a 2% penalty
for every month of late payment.
- Aside from the wet market lease, Paculdo
also leased 11 other properties from Regalado.
Paculdo also bought 8 heavy equipment and
vehicles.
- July 6&17, 1992: Due to non-payment of
P361, 895.55 on May 1992, and nonpayment
of full monthly rental of June and July 1992,
Regalado sent a demand letter demanding
payment of the back rentals, and if no
payment was made within 15 days from its
receipt, it would cause the cancellation of the
lease contract.
- Aug 3, 1992: Regalado mortgaged the wet
market building including 35 million worth of
improvements which Regalado made.
- Aug 12, 1992 and subsequent dates
thereafter: Regalado refused to accept
petitioners daily rental payments
- Aug 20, 1992: Paculdo filed an action for
injunction and damages seeking to enjoin
Regalado from disturbing his possession of the
property subject of the lease contract at the
RTC. Meanwhile Regalado filed a complaint for
ejectment with the MTC.
- Jan 31, 1994: MTC ruled in favor of Regalado
and ordered Paculdo to vacate the leased
Obligations and Contracts
premises and pay the back rental fees with
interest. This is eventually affirmed by the RTC.
- Feb 19, 1994: Regalado with the support of
50 armed security guards forcibly entered the
property and took possession of the wet
market building.
- July 21, 1994: Paculdo files a petition for
review with the CA. He alleges that he
paid the amount of P11,478,121.85 for
security deposit and rentals on the wet market
building, but respondent, without his consent,
applied portions of the payment to his other
obligations. The vouchers and receipts
indicated that the payments made were for
rentals. Thus, at the time of payment
petitioner had declared as to which obligation
the payment must be applied.
Issue/s:
1. WON Paculdo was truly in arrears in the
payment of rentals (wet market building lease)
at the time of the filing of the complaint for
ejectment
2. Who has right to specify which payment
should be prioritized?
3. WON replying to the proposed application
of payments by Regaldo means that Paculdo
agreed
4. What if Paculdo did not indicate which
obligation he will prioritize first? Can Regalado
assign the application of payments?
Ruling:
The ejectment case was dismissed, without
prejudice to the determination and settlement
of the money claims of the parties.
Ratio:
1. No. Paculdo made a total payment of
P10,949,447.18 to respondent as of July 2,
1992. Hence, if the payment made by
respondent applied to petitioners other
obligations is set aside, and the amount
petitioner paid be applied purely to the rentals
on the Fairview wet market building, there
would be an excess payment of P1,049,447.18
as of July 2, 1992.
147 291
 2. Paculdo (debtor). The right to specify which
obligation to pay first is given to the debtor.
(Art. 1252)
- Paculdo clearly told Regalado that payment
was to be for the Fairview wet market
property. This was the property that had due
dates and the payments for the heavy duty
equipment and the other properties were
not yet due.
- Also, the lease over the wet market property
was the most onerous among all the
obligations of petitioner to respondent. It was
a going-concern where Paculdo had invested
P35,000,000.00, in the form of improvements,
on the property. Paculdo would stand to lose
more if the lease would be rescinded, than if
the contract of sale of heavy equipment would
not proceed.

3. No. There was no clear assent by Paculdo to

the change in the manner of application of
payments.
- Paculdos silence as regards the application of
payment by Regalado cannot mean that he
consented. There was no meeting of the
minds. Though an offer may be made, the
acceptance of such offer must be
unconditional and unbounded in order that
concurrence can give rise to a perfected
contract.

4. Yes Regalado may do so. BUT this is subject

to the condition that Paculdo must give his
consent.
- Also as discussed in Art. 1252, if the debtor
did not declare at the time he made the
payment to which of his debts with the
creditor the payment is to be applied, no
payment is to be made to a debt that is not yet
due and the payment has to be applied first to
the debt most onerous to the debtor.

Obligations and Contracts 148 291

 DBP v. CA
G.R. No. 118342
Jan. 5, 1998
Davide, Jr., J.
Miguel Sevilla
Keywords: Fishpond leasehold rights; pactum
commissorium
Facts:
- Lydia Cuba is a grantee of a Fishpond Lease
Agreement from the government.
- Cuba obtained loans from DBP and as
security for the loans, she executed two Deeds
of Assignment of her leasehold rights.
- Cuba failed to pay her loans on time so the
DBP, without foreclosure proceedings,
appropriated the Leasehold Rights of Cuba
over the fishpond. After the appropriation,
DBP executed a Deed of Conditional Sale of
the Leasehold Rights in favor of Cuba. In the
negotiation of repurchase, DBP accepted
Cubas offer to repurchase.
- After the Deed of Conditional Sale was
executed in favor of Cuba, another Fishpond
Lease Agreement was issued by the Ministry of
Agriculture and Food in favor of Cuba.
- Cuba failed to pay the amortizations
stipulated in the Deed of Conditional Sale so
she entered with the DBP a temporary
arrangement whereby in consideration for
the deferment of the Notarial Rescission of
Deed of Conditional Sale, Cuba promised to
make certain payments.
- DBP sent the Notice of Rescission through
Notarial Act and took possession of the
Fishpond Leasehold Rights. DBP then
conducted a public bidding to dispose of the
property, which Agripina Caperal won. DBP
executed the Deed of Conditional Sale in favor
of Caperal and Caperal was awarded the
Fishpond Lease Agreement by the Ministry of
Agriculture and Food.
Issue/s:
WON the assignment of leasehold rights
constitute a dation in payment
Obligations and Contracts
Ruling:
No. The assignment of leasehold rights
constitutes a mortgage, which cannot be a
dation of payment.
Ratio:
- Proof that the assignment is a mortgage: In
all of the promissory notes, there is a provision
that in the event of foreclosure of the
mortgage securing this note, I/We further bind
myself/ourselves, jointly and severally, to pay
the deficiency, if any. Moreover, in Condition
No. 22 of the deed, it was provided that
failure to comply with the terms and condition
of any of the loans shall cause all other loans to
become due and demandable and all
mortgages shall be foreclosed. In the facts
stipulated, it states that As security for loans,
plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her leasehold rights. The said
assignment merely complemented or
supplemented the notes in the assurance for
payment of debt; both could stand together.
The assignment is only an accessory to the
promissory notes.
- Art. 1245: Dation in payment, whereby
property is alienated to the creditor in
satisfaction of a debt in money, shall be
governed by the law of sales. Dation in
payment defined: conveyance of ownership of
a thing by the debtor to creditor as an
accepted equivalent of performance of a
monetary obligation.
- Applied in the case: Condition No. 12 of Deed
of Assignment of Leasehold Rights did not
provide that the ownership over the leasehold
rights would automatically pass (convey) to
DBP upon Cubas failure to pay the loan on
time. It merely provided for the appointment
of DBP as attorneyin-fact with authority,
among other things, to sell or otherwise
dispose of said real rights, in case of default by
Cuba, and to apply proceeds from the loan.
149 291
 Filinvest v. Philippine Acetylene Co. (PAC)
G.R. No. L-50449
January 30, 1982
De Castro, J.
Jechel Tan De Guzman
Keywords:
Mortgaged chevrolet; unpaid taxes on car
Facts:
PAC purchased for P55,247 w/ downpayment of
20,000 a Chevrolet as security for the payment
of said promissory note, the appellant executed
a chattel mortgage over the same motor vehicle
in favor of said Alexander Lim. Lim assigned to
the Filinvest all his rights, title, and interests in
the promissory note and chattel mortgage.
Appellant failed to comply with the terms and
conditions set forth in the promissory note and
chattel mortgage since it had defaulted in the
payment of nine successive installments.
Replying thereto, appellant, thru its assistant
general- manager, wrote back advising appellee
of its decision to "return the mortgaged
property, which return shall be in full
satisfaction of its indebtedness pursuant to
Article 1484 of the New Civil Code."
Accordingly, the mortgaged vehicle was
returned to the appellee together with the
document "Voluntary Surrender with Special
Power of Attorney To Sell"
Appellee cannot sell the motor vehicle as there
were unpaid taxes on the said vehicle in the
sum of P70,122.00, appellee offered to deliver
back the motor vehicle to the appellant but the
latter refused to accept it, so appellee instituted
an action for collection of a sum of money with
damages.
Issue/s + Ruling + Ratio:
1. Dation en Pago? (NO no consent)
The mere return of the mortgaged
motor vehicle by the mortgagor, the herein
appellant, to the mortgagee, the herein
appellee, does not constitute dation in payment
or dacion en pago in the absence, express or
implied of the true intention of the parties. The
essential elements of a contract of sale, namely,
Obligations and Contracts
consent, object certain, and cause or
consideration must be present. In its modern
concept, what actually takes place in dacion en
pago is an objective novation of the obligation
where the thing offered as an accepted
equivalent of the performance of an obligation
is considered as the object of the contract of
sale, while the debt is considered as the
purchase price. In any case, common consent is
an essential prerequisite, be it sale or
innovation to have the effect of totally
extinguishing the debt or obligation.
True intention of the parties is
furnished by the document executed by
appellant captioned "Voluntary Surrender with
Special Power of Attorney To Sell". Authorizing
the latter to look for a buyer and sell the vehicle
in behalf of the appellant who retains
ownership thereof, and to apply the proceeds
of the sale to the mortgage indebtedness, with
the undertaking of the appellant to pay the
difference, if any, between the selling price and
the mortgage obligation.
2. Acceptance of possession constitutes
estoppel?
No because appellee never accepted
the mortgaged motor vehicle in full satisfaction
of the mortgaged debt.
3. Unpaid Taxes
When appellee accepted the
assignment of credit from the seller Alexander
Lim, there is a specific agreement that Lim
continued to be bound by the warranties he
had given to the buyer, the herein appellant,
and that if it appears subsequently that "there
are such counterclaims, offsets or defenses that
may be interposed by the debtor at the time of
the assignment, such counterclaims, offsets or
defenses shall not prejudice the FILINVEST
FINANCE CORPORATION and I (Alexander Lim)
further warrant and hold the said corporation
free and harmless from any such claims, offsets,
or defenses that may be availed of." -> Transfer
only for rights, title and interest, as such is the
essence of assignment of credit
The ownership of the mortgaged
property never left the mortgagor, the herein
150 291
 appellant, the burden of the unpaid taxes
should be borne by owner (PAC)

*Article 1245. Dation in payment, whereby

property is alienated to the creditor in
satisfaction of a debt in money, shall be
governed by the law of sales.

Obligations and Contracts 151 291

 DE GUZMAN V. CA and SINGH
G.R. No. L-52733
July 23, 1985
Concepcion, JR., J.
Bec Tiangco
Keywords:
Breach of compromise agreement; absent
petitioners (no one to receive money)
Facts:
On February 17, 1971, Petitioners (De Guzman,
sps Gestuvo) executed a contract to sell with
the respondent (Singh) covering two parcels of
land in Pasay. It was stipulated that the
respondent is to pay P133,640 on or before
February 17,1975. Two days before the date,
respondent asked the petitioners to provide the
statement of account of the balance due, copies
of certificates of land titles, and power of
attorney executed by Rolando Gestuvo in favor
of Pilar De Guzman. However, petitioner
refused leading to the filing of complaint for
specific performance with damages against
petitioners in CFI Rizal.
The parties executed a compromise agreement
which the Court approved.
-Singh to pay P240,000 not later than Dec. 18,
1977. Failure to do so, she has to pay P250,000
until Jan. 27, 1978. This shall he treated as
complete and final payment for the contract to
sell.
-After the receipt of the amount, De Guzman
will execute the legal documents to transfer the
lands to Singh.
-That De Guzman would temporarily desist
from enforcing their right to the properties until
Jan. 27.
-Should Singh fail to pay either the amounts
mentioned, contract to sell is automatically
rescinded and immediate enforcement of right
of possession without need of further notice
and demand.
-Payment shall take place before Hon. Bautista
in the courtroom of CFI Rizal at 10AM, Jan. 27,
1978 unless payment was earlier made.
On January 28, the petitioners filed a motion for
the issuance of writ of execution, claiming that
Obligations and Contracts
respondents failed to abide by the terms of the
compromise agreement. However, the Court
ordered the release of the deposited P250,000
to the petitioners and the transfer of the land
titles.
Issue/s:
WON the contract to sell should be rescinded
for breach of the compromise agreement?
*The court did not even pass upon the issue of
the validity of consignation. They solved the
issue based on the substantial fulfillment of the
compromise agreement.
Held:
The respondent had substantially complied with
the terms and conditions of the agreement. The
failure to deliver to the petitioners the full
amount was not her fault.
Ratio:
The record shows that the respondent went to
the sala of Judge Bautista on the appointed day
to make the payment but the petitioners were
not there to receive it. Only their legal counsel
was present, who did not have the authority to
receive the payment. They went to the house of
petitioners but they werent there. She waited
until 4 pm as she was promised that the
petitioners would arrive. But they did not show
up, and did not even call. The next day, she
went to the office of the clerk of court to
deposit the balance. However, it is only on
Monday that she was able to deposit the money
(it being a Saturday on Jan. 28, 1978). The
deposit of the money was done in good faith
and that respondent had no fault for thefailure
to pay in the stipulated date. There was
substantial compliance with the terms and
conditions of the compromise agreement.
152 291
 TLG Intnl v FLORES
G.R. No. L-35381
October 31, 1972
Antonio, J.
Kaks Alampay
Keywords:
Intervenor consigned; not allowed to withdraw
Facts:
In a civil case involving the rights of Bearcon
Trading Co., Inc as lessee of certain premises,
TLG International Continental Interprising Inc.
was granted a motion to intervene by the Court.
TLG then deposited a sum of 3,750 Php with the
clerk of court by way of consignation, when the
Court approved its motion to intervene.
The purpose behind TLGs intervention was to
protect its rights as sub-lessee of Bearcon, and
to enable TLG, during the pendency of the case,
to make a consignation of monthly rentals in
the form of 3750 Php, as it was at a loss as to
who is lawfully and rightfully entitled to receive
payments of the monthly rentals.
The civil case was later dismissed upon motion
by the defendants, dismissing both Bearcons
complaint and TLGs complaint in intervention.
When TLG filed to withdraw its deposited sum
in order to turn the same over to the
defendants, Respondent Judge Flores denied
TLGs motion to withdraw the consignation,
reasoning that since the Court had not ordered
the intervenor to make any deposit in
connection with the case, it could not
authorize the withdrawal of said deposits.
Issue/s:
W/N Respondent Judge could authorize
withdrawal of the deposit made by TLG.
Ruling+Ratio:
YES.ART 1260: Before the creditor has
accepted the consignation, or before a judicial
declaration that the consignation has been
properly made, the debtor may withdraw the
thing or the sum deposited, allowing the
obligation to remain in force.
The Debtor is entitled to withdraw the deposit
Obligations and Contracts
made with the court before consignation is
accepted by the creditor or prior to judicial
approval of such consignation.
In the case at bar, the case was dismissed
before the amount deposited by TLG was either
accepted by the creditor or declared approved
by judicial declaration. Such dismissal rendered
the consignation ineffectual. Respondent Flores
should have allowed the withdrawal of sum TLG
had deposited.
Respondent Judges position that the Court has
no authority to authorize withdrawal does not
hold. Pursuant to Art. 1258, Consignation shall
be made by depositing the things due at the
disposal of judicial authority, before whom the
tender of payment shall be proved, in a proper
case. When TLG deposited the sum, the money
was received by the Clerk of Court, pursuant to
Sec. 6 of the Judiciary Act, putting said sum
under the jurisdiction and control of the Court.
The Court therefore has authority to authorize
its withdrawal.
Doctrine:
ART 1260: Before the creditor has accepted
the consignation, or before a judicial
declaration that the consignation has been
properly made, the debtor may withdraw the
thing or the sum deposited, allowing the
obligation to remain in force.
Ruling: Petitioner TLG is entitled to withdraw
the deposit it made with the court as
consignation, as its complaint in intervention
was dismissed prior to the creditor accepting
the consignation or before the Court had
declared the consignation properly made.
Respondent Judge was ordered to grant the
withdrawal of the deposit.
153 291
 McLaughlin v CA
G.R. No. L-57552
October 10, 1986
Feria, Actg. C.J.
Norly Bayona
Keywords:
Deed of conditional sale; Compromise
agreement; Valid tender of payment
Facts:
Petitioner Luisa McLaughlin and respondent
Ramon Flores entered into a contract of
conditional sale of real property. On June 19,
1979, petitioner filed a complaint 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. Then they
entered into a compromise agreement w/ a
penal clause1 (Dec. 1979). 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. On
October 30, 1980, Flores sent a letter to
petitioner signifying his willingness and
intention to pay the full balance. On November
3, 1980, the first working day of said month, he
tendered payment to petitioner but this was
refused acceptance by petitioner. On Nov. 7,
petitioner filed a Motion for Writ of Execution
and prayed for rescission of the contract and
payment of P1000 back rentals. TC granted the
motion so Flores filed a motion for
reconsideration and tendered 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. TC denied MR. CA reversed saying that
17-day delay is a slight breach w/c does not
justify rescission.
Issue/s:
1. WON CA arbitrarily abused its judicial
discretion by disregarding the penal clause
stipulated by the parties in the compromise
agreement which was the basis of the decision
of the lower court - No
Obligations and Contracts
2. WON there was a valid tender of payment
and consignation Yes, No
Ruling + Ratio:
Ct agrees w/ CA that it would be inequitable to
cancel the contract of conditional sale and to
have the amount of P101,550 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. This constitutes
substantial compliance w/ the compromise
agreement.
Also, Flores made a valid tender of payment on
Nov. 17, 1979 when he issued a certified
managers check payable to petitioner. Section
4 of Republic Act No. 6552 (Maceda Law)
provides for the right of the seller [upon failure
of buyer to pay installments] to cancel the
contract after 30 days from buyers receipt of
the demand for rescission. Considering
petitioner's motion for execution filed on
November 7, 1980 as a notice of cancellation,
the tender of payment on Nov. 17 is w/in the
30-day period. However, although Flores had
made a valid tender of payment which
preserved his rights as a vendee in the contract
of conditional sale of real property, he did not
follow it with a consignation or deposit of the
sum due with the court thus remains liable for
the payment of his obligation [the Managers
check was withdrawn and replaced by cash but
the cash was not deposited w/ the Ct]. Since he
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 Pl,000.00 from January 1, 1981 until
obligation is fully paid. [Art. 1256-1258 CC]
Notes:
1
Paragraphs 6 and 7 of the Compromise
Agreement: That the parties are agreed that in
the event the defendant (private respondent)
fails to comply with his obligations herein
provided, the plaintiff (petitioner) will be
entitled to the issuance of a writ of execution
rescinding the Deed of Conditional Sale of Real
154 291
 Property. In such eventuality, defendant
(private respondent) hereby waives his right to
appeal to (from) the Order of Rescission and the
Writ of Execution which the Court shall render
in accordance with the stipulations herein
provided for. That in the event of execution all
payments made by defendant (private
respondent) will be forfeited in favor of the
plaintiff (petitioner) as liquidated damages.

Obligations and Contracts 155 291

 SOCO v. MILITANTE
G.R. No. L-58961
June 28, 1983
Guerrero, J.
Dianne Cadorna
Keywords:
Commercial building; lease; sublessee pays
more than lessee
Facts:
The plaintiff-appellee-Soco (lessor) and the
defendant-appellant-Francisco (lessee) entered
into a contract of lease covering a commercial
building and the lot on which it stands. The
terms involve a monthly rental of P800.00 to be
paid over a period of 10 years, and the contract
is renewable for another 10 years at the option
of the lessee.
The CFI found that some time before the civil
case occurred, Soco stopped sending to
Francisco the collector of rental payments,
prompting the latter to write the former a letter
and thereafter send him payment for the
rentals through checks issued by the Comtrust
bank. Soco admitted having received these
checks, except for the ones covering payments
for the months of May to August 1977. Soon
after, Soco learned that Francisco sub-leased a
portion of the building to NACIDA, at a monthly
rental of more than P3,000.00, which is way
higher than what Francisco was paying to
Soco under their Contract of Lease. Feeling that
she was on the losing end of the lease
agreement, she tried to look for ways and
means to terminate the contract. This led to her
filing of the illegal detainer case with the City
Court of Cebu, which ruled in her favor, but
which ruling was thereafter reversed by the CFI.
The reversal by the CFI was due to its
conclusion that there was in fact a tender of
payment of the rentals covering the dues for
May to August 1977 made by Francisco to Soco
through Comtrust, and that since these
payments were not accepted by Soco, Francisco
was impelled to deposit the rentals with the
Obligations and Contracts
Clerk of Court of the City Court of Cebu. The CFI
also found that Soco was notified of this deposit
as well as the subsequent consignation, and
therefore, it declared that consignation being
valid it produced the effect of a valid payment
for the rentals.
Issues:
WON the CFI was correct in ruling that the
consignation, and therefore the payments for
the rent, was valid and effective
Ruling:
The court reversed and set aside the decision of
the CFI, declaring said consignation invalid.
Ratio:
NO. In order that consignation may be effective,
the debtor must first comply with certain
requirements prescribed by law. The debtor
must show
(1) that there was a debt due;
(2) that the consignation of the obligation had
been made because the creditor to whom
tender payment was made refused to accept it,
or because he was absent or incapacitated, or
because several persons claimed to be entitled
to receive the amount due (Art. 1176, Civil
Code);
(3) that previous notice of the consignation had
been given to the person interested in the
performance of the obligation (Art. 1177, Civil
Code);
(4) that the amount due was placed at the
disposal of the court (Art. 1178, Civil Code); and
(5) that after the consignation had been made
the person interested was notified thereof (Art.
1178, Civil Code).
Failure in any of these requirements is enough
ground to render a consignation ineffective.
Further, the Court ruled that the essential
requisites of a valid consignation must be
complied with fully and strictly in accordance
with the law. Substantial compliance, which
prompted the CFI to rule in Franciscos favour,
is not enough for that would render only a
directory construction to the law.
The following findings led the Court to conclude
156 291
 that Francisco failed to prove the requisites of a
valid consignation:
1. Francisco failed to prove tender of payment
except that made in its June 9, 1977
letter (Exh. 10), in which his counsel
wrote Soco to inform her to pick up
payments it had supposedly refused to
accept.
2. Francisco failed to prove that prior to the
consignation, except that given in Exh.
10, he notified Soco of the same; said
notification constitutes the first notice
required by law for a valid consignation,
and its purpose is to give the creditor
an opportunity to reconsider his
unjustified refusal and to accept
payment thereby avoiding consignation
and the subsequent litigation. There is
no factual basis for the CFIs finding that
Francisco had tendered payment of the
monthly rentals, since what was evident
from his letter to the Vice President of
Comtrust was that it was his duty to
send someone to get the cashier's
check from the bank and logically, he
has the obligation to make and tender
the check to the lessor. This he failed to
do; thus, he failed to meet the third
requisite.
3. Francisco failed to prove that he notified
Soco of the consignation after it was
made, except the two made in Exh. 12,
which notification constitutes the
second notice required by law for a
valid consignation. From thetestimony
of the Comtrust Bank Comptroller,
whom Francisco presented as witness in
an attempt to prove his compliance
with the fifth requisite, it is clear that
the bank did not send notice to Soco
that the checks will be deposited in
consignation with the Clerk of Court
(the first notice) and also, that it did not
send notice to Soco that the checks
were in fact deposited (the second
notice) because no instructions were
Obligations and Contracts
given by its depositor, Francisco, to this
effect. This notification is important
because it enables the creditor to
withdraw the goods or money
deposited. It would be unjust to make
him suffer the risk for any deterioration,
depreciation or loss of such goods or
money by reason of lack of knowledge
of the consignation.
4. Francisco failed to prove the actual deposit or
consignation of the monthly rentals
except the two cashier's checks
referred to in Exhibit 12. Neither do the
Debit Memorandums issued by
Comtrust Bank deducting the amounts
of the checks from the account of
Francisco prove payment of the
monthly rentals since these are merely
internal banking practices which are not
binding upon a third person such as
Soco, the lessor. What is important is
whether the checks were picked up by
Francisco as per his arrangement with
Comtrust. On this vital point, he
miserably failed to present any proof
that he complied.
Due to the foregoing, the Court held that the
evidence is clear, competent and convincing
that Francisco has violated the terms of the
lease contract and he may, therefore, be
judicially ejected from the premises of Socos
building.
157 291
 Sotto v. Mijares, et. al
G.R. No. L-23563
May 8, 1969
Makalintal, J.

Maye Cristobal

Keywords:
Deposit with condition

Facts:
This is an appeal from a portion decision of a
lower court requiring defendants to deposit
with the Clerk of Court P5,106.00 within 10 days
from receipt of the order. Defendants admit the
indebtedness, which had already been offered
to the plaintiff who refused to receive said
amount.

This appeal signified the defendants willingness

to pay on the condition that the plaintiff will
cancel the mortgage on which the P5,106 was
secured and that plaintiff be ordered to return
to them TCT No. 29327 covering Lot No. 882 of
Hinigaran Cadastre, Negros Occidental.

Issues/s:
WON defendants can be compelled to make the
deposit without the condition they asked

Ruling + Ratio:
NO. The right to deposit in the nature of a
consignation belongs to the debtor exclusively
and he may not be compelled to do so.

Consignation is a facultative remedy which the

debtor may or may not avail himself of. The
debtor has the right to withdraw the thing or
sum deposited before the creditor has accepted
or before a judicial declaration that the
consignation has been properly made is given. If
the debtor has such right of withdrawal, he
surely has the right to refuse to make the
deposit in the first place.
The order appealed from is set aside, without
pronouncement as to costs.

Obligations and Contracts 158 291

 Riesenbeck v. CA & Maile
G.R. No. 90359
June 9, 1992
Grino-Aquino, J.
Roby Cruz
Keywords:
Acceptance of consigned amount with
reservation
Facts:
On July 25, 1988, Riesenbeck filed in the RTC
Cebu a complaint for consignation and damages
against Maile. Two days later, Riesenbeck
consigned and deposited with the Clerk of Court
of the said RTC P113,750. Maile then filed a
Manifestation Accepting Consignation and
Motion to Dismiss dated August 1, 1988,
wherein he accepts the sum, provided that the
present complaint be dismissed outright with
cost against plaintiff." Petitioner opposed the
manifestation, while Maile filed an Answer with
Special Defenses and Counterclaim. On
September 28, 1988, RTC Judge Risos ruled that
there was a valid consignation, and Maile could
legally accept the payment by consignation with
reservation to prove damages and other claims
as held by the SC decision in the case of Sing
Juco v. Cuaycong. Petitioner's motion for
reconsideration was denied by the RTC. He then
filed for a petition for certiorari in the CA to
annul and set aside the two orders of Judge
Risos, which was also dismissed.
Issue/s:
WoN respondent's acceptance with reservation
of the amount consigned by the petitioner is
not a valid consignation, enabling petitioner to
claim and withdraw the said amount - NO
Ruling:
Petition for review on certiorari dismissed for
lack of merit.
Ratio:
Private respondent's acceptance of the amount
consigned by the petitioner-debtor with a
reservation or qualification as to the
Obligations and Contracts
correctness of the petitioner's obligation, is
legally permissible. There is authority for the
view that before a consignation can be judicially
declared proper, the creditor may prevent the
withdrawal of the amount consigned by the
debtor, by accepting the consignation, even
with reservations (Tolentino).A sensu
contrario, when the creditor's acceptance of the
money consigned is conditional and with
reservations, he is not deemed to have waived
the claims he reserved against his debtor.
Thus, when the amount consigned does not
cover the entire obligation, the creditor may
accept it, reserving his right to the balance
(Tolentino).In this case, Maile (creditor)
accepted with reservation the amount
consigned in court by Reisenbeck (debtor).
Therefore, the creditor is not barred from
raising his other claims. As creditor's
acceptance of the amount consigned was with
reservations, it did not completely extinguish
the entire indebtedness of the debtor. It must
be noted that consignation is completed at the
time the creditor accepts the same without
objections, or, if he objects, at the time the
court declares that it has been validly made in
accordance with law. (Tolentino).
The lower court already ruled that there was a
valid consignation by Reisenbeck (debtor). Thus,
he can no longer claim that he is still the owner
of the amount consigned and that he can still
withdraw it.The consignation has retroactive
effect. The payment is deemed to have been
made at the time of the deposit of the money in
court, or when it was placed at the disposal of
the judicial authority. In this case, payment is
considered made on July 27, 1988 when
petitioner consigned and deposited with the
respondent court the sum of P113,750.
159 291
 Valid consignation can only be made with the
Licuanan v Diaz, Pineda court or with a bank. (Lanchico v Tensuan)
G.R. No. L-59805 Substantial compliance is not enough; the codal
July 21, 1989 provisions regarding consignation should be
Paras, J. given mandatory and strict construction. (Soco
v Militante)In this case, 1st notice was never
Mike De Castro given as well as tender of payment for the
succeeding months (May-Sept).
Keywords:
Occupied garage without consent; go away!!!!

Quick Read
In a suit for illegal detainer, the lessee claimed
by way of defense that she had already
deposited her rentals with the Civil Relations
Service of the AFP. SC: NOT A VALID
CONSIGNATION.

Facts:
- Licuanan (lessor) and Pineda (lessee) entered
into a contract of lease for a unit.
- Licuanan later found that Pineda had been
occupying her garage w/o her consent and
demanded that Pineda vacate therefrom.
- Pineda sought help from the Civil Relations
Service of the AFP
- Both Licuanan and Pineda appeared before
the hearing officer
As a precautionary measure, the officer
instructed Pineda to deposit the amount due
for that month
- Licuanan sued Pineda for illegal detainer w/
damages
For failure to pay April-Sept rentals
- Pineda defense: she had already deposited her
rentals w/ the Civil Relations Service bc
Licuanan refused payment
- City Court, CFI: Licuanan complaint dismissed

Issue/s:
WON Consignation to the Civil Relations
Service, AFP is valid

Ruling:
NO, only consignation the Court (Art 1258)
and/or Bank (BP 25) is allowed.

Ratio:

Obligations and Contracts 160 291

 Chan v. C.A.
G.R. No. 109020
March 3, 1994
Davide, Jr., J.
Jocs Dilag
Keywords:
Lease; Learning center
Facts:
- Feb. 1, 1983
Chan and Cu entered into a contract of lease
whereby the latter will occupy (for residential
purposes) Room 401 and the rooftop of Room
442 of a building in Urbiztondo, Manila
TERMS: 1 year, monthly rental of P2,400
Was renewed every year for 2 successive years
(until 1986)
Agreed that the premises shall be used as a
learning center
- After Feb. 1, 1986
No contract anymore but Cu continued
occupying the premises as a learning center
- November 1989
Chan padlocked the way to the rooftop and
insisted that she merely tolerated the use of the
rooftop, and the lease was only valid for Room
401.
Chan terminated the lease, giving Cu until Jan.
1, 1990 to vacate the premises
- December 1989
Chan did not collect rent for December
because of the dispute between them.
Cu tendered to Felisa a check amounting to
P3,310.56, which Felisa refused to accept, so
Cus lawyer tendered the payment in cash in
the same amount, with notice to Felisa that if
she will not accept payment, the same will be
deposited in court by way of consignation
Because of this, Chan allowed Cu to hold
classes only up to March 1990
- Jan. 15, 1990
Cu filed a Civil Case for Consignation at the
MTC of Manila, alleging the refusal without
Obligations and Contracts
justification of Chan for the rentals of the said
premises
- MTC ruled that the consignation was valid and
legal
- RTC affirmed
- CA held that:
MTC and RTC decisions reversed and
set aside
Complaint for consignation dismissed
for lack of merit
MTC and RTC erred in passing upon
the issue of ejectment raised in the
counterclaim. An action for ejectment
can only be initiated through a verified
complaint, not a counterclaim. The
period or life of the
lease or tenancy should be decided in a
case of ejectment or detainer. (Ching
Pue v. Gonzales)
Chans refusal to accept the rental was
justified
MTC and RTC should not have fixed
the terms of the lease.
Issue/s:
WON the consignation was valid.
- YES, CA shouldnt have decided upon the issue
of the consignation as it was not alleged in the
appeal
Ruling + Ratio:
- Both MTC and RTC ruled that the consignation
was valid.
- Cu has complied with the requisites of
consignation laid down in Ponce de Leon v.
Syjuco, wherein the debtor must show:
- That there is a debt due
- That the consignation of the obligation
has been made because the creditor to
whom
tender of payment was made but
refused to accept it, or because he was
absent or incapacitated, or because
several persons claimed to be entitled
to received the amount due (Art. 1176,
NCC)
- That previous notice of the
consignation had been given to the
161 291
 person interested in the performance of the Court of Appeals in CA-G.R. SP No. 28870 is
the obligation (Art. 1177, NCC) hereby SET ASIDE, and the Decisions of 27
- That the amount due was place at the March 1992 of Branch 11 of the Regional Trial
disposal of the court Court of Manila in Civil Case No. 91-55879, and
- That after the consignation had been of 18 December 1990 of Branch 15 of the
made the person interested was Metropolitan Trial Court of Manila in Civil Case
notified thereof No. 131203-CV are REINSTATED.
Costs against the private respondent
- The CA seriously erred when it dismissed the
complaint for consignation on the ground that it
has no merit
This was because the validity of the
consignation was not raised before it
- Also, jurisdiction is not involved in the
consignation case, and no plain errors with
respect thereto are discernible from the MTC
and RTC decisions
First, the parties conceded to the propriety of
a counterclaim for ejectment
The consignation was relegated to the
background and the parties heatedly
tangled on the nagging issues on the
duration of the lease after the
expiration of the last written contract,
the power of the court to extend the
lease and the length of the extension
all of which were provoked by and
linked to the counterclaim for
ejectment.
Second, Ching Pue v. Gonzales is inapplicable
because in that case, they talked about a
consignation case filed in the CFI which did not
have jurisdiction over ejectment cases, which
means that no counterclaim could have been
filed.
In this case, it was filed in the MTC,
which had jurisdiction, meaning a
counterclaim may be interposed.

Minor Issue
What the CA should have done was to just
confined itself to the principal error, which is
the duration of the extended term of the lease
fixed by the MTC and affirmed by the RTC.
MTC had authority as Art. 1670 and 1687 are
applicable

Wherefore, the instant petition is GRANTED and

the challenged Decision of 20 January 1993 of

Obligations and Contracts 162 291

 Meat Packing v. Sandiganbayan
G.R. No. 103068
June 22, 2001
Ynares-Santiago, J.
DJ Dolot
Keywords:
PCGG took over PIMECOs assets; MPCP was
affected
Facts:
- Meat Packing Corporation of the Philippines
(MPCP) is a corporation wholly-owned by GSIS.
It is the owner of 3 parcels of land, as well as
the meat processing and packing plant thereon.
In 1975, MPCP and the Philippine Integrated
Meat Corporation (PIMECO) entered into a
lease-purchase agreement for 28 years. The
Agreement contained rescission clauses, to wit:
5. If for any reason whatsoever the
LESSEE-VENDEE should fail or default in
the payment of rentals equivalent to
the cumulative sum total of three (3)
annual installments, this Agreement
shall be deemed automatically
cancelled and forfeited without need of
judicial intervention, and LESSOR-
VENDOR shall have the complete and
absolute power, authority, and
discretion, and without reservation by
the LESSEE-VENDEE, to dispose of, sell,
transfer, convey, lease, assign, or
encumber the project to any person or
persons, natural or juridical, in the
same manner as if this lease- purchase
arrangement was never entered into. In
the event of such cancellation or
forfeiture, the LESSEE-VENDEE
unconditionally agrees that all forms of
money paid or due from the LESSEE-
VENDEE shall be considered as rentals
for the use and occupancy of the
project, and the LESSEE- VENDEE
hereby waives and forfeits all rights to
ask for and demand the return or
reimbursement thereof.
Obligations and Contracts
The lease-purchase agreement was for
P93,695,552.59, at an annual rental rate of
P3,346,269.70.
In March 1986, PCGG sequestered all the
assets, properties and records of PIMECO. The
sequestration included the meat packing plant
and the lease-purchase agreement.1
In November 1986, MPCP gave PIMECO
notice of rescission of the lease-purchase
agreement for non- payment of rentals in the
year 1986.
GSIS then asked PCGG to exclude the meat
packing plant from the sequestered assets of
PIMECO inasmuch as the same is owned by
MPCP. However, PCGG denied said request.
MPCP likewise sought the turnover to it of the
plant on the ground that the lease-purchase
agreement had already been rescinded. In this
regard, PCGG passed a resolution:
a. PCGG ordered the transfer of subject
property, consisting of the meat packing
complex (including the MPCP property) to
GSIS under the condition that the PCGG
management team might continue its
operations for the purpose of completing
the outstanding orders up to December
1988
b. Whatever claims PIMECO had to the
complex under the lease-purchase
agreement has been validly rescinded by
GSIS/ MPCP; and that the projected turn-
over to GSIS will not adversely affect the ill-
gotten wealth case pending against crony
Peter Sabido before the Sandiganbayan
c. Turn-over to GSIS has the ff. conditions: (1)
joint PCGG-COA audit; (2) approval by the
Sandiganbayan; and (3) execution of a MOA
However, the approval of Sandiganbayan was
not obtained and it was also alleged that the
case ROP v. Sabido will be affected by the turn-
over (particularly if it will be proven that the
properties of Sabido were not ill-gotten afterall).
Consequently, the Sandiganbayan enjoined
163 291
 PCGG from proceeding or consummating the
projected turnover.
Hearings in Sandiganbayan ensued and in
1989, it issued a resolution holding:
1. PCGG gravely abused its
discretion when it passed the
resolution on the turn-over to
GSIS/MPCP
2. PCGG Commissioner exceeded
his authority when he executed
a MOA with MPCP transferring
the management and operation
of PIMECO to GSIS/ MPCP
3. Said turnovers are declared null
and void ab initio
4. PCGG, its commissioners,
officers, representatives and
agents are permanently
enjoined from implementing
the same turnovers or transfers
In 1990, PIMECO filed a case with
Sandiganbayan against MPCP and PCGG,
alleging that from 1981 to 1985, PIMECO has
been regularly paying the annual rentals and
that prior to its sequestration in 1986, PIMECO
was able to pay MPCP. However, after its
sequestration, the PCGG Management Team
that took over the plant became erratic and
irregular in its payments of the annual rentals to
MPCP, thus presenting the danger that PIMECO
may be declared in default in the payment of
rentals equivalent to three (3) annual
installments and causing the cancellation of the
lease-purchase agreement. Hence, PIMECO
prayed for a declaration that it is no longer
bound by the provisions of the above-quoted
paragraph 5 of the lease-purchase agreement.
In the meantime, PCGG tendered to MPCP
two checks in the amounts of P3,000,000.00
and P2,000,000.00, or a total of P5,000,000.00,
representing partial payment of accrued rentals
on the meat packing plant, which MPCP refused
to accept on the theory that the lease-purchase
agreement had been rescinded. Thus, the PCGG
filed an Urgent Motion praying that the
Obligations and Contracts
Sandiganbayan order MPCP to accept the
tendered amount of P5,000,000.00.
The Sandiganbayan set the aforesaid Urgent
Motion for hearing. MPCP said that its lease-
purchase agreement with PIMECO has been
rescinded as early as November 1986; and that
PIMECO was in arrears in the payment of
rentals in the amount of P12,378,171.06, which
is more than the equivalent of three cumulative
rentals at the annual rate of P3,346,269.70.
Sandiganbayan ruled that the consignation
was valid and ordered MPCP to accept the
payment and issue the corresponding receipt.
Sandiganbayan said that when the PCGG
sequestered the assets and records of PIMECO,
including the lease-purchase agreement over
MPCPs meat packing plant, it assumed the duty
to preserve and conserve those assets and
documents while they remained in its
possession and control. To rule otherwise
would be unfair to PIMECO.
Issue/s:
1. WON Sandiganbayan has jurisdiction
over MPCP even if it is not a party to
the case ROP v. Sabido: YES
2. WON Sandiganbayan has acquired
jurisdiction over PIMECO: YES
3. WON PCGG is in estoppel because it has
already admitted in its resolution that
the lease-purchase agreement
between MPCP and PIMECO has been
rescinded: NO
4. WON MPCP may be compelled to
accept the tendered amount of
P5,000,000 by PCGG: YES
Ruling:
Petition is dismissed.
Ratio:
1. Yes, because MPCP has a case which is
interrelated to ROP v. Sabido.
Moreover, it has voluntarily
participated in the proceedings.
164 291
 2. Yes.
3. No, because PCGGs resolution is not
premised on its admission of rescission.
4. Yes, because the consignation done by
PCGG is valid.
In the case at bar, there was prior tender by
PCGG of the amount of P5,000,000.00 for
payment of the rentals in arrears. MPCPs
refusal to accept the same, on the ground
merely that its lease- purchase agreement with
PIMECO had been rescinded, was unjustified. As
found by the Sandiganbayan, from January 29,
1986 to January 30, 1990, PIMECO paid, and
GSIS/MPCP received, several amounts due
under the lease-purchase agreement, such as
annual amortizations or rentals, advances,
insurance, and taxes, in total sum of
P15,921,205.83. Surely, the acceptance by
MPCP and GSIS of such payments for rentals
and amortizations negates any rescission of the
lease-purchase agreement.
In support of its contention that the lease-
purchase agreement has been rescinded, MPCP
makes reference to the resolutions of the PCGG
turning over to the GSIS the meat packing
complex and the land on which it is situated.
MPCP argues that PCGG was estopped from
taking a contrary position. A closer perusal of
the resolutions, however, readily shows that
the turn-over was explicitly made dependent on
certain conditions precedent, among which was
the approval by the Sandiganbayan and the
execution of a Memorandum of Agreement
between PCGG and MPCP.
rescission of the contract. Therefore, it must be
shown that PIMECO failed to pay the aggregate
amount of at least P10,038,809.10 before the
lease-purchase agreement can be deemed
automatically cancelled. Assuming in the
extreme that, as alleged by MPCP, the arrears
at the time of tender on January 30, 1991
amounted to P12,578,171.00, the tender and
consignation of the sum of P5,000,000.00,
which had the effect of payment, reduced the
back rentals to only P7,578,171.00, an amount
less than the equivalent of three annual
installments. Thus, with the Sandiganbayans
approval of the consignation and directive for
MPCP to accept the tendered payment, the
lease- purchase agreement could not be said to
have been rescinded.
Note:
1 Peter Sabido is a stockholder of PIMECO.
Sabido is a crony of Marcos and in view of
allegations of ill-gotten wealth, his properties
were sequestered by PCGG.

