1. JARDINE DAVIES INC vs.

COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION

1305: Contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or
to render some service.
Requistes of contract

FACTS:

In 1992, petitioner PUREFOODS decided to install two 1500 KW generators in its food processing plant in San Roque,
Marikina City. A bidding for the supply and installation of the generators was held. Out of the 8 prospective bidders who attended the
pre-bidding conference, only 3 bidders submitted bid proposals and gave bid bonds. In a letter dated 12 December 1992 addressed to
FEMSCO PUREFOODS confirmed the award of the contract to FEMSCO which also contains “basic terms and conditionds”.
FEMSCO, as stated in the basic terms and conditions, submitted the required performance and contractor’s all-risk insurance.
However, in a letter dated 22 December 1992, PUREFOODS through its Senior VP Teodoro L. Dimayuga unilaterally canceled the
award. FEMSCO protested the cancellation of the award. Before the matter could be resolved, PUREFOODS awarded the project and
entered into a contract with JARDINE NELL, a division of Jardine Davies, Inc. (JARDINE), which was not one of the bidders. FEMSCO
filed a complaint.

ISSUE: WON their existed a perfected contract between PUREFOODS AND FEMSCO.

RULING:

YES. Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made by the offeror. From that moment,
the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according
to their nature, may be in keeping with good faith, usage and law. The acceptance must not qualify the terms of the offer. However, the
acceptance may be express or implied. For a contract to arise, the acceptance must be made known to the offeror. Acceptance can be
withdrawn or revoked before it is made known to the offeror.

The 12 December 1992 letter of petitioner PUREFOODS to FEMSCO constituted acceptance of respondent FEMSCO’s offer as
contemplated by law. The tenor of the letter, i.e., “This will confirm that Pure Foods has awarded to your firm (FEMSCO) the project,”
could not be more categorical. While the same letter enumerated certain “basic terms and conditions,” these conditions were imposed
on the performance of the obligation rather than on the perfection of the contract.

But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS constituted a “conditional counter-offer,”
respondent FEMCO’s submission of the performance bond and contractor’s all-risk insurance was an implied acceptance, if not a clear
indication of its acquiescence to, the “conditional counter-offer,” Petitioner PUREFOODS also argues that it was never in bad faith. But
by the unilateral cancellation of the contract, the defendant (petitioner PURE FOODS) has acted with bad faith and this was further
aggravated by the subsequent inking of a contract between defendant Purefoods and erstwhile co-defendant Jardine. It is very evident
that Purefoods thought that by the expedient means of merely writing a letter would automatically cancel or nullify the existing contract
entered into by both parties after a process of bidding. This, to the Court’s mind, is a flagrant violation of the express provisions of the
law and is contrary to fair and just dealings to which every man is due.

2. ANG YU ASUNCION et. al vs. CA and BUEN REALTY DEVELOPMENT CORPORATION

1305: Contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or
to render some service.

FACTS:
1. A Second Amended Complaint for Specific Performance was filed by Ann Yu Asuncion et al., against Bobby Cu Unjieng, Rose Cu
Unjieng and Jose Tan before the RTC, alleging that plaintiffs are tenants or lessees of residential and commercial spaces owned by
defendants at Ongpin Street, Binondo, Manila.
2. This suit originated form the antecedent facts that they have occupied said spaces since 1935 and have been religiously paying the
rental and complying with all the conditions of the lease contract. That on several occasions, defendants (Cu Unjiengs) informed
plaintiffs (Asuncion et.al) that they are offering to sell the premises and are giving them priority to acquire the same; that during the
negotiations, Bobby Cu Unjieng offered a price of P6-million while plaintiffs made a counter offer of P5-million; that plaintiffs thereafter
asked the defendants to put their offer in writing to which request defendants acceded; that in reply to defendants' letter, plaintiffs wrote
them asking that they should specify the terms and conditions of the offer to sell; that when plaintiffs did not receive any reply, they sent
another letter with the same request; that since defendants failed to specify the terms and conditions of the offer to sell and through an
information received by the plaintiffs, it was known that Cu Unjiengs were about to sell the property, compelling them to file the
complaint to compel defendants to sell the property to them.
3. The trial court found that defendants’ offer to sell was never accepted by the plaintiffs for the reason that the parties did not agree
upon the terms and conditions of the proposed sale, hence, there was no contract of sale at all which was also affirmed by the CA.
Then, the decision was brought to the Supreme Court by petition for review on certiorari but was denied due to insufficiency in form and
substance.
4. Pending consideration of the Court, the Cu Unjieng spouses executed a Deed of Sale transferring the property in question to herein
defendant Buen Realty and Development Corporation. As the new owner of the subject property wrote a letter to the lessees (Asuncion
et. al) demanding that the latter vacate the premises. The lessees wrote a reply to petitioner stating that petitioner brought the property
subject to the notice of lis pendens which was ordered by the CA to have been executed in bad faith and was set aside then a writ of
execution was issued against the Buen Realty.

