CASE DIGEST 1/12/2018 1

BREACHOF CONTRACT
SONG FO AND CO V HAWAIIAN PHILIPPINE CO.

Facts:
 Hawaiian-Philippine Co (HPC) entered into a contract with Song Fo and Co where it would deliver molasses to
the latter.
 A letter addressed by the administrator of the HPC to SFC on December 13, 1922 contains their contract in
writing. It states the ff:
o Mr. Song Fo agreed to the delivery of 300,000 gallons of molasses
o Mr. Song Fo also asked if HPC could supply him with another 100,000 gallons of molasses to which the
latter replied that they believe it is possible and that they will do their best to let Mr. Song Fo have the
extra 100,000 gallons during the next year.
 HPC was able to deliver 55,006 gallons of molasses before the breach of contract.
 SFC filed a complaint with two causes of action for breach of contract against the HPC and asked for P70,369.50
 HPC answered that there was a delay in the payment from SFC and that HPC has the right to rescind the contract
due to that and claims it as a special defense.
 The judgment of the trial court condemned HPC to pay SFC a total of P35,317.93, with legal interest from the
date of the presentation of the complaint, and with costs.

Issues and Ruling:

Did HPC agree to sell 400,000 gallons of molasses or 300,000 gallons of molasses?
 Only 300,000 gallons of molasses was agreed to by HPC as seen in the documents presented in court. HPC
also believed it possible to accommodate SFC by supplying the latter company with an extra 100,000 gallons.
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However, the language used with reference to the additional 100,000 gallons was not a definite promise. Still
less did it constitute an obligation

Had HPC the right to rescind the contract of sale made with SFC?
 With reference to the second question, doubt has risen as to when SFC was supposed to make the payments
for the delivery of molasses as shown in the documents presented by the parties. It was ultimately settled that
payment had to be made upon presentation of accounts at the end of each month
 FACT: SFC should have paid for the molasses delivered in December 1922, not later than January 31 1923.
Instead payment was not made until February 20, 1923. All the rest of the molasses was paid for either on time
or ahead of time.
 HPC does not have the right to rescind the contract. It should be noted that the time of payment stipulated for in
the contract should be treated as of the essence of the contract.
 There was only a slight breach of contract when the payment was delayed for 20 days after which HPC
accepted the payment of the overdue accounts and continued with the contract, waiving its right to
rescind the contract. The delay in the payment of SFC was not such a violation for the contract.
 GENERAL RULE: rescission will not be permitted for a slight or casual breach of the contract, but only for such
breaches as are so substantial and fundamental.

On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract imprudently breached by HPC,
what is the measure of damages?
 The first cause of action of SFC is based on the greater expense to which it was put in being compelled to secure
molasses from other sources to which Supreme Court ruled that P3,000 should be paid by HPC with legal interest
from October 2, 1923 until payment.
o 55,006 gallons were delivered before the breach. (This leaves 244,994 gallon)
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o 100,000 gallons of molasses were secured from the Central North Negros Sugar Co., Inc at 2 cents a
gallon, so plaintiff suffered no material loss in having to make this purchase. (this leaves as a result
144,994 gallons)
o 100,000 gallons were secured from Central Victorias Milling at 3.5 cents per gallon. This meant a loss
of approximately P2,174.91
 The second cause of action was based on the lost profits on account of the breach of contract. Supreme
Court said that SFC is not entitled to recover anything under the second cause of action because the testimony of
Mr. Song Heng will follow the same line of thought as that of the trial court which in unsustainable and there was
no means for the court to find out what items make up the P14,000 of alleged lost profits.

ANGELES VS CALASANZ 135 SCRA 323 (1985)

FACTS

1. On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs -
appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in
Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum.
2. The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to
pay the balance in monthly installments of P41.20 until fully paid, the installments being due and payable on the
19th day of each month.
3. The plaintiffs’ appellees paid the monthly installments until July 1966, when their aggregate payment already
amounted to P4, 533.38. On numerous occasions, the defendants-appellants accepted and received delayed
installment payments from the plaintiffs-appellees.

4. On December 7, 1966, the defendants- appellants wrote the plaintiffs-appellees a letter requesting the remittance
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of past due accounts. On January 28, 1967, the defendants-appellants cancelled the said contract because the
plaintiffs -appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration,
of the said cancellation was denied by the defendants-appellants.

5. The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh Judicial District
Branch X to compel the defendants-appellants to execute in their favor the final deed of sale alleging inter alia
that after computing all subsequent payments for the land in question, they found out that they have already paid
the total amount of P4, 533.38 including interests, realty taxes and incidental expenses for the registration and
transfer of the land. CFI rendered a ruling favor of the plaintiffs-appellees prompting Calasanz spouses to appeal.

ISSUES
1. WON the contract to sell has been automatically and validly cancelled by the defendants-appellants Calasanz spouses

2. WON the contract partakes of a contract of adhesion and therefore must be strictly construed against the one who
drafted it (defendants-appellants)

HELD
1. NO. "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.