A Memorandum of Agreement was in fact

executed on April 28, 1989, although the same
suffers from formal and substantial infirmities.
However, no approval was sought from the
Sandiganbayan. On the contrary, the
Sandiganbayan, in its Resolution declaring the
turn-over null and void, refused to honor the
PCGG resolutions. Under the terms of the
lease-purchase agreement, the amount of
arrears in rentals or amortizations must be
equivalent to the cumulative sum of three
annual installments, in order to warrant the

Obligations and Contracts 165 291

 Occea v. CA
G.R. No. L-44349
October 29, 1976
Teehankee, J.
Julie Enad
Keywords:
Subdivision contract; Tropical to develop
petitioners lands
Facts:
Petitioners who are landowners had a
subdivision contract with Tropical Homes Inc, in
which the latter will develop the lands owned
by the Petitioners. Tropical filed a complaint for
modification of the terms and conditions of
their contract, alleging that due to the increase
in the price of oil and its derivatives and the
concomitant worldwide spiralling of prices of all
commodities including basic raw materials for
the development work, the cost of
development has risen to levels which are
unanticipated, unimagined, and not within the
remotest contemplation of the parties at the
time the agreement was made, such that the
conditions and factors which formed the
original basis of the contract have been totally
changed.
They continue that further performance by
them under the contract would cause iniquitous
distribution of proceeds from the sales of
subdivided lots in manifest contravention of the
original essence of the agreement, causing
implacable losses to Tropical.
What Tropical wanted to modify was their
guarantee to petitioners of a fixed and sole
share equivalent to 40% of all cash receipts
from the sale of the subdivision lots. They
wanted to change it to: fixing the proper shares
that should pertain to the herein parties out of
the gross proceeds from the sales of subdivided
lots.
RTC dismissed the petition, CA reversed, citing
Article 1267 of the CC. They stated that a
positive right is created in favour of the obligor
Obligations and Contracts
to be released from the performance of an
obligation in full or in part when its
performance has become so difficult as to be
manifestly beyond the contemplation of the
parties.
Issue/s:
WoN petition constitutes a sufficient cause of
action for modification of the subdivision
contract.
Ruling + Ratio:
NO. Applying Art 1267, the general rule is that
impossibility of performance releases the
obligor. However, it is submitted that when the
service has become so difficult as to be
manifestly beyond the contemplation of the
parties, the court should be authorized to
release the obligor in whole or in part. The
intention of the parties should govern as have
been beyond their contemplation it would be
doing violence to that intention to hold the
obligor still responsible.
This was misapplied by the CA. If Tropicals
complaint were to be released from having to
comply with the subdivision contract, assuming
it could show at the trial that the service
undertaken contractually by it had become so
difficult as to be manifestly beyond the
contemplation of the parties, then CA will be
correct in upholding Tropicals complaint.
Without Article 1267, Tropical would remain
bound by its contract under the theretofore
prevailing doctrine that performance therewith
is not excused by the fact that the contract
turns out to be hard and improvident,
unprofitable or impracticable, ill advised or
even foolish, or less profitable, or unexpectedly
burdensome, since in case a part desires to be
excused from performance in the event of such
contingencies arising, it is his duty to provide
therefore in the contract.
BUT Tropicals complaint seeks not release from
the contract but modification, which is not
granted to the courts by the cited article.
Tropicals complaint for modification of
166 291
 contract manifestly has no basis in law and
therefore states no cause of action.
Judgment Reversed.

Obligations and Contracts 167 291

 Philippine National Construction Corp. v. CA
G.R. No. 116896
May 5, 1997
Davide, JR., J.
Apo Espaola
Keywords:
Rock crushing project; industrial clearance
Facts:
Private respondents leased a parcel of land to
PNCC, to be used as premises for a rock
crushing plant and field office. The lease was to
run for five years, with rent at a monthly rate of
P20k, paid yearly in advance.
To begin the rock crushing project, PNCC
required industrial clearance from the Ministry
of Human Settlement, but it was only able to
obtain a Temporary Use Permit, valid for two
years unless revoked sooner by the Ministry.
Respondents then requested the first annual
rental of P240k. PNCC refused to pay, reasoning
that the payment of rental would begin from
the date of issuance of the industrial clearance,
and not from the date of the signing of the
contract.
It also expressed the intention to terminate the
contract, because financial and technical
difficulties had forced it to discontinue the rock
crushing project.
While respondents insisted that PNCC perform
the obligation, because it had become due from
the time the contract was signed, PNCC
objected and argued that it was only obligated
to pay P20k, covering the one-month period
from when the Temporary Use Permit was
issued up to when it expressed to respondents
its wish to terminate the contract.
Respondents thus filed this action for specific
performance with damages against PNCC.
The trial court decided in the respondents
favor, ordering PNCC to pay the rentals for two
years. The Court of Appeals affirmed the lower
court.
Obligations and Contracts
Issue/s:
Whether Art. 1266 and the principle of rebus sic
stantibus are applicable.No.
Ruling:
The Court affirmed the CAs ruling in toto.
Ratio:
Application of Art. 12661
PNCC claims that, based on Art. 1266, it should
be released from the lease contract because the
purpose of the contract did not materialize due
to the abrupt change in political climate after
the EDSA Revolution and financial difficulties.
First, Art. 1266 expressly states that it is
applicable to obligations to do. The obligation in
the lease to pay rentals is an obligation to give.
Second, PNCC only stated the alleged
uncertainties in government policies on
infrastructure projects, and failed to identify
specifically the circumstances brought about by
the change in political climate.
The unforeseen event and causes mentioned by
PNCC are not the legal/physical impossibilities
contemplated by Art. 1266.
Application of rebus sic stantibus2/Art. 1267
The principle of rebus sic stantibus is said to be
the basis for Art. 12673, which enunciates the
doctrine of unforeseen events.
However, this is not an absolute application.
The parties to the contract are presumed to
have assumed the risks of unfavorable
developments; therefore, only absolutely
exceptional changes of circumstance are
considered under this article.
PNCC entered into the lease contract on Nov.
18, 1985prior to which, Sen. Benigno Aquino,
Jr. had been assassinated (1983) and Pres.
Ferdinand Marcos had announced that snap
elections would take place (Nov. 3, 1985, with
the elections scheduled for 1986).
Thus, PNCC entered into the lease with private
respondents in spite of being aware of the
deteriorating conditions of the country.
168 291
 PNCCs poor financial condition, meanwhile,
cannot also release it from the binding effect of
the lease contract. Mere pecuniary inability to
fulfill an engagement does not discharge a
contractual obligation; neither is it a defense
to an action for specific performance.
Regarding the fact that PNCCs purpose for the
lease contractthe use of the premises as a
site for a rock crushing plantnot materializing,
this also does not invalidate the contract.
The cause or essential purpose in a lease
contract is the use or enjoyment of the thing.
Thus, the partys purpose for contracting does
not affect the validity of the contract, or its
existence.4 The fact that its purpose did not
arise does not mean PNCC is entitled to a
release from its obligation.
1 ART. 1266. The debtor in obligations to do
shall also be released when the prestation
becomes legally or physically impossible
without the fault of the obligor.
2 Rebus sic stantibusThe parties stipulate in
light of certain prevailing conditions; once these
conditions cease to exist, the contract also
ceases to exist.
3 ART. 1267. When the service has become so
difficult as to be manifestly beyond the
contemplation of the parties, the obligor may
also be released therefrom, in whole or in part.
4 The exception being when a motive or
purpose has been made a condition upon which
the contract depends. Of course, the exception
is not to be found in this case.

*Re: The industrial permit

PNCC contends that the Temporary Use Permit
is not the industrial permit contemplated in
their contract with respondents.
The Court said that PNCC is now estopped from
such a defense. When PNCC objected to private
respondents claim for the rent, it expressly
stated that it ought to be responsible only for
the one-month period from when the permit
was issued to when notice of intention to
terminate the contract was served upon
respondents.
By recognizing its obligation thus, PNCC itself
has considered the permit as the industrial
clearance.
Further, PNCC, in expressing its wish to
terminate the lease, requested the conformity
of private respondents by asking for their
signatures upon the notice of termination.
Had PNCC truly not considered the Temporary
Use Permit as the stated industrial clearance, it
would no longer have solicited such conformity
from respondents. No juridical relation would
have been created yet, because the suspensive
conditionthe issuance of an industrial
permithas not yet been fulfilled.

Notes:

Obligations and Contracts 169 291

 Yam v Court of Appeals
G.R. No. 104726
February 11, 1999
Mendoza, J.
Pia Falcone
Keywords:
Loan Agreement; printing machinery
Facts:
Petitioners entered into a Loan Agreement with
Assumption of Solidary Liability whereby they
were given P500,000 by private respondent.
Denominated the first Industrial Guarantee and
Loan Fund (IGLF), the loan was secured by a
chattel mortgage on the printing machinery in
petitioners establishment. Petitioners
subsequently obtained a second IGLF loan of
P300,000.
On May 17, 1986 (a year after they paid their
first loan), petitioners made a partial payment
of P50,000 on their second loan. They wrote to
private respondent on their proposal to settle
their obligation, to which it replied with a
counter-offer, namely, that it would reduce the
penalty charges up to P1400,000 provided that
petitioners can pay their obligation on or before
July 30, 1986.
On July 31, 1986, petitioners paid P410,854.47
by means of a Pilipinas Bank check, receipt of
which was acknowledged by Destajo. This
amount was the sum of the principal
(P259,469.47) and the interest (P165,385) less
the partial payment of P50,000. Since theres
still a balance of P266,146.88 left, respondent
filed a case for the collection of this plus
interests, penalties and service charges, or, in
the alternative, for the foreclosure of the
mortgaged machineries.
Petitioners claimed that they had fully paid
their obligation. They contended that after
receiving respondents letter of conditional
offer to reduce their penalty charges, they met
with Carlos Sobrepenas, president of
respondent corporation. Apparently, the latter
Obligations and Contracts
agreed to waive the penalties and service
charges, provided that petitioners paid the
principal and interest, less the earlier payment
of P50,000. This is why they only paid
P410,854.47, with the voucher having the
notation full payment of IGLF loan.
Issue/s:
WON petitioners are liable for the payment of
the penalties and service charges on their loan,
amounting to P266,146.88. - Yes.
Ruling + Ratio:
Article 1270, par. 2 provides that express
condonation must comply with the forms of
donation. Art. 748, par. 3 provides that the
donation and acceptance of a movable, the
value of which exceeds P5,000, must be made
in writing, otherwise the same shall be void.
Additionally, under Art. 417, par. 1, obligations,
actually referring to credits, are considered
movable property. In this case, its undisputed
that the alleged agreement to condone
P266,146.88 of the second IGLF loan was never
made in writing.
The notation full payment of IGLF loan also
doesnt bind private respondent. It merely
states petitioners intention in making the
payment. If private respondent really condoned
the amount in question, petitioners shouldve
asked for a certificate of full payment from
respondent corporation, just like what they did
when they paid off their first loan.
The countersigning of the voucher by Destajo
did no more than acknowledge the receipt of
payment. She had no authority to condone any
indebtedness as her duties were limited to
issuing official receipts, preparing check
vouchers and documentation. Moreover, the
alleged agreement was supposedly entered into
the parties sometime in July 1986, after
respondent corporation had been placed under
receivership. As held in Villanueva v CA, the
appointment of a receiver operates to suspend
the authority of a [corporation] and of its
directors and officers over its property and
effects, such authority being reposed in the
170 291
 receiver. This means that Sobrepenas had no
authority to condone the debt.

Note: a receiver is a person appointed by the

court in behalf of all the parties to the action for
the purpose of promoting and conserving the
property in litigation and preventing its possible
destruction or dissipation, if it were left in the
possession of any of the parties.

Obligations and Contracts 171 291

 Gan Tion v CA, Judge Mantesa, Ong Wan Sieng - It is the litigant (Ong), not counsel, who's the
and Sheriff of Manila judgment creditor and may enforce judgment
G.R. No. L-22490 by execution. Such credit, therefore, may be the
May 21, 1969 subject of legal compensation- Unjust to
Makalintal, J. compel petitioner to pay P500 when admittedly
his creditor is indebted to him for more than
Coopey Hermosisima P4k

Keywords:
Ejectment case; lease; legal compensation

Facts:
- Ong Wan Sieng was a tenant in certain
premises owned by Gan Tion
- In 1961 Gan Tion filed ejectment case v private
respondent for alleged non- payment for 2
months of rentals.
- CFI dismissed complaint and ordered Gan Tion
to pay Ong P500 as atty's fees
- October 10 1963, Gan Tion served another
notice to Ong increasing rent to P180/m and at
the same time demanded the rents in arrears
from August 1961- October 1963 (Amounting to
P4,320)
- In the meantime, Ong was able to obtain writ
of execution of judgment of attorney's fees in
his favor.
- Gan Tion went on certiorari to CA, where he
pleaded legal compensation, claiming Ong Was
indebted to him for P4320 in unpaid rents.
- CA said that the sum of P500 couldn't be the
subject of legal compensation. Reason? a) That
they weren't creditors and debtors of each
other in their own right b) Not principal creditor
and bound prinicipally. CA said that the real
creditor of the P500 was Ong Wan Sieng's
counsel, not Ong

Issue/s:
W/N there has been legal compensation

Ratio:
- Award for attorney's fees made in favor of
Ong, not counsel, and justified by way of
indemnity for damages recoverable by Ong.
(damages for being sued?)

Obligations and Contracts 172 291

 BPI v. Reyes
G.R. No. 116792
March 29, 1996
Puno, J.
Pao Macariola
Keywords:
Treasury warrant; joint account; legal
compensation
Facts:
- On September 25, 1985, private respondent
Edvin F. Reyes opened a BPI joint savings
account with his wife. Respondent also held a
joint savings account with his grandmother,
Fernandez, opened on February 11, 1986 at the
same BPI branch. He regularly deposited in this
account the U.S. Treasury Warrants payable to
the order of Emeteria M. Fernandez as her
monthly pension.
- Emeteria M. Fernandez died on December 28,
1989 without the knowledge of the U.S.
Treasury Department. She was still sent U.S.
Treasury Warrant. Respondent deposited the
said U.S. treasury check of Fernandez in the
joint savings account with her grandmother.
Savings. Two months, private respondent joint
savings account with her grandmother and
transferred it to the joint account with his wife.
- On January 16, 1991, the treasury check was
dishonored as it was discovered that Fernandez
died prior to its issuance. The U.S. Department
of Treasury requested petitioner bank for a
refund. Respondent verbally authorized the
bank to debit from his other joint account the
amount stated in the dishonored U.S. Treasury
Warrant. But when respondent visited the bank,
he demanded from petitioner bank restitution
of the debited amount.
Issue/s:
1) WON private respondent verbally authorized
petitioner bank to debit his joint account with
his wife for the amount of the returned U.S.
Treasury Warrant. [YES]
Obligations and Contracts
2) WON legal compensation is proper. [YES]
Ruling + Ratio
1) The Court ruled that petitioners were able to
prove this verbal authority by preponderance of
evidence. The testimonies of Bernardo [bank
employee] and Romero [bank manager]
deserve credence that Reyes gave verbal
authorization and that he promised me that he
will give me written confirmation or
authorization when he drop by the bank.
While Reyes testimony that he did not give any
authorization is uncorroborated. Nor does he
inspire credence for his past and fraudulent
conduct is evidence against him. He concealed
from petitioner bank the death of Fernandez
since he knew that Fernandez was no longer
entitled to receive any pension. To pre-empt a
refund, private respondent closed his joint
account with Fernandez and transferred its
balance to his joint account with his wife.
Worse, private respondent declared under the
penalties of perjury in the withdrawal slipthat
his co-depositor, Fernandez, is still living. By his
acts, private respondent has stripped himself of
credibility.
2) Court ruled that the CA erred when it failed
to rule that legal compensation is proper. Art.
1278 of CC states that compensation shall take
place when two persons, in their own right, are
creditors and debtors of each other. Article
1290 of the Civil Code provides that "when all
the requisites mentioned in Article 1279 are
present, compensation takes effect by
operation oflaw, and extinguishes both debts to
the concurrent amount, even though the
creditors and debtors are not aware of the
compensation." Legal compensation operates
even against the will of the interested parties
and even without the consent of them. Since
this compensation takes place ipso jure, its
effects arise on the very day on which all its
requisites concur.
Article 1279 states that in order that
compensation may be proper, it is necessary:
173 291
 (1) That each one of the obligors be bound
principally, and that he be at the same time a CA decision ANNULLED and SET ASIDE and the
principal creditor of the other; Decision of the trial court REINSTATED.
(2) That both debts consist in a sum of money,
or if the things due are consumable, they be of
the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any
retention or controversy, commenced by third
persons and communicated in due time to the
debtor.

The elements of legal compensation are all

present in the case at bar. The obligors bound
principally are at the same time creditors of
each other. Petitioner bank stands as a debtor
of the private respondent, a depositor. At the
same time, said bank is the creditor of the
private respondent with respect to the
dishonored U.S. Treasury Warrant which the
latter illegally transferred to his joint account.
The debts involved consist of a sum of money.
They are due, liquidated, and demandable. They
are not claimed by a third person.

It is true that the joint account of private

respondent and his wife was debited in the case
at bar. The Court held that the presence of
private respondent's wife does not negate the
element of mutuality of parties, i.e., that they
must be creditors and debtors of each other in
their own right. The wife of private respondent
is not a party in the case at bar. She never
asserted any right to the debited U.S. Treasury
Warrant. Indeed, the right of the petitioner
bank to make the debit is clear and cannot be
doubted. To frustrate the application of legal
compensation on the ground that the parties
are not all mutually obligated would result in
unjust enrichment on the part of the private
respondent and his wife who herself out of
honesty has not objected to the debit. The rule
as to mutuality is strictly applied at law. But not
in equity, where to allow the same would
defeat a clear right or permit irremediable
injustice.

Obligations and Contracts 174 291

 PNB v Sapphire Shipping
G.R. No. 108052
July 24, 1996
Panganiban, J.
Kaks Alampay
Keywords:
2 accounts - Citibank and PNB; double credit
with PNB
Facts:
- PNB appropriated the amounts 2, 627 USD
and 34, 340 PHP from remittances of Sapphire
Shippings principals abroad, the first amount
by the National Commercial Bank of Jeddah to
be credited to Sapphire Shippings account at
Citibank Greenhills, the second from Libya
intended to be deposited at Sapphires account
with PNB
- In two instances in the past, Sapphire
Shippings account with PNB as doubly-credited
with 5, 679 USD and 5, 8885 USD, amounting to
an aggregate of 87, 380 Php. PNB made a
demand upon Sapphire Shipping for the
erroneous double-credit, which Sapphire
Shipping did not contest, since the erroneous
double payments made to Sapphire Shippings
accounts created an extra-contractual
obligation on the part of Sapphire Shipping to
PNB under the principle of Solutio Indebiti. 1
- PNBs argument is that in order to recover the
erroneous double payment it is entitled to by
virtue of solutio indebiti, PNB can appropriate
the remittances from Sapphire Shippings
foreign principals (Jedda and Libya) as
compensation.
Issue/s:
W/N PNB was legally justified in making
compensation or set-off against the two
remittances coursed through it in favor of
Sapphire Shipping (one from the bank in
Jeddah, for Sapphires account in Citibank, and
one from the bank in Libya, for Sapphires
account with PNB), to recover on the erroneous
double payments it was entitled to recover
from Sapphire Shipping?
Obligations and Contracts
Ruling:
With regard to the remittances from Jedda
intended for Sapphire Shippings account with
Citibank Greenhills, PNB may NOT compensate
the erroneous double credit, because the
remittances were intended for Sapphire
Shippings account with Citibank, Greenhills;
PNB was merely a trust through which said
amount was coursed, and therefore not being
bound as principal with Sapphire Shipping with
regard to this particular amount, this amount
cannot be used as compensation to off-set the
erroneous double credit Sapphire Shipping has
with PNB.
With regard to the remittances from Libya, PNB
may compensate the erroneous double credit,
because the remittances were intended for
Sapphire Shippings account with PNB; in this
case, Sapphire Shipping and PNB are principally
bound as obligor and obligee in this relationship,
making compensation valid.
Ratio:
Of the essential requisites in order for
compensation to prosper2, the first requisite
(that each of the obligors be bound principally,
and that he be at the same time a principal
creditor of the other) is not fulfilled as per the
relationship between PNB and Sapphire
Shipping with regard to the remittance from the
bank in Jedda.
The relationship between Sapphire Shipping
and PNB is one of creditor and debtor,
respectively. But the relationship with regard to
the fund telefaxed from Jedda creates a
contract between the foreign bank and a local
bank, asking the local bank (PNB) to pay an
amount to a beneficiary (Sapphire Shipping),
thus creating an implied trust between PNB, as
the local correspondent of the foreign bank in
Jeddah, and Sapphire Shipping as the
beneficiary. 3
By solutio indebitii, Sapphire Shipping unduly
received something by mistake and is obligated
to PNB to return it, creating a relationship of
obligor and obligee between them under quasi-
175 291
 contract with regard to the erroneous double-
credits. However, with respect to the amount
from bank in Jedda, PNB is merely a TRUST held
for Sapphire Shipping, creating a trustee-
beneficiary relationship between them that
does not fulfill the essential requisite of
principal obligation between the parties in
order for compensation to be valid. PNB cannot
therefore off-set Sapphire Shippings debt
under the quasi-contract using the telefaxed
amount from the bank in Jedda as
compensation, because PNB is merely an
implied trustee obliged to deliver to Sapphires
Citibank account the sum telefaxed from the
bank in Jedda. Because the parties are not
principals to one another with regard to the
amount from the bank in Jedda, even if
Sapphire owes PNB the equivalent sums
erroneously double credited to his account,
PNB may not intercept the amount of 2, 627
USD as compensation. Furthermore, such would
erode the trust and confidence of the
international banking community. The set-off or
compensation against the double payments to
Sapphires account is not in accordance with
law.
But with regard to the amount received from
Libya, such remittance was intended for
Sapphire Shippings account with PNB, in which
Sapphire Shipping and PNB are principally
bound as creditor and debtor, being depositor
and depository, respectively. Therefore, PNBs
retention and application of 34, 340 Php from
said remittance from Libya in order to off-set
Sapphire Shippings erroneous double credit is
valid, because all requisites of Art. 1279 are
present and the amount may properly be the
subject of compensation.
Notes:
1 Solutio Indebiti: Art. 2154: If something is
received when there is no right to demand it,
and it was unduly delivered through mistake,
the obligation return it arises.
2 Art. 1279 of the Civil Code: In order that
compensation may prosper, it is necessary:
Obligations and Contracts
- that each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other
- that both debts consists in a sum of money, or
if the things due are consumable, they be of the
same kind, and also of the same quality if the
latter has been stated
- that the two debts be due
- that they be liquidated and demandable
- that over neither of them there be any
retention or controversy, commenced by third
persons and communicated in due time to the
debtor
3 Art 1453: When the property is conveyed to
a person in reliance upon his declared intention
to hold it for, or transfer it to another or the
grantor, there is an implied trust in favor of the
person whose benefit is contemplated.
Main Issue: may PNB intercept money telexed
from a foreign bank in Jeddah to Sapphires
Citibank, Greenhills account to off- set a
separate debt Sapphire Shipping has with PNB
resulting from an erroneous double credit?
Short answer: NO. For compensation to take
place, one essential requisite is that the parties
must be bound principally to one another as
obligor and obligee. Sapphire Shipping, as
depositor, and PNB as depository, are creditor
and debtor respectively. Sapphire Shipping
incurred a debt with PNB due to an amount
erroneously double-credited to Sapphires PNB
account. When Sapphires principal in Jedda
telexed money to Sapphires Citibank,
Greenhills account and coursed said amount
through PNBs head office, PNB intercepted the
money to compensate for Sapphires debt with
PNB. However, the Court ruled that with regard
to said amount telexed from the foreign bank in
Jedda to Sapphires account with Citibank, PNB
is MERELY A TRUST, with Sapphire Shipping as
creditor and the bank in Jedda as debtor. The
relationship between PNB and Sapphire
Shipping with regard to the telexed amount
from Jedda not being one of principality, PNB
cannot use the said amount as compensation
for Sapphire Shippings debt, because being
176 291
 principals with respect to the obligation is one
of the essential requisites for compensation be
valid.

Obligations and Contracts 177 291

 CKH Industrial Development v CA
G.R. No. 111890
May 7, 1997
Torres, JR., J.
Norly Bayona
Keywords:
Promissory notes; not mutually bound as
creditors and debtors of each other
Facts:
Petitioner CKH Industrial Devt [owned by
deceased Cheng Kim Heng] executed a Deed of
Absolute Sale (DAS) in favour of Century-Well
for two parcels of land worth 800,000. Both
parties have their own version of what
happened during the execution of the said
document. The only undisputed fact is the
genuineness and due execution of the Deed of
Absolute Sale1.
CHKs [represented by 2nd wife Ruby Saw]
version:
Saw claims that Lourdes Chong and Uy Chi Kim
maliciously misled her to believe that they
would pay the P800,000 as consideration when
in fact they had no intention to pay [signed the
deed w/o receiving the money bec she believed
in UCKs words]
Century-Wells version [represented by
Lourdes Chong]:
Chong claims that the sale of the two parcels
came about from dispute settlement, to w/c Uy
Chi Kim acted as a mediator, after the death of
Cheng Kim Heng. The consideration for the said
land was paid by means of off-setting or legal
compensation in the amount of P700,000 thru
alleged promissory notes executed by Cheng
Kim Heng in favor of his sons Chong Tak Choi
and Chong Tak Kei and payment of P100,000.00
in cash. CKH borrowed from Chong Tak Choi
and Chong Tak Kei the total sum of P700,000.00
paying interest on P300,000.00 while the
remaining P400,000.00 was interest free, and
upon the death of Cheng Kim Heng, it stopped
making said payments.
Obligations and Contracts
Issue/s:
WON there was a valid compensation of the
obligations of Cheng Kim Heng to his sons with
the purchase price of the sale There was none.
Ruling:
Rescission granted for failure of consideration
Ratio:
It is clear from the DAS that the vendor
admitted the receipt of the purchase price by
signing it thus effectively giving imprimatur to
the provisions of the deed and cant now
challenge its veracity. However, the suitability
of the said stipulations as benchmarks for the
intention of the contracting parties, does not
come clothed with the cloak of validity. It must
be remembered that agreements affecting the
civil relationship of the contracting parties must
come under the scrutiny of the provisions of
law existing and effective at the time of the
execution of the contract. Here is where the
issue on compensation comes in.
Application of the law: Art. 1279 CC2 - 1st
requisite (both parties are creditors and debtors
of each other) was not met.
In the instant case, there can be no valid
compensation of the purchase price with the
obligations of Cheng Kim Heng reflected in the
promissory notes, for the reason that CKH and
Century-Well the principal contracting parties,
are not mutually bound as creditors and
debtors in their own name. A close scrutiny of
the promissory notes does not indicate the late
Cheng, as then president of CKH, acknowledging
any indebtedness to Century-Well. As worded,
the promissory notes reveal CKH's indebtedness
to Chong Tak Choi and Chong Tak Kei.
There is no indication at all, that such
indebtedness was contracted by Cheng from
Choi and Kei as stockholders of Century-Well.
Choi and Kei, in turn, are not parties to the
Deed of Absolute Sale. They are merely
178 291
 stockholders of Century-Well, 25 and as such, principally, and that he be at the same time a
are not bound principally, not even in a principal creditor of the other;
representative capacity, in the contract of sale. (2) That both debts consist in a sum of money,
Thus, their interest in the promissory notes or if the things due are consumable, they be of
cannot be off-set against the obligations the same kind, and also of the same quality if
between CKH and Century-Well arising out of the latter has been stated;
the deed of absolute sale, absent any allegation, (3) That the two debts be due;
much less, even a scintilla of substantiation, (4) That they be liquidated and demandable;
that Choi and Kei's interest in Century-Well are (5) That over neither of them there be any
so considerable as to merit a declaration of retention or controversy, commenced by third
unity of their civil personalities. persons and communicated in due time to the
debtor.
*Note: Compensation may also be voluntary or
conventional, that is, when the parties, who are
mutually creditors and debtors agree to
compensate their respective obligations, even
though not all the requisites for legal
compensation are present. Without the
confluence of the characters of mutual debtors
and creditors, contracting parties cannot
stipulate to the compensation of their
obligations, for then the legal tie that binds
contracting parties to their obligations would be
absent. At least one party would be binding
himself under an authority he does not possess.

Requirements of conventional compensation:

(1) that each of the parties can dispose of the
credit he seeks to compensate
(2) that they agree to the mutual
extinguishment of their credits.

Note:
1 That for and in consideration of the sum of
EIGHT HUNDRED THOUSAND (P800,000.00)
PESOS, Philippine Currency, paid by VENDEE to
VENDOR, receipt of which is hereby
acknowledged by the latter to its entire
satisfaction, said VENDOR, by these presents,
has SOLD, CEDED, TRANSFERRED, and
CONVEYED by way of absolute sale unto said
VENDEE, its successors and assigns, the two
parcels of land above described and any and all
improvements therein.

2 Art. 1279. In order that compensation may be

proper, it is necessary:
(1) That each one of the obligors be bound

Obligations and Contracts 179 291

 MIRASOL v. CA
G.R. No. 128448
February 1, 2001
Quisumbing, J.
Dianne Cadorna
Keywords:
Sugar production; not creditors/debtors of each
other; land subject to litigation
Facts:
Petitioner spouses Mirasol are sugarland
owners and planters. PNB financed their sugar
production venture for crop years 1973-1974
and 1974-1975 under a crop loan financing
scheme, in which the petitioner spouses signed
Credit Agreements, a Chattel Mortgage on
Standing Crops, and a Real Estate Mortgage in
favor of PNB. The Chattel Mortgage empowered
PNB to negotiate and sell the latter's sugar, and
to apply the proceeds of which as payment for
their obligations.
Meanwhile, President Marcos issued PD 579 in
November, 1974, authorizing PHILEX to
purchase sugar allocated for export to the US
and other foreign markets. This decree also
authorized PNB to finance PHILEX's purchases,
with a mandate that whatever profit PHILEX
might realize (minus commissions, overhead
expenses and other liabilities) was to be
remitted to the government and used for public
purposes.
PNB continued to finance the sugar production
venture of the petitioner spouses through 1977.
Believing that the proceeds of their sugar sales
to PNB, if properly accounted for, were more
than enough to pay their obligations, they
asked PNB for an accounting of the proceeds of
the sale of their export sugar, which request
was ignored by PNB. Meanwhile, petitioner
spouses continued to avail of other loans from
PNB and to make unfunded withdrawals from
their current accounts with said bank,
prompting PNB to ask them to settle their due
and demandable accounts. In this regard, they
conveyed to PNB real properties valued at
Obligations and Contracts
P1,410,466.00 by way of dacion en pago,
leaving an unpaid overdrawn account of
P1,513,347.78. On August 10, 1982, the balance
of their loans stood at P15,964,252.93, and
despite demands, the petitioner spouses failed
to settle their accounts. Thus, PNB proceeded
to extrajudicially foreclose the mortgaged
properties, and after applying the proceeds
from the auction sale, there resulted a
remaining balance of P12,551,252.93 on PNBs
claim.
Petitioners insisted that PNB account for the
proceeds of the sale of their export sugar for
crop years 1973-1974and 1974-1975, claiming
that said proceeds, if properly liquidated, could
offset their outstanding obligations with the
bank. As PNB remained adamant that under
P.D. No. 579, there was nothing to account for
since said law states that all earnings from the
export sales of sugar pertained to the National
Government, the petitioner spouses proceeded
to file a suit for accounting, specific
performance, and damages against PNB. In
particular, they asked that PD 579 be declared
unconstitutional, and that accounting for the
unliquidated profits of sugar sales for 1973-
1975 be done. Appurtenant to their claim that
said profits are enough to offset their
obligations to PNB, they asked for the court to
declare that the dacion en pago they executed
in favour of PNB, as well as the latters act of
foreclosing their properties, void for want of
consideration. The RTC ruled in their favour but
the CA reversed.
Issue/s:
WON the CA was wrong in upholding the
validity of dacion en pago and foreclosure on
the petitioner spouses properties considering
their claim that these should have been
invalidated by virtue of legal compensation of
the 1973-1975 sugar sales on their outstanding
obligations with PNB
Ruling:
The court denied the petition and upheld the
CAs ruling.
180 291
 Ratio: constitutionality issue raised by petitioner
NO. Petitioner spouses' argument that legal spouses because it was not the lis mota of the
compensation has taken place has no basis in case.
law. For legal compensation to take place, the
requirements set forth in Articles 1278 and
1279 of the Civil Code must be present. Art.
1278 provides that compensation shall take
place when two persons, in their own right, are
creditors and debtors of each other.

Meanwhile, Art. 1279. provides the requisites

for a valid compensation, namely:
(1) That each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money,
or if the things due are consumable, they be of
the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any
retention or controversy, commenced by third
persons and communicated in due time to the
debtor."

In the present case, set-off or compensation

cannot take place between the parties for the
following reasons:

(1) Neither of the parties are mutually creditors

and debtors of each other. Under P.D. No. 579,
neither PNB nor PHILEX could retain any
difference claimed by the Mirasols in the price
of sugar sold by the two firms as said decree
already prescribes for the application of the
profits, namely, to a special fund of the National
Government subject to the disposition of the
President for public purposes. Hence, the CA
was correct in ruling that there was nothing
with which PNB was supposed to have offset
Mirasols' admitted indebtedness.

(2) Compensation cannot take place where one

claim, as in the instant case, is still the subject
of litigation, as the same cannot be deemed
liquidated.

Obiter: The Court dismissed the

Obligations and Contracts 181 291

 Associated Bank v. Tan
G.R. No. 156940
December 14, 2004
Panganiban, J.
Maye Cristobal
Keywords:
Withdrawal prior to clearance; insufficiency of
funds
Facts:
- Tan is a businessman and a regular depositor-
creditor of the Bank
- Sep. 1990
Tan deposited a postdated UCPB
check with the Bank in the amount of
Php 101,000.00
Check was duly entered into his bank
record, making his balance Php
297,000.00
- Oct. 1, 1990
Allegedly, upon advice and instruction
of the Bank that the UCPB check was
cleared, Tan withdrew the amount of
Php 240,000, leaving a balance of Php
57,793.45
- Oct. 2, 1990
Tan deposited Php 50,000.00 into his
account, making his exiting balance Php
107,793.45
This was done because he had issued
several checks to his business partners
amounting to a total of Php 47,357.40
- After issuing the checks, his suppliers and
business partners went back to him alleging
that the check he issued bounced for
insufficiency of funds
This prompted Tan to ask the Bank,
thru his lawyer, to take positive steps
regarding the matter, as he was led to
believe that he had sufficient balance.
- CA ruled that:
The bank should not have authorized the
withdrawal of the value of the deposited check
prior to its clearing
It is contrary to its obligation to treat
respondents account with meticulous care
Obligations and Contracts
Now it is estopped from blaming Tan to
fund his account
If the Php 101,000 was not debited,
respondent would have had sufficient funds for
the postdated checks he issued
Thus, the proximate cause for the
bounced checks was the supposed
accommodation (letting him get the
amount before it got cleared)
Issue/s:
1. WON the bank had a right to debit the
account of its client for a check deposit which
was dishonoured by the drawee bank
YES, the right to setoff has been established in
jurisprudence
2.WON this remedy was properly exercised
NO, the bank failed to give the highest care in
handling the petitioners account
Ruling + Ratio:
1) The court agrees that a bank generally has a
right of setoff over the deposits therein for the
payment of any withdrawals on the part of a
depositor. The right to debit a clients account
for a dishonoured check has also been fairly
established in past cases. BPI v. CA explained
that a bank and a depositor have a relationship
of creditor and debtor.
Though the following rules on legal
compensation might be applicable, we
must address the 2nd issue of knowing
whether the said Bank exercised such
right of legal compensation.
Art. 1279
In order that compensation may be proper, it is
necessary:
1. That each one of the obligors be bound
principally, and that he be at the same
time a
principal creditor of the other;
2. That both debts consist in a sum of
money, or if the things due are
consumable, they be of
the same kind, and also of the same
quality if the latter has been stated;
3. That the two debts be due;
182 291
 4. That they be liquidated and Wherefore, the Petition is DENIED and the
demandable; assailed Decision affirmed. Costs against
5. That over neither of them there be any petitioner
retention or controversy, commenced
by third
persons and communicated in due time
to the debtor.
2) Obligation as Depository Bank
As the banking business is impressed with
public interest, the highest degree of diligence
is expected, more than that of a good father of
a family.
Did the petitioner treat the respondents
account with the highest degree of care? NO
The act of accommodating Tan was a
clear disregard of the banks clearing
requirement (this practice was really
unusual)

Obligation as Collecting Agent

As a general rule, a bank is liable for the
wrongful or tortuous acts and declarations of its
officers/agents within the course and scope of
their employment.
Banks are expected the highest degree of
diligence in the selection and supervision of
their employees
Did the acts of the Branch Manager
constitute the proximate cause for the bouncing
of the checks? YES
The depositor withdrew money upon
the advice of the manager that the
money has been already cleared.
Without such advice, then Tan would
not have issued some of the checks
Did the Bank show that it immediately and
duly informed Tan of the debiting of his
account? NO
Since Tan was considered a valued
customer of the Bank, he should have
been officially notified by the
precarious condition of his account
It was shown that Tan regularly made a check
on his account, as it is not unusual for a well-
reputed businessman to take not of the amount
of money he takes and releases.