ISSUE:
1. WON the CA erred in affirming the decision of the RTC that there was no contract of sale.
2. WON Buen Realty can be held bound by the writ of execution by virtue of the notice of lis pendens, carried over on the title issued in
the name of Buen Realty, at the time of the latter's purchase of the property from the Cu Unjiengs.

HELD:
1. The decision of the CA is affirmed. An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The
obligation is constituted upon the concurrence of the essential elements thereof. Among the sources of an obligation is a contract (Art.
1157, Civil Code), which is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give
something or to render some service (Art. 1305, Civil Code). A contract undergoes various stages that include its negotiation or
preparation, its perfection and, finally, its consummation. Negotiation covers the period from the time the prospective contracting parties
indicate interest in the contract to the time the contract is concluded (perfected). The perfection of the contract takes place upon the
concurrence of the essential elements thereof. A contract which is consensual as to perfection is so established upon a mere meeting
of minds, such as the concurrence of offer and acceptance, on the object and on the cause thereof. Until the contract is perfected, it
cannot, as an independent source of obligation, serve as a binding juridical relation. In sales, particularly, to which the topic for
discussion about the case at bench belongs, the contract is perfected when a person, called the seller, obligates himself, for a price
certain, to deliver and to transfer ownership of a thing or right to another, called the buyer, over which the latter agrees.
2. Buen Realty, cannot be held subject to the writ of execution issued by respondent Judge, let alone ousted from the ownership and
possession of the property, without first being duly afforded its day in court. The remedy is not a writ of execution on the judgment,
since there is none to execute, but an action for damages in a proper forum for the purpose.

3. De los Reyes vs Alojado

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

Facts
Veronica Alojado had a loan from Benito de los Reyes, the sum of 67.60 Php for the purpose of paying a debt she owed to
Olimpa Zaballa. It was agreed that Alojado should remain as a servant in the house and in the service of her creditor, de los Reyes,
without any remuneration, until she should find some one who would furnish her with the same amount wherewith to repay the loand.
Alojado left the house of de los Reyes without paying the debt. De los Reyes filed a suit against Alojado in the court of justice of peace
for the said amount and to compel her to return to his service. The court rendered judgment declaring that Alojado should pay for the
amount, and if she should be insolvent, be obliged to fulfill the agreement between her and the plaintiff. Alojado appealed the judgment
in the Court of First Instance. The CFI advised de los Reyes to reproduce his complaint. In his reproduced complaint, aside from
relating the same facts, he added that besides the 67.60 Php, Alojado received from him various small amounts under the same
conditions. The aggregated amount is 11.97, added to 67.60, de los Reyes is now claiming 79.57. And until this amount is paid, Alojado
should remain gratuitously in the service of de los Reyes. The CFI absolved Alojado.
Issue [Relating to Article 1306]

Whether rendering service as servant without renumeration a valid condition for failure to pay loan?

Held

No, rendering service as servant without renumeration is not valid as this condition is contrary to law and morality. Domestic
services are always to be enumerated and no agreement may subsist in law in which it is stipulated that any domestic services shall be
absolutely gratuitous unless it is admitted that slavery may be established in this country through a covenant entered into between the
interested parties. There are laws governing domestic service and one of them ordered that all usurious conduct toward the servants
and employees of every class is prohibited, and the master who, under pretext of an advance of pay or having paid the debts or the
taxes of the servant, shall have succeeded in retaining the latter in his service at his house, shall be compelled to pay to such servant
all arrears due him and any damages he may have occasioned him.