- The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart
from the initial downpayment of P392.00 the plaintiffs -appellees had already paid the monthly installments for a period
of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore,
although the principal obligation was only P3,920.00 excluding the 7 percent interests, the plaintiffs-appellees had already
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paid an aggregate amount of P4,533.38. To sanction the rescission made by the defendants-appellants will work injustice
to the plaintiffs-appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the defendants-
appellants.

- Article 1234 of the Civil Code which provides that:

“If the obligation has been substantially performed in good faith, the obligor may recovers though there had been a strict
and complete fulfillment, less damages suffered by the obligee."
- Also militates against the unilateral act of the defendants-appellants in cancelling the contract. We agree with the
observation of the lower court to the effect that: "Although the primary object of selling subdivided lots is business, yet, it
cannot be denied that this subdivision is likewise purposely done to afford those landless, low income group people of
realizing their dream of a little parcel of land which they can really call their own."

- The defendants-appellants argue that paragraph nine of the contract clearly allows the seller to waive the observance
of paragraph 6 not merely once, but for as many times as he wishes. The defendants-appellants' contention is without
merit. We agree with the plaintiffs-appellees that when the defendants- appellants, instead of availing of their alleged right
to rescind, have accepted and received delayed payments of installments, though the plaintiffs - appellees have been in
arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and
are now estopped from exercising their alleged right of rescission.

2. YES. We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some characteristics
of a contract of adhesion. The defendants-appellants drafted and prepared the contract. The plaintiffs-appellees, eager
to acquire a lot upon which they could build a home, affixed their signatures and assented to the terms and conditions of
the contract. They had no opportunity to question nor change any of the terms of the agreement. It was offered to them
on a "take it or leave it" basis. "x x x (W)hile generally, stipulations in a contract come about after deliberate drafting by
the parties thereto, . . . there are certain contracts almost all the provisions of which have been drafted only by one party,
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usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the
signing of his signature or his 'adhesion' thereto. Insurance contracts, bills of lading, contracts of sale of lots on the
installment plan fall into this category. '(Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p. 80.)" (Italics supplied)

- While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants -appellants the
sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12 the seller is obligated to transfer
the title to the buyer upon payment of the P3,920.00 price sale. The contract to sell, being a contract of adhesion, must
be construed against the party causing it. We agree with the observation of the plaintiffs- appellees to the effect that "the
terms of a contract must be interpreted against the party who drafted the same, especially where such interpretation will
help effect justice to buyers who, after having invested a big amount of money, are now sought to be deprived of the same
thru the prayed application of a contract clever in its phraseology, condemnable in its lopsidedness and injurious in its
effect which, in essence, and in its entirety is most unfair to the buyers."

Disposition Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs -appellees have
already paid an aggregate amount of P4,533.38, the courts should only order the payment of the few remaining
installments but not uphold the cancellation of the contract. Upon payment of the balance of P671.67 without any interests
thereon, the defendants- appellants must immediately execute the final deed of sale in favor of the plaintiffs-appellees
and execute the necessary transfer documents as provided in paragraph 12 of the contract. The attorney's fees are
justified.

WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is AFFIRMED with the
modification that the plaintiffs -appellees should pay the balance of SIX HUNDRED SEVENTY-ONE PESOS AND SIXTY-
SEVEN CENTAVOS (P671.67) without any interests.
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DELTA MOTOR CORPORATION, petitioner, vs. EDUARDA SAMSON GENUINO, JACINTO S. GENUINO et al

Doctrine: 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 a contract is substantial depends upon the attendant circumstances.

FACTS:
•Private respondents are owners of an iceplant and cold storage who ordered black iron pipes from Delta Motors, for
which the latter provided two letter quotations indicating the selling price and delivery of said pipes. Terms of payment
are also included. Genuino made initial payments on both contracts but delivery of pipes was not made by Delta, thus,
Genuino did not made subsequent payments notwithstanding agreed terms of payment. On July 1972, Delta offered to
deliver the pipes but Genuino refused because construction of ice plant building where pipes were to be installed was not
yet finished.

•Three years later, Genuino asked Delta to deliver the iron pipes within 30 days upon receipt of request. Delta is unwilling
to deliver unless Genuino agree to a new quotation price set by former. Respondent rejected new quoted price ad instead
filed a complaint for specific performance with damages seeking Delta to deliver the pipes. Meanwhile, Delta in its answer
prayer for rescission of contract pursuant to Art. 1191 of NCC.

•After trial the Court of First Instance ruled in favor of Delta. On appeal, the Court of Appeals reversed CFI decision. MR
was filed but was denied. Hence, this petition.

ISSUES:

W/N Genuinos' non-performance of its obligations was a substantial breach, let alone a breach of contract, as would
warrant rescission under Art. 1191 of NCC. –NO
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RATIO:

In construing Art. 1191, the Supreme Court has stated that, "[r]escission 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." [Phil. Amusement Enterprises, Inc. v. Natividad, G.R. No. L-21876, September 29, 1967, 21 SCRA
284, 290.] Further, "[t]he question of whether a breach of a contract is substantial depends upon the attendant
circumstances." [Universal Food Corporation v. Court of Appeals, G. R. No. L-29155, May 13,1970,33 SCRA 1, 18].
In the case at bar, the conduct of Delta indicates that the Genuinos' non-performance of its obligations was not a
substantial breach, let alone a breach of contract, as would warrant rescission.