Obligations and Contracts 183 291

 Villanueva v Tantuico, Jr., & Cruz
G.R. No. L-53585
February 15, 1990
Narvasa, J.
Roby Cruz
Keywords:
Seminar fees; restitution
Facts:
Romulo Villanueva was a Government officer of
the Bureau of Records Management designated
Administrative Officer and Training Coordinator
of 2 regional seminars of the Bureau (re:
updating records management techniques). The
seminar fees were charged against the
appropriations of the participants' respective
offices in accordance with Memo Circular 830
issued by the Office of the President,
authorizing the attendance of records officers
from the different government agencies at the
seminars. All the fees collected, P43,000.00 in
the aggregate, were placed under Villanueva's
control and supervision, and were made
disbursable only upon his authorization and for
the purposes of the seminars specified in
Seminar Operation Plans Numbered 001 and
002.
For both seminars, Villanueva authorized
disbursements of P41,148.20 in payment of
food, snacks, transportation expenses, seminar
kits and hand-outs of the participants; hauling
services; additional allowance for training staff
(including snacks for personnel who worked
overtime in preparation for the seminars); hotel
bills and honoraria of resource speakers. The
balance of P1,851.80 was deposited with the
Cashier of the Bureau of Records Management
after the conclusion of the seminars.
Unknown to Villanueva, employees and officers
designated to take part in the seminars had
already collected from their own offices or
corporations, their transportation expenses, per
diems, and other allowances. Because of this,
the Auditor of the Bureau of Records
Management, Emiliana Cruz, disallowed the
Obligations and Contracts
disbursement of seminar funds amounting to
P31,949.15 which Villanueva had authorized.
Cruz then wrote to Villanueva demanding
restitution of the said sum but Villanueva
demurred, claiming that the seminar funds
were private funds, and they had been
disbursed in pursuance to the objectives of the
seminars. Cruz issued to Villanueva a certificate
of permanent disallowance. She considered the
said disbursements as an "indebtedness" to the
Government within the meaning of Section 624
of the Revised Administrative Code, as a result
of which Villanueva was prevented from
receiving his salaries (P13,313.30), his
transportation and representation expenses in
the seminars (P2,205), and the money value of
his terminal leave (P14,796.29).
Villanueva was also charged by the CoA with
malversation of public funds before the
Tanodbayan, which was later on dismissed (fees
not public funds and released in good faith). He
then appealed to the President of the
Philippines for reversal of Auditor Cruz's action,
so he can receive the money (his salary &
allowances) withheld from him. CoA, to whom
the matter was referred to, rejected him. Thus,
he filed for special civil action of certiorari,
charging the respondents with having acted
with lack or excess of jurisdiction or grave abuse
of discretion.
Issue/s:
1. WoN the seminar fees entrusted to
Villanueva were private, not public funds
2. WoN Villanueva is indebted to the
Government which would require him to
compensate for the fees/funds he disbursed
Ruling:
Writ of certiorari granted. Certificate of
permanent disallowance and CoA resolution
annulled and declared void ab initio. Ordered
immediate payment to the petitioner of the
sums rightfully due but improperly withheld
from him.
Ratio:
1. No. The fees were deemed public funds. The
184 291
 record shows that the seminar fees collected participants concerned, not from Villanueva.
from seminar participants and entrusted to
Villanueva were chargeable against the
appropriations of the participants' respective
offices or agencies in accordance with the
President's Memorandum Circular No. 830. As
public funds, the audit of the disbursements of
said funds conducted by a government auditor
was therefore entirely in order.

2. No. While Section 624 of the Revised

Administrative Code does indeed authorize the
set-off of a person's indebtedness to the
Government against "any money due him or his
estate to be applied in satisfaction of such
indebtedness," that indebtedness must be one
that is admitted by the alleged debtor or
pronounced by final judgment of a competent
court. In such a case, the person and the
Government are in their own right both debtors
and creditors of each other, and compensation
takes place by operation of law in accordance
with Art. 1278, CC. Absent, any such categorical
admission by an obligor or final adjudication, no
legal compensation can take place.

Unless admitted by a debtor himself, the

conclusion that he is in truth indebted to the
Government cannot be definitely and finally
pronounced by a Government auditor, no
matter how convinced he may be from his
examination of the pertinent records of the
validity of that conclusion. Such a declaration,
that a government employee or officer is
indeed indebted to the Government, if it is to
have binding authority, may only be made by a
court.

The Court ruled that his disbursements were

within the letter and contemplation of the
Seminar Operation Plans. The disbursements
were for items explicitly specified as authorized
expenditures. Also, Villanueva had no
knowledge that some of the seminar
participants had already collected from their
home offices or agencies certain amounts to
cover some of their expenses for attendance at
the seminar. The liability for that duplication in
disbursements should be exacted from the

Obligations and Contracts 185 291

 Perez v. CA and Mever Films, Inc.
G.R. No. L56101
February 20, 1984
Melencio-Herrera, J.
Hans Dantes
Keywords:
Compensation; Money lending
Facts:
May 1974 CONGENERIC owed Ramon Mojica
P320,000 through two loans (~P112K and
P208K), due on August 6 & 13 June MEVER, in
turn, owed CONGENERIC P500,000 under a
Negotiable Certificate of Indebtedness, due on
August 5 July CONGENERIC sold P200,000 of
MEVERs P500,000 debt to Corazon Perez
August 5 MEVER paid P100K to CONGENERIC;
CONGENERIC then paid this to Perez (leaving
400K remaining debt)
August 6 & 13 CONGENERIC paid interests to
Mojica but full payment was rolled over to
October 4 & 11
September 9 Mojica assigned CONGENERICs
debts to MEVER, now both a debtor and a
creditor of CONGENERIC
October 3 MEVER surrendered to
CONGENERIC the originals of CONGENERICs
320K debt to Mojica
October 7 CFI Rizal sent notice of garnishment
to MEVER for CONGENERICs debts, amounting
to P185,000
Then CONGENERIC informed MEVER that
P200,000 of his P500,000 debt was sold to a
third person
November 15 MEVER paid CFI Rizal P79,000
its liability to CONGENERIC minus the
compensation (400K 320K)
July 1975 Perez sued MEVER for the P100,000
remaining debt of MEVER (half of it paid on
August 5, 1974).
Obligations and Contracts
MEVER invoked compensation as a defense,
citing Art. 1285 par. 3:
If the assignment is made without the
knowledge of the debtor, he may set up
compensation of all credits prior to the
same and also later ones until he had
knowledge of the assignment.
In this case, MEVER claims that the other
P100,000 was already paid amongst the
compensated remaining debt to CONGENERIC.
Trial court favored Perez but CA later favored
MEVER.
CA held that there was compensation between
MEVER and CONGENERIC under Art. 12791 on
September 9, stating that CONGENERICs debt
to Mojica matured on August 6 & 13, while
MEVERs debt to CONGENERIC matured on
August 5.
Thus, the two debts were already due and
demandable at that time.
CA further said that said compensation can be
used as a defense under Art. 1285 par. 3.
Issue/s:
1. WON there was compensation between
CONGENERIC and MEVER on September 9, as
CA held
2. WON compensation may serve as a defense
against Perezs claim
Ruling + Ratio:
1. NO. SC ruled that the deadline of
CONGENERICs debt to Mojica was pushed on
August 6 & 13 the very day it should have paid
in full to October 4 & 11. This was before
Mojicas assignment of his rights to the debt to
MEVER on September 9. It was not yet due &
demandable on that date not even on
October 3, when MEVER surrendered the
originals of the Mojica debt to CONGENERIC.
2. NO. SC ruled that Art. 1285 par. 1 applies
instead of par. 3.
Paragraph 1 states that the debtor (MEVER)
who has consented to the assignment of rights
made by a creditor (CONGENERIC) in favor of a
third person (Perez), cannot set up against the
assignee (Perez) the compensation which
186 291
 would pertain to him against the assignor
(CONGENERIC), unless the assignor was
notified by the debtor at the time he gave his
(MEVERs) consent, that he reserved his right
to the compensation.

The Court considered Perezs contention that

MEVER necessarily consented as part of its
obligation under the Negotiable Certificate of
Indebtedness with CONGENERIC.
Furthermore, the Court considered the nature
of CONGENERICs moneymarketing business as
impersonal and intended to provide quick
mobility of money and securities by
CONGENERIC acting as the middleman.
Says the Court:
The issuer of a commercial paper in the money
market necessarily knows in advance that it
would be expeditiously transacted and
transferred to any investor/lender without need
of notice to said issuer. In practice, no
notification is given to the borrower or issuer of
commercial paper of the sale or transfer to the
investor.

Note:
1 Art. 1279. In order that compensation may be
proper, it is necessary:
(1) That each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money,
or if the things due are consumable, they be of
the same kind, and also of the same quality if
the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any
retention or controversy, commenced by third
persons and communicated in due time to the
debtor.

Obligations and Contracts 187 291

 Silahis Marketing v IAC, de Leon
G.R. No. L-74027
December 7, 1989
Fernan, C.J.
Mike De Castro
Keywords:
DOLE; direct sale
Facts:
- Gregorio de Leon delivered various goods to
Silahis worth P22,213.75
- For failure to pay its account despite repeated
demand, Silahis was sued by de Leon to collect
on the sum
- Silahis defenses:
De Leon owed Silahis P22,200 as
commission for the sale of sprockets to Dole
Philippines in the amt of P111,000, w/o
coursing the sale thru Silahis in violation of
their usual practice (debit memo as proof)
Silahis is entitled to return a defective
stainless steel screen and to have its value
deducted from the amt it owed
- TC: Silahis liable to pay, but offset
(compensate) the amt against the amt owed by
de Leon: Silahis to pay P13.75.
- IAC: there was no agreement between them
prohibiting de Leon from making a direct sale to
Dole, and there is nothing in the debit memo
that obligates de Leon to pay the commission
principally and that he be at the same time
a principal creditor of the other
2) That both debts consist in a sum of money,
or if the things due are consumable, they
can be of the same kind, and also of the same
quality if that latter has been stated
3) That the two debts be due
4) That they be liquidated and demandable
5) That over neither of them there be any
retention or controversy, commenced by 3rd
persons and communicated in due time to the
debtor
-> When all the requisites are present,
compensation takes effect by operation of law,
even w/o consent or knowledge of the creditors
and debtors
-> BUT there is no evidence showing that there
was an agreement between de Leon and Silahis
prohibiting de Leon from selling directly to Dole
Philippines

Issue/s:
WON De Leon is liable to pay Silahis for the
commission of his direct sale to Dole
-NO, there is nothing to show that de Leon was
obligated to compensate the outstanding
accounts of Silahis

Ruling:
IAC decision affirmed, Silahis to pay P22,200 +
costs

Ratio:
Art 1279: In order that compensation may be
proper, it is necessary:
1) That each one of the obligors be bound

Obligations and Contracts 188 291

 BPI v. C.A.
G.R. No. 116792
March 29, 1996
Puno, J.
Jocs Dilag
Keywords:
Grandmas account; US Treasury Warrants
Facts:
- Sep. 25, 1985
Edvin Reyes opened a joint AND/OR Savings
account with his wife, Sonia Reyes
- Feb. 11, 1986
Edvin Reyes also held a joint AND/OR Savings
account with his grandma, Emeteria Dernandez
He regularly deposits in this account (2nd
Savings account) US Treasury Warrants payable
to grandma as monthly pension
- Dec. 28, 1989
Grandma Fernandez died WITHOUT THE
KNOWLEDGE of the US Treasury Department
and BPI
- Jan. 4, 1990
Edvin Reyes deposited a US Treasury Warrant
dated Jan. 1 in the 2nd Savings account
US Veterans Admin Office conditionally
cleared the check and sent it to the US for
further clearing
- Mar. 8, 1990
Edvin Reyes closed the 2nd Savings account
and transferred all of the funds (13k) to the 1st
Savings account
- Jan. 16, 1991
US Department of Treasury discovered that
Fernandez has died 3 days prior to the issuance
of the US Treasury Warrant (Jan 1)
So they requested BPI for a refund (thus, BPI
suddenly being aware of the death of grandma)
- Feb. 19, 1991
Obligations and Contracts
Edvin Reyes received an urgent telegram
from BPI requesting him to contact the bank
He was thereafter informed that the Treasury
Check was being claimed back
He then reassured that he would drop by the
bank soon
He also verbally authorized them to debit the
amount from the 1st Savings account
BPI debited the amount
- Feb. 21, 1991
Edvin Reyes, together with lawyer, went to
the bank
He was given the refund documents
He demanded BPI to return to him the
amounts debited
He filed a suit for damages against BPI as he
failed to withdraw the money when he needed
them
Issue/s:
- WON there was legal compensation in the said
circumstances
YES, as all of the requisites are present. No
need for consent.
Ruling:
In view hereof, the Decision of respondent
Court of Appeals in CA G.R. CV No. 41543
dated August 16, 1994 is ANNULLED and SET
ASIDE and the Decision of the trial court in Civil
Case No. Q-91-8451 dated January 20, 1993 is
REINSTATED. Costs against private respondent.
Ratio:
The respondent court erred when it failed to
rule that legal compensation is proper. The
following provisions are relevant in order to
support LEGAL COMPENSATION:
Art. 1278
Compensation shall take place when two
persons, in their own right, are creditors and
debtors of each other.
Art. 1279
In order that compensation may be proper, it is
necessary:
189 291
 1. That each one of the obligors be bound
principally, and that he be at the same
time a
principal creditor of the other;
2. That both debts consist in a sum of
money, or if the things due are
consumable, they be of
the same kind, and also of the same
quality if the latter has been stated;
3. That the two debts be due;
4. That they be liquidated and
demandable;
5. That over neither of them there be any
retention or controversy, commenced
by third
persons and communicated in due time
to the debtor.

Art. 1290
When all the requisites mentioned in Article
1279 are present, compensation takes effect by
operation of law, and extinguishes both debts
to the concurrent amount, even though the
creditors and debtors are not aware of the
compensation.
Since compensation takes place ipso jure, its
effects arise on the very day on which all its
requisites concur.

All of the elements were present:

1. BPI was debtor of Reyes (depositor-
bank relationship) & BPI was creditor of
Reyes (dishonoured US Treasury
Warrant)
2. Both debts consisted of a sum of money
3. Two debts were due (deposits are
always due, US Treasury warrant was
due when it was
demanded by the US Treasury)
4. The debts were liquidated and
demandable
5. They are not claimed by third persons

Obligations and Contracts 190 291

 Millar v. CA and Gabriel
G.R. No. L-29981
April 30, 1971
Castro, J.
DJ Dolot
Keywords:
Mortgaged jeep; unsatisfied writs of execution
Quick Read:
2 obligations:
(a) judgment obligation and
(b) chattel mortgage. No novation, whether
express or implied, because it was not declared
in explicit terms nor was there substantial
incompatibility between the two obligations
(Art.1292- which the court did NOT cite as
reference).
Facts:
In 1956, Eusebio S. Millar obtained a favorable
judgment from the CFI of Manila, in a civil case,
condemning Antonio P. Gabriel to pay him the
sum of P1,746.98 with interest at 12% per
annum from the date of the filing of the
complaint, the sum of P400 as attorney's fees,
and the costs of suit. Respondent Gabriel's
appeal to the Court of Appeals of the said
judgment was dismissed.
In 1957, petitioner Millar moved for the
issuance of the corresponding writ of execution
to enforce the judgment. The lower court
issued the said writ applied for. On the basis of
which the sheriff of Manila seized Gabriel's
Willy's Ford jeep. Gabriel pleaded with Millar to
release the jeep under an arrangement
whereby the respondent, to secure the
payment of the judgement debt, agreed to
mortgage the vehicle in favor of the petitioner.
Millar agreed and so the parties, on February 22,
1957, executed a chattel mortgage on the jeep.
This chattel mortgage stipulated that:
This mortgage is given as security for
the payment to the said EUSEBIO S.
MILLAR, mortgagee, of the judgment
and other incidental expenses in Civil
Case No. 27116 of the Court of First
Obligations and Contracts
Instance of Manila against Antonio P.
Gabriel, MORTGAGOR, in the amount of
ONE THOUSAND SEVEN HUNDRED
(P1,700.00) PESOS, Philippine currency,
which MORTGAGOR agrees to pay as
follows:
March 31, 1957 EIGHT HUNDRED
FIFTY (P850) PESOS; April 30, 1957
EIGHT HUNDRED FIFTY (P850.00) PESOS.
Because Gabriel failed to pay the first
installment, Millar obtained alias writs of
execution which were all returned unsatisfied.
Pursuant to the fifth and last writ, the sheriff
levied on certain personal properties belonging
to Gabriel, and then scheduled them for
execution sale. In 1961, Gabriel filed an urgent
motion for the suspension of the execution sale
on the ground of payment of the judgment
obligation. The lower court ordered the
suspension to afford the respondent
the opportunity to prove his allegation of
payment of the judgment debt.
CFI: no novation had taken place, and that the
parties had executed the chattel mortgage only
to secure or get better security for the
judgment.
Gabriel appealed to the CA, which set aside the
order of execution, holding that the subsequent
agreement of the parties impliedly novated the
judgment obligation in the civil case. The CA
stated that the following circumstances
sufficiently demonstrate the incompatibility
between the judgment debt and the obligation
embodied in the deed of chattel mortgage,
warranting a conclusion of implied novation (4
CIRCUMSTANCES):
1. Whereas the judgment orders the
respondent to pay the petitioner the sum of
P1,746.98 with interest at 12% per annum, plus
the amount of P400 and costs of suit, the deed
of chattel mortgage limits the principal
obligation of the respondent to P1,700;
2. Whereas the judgment mentions no specific
mode of payment of the amount due to the
petitioner, the deed of chattel mortgage
191 291
 stipulates payment of the sum of P1,700 in two
equal installments;
3. Whereas the judgment makes no mention of
damages, the deed of chattel mortgage
obligates the respondent to pay liquidated
damages in the amount of P300 in case of
default on his part; and
4. Whereas the judgment debt was unsecured,
the chattel mortgage, which may be foreclosed
extra-judicially in case of default, secured the
obligation.
Issue/s:
WON the subsequent agreement of the parties
as embodied in the deed of chattel mortgage
impliedly novated the judgment obligation in
the civil case - NO
Ruling:
CA Decision set aside, and the order of the CFI
of Manila affirmed.
Ratio:
1. 1st CIRCUMSTANCE: Where the new
obligation merely reiterates or ratifies the old
obligation, although the former
effects but minor alterations or slight
modifications with respect to the cause or
object or conditions of the latter, such
changes do not effectuate any substantial
incompatibility between the two obligations.
Only those essential and principal changes
introduced by the new obligation producing an
alteration or modification of the essence of the
old obligation result in implied novation. In the
case at bar, the mere reduction of the amount
due in no sense constitutes a sufficient indictum
of incompatibility, especially in the light of
(a) the explanation by Millar that the reduced
indebtedness was the result of the partial
payments made by Gabriel before the execution
of the chattel mortgage agreement and
(b) the latter's admissions bearing thereon.
Obligations and Contracts
The parties apparently in their desire to avoid
any future confusion as to the amounts already
paid and as to the sum
still due, decoded to state with specificity in the
deed of chattel mortgage only the balance of
the judgment debt properly collectible from the
respondent. Therefore, the first circumstance
fails to satisfy the test of substantial and
complete incompatibility between the
judgment debt and the pecuniary liability of the
respondent under the chattel mortgage
agreement.
2. 3rd CIRCUMSTANCE: The discrepancy
between the amount of P400 and tile sum of
P300 fixed as attorney's fees in the judgment
and the deed of chattel mortgage, respectively,
is explained by Millar, thus: the partial
payments made by the respondent before the
execution of the chattel mortgage agreement
were applied in satisfaction of part of the
judgment debt and of part of the attorney's fee
fixed in the judgment, thereby reducing both
amounts.
3. 2nd and 4th CIRCUMSTANCES: The SC sees no
substantial incompatibility between the
mortgage obligation and the judgment liability
of the respondent sufficient to justify a
conclusion of implied novation. The stipulation
for the payment of the obligation under the
terms of the deed of chattel mortgage serves
only to provide an express and specific method
for its extinguishment payment in two equal
installments. The chattel mortgage simply gave
the respondent a method and more time to
enable him to fully satisfy the judgment
indebtedness. The chattel mortgage agreement
in no manner introduced any substantial
modification or alteration of the judgment.
Instead of extinguishing the obligation of the
respondent arising from the judgment, the
deed of chattel mortgage expressly ratified and
confirmed the existence of the same, amplifying
only the mode and period for compliance by the
respondent.
192 291
 The unmistakable terms of the deed of chattel
mortgage reveal that the parties constituted the
chattel mortgage
purposely to secure the satisfaction of the then
existing liability of the respondent arising from
the judgment against him. As a security for the
payment of the judgment obligation, the chattel
mortgage agreement effectuated no
substantial alteration in the liability of the
respondent.

The defense of implied novation requires clear

and convincing proof of complete
incompatibility between the two obligations.
The law requires no specific form for an
effective novation by implication. The test is
whether the two obligations can stand together.
If they cannot, incompatibility arises, and the
second obligation novates the first. If they can
stand together, no incompatibility results and
novation does not take place.

CONCLUSION: There is no substantial

incompatibility between the two obligations as
to warrant a finding of an implied novation. Nor
is there satisfactory proof showing that the
parties, by explicit terms, intended the full
discharge of the respondent's liability under the
judgment by the obligation assumed under the
terms of the deed of chattel mortgage so as to
justify a finding of express novation.

Obligations and Contracts 193 291

 Dormitorio v Fernandez
GR. No. L-25897
Aug. 21, 1976
J. Fernando
Julie Enad
Keywords:
Subdivision plan; no actual possession of Lot.
No. 2; Stipulation of facts
Facts:
December 7, 1948 - Lazalita bought Lot No. 1,
Block 16 of the consolidated subdivision plan of
the Municipality of Victorias, Negros Occidental
by a deed of definite sale from the Mayor, and
this had been in his full and peaceful possession
ever since (built permanent and valuable
improvements).
By 1955, Dormitorio spouses bought Lot No. 2,
Block 16, but they never had actual possession
of the land. On December 12, 1958, the spouses
filed a suit against Lazalita for ejectment. A
private land surveyor hired by the Municipality,
found out that the lot sold to Lazalita was
converted into the new Munipal Road known as
Jover Street and that the lot presently
occupied by him was lot No. 2. Court ruled in
favour of spouses, ordering Lazalita to vacate
the land and pay mothly rental of P20.
Lazalita failed to appeal, filed certiorari case in
SC, against the Municipality, joined by the
Dormitorio spouses as formal parties, because
of the value of his permanent improvements
and buildings which exceeded the original
purchase price of the land.
mislead the Honorable Court to issue by
mistake an Order for the issuance of a Writ of
Execution.
Respondent Judge stated, in view of the
conclusion reached by him in setting aside the
writ of execution, that the compromise
between the parties, evidenced by the agreed
stipulation of facts, was clear proof of animus
novandi and thus superseded the previous
judgment.
Issue/s:
WoN there was grave abuse of discretion by
Judge Fernandez when he set aside the writ.
Ruling + Ratio:
NO. He had no choice in the matter. What he
did finds support in applicable authorities:
Agreement filed by the parties in the ejectment
case created as between them new rights and
obligations which naturally superseded the
judgment of the municipal court (Barretta v
Lopez); In another case, it was contended that a
lower court decision was novated by
subsequent agreements of the parties. There
was a clear manifestation of will by the parties,
as evidenced by the agreement. Thus, there was
animus novandi.

Respondent Judge, then in a later case, set

aside the order of Execution, because of the
parties Agreed Stipulation of Facts in the
latter case. The Stipulation states that the
spouses agree that Lazalita should be
reimbursed for his expenses in transferring his
house to another Lot; and that the decision in
the first case shall not be enforced and
executed anymore; and that by mean of fraud,
misrepresentation and concealment of the true
facts of the case, the spouses were able to

Obligations and Contracts 194 291

 Magdalena Estates, Inc. v. Rodriguez
G.R. No. L-18411
December 17, 1966
Regala, J.
Apo Espaola
Keywords:
Bond; pay principal only; surety agreement; no
novation
Facts:
Appellants Rodriguez bought from appellee
Magdalena Estates, Inc. a parcel of land in
Quezon City, and executed a promissory note
for P5000, which represented the unpaid
balance of P5000 of the purchase price.
In the promissory note, the Rodriguezes stated
they would pay said amount with interest at the
rate of 9% per annum.
They also executed a bond with the Luzon
Surety Co, Inc. in favor of Magdalena Estates, in
which Luzon Surety obligated itself to paying
only the P5000 principal. The obligation became
due and demandable, and Luzon Surety paid to
Magdalena the P5000. The latter then
demanded from the Rodriguezes P655.89,
which represented the accumulated interests.
Appellants refused and reasoned that
Magdalena Estates acceptance of the surety
agreement novated their earlier contract, and
its acceptance of the principal without
exercising its right to apply the accrued interest
was a condonation of the interests due.
This suit was then brought in order to enforce
the collection of the amount. The Municipal
Court of Manila held in favor of Magdalena
Estates, and the Court of First Instance of
Manila affirmed.
Issue/s:
Whether the surety agreement constituted a
novation of the terms agreed upon in the
promissory note.No.
Ruling + Ratio:
The Court affirmed the lower courts ruling,
holding that the surety bond is not a new and
Obligations and Contracts
separate contract but an accessory of the
promissory note.
The appellants claim that, because the appellee
had accepted without reservation the surety
bond despite its failure to provide for the
payment of accrued interest, there had been a
novation of the obligation.
However, novation is never presumed, and
must be established by showing either:
1. That the old and new contracts are
incompatible in all points, or
2. That the will to novate appears by express
agreement of the parties or in acts of similar
import.
An obligation to pay a sum of money is not
novated in a new instrument, which only ratifies
the original agreement. The new instrument
may change the terms of the payment or add
other obligations not incompatible with the old
one, or it may merely supplement the old
contract, without affecting the original
obligation.
The creditor may receive a guaranty or accept
payment from a third person who has agreed to
assume the obligation, and still this will not
constitute a novation, unless there has been
agreement that such acts would release the
original debtor from responsibility. Thus the
creditor can still enforce the obligation against
the original creditor.
With regard to the interest, the Court held that
Magdalena Estates did not object when it
accepted the payment of P5000 because it
knew that was the complete amount
undertaken by the surety. The payment for the
accrued interest was provided for in the original
promissory note, which the bond merely
supplemented. Thus, the appellants reliance on
Art. 12351 is mistaken.
The appellants reliance on Art. 12532 is
likewise wrong, because Arts. 1252-1254 of the
Civil Code apply to a person owing several debts
of the same kind to the same creditor, which is
195 291
 not the case at hand. In any case, Art. 1253 was
said to be merely directory, and not mandatory.
Thus the Rodriguezes were ordered to pay the
sum of P655.89, representing the accrued
interest on the principal, plus legal interest
therefrom.

Doctrine:
Novation is never presumed. Either of two
things must be established: first, that the old
and new contracts are incompatible on all
points, or, second, that the will to novate is
shown by express agreement of the parties, or
may be inferred from their acts

Note:
1 ART. 1235. When the obligee accepts the
performance knowing its incompleteness or
irregularity, and without expressing any protest
or objection, the obligation is deemed fully
complied with.
2 ART. 1253. If the debt produces interest,
payment of the principal shall not be deemed to
have been made until the interests have been
recovered.

Obligations and Contracts 196 291

 Reyes v Court of Appeals
G.R. No. 120817
November 4, 1996
Torres, JR., J
Pia Falcone
Keywords:
21 postdated checks dishonored; Fraudulent
borrowing of treasury notes
Facts:
Petitioner Elsa Reyes, the president of Eurotrust
Capital Corporation, a domestic corporation
engaged in credit financing, is seeking the
nullification of either of the two resolutions:
1. Resolution dated January 23, 1992
Reyes alleges that Eurotrust and
BERMIC (B.E. Ritz Mansion International
Corporation) entered into a loan
agreement where Eurotrust extended
to Bermic P216,053,126.80 to finance
the construction of the latters Ritz
Condominium and Gold Business Park.
Bermic issued 21 post-dated checks but
when they were presented for payment,
they were dishonoured by the bank due
to stop payment order made by
Graciela Eleazar, Bermics president.
This prompted Reyes to file criminal
complaints against Eleazar for violation
of B.P. 22 and estafa.
The Armed Forces of the Philippines
Mutual Benefit Assoc., Inc. (AFP-MBAI),
a corporation organized to perform
welfare services for the AFP, conducted
its own investigation since they also
invested their funds with Eurotrust.
They found out that after Eurotrust
delivered to AFP-MBAI the securities
they purchased, the former borrowed
the same securities but failed to return
it to them; and that the amounts paid
by AFP-MBAI to Eurotrust for those
securities were lent by Elsa to Bermic
and others.
Obligations and Contracts
The representatives of Eurotrust and
Bermic then agreed that Bermic would
directly settle its obligations with the
real owners of the fund AFP-MBAI and
DECS-IMC. This agreement was
formalized in two letters dated March
19, 1991. Pursuant to this, Bermic
negotiated with AFP and made
payments to them.
However, Eleazar later learned that
Reyes continued to collect post-dated
checks issued by her, contrary to their
agreement. So Bermic wrote to
Eurotrust to hold the amounts in
constructive trust for the real owners.
But since Reyes continued in doing so,
Eleazar had her payments stopped.
2. Resolution dated January 12, 1993
At the time of the pendency of the first
case, AFP-MBAI lodged a separate
complaint for estafa and violation of B.P.
22 against Elsa Reyes. Apparently,
Eurotrust delivered treasury notes
amounting to P73M which they also
fraudulently borrowed for verification
purposes with the Central Bank. Despite
their demands, Eurotrust failed to
return the said treasury notes and
instead delivered 21 postdated checks
which wore dishonoured by the bank
upon presentment.
Reyes interposed the defense of
novation and insisted that AFP-MBAIs
claim of unreturned P73M of
government securities has been
satisfied upon her payment of P30M,
with the remaining P43M also paid
when Eurotrust assigned its
Participation Certificates to AFP-MBAI.
Issue/s:
1. Regarding the first resolution: WON
their agreement of Eleazar assuming
the obligation of Reyes to
AFP-MBAI constituted novation,
extinguishing any criminal liability on
the part of Eleazar.
197 291
 2. Regardingthesecondresolution:WONpet
itionercanbeheldcriminallyliableforthec
rimecharged because the contract of
sale of securities between her and AFP-
MBAI was novated by substitution of
donor.
Ruling + Ratio:
1. No, that wasnt novation because it lacked
the last three essential requisites of novation,
which are:
a. There must be a previous valid obligation;
b. There must be an agreement of the parties
concerned to a new contract;
c. There must be the extinguishment of the
old contract; and
d. There must be validity of the new contract.
The absence of a new contract extinguishing the
old one destroys any possibility of novation by
conventional subrogation. The two letters
merely gave respondent Eleazar an authority to
directly settle the obligation of petitioner to
AFP-MBAI. Its an agreement between
petitioner and respondent only. There was no
mention of AFP-MBAIs consent to the new
agreement, much less an indication of its
intention to be the substitute creditor in the
loan contract.
that no evidence was presented which would
demonstrate the intention of AFP-MBAI to
release petitioner from her obligation to pay
under the contract of sale of securities. The
debtor must always be made with the consent
of the creditor. Article 1293 is explicit, thus:
Novation which consists in substituting a new
debtor in the place of the original one, may be
made event without or against the will of the
latte, but not without the consent of the
creditor...
The consent of the creditor to a novation by
change of debtor is as indispensable as the
creditors consent in conventional subrogation
in order that a novation shall legally take place.
The mere circumstance of AFP-MBAI receiving
payments from Eleazar doesnt constitute
novation. At most, it only creates a juridical
relation of co-debtorship or suretyship on the
part Eleazar to the contractual obligation of
petitioner to AFP-MBAI, and the latter can still
enforce the obligation against the petitioner.
Novation arising from a purported change in the
person of the debtor must be clear and express.

The rule of novation by substitution requires an

agreement among the three parties concerned
the original creditor, the debtor, and the new
creditor. There is no novation if there is no
mutual agreement and no new contract
executed by the parties. Article 1301 is explicit:
Conventional subrogation of a third person
requires the consent of the original parties and
of the third person.
The fact that Eleazar made payments to AFP-
MBAI and the latter accepted doesnt ipso facto
result in novation. There must be an express
intention to novate. It is never presumed.
Article 1300 provides that conventional
subrogation must be clearly established in order
that it may take effect.

2. Just like in Issue 1, no novation took place in

this case. An examination of the records shows

Obligations and Contracts 198 291

 Conchingyan Jr v R&B Surety Insurance Co Inc.
G.R. No. L-47369
June 30, 1987
Feliciano, J.
Coopey Hermosisima
Keywords:
Surety bond; indemnity agreements; trust
agreements
Facts:
- November 1963, Pacific Agricultural Suppliers
(PAGRICO) applied for and granted an increase
in line of credit from P400k-P800k with PNB. To
secure approval, PAGRICO had to give a good
and sufficient bond of P400k to secure faithful
compliance.
- In compliance with this requirement, PAGRICO
submitted Surety Bond 4765, issued by R&B
Surety. Under the terms of the Surety Bond,
PAGRICO and R&B bound themselves jointly
and severally to comply with the terms and
conditions of the advance line of credit
established by PNB; PNB had the right to
proceed directly v R&B without the necessity of
first exhausting assets of PAGRICO; lastly, Bond
provided that R&B's liability was not to be
limited to the principal sum of P400K but would
also include accrued interest plus all expenses,
charges etc
- In consideration of R&B's issuance of the
Surety Bond, two identical indemnity
agreements were entered into w/ R&B:
a) Dec 23 1963 was executed by the Catholic
Church Mart and Jose Cochingyan
b) Dec 24 1963 was executed by PAGRICO,
Pacific Copra, Jose Villanueva and Lin Tua Beh
- Under both agreements, the indemnitors
bound themselves jointly and severally to R&B
Surety to pay an annual premium of P5,103.05
and for the faithful compliance of the terms and
conditions set forth in said SURETY BOND until
the same is CANCELLED and/or DISCHARGED
Obligations and Contracts
- 2 years after that (28 Dec 1965), a Trust
Agreement between (TA) Jose and Susana
Cochingyan (under the name Catholic Church
Mart) as Trustors, Tomas Besa of PNB as
Trustee and PNB as beneficiary.
- PAGRICO failed to comply with Principal
Obligation to PNB -> PNB demanded payment
from R&B for P400k-> R&B made series of
payments to PNB totaling P70K
- R&B in turn sent formal demand letters to
Conchingyan and Villanueva for reimbursement
of the payments made by it to PNB as well as
the discharge of its liability to PNB under surety
bond. R&B thereafter brought suit against those
who signed the Indemnity Agreements
- CFI Manila rendered decision for R&B,
ordering petitioners to pay P400K ++
Issues + Ruling + Ratio:
1) W/N the Trust Agreement had extinguished,
by novation, the obligation of R&B to the PNB
under Surety Bond, w/c, in turn, extinguished
the obligations of petitioners under the
Indemnity Agreements- NO
- Trust Agreement mentioned here was
executed 2 years after the execution of Surety
Bond and Indemnity Agreements
- Under the Trust Agreement, "TRUSTOR, is
therefore bound to comply with his obligation
under the indemnity agreements
aforementioned executed by him in favor of
R&B...and in order to forestall impending suits
by the BENEFICIARY against said companies, he
is willing as he hereby agrees to pay the
obligations of said companies in favor of the
BENEFICIARY in the total amount of P1.3M..."
xxxx
"9.This agreement shall not in any manner
release the R&B..from their respective liabilities
under the bonds mentioned above
- Novation is the extinguishment of an
obligation by the substitution or change of the
obligation by a subsequent one which
terminates it, either by changing its object or
principal conditions, or by substituting a new
debtor in place of an old one, or by subrogating
a 3rd person to the rights of the creditor.
199 291
 - If objective novation is to take place, it is thereupon becoming subrogated to such
imperative that the new obligation expressly remedies as R&B may have v PAGRICO
declare that the old obligation is thereby
extinguished, or that the new obli be on every 3) W/N filing of complaint was premature since
point incompatible with the old one. PNB had not yet filed a suit v R&B Surety for the
- If subjective novation is to occur, essential forfeiture of its Surety Bond.
that the old debtor be released from the - Clauses (b) and (c) of the Indemnity
obligation, and the new debtor take his place Agreements allow R&B to recover from
in the new relation. If not released, no petitioners even before R&B shall have paid
novation, new debtor becomes merely co- PNB.
debtor or surety
- Applying these principles, Trust Agreement * In a contract against liability, indemnitor's
does not terminate obligation of R&B under liability arises as soon as the liability of the
Surety Bond (refer to par 9) person to be indemnified has arisen w/o regard
- No implied novation as well: parties to new to whether or not he has suffered actual loss
obligation expressly recognize the continuing
existence and validity of the old obligation
- What TA did was, at most, merely to bring in
another person to assume same obligation that
R&B was bound to perform under Surety
Bond.
- There'd now be 3 solidary obligors bound to
PNB: PAGRICO, R&B and the Trustor

2) Was Villanueva's obligation under the

Indemnity Agreement extinguished when PNB
agreed in the Trust Agreement "to hold in
abeyance any action to enforce its claims
against R&B"? NO

- Petitioners, so far as the record goes,

remained simply indemnitors bound to R&B but
not to PNB, such that PNB could not have
directly demanded payment from Villanueva
(art 2079 doesn't apply)
- Also, by the time the Trust Agreement was
entered into, Principal Obligation of R&B has
already matured. So did the Indemnity
Agreement for that was to mature "as soon as
R&B became liable to payment of any sum
under the surety bond..."
- Art 2079: The mre failure on the part of the
creditor to demand payment after the debt has
become due does not of itself constitute any
extension of time referred to herein.
- Nothing to prevent petitioners from tendering
payment, if they were so minded, to PNB of
matured obligation on behalf of R&B and

Obligations and Contracts 200 291

 Broadway Centrum Condominium Corp. V.
Tropical Hut Food Market
G.R. No. 79642
July 5, 1993
Feliciano, J.
Pao Macariola
Keywords:
Lease agreement; rent reduction proposals
Facts:
1. On Nov. 28, 1980, Broadway and Tropical Hut
executed a contract of lease of a portion of the
Broadway Centrum Commercial Complex for a
period of 10 years (1981-1991), renewable for
a like period upon the mutual agreement of
parties. Rent is at P120,000 per month during
the first 3 years, P140,000 for the next 3, and
P165,000 for the last 4 years. Due to low total
sales projection for Feb 1982, Tropical Hut
proposed to reduce the rental to P50,000 or
2.0% of their monthly sales, whichever is
higher. Broadway responded by offering a
P20,000 conditional reduction for four months
dependent on the good faith implementation of
any of the 6 management suggestions of
Broadway to increase sales of Tropical Hut. If
sales did not increase by 5% then P80,000
reduction of rent would not have to be paid
anymore. Any reduction in rental extended is
merely temporary suspension of the original
rate of rental stipulated in the lease contract
and not an amendment thereto. (April-August
1982)
2. On Dec 1982 Tropical proposed another rent
reduction to P60,000 but Broadway refused
saying that the first concession was enough for
Tropical to fix its business constraints and raised
the rent to P100,000 (lower than the Nov. 28
contract). President of Tropical Hut, Mr. Que
replied, asking for the maintenance of the
provisional rates until such time that more
sales are achieved. But Broadway did not agree
as it suffered setbacks and it absorbed the
losses of Tropical Hut for four months already.
3. As Tropical Hut continued its renegotiation
Obligations and Contracts
efforts, Broadway finally agreed to delay the
effectivity of P100,000 rentals from April 1983
to July 1983. However, it could not grant
anymore concessions as Broadway suffered
P620,000 loss on rental income. Tropical Hut
replied saying that Broadway could not
unilaterally increase the rentals, as that was a
matter subject to mutual agreement of the
parties. Broadway was appalled at the attempt
to distort the temporary alteration of the
rentals. Should Tropical Hut fail to pay its back
accounts (P100,000 exclusive of penalty
charges), Broadway will be forced to implement
sec. 5 of the lease contract. (penalty clause)
4. Tropical Hut filed a complaint before the RTC
QC seeking a restraining order to prevent the
implementation of sec. 5 of their lease
agreement and asked the Court to decree that
the provisional rates should subsist while the
low volume of sale still continues. Court ruled in
favor of Tropical Hut. CA affirmed with
correction on the rentals due.
Issue/s:
WON the letter agreement (April 20, 1982) had
novated the contract of lease (Nov. 28, 1980)?
Ruling:
NO. Tropical Hut should pay P80,000 per
month from Jan-June 1983, P100,000 from
July- Jan 1984, P140,000 from Feb 1984-1987
and P160,000 from Feb 1987-Jan 1991. Penalty
reduced to 10% + attorneys fees
Ratio:
Novation is the extinguishment of an obligation
by the substitution of that obligation with a
subsequent one, which terminates it by
changing its object, principal conditions,
substituting a new debtor, or by subrogating a
third person to the rights of the creditor. An
essential requirement for an objective novation
is the express declaration that the old
obligation is extinguished, or that the new
obligation be incompatible on every point with
the old one. Novation is never presumed, as it
must be discharged by the express terms of the
new agreement between the parties, or by their
201 291
 acts which are clear and unequivocal to be
mistaken.