4. DE LUNA VS. ABRIGO

Art. 1306 – The contracting parties may establish such stipulations, clauses, terms and conditions NOT contrary to law, morals, good
customs, public order or public policy.

Petitioners – Evelyn De Luna et al

Respondent – Judge Sofronio Abrigo & Luzonian University Foundation, Inc.

Case: Petition for review on certiorari of the Order of Judge Abrigo of CFI Quezon, dismissing the complaint of petitioners on the
ground of prescription of action.

Facts:
 Prudencio de Luna donated a portion of lot in favor to the Luzonian University Foundation, Inc, as embodied in a Deed of
Donation Intervivos.
 The donation was subject to certain terms and conditions and provided for the automatic reversion to the donor of the donated
property in case of violation or non-compliance.
 The foundation failed to comply the conditions of the donation so that Prudencio revived the said donation in favor of the
foundation subject to terms and conditions, again with automatic reversion clause in case of violation thereof.
 After the death of Prudencio, his heirs filed a complaint for the cancellation of the donation and the reversion of the donated
land to the them, alleging that the terms and conditions of the donation were not complied with by the foundation.
 In its answer, the foundation claimed of partial and substantial compliance with the conditions of the donation and that was
granted an indefinite extension of time.
 The trial court dismissed the complaint by reason of prescription.
 The petitioners brought the instant petition for review, contending that onerous donations are governed by the rules on
contracts and not the rules on donations, so that the automatic reversion of the donated area to the donor in case of violation of any of
the conditions is effective without the need of executing any other document for that purpose as stipulated in the donation.

Issue:
WoN the stipulation of automatic reversion in the Deed of Donation is valid and binding upon the foundation who voluntarily
consented thereto.

Held:
Yes, said stipulation not being contrary to law, morals, good customs, public order or public policy, is valid and binding upon
the foundation.
Under Article 1306 of the New Civil Code, the parties to a contract have the right "to establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public
policy."
In the case at bar, the validity of the stipulation in the contract providing for the automatic reversion of the donated property to
the donor upon non-compliance cannot be doubted. It is in the nature of an agreement granting a party the right to rescind a contract
unilaterally in case of breach, without need of going to court.
Thus, the petition is GRANTED. Respondent judge is ordered to conduct a trial on the merits to determine the propriety of the
revocation of the subject donation.
5. Leal v. IAC

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.
Facts:

A document entitled “Compraventa,” written entirely in the Spanish language, involving three parcels of land, was executed by
the private respondent’s predecessors-in-interest (Santiagos) in favor of Cirilo Leal, the deceased father of petitioners. When Cirilo
died, the subject lands were inherited by his six children. Vicente Santiago approached the petitioners and offered to repurchase the
subject properties. Petitioners refused the offer. Consequently, Santiago instituted a complaint for specific performance.
RTC dismissed the complaint on the ground that there was, as yet, neither sale nor any alienation equivalent to a sale. CA
reversed the decision and ordered the Leals to accept the repurchase price (amount stipulated in the “Compraventa”) tendered by the
Santiagos.
The “Compraventa” contains the stipulation that the buyers are not allowed to sell to others the said lot but only to the seller
Vicente Santiago or to his heirs or successors. However, the petitioners endorse the decision penned by Justice Paras stating that “a
prohibition to alienate should not exceed at most a period of twenty years; otherwise there would be subversion of public policy, which
naturally frowns on unwarranted restrictions on the right of ownership”.

Issue:
Whether or not the stipulation prohibiting the buyer to sell the parcels of land to third parties is binding.
Ruling:

No, the stipulation is contrary to public policy.

Art. 1306. That contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Prohibition to sell to third parties amounts to a perpetual restriction on the right of ownership, specifically the owner’s right to
freely dispose of his properties. Thus, any such prohibition, indefinite and unlimited as to time, so much so that it shall continue to be
applicable even beyond the lifetime of the original parties to the contract, is, without doubt, a nullity.

7. Pakistan International Airlines v. Ople

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

FACTS:
Pakistan International Airlines Corporation (“PIA”), a foreign corporation licensed to do business in the Philippines, executed in Manila
two (2) separate contracts of employment, one with private respondent Ethelynne B. Farrales and the other with private respondent Ma.
M.C. Mamasig.