First, Delta did not do anything when Genuinos refused to accept the delivery of the pipes two months after the execution
of contract.

Secondly, three (3) years later when the Genuinos offered to make payment Delta did not raise any argument but merely
demanded that the quoted prices be increased. Moreover, the power to rescind under Art. 1191 is not absolute. "[T]he
act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must
be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court." In
the instant case, Delta made no manifestation whatsoever that it had opted to rescind its contracts with the Genuinos. It
only raised rescission as a defense when it was sued for specific performance by private respondents.
Further, it would be highly inequitable for petitioner Delta to rescind the two (2) contracts considering the fact that not only
does it have in its possession and ownership the black iron pipes, but also the P15,900.00 down payments private
respondents have paid. And if petitioner Delta claims the right to rescission, at the very least, it should have offered to
return the P15,900.00 down payments [See Art. 1385, Civil Code and Hodges v. Granada, 59 Phil. 429 (1934)].
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VERMEN REALTY DEVELOPMENT CORPORATION VS. COURT OF APPEALS

FACTS:

Under the conditions of the so-called “Offsetting Agreement”, Vermen Realty (the first party in the contract) and Seneca
Hardware (the second party) were under a reciprocal obligation. Seneca Hardware shall deliver to Vermen Realty
construction materials worth P552,000.00.

Vermen Realty's obligation under the agreement is threefold: he shall pay Seneca Hardware P276,000.00 in cash; he
shall 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 (Rollo, p. 28). In 1982, the 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 the Vermen Realty corporation averred that Room 602 was leased to another tenant because Seneca
Hardware corporation had not paid anything for purchase of the condominium unit. Vermen Realty corporation demanded
payment of P27,848.25 representing the balance of the purchase price of Room 601.

On June 21, 1985, Seneca Hardware filed a complaint with the Regional Trial Court of Quezon City (Branch 92) for
rescission of the Offsetting Agreement with damages. In said complaint, Seneca Hardware alleged that Vermen Realty
Vermen Realty Corporation 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
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the Offsetting Agreement. After conducting hearings, the trial court rendered a decision dismissing the complaint and
ordering the plaintiff (Seneca Hardware in this petition) to pay defendant (Vermen Realty in this petition) 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 as adverted to above.

ISSUE:
Do 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. 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 Under the agreement, Seneca
Hardware shall deliver to Vermen Realty construction materials. Vermen Realty's obligation under the agreement is three-
fold: he shall pay Seneca Hardware P276,000.00 in cash; he shall 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 givenoption to transfer to similar units therein.

Article 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.

In the case at bar, Vermen Realty argues that it was Seneca Hardware who failed to perform its obligation in the Offsetting
Agreement. Seneca Hardware, on the other hand, points out that the subject of the Offsetting Agreement is Phase II of
the Vermen Pines Condominiums. It alleges that since construction of Phase II of the Vermen Pines Condominiums has
failed to begin it has reason to move for rescission of the Offsetting Agreement, as it cannot forever wait for the delivery
of the condominium units to it.
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It is evident from the facts of the case that Seneca Hardware did not fail to fulfill its 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.

CETUS DEVELOPMENT, INC. VS. CA

CASE: Petition for review on certiorari on the decision of the CA dated January 30, 1987.
FACTS:
1. Private respondents, Ederlina Navalta, Ong Teng, Jose Liwanag, Leandro Canlas, Victoria Sudario, and Flora
Nagbuya were the lessees of the premises located at No. 512 Quezon Boulevard, Quiapo, Manila, originally
owned by Susana Realty. (Month-to-month basis)
Rates: Ederlina Navalta: Php 80.50
Ong Teng: Php 96.10
Jose Liwanag: Php 40.35
Leandro Canlas: Php 80.55
Victoria Sudario: Php 50.45
Flora Nagbuya: Php 80.55
2. March 1984 – Susana Realty sold the leased premises to the Cetus Development, Inc.
3. April – June 1984 – private respondents continued to pay their monthly rentals to a collector sent by the petitioner.
July-September 1984 – they failed to pay their monthly individual rentals as no collector came.
4. October 9, 1984 – petitioner sent a letter to each respondent demanding that they vacate the subject premises
and to pay back rentals from July-September within 15 days from the receipt thereof. Upon the receipt of the
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letters, respondents paid their respective arrearages which were accepted by the petitioner subject to a unilateral
condition that it was without prejudice to the filing of an ejectment suit.
5. Subsequent monthly rental payments were accepted by the petitioner under the same condition.
6. Petitioner filed with the METc of Manila complaints for ejectment against the respondents for failure to vacate the
premises.
7. Private respondents claim:
 They paid their monthly rental regularly through a collector of the lessor
 Their nonpayment of the rentals for the months July-September was due to the failure of the petitioner
to send its collector
 They were loss as to where they should pay their rentals (new owner or original owner?)
 One of the respondents called the office to inquire as to where to make the payments and he was told
that a collector would be sent, but no collector was sent.
8. Private Respondents – Motion for consolidation of the six cases. As a result, cases were consolidated.
9. Trial Court: dismiss the cases on the grounds that the rentals had all been paid and hence, the plaintiff cannot
eject the defendants from the leased premises. There are no rentals in arrears.
10. Petitioner appealed to RTC; dismiss for lack of merit.
11. Petitioner filed a petition for review of the decision of the RTC to CA