The letteragreement was merely a provisional

and temporary agreement to a reduction of the
monthly rentals as proved by the sentence this
provisional agreement should not be
interpreted as amendment to the lease
contract entered into by us.

Broadway retained the discretionary right to

return to the original contractual rates of rental
whenever it felt appropriate to do so. There is
nothing in the letter-agreement that reduced
rates could not be terminated by Broadway
without the consent of Tropical. The notarized
lease of contract also made it clear that
temporary and provisional concessional
reduction of rentals is not to be construed as
alteration or waiver of any terms of the lease
contract.

Furthermore, there was a clear indication that

even before the execution of the letter-
agreement, the parties knew that it was only a
temporary and provisional reduction of rentals.
There is no sign of mutual agreement or
recognition that the reduced rentals had
permanently replaced the contract stipulations
as to have become immune to change except
by a common consent of both parties. The
argument of Tropical Hut that Broadway agreed
to maintain reduced rentals as long as Tropical
Hut is suffering from low volume of sales is
untenable. Their claim of vitiated consent as to
the alleged false representation of Broadway in
their feasibility studies is also untenable and
without basis.

On the issue of partial novation as rentals were

decreased by 50% and floor space by 15%:
there is no substantial relationship that existed
between the amount of rental reduction and
area of space of Tropical as the rental rate was
not specified on a per square meter basis.

Obligations and Contracts 202 291

 Molino vs. SDIC
G.R. No. 136780
Aug. 16, 2001
Gonzaga-Reyes, J.
Carlos Marin
Keywords:
Credit card; Sister-in-law as surety
Facts:
SDIC issued a credit card with a credit limit of
10,000.00php to Danilo Alto wherein his sister--
in-law Jeanette Molino acted as surety in
compliance with bank regulations necessitating
the presence of a surety for every credit card
applicant. 7 months later, Alto sent a letter to
SDIC which signified his desire to upgrade his
card to a Diamond Edition onewhich no
longer had the 10k credit limit.
consideration of the first credit card clearly
provided that novation would not release her
from her liability as surety.
By performance of ART. 1370, in the absence
of ambiguity in any of a contracts terms and of
the intention of the parties concerned, the
literal meaning of its stipulations shall be used.
With regard to the argument of Molino that, as
surety, she could not be held liable because the
principal debtor, Alto, was not being held liable
the court used ART. 1216 which states that the
creditor may proceed against any one of the
solidary debtors. As surety for Alto, Molino was,
in essence, a solidary debtor from whom the
entirety of the obligation may be demanded.

Molino approved his request for an upgrade as

signified by a note that she duly executed and
signed. Several months after obtaining his
Diamond Edition card, Alto defaulted in the
payment of his credit card obligations that
amounted to 166,408.31php. As a result of his
inability to settle his debt to the bank, SDIC
pursued Molino for the same amount. Molino
contended that her liability as surety was
limited to just 10k because she did not
expressly and categorically agree to be surety
for Alto for any amount in excess of such.

Issue/s:
WON Molino is liable for the entirety of Altos
debt

Ruling + Ratio:
While the Court admitted that the upgrade of
the credit card constituted novation because it
effectively cancelled the object of the first
contract (the initial credit card), they also took
cognizance of the fact that Molino expressly
waived discharge in case of change or novation
in the agreement regarding the use of the first
credit card. In other words, although novation
had occurred she could not be released because
the Surety Undertaking which she signed in

Obligations and Contracts 203 291

 Garcia v. Llamas
G.R. No. 154127
Dec. 8, 2003
Panganiban, J.
Trance Nuez
Keywords:
Promissory note; check payment; no novation
Facts:
Romeo Garcia and Eduardo de Jesus borrowed
from respondent Dionisio Llamas Php 400,000
and executed a promissory note wherein they
bound themselves jointly and severally to pay
the loan on or before Jan 23, 1997 with
interests. The loan being long overdue and no
payment had been made despite repeated
demands; Llamas filed a complaint for sum of
money and damages.
Garcia resisted the complaint, alleging that the
payment made by de Jesus of a check
constituted novation of the obligation thereby
releasing him from liability to pay the loan.
Furthermore, he argued that he assumed no
liability under the promissory note because he
merely signed it as an accommodation party.
Llamas on the other hand, answered that the
check issued by de Jesus was a bum check. De
Jesus asserted that he had paid by way of
interests and that Llamas exhibited bad faith in
filing the case since he requested an extension
of time.
The RTC ruled in favor of the respondent,
ordering petitioners to pay the loan of 400,000
pesos less the amount paid by de Jesus.
At the CA level, the CA ruled that de Jesus
raised contentious issues thus it remanded the
case to the RTC insofar as his case is concerned.
As to Garcia, the CA issued a summary
judgment since Garcia failed to raise even a
single genuine issue. The summary judgment
held that no novation had taken place and the
obligation was not extinguished. Hence, the
petition before the SC.
Issue/s:
ObliCon issue - WoN there was any novation,
express or implied?
Obligations and Contracts
Other issues: WoN Garcia was not liable by
virtue of being an accommodation party? WoN
the summary judgment issued by the CA was
proper?
Ruling + Ratio:
1. NO. There was no novation. In the first place,
the issuance of the check did not extinguish
the obligation since it bounced; and
because a check is only legal tender when it
is cashed. The novation asserted was that of
a modification as to the person of the
debtor. It can be done either by
expromision or delegacion. In expromision
the creditor allows a consenting third party
to assume the debt without knowledge of
the debtor. In delegacion, the debtor offers,
the creditor accepts and a consenting third
party accepts the obligation. No such
substitution can take place because de
Jesus was not a third party to the
obligation, and the creditor did not express
any consent. NOVATION IS NEVER
PRESUMED, a purported change must be
clear and express. Furthermore, the
respondent's acceptance of the check did
not release Garcia because he was a
solidary debtor, whose obligations cease
upon extinguishment of the obligation.
2. The payment of interests does not constitute
novation. The requisite of novation is that
the two obligations are incompatible with
each other. Such payment was provided in
the promissory note and was in accord with
the terms thereof.
3. Under the Negotiable Instruments law, the
promissory note entered into by the parties
is not a negotiable instrument since it was
made payable to a specific person. Even if
this is so, the liability of an accommodation
party was that of a surety.
4. The issuance of a summary judgment by the
CA is proper. The answers filed did not raise
any contentious issues of fact that need to
be put on trial.
204 291
 California Bus Lines, Inc. (CBLI) vs. State
Investment House, Inc. (SIHI)
G.R. No. 147950
December 11, 2003
Quisumbing, J.
Justin Ordoyo
Keywords:
16 promissory notes; chattel mortgages over 35
bus units
Facts:
- In 1979, Delta Motors Corporation (Delta)
applied for financial assistance from SIHI. SIHI
agreed to extend a credit line to Delta for P25M.
Delta eventually became indebted to SIHI.
- From April 1979 to May 1980, CBLI, purchased
on installment basis 35 buses and 2 diesel
conversion engines from Delta. To secure the
payment of the 35 buses, CBLI executed 16
promissory notes. CBLI
a) promised to pay Delta P2.3M
payable in 60 monthly installments with
interest at 14% per annum
b) promised to pay the holder of the
said notes 25% of the amount due on
the same as attorneys fees and
expenses of collection
c) executed chattel mortgages over the
35 buses in Deltas favor.
- When CBLI defaulted on all payments due, it
entered into a restructuring agreement with
Delta which provided for a new schedule of
payments of CBLIs past due installments. In
case of default, Delta would have the authority
to take over the management and operations of
CBLI until CBLI updated its past due account.
CBLI and Delta also increased the interest rate
to 16%.
- In Dec. 1981, Delta executed a Continuing
Deed of Assignment of Receivables in favor of
SIHI as security for the payment of its
obligations to SIHI per the credit agreements. In
view of Deltas failure to pay, the loan
agreements were restructured under a MOA
Obligations and Contracts
and Delta obligated itself to pay a fixed monthly
amortization of P0.4M to SIHI and to discount
with SIHI P8M worth of receivables with the
understanding that SIHI shall apply the
proceeds against Deltas overdue accounts.
- CBLI continued having trouble meeting its
obligations to Delta. This prompted Delta to
threaten CBLI with the enforcement of the
management takeover clause. CBLI filed a
complaint for injunction. Delta for issuance of a
writ of preliminary mandatory injunction to
enforce the management takeover clause and a
writ of preliminary attachment over the buses it
sold to CBLI. RTC granted Deltas prayer on
account of the fraudulent disposition by CBLI of
its assets.
- In Sept.1983, pursuant to the MOA, Delta
executed a Deed of Sale assigning to SIHI 5 of
the promissory notes from CBLI, which, at the
time of assignment, had a value P16.1M
inclusive of interest at 14% p.a. SIHI
subsequently sent a demand letter to CBLI
requiring CBLI to remit the payments due on
the 5 promissory notes directly to it. CBLI
informed SIHI that Delta had taken over its
management.
- In a compromise agreement, CBLI agreed that
Delta would exercise its right to extrajudicially
foreclose on the chattel mortgages over the 35
bus units. RTC Pasay approved this compromise
agreement. Following this, CBLI vehemently
refused to pay SIHI the value of the 5
promissory notes, contending that the
compromise agreement was in full settlement
of all its obligations to Delta including its
obligations under the promissory notes.
- In Dec. 1984, SIHI filed a complaint against
CBLI, to collect on the 5 promissory notes with
interest at 14% p.a. and prayed for the issuance
of a writ of preliminary attachment against the
properties of CBLI.
- Delta filed a petition for extrajudicial
foreclosure of chattel mortgages pursuant to its
compromise agreement with CBLI. In view of
205 291
 Deltas petition, the RTC granted SIHIs
application for preliminary attachment,
enabling SIHI to attach and take possession of
32 buses belonging to CBLI. CBLI filed a motion
to quash said writ but the IAC ruled that said
writ should stay.
- In April 1987, the sheriff of Manila, by virtue
of the writ of execution sold 14 buses at public
auction in partial satisfaction of the judgment
SIHI obtained against Delta. SIHI moved to sell
the 16 buses of CBLI and the motion was
granted. In Nov. 1988, however, SIHI filed an ex-
parte motion to amend the order claiming that
its new counsel made a mistake in the list of
buses in the Motion to Sell. SIHI explained that
14 of the buses listed had already been sold to
Delta and that 2 of the buses listed had been
released to a third party. CBLI opposed SIHIs
motion to allow the sale of the 16 buses. The
RTC denied SIHIs motion.
- RTC and CA Ruling: Judgment discharged CBLI
from liability on the 5 promissory notes. RTC
directed SIHI to return the 16 buses or to pay
CBLI P4M representing the value of the seized
buses, with interest at 12% p.a. RTC held that
the restructuring agreement between Delta and
CBLI novated the 5 promissory notes; hence, at
the time Delta assigned the 5 promissory notes
to SIHI, the notes were already merged in the
restructuring agreement and cannot be
enforced against CBLI. CA reversed.
Issue/s + Ruling + Ratio:
1. WON the Restructuring Agreement
between CBLI and Delta novated
the 5 promissory notes Delta
assigned to respondent SIHI;
NO. An agreement subsequently
executed between a seller and a buyer
that provides for a different schedule
and manner of payment, to restructure
the mode of payments by the buyer so
that it could settle its outstanding
obligation in spite of its delinquency in
payment is not novation1.
The restructuring agreement between
Delta and CBLI executed shows that the
Obligations and Contracts
parties did not expressly stipulate that
the restructuring agreement novated
the promissory notes. Absent an
unequivocal declaration of
extinguishment of the preexisting
obligation, only a showing of complete
incompatibility between the old and the
new obligation would sustain a finding
of novation by implication. However, a
review of its terms yields no
incompatibility between the promissory
notes and the restructuring agreement.
Furthermore, obligation is not novated
by an instrument that expressly
recognizes the old, changes only the
terms of payment, and adds other
obligations not incompatible with the
old ones, or where the new contract
merely supplements the old one
2. WON the Compromise Agreement
between Delta and CBLI superseded
and/or discharged the subject 5
promissory notes.
NO. A compromise agreement
determines the rights and obligations of
only the parties to it.
Having previously assigned the 5
promissory notes to SIHI, Delta had no
more right to compromise the same.
Deltas limited authority to collect for
SIHI stipulated in the Deed of Sale
cannot be construed to include the
power to compromise CBLIs obligations
in the said promissory notes. An
authority to compromise, by express
provision of Art. 1878, CC, requires a
special power of attorney, which is not
present in this case. Furthermore, the
compromise agreement itself provided
that it covered the rights and
obligations only of Delta and CBLI and
that it did not refer to, nor cover the
rights of, SIHI as the new creditor of
CBLI in the subject promissory notes.
The assignment of the 5 notes operated
to create a separate and independent
obligation on the part of CBLI to SIHI,
distinct and separate from CBLIs
206 291
 obligations to Delta. And since there
was a previous revocation of Deltas
authority to collect for SIHI, Delta was
no longer SIHIs collecting agent. CBLI,
in turn, knew of the assignment and
Deltas lack of authority to compromise
the subject notes, yet it readily agreed
to the foreclosure.
CA ruling affirmed. CBLI is ordered to
pay SIHI the value of the 5 promissory
notes less the proceeds from the sale of
the attached 16 buses.
obligations can stand together, each one having
its independent existence. If they cannot, they
are incompatible and the latter obligation
novates the first. Corollarily, changes that breed
incompatibility must be essential in nature and
not merely incidental. The incompatibility must
take place in any of the essential elements of
the obligation, such as its object, cause or
principal conditions thereof; otherwise, the
change would be merely modificatory in nature
and insufficient to extinguish the original
obligation.

Note:
1Novation Defined and its Requisites (See Art.
1291). Novation is the extinguishment of an
obligation by the substitution or change of the
obligation by a subsequent one which
terminates the first, either by (1) changing the
object or principal conditions; (2) substituting
the person of the debtor; or (3) subrogating a
third person in the rights of the creditor.
Novation is extinctive when an old obligation is
terminated by the creation of a new obligation
that takes the place of the former; It is merely
modificatory when the old obligation subsists to
the extent it remains compatible with the
amendatory agreement.
For novation to take place, the following
requisites have to be met (Reyes annotations):
1. (1) an old valid obligation;
2. (2) a new valid obligation;
3. (3) a substantial difference (aliquid
novum) between the old and the new
obligations;
4. (4) capacity of the parties;
5. (5) intention to extinguish or modify
the old obligation (animus novandi).
Express and Implied Novation (See Art. 1292).
There are 2 ways which could indicate the
presence of novation and thus produce the
effect of extinguishing an obligation by another
which substitutes the same. The first is when
novation has been explicitly or expressly stated
and declared in unequivocal terms. The second
is implied novation. When the old and the new
obligations are incompatible on every point.
The test of incompatibility is whether the 2

Obligations and Contracts 207 291

 Chester Babst vs. CA, BPI, Elizalde Steel
G.R. No 104625
January 26, 2001
Ynares-Santiago, J.
Carlos Pagdanganan
Keywords:
BPI-CBTC; merger; DBP-ELISCON; valid novation
Facts:
On June, 1973, ELISCON obtained from
Commercial Bank and trust Company (CBTC) a
loan in the amount of P8, 015,900.84 with
interest at the rate of 14% per annum. ELISCON
defaulted, leaving an outstanding balance of P2,
795,240.67 as of October, 1982.
On September, 1978, Antonio Roxas Chua and
Chester Babst executed a continuing suretyship
where they bound themselves jointly and
severally to pay any existing indebtedness of
MULTI to CBTC to the extent of P8, 000, 000
each.
On October, 1978, CBTC opened for ELISCON,
using the credit facilities of MULTI with CBTC,
three domestic letters of credit in the amounts
of P1, 946, 805.73, P1, 702, 869.32 and P200,
307.72 which ELISCON used to purchase tin
black plates from National Steel Corporation.
ELISCON also defaulted in its obligation to pay
the amounts of the letters of credit and as of
October, 1982, left an outstanding balance of
P3, 963, 372.08. (Basically, ELISCON owed a
huge amount of money to CBTC)
On December, 1980, BPI and CBTC entered into
a merger wherein BPI was the surviving
corporation and thus acquired all the assets and
assumed all the liabilities of CBTC. ELISCON on
the other hand encountered financial
difficulties and became indebted to
Development Bank of the Philippines which
resulted in DBP taking over the assets of
ELISCON on October 1981. DBP proposed
formulas to settle all the obligation of ELISCON
to BPI but BPI found these unacceptable. As
such, as successor in interest of CBTC, BPI filed a
complaint for sum of money against ELISCON,
Obligations and Contracts
MULTI, and Babst. RTC ruled for BPI, CA
modified the decision (only to some extent,
adding lawyers fees and changing the value of
ELISCONs reimbursement to Babst). ELISCON
filed a petition for review on certiorari, claiming
that there was a valid novation of contract
between ELISCON and BPI.
Issue/s:
WON there was a valid novation indeed (change
of subject)
BPIs defense It did NOT give consent to the
DBP takeover of ELISCON; Express consent of
creditor to substitution should be recorded in
books
Ruling + Ratio:
YES, there WAS a valid novation.
The court cited the case of Testate Estate of
Mota et al. vs Serra where they held that in
order to give novation its legal effect, the law
requires that the creditor should consent to the
substitution of a new debtor and that such
consent must be given expressly for the reason
that since the novation extinguishes the
personality of the first debtor who is
substituted by a new one, it implies on the part
of the creditor a waiver of the right that he had
before novation, which waiver must be express
in consonance with the law declaring that a
waiver of right is not presumed.
The court clarified their ruling in Mota vs Serra
in the later case of Asia Banking Corporation vs
Elser, wherein they said that the article 1205
(now 1293) does not mean that the creditors
consent to the change of debtors must be given
simultaneously with the debtors consent to the
substitution, saying that it is sufficient that the
creditors consent be given at any time and in
any form whatever, while the agreement of the
debtors subsists. The rule that novation must
be express is NOT absolute; the existence of
consent may well be inferred from the acts of
the creditor, since volition may as well be
expressed by deeds as by words.
In the case at bar, BPI was fully aware of the
208 291
 assumption by DBP of the obligations of
ELISCON, even admitting DBPs efforts at
coming up with a formula to settle ELISONs
obligations to BPI. The authority granted by BPI
to its account officer to attend the creditors
meeting wherein ELISCONs creditors were
informed of DBPs takeover was an authority to
represent the bank such that when he failed to
object to the substitution of the debtors, he did
so in behalf of and for the bank. BPIs failure to
object to the substitution early on only means
acquiescence in the assumption by DBP of
ELISCONs obligations. BPIs objection was only
to the proposed payment scheme by DBP.
(According to the court, BPIs actions seemed to
imply that they wished to go after the sureties
rather than DBP itself) As such, BPI should
enforce its cause of action against DBP and NOT
ELISCO, given that they had consented to the
novation of the contract by change of subject.

CA decision holding ELISCON, MULTI and Babst

solidarily liable for payment to BPI of the loan
and the letters of credit is REVERSED and SET
ASIDE.

BPIs complaint against ELISCON, MULTI and

Babst is DISMISSED

Obligations and Contracts 209 291

 Quinto v. People
G.R. No. 126712
April 14, 1999
Vitug, J.
Carlos Poblador
Keywords:
Commission basis; jewelry; no novation
Facts:
- Petitioner Quinto was charged for the crime
of estafa. She received in trust from a certain
Cariaga three pieces of jewelry valued at
P17.5k, P16k, and P2.5k respectively (total of
P36k) for the purpose of selling on commission
basis and the express obligation that she should
return them if she cant sell them in five days.
However, six months elapsed and nothing was
returned hence this case for estafa.
- Defense says that Quinto cannot be liable for
estafa because there occurred a novation in
their contract. They contend that for two sales,
one to Mrs. Camacho and one to Mrs. Ramos,
the terms of the contract changed because they
agreed to a different manner of payment. Both
Mrs. Camacho and Mrs. Ramos couldnt fully
pay for certain rings so both of them agreed to
pay Cariaga directly by installment.
Issue/s:
WON the agreement between Quinto and
Cariaga was effectively novated when the latter
consented to receive payment on installments
directly from Mrs. Camacho and Mrs. Ramos
>>> No. There was no novation.
Ruling + Ratio:
-The changes alluded to by petitioner consists
only in the manner of payment. There was
really no substitution of debtors since private
complainant merely acquiesced to the payment
but did not give her consent to enter into a new
contract.
- Moreover, it is to be noted that the aforesaid
payment was for the purchase, not of the
jewelry subject of this case, but of some other
Obligations and Contracts
jewelry subject of a previous transaction.
- There are two forms of novation by
substituting the person of the debtor,
depending on whose initiative it comes from, to
wit: expromision and delegacion. In the former,
the initiative for the change does not come
from the debtor and may even be made
without his knowledge. Since a third person
would substitute for the original debtor and
assume the obligation, his consent and that of
the creditor would be required. In the latter,
the debtor offers, and the creditor accepts, a
third person who consents to the substitution
and assumes the obligation, thereby releasing
the original debtor from the obligation, here,
the intervention and the consent of all parties
thereto would perforce be necessary. In both
forms, consent of the creditor is necessary.
Not too uncommon is when a stranger to a
contract agrees to assume an obligation; and
while this may have the effect of adding to the
number of persons liable, it does not
necessarily imply the extinguishment of the
liability of the first debtor. Neither would the
fact alone that the creditor receives guaranty or
accepts payments from a third person who has
agreed to assume the obligation, constitute an
extinctive novation absent an agreement that
the first debtor shall be released from
responsibility.
Effects of novation on estafa
- Novation is not one of the means recognized
by the Penal Code whereby criminal liability can
be extinguished; hence, the role of novation
may only be either to prevent the rise of
criminal liability or to cast doubt on the true
nature of the original basic transaction,
whether or not it was such that its breach
would not give rise to penal responsibility
- The criminal liability for estafa already
committed is then not affected by the
subsequent novation of contract, for it is a
public offense which must be prosecuted and
punished by the State in its own conation
210 291
 Licaros v. Gatmaitan
G.R. No. 142838
August 9, 2001
Gonzaga-Reyes, J.
Laurie Quiambao
Keywords:
Voluntary assumption to pay for debt;
conventional subrogation; no consent
Facts:
Licaros made a fund placement with Anglo-
Asean Bank and Trust Limited. The said bank
made money by investing such deposits in
money market placements and potentially
profitable capital ventures in several countries.
However, Licaros encountered difficulties in
retrieving not only the interest or profits but
even the very investments ($150,000) he put in
Anglo-Asean. He sought the help of Gatmaitan
who voluntarily offered to assume the
payment of Anglo-Aseans indebtedness to
Licaros subject to certain terms and conditions.
They executed a notarized Memorandum of
Agreement which stated in part,
Whereas, the parties herein have come to an
agreement on the nature, form an extent of
their mutual prestations which they now record
herein with the express conformity of the third
parties concerned.
and also included in the signature page, With
Our Conforme: Anglo-Asean Bank & Trust,
which however, was unsigned by Anglo-Asean.
Gatmaitan also executed a Non-Negotiable
Promissory Note with Assignment of Cash
Dividends in favor of Licaros wherein he
promised to pay Licaros P3,150,000 without
interest and gave as security 70% of cash
dividends from his stocks at Prudential Life
Realty Inc., and/or Prudential Life Plan, Inc.
Gatmaitan presented the Memorandum of
Agreement to Anglo-Asean but there was no
formal response made by said bank to Licaros
Obligations and Contracts
or Gatmaitan. Because of this, Gatmaitan didnt
bother to make good on his promise to Licaros,
which prompted the latter to file suit on the
basis of the promissory note. RTC ruled in favor
of Licaros while the CA reversed the decision.
Issue/s:
1) Whether the Memorandum of Agreement
between Licaros and Gatmaitan is one of
assignment of credit or one of conventional
subrogation CONVENTIONAL SUBROGATION
2) WON Gatmaitan became liable to petitioner
under the promissory note considering that its
efficacy is dependent on the Memorandum of
Agreement, the note being merely an annex to
said memorandum NO
Ruling:
Petition DENIED. CA Decision is AFFIRMED.
Ratio:
The memorandum was in the nature of a
conventional subrogation based on the
aforementioned stipulations found in the same.
Had the intention been merely to confer on
appellant the status of a mere assignee of
appellees credit, there is simply no sense for
them to have stipulated in their agreement that
the same is conditioned on express
conformity of Anglo-Asean Bank. The Court
differentiated an assignment of credit1 from a
conventional subrogation2. In this case, the
1
Assignment of Credit process of transferring
the right of the assignor to the assignee who
would then have the right to proceed against
the debtor. It may be done gratuitously or
onerously; in which case, the assignment has an
effect similar to that of a sale.
2
Subrogation transfer of all rights of the
creditor to a third person, who substitutes him
in all his rights; may either be legal (takes place
without agreement of parties but by operation
of law because of certain acts) or conventional
(takes place by agreement of parties).
211 291
 crucial distinction is with regard to the
necessity of the consent of the debtor in the
original transaction. An assignment of credit
doesn't require the debtors consent, while a
conventional subrogation does.3 The fact that
Anglo-Aseans signature (aka. Consent) is found
wanting in this case means that the
memorandum never came into effect and as
such, Gatmaitan never became liable for the
amount stipulated.

Petitioners argument that since no new

obligation was created, it could not be a
conventional subrogation is unavailing as well.
The extinguishment of the old obligation is the
effect of the establishment of a contract for
conventional subrogation. It isnt a requisite
without which a contract for conventional
subrogation may not be created.

3
Art. 3301 of the NCC - Conventional
subrogation of a third person requires the
consent of the original parties and of the third
person.

Obligations and Contracts 212 291

 Astro Electronics Corp. v. Philguarantee
G.R. No. 136729
September 23, 2003
Austria-Martinez, J.
Paolo Quilala
Keywords:
Promissory notes; signed on behalf of company
+ personal capacity
Facts:
Astro was granted 3 promissory notes by
Philtrust wherein Astros president Roxas signed
twice, first for Astro and another in his personal
capacity.
He also signed a continuing suretyship
agreement in favor of Philtrust as President and
in his personal capacity.
Philguarantee with the consent of Astro
guaranteed 70% of the loan on the condition
that it be subrogated to the rights of Philtrust
against Astro.
Upon failure of Astro to pay the loan,
Philguarantee paid 70% as agreed, and filed
against Astro & Roxas complaint for sum of
money.
Roxas alleged that the phrases in his
personal capacity and in his official capacity
were inserted without his knowledge. RTC and
CA held in favor of Philguarantee.
Issue/s:
WON legal subrogation existed - YUP
Ruling + Ratio:
1. Under the Negotiable Instruments Law,
persons who write their names on the
face of promissory notes are
makers,[10] promising that they will
pay to the order of the payee or any
holder according to its tenor.[11] Thus,
even without the phrase personal
capacity, Roxas will still be primarily
liable as a joint and several debtor
under the notes considering that his
intention to be liable as such is
manifested by the fact that he affixed
his signature on each of the promissory
Obligations and Contracts
notes twice which necessarily would
imply that he is undertaking the
obligation in two different capacities,
official and personal. Plus it was noted
by the SC that his signatures covered
portion of the typewritten words
indicating that the words came first
before his signature.
2. Philguarantee has all the right to
proceed against petitioner, it is
subrogated to the rights of Philtrust to
demand for and collect payment from
both Roxas and Astro since it already
paid the value of 70% of roxas and
Astro Electronics Corp.s loan obligation.
In compliance with its contract of
Guarantee in favor of Philtrust.
Subrogation is the transfer of all the
rights of the creditor to a third person,
who substitutes him in all his rights. It
may either be legal or conventional.
Legal subrogation is that which takes
place without agreement but by
operation of law because of certain
acts. Instances of legal subrogation are
those provided in Article 1302 of the
Civil Code. Conventional subrogation,
on the other hand, is that which takes
place by agreement of the parties.
Roxas acquiescence is not necessary
for subrogation to take place because
the instant case is one of the legal
subrogation that occurs by operation of
law, and without need of the debtors
knowledge. Further, Philguarantee, as
guarantor, became the transferee of all
the rights of Philtrust as against Roxas
and Astro because the guarantor who
pays is subrogated by virtue thereof to
all the rights which the creditor had
against the debtor.
Art. 1302. It is presumed that there is legal
subrogation:
(1) When a creditor pays another creditor who
is preferred, even without the debtor's
knowledge;
213 291
 (2) When a third person, not interested in the
obligation, pays with the express or tacit
approval of the debtor;
(3) When, even without the knowledge of the
debtor, a person interested in the fulfillment of
the obligation pays, without prejudice to the
effects of confusion as to the latter's share.
(1210a)

Obligations and Contracts 214 291

 Martinez v. HSB
G.R. No. 5496
Feb. 19, 1910
Moreland, J.
Norly Bayona
Keywords: settlement contract; wife did not act
under duress and undue influence but by
reason of her good business judgment
Facts:
- Alejandro Macleod (managing partner of
Aldecoa & Co) was charged, along with his wife
Mercedes Martinez, in a civil action for fraud by
Aldecoa and by Hongkong & Shanghai Bank
(creditor of Aldecoa & Co) against Macleod and
his wife.
- Afraid of an apparent criminal proceeding
against him, Macleod flew to the Macao.
Aldecoa filed a complaint against Macleod
charging him of falsification of a commercial
document but court couldnt get jurisdiction
because formal request for extradition was
denied by Portuguese authorities.
- In the meantime, Aldecoa and the Bank, as a
consideration for such settlement, insisted
upon the conveyance not only of all the
property of Alejandro S. Macleod but also of at
least a portion of the property claimed by his
wife. Martinez (wife) objected saying that the
property she was being asked to convey were
her exclusive property and not liable for her
husbands debts.
- During the negotiation, Mr. Fisher, Martinez
counsel, advised the latter to settle but she
refused to. Both Martinez and Aldecoas
counsel sought one of the Banks lawyers to act
as intermediary.
-Mr. Stephen, manager of HSB, communicated
to Mr. Kingcome (son-in-law of Martinez &
businessman) the full condition of affairs which
is to the effect that unless the settlement were
consummated, additional and mortifying
misfortunes [scandals and disgrace] wound fall
upon Mr. Macleods family.
- Another conference was held was held
between plaintiff, her attorney, Mr. Kingcome,
her son-in-law, and William Macleod, her
Obligations and Contracts
attorney-in-fact, at which she was informed in
substance that if she assented to the
requirements of Aldecoa & Co. and the bank
the civil suits against herself and her husband
would be dismissed and the criminal charges
against him withdrawn, while if she refused her
husband must either spend the rest of his life in
Macao or be criminally prosecuted on the
charged already filed and to be filed.
- Martinez refused again but the next day, she
acceded to the terms proposed and authorized
her attorney-in-fact to execute the contract of
settlement in her behalf. She ratified it the
same day.
- After Aldecoa and the Bank had taken
possession of the property of Martinez and her
husband, the civil suits and criminal charges
were withdrawn and Macleod returned to
Manila. But on Dec 1907 [almost 4 months after
signing the contract], she filed an action to set
aside the contract on the ground that her
consent thereto was given under duress and
undue influence1.
Issue/s:
WON the contract of settlement should be
annulled by reason of duress and undue
influence
Ruling:
No. Martinez executed the settlement contract
of her own free will and choice and not from
duress.
Ratio:
Test: influence exercised amounted to
deprivation of free will and choice such that
one acted from fear and not from judgment
- Not every contract made by a wife to relieve
her husband from the consequences of his
crimes is voidable. If there are time and
opportunity for judgment to take the place of
fear, and if apart from the threat there are
reasons disclosed which might lead one in the
exercise of good judgment to perform the acts
complained of, then the evidence as to duress
and undue influence must be very clear in
order that such acts may be recalled. The
215 291
 question is not did she make a mistake, but did
she consent; not was she wrongly advised, but
was she coerced; not was she wise, but was
she duressed.
- Proofs that she acted out of her judgment and
not of duress and undue influence:
1. The first offers of compromise were made
by the plaintiff herself through her
representatives. The position of Aldecoa & Co.
throughout the negotiations, as it appears
from the testimony in the case, was that a
settlement of their claims against the plaintiffs
would not result in any peculiar or special
benefit to them inasmuch as by the actions
already commenced by them would be able
to secure exactly the same property that they
would obtain by the settlement proposed.
They left Macleod and his wife to choose for
themselves, upon their own judgment and
upon the advice of their attorneys and
relatives, the course [through courts or by
means of settlement] to be by them pursued.
reason of duress and undue influence; rather
it is a result of her own deliberate judgment.
4. Martinez took advantage of said contract
after its execution and required the complete
fulfilling of every one of its provisions
favorable to herself. This is confirmatory of
the theory that in the execution of the
contract complained of she acted according to
the dictates of good business judgment rather
that from duress and undue influence.
- In sum, under the advice of her counsel, the
situation was so presented to her that it was
evidence that in signing the agreement of the
14th of August she had all to gain and nothing
to lose, whereas, in refusing to sign said
agreement, she had all to lose and nothing to
gain. In the one case she would lose her
property and save her husband. In the other,
she would lose her property and her husband
too. The argument thus presented to her by
her attorneys addressed itself to judgment and
not to fear.

2. The offers, proposition, or treats, if any, made

by the defendants were filtered to her through
the personality, mind, and judgment of her own
attorneys or relatives, all of them being
persons who had her welfare and the welfare
of her family deeply at heart and who were
acting for her and her husband and not for the
defendants. That personal presence of
threatening party and the influence springing
therefrom, factors so potent in duress and
undue influence, were wholly lacking.