The contracts provided that (1) (Par 5) the Duration of Employment is for a period of 3 years, (2) (Par 6) PIA reserves the right to
terminate this agreement at any time by giving the EMPLOYEE notice in writing in advance one month before the intended termination
or in lieu thereof, by paying the EMPLOYEE wages equivalent to one month’s salary; and (3)(Par 10) the agreement shall be
construed and governed under and by the laws of Pakistan, and only the Courts of Karachi, Pakistan shall have the jurisdiction to
consider any matter arising out of or under this agreement.

Farrales and Mamasig then commenced training in Pakistan and after such, they began discharging their job functions as flight
attendants with base station in Manila and flying assignments to different parts of the Middle East and Europe.
One (1) year and four (4) months prior to the expiration of the contracts of employment, PIA sent separate letters to private respondents
advising both that their services as flight stewardesses would be terminated. PIA claimed that both were habitual absentees, were in
the habit of bringing in from abroad sizeable quantities of “personal effects”.

Farrales and Mamasig jointly instituted a complaint for illegal dismissal and non-payment of company benefits and bonuses against PIA
with the Ministry of Labor Employment (MOLE)
The PIA submitted its position paper, but no evidence, and there claimed that both private respondents were habitual absentees; that
both were in the habit of bringing in from abroad sizeable quantities of “personal effects”; and that PIA personnel at the Manila
International Airport had been discreetly warned by customs officials to advise private respondents to discontinue that practice. PIA
further claimed that the services of both private respondents were terminated pursuant to the provisions of the employment contract.
(par 5 and 6)

Regional Director of MOLE ordered the reinstatement of private respondents with full backwages or, in the alternative, the payment to
them of the amounts equivalent to their salaries for the remainder of the fixed three-year period of their employment contracts having
attained the status of regular employees.

On appeal the Deputy Minister of MOLE, adopted the findings of fact and conclusions of the Regional Director. Hence, this instant
Petition for Certiorari by PIA.
Issue:

Whether or not the Paragraph 5 and 6 of the contract superseded the general provisions of the Labor Code?

Held:

No. A contract freely entered into should, of course, be respected, as PIA argues, since a contract is the law between the parties. The
principle of party autonomy in contracts is not, however, an absolute principle. The rule in Article 1306, of our Civil Code is that the
contracting parties may establish such stipulations as they may deem convenient, “provided they are not contrary to law, morals, good
customs, public order or public policy.” Thus, counter-balancing the principle of autonomy of contracting parties is the equally general
rule that provisions of applicable law, especially provisions relating to matters affected with public policy, are deemed written into the
contract. The law relating to labor and employment is clearly such an area and parties are not at liberty to insulate themselves and
their relationships from the impact of labor laws and regulations by simply contracting with each other. It is thus necessary to appraise
the contractual provisions invoked by petitioner PIA in terms of their consistency with applicable Philippine law and regulations.

9. Valencia Hardwood v CA

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

Facts
On 16 January 1984, plaintiff (Valenzuela Hardwood and Industrial Supply, Inc.) entered into an agreement with the defendant Seven
Brothers (Shipping Corporation) whereby the latter undertook to load on board its vessel M/V Seven Ambassador the former’s lauan
round logs numbering 940 at the port of Maconacon, Isabela for shipment to Manila.

Plaintiff insured the logs against loss and/or damage with defendant South Sea Surety and Insurance Co., Inc. for P2,000,000.00 and
the latter issued its Marine Cargo Insurance Policy No. 84/24229 for P2,000,000.00 on said date

On January 24 1984 Valencia Hardwood tendered a check as payment for premium on the insurance policy. The following day MV
Seven Ambassador sank.

On 30 January 1984, a check for P5,625.00 (Exh. ‘E’) to cover payment of the premium and documentary stamps due on the policy
was tendered due to the insurer but was not accepted. Instead, the South Sea Surety and Insurance Co., Inc. cancelled the insurance
policy it issued as of the date of the inception for non-payment of the premium due in accordance with Section 77 of the Insurance
Code.

Plaintiff filed formal claims against South Sea Surety and Insurance Co., and Seven Brothers Shipping Corporation.