ISSUE: WON there exists a cause of action when the complaints for unlawful detainer were filed considering the fact that
upon demand by the petitioner from the private respondents for payment of back rentals, the latter immediately tendered
payment which was accepted by the petitioner.
HELD: SC affirmed the decision of the CA.
1. Section 2, Rules of Court, "Landlord to proceed against tenant only after demand." Statesthat the right to bring
an action of ejectment or unlawful detainer must be counted from the time the defendants failed to pay rent
after the demand therefore. The demand required partakes of an extrajudicial remedy that must be pursued
beforeresorting to judicial action so much so that when there is full compliance with thedemand, there is no need
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for court action.

2. Two requisites in bringing an ejectment suit: there must be a failure to pay rent or comply with the conditions of
the lease, and there must be a demand both to pay or to comply and vacate within the periods specified in Sec
2 Rule 70 (15days in case of lands, 5 days in case of buildings).
3. In this case, no cause of action for the ejectment has accrued, no failure on the part of the private respondents
to pay rents for three consecutive months.
4. Article 1169, “Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extra judicially demands from them the fulfillment of their obligation.”
5. Petitioner failed to demand payment of the rentals when the obligation matured, thus, the private respondents
cannot be held guilty of mora solvendi or delay in the payment of rentals.
6. Demand to vacate was premature.
7. Failure to send a collector is not a valid defense; it is customary for private respondents to pay rentals
through a collector. Art 1257 of NCC 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. Delay in paying is not imputable to the
respondents; it was attributable to the petitioner’s omission or neglect to collect.

AEROSPACE CHEMICAL INDUSTRIES, INC VS CA AND PHILIPPINE PHOSPHATE FERTILIZER CORP.

Facts
1. On June 27, 1986, petitioner Aerospace Industries, Inc. purchased five hundred metric tons of sulfuric acid from
private respondent Philippine Phosphate Fertilizer Corporation.
2. Petitioner agreed to secure the means of transport to pick-up the sulfuric acid from private respondents' loadports
in Basay, Negros Oriental and Sangi, Cebu.
3. On October 3, 1986, petitioner paid the purchased price of 500 MT of sulfuric acid. Then, it chartered M/T Sultan
Kayumanggi to carry the agreed volumes of freight from designated loading areas.
4. But the vessel was able to withdraw a partial amount of sulfuric acid from Basay and Sangi because it tilted. And
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later, it sank with a total amount of 227.51 MT of sulfuric acid on board.

5. Petitioner sent a demand letter to private respondent for delivery of the 272.49 MT of sulfuric acid.
6. Petitioner then filed a complaint against private respondent for specific performance and/or damages before the
Regional Trial Court of Pasig.
7. The private respondent filed an answer with counterclaim and alleged that it was the petitioner which was remiss
in the performance of its obligation in arranging the shipping requirements of its purchases and, hence, should
pay damages.
8. Petitioner prevailed in the trial court.
9. However, on appeal, the Court of Appeals reversed the decision of the trial court and instead found petitioner
guilty of delay and therefore, liable for damages.
10. Hence, this petition.
Issue
1. Did the respondent court err in holding that the petitioner committed breach of contract, considering that:
a. the petitioner allegedly paid the full value of its purchases, yet received only a portion of said purchases?
b. petitioner and private respondent allegedly had also agreed for the purchase and supply of an additional
227.519 MT of sulfuric acid, hence prior delay, if any, had been waived?
2. Did the respondent court err in awarding damages to private respondent?
3. Should expenses for the storage and preservation of the purchased fungible goods, namely sulfuric acid, be on
seller's account pursuant to Article 1504 of the Civil Code?
Ruling
1. No, CA did not err in absolving the private respondent from liability.
Petitioner, as the buyer, was obligated under the contract to undertake the shipping requirements of the cargo from the
private respondent's loadports to the petitioner's designated warehouse. It was petitioner which chartered M/T Sultan
Kayumanggi. The vessel was petitioner's agent. When it failed to comply with the necessary loading conditions of sulfuric
acid, it was incumbent upon petitioner to immediately replace M/T Sultan Kayumanggi with another sea worthy vessel.
Where there has been breach of contract by the buyer, the seller has a right of action for damages. Following this rule, a
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cause of action of the seller for damages may arise where the buyer refuses to remove the goods, such that buyer has to
remove them. Article 1170 of Civil Code provides: "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."