3. Martinez, by means of the negotiations

and settlement in question, was engaged
partly at least in the settlement of her own
suits and controversies. The P45,000 worth of
notes and half the property in Malate which
Martinez was claiming rights to were in both
in litigation and legality of both was seriously
questioned and doubted by her own
attorneys. The fact that the validity of her
claims thereto was denied by her own
attorneys strongly tends to impeach the
claim that she released those properties by

Obligations and Contracts 216 291

 Lee V. CA
G.R. 90423
Sept. 6, 1991
Medialdea, J.
Dianne Cadorna
Keywords: pregnant; highly educated woman;
threat to sue
Facts:
- Francis Lee, Branch Manager of the Pacific
Banking Corporation, was found guilty by the
RTC of the crime of light coercion under Art.
287 (2) of the RPC. This ruling was later on
modified by the MTC, which ruled that he was
guilty of grave coercion under Art. 286 of the
RPC instead. Said MTC decision was affirmed by
the CA.
- His conviction stemmed from a complaint filed
by Pelagia Panlino de Chin, who alleged that:
In the morning of June 20, 1984, Pelagia, then 5
months pregnant, was fetched from her house by
Atanacio Lumba, an employee of Pacific Banking
Corporation, upon instruction from Lee. She was
escorted to the bank and was made to wait for
about an hour until Lee confronted her about a
forged Midland National Bank Cashier Check, which
she allegedly deposited in the account of Honorio
Carpio, her uncle. During the said confrontation, Lee
was allegedly shouting at her with piercing looks and
threatened to file charges against her unless and
until she returned all the money equivalent of the
subject cashier check. Accordingly, she was caused
to sign a prepared withdrawal slip, and later, an
affidavit prepared by the bank's lawyer, where she
was made to admit that she had swindled the bank
and had returned the money equivalent of the
spurious check. She averred that during her stay at
the said bank, she was watched by the bank's
employees and security guards, and that it was only
at about six o'clock in the afternoon of the same day
when she was able to leave the bank premises.
- For his part, Lee denied having exerted any
force or intimidation to vitiate Pelagias
consent in executing and signing the
abovementioned documents. He said that he
merely informed her of the spurious check,
Obligations and Contracts
and that she was not compelled into signing
the withdrawal slip but that she acted freely
and voluntarily in executing her affidavit and in
returning the money equivalent of the subject
check. He also pointed out that there was
nothing unusual during her lengthy stay in the
bank.
Issue/s:
WON not the acts of Lee in simply "shouting at
the complainant with piercing looks" and
"threatening to file charges against her" are
sufficient to convict him of the crime of grave
coercion
Ruling:
No. The court reversed and acquitted Lee. The
case didnt involve intimidation within the
contemplation of Art. 1335.
Ratio:
- First, it must be mentioned that in
consideration of the fact that the present case
does not involve violence but intimidation, the
provisions of Article 1335 of the New Civil Code
on intimidation, and not those of the RPC on
light and grave coercion, are relevant. Said
provision provides that:
Art. 1335. There is intimidation when one of the
contracting parties is compelled by a reasonable and
well-grounded fear of an imminent and grave evil
upon his person or property, or upon the person or
property of his spouse, descendants or ascendants,
to give his consent.
To determine the degree of the intimidation, the
age, sex and condition of the person shall be borne
in mind.
A threat to enforce one's claim through competent
authority, if the claim is just or legal, does not vitiate
consent.
- Applying the said provision to the facts of
the case, as found by the SC, the court came
up with a different conclusion from the ones
arrived at by the lower courts.
- The Court found it proper to disregard the
CAs finding of facts, in light of some fact or
circumstance of weight and influence, which
they deemed to have been overlooked by the
CA.
217 291
 - While the CA emphasized the pregnancy and
feminine gender of the Pelagia, it overlooked
other significant personal circumstances which
are material in determining the presence of
coercion which are:
- She is a highly educated person who is
familiar with banking procedures, having
graduated with a degree in Business
Administration major in Banking and
Finance, and having finished one semester
of MA in graduate school.
- She actively participated in the deposit and
withdrawal of the proceeds of the
controversial check by (1) asking Carpio, her
uncle and payee of the check to open a
savings account with the Pacific Banking
Corporation; (2) depositing said check to the
bank under the pretext that her uncle
requested her to do so, and thereafter
assuring the bank that it would be honoured
(after the amount of the check was credited
to Carpios account, the bank gave a notice
to Carpio but the notice was returned since
the address of Carpio that they had on record
turned out to be false); (3) making several
withdrawals from Carpios account out of the
proceeds of the check through withdrawal
slips purportedly signed by Carpio (Carpio
allegedly had already left for abroad); (4)
closing Carpios account after she had
made the withdrawals; and (5)
redepositing out of the said withdrawals the
sum of P50,000.00 to her own savings
account, and appropriating for herself the
remaining balance in cash.
- Due to foregoing circumstances, the Court
found that Lees demand that Pelagia return
the proceeds of the check accompanied by a
threat to file criminal charges was not
improper, since there is nothing unlawful on
the threat to sue (supported by Par. 3 of Art.
1335).
- The argument of the Solicitor General that
Pelagia was intimidated and compelled into
disclosing her time deposit, and signing the
typewritten withdrawal slip and the affidavit
by Lees threat to detain her at the bank was
untenable, by virtue of the distinction that
Obligations and Contracts
needs to be made between a case (1) where
a person gives his consent reluctantly and
against his good sense and judgment, and (2)
where he gives no consent at all, as where he
acts against his will under a pressure he
cannot resist. Intimidation, to be recognized
in law as duress that vitiates consent, must
fall under the second category and not the
first.
- In the present case, Pelagia, despite her
protestations, voluntarily, albeit reluctantly,
consented to do all the aforesaid acts. The
allegation that she did so because of Lee's
threats came from her, and she has not been
able to present any other witness to buttress
her claim. Moreover, while complainant
claimed that her freedom of movement was
restrained during her stay at the bank, she,
however, was able to move about freely
unguarded. The other acts of Pelagia after
the purported threats also militate against a
conclusion that they really existed, or that
they were of such extent as to render her
incapable of refusing to act against her will.
- As provided by American authorities, "force
which is claimed to have compelled criminal
conduct against the will of the actor must be
immediate and continuous and threaten grave
danger to his person during all of the time the act is
being committed. It must be a force threatening
great bodily harm that remains constant in
controlling the will of the unwilling participant while
the act is being performed and from which he
cannot then withdraw in safety."
- Lastly, the CAs contention that the
prestigious nature of Lees position as a bank
manager made it natural for him to rage in
anger after finding out that their bank had
been swindled, but that the same is not a
righteous thing to do, should fall because it
assumes that Lee took the matter personally.
Besides, Lee, in his testimony was able to
debunk said pronouncement by saying that
such a case wasnt really a big deal and fell
within the ordinary risks of the banking
business.
218 291
 Hill V. Veloso
G.R. L-9421
July 24, 1915
Arellano, C. J.
Maye Cristobal
Keywords: promise to pay
Facts:
- Dec. 30, 1910: Maximina Veloso, with consent
from her husband Manuel Tio Cuana and son-
in-law Domingo Franco executed and signed a
document:
For value of the goods we have received in
La Cooperativa Filipina we promise to pay
jointly and severally to Michael & Co., S. en
C., or its order, in the municipality of Cebu,
the sum of 6,319.33, in the manner
hereinafter set forth, with interest on such
part of said principal as may remain unpaid
at the end of each month at the rate of one
and a half per cent per month until the
principal shall have been completely paid.
The said sum of six thousand three hundred
and nineteen pesos and thirty-three
centavos (P6,319.33) shall be paid at the
rate of five hundred pesos (P500) monthly
on or before the 15th day of each month,
and the interest shall also be paid monthly.
- In case of default in the monthly payments,
the unpaid principal shall be demandable, and
in case of suit, bound themselves jointly and
severally to pay additional attorneys fees. This
promissory note was endorsed to L.L. Hill by
Michael, S. en C. P2000 was paid in four
installments and then they defaulted.
- L.L. Hill brought the present suit to recover.
- Defendants alleged that Franco told them
that Levering, guardian of minor children of
Potenciano Chiong Velos, suggested that
they execute a document in Leverings
behalf, saying that they will pay Levering the
P8,000 they owe Damasa Ricablanca, the
former guardian. Franco apparently said that
the paper would be filled out inside his office
and thus they signed the paper. But when
Franco died, defendants learned that he did
not deliver to Levering the document and
Obligations and Contracts
that the document they signed was filled out
with a different obligation. Defendants
allege that they had no transaction with
Michael & Co. nor with L.L. Hill.
- However, it appeared that Levering sued
the defendants in 1912 for the P8,000 they
owed and that Maximina answered the
complaint, stating that her debt was owed to
Ricablanca and not to her capacity as
guardian.
Issue/s:
WON there was deceit?
Ruling:
NO. There was insufficient proof to prove
deceit.
Ratio:
- If Maximina believed and so stated in 1912
that she had no obligation to Levering because
she was obligated to Ricablanca, then she
shouldnt have signed the blank document in
1910. On trial, she alleged that she could not
remember the events.
- Court held that even if it was proven that
Franco acted in the manner alleged, the deceit
or error could not annul the consent of the
contracting parties to the promissory note, nor
exempt the defendant from the obligation.
- "There is deceit when by words or insidious
machinations on the part of one of the
contracting parties, the other is induced to
execute a contract which without them he
would not have made." CC 1269 (NCC 1338).
-Franco is not one of the contracting parties
who may have deceitfully induced the other
contracting party, Michael & Co., to execute the
contract. The one and the other contracting
parties, to whom the law refers, are the active
and the passive subjects of the obligation, the
party of the first part and the part of the second
part who execute the contract. The active
subject and party of the first part of the
promissory note in question is Michael & Co.,
and the passive subject and the party of the
second part are Maximina Ch. Veloso and
Domingo Franco; two, or be they more, who are
one single subject, one single party.
219 291
 - It was also proven that La Cooperativa Filipina
belonged to Maximina and that the goods came
from Michael & Co.

Obligations and Contracts 220 291

 Geraldez V. CA & Kenstar Travel Corp.
G.R. 108253
Feb. 23, 1994
Regalado, J.
Roby Cruz
Keywords: Europe tour
Facts:
- After reading various newspaper
advertisements about Kenstar's tours in Europe,
Lydia Geraldez contacted the company to avail
of its services. The company sent her Alberto
Vito Cruz as representative, who showed her a
brochure containing their tour packages and
explained to her the highlights of each tour. She
chose the Volare 3 package which includes a
22-day tour in Europe and paid for P190,000 for
her and her sister.
- Geraldez claimed that, during the tour, she
was very uneasy and disappointed when it
turned out that, contrary to what was stated in
the brochure, there was no European tour
manager for their group of tourists, the hotels
in which she and the group stayed were not
first-class, the UGC Leather Factory which was
specifically added as a highlight of the tour was
not visited, and the Filipino lady tour guide,
Rowena Zapanta, was a first timer.
- She then filed for an action for damages by
reason of contractual breach against Kenstar
with the QC RTC. She likewise moved for the
issuance of a writ of preliminary attachment
against the company on the ground that it
committed fraud in contracting an obligation, as
contemplated in Section 1(d), Rule 57 of the
Rules of Court.
- RTC rendered its decision ordering Kenstar to
pay petitioner P500,000 as moral damages,
P200,000 as nominal damages, P300,000 as
exemplary damages, P50,000 as and for
attorney's fees, and the costs of the suit. On
appeal, CA deleted the award for moral and
exemplary damages as there was no malice or
bad faith on the part of the respondent, and
reduced the awards for nominal damages and
attorney's fees to P30,000 and P10,000,
respectively.
Obligations and Contracts
Issue/s:
WON Kenstar did commit fraudulent
misrepresentations amounting to bad faith or
with gross negligence in discharging its
obligations under the contract
Ruling:
Yes. CA decision set aside. Kenstar to pay
Geraldez the sums of P100,000 by way of moral
damages, P50,000 as exemplary damages, and
P20,000 as and for attorney's fees, with costs
against private respondent. The award for
nominal damages is deleted.
Ratio:
Fraudulent misrepresentations were evident in
the ff:
- Choice of tour guide: Zapanta was a first
timer. Kenstar consciously and deliberately
chose her so the tour can serve as an OJT
training and equip her with the necessary
qualifications needed to be an experienced tour
guide in the future. Respondent should have
selected an experienced European tour guide,
or it could have allowed Zapanta to go merely
as an understudy under the guidance, control
and supervision of an experienced and
competent European or Filipino tour guide, who
could give her the desired training. It was noted
that she daily called the Manila office for
instructions on how to handle the tour. She also
failed to attend to the basic and possible needs
and necessities of the tourists. Because of her
negligence, the group failed to visit the UGC
Leather Factory, which was one of the tour's
highlights. All of these show a manifest
disregard of respondent's specific assurances to
the tour group, resulting in agitation and
anxiety on their part, and which deliberate
omission is contrary to the elementary rules of
good faith and fair play.
- Absence of promised European Tour
Manager: Kenstar contends that the term
"European Tour Manager" does not refer to an
individual but to an organization, allegedly the
Kuoni Travel of Switzerland which supposedly
prepared the itinerary for its "Volare Europe
Tour." But a cursory reading of their
advertisement will readily reveal the express
221 291
 representation that the contemplated European -In either case, whether respondent has
tour manager is a natural person, and not a committed dolo causante or dolo incidente by
juridical one, with their use of the pronoun making misrepresentations in its contracts with
he. Zapanta claims she was accompanied by a petitioner and other members of the tour
European tour guide, but does not remember group, it is indubitably liable for damages to
his/her name, which is dubious considering the petitioner.
length and duration of the sojourn.
- First-class and accessible hotels: Some of In the belief that an experienced tour escort
the hotels were not sufficiently equipped with and a European tour manager would
even the basic facilities (bathtub, showers, accompany them, with the concomitant
toiletries, etc.) and were at a distance from the reassuring and comforting thought of having
cities covered by the projected tour. security and assistance readily at hand,
Respondent contends that it merely provided Geraldez was induced to join the Volare 3
such "first class" hotels which are tourists, instead of travelling alone. She likewise
commensurate to the tourists budget, or which suffered serious anxiety and distress when the
were, under the given circumstances, the "best group was unable to visit the leather factory
for their money." It could have offered better and when she did not receive first-class
ones if it weren't for the low amount given by accommodations in their lodgings which were
the tourists and in fact, it only earns a small misrepresented as first-class hotels and thus
marginal profit for its services. But this is justifies the award for moral damages.
untenable as it was the company itself which Exemplary damages were likewise awarded to
fixed the rates. petitioner to deter travel agencies from
resorting to advertisements and enticements
Based on the facts and testimonies gathered, with the intention of realizing considerable
the Court found that Kenstar can be faulted profit at the expense of the public, without
with fraud in the inducement, which is ensuring compliance with their express
employed by a party to a contract in securing commitments.
the consent of the other.
- The fraud or dolo which is present or
employed at the time of birth or perfection of a
contract may either be dolo causante or dolo
incidente. The first, or causal fraud referred to
in Art.1338, are those deceptions or
misrepresentations of a serious character
employed by one party and without which the
other party would not have entered into the
contract. Dolo incidente, or incidental fraud
which is referred to in Art.1344, are those
which are not serious in character and without
which the other party would still have entered
into the contract.
- Dolo causante determines or is the essential
cause of the consent, while dolo incidente
refers only to some particular or accident of
the obligations. The effects of dolo causante
are the nullity of the contract and the
indemnification of damages, and dolo
incidente also obliges the person employing it
to pay damages.

Obligations and Contracts 222 291

 Sierra V. CA & Ebarle
G.R. 90270
July 24, 1992
Cruz, J.
Hans Dantes
Keywords: promissory note; educated
Facts:
- This case revolves around the P85,000
promissory note made by the Ebarles in favor of
Sierra, who sued before the courts.
Another promissory note, for P54,000, was
signed by the same parties the same day,
although not the subject of the suit.
- The Ebarles defenses were that:
They signed it under duress, fear, undue
influence and fraud
The actual loan was only P20,000
Sierra said it was all a formality since his
business partner demands immediate payment,
and that it will later be corrected
Sierra assured them that the later correction
will make payment easier in case they allowed
themselves to be in default
They could not have received the money since
it was not likely that Sierra had that much cash
ready
The promissory notes were not notarized in
their presence
The promissory notes themselves are spurious
because they were signed separately on the
same day
Issue/s:
WON the promissory note is valid
Ruling:
YES. There must be clear and convincing
evidence to challenge the contents of an
agreement reduced to writing
Ratio:
- Sol Ebarle admitted that there petitioner
neither harassed nor threatened them,
discounting duress. There was no
undue influence since they were neither
mentally weak nor ignorant, being graduated
Obligations and Contracts
professionals, and such moral coercion,
harassment or threats were denied by the
respondents. Fraud must likewise be
established by clear and convincing evidence,
not mere preponderance; the deceit is serious
as to lead an ordinarily prudent person into
error
The court found it unbelievable that they
actually signed the notes valued 7 times greater
than the allegedly original loan.
A more natural response would be an irate
refusal and a demand for correction before
signing the notes.
Even if Sierra was in a hurry, the Ebarles
themselves were not there was no reason to
an immediate signing, especially if,
as they claim, they have not received nor are
expecting to receive the P85K and P54K loans.
- The Court adds that the Ebarles
were educated enough to have misunderstood
the implications of the notes, let alone buying
into the petitioners alleged
assurance despite knowing the meaning of
going into default
Sierra always has ready cash, since his
businesses (car, real estate, vineyard, hacienda)
demand ready cash
A promissory note does not have to be
notarized to be binding
223 291
 Tuason V. Marquez Ratio:
G.R. No. L-20659 - Art 1339. Failure to disclose facts when there
Nov. 3, 1923 is a duty to reveal them, as when the parties are
Malcolm, J. bound by confidential relations, constitutes
fraud.
Mike de Castro - The contract merely renewed a previous
inventory of the property. The franchise
Keywords: electric plant; estoppel by laches therefore was not the determining cause of the
purchase. The franchise was then in force and
Facts: either party could easily have ascertained its
- Crisanto Marquez owned an electric light status by applying at the office of the Public
plant in Lucena, but he became disgusted Utility Commissioner. The innocent non-
with the business because of the many disclosure of the fact does not affect the
problems encountered formation of the contract. The maxim caveat
emptor (buyer beware) should be recalled.
- He decided to give up the franchise on Feb
- Furthermore, Tuason is estopped by laches. He
28, 1921.
operated the plant for 16 months without
- On Mar 9, he sold the plant to Tuason for
question; he made the first payment of the
P14,400. The contract included the stipulation:
contract without protest. He sued only after the
El derecho a la franquicia concedido a la
venture proved disastrous.
Compaa para la explotacion de la industria
a a que la misma esta dedicada (The right to
the franchise is granted to the company for
the utilization of the industry for which it is
dedicated)
- On Mar 29, the Public Utility Commissioner
cancelled the franchise now transferred to
Tuason
- Tuason was permitted to operate using a
special license
- A franchise was eventually granted to them,
but subject to conditions (w/c amounted to the
total renovation of the plant)
- Tuason sued Marquez; he claimed that there
was misrepresentation and fraud perpetrated
by the defendant in selling an electric light plant
with a franchise, when in fact Marquez had
already given up his rights to the franchise
Issue/s:
WON Marquez committed fraud in not
disclosing that the franchise was to be cancelled
Ruling:
NO, the franchise was not the determining
cause of the purchase; and Tuason is already
estopped by laches

Obligations and Contracts 224 291

 Rural Bank of Sta. Maria V. CA
G.R. No. 110672
Sept. 14, 1999
Gonzaga-Reyes, J.
Jocs Dilag
Keywords: assumption of mortgage
Facts:
- Manuel Behis mortgaged a parcel of land
located in Baguio in favor of the Rural Bank of
Sta. Maria. But he was delinquent in paying his
debts.
- Jan. 9, 1985: A Deed of Absolute Sale with
Assumption of Mortgage was executed
between Behis as vendor/assignor and
Rayandayan and Arceo as vendees/assignees
for P250,000. On the same day, Rayandayan
and Arceo together with Manuel Behis
executed another Agreement embodying the
real consideration of the sale of the land in the
sum of P2,400,000. (There were 2 contracts, the
real price was reflected in the 2nd one.)
- Rayandayan and Arceo negotiated with the
principal stockholder of the Rural Bank for the
assumption of the indebtedness of Behis and
the subsequent release of the mortgage on the
property by the bank. Rayandayan and Arceo
did not show the bank the 2nd Agreement with
Behis providing for the real consideration of
P2,400,000.
- The bank consented to the substitution of
plaintiffs as mortgage debtors in place of Behis.
The bank restructured and liberalized the terms
for the payment of the mortgage debt
(Bank-Raynadayan MOA)
- The Rural Bank now wants the Bank-
Raynadayan MOA to be annulled on the ground
that its consent was vitiated by fraud because
respondents withheld the fact that the real
consideration for the sale with assumption of
mortgage is P2,400,000 and not P250,000.
Issue/s:
WON the Bank-Raynadayan MOA can be
annulled on the basis of fraud.
Obligations and Contracts
Ruling:
NO. The fraud contemplated in Art. 1338 is not
present in the negotiations.
Ratio:
- Art. 1338: There is fraud when, through
insidious words or machinations of one of the
contracting parties, the other is induced to
enter into a contract which, without them, he
would not have agreed to.
- Rural Bank argues that it would not have
consented into entering the MOA with the
respondents as it was put in the dark as to the
real capacity and financial standing of
respondents to assume the mortgage from
Manuel Behis.
- The Court cannot see how the ommission or
concealment of the real purchase price could
have induced the bank into giving its consent
for 3 reasons.
1. The kind of fraud that will vitiate a
contract refers to those insidious words or
machinations resorted to by one of the
contracting parties to induce the other to
enter into a contract which without them he
would not have agreed to. Simply stated, the
fraud must be the determining cause of the
contract, or must have caused the consent
to be given.
- The consideration could not have been the
determining cause for the petitioner bank to
enter into the MOA. To all intents and
purposes, the bank entered into said
agreement in order to effect payment on the
indebtedness of Manuel Behis.
2. Pursuant to Art. 1339, 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
thecommunication should be made. Verily,
respondents had no duty, and therefore did
not act in bad faith, in failing to disclose the
real consideration of the sale between them
and Manuel Behis.
3. The bank had other means of verifying
the financial capacity of respondents. Also,
the bank security remained unimpaired
regardless of the consideration of the sale. In
225 291
 fact, the bank admits that no damages have
been suffered by it.
Elements of fraud vitiating consent:
1) It was employed by a contracting party upon
the other;
2) It induced the other party to enter into the
contract;
3) It was serious;
4) It resulted in damages and injury to the party
seeking annulment.

- Rural Bank has not sufficiently shown proof

that they were either induced to enter into the
contract or that it suffered any damages by the
non-disclosure of the original price.

General Rule:
Whoever alleges fraud or mistake in any
transaction must substantiate his allegation,
since it is presumed that a person takes
ordinary care of his concerns and that private
transactions have been fair and regular.

Obligations and Contracts 226 291

 Azarraga V. Gay
G.R. No. L-29449
Dec. 29, 1928
Villamor, J.
DJ Dolot
Keywords: sale of 2 parcels of land
Facts:
- Leodegario Azarraga sold 2 parcels of land to
Maria Gay for a LUMP SUM of 47k payable in
installments, as follows:
1. 5k at the time of the execution of the
contract
2. 20k upon delivery of the 1st lands Torrens
title
3. 10k upon delivery of the 2nd lands TCT
4. 12k 1 year after the delivery of the 2nd TCT
- He failed to pay the last 2 installments hence,
Azarraga filed for claims with legal interest.
Gays Defense:
1. By misrepresentation lead the defendant to
believe that said second parcel contained 98
hectares, when in fact it was really just 60
hectares. Thus, he induced Gay to bind herself
to pay P47,000 for the two parcels of land,
which he claimed contained an area of at least
200 hectares, to which price she would not
have bound herself had she known that the
second parcel of land was only 60 hectares;
2. That in addition to the amounts
acknowledged by Azarraga, she paid other sums
amounting to P4,000;
3. That she is entitled to a reduced price of 38k
and that she never refused to pay the justly
reduced price, but it was Azarraga who refused
to receive said just amount
- And by way of cross-complaint, the defendant
prays that she be indemnified in the sum of
P15,000 for damages sustained by her by
reason of the malicious filing of the instant
complaint.
Lower Court: NO FRAUD. Neither the plaintiff
nor the defendant gave any importance to the
area of the land in consenting to the contract
in question, and that there having been no
Obligations and Contracts
fraud when the parties agreed to the lump sum
for the two parcels of land described in the
deed Exhibit A, following Article 1471 of the Old
Civil Code, ordered the defendant to pay the
plaintiff the sum of P19,300 with legal interest
at 8 per cent per annum from April 30, 1921 on
the sum of P7,300, and from April 30, 1922, on
the sum of P12,000. And finally dismissed the
defendant's cross-complaint, without special
pronouncement as to costs.
Issue/s:
WON there is fraud
Ruling:
No. SC Concurs with the lower court.
Ratio:
1. Defendant had the chance to examine the
plaintiffs land and made her calculations of the
area of the 2 parcels in question; also, Azarraga
delivered to Gay the documents covering the
land he was trying to sell. She had this
document in her possession so it is presumed
that she and her lawyer had read it. It was also
Gay who entrusted the drawing of the deed of
sale to her attorney and notary. She then signed
the documents after. Therefore, the defendant
accepted the representation at her own risk.
Hence, without complaints then, she is now
estopped.
2. Furthermore, the defendant had ample
opportunity to appraise herself of the condition
of the land which she purchased, and Azarraga
did nothing to prevent her from making such
investigation as she deemed fit. When the
purchaser proceeds to make investigations by
himself, and the vendor does nothing to
prevent it, the purchaser cannot later allege
that the vendor made false representations.
3. Art 1471 Old CC (Art. 1542 in NCC): In case
of the sale of real estate for a lump sum and not
at the rate of a specified price for each unit of
measure, there shall be no increase or decrease
of the price even if the area be found to be more
or less than that stated in the contract.
- In this case it is clear that it is the determinate
object (2 parcels of land) and not the # of
hectares which was considered in the contract.
227 291
 It is only when the delivery is incomplete (all
within the boundaries of what was stipulated)
can the defendant assert his counterclaims. But
in this case, the plaintiff delivered the 2 parcels
of land by virtue of the 2 Torrens title delivered.

Obligations and Contracts 228 291

 Trinidad V. IAC & Francisco
G.R. No. 65922
Dec. 3, 1991
Cruz, J.
Julie Enad
Keywords: flood in Commonwealth
Facts:
- In early 1969, Trinidad offered to buy
Franciscos Bungalow in Commonwealth. She
inspected the house and lot and examined a
vicinity map which indicated drainage canals
along the property. On March 29, 1969,
Trinidad paid Francisco 5,000 as earnest money
(purchase price: 70,000) and entered into
possession of the house.
- Subsequently, her new neighbours told her
that two buyers had previously vacated the
property because it was subject to flooding.
Trinidad told Francisco about it, and she was
told that everything had been fixed and the
house would never be flooded again. She then
gave him 12, 500 to complete the
downpayment (17, 500 in total), and they
signed the Contract of Conditional Sale on
August 8, 1969.
- Trinidad paid the first two installments (5
instalments in the agreement). She eventually
decided not to continue paying because the
house was flooded again on July 18, 21, and 30,
1972, the waters rising to as high as five feet.
She requested the City Engineer to inspect what
was causing the flood, and the finding was that
the lot is low and is a narrowed portion of the
creek.
Issue/s:
WoN there was a misrepresentation on the part
of Francisco to justify the rescission of the sale
and the award of damages to Trinidad.
Ruling:
NO. The fraud alleged by Trinidad has not been
satisfactorily established to call for the
annulment of the contract.
Obligations and Contracts
Ratio:
- First. It was Trinidad who admittedly
approached Francisco, who never advertised
the property nor offered it for sale to her.
- Second. Trinidad had full opportunity to
inspect the premises, including the drainage
canals indicated in the vicinity map that was
furnished her, before she entered into the
contract of conditional sale.
- Third. Assumed is that she made her appraisal
of the property not with the untrained eye of
the ordinary prospective buyer but with the
experience and even expertise of the licensed
real estate broker that she was. If she
minimized the presence of drainage canals, she
has only her own negligence to blame.
- Fourth. Seeing that the lot was depressed and
there was a drainage lot abutting it, she cannot
say she was not forewarned of the possibility
that the place might be flooded.
- Fifth. No proof except her own testimony that
two previous owners of the property had
vacated it because of the floods and that
Francisco assured her that it would not be
flooded again.
- Sixth. Trinidad still paid the first two
instalments even if she experienced flooding
prior to the payment.
- Seventh. Still made annexes and decorations
of permanent nature.
- Even if we assume that Francisco made such
representations, Trinidad was deemed to have
accepted them at her own risk and therefore
must be responsible for the consequences of
her careless credulousness.
- However, the stipulation that converts her
instalments to rents should not be strictly
enforced because it is unconscionable, sine she
believed it was her right that she was upholding
by refusing to pay. Contract not rescinded,
Trinidad still has to pay the remaining
balance, but the house will not be
returned to Francisco.
229 291
 Songco V. Sellner
G.R. No. 11513
Dec. 4, 1917
Street, J.
Apo Espanola
Keywords: sugarcane
Facts:
- Defendant George C. Sellner and plaintiff
Lamberto Songco are owners of contiguous
sugarcane farms in Floridablanca, Pampanga.
Both farms had sugarcane ready for cutting.
- Sellner wished to mill his cane at a nearby
sugar central, but the owners were not sure
they could mill his cane and would not promise
to take it.
- However, he found out the central was going
to mill Songcos cane, so he conceived the idea
of buying the latters cane and then running his
own cane with that of the other during the
milling.
- Sellner bought Songcos cane for P12,000,
executing three promissory notes of P4k each.
Two of these notes were paid; the third is the
subject of the present action.
- Sellner claimed the third promissory note was
obtained through the false representations of
Songco, who told him the cane would produce
3,000 piculs of sugar. Sellner then bought the
crop believing this estimate to be substantially
correct, when in fact Songcos cane only yielded
2,017 piculs. After the toll for the milling was
deducted, the net amount left to Sellner was
even less.
- The lower court ruled for plaintiff Songco;
thus, this appeal by Sellner.
Issue/s:
Whether Songcos representation constitutes
fraud
Ruling:
No. The Court affirmed the decision appealed
from.
Obligations and Contracts
Ratio:
- Based on the evidence, the Court concluded
that Songco knew he had greatly exaggerated
the probable produce of his fields, he having
produced from these same fields for several
years. He would have known that the years
harvest would yield less than the amount he
had claimed.
- However, the Court still ruled that this did not
amount to fraud. A misrepresentation upon a
mere matter of opinion is not an actionable
deceit, nor is it a sufficient ground for avoiding
a contract as fraudulent. (The Court did not
outright cite Art. 1341, but this principle is
found in the article.)
- That Songco had refused to guarantee his
claim of a 3,000 picul yield should have warned
Sellner that the estimate was mere opinion. A
man must assume the consequences if, at his
own peril, he relies upon an affirmation made
by someone whose interest might prompt an
exaggeration in the value of his property.
- Further, not every false representation
regarding the subject matter of a contract will
render it void. The Court said that the fraud
must pertain to matters of fact that
substantially affect the buyers interest, and not
simple matters of opinion, judgment,
probability, or expectation.
- Art. 1341 also provides the exception for the
expression of opinion; that is, if one with
special or expert knowledge expressed the
opinion, and he took advantage of the
ignorance of the other party, it is considered a
false representation.
- Sellner tried to avail this defense when he
claimed that he was a novice in the business
while Songco was an experienced farmer. The
Court, however, did not accept his defense.
- Thus, the Court held that Sellner was still
liable for the amount of the third promissory
note, as in the judgment of the lower court
230 291
 Mercado V. Espiritu
G.R. No. L-11872
Dec. 1, 1917
Torres, J.
Pia Falcone
Keywords: minors who pretended to be of age
Facts:
- Petitioners Domingo and Josefa Mercado
brought suit against Luis Espiritu (but now
directed against the administrator, Jose
Espiritu, since Luis died), alleging that they and
their sisters are the sole heirs of Margarita
Espiritu, their mother and the sister of the
defendant. Petitioners claim that in 1910, Luis,
by means of cajolery, induced and fraudulently
succeeded in getting the petitioners to sign a
deed of the land left by their mother for P400,
notwithstanding the fact that said land,
according to its assessment, was valued at
P3,795. They therefore ask that the sale be
rendered null & void and that defendant be
ordered to deliver and restore to petitioners the
shares of the land, together with its products.
- The defendant answers this by saying that
Margarita, with due authorization of her
husband and petitioners father Wenceslao,
sold to Luis a portion of the land (15 cavanes of
seed) for P2,000. To cover his childrens needs,
Wenceslao subsequently pledged or mortgaged
to Luis the remainder of said land (6 cavanes of
seed) at P375. With this amount being
insufficient, he additionally borrowed other
sums of money aggregating a total of P600.
After their fathers death, the petitioners then
declared themselves to be of legal age and
executed, together with their sisters, the
notarial instrument ratifying the previous
contracts and selling absolutely and in
perpetuity to Luis Espiritu, for the sum of P400
as an increase of the previous purchase price,
the property that had belonged to their mother.
Issue/s: WON the sale can be annulled on the
grounds that petitioners were minors without
Obligations and Contracts
legal capacity to contract on the date of its
execution, and that the defendant availed
himself of deceit and fraud in obtaining
petitioners consent.
Ruling:
No, the sale cannot be annulled.
Ratio:
- First, the evidence adduced at the trial doesnt
show, even circumstantially, that the purchaser
Luis Espiritu employed fraud, deceit, violence or
intimidation in order to effect the sale. Second,
no evidence appears in the records that
petitioners were minors when they executed
and signed the document. No certified copies of
their baptismal certificates were presented, nor
did they produce any supplemental evidence to
prove that Domingo was 19 and Josefa 18 when
they signed the document. The statement made
by one of the adult parties of said deed, in
reference to certain notes made in a book or
copybook of a private nature, which she said
their father kept during his lifetime and until his
death, is not sufficient to prove the plaintiffs
minority on the date of the execution of the
deed.
- Even in the doubt whether they were of legal
age on the date referred to, the courts, in their
interpretation of the law, have laid down the
rule that the sale of real estate, effected by
minors who pretend to be of legal age, is valid,
and they cannot be permitted afterwards to
excuse themselves from compliance with the
obligation assumed by them or to seek their
annulment. (Law 6, title 19, 6th partida.4) The
judgment that holds such a sale to be valid and
absolves the purchase from the complaint filed
4 If he who is a minor (1) deceitfully says or
sets forth in an instrument that he is over twenty-
five years of age, and this assertion is believed
by another person who takes him to be of about
that age, (2) in an action at law he should be
deemed to be of the age he asserted, and
should not (3) afterwards be released from
liability on the plea that was not of said age
when he assumed the obligation. The reason for
this is that the law helps the deceived and not
the deceivers.
231 291
 against him doesnt violate the law relative to
the sale of minors property nor the rules laid
down in consonance therewith.

Obligations and Contracts 232 291

 Braganza V. Villa Abrille
G.R. No. L-12471
Apr. 13, 1959
Bengzon, J.
Coopey Hermosisima
Keywords: Japanese notes; minors are liable as
much as they are benefited
Facts:
- Rosario, with her sons Rodolfo and Guillermo,
received from respondent, as a loan, on
October 30 1944, P70,000 in Japanese notes
and in consideration, promised to pay him
P10,000 in the legal currency of the Philippine
Islands 2 years after the cessation of hostilities
or as soon as International Exchange has been
established in the Philippines
- Since the petitioners didn't pay, Villa Abrille
sued them on March 1949
- Braganzas claim as defense that they only
received P40,000 and that Guillermo and
Rodolfo were minors when they signed the
promissory note
-How is this different from Mercado? In
Mercado, there was an active
misrepresentation in that the siblings Mercado
wrote in the document that they were of age.
Here, no such thing. = Guillermo and Rodolfo
are not legally bound
- Article 1301 of the old Civil Code states that
"an action to annul a contract by reason of
minority must be filed within 4 years" Since
Rodolfo turned 1947, action will expire October
1951. Action was filed June 1951, so within the
period. BUT the brothers are not entirely
absolved. Article 1340 "states that the minor
party must make restitution to extent that
they may have profited by money they
received" (Funds were used for their support)
- While the promise to pay P10,000 can't be
enforced, 1340 states that they should be liable
for P1000

Issue/s:
WON the mom is liable? How about Rodolfo
and Guillermo?

Ruling:
Mom is liable. Children are liable in as much as
they benefited from the loan.

Ratio:
- No question on mom's liability. She can't use
minority as a defense since it is a personal
defense of the minors. However, such defense
will benefit her to the extent of the shares for
which minors were responsible
- At time of the signing of the loan agreement,
Guillermo was 16 and Rodolfo 18.
- Failure to disclose their minority in promissory
note does not mean that they'll not be
permitted to assent it. THERE WAS NO
JURIDICAL DUTY TO DISCLOSE INABILITY

Obligations and Contracts 233 291

 Rodriguez V. Rodriguez
G.R. No. L-23002
July 31, 1967
Reyes, J.B.L., J.
Paolo Macariola
Keywords: fishpond
Facts:
- Concepcion Felix, widow of the late Don Felipe
Calderon and with whom she had one living
child, Concepcion Calderon, contracted a
second marriage with Domingo Rodriguez,
widower with four children by a previous
marriage. There was no issue in this second
marriage.
- Prior to her marriage to Rodriguez,
Concepcion Felix was the registered owner of 2
fishponds. On January 1934, Concepcion Felix
appeared to have executed a deed of sale
conveying ownership of the aforesaid
properties to her daughter, Concepcion
Calderon, for the sum of which the latter in turn
appeared to have transferred to her mother
and stepfather. Both deeds were notarized and
registered in the Register of Deeds. [Mother ->
Daughter -> Mother and Stepdad (as part of
conjugal property)]
- On March 6, 1953, Domingo Rodriguez died
intestate, survived by the widow, Concepcion
Felix, his children and grandchildren. The
above-named widow, children and
grandchildren of the deceased entered into an
extra-judicial settlement of his (Domingo's)
estate, consisting of one-half of the properties
allegedly belonging to the conjugal partnership.
of the fishpond belongs to Felix and
belongs to the children and grandchildren.
- Later on, the children and grandchildren
authorized Felix to managed their shares in the
fishpond and granted the widow lifetime
usufruct over one-third of the fishpond which
they received as hereditary share in the estate;
which grant was accepted by Concepcion Felix.
Then, in a contract, the widow has leased from
the Rodriguez children and grandchildren the
fishpond for a period of 5 years.
Obligations and Contracts
- At about this time, it seemed that the
relationship between the widow and her
stepchildren had turned for the worse. When
she failed to deliver to them the balance of the
earnings [lease] of the fishponds, the lawyer of
her stepchildren sent a letter of demand for
payment. It is now then that Felix alleged that
the deed of transfer (dated Jan 1934) of the
fishponds inexistent (and null and void) because
Domingo Rodriguez exercised force and
pressure over Concepcion Felix during the
alleged transfer.
Issue/s:
1. WON the deed of transfer was executed
through violence or intimidation.
2. WON the deed of transfer is a simulated
contract.
3. WON the conveyances in issue (the
fishponds) were inexistent, being without
consideration.
Ruling:
Ruling of CFI affirmed. Concepcion Felix is
estopped from reclaiming her property.
Ratio:
1. No. The evidence isnt convincing that the
contracts of transfer from Concepcion Felix to
her daughter, and from the latter to her parents
were executed through violence or
intimidation.
- The charge is predicated solely upon the
improbable and biased testimony of appellant's
daughter. The charge of duress should be
treated with caution considering that Rodriguez
had already died when the suit was brought, for
duress, like fraud, is not to be lightly paid at the
door of men already dead.
- Duress being merely a vice/defect of consent,
an action based upon it must be brought within
4 years after it has ceased. The present action
was instituted 28 years after the intimidation is
claimed to have occurred, and 9 years after the
supposed culprit died. Additionally, Concepcion
Felix entered into a series of subsequent
transactions with the Rodriguez children and
grandchildren that confirmed the contracts
234 291
 shes now trying to set aside. This cause of question which placed her in estoppel to
action is clearly barred. question the validity of said conveyances
2. NO. Appellants main stand in attacking the
conveyances in question is that they are
simulated/fictitious, and inexistent for lack of
consideration. 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. But appellant
contends that the sale by her to her daughter,
and the subsequent sale by the latter to
appellant and her husband, the late Domingo
Rodriguez - were done for the purpose of
converting the property from paraphernal to
conjugal, thereby vesting a half interest in
Rodriguez, and evading the prohibition against
donations from one spouse to another during
coverture (Civil Code of 1889, Art. 1334). If this
is true, then the appellant and her daughter
must have intended the two conveyance to be
real and effective; for appellant could not
intend to keep the ownership of the fishponds
and at the same time vest half of them in her
husband. The two contracts of sale then could
not have been simulated, but were real and
intended to be fully operative, being the
means to achieve the result desired. Nor does
the intention of the parties to circumvent by
these contracts the law against donations
between spouses make them simulated ones.
3. NO. In each conveyance the buyer became
obligated to pay a definite price in money, such
undertaking constituted in themselves actual
causa or consideration for the conveyance of
the fishponds. That the prices were not paid
(assuming ad arguendo that Concepcion
Calderon's testimony, to this effect is true) does
not make the sales inexistent for want of causa.
What would invalidate the conveyances is the
fact that they were supposed to circumvent the
legal prohibition against donations between
spouses. However, in contracts invalidated by
illegal subject matter, Articles 1305 and 13061
of the CC (then in force) apply rigorously the
rule denying all recovery to the guilty parties.
Concepcion also entered into a series of
agreements regarding the conveyances in