Issue:

Whether the contract of private carriage entered by the Valencia Hardwood with Seven Brothers is valid within the purview of Article
1306 of the New Civil Code:
Held:

In a contract of private carriage, the parties may validly stipulate that responsibility for the cargo rests solely on the charterer, exempting
the shipowner from liability for loss of or damage to the cargo caused even by the negligence of theship captain.

Pursuant to Article 1306 17 of the Civil Code, such stipulation is valid because it is freely entered into by the parties and the same is not
contrary to law, morals, good customs, public order, or public policy.

The court stress that in a contract of private carriage, the parties may freely stipulate their duties and obligations which perforce would
be binding on them. Unlike in a contract involving a common carrier, private carriage does not involve the general public. Hence, the
stringent provisions of the Civil Code on common carriers protecting the general public cannot justifiably be applied to a ship
transporting commercial goods as a private carrier. Consequently, the public policy embodied therein is not contravened by stipulations
in a charter party that lessen or remove the protection given by law in contracts involving common carriers

10. Bustamante vs Spouses Rosel

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

FACTS OF THE CASE:

On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with petitioner Natalia Bustamante and her late
husband Ismael C. Bustamante, under the following terms and conditions:

1. That the borrowers are the registered owners of a parcel of land, evidenced by TRANSFER CERTIFICATE OF
TITLE No. 80667, containing an area of FOUR HUNDRED TWENTY THREE (423) SQUARE Meters, more or less,
situated along Congressional Avenue.

2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS from
the LENDER, for a period of two (2) years, counted from March 1, 1987, with an interest of EIGHTEEN (18%)
PERCENT per annum, and to guaranty the payment thereof, they are putting as a collateral SEVENTY (70)
SQUARE METERS portion, inclusive of the apartment therein, of the aforestated parcel of land, however, in the
event the borrowers fail to pay, the lender has the option to buy or purchase the collateral for a total consideration of
TWO HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed amount and interest therein;

3. That the lender do hereby manifest her agreement and conformity to the preceding paragraph, while the borrowers
do hereby confess receipt of the borrowed amount.

When the loan was about to mature on March 1, 1989, respondents proposed to buy at the pre-set price of P200,000.00, the seventy
(70) square meters parcel of land covered by TCT No. 80667, given as collateral to guarantee payment of the loan. Petitioner, however,
refused to sell and requested for extension of time to pay the loan and offered to sell to respondents another residential lot located at
Road 20, Project 8, Quezon City, with the principal loan plus interest to be used as down payment. Respondents refused to extend the
payment of the loan and to accept the lot in Road 20 as it was occupied by squatters and petitioner and her husband were not the
owners thereof but were mere land developers entitled to subdivision shares or commission if and when they developed at least one
half of the subdivision area.

Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which the latter refused to accept, insisting on
petitioner's signing a prepared deed of absolute sale of the collateral.

On February 28, 1990, respondents filed with the Regional Trial Court, Quezon City, Branch 84, a complaint for specific performance
with consignation against petitioner and her spouse.

Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell the collateral pursuant to the option to buy
embodied in the loan agreement.
On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City a petition for consignation, and deposited
the amount of P153,000.00 with the City Treasurer of Quezon City on August 10, 1990. 7

When petitioner refused to sell the collateral and barangay conciliation failed, respondents consigned the amount of P47,500.00 with
the trial court. In arriving at the amount deposited, respondents considered the principal loan of P100,000.00 and 18% interest per
annum thereon, which amounted to P52,500.00. The principal loan and the interest taken together amounted to P152,500.00, leaving a
balance of P 47,500.00.

After due trial, the trial court ordered the defendants to pay the loan of P100,000.00 with interest thereon at 18% per annum
commencing on March 2, 1989, up to and until August 10, 1990, when defendants deposited the amount with the Office of the City
Treasurer.

Respondents appealed from the decision to the Court of Appeals. The Court of Appeals rendered decision reversing the ruling of the
Regional Trial Court and ordered the defendants to accept the amount of P47,000.00 deposited with the Clerk of Court of Regional Trial
Court of Quezon City, and for defendants to execute the necessary Deed of Sale in favor of the plaintiffs over the 70 SQUARE METER
portion and the apartment standing thereon being occupied by the plaintiffs and covered by TCT No. 80667 within fifteen (15) days
from finality hereof. Defendants, in turn, are allowed to withdraw the amount of P153,000.00 deposited by them of the City Treasurer's
Office of Quezon City.