2. No, respondent court did not err in awarding damages to private respondent.
Where there has been breach of contract by the buyer, the seller has a right of action for damages. Following this rule, a
cause of action of the seller for damages may arise where the buyer refuses to remove the goods, such that buyer has to
remove them. Article 1170 of Civil Code provides: "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."
Delay begins from the time the obligee judicially or extrajudicially demands from the obligor the performance of the
obligation. Art. 1169 states: "Art. 1169. 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 their obligation." In order that the debtor may be in default,
it is necessary that the following requisites be present:
(1) that the obligation be demandable and already liquidated;
(2) that the debtor delays performance; and
(3) that the creditor requires the performance judicially or extrajudicially.

Records reveal that a tanker ship had to pick up sulfuric acid in Basay, then proceed to get the remaining stocks in Sangi,
Cebu. A period of three days appears to us reasonable for a vessel to travel between Basay and Sangi. Logically, the
computation of damages arising from the shipping delay would then have to be from December 15, 1986, given said
reasonable period after the December 12th letter. More important, private respondent was forced to vacate Basay wharf
only on December 15th. Its Basay expenses incurred before December 15, 1986, were necessary and regular business
expenses for which the petitioner should not be obliged to pay. AaID

3. No, Article 1504 is not applicable.

The general rule that before delivery, the risk of loss is borne by the seller who is still the owner, is not applicable in this
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case because petitioner had incurred delay in the performance of its obligation. Article 1504 of the Civil Code clearly
states: "Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to the
buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether actual delivery
has made or not except that: . . . (2) Where actual delivery had been delayed through the fault of either the buyer or seller
the goods are at the risk of the party at fault.

As pointed out earlier, petitioner is guilty of delay, after private respondent made the necessary extrajudicial demand by
requiring petitioner to lift the cargo at its designated loadports. When petitioner failed to comply with its obligations under
the contract it became liable for its shortcomings. Petitioner is indubitably liable for proven damages.

SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs. ERNESTO V. SANTOS and RIVERLAND, INC.,
respondents.

Facts:
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were plaintiff and defendant, respectively, in
several civil cases. On October 26, 1990, the parties executed a Compromise Agreement wherein Foundation shall pay
Santos P14.5 Million in the following manner: a. P1.5 Million immediately upon the execution of this agreement; and. The
balance of P13 Million shall be paid, whether in lump sum or in installments, at the discretion of the Foundation, within a
period of not more than two (2) years from the execution of this agreement.In compliance, Santos moved for the dismissal
of the cases, while SVHFI paid the initial P1.5 million. After several demands, SVHFI failed to pay the balance of P13
million, prompting Santos to apply for the issuance of a writ of execution of the compromise judgment of the RTC dated
September 30, 1991.

Twice, SVHFI’s properties were auctioned and sold to Riverland, Inc. On June 2, 1995, Santos and Riverland Inc. filed a
Complaint for Declaratory Relief and Damages alleging delay on the part of SVHFI in paying the balance. They further
alleged that under the Compromise Agreement, the obligation became due on October26, 1992, but payment of the
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remaining balance was effected only on November 22, 1994. Thus, respondents prayed that petitioner be ordered to pay
legal interest on the obligation, penalty, attorney's fees and costs of litigation. SVHFI alleged that the legal interest on
account of fault or delay was not due and payable, considering that the obligation had been superseded by the
compromise agreement. Moreover, SVHFI argued that absent a stipulation, Santos must ask for judicial intervention for
purposes of fixing the period.

Issue:
Whether or not SVHFI incurred in delay based on the compromise agreement and thereby liable for legalinterest

Ruling:

SVHFI is liable for legal interest as penalty on account of delay. The Compromise Agreement was entered into on October
26, 1990.

It was judicially approved on September30, 1991. Applying existing jurisprudence, the compromise agreement as a
consensual contract became binding between the parties upon its execution and not upon its court approval. Hence, the
two-year period should have begun on October 26, 1990.In this case, there was non-fulfillment of the obligation with
respect to time.

The requisites of mora were all met: (1) that the obligation be demandable and already liquidated
—the two-year period already lapsed and the amount of payment was already determined ;(2) that the debtor delays
performance
—SVHFI paid the balance beyond the two-year period; and finally,(3) that the creditor requires the performance judicially
or extra-judicially
—
a demand letter was sent in accordance with the extra-judicial demand as contemplated by law. When the debtor knows
 CASE DIGEST 1/12/2018 18

the amount and period when he is to pay, interest as damages is generally allowed as a matter of right. The legal interest
for loan as forbearance of money is 12% per annum to be computed from the time the demand was made under the
provisions of Article 1169 of the Civil Code.