Obligations and Contracts 235 291

 Suntay V. CA
G.R. No. 114950
Dec. 19, 1995
Hermosisima, Jr., J.
Carlos Marin
Keywords: NARIC; nephew-lawyer; badge of
simulation
Facts:
- Federico Suntay owned land that
amounted to 5,118 sq. meters wherein rice
mills, warehouses, and various other
improvements. His application to the NARIC
to become a miller-contractor, however,
was declined because he had several unpaid
loans.
- In order to sidestep the fact that he was
denied such privilege on the basis of his
debts, he arranged for the sale of his
property to his nephew Rafael Suntay. - -
He sold his property for the amount of
20,000.00php. Around three months after
the conveyance of Federicos property to
Rafael, the same was supposedly returned
to Federico through a counter conveyance
for, again, the amount of 20,000.00 php.
- In the meantime, despite the fact that
Rafael was technically the owner of the lot,
he made no attempt to take possession of it
at any time. Federico continued to occupy
and manage the rice mills. (In essence, the
two acts of conveyance should have
resulted in there being no change in the
ownership of the property while also
allowing Federico Suntays property to
become a supplier of NARIC).
- However, Rafael declined to
accommodate Federicos request that
the former deliver his copy of the TCT
of the lot which was still under Rafaels
name so that the same could be
registered under Federicos name. As a
result, Federico filed suit claiming that
Obligations and Contracts
the said deed was a counterfeit and
could not transfer real rights according
to law. The primary reasons for such
were:
Despite the deed of sale, there
was an understanding between
the parties that ownership,
possession, and use of the and
would remain with Federicothe
formal re-conveyance of the
property to him could be
requested at any time
The 20,000php price of the lot
when Federico sold the same to
Rafael was never paid by the latter to
the former
Rafael prepared a deed of
absolute sale that sought to return
technical ownership back to Federico
but left the same undated and un--
notarized so that the latter could
date and notarize the deed whenever
he deemed the re- conveyance of his
property convenient
Rafael, not once, ever exercised a
single act of ownership, possession,
use, or enjoyment of the land he
supposedly owned
Federico sought the re--
conveyance of his property because
he needed the TCT in order to use
the land as collateral for loans he
applied for in order to obtain money
for the expansion of his rice mills
- As defense, Rafael maintained that the
property was validly and absolutely sold
and conveyed. The TC and, initially the CA
(they later reversed their decision, hence
this case), affirmed the validity of the deed
of sale.
Issue/s:
WON the deed of sale was void because it
was void and simulated
236 291
 Ruling: YES. The Court held that the
attendant circumstances of the case
clearly provided justification for inferring
and assuming that the deed of sale was
simulated.
Ratio:
- First, the Court pointed out not only the
close professional relationship between
Federico and Rafael but also that they
were related by blood. Their exceptional
relationship thus provided faith and
confidence between the two that could
lead to Federico trusting Rafael to the
point of selling his property to the latter
without fear of it actually being lost.
Rafaels refusal, the Court surmised, could
be attributed to the fact that the
relationship between the two soured, thus
placing Federico in a precarious situation
with regard to the property that he had
technically sold to his nephew.
Notwithstanding such later fall out
between the two parties, the Court held
that at the time they executed the deed of
sale their close ties to each other
constituted a badge of simulation
- Second, Rafaels claim that the land was
given to him in consideration of his unpaid
attorneys fees was not afforded merit by
the Court because this was only alleged 6
years after he filed his original response to
Federicos complaint. Also, it was evident
that they never had a clear-cut system of
compensation for legal services rendered.
In fact, it became clear that their business
relationship was characterized by doing
each other favors that could not be
reduced to mere monetary quantification.
This sort of arrangement between the two
served as another badge of simulation.
- Third, as mentioned previously, the fact
that Rafael never tried to take possession
Obligations and Contracts
of the land functioned as another badge
of simulation. Not taking possession of
property you purchased, according to the
Court, was manifestly contrary to the
nature of valid sales.
- Fourth, contrary to Rafaels stand that
Federico had admitted several times that
he had sold the property to the former, no
evidence of such admission was present.
What was repeatedly asserted by Federico
was the fact that Rafael had already resold
the property to him by virtue of the deed
of sale that he (Federico) dated and
notarized himself.
- Fifth, although the deed of sale to
Federico was duly notarized, it did not
mean that the sale was a true
conveyance that bound both parties to its
consequences. When there was never an
intention for an agreement to have a
binding legal effect, not even notarization
will result in both parties being bound to
a simulated agreement. the intention of
the parties is the primary consideration
of determining the true nature of a
contract.
- Last, Rafael never declared the
property in his annual Statement of
Assets and Liabilities. Thus, the Court
concluded that he never considered the
property as his own. There being no
intention to enter into a sale, the first
deed of sale is void. And as a result, the
second deed re-conveying the land back
to Federico is immaterial and
superfluous.
237 291
 Pangadil et al VS. CFI
G.R. No. L-32437
Aug. 31, 1982
Vasquez, J.
Trance Nunez
Keywords: guardianship; ratification de una
venta
Facts:
- This dispute revolves around a piece of land
owned by Pangadil Maslamama, which he sold
to Kagui in 1941. In 1946, a special action was
instituted by petitioner Salandang Pangadil to
assume guardianship over her minor siblings;
the petition was granted. Salandang, acting on
behalf of her siblings, and another sister
Tingting executed a document that ratified the
earlier sale made by their father to Kagui.
- An action was filed seeking the annulment of
the said document. The Court of First Instance
denied the petition on the ground of
prescription. Petitioners now assailed the
petition, arguing that under Article 1409, the
action to impugn the validity of the contract is
imprescriptible as it is void ab initio for being
a simulated contract and one that is contrary
to public policy.
Issue/s:
WoN the document Ratificacion De Una
Venta was a simulated contract?
Ruling:
No, the contract was valid.
Ratio:
- The argument that the contract was
simulated hinged on their allegation that the
contract was attended by fraud and
misrepresentation. The petitioners asserted
that the contract was not one for sale but for
mortgage. The court held that if the contract
were indeed attended by fraud or
misrepresentation, the contract would only
be voidable.
Obligations and Contracts
- Nor was the contract void for being
contrary to public policy since it deprived
the minor siblings their share in the
inheritance.
-Records show that the father made the sale
during his lifetime. Therefore the siblings
were not deprived of their inheritance since
there was nothing for them to be deprived
of in the first place.
- An absolute simulated contract is one
wherein the parties did not intend to be
bound at all. Here the parties intended to be
bound, but contend that they though it was
only to ratify a mortgage instead of a sale. It's
not a relative simulation since there was no
intent to prejudice a third person and not
intended for a purpose contrary to law,
morals, good customs, public order or public
policy - even if the contrary appears, the
contract will bind them.
- Only contracts under article 1409 are
imprescriptible. The contract in question not
falling under the list, is not void therefore
action for its annulment is barred by
prescription. (It took them 27 years before
they instituted the case).
238 291
 Umali et al. V. CA
G.R. No. 89561
Sept. 13, 1990
Regalado, J.
Justin Ordoyo
Keywords: annulment of title
Facts:
- The Castillos own a parcel of land in Lucena
City which was given as security for a loan from
DBP. For their failure to pay amortization,
foreclosure of said property was about to be
initiated. This was made known to Santiago
Rivera, President of Slobec Realty & Devt., Inc.
(SRDI) and nephew of Mauricia Vda. de Castillo,
who proposed to them the conversion
into subdivision of four parcels of land adjacent
to the mortgaged property to raise the
necessary fund.
- Thereafter, the Castillos executed a MOA with
SRDI, wherein Rivera obliged himself to pay the
Castillos P70,000 immediately after its
execution and P400,000.00 after the property
has been converted into a subdivision.
- Rivera, armed with the MOA, approached
Modesto Cervantes, President of Bormaheco,
and proposed to purchase two tractors (D-7
and D-8).
- On January 23, 1971, Bormaheco and SRDI
executed a Sales Agreement over one D-7
tractor for P230,000 with P50,000 down
payment, and P180,000 payable in monthly
installments.
- SRDI executed in favor of Bormaheco a Chattel
Mortgage over the said equipment as security
for the payment of P180,000.00. As further
security, SRDI obtained from Insurance Corp. of
the Phil. (ICP) a Surety Bond, with ICP as surety
and SRDI as principal, in favor of Bormaheco.
Said bond was in turn secured by a Counter-
Guaranty Agreement (CGA) with Real Estate
Mortgage SRDI and Mauricia, Buenaflor Castillo
Umali, et al. as mortgagors and ICP as
mortgagee. ICP required that the Castillos
mortgage to them the four parcels of land in
question. SRDI received from Bormaheco the
D-7 tractor.
Obligations and Contracts
- Meanwhile, for violation of the terms
and conditions of the CGA, the properties of
the Castillos were foreclosed by ICP. A Cert. of
Sale and TCTs were issued to ICP as the highest
bidder. The mortgagors had one year from the
date of the registration of the certificate of sale,
that is, until October 1, 1974, to redeem the
property, but they failed to do so. A Deed of
Sale of Real Estate covering the subject
properties was issued in favor of ICP.
- On April 10, 1975, ICP sold to Phil. Machinery
Parts Manufacturing Co. (PM Parts) the four
parcels of land.
- Thereafter, PM Parts, through its President,
Modesto Cervantes, sent a letter to Mauricia
requesting her family to vacate the property.
She refused to comply.
- On September 29, 1976, the heirs of the late
Felipe Castillo, particularly Buenaflor as the
administratrix of the properties filed an
action for annulment of title. They
contended that all the aforementioned
transactions starting with the CGA with Real
Estate Mortgage, etc. are void for being
entered into in fraud and without the consent
and approval of the CFI of Quezon before
which the proceedings have been pending.
They prayed that the four parcels of land be
declared as owned by the estate of the late
Felipe Castillo and that all TCTs be declared
null and defendants to pay damages and
attorney's fees.
-The defendants claimed that: (1) the complaint
did not state a cause of action against
defendants; (2) plaintiffs are not entitled to
the reliefs demanded; (3) plaintiffs are
estopped or precluded from asserting the
matters set forth in the Complaint; (4) plaintiffs
are guilty of laches in not asserting their
alleged right in due time; (5) PM Parts is an
innocent purchaser for value and relied on
the face of the title before it bought the
subject property.
- After trial, the court a quo rendered
judgment in favor of the plaintiffs, declaring
the CGA, Sales Agreements, Chattel
Mortgages and Certificate of Sale null and
void for being spurious and without
239 291
 consideration. Consequently, the TCTs issued
to ICP are null and void.
- The sale by ICP in favor of PM Parts, over the
four parcels of land and the TCTs subsequently
issued are similarly declared null and void, and
the Register of Deeds of Lucena City is hereby
directed to issue TCTs in the names of the
plaintiffs, except Santiago Rivera.
- The trial court also awarded exemplary
damages and litigation fees. CA reversed.
Issue/s:
1. WON the transactions entered into
between SRDI and Bormaheco are fraudulent
and simulated and should, therefore, be
declared null and void.
2. WON there was a valid foreclosure of the
properties by ICP
Ruling:
NO and NO! The CA decision is REVERSED and
SET ASIDE. The following are declared null: (1)
Certificate of Sale executed by the Provincial
Sheriff of Quezon in favor of the ICP; (2) TCTs
issued in the name of the ICP; (3) The sale by
ICP in favor of PM Parts of the four parcels of
land; and (4) TCTs issued by virtue of said
sale in the name of PM Parts
Ratio:
1. Such allegation is premised primarily on the
fact that contrary to the stipulations agreed
upon in the Sales Agreement:
a) Rivera never made the down payment of
P50,000.00 to Bormaheco;
b) the tractor was received by Rivera only on
January 23, 1971 and not in 1970 as stated
in the Chattel Mortgage;
c) when the CGA with Chattel/Real Estate
Mortgage was executed on October 24,
1970, the Sales Agreement and Chattel
Mortgage had not as yet been executed,
aside from the fact that Bormaheco paid the
premium for the surety bond issued by ICP,
and not Rivera.
NEGATIVE. The CA found that the questioned
documents are valid and binding upon the
parties, that there was no fraud employed by
Obligations and Contracts
the respondents in the execution thereof, and
that, petitioners had every intention to be
bound by their undertakings in the various
transactions had with the respondents. Findings
of fact of the CA are final and conclusive if
there is no proof of grave abuse of discretion.
- The alleged failure of Rivera to pay the down
payment, which clearly constitutes a breach of
the contract, cannot be availed of by the guilty
party to justify an action for the declaration of
nullity of the contract. One who commits a
breach of his contract may not seek refuge
under the protective mantle of the law.
- The evidence of record does not show the
validity of petitioners' contention that the
contracts entered into by the p a r t i e s a r e
either absolutely simulated or downright
fraudulent. There is absolute simulation, which
renders the contract null and void, when the
parties do not intend to be bound at all by the
same. The basic characteristic of this type of
simulation is the fact that the apparent contract
is not really desired or intended to either
produce legal effects or in any way alter the
juridical situation of the parties.
- The subsequent act of Rivera in receiving and
making use of the tractor subject matter of
the Sales Agreement and Chattel Mortgage,
and the simultaneous issuance of a surety bond
in favor of Bormaheco, concomitant with
the execution of the CGA with Chattel/Real
Estate Mortgage, shows that petitioners had
every intention to be bound by these
contracts.
- Petitioners failed to show clear and
convincing evidence that they were induced
to enter into a contract through the insidious
words and machinations of respondents
without which the former would not have
executed such contract.
- The fact that it was Bormaheco which paid
the premium for the surety bond issued by ICP
does not per se affect the bonds validity.
- Petitioners admit that Rivera executed a
Deed of Sale with Right of Repurchase of his
car in favor of Bormaheco and agreed that a
part of the proceeds shall be used to pay the
premium. In effect, Bormaheco accepted the
payment as an agent of ICP. This shows that
240 291
 Rivera recognized Bormaheco as an agent of
ICP. Such payment to the agent is, therefore,
binding on Rivera. He is now estopped from
questioning the validity of the suretyship
contract.
- Consequently, the foreclosure of the
mortgage, after the expiration of the surety
bond under which ICP as surety has not
incurred any liability, should be declared null
and void.

2. (a) There was no notice of default issued by (c) Where the guarantor holds property of the
Bormaheco to ICP which would have entitled principal as collateral surety for his personal
Bormaheco to demand payment from ICP under indemnity, he may resort to the same only
the suretyship contract. after his payment.
- The court a quo categorically stated that no - There is no doubt that the CGA was issued
evidence was presented to show that for the personal indemnity of ICP.
Bormaheco demanded payment from ICP nor Considering that the payment by ICP has never
was there any action taken by Bormaheco on been established, it follows that ICP cannot
the bond posted by ICP to guarantee the foreclose the properties.
payment of plaintiffs obligation.
- There is nothing in the records of the
proceedings to show that ICP indemnified
Bormaheco for the failure of the plaintiffs to
pay their obligation. The failure, therefore, of
Bormaheco to notify ICP in writing about SRDI's
supposed default released ICP from liability
under its surety bond.
- Consequently, ICP could not validly foreclose
the real estate mortgage executed by
petitioners in its favor since it never incurred
any liability under the surety bond.

(b) At the time of the foreclosure of

the mortgage, the liability of ICP under the
surety bond had already expired.
- It is possible that the period of suretyship
may be shorter than that of the principal
obligation, as where the principal debtor is
required to make payment by installments.
In this case, the surety bond issued by ICP was
to expire on January 22, 1972, whereas SRDI's
installment payment was to end on July 23,
1972. Therefore, while ICP guaranteed the
payment by SRDI, such guaranty was valid only
until January 22. Thereafter, from January 23 to
July 23, the liability of SRDI became an
unsecured obligation. The default of SRDI
during this period cannot be a valid basis for
the exercise of the right to foreclose by ICP
since its surety contract had already been
terminated.

Obligations and Contracts 241 291

 Macapagal V. Remorin, Caluza-
Bamrungcheep, Caluza-Valenciano
G.R. No. 158380
May 16, 2005
Puno, J.
Carlos Pagdanganan
Keywords: Thai, second wife, affidavit of loss,
sale to two persons, ejectment
Facts:
- After Candido Caluza died in 1981, his second
wife Purificacion and his legally adopted
daughter from his first marriage Corazon
executed a deed of extrajudicial settlement
adjudicating between themselves Candidos
properties. Corazon received 3 parcels of land,
Lots 23, 24, and 25, while Purificacion got
Candidos property in Bulacan. Corazon left for
Thailand to marry a Thai and while she was
away, without her knowledge, Purificacion
executed an affidavit of loss alleging that the
TCTs of Lots 24-25 were lost. Purificacion filed
a petition for a new TCT, claiming that she was
the owner of the aforementioned lots which
was granted.
- She later on sold them to Catalina Remorin
who then mortgaged Lots 24 and 25 to L&R
Corp for P200,000. After finding out, Corazon
filed for reconveyance, and damages, as well
as a complaint for falsification against
Purificacion and Catalina. Catalina then
executed a deed of transfer, signed by
Purificacion admitting their wrong and
acknowledging Corazon as the rightful owner
of the lots.
- New TCTs were issued under Corazons
name, but prior to that, Catalina mortgage
(again? wtf how can that happen) Lots 24 and
25 to Laurelia Caluza-Valenciano to pay off
her mortgage indebtedness to L&R.
- Eventually, the parties settled the civil
case pending by coming to an agreement
which was executed in March, 1988, stating
that Corazon would cede to Purificacion
ownership of the lots provided that
Purificacion would assume satisfaction of the
mortgage of Catalina.
Obligations and Contracts
- HOWEVER, Purificacion died shortly after so
they made a new agreement, which stated
that the property shall be transferred directly
to its interested buyer with Catalina paying
her mortgage obligation to Laurelia from the
proceeds of the said sale. Corazon sold the lot
to Laurelia on May, 1989. BUT Catalina also
sold it to Mariquita Macapagal on August,
1989.
- Laurelia demanded Mariquita to vacate to no
avail, so she filed for ejectment. Mariquita
filed for nullification of contract and
damages.
- RTC ruled for Mariquita, CA reversed and
ruled for Corazon and Laurelia.
Issue/s:
WHO had the right to sell the aforementioned
property
Ruling:
CORAZON HAD THE RIGHT TO SELL THE
AFOREMENTIONED PROPERTY THUS THE SALE
TO LAURELIA SHALL BE VALID.
Ratio:
- Corazon was the registered owner of the
disputed lot at the time the 2 sales were
executed. As owner, she had the right to
enjoy and dispose of the lot as well as
exclude and person from the said enjoyment
and disposal.
- A waiver of such rights cannot be casually
attributed when the terms thereof explicitly
prove and there is no showing of intent to
abandon the said rights.
- The second agreement cannot be taken as
a waiver of Corazons authority to enjoy and
dispose because the agreement merely
stipulated that Catalina satisfy her mortgage
obligation through the proceeds of the sale.
- It WAS imperative that the money for the
satisfaction of the mortgage obligation should
come from the sale BUT it was not expressly
stated nor did it mean that Catalina herself
should be the one to sell the property.
Authority to sell must be couched in clear,
unmistakable language. The intent to give
Catalina the right to sell the property CANNOT
242 291
 be attributed to Corazon because in the first
place, she was the one who filed for
reconveyance, damages, and a criminal
complaint for falsification to get her property
back.
- Petitioner Mariquita cannot demand
enforcement of the compromise agreement
being an interested buyer because she is a
stranger to the agreement and compromise
agreements determine the rights only of the
parties to it. She cannot be a buyer in good
faith considering that she did not buy the
disputed lot from the registered owner.
Moreover, in double sales of real property,
ownership passes on to the vendee who in
good faith first recorded it in the Registry
of Property. Laurelia was issued a TCT on July
1989 through the sale executed with Corazon.
- The fact that the deed of sale between
respondents Corazon and Laurelia did not
accurately reflect the true consideration
thereof is not cause for declaration of its nullity.
When the parties intended to be bound by the
contract except that it did not reflect the
actual purchase price of the property, there is
only a relative simulation of the contract
which remains valid and enforceable. It
cannot be declared null and void since it does
not fall under the category of an absolutely
simulated or fictitious contract. The contract of
sale is valid but subject to reformation.

(The last paragraph was taken exactly from the

courts decision. Im not exactly sure WHY the
sale between Corazon and Laurelia was
considered a relative simulation. Im guessing
that since Corazon sold it to Laurelia, and the
proceeds from the said sale were to be used to
satisfy the mortgage obligation to Laurelia
herself, then the money didnt really change
hands, and as such, the contract did not exactly
reflect the actual price of the property, as the
court mentioned.)

Obligations and Contracts 243 291

 Blas V. Santos
G.R. No. L-14070
March 29, 1961
Labrador, J.
Chaz Poblador
Keywords: 2 marriages; no liquidation
Facts:
- Simeon Blas had two marriages. First was with
Marta Cruz with whom he had three children.
Blas then married Maxima Santos after his first
wife died. No liquidation of properties for the
first marriage was made.
- On December 26, 1936, a week before Blas
died, he executed a last will and testament
which stated that:
During my second marriage with Maxima
Santos de Blas, I possessed and acquired wealth
and properties, consisting of lands, fishponds
and other kinds of properties, the total assessed
value of which reached the amount
P678,880.00.
One-half of our properties, after the payment
of my and our indebtedness, all these
properties having been acquired during
marriage (conjugal properties), constitutes the
share of my wife Maxima Santos de Blas,
according to the law.
- Basically, is will stated that all his
properties are conjugal properties (including
unliquidated ones from first marriage) and
that of them goes to Maxima as her share in
the conjugal partnership.
- On the same day, Maxima executed a
document (Exhibit A) stating that she
recognized the will of her husband, and that she
would hold half of her share in trust for the
heirs and legatees that were named in the will
of her husband, with the obligation of
conveying to them this share as she may choose
in her own last will. Her obligation, therefore,
was to give the indicated properties to the heirs
of Blas. Maxima died without conveying any of
the property.
- The petitioners, who were some of the heirs
indicated in the will, filed a case against the
Obligations and Contracts
administratix of the estate of Maxima. They
requested that the said properties so promised
be adjudicated to them. They contend that
Exhibit A is both a trust agreement and a
contract in the nature of a compromise to
avoid litigation.
- The defendants claim that Exhibit A is a
contract of future inheritance and therefore it
is not enforceable because no property is
capable of determination.
- The lower court sided with the defendants and
said that Exhibit A did not create any right in
favor of the petitioners. It is not an enforceable
contract because of a lack of consideration and
that the contract deals with future inheritance.
Issue/s:
WON petitioners can make a claim for the
properties received by Maxima from her
husbands will
Ruling:
- YES. Lower court reversed and defendants
should convey the contested properties to the
petitioners.
Ratio:
- Exhibit A was ordered by Simeon Blas evidently
to prevent his heirs by his first marriage from
contesting his will and demanding liquidation
of the conjugal properties acquired during the
first marriage. It is therefore a compromise
agreement as defined in Art. 1809 of the Civil
Code of Spain: "Compromise is a contract by
which each of the parties in interest, by giving,
promising, or retaining something avoids the
provocation of a suit or terminates one which
has already been instituted."
- The court also rejected the contention
that Exhibit A was a contract of future
inheritance, which is prohibited to be the
subject matter of a contract under Article
1271 of the CC (1347 in NCC).
- They defined future inheritance as
any property or right not in existence or
capable of determination at the time of
244 291
 the contract, that a person may acquire
by succession.
- However, in this case, the properties
under Exhibit A are well defined, existing
at the time of the agreement because
Blas clearly indicated that they belonged
to Maxima as her share in the conjugal
partnership.

Obligations and Contracts 245 291

 J.L.T. Agro, Inc. V. Balansag and Cadayday
G.R. No. 141882
March 11, 2005
Tinga, J.
Laurie Quiambao
Keywords: compromise agreement
Facts:
- Don Julian Teves contracted 2 marriages: 1st
with Antonia (2 children: Josefa and Emilio) and
the 2nd after Antonias death, with Milagros (4
children: Maria Evelyn, Jose Catalino, Milagros,
Pedro).
- When Antonia died, there was a case for
partition and damages. The conjugal partnership
properties were the subject of this suit. This
included Bais Cadastre (Lot No. 63) - the subject
of the present controversy. Later, the parties to
the case entered into a Compromise Agreement
which embodied the partition of all the
properties of Don Juan. CFI declared Hacienda
Medalla Milagrosa as property owned by Don
Julian and his 2 children from the first marriage.
Don Julian retained the remainder of the
properties (including Bais Cadastre).
- Paragraph 13 (effect of the eventual death of
Don Juan) of the Compromise Agreement states:
13. That in the event of death of Julian L.
Teves, the properties hereinafter
adjudicated to Josefa Teves Escano and
Emilio B. Teves, (excluding the properties
comprised as Hacienda Medalla Milagrosa
together with all its accessories and
accessions) shall be understood as including
not only their one-half share which they
inherited from their mother but also the
legitimes and other successional rights
which would correspond to them of the
other half belonging to their father, Julian L.
Teves. In other words, the properties now
selected and adjudicated to Julian L. Teves
(not including his share in the Hacienda
Medalla Milagrosa) shall exclusively be
adjudicated to the wife in second marriage of
Obligations and Contracts
Julian L. Teves and his four minor children,
namely, Milagros Donio Teves, his two
acknowledged natural children Milagros
Reyes Teves and Pedro Reyes Teves and his
two legitimated children Maria Evelyn Donio
Teves and Jose Catalino Donio Teves.
- During his life time, Don Julian (with Emilio and
Josefa) executed a Deed of Assignment of Assets
with Assumption of Liabilities in favor of J.L.T.
Agro, Inc.5
- Less than a year later, they executed an
instrument entitled Supplemental to the Deed of
Assignment of Assets with the Assumption of
Liabilities (Supplemental Deed), which
transferred ownership of Lot No. 63 (and other
properties) in favor of the J.L.T. When Don
Julian died, J.L.T. sought the registration of Lot
No. 63 in its name based on the Supplemental
Deed. The same was granted to it and since then
J.L.T. has been paying taxes assessed on the
subject lot.
- Meanwhile, Milagros took over the possession
of Lot No. 63 after the execution of the
Compromise Agreement and leased it to
Balansag and Cadayday. Milagros et al. then
executed a Deed of Extrajudicial Partition of Real
Estate wherein Lot No. 63 was allotted to them.
Balansag and Cadayday subsequently bought the
lot from Milagros et al. without knowing that lot
was already registered in J.L.T.s name. They
failed to register the deed of absolute sale
because the lot was already J.L.Ts. Balansag and
Cadayday filed a complaint seeking the
declaration of nullity and cancellation of TCT No.
T-375 + damages.
TC: found that Lot No. 63 was validly transferred
to JLT and since the right of Milagros et al would
only arise upon Don Julians death, they had no
right to sell the lot (because nauna yung transfer
to JLT kesa sa pagbenta nina Milagros et al to B
and C) complaint dismissed. B and C to vacate
Lot 63.
5 J.L.T. Agro Inc. is a family company headed by Don Julian.
Josefa is the treasurer.
246 291
 CA: Reversed TC. Once the Compromise
Agreement was executed, the two sets of heirs
acquired full ownership. Supplemental Deed
contains a prohibited preterition6 of Don Julians
heirs from the 2nd marriage.
Issue/s:
WON the ownership Lot No. 63 was validly
transferred to the 2nd wife + family during the
lifetime of Don Julian > the 2nd wife + family
only had an inchoate right before the death of
Don Julian
Ruling:
CA decision affirmed.
Ratio:
- JLT argues that the CA erred in holding that
future legitime can be determined, adjudicated,
and reserved prior to the death of Don Julian. SC
agrees and cites Art 1347. All things, even future
ones, which are not outside the commerce of
man may be the object of a contract. The
exception is that no contract may be entered into
with respect to future inheritance, and the
exception to the exception is the partition inter
vivos referred to in Art. 1080.
- For the inheritance to be considered "future,"
the succession must not have been opened at
the time of the contract. A contract may be
classified as a contract upon future inheritance,
prohibited under the second paragraph of Article
1347, where the following requisites concur: (1)
That the succession has not yet been opened; (2)
That the object of the contract forms part of the
inheritance; and (3) That the promissor has, with
respect to the object, an expectancy of a right
which is purely hereditary in nature.
- Art. 1080 on the other hand, authorizes a
testator to partition inter vivos his property, and
distribute them among his heirs, and this
6Preterition - omission of the heir in the will, either by not
naming him at all or, while mentioning him as father, son,
etc., by not instituting him as heir without disinheriting
him expressly, nor assigning to him some part of the
properties. It is the total omission of a compulsory heir in
the direct line from inheritance
Obligations and Contracts
partition is neither a donation nor a testament,
but an instrument of a special character, sui
generis, which is revocable at any time by the
causante during his lifetime, and does not
operate as a conveyance of title until his death.
- It was not a will that was executed by Don Julian
but a partition inter vivos, and as such, it is
premature to speak of preterition prior to his
death in the absence of a will depriving a legal
heir of his legitime. The partition inter vivos of
the properties of Don Julian (as evidenced by
the court approved Compromise Agreement) is
undoubtedly valid pursuant to Article 1347. -
However, considering that it would become
legally operative only upon the death of Don
Julian, the right of his heirs from the second
marriage to the properties adjudicated to him
under the compromise agreement was but a
mere expectancy. So, Don Julian remained the
owner of the property during his lifetime and
could thus validly dispose of it. But it is pointed
out by the Court that there was a grave
irregularity and illegality marring the replacement
of Don Julians OCT No. 5203 by the TCT No. T-
375 of JLT based on the procedure and
requirements provided by Section 53 and 57 of
PD No. 15297.
7 PD 1529 (Property Registration Decree)
SEC. 53. Presentation of owners duplicate upon entry of
new certificate. No voluntary instrument shall be
registered by the Register of Deeds unless the owners
duplicate certificate is presented with such instrument,
except in cases expressly provided for in this Decree or
upon order of the court, for cause shown.
SEC. 57. Procedure in registration of conveyances. An
owner desiring to convey his registered land in fee simple
shall execute and register a deed of conveyance in a form
sufficient in law. The Register of Deeds shall thereafter
make out in the registration book a new certificate of title
to the grantee and shall prepare and deliver to him an
owners duplicate certificate. The Register of Deeds shall
note upon the original and duplicate certificate the date of
transfer, the volume and page of the registration book in
which the new certificate is registered and a reference by
number to the last preceding certificate. The original and
the owners duplicate of the grantors certificate shall be
stamped "cancelled." The deed of conveyance shall be
filed and endorsed with the number and the place of
registration of the certificate of title of the land conveyed.
247 291
 - When a transferee relies on a voluntary
instrument to secure the issuance of a new title
in his name, that instrument has to be
presented to the Register of Deeds. In this case,
JLT bases its right to the subject lot on the
Supplemental Deed and thus should have
presented it to the Register of Deeds.
- Apparently, it had not done so because:
Assignment in Supplemental Deed is not
supported by any consideration > absence of
the usual recital of consideration in a transaction
+ JLT is a corporation headed by Don Julian
forecloses the application of the presumption of
existence of consideration -> Supplemental Deed
lacks an essential element of contracts (cause)
and is thus void.
1. The Supplemental Deed doesnt
constitute a deed of conveyance of the
registered land in fee simple in the form
sufficient in law as required by Sec. 57 PD
1529. The amount of P84k in the instrument
is a mere statement of the market value of all
the 19 properties enumerated in the
instrument (including Lot No. 63).
2. 1948 mortgage annotated on TCT No. T-
375 was executed in favor of Rehabilitation
Finance Corporation and not JLT. There was
no showing that JLT paid off the mortgage
obligation and thus, could not have been the
consideration for the assignment to JLT.
- Also, Supplemental Deed not a donation -> yes
public document, but no acceptance in the same
deed or separate doc.
- Art. 749. In order that the donation of the
immovable may be valid, it must be made in a
public document, specifying therein the
property donated and the value of the charges
which the donee must satisfy. The acceptance
may be made in the same deed of donation or in
a separate public document, but it shall not take
effect unless it is done during the lifetime of the
donor. If the acceptance is made in a separate
instrument, the donor shall be notified thereof
in an authentic form, and this step shall be
noted in both instruments.

Obligations and Contracts 248 291

 Liguez V. CA
G.R. No. L-11240
Dec. 18, 1957
Reyes, J.B.L., J.
Paolo Quilala
Keywords: DOM, land for sex
Facts:
- Salvador Lopez (DOM) wanted to have
sexual relations with appellant Conchita
Liguez (16 years old) he confessed to his love
for appellant to the instrumental witnesses,
with the remark that her parents would not
allow Lopez to live with her unless he first
donated the land in question.
- After the donation, Conchita and Salvador
lived together in the house that was built
upon the latter's orders, until Lopez was
killed on July 1943, by some guerrillas who
believed him to be pro-Japanese.
- It was also ascertained by the Court of
Appeals that the donated land originally
belonged to the conjugal partnership of his
legal wife, Maria Ngo.
- Maria now seeks nullity of the donation
because the cohabitation was an implied
condition to the donation, and being unlawful,
necessarily tainted the donation itself.
Issue/s:
WON the donation of land is null and void for
having an illicit causa
Ruling: NO
Ratio:
- Under Article 1274, liberality of the donor is
deemed causa in those contracts that are of
"pure" beneficence; contracts designed solely
and exclusively to procure the welfare of the
beneficiary, without any intent of producing
any satisfaction for the donor; contracts, in
other words, in which the idea of self- interest
is totally absent on the part of the transferor.
In case at hand, the donation was not pure
beneficence as there was a service that was
required for the donation, which is for
Obligations and Contracts
Conchita to have sexual relations with
Salvador.
- Appellant was a mere minor, 16 years of
age, when the donation was made; there is
no finding made by the Court of Appeals
that she was fully aware of the terms of
the bargain entered into by and Lopez and
her parents; that, her acceptance in the
deed of donation (which was authorized by
Article 626 of the Old Civil Code) did not
necessarily imply knowledge of conditions
and terms not set forth therein; and that
the substance of the testimony of the
instrumental witnesses is that it was the
appellant's parents who insisted on the
donation before allowing her to live with
Lopez.
- These facts are more suggestive of
seduction than of immoral bargaining on
the part of appellant. It must not be
forgotten that illegality is not presumed,
but must be duly and adequately proved.
Since Lopez is the party at fault, he is
barred from setting up the plea that said
donation is illegal according to Art 1412,
and as such, his heirs and successors in
interest can have no better rights than
Lopez himself.
- Lopez could not donate the entirety of the
property in litigation, to the prejudice of his
wife Maria Ngo, because said property was
conjugal in character and the right of the
husband to donate community property is
strictly limited by law. Therefore according to
articles below, it is plain that donation made
by the husband in contravention of the law is
not void in its entirety but only so far as it
prejudices the interest of the wife and the
compulsory legitime of the children which is
granted to them by law.
ART. 1409. The conjugal partnership shall
also be chargeable with anything which may
have been given or promised by the
husband alone to the children born of the
marriage in order to obtain employment for
them or give then, a profession or by both
spouses by common consent, should they
249 291
 not have stipulated that such expenditures
should be borne in whole or in part by the
separate property of one of them.".
ART. 1415. The husband may dispose of the
property of the conjugal partnership for the
purposes mentioned in Article 1409.
ART. 1413. In addition to his powers as
manager the husband may for a valuable
consideration alienate and encumber the
property of the conjugal partnership
without the consent of the wife.
- With regard to the improvements in the
land in question, the same should be
governed by the rules of accession and
possession in good faith, it being undisputed
that the widow and heirs of Lopez were
unaware of the donation in favor of the
appellant when the improvements were
made.

Obligations and Contracts 250 291

 Carantes V. CA
G.R. No. L-33360
Apr 25, 1977
Castro, C.J.
Alex Ramos
Keywords: Loakan Airport; sole owner one of
his children only
Facts:
- Mateo Carantes was the original owner of Lot
No. 44 situated at Loakan, Baguio City. He was
survived by his widow Ogasia and six children.
- Because a portion of Lot No. 44 was
needed for the landing field of the Loakan
Airport, the Government instituted
proceedings for its expropriation. Lot was
divided into 44-A to 44-E.
- One of his sons, herein petitioner Maximino
Carantes, was appointed and qualified as
judicial administrator of the estate. He filed a
project of partition wherein he listed as the
heirs of Mateo Carantes who were entitled to
inherit the estate, himself and his brothers and
sisters, or the latter's surviving children
Apparently because negotiations were, by that
time, under way for the purchase by the
Government of Lots Nos. 44-B and 44-C.
- Deed denominated "Assignment of Right to
Inheritance" was executed by four of Mateo
Carantes children, namely, Bilad, Sianang, Lauro
and Crispino, and the heirs of Apung Carantes
(also a son of Mateo who died in 1923).
- It assigned their rights to their inheritance to
Maximino for a consideration of P1.00 and also
contained a recital that private respondents
have agreed to cede their rights to inherit the
remaining lots to Maximino, saying that this is
with respect to Mateo having verbally
conveyed the remaining lots to Maximino
alone, and that these belonged to the latter
exclusively.
- Maximino sold lots 44 B and 44 C to the
government, dividing the proceeds among the
parties. The parties had OCT 3 cancelled and
replaced with TCT 2533, in all their names as co-
owners. However, when Maximino registered
the deed of assignment, he named himself as
Obligations and Contracts
the sole owner of the property. A44-C was
given to the government, 44D-E was named to
him alone.
- Respondents only knew about it when they
secured a copy of the deed. They filed a
complaint thereafter.
RESPONDENTS: they were made to believe that
the agreement merely empowered Maximino to
represent them in conveying /44 A-C to the
government in order to minimize costs
Defense: They knew what they were doing and
right of action has already prescribed
TC: Date relevant to prescription period was
March 16, 1940
Issue/s:
WoN the P1.00 consideration is so shocking to
the conscience that there was in fact no
consideration, hence rendering the agreement
void ab initio
Ruling:
No, there was proper consideration. Only
total absence of cause or consideration
renders a contract void. (Art. 1409)
Ratio:
The sum of P1.00 appears in the document as
one of the considerations for the assignment
of inheritance. In addition and this of
great legal import the document recites
that the decedent Mateo Carantes had,
during his lifetime, expressed to the
signatories to the contract that the property
subject-matter thereof rightly and exclusively
belonged to the petitioner Maximino
Carantes. This acknowledgment by the
signatories definitely constitutes valuable
consideration for the contract.
From what time must fraud be deemed to
have been discovered?
- Fraud is deemed to have been discovered
from March 16, 1940, the time the assignment
was registered in the Register of Deeds. It was
only after 18 years when they filed the
complaint hence action has already prescribed.
251 291
 No express trust bound both parties hence only
constructive notice is needed.

Obligations and Contracts 252 291

 Sps. Buenaventura, et al. V. CA
G.R. No. 126376
Nov 20, 2003
Carpio, J.
Dean Reposar
Keywords: legitime not impaired; no legal
capacity
Facts:
- Defendant spouses Leonardo Joaquin and
Feliciana Landrito are the parents of plaintiffs
Consolacion, Nora, Emma and Natividad as well
as of defendants Fidel, Tomas, Artemio, Clarita,
Felicitas, Fe, and Gavino, all surnamed
JOAQUIN. The married Joaquin children are
joined in this action by their respective spouses.
- Sought to be declared null and void ab initio
are certain deeds of sale of real property
executed by defendant parents Leonardo
Joaquin and Feliciana Landrito in favor of their
co-defendant children and the corresponding
certificates of title issued in their names.
- In their complaint the petitioners aver that the
Deeds of Sale are simulated and null and void
ab initio.
a) Firstly, there was no actual valid
consideration for the deeds of sale xxx over
the properties in litis;
b) Secondly, assuming that there was
consideration in the sums reflected in the
questioned deeds, the properties are more
than three-fold times more valuable than
the measly sums appearing therein;
c) Thirdly, the deeds of sale do not reflect
and express the true intent of the parties
(vendors and vendees); and
d) Fourthly, the purported sale of the
properties in litis was the result of a
deliberate conspiracy designed to unjustly
deprive the rest of the compulsory heirs
(plaintiffs herein) of their legitime.
- Defendants, on the other hand aver (1) that
plaintiffs do not have a cause of action against
them as well as the requisite standing and
interest to assail their titles over the properties
in litis; (2) that the sales were with sufficient
Obligations and Contracts
considerations and made by defendants parents
voluntarily, in good faith, and with full
knowledge of the consequences of their deeds
of sale; and (3) that the certificates of title were
issued with sufficient factual and legal basis.
Issue/s:
Whether the Deeds of Sale are void for gross
inadequacy of price
Ruling:
No. The SC held that the petitioners failed to
prove any instances in Art 1355 and art 1470
that would invalidate the Deeds of Sale. There is
no requirement that the price be equal to the
exact value of the subject matter of sale.
Ratio:
- TC: dismissed the case; In the first place, the
testimony of the defendants, particularly that of
the father will show that the Deeds of Sale were
all executed for valuable consideration. This
assertion must prevail over the negative
allegation of plaintiffs. And then there is the
argument that plaintiffs do not have a valid
cause of action against defendants since there
can be no legitime to speak of prior to the
death of their parents. The court finds this
contention tenable. In determining the legitime,
the value of the property left at the death of
the testator shall be considered (Art. 908 of the
New Civil Code). Hence, the legitime of a
compulsory heir is computed as of the time of
the death of the decedent. Plaintiffs therefore
cannot claim an impairment of their legitime
while their parents live.
- CA: affirmed TC decision. [Their] right to the
properties of their defendant parents, as
compulsory heirs, is merely inchoate and vests
only upon the latters death. While still alive,
defendant parents are free to dispose of their
properties, provided that such dispositions are
not made in fraud of creditors. The plaintiffs
are not parties to the alleged deed of sale and
are not principally or subsidiarily bound
thereby; hence, they have no legal capacity to
challenge their validity.
- The SC held that the petitioners failed to
prove any instances in Art 1355 and art 1470
253 291
 that would invalidate the Deeds of Sale. There is
no requirement that the price be equal to the
exact value of the subject matter of sale.
- Art. 1355. Except in cases specified by law,
lesion or inadequacy of cause shall not
invalidate a contract, unless there has been
fraud, mistake or undue influence.
- Art. 1470. Gross inadequacy of price does not
affect a contract of sale, except as may indicate
a defect in the consent, or that the parties really
intended a donation or some other act or
contract.
- As the Court held in Vales v Villa: Courts
cannot follow one every step of his life and
extricate him from bad bargains, protect him
from unwise investments, relieve him from one-
sided contracts, or annul the effects of foolish
acts.
- The factual findings of the appellate court are
conclusive and binding to both the parties,
especially if the findings coincide with that of
the trial court, giving them more weight. The
TC found that the lots were sold for a valid
consideration and that the defendant
children actually paid the purchase price
stipulated in their respective Deeds of Sale.