ISSUE: Whether or not the stipulation in the loan contract was valid and enforceable.

RULING:

No. A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given as security for the
loan. This is embraced in the concept of pactum commissorium, which is proscribed by law. The elements of pactum commissorium are
as follows: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should
be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period.

Petitioner did not fail to pay the loan and tendered payment to settle the loan which respondents refused to accept, insisting that
petitioner sell to them the collateral of the loan.

We note the eagerness of respondents to acquire the property given as collateral to guarantee the loan. The sale of the collateral is an
obligation with a suspensive condition. It is dependent upon the happening of an event, without which the obligation to sell does not
arise. Since the event did not occur, respondents do not have the right to demand fulfillment of petitioner's obligation, especially where
the same would not only be disadvantageous to petitioner but would also unjustly enrich respondents considering the inadequate
consideration (P200,000.00) for a 70 square meter property situated at Congressional Avenue, Quezon City.

Respondents argue that contracts have the force of law between the contracting parties and must be complied with in good
faith. There are, however, certain exceptions to the rule, specifically Article 1306 of the Civil Code, which provides:

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy.

A significant task in contract interpretation is the ascertainment of the intention of the parties and looking into the words used by the
parties to project that intention. In this case, the intent to appropriate the property given as collateral in favor of the creditor appears to
be evident, for the debtor is obliged to dispose of the collateral at the pre-agreed consideration amounting to practically the same
amount as the loan. In effect, the creditor acquires the collateral in the event of non payment of the loan. This is within the concept
of pactum commissorium. Such stipulation is void.

All persons in need of money are liable to enter into contractual relationships whatever the condition if only to alleviate their financial
burden albeit temporarily. Hence, courts are duty bound to exercise caution in the interpretation and resolution of contracts lest the
lenders devour the borrowers like vultures do with their prey.
The petitioner’s motion for reconsideration was granted and the decision of the Court of Appeals was reversed.

11. Power Sector Assets and Liabilities Management Corporation v. Pozzolanic Philippines Incorporated

Art. 1306. The contracting parties may established such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

FACTS

Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a GOCC. Respondent Pozzolanic
Philippines Incorporated (Pozzolanic) is the local subsidiary of Pozzolanic Australia Pty. Ltd. (Pozzolanic Australia), an Australian
corporation which claims to have perfected the techniques in the processing of fly ash for use in the making of cement.
In 1986, Pozzolanic Australia won the public bidding for the purchase of the fly ash generated by NPC's power plant in Batangas. NPC
accepted Pozzolanic Australia's offer and they entered into a long-term contract, denominated as (the Batangas Contract).
Under Article I of the contract, NPC, granted Pozzolanic Australia a right of first refusal to purchase the fly ash generated by the coal-
fired plants that may be put up by NPC in the future. In 1998, the Masinloc Coal-Fired Thermal Power Plant (Masinloc Plant) started
operations to provide power for NPC. Late that year, respondent began the installation of its fly ash processing equipment in the
Masinloc Plant and began off taking the fly ash produced therein. Subsequently, on 15 February 1999, NPC and respondent, on an
interim basis and prior to the conduct of a public bidding for the contract to purchase the Masinloc Plant's fly ash, executed a contract
whereby respondent was given the right to purchase the said fly ash for a period of one year.

In October 1999, the Sual Coal-Fired Power Plant started providing electricity in the Luzon region. NPC thereafter caused to
be published in the Philippine Star and the Manila Bulletin an "Invitation to Pre-Qualify and to Bid," inviting all interested buyers to pre-
qualify for the purchase of fly ash from the Masinloc and/or Sual Power Plants. As a result, respondent sent letters to NPC calling its
attention to respondent's right of first refusal under the Batangas Contract. It also demanded that any tender documents to be issued in
connection with the bidding on the right to purchase the Masinloc and Sual Plants' fly ash include notices informing prospective bidders
of respondent's right of first refusal. In a letter dated 7 March 2000, NPC informed respondent that it had decided to defer indefinitely
the bidding on the right to purchase the Masinloc Plant's fly ash and to proceed first with the bidding on the right to purchase the Sual
Plant's fly ash. This prompted respondent to file a complaint (later amended).