DANIEL VAZQUEZ VS AYALA CORPORATION

FACTS: Daniel Vasquez owns Conduit Development, Inc. In 1981, Vasquez enters into a Memorandum of
Agreement (MOA) with Ayala Corporation wherein Ayala bought Conduit from Vasquez. Ayala committed to
develop Conduit’s lands including 4 parcels of land adjacent to Vasquez’ retained land. Be it noted that these parcels
of land were in the 3rd phase of Ayala’s development plan. Paragraph 5.15 of the MOA provides:
5.15. The BUYER (AYALA) agrees to give the SELLERS (Vasquez) a first option to purchase four developed
lots next to the “Retained Area” at the prevailing market price at the time of the purchase.”
In 1990, Ayala was able to develop the said lots. (This was after some slump, and some litigation between Conduit’s
former contractor (GP construction) and GP’s subcontractor (Lancer Builders).) Ayala then offered to sell the 4
parcels of land to Vasquez at P6.5k/sq. m. which was the market price in 1990. Vasquez refused the offer. Vasquez
contended that the purchase price should be P460/sq. m. which was the market price in 1981 (time of purchase).
Ayala then lowered the purchase price to P5k/sq. m. but Vasquez refused again. Instead he made a counter offer
to buy the lots at P2k/sq. m. This time, Ayala refused.
ISSUE: Whether or not Paragraph 5.15 of the MOA is an option contract or right of first refusal.
HELD: No. The said paragraph is a mere right of first refusal. Although the paragraph has a definite object, i.e., the
sale of the 4 lots, the period within which they will be offered for sale to Vasquez and, necessarily, the price for
which the subject lots will be sold are not specified. The phrase “at the prevailing market price at the time of the
purchase” connotes that there is no definite period within which Ayala is bound to reserve the subject lots for
 CASE DIGEST 1/12/2018 19

Vasquez to exercise his privilege to purchase. Neither is there a fixed or determinable price at which the subject
lots will be offered for sale. The price is considered certain if it may be determined with reference to another thing
certain or if the determination thereof is left to the judgment of a specified person or persons.
Further, paragraph 5.15 was inserted into the MOA to give Vasquez the first crack to buy the subject lots at the
price which Ayala would be willing to accept when it offers the subject lots for sale. It is not supported by an
independent consideration.
VDA DE VILLARUEL VS MANILA MOTOR December 13, 1958

FACTS:

Plaintiffs Villaruel and Defendant Manila Motors Co. entered into a contract in which the plaintiff agreed to lease to
defendant a 500sqm space of a building for automobile showroom, office, and storage. Another building for a
repairshop and a 5 bedroom residence for the Bacolod branch manager.

The term of lease was for 5 years (and renewable for another 5 years) starting from the time that the building was
to be delivered to the lessee. Manila Motor company then agreed to pay Plaintiifs 300 pesos as monthly rental
payable on the 5th of each month and 50 pesos for the residential house. The premises were in their possession
on October 31, 1940. This continued until 1941 after which the property was held by the Japanese forces until
March 29, 1945. No payment was made during those time.

The American forces later occupied the same and rentals were paid by the occupants at the same rate that the
defendant paid plaintiffs. When the American forces left the premises, the branch manager decided to extend the
lease for another 5 years and they agreed that the 7 month occupancy of the US forces would not be counted as
part of the new 5 year lease, the residential part would be used to Arturo Colmanares.
 CASE DIGEST 1/12/2018 20

Before resuming the collection of the rentals, Dr. Viallruel with the advice of Atty Hilado, demanded payment for the
period occupied by the Japanese forces. Defendant refused to pay and Plaintiff gave a notice for recession of the
contract of lease and payment of the rentals from June 1, 1942 to March 31, 1941 (P11,900) which was also rejected
by the Defendant in a letter dated July 27, 1946

On the same month, Rafael Frey offered to pay the Paintiff P350 for the full month of July. Plaintiff accepted the
payment provided that it was without prejudice to their previous demand and increased rentals until the bldgs. Are
returned to them. Dr. Villaruel indicated his willingness to limit the condition of his acceptance to be that "neither
the lessee nor the lessors admit the contention of the other by the mere fact of payment". As no accord could still
be reached between the parties as to the context of the receipt, no payment was thereafter tendered until the end
of November, 1946.

The plaintiff commenced an action before the CFC of Neg. Occidental against Defendant Company. During the
pendency of the case, the leased building was burned down. Because of the occurrence, plaintiffs demanded
reimbursement from the defendants, but having been refused, they filed a supplemental complaint to include a 3rd
cause of action, the recovery of the value of the burned building. The trial court rendered judgment in favor of the
plaintiff. Hence the defendants appeal.

Issue: WON Manila Motors Co. is liable for the loss of the leased premises

Held: No

Ratio: Clearly, the lessor's insistence upon collecting the occupation rentals for 1942-1945 was unwarranted in law.
Hence, their refusal to accept the current rentals without qualification placed them in default (mora creditoris or
 CASE DIGEST 1/12/2018 21

accipiendi) with the result that thereafter, they had to bear all supervening risks of accidental injury or destruction
of the leased premises. While not expressly declared by the Code of 1889, this result is clearly inferable from the
nature and effects of mora. In other words, the only effect of the failure to consign the rentals in court was that the
obligation to pay them subsisted and the lessee remained liable for the amount of the unpaid contract rent,
corresponding to the period from July to November, 1946; it being undisputed that, from December 1946 up to
March 2, 1948, when the commercial buildings were burned, the defendants appellants have paid the contract
rentals at the rate of P350 per month. But the failure to consign did not eradicate the default (mora) of the lessors
nor the risk of loss that lay upon them.