Obligations and Contracts 254 291

 Hernaez V. De los Angeles
G.R. No. L-27010
Apr 30, 1969
Reyes, J.B.L., Acting C.J.
Gianella Reyes
Keywords: motion picture actress; no written
document
Facts:
- Petitioner Marlene Dauden-Hernaez, a
motion picture actress, had filed a
complaint against herein private respondents,
Hollywood Far East Productions, Inc., and its
President and General Manager, Ramon
Valenzuela, to recover P14,700.00
representing a balance allegedly due said
petitioner for her services as leading actress
in two motion pictures produced by the
company, and to recover damages.
- Her petition was dismissed by the lower court
because claim of the plaintiff was not
evidenced by any written document, either
public or private and that the
complaint was defective on its face for
violating Article 1356 and 1358 of the Civil
Code.
- Plaintiff sought reconsideration of the
dismissal and for admission of an amended
complaint, attached to the motion. The court
denied reconsideration and the leave to
amend; whereupon, a second motion for
reconsideration was filed. Nevertheless, the
court also denied it for being pro forma, as its
allegations "are, more or less, the same as the
first motion", and for not being accompanied
by an affidavit of merits, and further declared
the dismissal final and unappealable.
- That by Article 1358 the writing was
absolute and indispensable, because the
amount involved exceeds five hundred
pesos (P500); and that the second motion
for reconsideration did not interrupt the
period for appeal, because it was not served
on three days' notice.
Issue/s:
Obligations and Contracts
WON the court below abused its discretion
in ruling that a contract for personal services
involving more than P500 was either invalid
or unenforceable under the last par of 1358
of the Civil Code.
Ruling:
- YES. The court below abused its discretion.
There was a misunderstanding of the role of the
written form in contracts, as ordained in the
present Civil Code.
- The order dismissing the complaint is SET
ASIDE, and the case is ordered REMANDED to
the court of origin for further proceedings not
at variance with this decision.
Ratio:
- The contractual system of our Civil Code still
follows that of the Spanish Code of 1889 and
of the Ordenamiento de Alcala of
upholding the spirit and intent of the
parties over formalities, hence, in general,
contracts are valid and binding from their
perfection regardless of the form, whether
they be oral or written as provided by Art
1315 (Contracts are perfected by mere
consent xxx) and by Art 1356 (Contracts shall
be obligatory in whatever form they may
have been entered into xxx).
- However 1356 also provides two exceptions:
a. Contracts for which the law itself requires
that they be in some particular form
(writing) in order to make them valid and
enforceable (the so-called solemn
contracts).
b. Contracts that the law requires to be
proved by some writing (memorandum) of
its terms as in those covered by the old
Statute of Frauds, now Art 1403 (2) of the
Civil Code. (This is needed for enforceability
of the contract by an action in court).
- The error in the courts decision lies in
overlooking that in our contractual system it is
not enough that the law should require that the
contract be in writing, as it does in Art 1358.
The law MUST further PRESCRIBE that without
the writing the contract is not valid or
enforceable by action.
255 291
 Resuena V. CA
G.R. No. 128338
March 28, 2005
Tinga, J.
Nasha Reyes
Keywords: co-owners; beach resort
Facts:
Juanito Borromeo, Sr. is the co-owner and
overseer of certain parcels of land located in
Pooc, Talisay, Cebu, designated as Lots Nos.
2587 and 2592 of the Talisay-Manglanilla
Estate.
He owns 6/8 of Lot No. 2587 while the
Sps. Bascon owned the remaining 2/8 thereof.
On the other hand, Lot No. 2592 is owned in
common by Borromeo and the heirs of one
Maneja. However, the proportion of their
undivided shares was not determined a quo.
The Resuenas and Garay resided in the
upper portion of Lot No. 2587, allegedly under
the acquiescence of the Spouses Bascon and
their heir, Andres Bascon. With regard to the
other lot, Rosario occupied a portion of it,
allegedly with the permission of the heirs of
Nicolas Maneja, one of the original co -
owners of Lot No. 2587. However, Borromeo
claimed that they have occupied portions of
the subject property by virtue of his own
liberality.
- Borromeo developed portions of Lots Nos.
2587 and 2592 occupied by him into a resort
known as the Borromeo Beach Resort. In his
desire to expand and extend the facilities of
the resort that he established on the subject
properties, respondent demanded that
petitioners vacate the property. Petitioners,
however, refused to vacate their homes.
Thus, on 16 February 1994, Borromeo filed a
Complaint for ejectment with the MTC against
the petitioners.
MTC dismissed the complaint and declared that
Borromeo had no right to evict the petitioners
because the area was owned in common and there
was no partition yet.
- RTC reversed the MTC decision. It held that
Article 487 of the Civil Code, which allows any one
Obligations and Contracts
of the co-owners to bring an action in ejectment,
may successfully be invoked by the respondent
because, in a sense, a co-owner is the owner and
possessor of the whole, and that the suit for
ejectment is deemed to be instituted for the
benefit of all co-owners. CA affirmed the RTC
decision.
Issue/s:
WON the petitioners have the right to occupy
the property even if there is no written
contract evidencing such
Ruling:
NO. Borromeo has a right to eject the
petitioners. The creation of real rights over
immovable property must appear in a public
document. Moreover, there is no basis to
review Rosarios claim. -> CA ruling is
maintained
Ratio:
- It is of no moment whether indeed, as
petitioners claim, there was a verbal
contract between Basilisa Maneja and
Borromeo when the latter indicated the
portions they each were to occupy in Lot No.
2587. Such verbal contract, assuming there
was one, does not detract from the fact that
the common ownership over Lot No. 2587
remained inchoate and undivided, thus
casting doubt and rendering purely
speculative any claim that the Spouses Bascon
somehow had the capacity to assign or
transmit determinate portions of the property
to petitioners.
- NO writing presented to evidence any claim
of ownership or right to occupancy to the
subject properties. NO lease contract.
- Article 1358 of the Civil Code provides
that acts which have for their object the
creation, transmission, modification or
extinguishment of real rights over
immovable property must appear in a
public instrument.
- Assuming that there was any verbal
agreement between petitioners and any of the
owners of the subject lots, Article 1358
grants a coercive power to the parties by
256 291
 which they can reciprocally compel the
documentation of the agreement.
- The absence of any document or any
occupancy right of petitioners as a
negation of their claim that they were allowed
by the Spouses Bascon to construct their
houses thereon and to stay thereon until
further notice.
- Article 487 of the Civil Code, which provides
simply that any one of the co-owners may
bring an action in ejectment, is a categorical
and an unqualified authority in favor of
respondent to evict petitioners from the
portions of Lot. No. 2587. Thus, a co-owner
may bring an action to exercise and protect the
rights of all. When the action is brought by one
co-owner for the benefit of all, a favorable
decision will benefit them; but an adverse
decision cannot prejudice their rights.
- Petitioners lack of authority to occupy the
properties, coupled with respondents right
under Article 487, clearly settles respondents
prerogative to eject petitioners from Lot No.
2587. Time and again, this Court has ruled that
persons who occupy the land of another at the
latter's tolerance or permission, without any
contract between them, are necessarily bound
by an implied promise that they will vacate the
same upon demand, failing in which a summary
action for ejectment is the proper remedy
against them.

Obligations and Contracts 257 291

 Garcia V. Bisaya
G.R. No. L-8060
Sept 28, 1955
Reyes, A., J.
Miguel Sevilla
Keywords: mistake in the deed of sale
Facts:
- Maria Bisaya executed a deed of sale
covering a parcel of land in favor of Paulino
Garcia. The land was erroneously designated
as an unregistered land when in fact, the said
land is a portion of a big mass of land
registered under OCT 6579 under Torcuata
Sandoval, a third person not interested in the
agreement.
- Defendant: action has prescribed.
- Plaintiff: he was without knowledge of the
error sought to be corrected at the time the
deed of sale was executed and only discovered
the error recently.
- Both parties regard the present action as an
action for reformation. The object sought is the
correction of the alleged mistake in a deed of
sale covering a piece of land.
to the real agreement or intention of the
parties.
- How then is the court to know that the
correction sought will make the instrument
conform to what was agreed or intended by
the parties?
Courts reform instruments to enable
some party to assert rights under them
as reformed. What right will Garcia be
able to assert under the reformed
instrument when according to himself,
said title is in the name of Sandoval.
The sale would be ineffective, either
way.
2) Art 1359 NCC: proper remedy is not
reformation of the instrument but annulment
of the contract.

Issue/s:
1) WON action for reformation was properly
raised
2) WON reformation is the proper action

Ruling:
1) NO. Garcias complaint shows no cause of
action, for it fails to allege the instrument to be
reformed does not express the real agreement
or intention of the parties.
2) NO. Perhaps the real grievance of Garcia is
that he has been led to enter into a deed of
sale through fraud or misrepresentation

Ratio:
1) The allegation of an instrument not
expressing the real agreement or intention of
the parties is essential because an action for
reformation is to make an instrument conform

Obligations and Contracts 258 291

 Bentir V. Leanda
G.R. No. 128991
Apr 12, 2000
Kapunan, J.
Jechel Tan de Guzman
Keywords: right of first refusal; reformation;
prescription
Facts:
- Respondent corporation alleged that it
entered into a contract of lease of a parcel of
land with petitioner Bentir for a period of 20
years starting May 5, 1968. According to
respondent corp., the lease was extended for
another 4 years or until May 31, 1992.
- On May 5, 1989, petitioner Bentir sold the
leased premises to petitioner spouses Samuel
Pormada and Charito Pormada.
- Respondent corporation questioned the sale
alleging that it had a right of first refusal on the
ground that its lawyer inadvertently omitted to
incorporate in the contract of lease executed in
1968, the verbal agreement or understanding
between the parties that in the event petitioner
Bentir leases or sells the lot after the expiration
of the lease, respondent corporation has the
right to equal the highest offer.
Issue/s:
WON prescription has barred reformation
Ruling:
Yes. Prescription is intended to suppress stale
and fraudulent claims arising from transactions
like the one at bar which facts had become so
obscure from the lapse of time or defective
memory.
Ratio:
- In the case at bar, respondent corporation
had 10 years from 1968, the time when the
contract of lease was executed, to file an action
for reformation.
- Sadly, it did so only on May 15, 1992 or 24
years after the cause of action accrued, hence,
its cause of action has become time-barred.
Obligations and Contracts
- The prescriptive period of 10 years provided
for in Art. 1144 applies by operation of law,
not by the will of the parties. Therefore, the
right of action for reformation accrued from
the date of execution of the contract of lease
in 1968. -> Not from the time the extension of
the lease, when the action for reformation of
instrument was filed in 1992 which was within
10 years from the extended period of the lease.
Private respondent theorized, and the Court of
Appeals agreed, that the extended period of
lease was an "implied new lease" within the
contemplation of Article 1670 of the Civil Code.
The SC did not agree.
- Even if we were to assume that prescription
has not lapsed, an action for the reformation
of an instrument is instituted as a special civil
action for declaratory relief. Since the purpose
of an action for declaratory relief is to secure
an authoritative statement of the rights and
obligations of the parties for their guidance in
the enforcement thereof, or compliance, and
not to settle issues arising from an alleged
breach thereof, it may be entertained only
before the breach or violation of the law or
contract to which it refers which in this case
the alleged breach or violation has already
committed.
259 291
 Quiros V. Arjona
G.R. No. 158901
March 9, 2004
Ynares-Santiago, J.
Victoria Tiangco
Keywords: Paknaan (amicable settlement);
reformation not nullification
Facts:
- The petitioners filed a complaint for
recovery of ownership and possession of a
parcel of land which is purported to be
their lawful share of the inheritance
from their late grandmother Rosa Arjona
Quiros (aka Doza).
- On January 5, 1997, a settlement was
reached between the petitioners and
Marcelo Arjona (Paknaan) which states
that by virtue of the land he inherited from
Doza, he is giving a land with more or less 1
hectare to petitioners.
- Another agreement was executed with
Jose Banda which signifies the intent to
vacate the land he is tilling, for and in
behalf of the Arjona family. However, upon
inspection, the land referred to in the 2nd
Paknaan is different from that of the first.
- The petitioners filed a complaint for the
execution of the compromise agreement
but it was denied because the subject
property cannot be determined with
certainty.
Issue/s:
WON the amicable settlement (Paknaan) is
valid and enforceable
Ruling:
- It is valid but not enforceable. The Court
could not issue execution of the amicable
settlement because the subject property
cannot be determined with certainty.
However the parties could file an action for
reformation.
Ratio:
Obligations and Contracts
- Petitioner: Section 416 of Local Govt Code
provides that an amicable settlement shall
have the force and effect of a final judgment
upon the expiration of 10 days from the date
thereof, unless nullified by the proper court.
In this case, no such nullification exists,
therefore, Court must execute the agreement.
- Generally, the rule is that where no
repudiation was made during the 10 day period,
the amicable settlement attains the status of
finality and it becomes the ministerial duty of
the court to implement and enforce it.
However this rule is flexible as it admits
certain exceptions which would render the
execution just.
- An amicable settlement, having the
nature of a contract, is subject to the
same legal provisions proving for the
validity, enforcement, rescission or
annulment of ordinary contracts. In order to
be valid, the amicable settlement should
comply with the requisites of validity in
accordance with Art. 1318.
1. There was a meeting of minds between
the contracting parties. The petitioners
accepted 1 hectare land being given by
the respondent. It was Arjona who
prepared the agreement wherein Quiros
and Villegas acceded.
2. The object is the 1 hectare land
representing the petitioners inheritance.
Although the land is not identified, the
object is determinable as to its kind.
3. The cause is the delivery of petitioners
share in the inheritance
- The inability of the Court to identify the
exact location of the property did not negate
the principal object of the contract. This is a
mere error to describe the subject property,
and not an indication of an absence of the
principal object. A failure to include a
sufficient description of the property is not
an action for nullification but that of
reformation.
- Reformation is a remedy in equity whereby
a written instrument is made of construes so
as to express or conform to the real
intention of the parties where some error
or mistake has been committed. For
260 291
 reformation to prosper, there are three
requisites:
a) there must be a meeting of minds
of the parties to the contract
b) instrument does not express the
true intention of the parties, and
c) failure of the instrument to express
the true intention of the parties is
due to mistake, fraud, inequitable
conduct of accident.
- When the terms of an agreement have
been reduced to w riting, it is considered as
containing all the terms agreed upon and
there can be no evidence other than the
content except when it fails to express the
true intent and agreement of the parties
thereto.
- In this case, the action to reformation of
the instrument arises to express the true
intention. The parties acknowledge that
petitioners are entitled to their inheritance.
The remedy of nullification will prejudice
and deprive the petitioners of their right.
It has the effect of punishing a person for
a negligent conduct, and the other party
escapes the consequences of his
negligence and profit thereby. This violates
the principle of unjust enrichment.

Obligations and Contracts 261 291

 Atilano V. Atilano
G.R. No. L-22487
May 21, 1969
Makalintal, J.
Kaks Alampay
Keywords: TCT mix-up A vs E; simple mistake
Facts:
- In 1920, Eulogio Atilano I (Atilano 1)
subdivided land he owned into five parcels,
identifying them as Lots 535-A to 535-E. He
sold one parcel, designated as No. 535-E, to
his brother Eulogio Atilano II (Atilano 2) for
Php 150. Lots 535-B, C and D were sold to
other people, while he kept the remaining
portion of land, presumably covered by title
535-A for himself, which passed to
defendant Ladislao Atilano after Eulogio I
passed away.
- Years later, in 1952, Atilano 2 wanted to
partition Lot 535-A among himself and his
children after his wife died. To do this, they
had the land resurveyed, only to find out
their lot was actually 535-E, and not 535-A,
while the land that Ladislao had inherited
from Atilano 1 was 535-A, and not 535-E.
(Basically, the titles on their respective
deeds of sale were mixed up)
- Pending action, Atilano 2 died, but his heirs
instituted an action against Ladislao offering
up 535-A to Ladislao in exchange for 535-E,
which they alleged was what was written in
their deed of sale (understandable, since
535-E had a bigger area than 535-A).
- Ladislaos defense was that the 1920 deed
of sale to Atilano 2 was an involuntary error,
and that the intention of the parties to that
sale (Atilano 1 and Atilano 2) meant to
convey the lot correctly identified as 535-A,
even if the deed stated 535-E, on the basis
that Atilano 1 had built a house on this lot
and had even increased its area while it was
in his possession by purchasing a lot next to
it, before it passed to Ladislao. Ladislao then
interposed a counterclaim that Atilano 2
execute in his favor the corresponding deed
of transfer with respect to 535-E.
Obligations and Contracts
Issue/s:
Whether Atilano 2 is entitled to the REAL
535-E, as stated in his deed of sale, or to
535-A, the land he has been in possession of
the whole time.
Ruling:
- Atilano 2 is entitled to 535-A, the land he has
been in possession of the whole time, and not
535-E. Basis of the Court: real intent of the
parties at the time of the sale.
Ratio:
- When one sells or buys real property a
piece of land, for example 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 of title.
- In this case, the portion correctly referred
to as lot No. 535-A was already in the
possession of the Atilano 2, who had built a
house on it even before Atilano 1 had sold it
to him. Atilano 1 had built a house for
himself on the real 535-E, and both brothers
had lived on their respective lands for years
until the mistake was discovered in 1959.
- The real issue here is not adverse
possession, but the real intention of the
parties to that sale. From all the facts and
circumstances, the real intent of the deed of
sale between the Atilano brothers was 535-A,
even if the deed referred to it as 535-E,
which was a simple mistake in the drafting
of the document. The mistake did not vitiate
the consent of the parties or affect the
validity and binding effect of the contract
between them.
- The proper remedy to such mistake is
REFORMATION OF THE INSTRUMENT: this
remedy is available when, there having
been a meeting of the funds of the parties
to a contract, their true intention is not
expressed in the instrument purporting to
embody the agreement by reason of
mistake, fraud, inequitable conduct on
accident (Art. 1359, et seq.) In this case,
262 291
 there is no need to reform the 1920 deed of
sale since the parties retained possession
their respective properties conformably to
the real intention of the parties to that sale,
and all they should do is to execute mutual
deeds of conveyance.

Obligations and Contracts 263 291

 Sarming et al. V. Cresencio Dy, et al.
G.R. No. 133643
June 6, 2002
Quisumbing, J.
Norly Bayona
Keywords: Complaint for reformation of
Settlement of Estate and Sale; TCT mix up
Facts:
- Two lots [Lot 5734 = OCT 4918-A & Lot 4163 =
OCT 3129-A] were owned by Valentina Flores
which upon her death was given to her 3
children [Jose, Venancio, Silveria]. Lot 5734 was
divided equally among the 3 while Lot 4163 (w/
2 rows of coconut trees as boundaries in the
middle) was divided between Jose and Silveria.
However, Lot 4163 was registered under
Silverias name alone because (as culled from
testimony) because she was alone at the time
they had it registered.
- Joses grandchildren, now owners of Joses deed, thereby ceding in favor of respondents
in Lot 4163 entered into contract with Alejandra
Delfino for the sale of their share (they initially
offered it to Silveria but she declined for lack of
money). Moreover, Silveria declared that
indeed Joses grandchildren were co-owners of
the land and that she was selling her three
coconut trees found in the half portion offered
to Alejandra Delfino for P15.
- The lawyer asked for the delivery of the title of
Lot 4163 but Silveria instead delivered Original
Certificate of Title No. 4918-A [Lot 5734]. At
that time, the parties knew the location of Lot
4163 but not the OCT Number corresponding
to said lot.
- Alejandra Delfino immediately took
possession and introduced improvements on
the purchased lot, which was actually one-half
of Lot 4163 instead of Lot 5734 as designated in
the deed. However, 2 years later Delfino found
out that what was designated in the deed, Lot
5734, was the wrong lot. They found out that
OCT No. 3129-A covering Lot 4163 was still on
file. Alejandra Delfino paid the necessary fees
so that the title to Lot 4163 could be released to
Silveria Flores, who promised to turn it over to
Obligations and Contracts
Pinili for the reformation of the deed of sale.
Despite repeated demands, Silveria did not do
so thus the action for reformation of deed of
sale with damages.
- Both TC and CA ruled in favour of Delfino, TC
citing Atilano doctrine [you buy what you see
not the lot number assigned to certificate of
title] to support its decision.
Issue/s:
1) WON there is a cause of action for
reformation of instrument against Silveria
Flores, and consequently the petitioners
2) WON reformation of the subject deed is
proper by reason of mistake in designating the
correct lot number
Ruling:
It is hereby ordered that the document
entitled Settlement of Estate and Sale be
reformed by changing the phrase Lot 5734 to
Lot 4163 found in the sixth paragraph of the
one-half portion of Lot 4163 instead of Lot
5734.
Ratio:
1) Yes. A close perusal of the deed would show
that Silveria Flores was a party to the contract.
She is not only the seller of the coconut trees
worth P15 but she was also one of the heirs
entitled to the estate of Venancio and
Maxima, one of the heirs of Jose Flores.
- Her name did not appear as one of the sellers
of one-half lot to Alejandra Delfino because
she never sold her share. What was sold was
the one-half share of Jose Flores, as
represented by his heirs.
- It is also established that it was Silveria
herself who delivered the subject lot to the
vendee Alejandra. Through her actions,
Silveria had made the parties to the deed
believe that the lot intended to be the object
of the contract was the same lot described in
the deed.
2) Yes. Reformation is that remedy in equity by
means of which a written instrument is made or
construed so as to express or conform to the
real intention of the parties.
264 291
 - Application of A1359 requisites for
reformation
1. meeting of the minds of the parties to
the contact
- No dispute on the intention of Silveria and
Joses children to sell the lot subject of the
deed but there was a mistake as to the
designation of the lot intended to be sold as
stated in the Settlement of Estate and Sale.
2. instrument does not express the true
intention of the parties
- The totality of the evidence clearly
indicates that what was intended to be sold
to Alejandra Delfino was Lot 4163 and not
Lot 5734.
- Why? One-half of Lot 4163 is in the
possession of plaintiff Alejandra Delfino
since 1956 up to the present.
- Now, why would Alejandra occupy and
possess one-half of said lot if it was not the
parcel of land which was the object of the
sale to her? If it were true that Silveria
Flores was the sole owner of Lot 4163, then
she should have objected when Alejandra
Delfino took possession of one-half thereof
immediately after the sale.
3. failure to express the true intention of
the parties is due to mistake, fraud,
inequitable conduct or accident
- There was a mistake in the preparation of
the document when it designated Lot 5734
as the subject lot in the deed of sale
covered by OCT 4918-A.

Obligations and Contracts 265 291

 Borromeo V. CA
G.R. No. L-22962
Sept. 28, 1972
Fernando, J.
Dianne Cadorna
Keywords: friendship; exception to
prescription
Facts:
- The late Jose A. Villamor, represented by
private respondents herein, was a distributor
of lumber belonging to one Mr. Miller, an
agent of the Insular Lumber Company in Cebu
City. His friend and former classmate, the late
Canuto O. Borromeo, represented by
petitioners herein, used to lend him certain
amounts of money from time to time.
- On one occasion, Villamor had to borrow a
large sum of money from Borromeo, for which
he mortgaged his land and house. He used the
money from this loan to pay off some debts
owing to Mr. Miller, who thereafter filed a civil
action against Villamor and placed an
attachment to his properties, including the
house and lot he mortgaged to secure his loan
from Borromeo.
- Borromeo made several demands for
Villamor to settle his obligation, amounting to
P7,220.00 plus interest of 12% per annum, but
as the latter had no money or property to
settle the same, he then offered to execute a
promissory note in which he promised to pay
his indebtedness even after the lapse of ten
years (Note: the prescriptive period for
obligations of this kind).
- In the note, it was indicated that Villamor
'hereby relinquish, renounce, or otherwise
waive my rights to the prescriptions
established by our Code of Civil Procedure for
the collection or recovery of the above sum of
P7,220.00. * * * at any time even after the
lapse of ten years from the date of this
instrument.
- After the execution of this document,
Borromeo limited himself to verbally
requesting Villamor to settle his indebtedness
from time to time. He did not file any
Obligations and Contracts
complaint against his friend within ten years
from the execution of the document as there
was no property registered in Villamors name
(Note: the land and house mortgaged was
already attached by Mr. Miller in the civil case
he filed against Villamor), and further, he had
been assured by the latter that he can collect
even after the lapse of ten years.
- After this period had prescribed, Borromeo
made various oral demands; however Villamor
still wasnt able to settle his indebtedness.
Thus, Borromeo instituted an action for
collection with the CFI, which ruled in his
favour and ordered Villamor to pay him, but
this ruling was later on reversed by the CA,
which nullified that part in the promissory
note in which Villamor waived the effect of
prescription. This ruling was, according to the
CA, in line with the principle that a person
cannot renounce future prescription.
Issue/s:
WON the CA erred in reversing the ruling of
the CFI
Ruling:
- The court reversed the decision of the Court
of Appeals and reinstated that of the Court of
First Instance.
Ratio:
- YES. The rather summary and curt disposition
of the crucial legal question by the Court of
Appeals places an undue reliance on certain
words employed in the written instrument
executed by the parties to the total disregard of
their intention. In this manner, the Court of
Appeals succumbed to the vice of literalism in
the interpretation of the language of the
promissory note. What vitiates most this
appealed decision, however, is that it would
amount not to just negating an agreement duly
entered into but would put a premium on
conduct that is hardly fair and could be
characterized as duplicitous.
- Understood against the background within
which the loan was obtained by Villamor from
Borromeo, it cannot be said that the latter was
renouncing his right when he did not institute
266 291
 any action to collect the formers debt within
the ten years from the execution of the
promissory note.
- What the Court of Appeals failed to
appreciate is that Borromeo, moved by ties of
friendship, was more than willing to give
Villamor the utmost latitude as to when his
admittedly scanty resources will allow him to
pay. He was not renouncing any right; he was
just being considerate. Besides, Borromeo
could not have effectively foreclosed the
mortgaged property of Villamor as the same
was already attached by Mr. Miller.
- It is a fundamental principle in the
interpretation of contracts that while
ordinarily the literal sense of the words
employed is to be followed, such is not the
case where they "appear to be contrary to the
evident intention of the contracting parties,"
which "intention shall prevail."
- Further, the terms, clauses and conditions
contrary to law, morals and public order
should be separated from the valid and legal
contract when such separation can be made
because they are independent of the valid
contract which expresses the will of the
contracting parties. Between two possible
interpretations, that which saves rather than
destroys is to be preferred. It is also a well-
settled principle that the validity of these
agreements, however, is one thing, while the
juridical qualification of the contract resulting
therefrom is very distinctively another," and is
determined by the principles of law.
- What emerges in the light of all the principles
set forth above is that the first ten years after
the execution of the promissory note on
November 29, 1933 should not be counted in
determining when the action of Borromeo,
now represented by the petitioners, could be
filed. This being the case, he had until
November 29, 1953 to start judicial
proceedings. Considering the fact that the
complaint was filed by Borromeo on January 7,
1953, he therefore rightfully exercised his right
before the period for collection prescribed, and
thus, the order of the CFI directing the
respondents to pay is appropriate and must be
reinstated.

Obligations and Contracts 267 291

 Kasilag V. Rodriguez
G.R. No. 46623
Dec. 7, 1939
Imperial, J.
Maye Cristobal
Keywords: homestead; verbal agreement
Facts:
- Respondents, children and heirs of Emiliana
Ambrosio, filed the case to recover from the
petitioner the possession of the land and
improvements granted by way of homestead
to Emiliana Ambrosio and that petitioner pay
P650 as the approximate value of the fruits of
from the land and to be restrained from
conveying the land and its improvements.
- Petitioner alleged that he was in possession of
the land and fruits by virtue of a mortgage
contract between him and Ambrosio over the
land including the fruits for P1000. In default
4.5 years after the execution, the mortgage
shall be subject to foreclosure.
- A year after the execution of contract,
Emiliana was unable to pay the interests and
tax. She and Kasilag then entered into another
verbal agreement whereby she conveyed to
the latter the possession of the land on the
condition that he would not collect the interest
on the loan, pay the tax and benefit the fruits of
the land and introduce improvements thereon.
Issue/s:
1) WON Contract 1 is an absolute deed of sale
of the land and its improvements, and
therefore void.
2) WON Kasilag acted in bad faith in taking
possession of the land and its fruits.
Ruling:
1) NO. It was valid and with legal effect.
2) NO. From the facts found established by the
CA, it cant be presumed that the petitioner was
aware of a flaw in his title or in the manner of
its acquisition, aside from the prohibition
contained in section 116.
Obligations and Contracts
Ratio:
1) The cardinal rule in the interpretation of
contracts is to the effect that the intention of
the contracting parties should always prevail
because their will has the force of law between
them. If the terms of a contract are clear and
leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulations shall control. And if the words
appear to be contrary to the evident intention
of the parties, the latter shall prevail over the
former. (CC 1281, NCC 1370)
- Another rule in interpretation is that terms,
clauses and conditions contrary to law, morals
and public order should be separated from valid
and legal contract which expresses the will of
the contracting parties.
- Contract 1 should therefore be interpreted
according to the literal meaning, it is a contract
of mortgage (and not a deed of absolute sale)
of the improvements on the land and is
therefore VALID.
- However, the 2nd verbal contract, being a
contract of antichresis, is illegal and void as per
sec. 116 of Act. No.2874.
2) According to Manresa, gross and inexcusable
ignorance of law may not be the basis of good
faith, but possible, excusable ignorance (of fact)
may be such basis. The petitioner is not a
lawyer, and in accepting the mortgage, he
proceeded on the well-grounded belief that he
was not violating the prohibition regarding
alienation of land. He did not know that the
possession and enjoyment of fruits are
attributes of the contract of antichresis and as
alien was prohibited by section 116. Court
therefore held that he acted in good faith.
Contract of antichresis. Art. 2132. Debtor
pledges real property to a creditor, allowing use
and occupation of the pledged property, in lieu
of interest on the loan.
268 291
 Santi V. CA & Heirs of Augusto Reyes
G.R. No. 93625
Nov. 8, 1993
Nocon, J.
Roby Cruz
Keywords: cinema house
Facts:
- Esperanza Jose, on July 12, 1957, leased a
portion of her property to spouses Eugenio
Vitan and Beatriz Francisco for a period of 20
years and automatically extended for another
20 years, with a rental of P220/month. The
spouses constructed a cinema house on the
land and in 1962, they sold all their rights,
interest and participation over the cinema
house, together with the leasehold rights on
the property to Augusto Reyes, Jr.
- A new lease contract was entered between
Reyes Jr. and Jose for a period of 20 years from
and after April 1, 1962 with a P180 monthly
rental payable in advance, with the said period
of lease being "extendable" for another
period of 20 years with a monthly rental
increased to P220, also payable in advance on
or about the first day of each month. Jose then
sold all her rights and participation over the
land to Vicente Santi and TCT was issued to
him afterwards.
- In 1982, Santi wrote Alexander Reyes (as
representative of Augusto who had died)
about the termination of the lease (on Mar.31)
and demanded the peaceful turn-over of
possession. Reyes refused to leave, claiming
that under paragraph 3 of the contract, the
lease was automatically extended for another
20 years with P220/month rental. He then
tendered the said amount to Santi, who
refused to accept it, which led to it being
deposited to the Clerk of Court of the Cavite
MTC. Santi, on the other hand, contended
that to extend the lease contract for another
20 years requires a subsequent agreement
between the parties as the phrase "being
extendable" meant "capable of being
extended." He filed a routine complaint to the
Brgy. Capt, but no settlement was reached. TC
Obligations and Contracts
ruled in favor of petitioner, but CA reversed,
ruling for respondent Reyes.
Issue/s:
WoN paragraph 3 of the lease contract between
Jose and Reyes Jr. should be interpreted as
automatic extension of the lease
Ruling:
TC decision reinstated. Reyes ordered to turn
over possession of the land to Santi and to pay
him P220/month from Apr.1, 1982 until the day
he vacates and turns over the land.
Ratio:
- No, lease is NOT automatically extended.
As original parties to the contract have died, the
terms and conditions of the contract were
resorted to in order to ascertain their true
intention. Under Arts.1370 & 1372 CC, when
terms and stipulations embodied in the
contract are clear and leave no room for
doubt, such should be read in its literal sense
and that there is absolutely no reason to
construe the same in another meaning.
- Unlike the 1957 lease contract between Jose
and the Vitan spouses, the phrase
"automatically extended" did not appear and
was not used in the 1962 lease contract
subsequently entered into by Jose and Reyes,
Jr. because the lessor does not want to be
bound by the stipulation of automatic
extension as provided in the previous lease
contract.
- To the Court, the stipulation "said period of
lease being extendable for another period of
twenty (20) years . . ." is clear that the lessor's
intention is not to automatically extend the
lease contract but to give her time to ponder
and think whether to extend the lease. If she
decides to do so, then a new contract shall be
entered into between the parties. Twenty years
is rather a long period of time and the lessor
may have other plans for the property. If the
intention of the parties were to provide for an
automatic extension of the lease contract,
then they could have easily provided for a
straight forty years contract instead of twenty.
269 291
 - The law further provides that if after the end
of the lease contract, the parties continue to
enjoy the thing leased, an implied lease is
created for the period mentioned in Art.1687
CC, and hence Reyes may continue to occupy
the leased premises provided such is with the
permission and consent of Santi. Since the lease
contract provided for a monthly rental of P220
to be paid by the lessee upon the expiration of
the first 20 years, the lessee (Reyes) shall be
bound by such amount which shall be paid to
the lessor (Santi).

Obligations and Contracts 270 291

 Rapanut V. CA & Flunker
G.R. No. 109680
July 14, 1995
Quiason, J.
Hans Dantes
Keywords: 2 interpretations re: interests
Facts:
- Nov. 29, 1985 Deed of Conditional Sale w/
Mortgage Susan Flunker will sell the land in
Pasay for ~P43K in installments of P500
monthly (5th day of month) and P1000
semianually (June 30 & Dec. 31) with 10%
interest per annum on the remaining balance
until the full amount is paid
- April 1986 Supplemental Agreement
Flunker will sell the portion of her lots for
~P37K in P500 monthly installments (5th day of
month) without need of demand and with
10% interest per annum on the remaining
balance until the full amount is paid. Starts on
January 1986. Failure to pay an installment 3
months due = rescission and previous
payments to be counted as rental.
- Jan. 1986 Jan. 1990 Diego Rapanut paid
P24,500 in monthly installments of P500.
- Feb 13, 1990 Rapanut received a letter
from Flunkers counsel that he failed to pay,
so contract is rescinded as of receipt thereof.
Flunker furthermore sued for rescission before
RTC on March.
- RTC & CA find for Flunker.
- Flunkers interpretation (accepted by RTC &
CA): P500 applies to unpaid accrued interest
first. The 10% interest is to be paid every year.
Basis: Art. 12531. RTC & CA: P10,900 unpaid
interest from 19861990; Rapanut owes P23,700 in
21 installments
- Rapanuts interpretation: P500 applies to
payment of principal + accrued interest, the
10% interest applies to the remaining balance
and he keeps paying P500 until principal +
interest is fully paid.
Basis: Contract does not specify when to pay the
10% interest; no number of years to pay
installments
Obligations and Contracts
Issue/s:
WON Rapanut failed to pay the installments,
as per Flunkers interpretation
Ruling:
NO. Rapanuts interpretation is closer to the
intent of the parties.To determine the intent
of the parties, the Court relied on Art. 1371.
Ratio
- Flunker accepted Rapanuts payments
religiously for four years. She was silent as to
the 10% interest, but they stipulated
predetermined dates to pay the monthly
installments.
- Courts liberal interpretation: 10% per
annum on the remaining balance After
monthly payments are deducted, the 10%
applies on the remaining principal; the
remaining balance is the principal and its 10%
interest, and the monthly installments apply to
this remaining balance. Rapanut continues to
pay at predetermined dates until the last
remaining balance is paid.
- Without need of demand applies to P500
monthly installment, not on 10% interest, so
her silence is not justified.
- Even assuming Flunker was right, she is
estopped to exercise her right to rescission
when she failed to do so after the alleged
default, continually accepting the payments
made by Rapanut.
- The Court interprets Art. 1253 thus: After
pondering on the meaning of Article 1253, we
reach the conclusion that in a contract involving
installment payments with interest chargeable
against the remaining balance of the obligation,
it is the duty of the creditor to inform of the
amount of interest that falls due and that he is
applying the installment payments to cover said
interest. Otherwise, the creditor cannot apply
the payments to the interest and then hold the
debtor in default for nonpayment of
installments on the principal.
271 291
 Oil and Natural Gas Commission V. CA
G.R. No. 114323
July 23, 1998
Martinez, J.
Mike De Castro
Keywords: Indian company; cement
Facts:
- ONC, an Indian Co, contracted w/ Pacific
Cement for the latter to deliver 4.3k tons of
oil well cement in exchange for $477k
- Despite having fully paid, the cargo was held
up in Bangkok and it failed to reach India.
Negotiations ensued.
- They eventually agreed that Pacific will
deliver Class G cement cost free to ONC.
Upon inspections, however, it failed to
conform w/ the specifications.
- ONC referred its claim to an Arbiter according
to Clause 16 of the contract, w/c says:
Except where otherwise provided in the
supply order/contract, all questions and
disputes, relating to the meaning of the
specification designs, drawings and
instructions herein before mentioned and
as to quality of workmanship of the items
ordered or as to any other question, claim,
right or thing whatsoever, in any way
arising out of or relating to the supply
order/contract design, drawing,
specification, instruction or these conditions
or otherwise concerning the materials or
the execution or failure to execute the same
during stipulated/ extended period or after
the completion/abandonment thereof shall
be referred to the sole arbitrations of the
persons appointed by the Member of the
Commission at the time of dispute.
- Clause 15, on the other hand, says:
All questions, disputes and differences,
arising under, out of, or in connection
with, this supply order, shall be subject
to the exclusive jurisdiction of the court,
within the local limits of whose
jurisdiction and the place from which
this supply order situated.
Obligations and Contracts
- The Indian court issued notices and directed
Pacific to pay filing fees, w/c the latter, thru a
letter, inquired into how much. There was no
reply from the court.
- The arbiter ordered Pacific Co. to reimburse
ONC, and the Indian court adopted the arbiters
judgment
- Pacific failed to pay; ONC sued in RTC
- Pacifics main challenge: Jurisdiction of the
arbiter and the foreign court
- ONC, in its pleading, slyly added a comma
between contract and design such that
C16 purports to say relating to the supply
order/contract, design
If the provision really were stated this
way, then the case would no doubt fall
w/in the arbiters jurisdiction
- ONC then argues: even if the above-stated
part of C16 was not applicable, then execution
or failure to execute the same squarely puts
jurisdiction on the Arbiter (answer below)
Issue/s:
1) How should execution or failure to execute
the same in Clause 16 be construed?
2) How should Clause 15 be construed vis--vis
Clause 16?
Ruling:
PACIFIC ORDERED TO PAY ONC in the amount
adjudged in the foreign judgment.
Ratio:
1) Construe the same as supply order/
contract such that execution or failure to
execute the same means execution or failure
to execute the supply order/contract; use
noscitur a sociis to limit supply order/contract
to design, drawing, instructions, specifications
or quality of the materials.
- The final construction should mean: failure
to execute the supply order/contract design,
drawing, instructions, specifications or quality
of the materials
- So what? Such a construction means that an
arbiter may only be summoned if there is a
failure to execute the supply order/contract
design, drawing, instructions, specifications or
272 291
 quality of the materials AND NOT for a failure
to execute the supply order/contract itself.
- This means that the arbiter SHOULD NOT
have adjudicated, that jurisdiction lies solely in
the (RP) court.