The pertinent articles of the Civil Code of Spain of 1889 provide:

ART. 1554. It shall be the duty of the lessor;

1. To deliver to the lessee the thing which is the subject matter of the contract;

2. To make thereon, during the lease, all repairs necessary in order to keep it in serviceable condition for the
purpose for which it was intended;

3. To maintain the lessee in the peaceful enjoyment of the lease during the entire term of the contract.

ART. 1560. The lessor shall not be liable for any act of mere disturbance of a third person of the use of the
leased property; but the lessee shall have a direct action against the trespasser.

It the third person, be it the Government or a private individual, has acted in reliance upon a right, such action shall
not be deemed a mere act of disturbance.
 CASE DIGEST 1/12/2018 22

BARONS MARKETING CORP., petitioner,

vs.
COURT OF APPEALS and PHELPS DODGE PHILS., INC. respondents. PRINCIPLE: Human Relations
Provision
ISSUE: two issues: (1) whether or not private respondent is guilty of abuse of right; and (2) whether or not private
respondent is entitled to interest and attorney's fees.

FACTS:

1. On August 31, 1973, plaintiff [Phelps Dodge, Philippines, Inc. private respondent herein] appointed
defendant [petitioner Barons Marketing, Corporation] as one of its dealers of electrical wires and cables
effective September 1, 1973 (Exh. A). As such dealer, defendant was given by plaintiff 60 days credit for
its purchases of plaintiff's electrical products. This credit term was to be reckoned from the date of delivery
by plaintiff of its products to defendant.
2. During the period covering December 1986 to August 17, 1987, defendant purchased, on credit, from
plaintiff various electrical wires and cables in the total amount of P4,102,438.30 (Exh. B to K). These wires
and cables were in turn sold, pursuant to previous arrangements, by defendant to MERALCO, the former
being the accredited supplier of the electrical requirements of the latter. Under the sales invoices issued by
plaintiff to defendant for the subject purchases, it is stipulated that interest at 12% on the amount due for
attorney's fees and collection (Exh. BB). 1 On September 7, 1987, defendant paid plaintiff the amount of
P300,000.00 out of its total purchases as above-stated (Exh. S), thereby leaving an unpaid account on the
aforesaid deliveries of P3,802,478.20. On several occasions, plaintiff wrote defendant demanding payment
of its outstanding obligations due plaintiff (Exhs. L, M, N, and P). In response, defendant wrote plaintiff on
 CASE DIGEST 1/12/2018 23

October 5, 1987 requesting the latter if it could pay its outstanding account in monthly installments of
P500,000.00 plus 1% interest per month commencing on October 15, 1987 until full payment (Exh. O and
O-4). Plaintiff, however, rejected defendant's offer and accordingly reiterated its demand for the full payment
of defendant's account (Exh. P).
3. On 29 October 1987, private respondent Phelps Dodge Phils., Inc. filed a complaint before the Pasig
Regional Trial Court against petitioner Barons Marketing Corporation for the recovery of P3,802,478.20
representing the value of the wires and cables the former had delivered to the latter, including interest.
Phelps Dodge likewise prayed that it be awarded attorney's fees at the rate of 25% of the amount
demanded, exemplary damages amounting to at least P100,000.00, the expenses of litigation and the costs
of suit.
4. Petitioner, in its answer, admitted purchasing the wires and cables from private respondent but disputed
the amount claimed by the latter. Petitioner likewise interposed a counterclaim against private respondent,
alleging that it suffered injury to its reputation due to Phelps Dodge's acts. Such acts were purportedly
calculated to humiliate petitioner and constituted an abuse of rights.

DECISION OF LOWER COURTS:RTC: the Court finds Phelps Dodge Phils., Inc. to have preponderantly proven
its case and hereby orders Barons Marketing, Inc. to pay Phelps Dodge

1. P3,108,000.00 constituting the unpaid balance of defendant's purchases from plaintiff and interest thereon at
12% per annum computed from the respective expiration of the 60 day credit term, vis-a-vis the various sales
invoices and/or delivery receipts; 2. 25% of the preceding obligation for and as attorney's fees; 3. P10,000.00 as
exemplary damages; 4. Costs of suit.
 CASE DIGEST 1/12/2018 24

Court of Appeals: modifying the decision of the trial court The Court of Appeals finds Phelps Dodge Phils., Inc. to
have preponderantly proven its case and hereby orders Barons Marketing, Inc. to pay Phelps Dodge the following:

1. P3,802,478.20 constituting the unpaid balance of defendant's purchases from plaintiff and interest thereon at
12% per annum computed from the respective expiration of the 60 day credit term, vis-a-vis the various sales
invoices and/or delivery receipts; and 2. 5% of the preceding obligation for and as attorney's fees. No costs.