2) ONC Construction: Clause 16 applies.

SC: WRONG.The stipulations should be
construed such that all provisions are
effective. The jurisdiction of the arbiter (in
C16) is NOT all encompassing. C15 covers all
other claims not falling under C16. Ergo, only
the courts have jurisdiction in this case.

- The construction of the court is self-

explanatory. I think they construed it the way
they did because they wanted to assume
jurisdiction. Otherwise, they could not at all have
decided this case. I will not mention the other
issues (Due Process, WON the foreign court
judgment is enforceable in RP) because they are
not pertinent in our subject. We have, in fact,
previously discussed this in Consti 1.

- The statutory bases for their construction of

C15 vis--vis C16 are the following:
Art 1373 CC. 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.
Art 1374 CC. The various stipulations of a
contract shall be interpreted together,
attributing the doubtful ones that sense which
may result from all of them taken jointly.
Rule 130, Sec 11 ROC. In the construction
of an instrument, where there are several
provisions or particulars, such a
construction is, if possible, to be adopted
as will give effect to all.

Obligations and Contracts 273 291

 Sps. Rigor V. Consolidated Orix Leasing and
Finance Corp
G.R. No. 136423
Aug 20, 2002
Carpio, J.
Jocs Dilag
Keywords: (Accdg to sir disappointing
decision; wrong reasoning)
Facts:
- Sps. Rigor obtained a loan from Consolidated
Orix in the amount of Php 1.6m
- In the promissory note, they stipulated that
they are going to pay in installments and that
the rules on venue would be as follows:
"x x x all legal actions arising out of this note
or in connection with the chattels subject
hereof shall only be brought in or submitted
to the proper court in Makati City,
Philippines."
- Also, the petitioners executed a deed of chattel
mortgage over their 2 dump trucks to secure
their loans, and that the rules on venue would be
as follows:
"x x x in case of litigation arising out of the
transaction that gave rise to this contract,
complete jurisdiction is given the proper
court of the city of Makati or any proper
court within the province of Rizal, or any
court in the city, or province where the
holder/mortgagee has a branch office,
waiving for this purpose any proper
venue."
Arguments:
Petitioner: Promissory note should prevail over
the deed of chattel mortgage as this was the
principal contract being sued upon. The use
of shall only makes exclusive and restricts
venue to the proper court of Makati City. The
deed of chattel mortgage doesnt even have
qualifying words that indicates that the venue
provisions in it are modifications of the other
Private Resp: The chattel mortgage was
negotiated with the petitioners in Dagupan City.
Obligations and Contracts
The convenience of the parties is the overriding
consideration in determining venues.
Issue/s:
WON venue was properly laid under the
provisions of the chattel mortgage contract in
light of Art. 1374
Ruling:
YES, the two documents must be construed
together, the deed of chattel mortgage
modifying the rules on the promissory note
Ratio:
General Rule: All personal actions may be
commenced and tried where any of the
plaintiffs or any of the defendants resides, at
the election of the plaintiff.
Exception: If there is a written agreement by the
parties.
- It is true that the principal contract
(promissory note) restricts the venue to
Makati. The deed of chattel mortgage, an
accessory contract, relies on the former, as
without such, it cannot exist.
- The court held in Napocor v. CA that the
provisions of an accessory contract must be read
in its entirety and together with the principal
contract between the parties.
(This was reiterated in Velasquez v. CA as
the complementary contracts construed
together doctrine)
- In applying the doctrine, we are now to
construe both documents together, and hold
that the rules on venue on the deed of chattel
mortgage clarified the one on the promissory
note
- In the explanation of the Private Respondents,
the older standard promissory notes confined
venue to Makati City. After they opened a
branch in Dagupan, they made corrections to
the deed of chattel mortgage but forgot to make
the corresponding corrections in the promissory
noted. But the petitioners still signed both
documents, notwithstanding the
abovementioned changes/differences.
274 291
 - Presumption that a person takes ordinary
care of his concerns: meaning the parties
signed the documents, fully aware of the
contents therein. They are of age and
businessmen of experience, thus the
presumption that they acted with due care and
full knowledge. (In any case, they did not
contest any erroneous entries in the latter
document.)

Obligations and Contracts 275 291

 Chua V. CA & Encarnacion Valdes- Choy
G.R. No. 119255
April 9, 2003
Carpio, J.
DJ Dolot
Keywords: managers check; torn deeds of
sale; contract to sell
Facts:
- Valdes-Choy advertised for sale her
paraphernal house and lot. Chua responded to
said advertisement and they agreed on the
purchase price of Php10.8M. Chua tendered an
earnest money of Php100K and further agreed
that the balance will be payable on/ before July
15, 1989. Failure to pay the balance will forfeit
the earnest money.
- On July 13, 1989, Valdes-Choy and Chua
executed a 2 Deeds of Sale (first- Php8M for
the house and lot; second- Php2.8M for the
furnishing, fixtures and movable properties).
They computed the Capital Gains Tax (CGT)
amounting to Php485K. Chua agreed to pay
the CGT, the amount of which shall be
deducted from the balance.
- Chua then showed to Valdes-Choy a managers
check (MC) of Php10.215M (the remaining
balance) but did not give the same to Valdes-
Choy saying that the property must first be
registered in his name. This angered Valdes-Choy
who tore up the Deeds of Sale claiming that this
was not part of the agreement.
- On the same day, Chua confirmed his stop
payment order for the MC of Php480K, but
according to PBCom AVP, said MC was
nevertheless honoured because Chua
subsequently verbally advised the Bank to lift
the stop payment order.
- On June 15, 1989 (deadline for payment),
Valdes-Choy suggested to Chua (through
Valdes- Choys counsel) to deposit in an escrow
account the balance of Php10.215M.
- Upon such deposit, the seller will be willing to
cause the issuance of a new TCT in the buyers
name. This way, she shall be protected if the
Obligations and Contracts
TCT is eventually transferred to the buyer
before she is fully paid. But nothing came of it.
Issue/s:
1) WON there is a perfected contract of sale
2) WON Chua can compel Valdes-Choy to cause
the issuance of a new TCT in Chuas name even
before payment of the full purchase price
Ruling:
- Chua acquired no right to compel Valdes-Choy
to transfer ownership of the Property to him
because the suspensive condition - the full
payment of the purchase price - did not
happen. There is no correlative obligation on
the part of Valdes-Choy to transfer ownership
of the Property to Chua.
- There is also no obligation on the part of
Valdes-Choy to cause the issuance of a new TCT
in the name of Chua since unless expressly
stipulated, this is not one of the obligations of a
vendor.
Ratio:
1) This is just a CONTRACT TO SELL
- A perusal of the Receipt shows that the true
agreement between the parties was a contract
to sell. Ownership over the Property was
retained by Valdes-Choy and was not to pass
to Chua until full payment of the purchase
price. It is true that Article 1482 of the Civil
Code provides that [W]henever earnest
money is given in a contract of sale, it shall be
considered as part of the price and proof of
the perfection of the contract. However, this
article speaks of earnest money given in a
contract of sale. In this case, the earnest
money was given in a contract to sell.
2) Valdes-Choy cannot be compelled
because Chuas condition has not been
previously agreed upon and it is not
customary in sale of real estate
- There is a variance of interpretation on the
phrase all papers are in proper order as
written in the Receipt (the full text of the
Receipt was not cited in the Decision). There is
no dispute though, that as long as the papers
276 291
 are in proper order, Valdes-Choy has the
right to forfeit the earnest money if Chua fails
to pay the balance before the deadline.
- Applying Art. 1376, which provides that the
usage and custom shall be borne in mind in
the interpretation of the ambiguities of a
contract, it appears that all papers were
indeed in proper order.
- Customarily, in the absence of a contrary
agreement, the submission by an individual
seller to the buyer of the ff. papers would
complete the sale of real estate: (1) owners
duplicate copy of the Torrens title, (2) signed
deed of absolute sale, (3) tax declaration, and
(4) latest realty tax receipt. Payment of CGT,
however, is not a pre- requisite to transfer
ownership to the buyer.
- In this case, Valdes-Choy was ready, able and
willing to submit to Chua all the papers that
customarily would complete the sale.
- However, Chuas condition is not customary
in a sale of real estate. Such a condition, not
specified in the contract to sell as evidenced
by the Receipt, cannot be considered part of
the omissions of stipulations which are
ordinarily established by usage or custom.
- What is increasingly becoming customary
is to deposit in escrow the balance of the
purchase price pending the issuance of a
new certificate of title in the name of the
buyer. Valdes-Choy suggested this solution
but unfortunately, it drew no response from
Chua.
- Chua had no reason to fear being swindled.
Valdes-Choy was prepared to turn-over to him
the owners duplicate copy of the TCT, the
signed Deeds of Sale, the tax declarations,
and the latest realty tax receipt. There was no
hindrance to paying the capital gains tax as
Chua himself had advanced the money to pay
the same and Valdes-Choy had procured a
managers check payable to the BIR covering
the amount. It was only a matter of time
before the capital gains tax would be paid.

Obligations and Contracts 277 291

 RCBC V. CA & Lustre
G.R. No. 133107
March 25, 1999
Kapunan, J.
Julie Enad
Keywords: Toyota car; postdated checks
Facts:
- On March 10, 1993 Lustre purchased a car
from Toyota Shaw, Inc. for which he made a
down payment of P164,620.00, the balance of
the purchase price to be paid in 24 equal
monthly instalments. Lustre then issued 24
postdated checks dated every 10th day of each
succeeding month. To secure the balance,
Lustre executed a promissory note and a
contract of chattel mortgage over the vehicle in
favour of Toyota.
- Paragraph 11 of the contract, provided for an
acceleration clause stating that should the
mortgagor default in the payment of any
instalment, the whole amount remaining
unpaid shall become due, and he shall also pay
25% of the principal due as liquidated damages.
Toyota then assigned all its rights and interests
in the chattel mortgage to RCBC.
- All the checks dated April 10, 1991 to January
10, 1993 were thereafter encashed and debited
by RCBC from Lustres account, except the
check dated August 10, 1991 because it was
unsigned. Previously, the amount represented
by said check was debited from Lustres
account despite the check being unsigned, but
was later recalled and re-credited to Lustre.
Because of the recall, the last two checks after
January 1993 were no longer presented for
payment, purportedly in conformity with
RCBCs procedure that once a clients
account was forwarded to its account
representative, all remaining checks
outstanding as of the date the account was
forwarded were no longer presented as
payment.
- RCBC, after 16 months, demanded from
private respondent the payment of the balance
of the debt, including the liquidated damages,
but Lustre refused.
Obligations and Contracts
- RCBC: Check for fifth installment not
encashed, instalment not paid. By virtue of par.
11, entire balance already due and
demandable. Despite demand, Lustre refused to
pay. Therefore, he is in delay (Art. 1170).
Issue/s:
WoN Lustre was in delay. WoN the lower courts
were correct in applying Art. 1377.
Ruling:
NO. In order for damages to be recovered in
delay, such delay must be either malicious or
negligent.
Ratio:
- There was no imputation that Lustre acted
with malice or negligence in failing to sign
the check. Such omission was mere
inadvertence on the part of Lustre. RCBCs blind
and mechanical invocation of par. 11 was
unwarranted.
- The whole controversy could have been
avoided if RCBC bothered to call Lustre and ask
him to sign the check. Good faith not only in
compliance with its contractual obligations, but
also in observance of the standard in human
relations, behoved the bank to do so.
- APPLICATION OF 1377: While ambiguities in a
contract of adhesion are to be construed
against the party that prepared the same, this
rule applies only if the stipulations in such
contract are obscure or ambiguous. If the terms
thereof are clear and leave no doubt upon the
intention of the contracting parties, the literal
meaning of its stipulation shall control. The
terms of Paragraph 11 leave no room for
construction. All that is required is the
application thereof.
Par. 11: In case the MORTGAGOR fails to pay nay of
the instalments, or to pay the interest that be due
as provided in the said promissory note, the whole
amount remaining unpaid therein shall immediately
become due and payable and the mortgage on the
property (ies) herein-above described may be
foreclosed by the MORTGAGEE, or the MORTGAGEE
may take any other legal action to enforce
collection of the o bligation hereby secured, and in
either case the MORTGAGOR further agrees to pay
278 291
 the MORTGAGEE an additional sum of 25% of the
principal due and unpaid, as liquidated damages,
which said sum shall become part thereof. The
MORTGAGOR hereby waives reimbursement of
the amount heretofore paid by him/it to the
MORTGAGEE.

Obligations and Contracts 279 291

 Gacos & Prieto V. CA, Briones & Mendones
G.R. No. 85962-63
Aug 3, 1992
Medialdea, J.
Apo Espanola
Keywords: verbal apportionment
Facts:
- Eladio Gacos owned a piece of unregistered
land in Irosin, Sorsogon. He verbally
apportioned this land to his three daughters
as their inheritance, the northernmost portion
going to Fortunata, the middle portion to
Lucia, and the southernmost to Petrona.
- Petrona immediately took possession and
occupied her share of the land, while her
sisters only did the same upon the death of
their father.
- Years later, Petrona offered to sell part of
her share to Marcial Olaybal, son-in-law of
her sister Fortunata. They executed a
document entitled Escritura de Venta
Absoluta consummating the sale.
- Then afflicted with tuberculosis, Petrona
instructed Lucia to sell a small part of the
eastern side of her property, in order to
answer for funeral expenses. After Petronas
death, Lucia sold said portion to Teodolfo
Mendones.
- Lucia then executed an Agreement of
Partition of Real Property on her own behalf
and on behalf of Petrona, with one of
Fortunatas heirs, formally recognizing the
boundaries of their respective shares in
Eladios land.
- Meanwhile, Marcial Olaybal sold his parcel
of land to Rosario Gacos (case doesnt say
whose heir she is). Rosario consolidated this
land with other properties she had bought
into one tax declaration. She then sold the
rest of Petronas land to Arnulfo Prieto, her
nephew, who leased it to his sister Vivencia
Prieto.
- However, respondent Brioneses, children of
Petrona Gacos, executed a document
adjudicating unto themselves the entire 1/3
share of their mother in the land.
Obligations and Contracts
- The Brioneses now contend that Petronas
portion of land had been merely held for
them by Lucia while they were minors, and
Rosario had thus unlawfully acquired it after
Lucias death, and sold it to Arnulfo Prieto.
- But Rosario and Arnulfo both contend that
Petrona had sold her entire share in the land
to Marcial Olaybal, thus there is no land
remaining for the Brioneses to assert
ownership to.
- The trial court rendered judgment in favor of
the Brioneses, and the Court of Appeals
affirmed. Hence, this appeal.
Issue/s:
Whether Petrona Gacos intended to sell her
entire share in the land to Marcial Olaybal.
Ruling:
The Court affirmed the trial and appellate
courts.
Ratio:
-No. The boundaries in the Escritura de Venta
Absoluta executed by Petrona in Marcials
favor does not match the boundaries in the
Deed of Absolute Sale executed by Marcial
when he sold the land to Rosario. It does not
even match the boundaries stated in the
Agreement of Partition of Real Property,
posthumously confirming Petronas hereditary
share.
- The Court of Appeals found it necessary to
resolve the issue on the basis of the evidence
presented, which the Court approved of. It
affirmed its finding that only a portion of
Petronas hereditary share was sold to Marcial
Olaybal, and he only sold the same portion to
Rosario.
- Three reasons support this:
1. Marcial Olaybal himself declared in a
tax declaration that his land was only 866
sqm. smaller than Petronas total
hereditary share;
2. He testified during trial that he only
bought 866 sqm.; and
3. In the Deed of Absolute Sale between
Marcial and Rosario, the boundary on the
280 291
 west states that the rest of the land is still
Petronas.
- The Court applied Art. 1372 and Art. 1378. In
accordance with the latter, the contract
should be interpreted as to effect the least
possible transmission of rights or interests.
This was proper, the Court said, because
Petrona was still living on the disputed land
with her four minor children and Lucia when
the supposed sales occurred, and thus, she
could not have sold her entire portion.
- The Court also shot down the petitioners
contention that they were possessors in good
faith, since it was proven that Rosario knew of
the sale to Teodolfo Mendones for funeral
expenses, and thus could not claim ownership
to Petronas entire hereditary share.

Thus, the Court upheld the trial and appellate

courts findings that only 866 sqm. of Petronas
land had been sold to Marcial Olaybal.

Obligations and Contracts 281 291

 Universal Food Corp V. CA
G.R. No. L-29155
May 13, 1970
Castro, J.
Pia Falcone
Keywords: Mafran banana ketchup
Facts:
- Magdalo V. Francisco, Sr. invented a formula
for the manufacture of a food seasoning derived
from bananas, popularly known as MAFRAN
sauce.
- Due to lack of sufficient capital to finance the
expansion of this business, he secured the
financial assistance of Tirso T. Reyes, who, after a
series of negotiations, formed with Universal
Food Corporation.
- This eventually led to the execution of the Bill
of Assignment. In this said agreement, in order to
preserve the secrecy of the Mafran formula,
Francisco is to be appointed as permanent Chief
Chemist. He gets absolute control over
laboratory assistants & personnel and in the
purchase and safeguarding of the products and
Universal Food Corp. gets monopoly over the use
of the Mafran sauce formula.
- However, due to the alleged scarcity and high
prices of raw materials, Francisco was first
deprived of his salary and then replaced. He then
filed for the rescission of this Bill of Assignment.
- Petitioner contends that rescission should be
denied because under Art 1383, rescission is a
subsidiary remedy which cannot be instituted
except when the party suffering damage has no
other legal means to obtain reparation for the
same.
Issue/s:
WON the Bill of Assignment can be rescinded.
Ruling:
Yes. The Bill of Assignment was rescinded and
Universal Food Corp was ordered to return and
restore to Francisco the right to the use of his
Mafran sauce trademark and formula.
Ratio:
Obligations and Contracts
- First, the Court looked at the first two
paragraphs of Art. 1911. The power to rescind
obligations is implied in reciprocal ones, in case
one of the obligors shouldnt comply with what
is incumbent upon him.
- In this case, the provisions of the Bill of
Assignment are reciprocal in nature, and the
petitioner corporation violated this contract
when they terminated the services of Francisco
without lawful and justifiable cause.
- The general rule is that a rescission will not
be permitted for a slight or casual breach, but
only for such substantial and fundamental
breach that would defeat the very object of
the parties making the agreement.
- Looking at the circumstances, the dismissal
of Francisco as the permanent chief chemist is
a fundamental and substantial breach. He was
dismissed without any fault or negligence on
his part, thus, apart from the legal principle
that the option of specific performance or
rescission belongs to the party, the fact
remains that he had no alternative but to file
the present action for rescission and damages.
- It is to be emphasized that he wouldnt have
agreed to the terms of the Agreement were it
not for the basic commitment of Universal
Food Corp to appoint him on a permanent
basis; that he would have absolute control
and supervision in the manufacturing of the
sauce; and that only by all these measures
could he preserve effectively the secrecy of
the formula, prevent its proliferation, enjoy its
monopoly, and in the process afford and
secure for himself a lifetime job and steady
income.
- The significant provisions of the Bill of
Assignment, namely, the transfer to the
corporation of only the use of the formula; his
appointment as Second Vice-President and
Chief Chemist on a permanent status; his
obligation to continue research on the patent
to improve the quality of the products of the
corporation; the need of absolute control and
supervision in the laboratory all these are
interdependent that violation of one would
result in virtual nullification of the rest.
Concurring Opinion of J.B.L. Reyes:
282 291
 - Concurs with Court opinion, but adds that
petitioners argument and reliance on Art. 1383
is predicated on a failure to distinguish between
a rescission for breach of contract under Art
1191 and rescission by means of lesion or
economic prejudice, under Art. 1381.
- A rescission for breach of contract under Art
1191 isnt predicated on injury to economic
interests of the party plaintiff but on the breach
of faith by the defendant that violates the
reciprocity between the parties. It is not a
subsidiary action and may be scanned without
disclosing anywhere that the action for rescission
is subordinated to anything other than the
culpable breach of his obligations by the
defendant. This rescission is a principal action
retaliatory in character, it being unjust that a
party be held bound to fulfill his promises when
the other violates his. Hence, the reparation for
damages for the breach is purely secondary.
- On the contrary, in a rescission by reason of
lesion or economic prejudice under Art 1381, the
cause of action is subordinated to the existence
of that prejudice, because it is the raison detre
as well as the measure of the right to rescind.
Hence, where the defendant makes good the
damage caused, the action cant be maintained
or continued, as expressly provided in Art 1383-
84. But the operation of these two articles is
limited to the cases of rescission for lesion
enumerated in Art 1381, and doesnt apply to
cases under Art 1191.

Obligations and Contracts 283 291

 Pryce Corp V. PAGCOR
G.R. No. 157480
May 6, 2005
Panganiban, J.
Coopey Hermosisima
Keywords: casino; termination v rescission
Facts:
- Nov 11 1992, PAGCOR entered into a contract
w/ Pryce (PPC) to set-up a casino in Pryce Plaza
in CDO for 3 years from December 1 1992 to Nov
30 1995 (Lease-Agreement). PAGCOR advertised
that casino operations would begin
Dec 13 1992
- Several resolutions were passed by the
Sangguniang Panglungsod of CDO disallowing
establishing of gambling casinos in CDO. The
most recent was Resolution 3375-93 which
provided a penalty for any violation of the
resolution
- Jan 7 1993 PPC filed for the declaration of
unconstitutionality of the resolutions-> Court of
Appeals both ruled for the unconstitutionality of
the resolutions. PAGCOR resumed operations
July 15 1993. Rallies and demonstrations were
held and PAGCOR was forced to temporarily
suspend the operations.
- Prior to September 1993, PAGCOR stopped
operations upon the order of the President. PPC
appraised PAGCOR of its outstanding accounts
from Sep-Nov 1993 and asked for full rental in
case of the pre-termination of the lease.
PAGCOR, on the other hand, asked for the
reimbursement of its deposit and expenses for
improvement of Pryce Hotel's parking lot.
Issue/s:
1) Was PPC entitled to collect future rentals
upon provisions of contract for unexpired
period?
2) Was it termination/ rescission?
3) Are they entitled to future rentals?
Ratio:
1) YES - Art. XX of the lease agreement:
Obligations and Contracts
a) gives PPC the right to terminate and
cancel in event of breach/ default by lessee
b) make PAGCOR fully liable for rentals for
remaining term of lease.
- Since the provisions are not contrary to law
and PAGCOR signed the lease agreement, it is
therefore bound by the provisions
2) -To rescind is to declare a contract void from
its inception and to put an end to it as though it
never were. Termination would entail
enforcement of its terms prior to declaration of
its cancellation (end in time)
- Parties in a case of termination are not restored
to original situation. Prior to termination, the
parties are obliged to comply with their
contractual obligations
- Actions of petitioner show that it never
intended to rescind lease contract. Shown by it
seeking to collect the accrued rentals
3) What occurred was termination. Contract
provided for a penalty clause (Substitute for
indemnity for damages and payment of
interests in case of non-compliance--> Exception
to this if there's a stipulation to the contrary*Art
126)
- Contract states "aside from the payment of
the rentals corresponding to the remaining
term of lease, the lessee shall also be liable
for all damages resulting from
default/termination"
- However, given the circumstances (rallies,
and ordered by government to stop), it's
entitled to a reduction of the penalty
Notes:
- Termination: entails enforcement of terms prior to
declaration of cancellation in same way that before
lessee is ejected, he has to fulfill his obligations
thereunder that had accrued prior to ejectment
- Rescission: to declare contract void in its inception;
deemed inexistent return to status quo
284 291
 Sps. Cannu V. Sps. Galang
G.R. No. 139523
May 26, 2005
Chico-Nazario, J.
Paolo Macariola
Keywords: buy the property and assume
mortgage obligations; breach of faith
Facts:
- Spouses Galang obtained a loan from
Fortune Savings & Loan Association for
P173,800.00 to purchase a house and lot. To
secure payment, a real estate mortgage was
constituted on the said house and lot in favor
of Fortune Savings & Loan Association.
- I n early 1990, NHMFC purchased the
mortgage loan of respondents-spouses from
Fortune Savings & Loan Association for
P173,800.00. Respondent Fernandina Galang
authorized her attorney-in-fact, 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 (the Developer
of the property). Petitioners made several
payments but a balance of P45,000 remained.
- A Deed of Sale with Assumption of
Mortgage Obligation was made and entered
into by and between spouses Galang
(vendors) and spouses Cannu (vendees) over
the house and lot. It is a special condition of
the contract that the Vendees shall assume
and continue with the payment of the
amortization with the National Home
Mortgage Finance Corporation Inc.
- Petitioners immediately took possession and
occupied the house and lot. However, they
failed to pay the remaining balance of 45,
000. Despite requests from Fernandina
Galang to pay the balance or in the
alternative to vacate the property, petitioners
refused to do so.
- It was also revealed that petitioners' formal
assumption of mortgage was not approved by
the NHMFC.
Obligations and Contracts
- Because of petitioners-spouses failure to
fully pay the consideration (P45,000 balance)
and to update the monthly amortizations with
the NHMFC, Sps. Galang paid in full the
existing obligations with NHMFC and treated
it as initial step in the rescission and
annulment of the Deed of Sale with
Assumption of Mortgage.
- RTC rescinded the deed and declared the
same nullified. CA affirmed
Issue/s:
1) WON the petitioners' breach was substantial.
2) WON the action for rescission is subsidiary.
3) WON a judicial declaration of rescission is
needed.
Ruling:
RTC and CA affirmed. Sps. Galang ordered
to return the partial payments made by
plaintiffs; and the plaintiffs are ordered to
return the physical and legal possession of
property.
Ratio:
1) Yes. Settled is the rule that rescission or,
more accurately, resolution of a party to an
obligation under Article 11911 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.
- The question of whether a breach of
contract is substantial depends upon the
attending circumstances and not merely on
the percentage of the amount not paid. In
the case at bar, the Court find petitioners
failure to pay the remaining balance of
P45,000.00 to be substantial.
- Taken together with the fact that the last
payment made was eighteen months before
the respondent Fernandina Galang paid the
outstanding balance of the mortgage loan
with NHMFC, the intention of petitioners to
renege on their obligation is utterly clear.
285 291
 - The fact that petitioners tendered a
Managers 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. Their failure to
fulfill their obligation gave the respondents-
spouses Galang the right to rescission.
- Sps. Cannu: There was no clear evidence to
show that spouses Galang demanded from
them a strict and/or faithful compliance of
the Deed of Sale with Assumption of
Mortgage.
Court: There is sufficient evidence showing
that demands were made from petitioners
to comply with their obligation. Attorney-in-
fact of respondents-spouses made constant
follow-ups after the last payment but
petitioners did not pay. 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.
- Sps. Cannu: There is no evidence of prejudice
or damage to justify rescission.
Court: The damage suffered by respondents-
spouses is the effect of petitioners failure to
fully comply with their obligation, that is, their
failure to pay the remaining P45,000 and to
update the amortizations on the mortgage
loan. Petitioners have in their possession the
property under litigation. Having parted with
their house and lot, respondents-spouses
should be fully compensated for it, not only
monetarily, but also as to the terms and
conditions agreed upon by the parties.
- Sps. Cannu: No rescission should be
decreed because there is no evidence on
record that respondent Fernandina Galang is
ready, willing and able to comply with her own
obligation to restore to them the total
payments they made.
Court: The right to rescind or resolve can be
demanded only if the plaintiff is ready, willing
and able to comply with his own obligation, and
Obligations and Contracts
the other is not. In other words, 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.
2) No. The reliance on Article 1383 of
petitioners is misplaced. The subsidiary
character of the action for rescission applies
to contracts enumerated in Articles 1381of the
Civil Code. The contract involved in the case is
not one of those mentioned therein. The
provision that applies in the case at bar is
Article 1191.
- Rescission under Article 1191 is a principal
action, while rescission under Article 1383 is a
subsidiary action. The former is based on
breach by the other party that violates the
reciprocity between the parties, while the
latter is not. Rescission under Article 1383 is
predicated on injury to economic interests
(lesion or economic prejudice).
- In the case at bar, the reciprocity between
the parties was violated when petitioners
failed to fully pay the balance of P45,000to
respondents and their failure to update their
amortizations with the NHMFC.
3) Yes. 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
before they fully paid the outstanding balance
with NHMFC.
- Be that as it may, the Court chose 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 the Court
has already taken cognizance of. Having found
that petitioners seriously breached the
contract, the Court declared the same is
rescinded in favor of Sps. Galang.
286 291
 Note: The consideration for the property stated
in the deed was 250,000 (when in fact, the true
consideration is only for 120,000 plus the
payment of oustanding mortgage with NHMFC
and the equity or second mortgage with CERF
Realty). Court: Inasmuch as the Deed of Sale
with Assumption of Mortgage failed to express
the true intent and agreement of the parties
regarding its consideration, the same should not
be fully relied upon. (So ang ginamit pa rin ng
Court for computation is P120k, hindi yung
nakasulat sa deed.)

Obligations and Contracts 287 291

 Rivera V. Del Rosario
G.R. No. 144934
Jan 15, 2004
Quisumbing, J.
Trance Nunez
Keywords: mortgage with agreement to sell
Facts:
- The Del Rosarios owned a parcel of
agricultural land denoted as Lot 1083-C.
The Del Rosario children owned the land
and they executed a Special Power of
Attorney in favor of their mother Fidela
who now had the right to sell, mortgage
or convey the land.
- Fidela borrowed as sum of 250,000 pesos
from Rivera. To secure the loan they
executed a deed of mortgage with an
agreement to sell the land.
- Three documents were prepared on March 9,
1987 and were signed by Del Rosario:
1. A document titled Kasunduan which
provided the terms of sale. The purchase
price was to be paid in 3 installments:
250,000 upon signing, 750,000 on Aug
31, 1987 and 1,141,622.50 for the last
installment. A Deed of Absolute Sale will
be issued upon the payment of the
second installment and a post-dated
check for the last.
2. A Deed of Real Estate Mortgage
3. The Deed of Absolute Sale
surreptitiously prepared by Rivera
- In order to secure compliance with the
Kasunduan, the Del Rosarios gave the
owner's copy of the parcel's TCT to Rivera
in an act of utter stupidity. Rivera did not
want to return the document, naturally,
prompting the Del Rosarios to annotate the
TCT. Alas, the parcel was now registered in
the name of Rivera's kids.
- The Riveras, who were purporting to be the
new owners of the plot, compelled a tenant
famer Nieto to relinquish his tenurial right
over a portion of the land, which he did.
- A case was filed by the Del Rosarios to
rescind the Kasunduan for failure to
Obligations and Contracts
comply with the conditions plus
damages. They also asked for the
annulment of the Deed of Absolute Sale
due to fraud.
- On the allegation of fraud, the Court held in
favor of Del Rosario, saying that the lady did
not intend to enter into a deed of sale at the
time she signed the Kasunduan. As far as the
transaction with Nieto was concerned, the
RTC ruled that the transaction was valid since
he relied on the representations of Rivera in
good faith.
Issue/s:
WON their action for rescission prescribe due
to laches
Ruling:
Action for rescission had not prescribed. The
contract was void in its entirety.
Ratio:
- The Court held that it did not. First the
Riveras contended that the action for
rescission should only be availed of when the
party claiming has proven that all legal means
have been exhausted. The SC reiterated that
the provision in question, Article 1383, only
applied to rescissible contracts under 1381.
The case at bar is a resolution under 1191 as
a principal action based on the breach of
one party.
- (NOTE: The court ruled that the Kasunduan
was a contract to sell, which is weird because
then it would not be a reciprocal obligation
which a contract of sale is, making it
beyond the ambit of 1191. Then again, the
court said that the contract cannot be
enforced anyway since the failure to make
the installment prevented the happening of
the positive suspensive condition that will
oblige the Del Rosarios to convey the title).
- The Court ruled that the action for rescission
had not prescribed. The period for
prescription runs four years from the
discovery of the fraud, not from the
reckoning of the contract under 1391.
288 291
 Equatorial Realty Devt V. Mayfair Theatre
G.R. No. 133879
Nov 21, 2001
Panganiban, J.
Justin Ordoyo
Keywords: back rentals; ownership, delivery
Facts:
The main factual antecedents of this Petition
arose out of an earlier case of the same title
decided by the SC in 1996, the dispositive
portion of which reads:
WHEREFORE, the petition for review of
the CA decision is DENIED. The Deed of
Absolute Sale between ERDI and Carmelo is
deemed RESCINDED. Carmelo is ordered to
return the purchase price to ERDI and allow
Mayfair to buy the lots for P11.3M.
Said decision became final and executory in
March 1997. The trial court granted Mayfairs
Motion for Execution in April 1997.
- However, Carmelo could no longer be
located. Thus, Mayfair, deposited P11.3M less
P847K as withholding tax with the clerk of court.
The lower court issued a Deed of Reconveyance
to Carmelo, and a Deed of Sale to Mayfair. The
Registry of Deeds cancelled ERDIs titles and
issued new ones in Mayfairs name.
- Meanwhile, ERDI filed an action for the
collection of a sum of money against Mayfair,
claiming payment of rentals or compensation
for Mayfairs use of the subject premises after
its lease contracts had expired.
- The lower court held that the rescission of
the Deed of Sale in the 1996 case did not
confer on ERDI any vested or residual
proprietary rights, and therefore ERDI was
not entitled to back rentals. The rescinded
Deed was VOID ab initio as though it didnt
happen.
Issue/s:
1) WON ERDI is entitled to back
rentals.
2) WON the fact that ERDI received rents
from Mayfair concedes actual delivery.
Obligations and Contracts
Ruling:
Petition is DENIED.
Ratio:
1) NEGATIVE. No ownership right was
transferred from Carmelo to ERDI in view of the
formers patent failure to deliver the property
to the buyer.
- Rent is a civil fruit that belongs to the owner
of the property producing it by right of
accession. Consequently, the rentals due from
the time the sale was perfected until its
rescission by final judgment should belong to
the owner of the property during that period.
- This right is transferred, not by contract
alone, but by tradition or delivery. There is
said to be delivery when the thing sold is
placed in the control and possession of the
vendee.
- In this case, ERDI never took actual control
and possession of the property sold, in view
of Mayfairs timely objection to the sale.
- The execution of a contract of sale as a form
of constructive delivery is a legal fiction. It
holds true ONLY when there is NO
impediment that may prevent the passing of
the property from the vendor to the vendee.
When such impediment exists, fiction yields
to reality the delivery has not been
effected. Mayfairs opposition was a legally
sufficient impediment.
- The point may be raised that under Art. 1164,
ERDI as buyer acquired a right to the fruits of
the thing sold from the time the obligation to
deliver the property to petitioner arose.
Does this mean that despite the judgment
rescinding the sale, the right to the fruits
belonged to ERDI?
- Art. 1385 answers this in the NEGATIVE
because rescission creates the obligation to
return the things which were the object of the
contract, TOGETHER WITH their fruits, and
the price with its interest x x x. Not only the
land and building sold, but also the rental
payments paid, if any, had to be returned by
ERDI.
2) NEGATIVE. The rental payments made by
Mayfair should not be construed as
289 291
 recognition of ERDI as the new owner. They
were made merely to avoid imminent
eviction.
- It may be conceded that a rescissible
contract is VALID until rescinded. However
this general principle is not decisive to issue
on ERDIs right to collect rentals. What is
decisive is the civil law rule that ownership is
acquired, not by mere agreement, but by
tradition or delivery. General propositions
do no t decide specific cases,as
pointed out by Justice Holmes.
- The sale to ERDI may have been valid from
inception, but it was judicially rescinded before
it could be consummated. ERDI never acquired
ownership because the sale was not
consummated by a legally effective delivery of
the property sold.

Obligations and Contracts 290 291

 The Union Insurance Society of Canton V. CA,
Far East Chemco Leasing and Financing Corp.
G.R. No. 100391
Aug 8, 1996
Torres, Jr., J.
Carlos Pagdanganan
Keywords: cotton, insurance, vessels, action
for rescission is subsidiary
Facts:
- The Union Insurance Society of Canton,
through its general agent, Ker & Co, was the
insurer subrogee of Litton Mills, Inc.
Philippine Tugs, Inc (PTI) was contracted by
Litton Mills to deliver 2045 bales of
compressed cotton from a ship to Magallanes
Drive.
- However, there was a shortage of 9 bales and
521 bales were found to be damaged by
seawater so Litton Mills sent formal claims to
its insurer (Ker & Co) and demands from PTI.
Ker & Co paid Litton Mills so as subrogee, they
seek reimbursement from PTI for the reason
that shortage and damage was PTIs
responsibility.
- CFI ruled for Ker & Co. CA affirmed. However,
during the pendency of the action in the CFI,
PTI through its corporate officers (Angel T.
Rodriguez, VP and Treasurer, Julian Cordero,
and Francisco Wong, directors) transferred
several of its vessels amounting to P2.6M
to Valenzuela Watercraft Corporation (which
said officers also owned) which in turn sold
the vessels to Far East Chemco Leasing
Corporation.
- After judgment by the CFI, plaintiffs had said
judgment annotated on titles of vessels. RTC
later ruled that said sale was made
fraudulently and thus invalid. They ruled that
the value of water vessels be returned to
plaintiff Union Insurance since Far East was
not a party to the case and said vessels could
no longer be returned. CA reversed the RTC
ruling.
Issue/s:
WON Far East Chemco should return the vessels
Obligations and Contracts
Ruling:
NO. Petition devoid of merit, CA decision
affirmed.
Ratio:
- While Far East Chemco, as buyer of the
vessels from Valenzuela Watercraft purchased
the said vessels at their own risk, such risk
only pertains to the possibility of the sale
being rescinded. It is error to make Far East
pay petitioner the value of three vessels or to
order the return of the vessels to petitioner
WITHOUT the sale first bein g rescinded.
- Moreover, the vessels are no longer owned by
Far East. When petitioner filed complaint, it
was already aware that the vessels had already
been sold to Peninsula Tourist Shipping Corp,
yet they did not implead Peninsula as a co-
defendant of Far East. Petitioner cannot be
given justice at the expense of Peninsula,
who cannot be bound by an adverse decision in
a case where it was not given a chance to
defend itself, and Far East, who should not be
made to pay anothers indebtedness in the
absence of showing that PTI has not paid
petitioner or that PTI has no other properties
to answer its liabilities to petitioner.
- To ru le that Far East should pay petitioner
the value of the vessels is without legal
basis and could result to the unjust
enrichment of the petitioner.
- Lastly, as quoted from the CAs decision,
petitioner had yet to show if it is entitled
to a rescission of the supposed fraudulent
transaction. Those asking for rescission must
prove that he has no other legal means to
obtain reparation because the action for
rescission is subsidiary; it cannot be instituted
except when the damaged party has no other
legal means to obtain reparation for the same.
- In the case at bar, petitioner has failed to
adduce sufficient evidence that they had
pursued all available legal remedies against
PTIs properties to satisfy their claims. Although
the sale of the vessels is rescissible, there is
insufficient basis to allow petitioner to rescind
the said sale.
291 291