RATIO DECIDENDI OF SUPREME COURT: Actions; Damages; It is an elementary rule that good faith is
presumed and that the burden of proving bad faith rests upon the party alleging the same.—The question,
therefore, is whether private respondent intended to prejudice or injure petitioner when it rejected petitioner’s offer
and filed the action for collection. We hold in the negative. It is an elementary rule in this jurisdiction that good
faith is presumed and that the burden of proving bad faith rests upon the party alleging the same. In the case at
bar, petitioner has failed to prove bad faith on the part of private respondent. Petitioner’s allegation that private
respondent was motivated by a desire to terminate its agency relationship with petitioner so that private respondent
itself may deal directly with Meralco is simply not supported by the evidence. At most, such supposition is merely
speculative.

Same; Same; A person who, in exercising his rights, does not act in an abusive manner is not deemed to
have acted in a manner contrary to morals, good customs or public policy as to violate the provisions of
Article 21 of the Civil Code.—Moreover, we find that private respondent was driven by very legitimate reasons for
rejecting petitioner’s offer and instituting the action for collection before the trial court. As pointed out by private
respondent, the corporation had its own “cash position to protect in order for it to pay its own obligations.” This is
not such “a lame and poor rationalization” as petitioner purports it to be. For if private respondent were to be required
 CASE DIGEST 1/12/2018 25

to accept petitioner’s offer, there would be no reason for the latter to reject similar offers from its other debtors.
Clearly, this would be inimical to the interests of any enterprise, especially a profit-oriented one like private
respondent. It is plain to see that what we have here is a mere exercise of rights, not an abuse thereof. Under these
circumstances, we do not deem private respondent to have acted in a manner contrary to morals, good customs or
public policy as to violate the provisions of Article 21 of the Civil Code.

Contracts; Principle of Autonomy of Contracts; Since a contract has the force of law between the parties,
each is bound to fulfill what has been expressly stipulated therein.—It may not be amiss to state that
petitioner’s contract with private respondent has the force of law between them. Petitioner is thus bound to fulfill
what has been expressly stipulated therein. In the absence of any abuse of right, private respondent cannot be
allowed to perform its obligation under such contract in parts. Otherwise, private respondent’s right under Article
1248 will be negated, the sanctity of its contract with petitioner defiled. The principle of autonomy of contracts must
be respected.

Same; Penalty Clauses; Attorney’s Fees; The attorneys’ fees so provided in penal clauses are awarded in
favor of the litigant, not his counsel, and it is the litigant, not counsel, who is the judgment creditor entitled
to enforce the judgment by execution.—Petitioner nevertheless urges this Sourt to reduce the attorney’s fees for
being “grossly excessive,” “considering the nature of the case which is a mere action for collection of a sum of
money.” It may be pointed out however that the above penalty is supposed to answer not only for attorney’s fees
but for collection fees as well. Moreover: x x x the attorneys’ fees here provided is not, strictly speaking, the
attorneys’ fees recoverable as between attorney and client spoken of and regulated by the Rules of Court. Rather,
the attorneys’ fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal
clause. It has been said that so long as such stipulation does not contravene law, morals, or public order, it is strictly
 CASE DIGEST 1/12/2018 26

binding upon defendant. The attorneys’ fees so provided are awarded in favor of the litigant, not his counsel. It is
the litigant, not counsel, who the judgment creditor is entitled to enforce the judgment by execution.

Same; Same; Same; Courts are empowered to reduce the penalty if the same is “iniquitous or
unconscionable.”—Nonetheless, courts are empowered to reduce such penalty if the same is “iniqui-tous or
unconscionable.” Article 1229 of the Civil Code states thus: ART. 1229. The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (Italics supplied.)

Same; Same; Same; Attorney’s fees and collection fees equivalent to twenty-five percent (25%) of the
principal and interest—with the interest running to some P4.5 Million, which interest even exceeds the
principal debt—are manifestly exorbitant.—It is true that we have upheld the reasonableness of penalties in the
form of attorney’s fees consisting of twenty-five percent (25%) of the principal debt plus interest. In the case at bar,
however, the interest alone runs to some four and a half million pesos (P4.5M), even exceeding the principal debt
amounting to almost four million pesos (P4.0M). Twenty five percent (25%) of the principal and interest amounts to
roughly two million pesos (P2M). In real terms, therefore, the attorney’s fees and collection fees are manifestly
exorbitant. Accordingly, we reduce the same to ten percent (10%) of the principal.

Same; Same; Same; Appeals; Supreme Court; Equity Jurisdiction; The Supreme Court is clothed with
ample authority to review matters, even if they are not assigned as errors in the appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case.—Private respondent, however, argues
that petitioner failed to question the award of attorney’s fees on appeal before respondent court and raised the issue
only in its motion for reconsideration. Consequently, petitioner should be deemed to have waived its right to question
such award. Private respondent’s attempts to dissuade us from reducing the penalty are futile. The Court is clothed
 CASE DIGEST 1/12/2018 27

with ample authority to review matters, even if they are not assigned as errors in their appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case.