The litigation became more complicated when petitioner, NPC, and the Department of Energy entered into a Memorandum of
Agreement with the Provincial Government of Zambales and several local government units of Zambales, pursuant to which the
Provincial Government of Zambales was awarded the exclusive right to withdraw the fly ash from the Masinloc Plant. With this
development, respondent filed a Third Supplementary Complaint

ISSUE: Whether or not the alleged right of first refusal raised by the plaintiff in the Batangas Contract is contrary to law
as would constitute a violation of Art.1306.

HELD: Yes, the right of first refusal granted to respondent in the Batangas Contract is invalid for being contrary to public policy as the
same violates the requirement of competitive public bidding in the award of government contracts, for the following reason

The grant to respondent of the right of first refusal constitutes an unauthorized provision in the contract that was entered into pursuant
to the bidding.

By its very nature, public bidding aims to protect public interest by giving the public the best possible advantages through open
competition. Thus, competition must be legitimate, fair and honest. In the field of government contract law, competition requires not only
bidding upon a common standard, a common basis, upon the same thing, the same subject matter, and the same undertaking, but also
that it be legitimate, fair and honest and not designed to injure or defraud the government

12. REPUBLIC vs. PLDT

Art. 1306. The contracting parties may established such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

FACTS:
1. The Bureau of Telecommunications (plaintiff represented by Republic) set up its own Government Telephone System (GTS) by
utilizing appropriation and equipment and by renting trunk lines of the PLDT to enable government offices to call private parties. Its
application for the use of these trunk lines was in the usual form of applications for telephone service, containing a statement, above
the signature of the applicant that the latter will abide by the rules and regulations of the PLDT which are on file with the Public Service
Commission. One of the many rules prohibits the public use of the service furnished the telephone subscriber for his private use. The
Bureau has extended its services to the general public since 1948, using the same trunk lines owned by, and rented from, the PLDT,
and prescribing its (the Bureau's) own schedule of rates.
2. The plaintiff (Bureau), entered into an agreement with RCA Communications, Inc., for a joint overseas telephone service whereby the
Bureau would convey radio-telephone overseas calls received by RCA's station to and from local residents. PLDT complained to the
Bureau that it was violating the conditions under which their Private Branch Exchange (PBX) and gave notice that if said violations were
not stopped by midnight of 12 April 1958, the PLDT would sever the telephone connections. When the PLDT received no reply, it
disconnected the trunk lines being rented by the Bureau. The result was the isolation of the Philippines, on telephone services, from the
rest of the world, except the United States.
3. The Bureau of Telecommunications had proposed to the PLDT to enter into an interconnecting agreement, with the government
paying (on a call basis) for all calls passing through the interconnecting facilities from the GTS to the PLDT. The PLDT replied that it
was willing to enter into an agreement on overseas telephone service to Europe and Asian countries provided that the Bureau would
submit to the jurisdiction and regulations of the Public Service Commission and in consideration of 37 1/2% of the gross revenues
which was reduced to 33 1/3% (1/3) as its share in the overseas telephone service. The proposals were not accepted by either party.
4. Plaintiff Republic commenced suit against the defendant, PLDT, praying in its complaint for judgment commanding the PLDT to
execute a contract with plaintiff, through the Bureau, for the use of the facilities of defendant's telephone system throughout the
Philippines under such terms and conditions as the court might consider reasonable, and for a writ of preliminary injunction against the
defendant company to restrain the severance of the existing telephone connections and/or restore those severed.
5. PLDT in its answer denied any obligation on its part to execute a contract of services with the Bureau of Telecommunications and
contested the jurisdiction of the CFI to compel it to enter into interconnecting agreements, and averred that it was justified to disconnect
the trunk lines heretofore leased to the Bureau under the existing agreement because its facilities were being used in fraud of its rights.
PLDT further claimed that the Bureau was engaging in commercial telephone operations in excess of authority, in competition with, and
to the prejudice of, the PLDT, using defendant's own telephone poles, without proper accounting of revenues.
6. The lower court rendered judgment that it could not compel the PLDT to enter into an agreement with the Bureau because the
parties were not in agreement; but decided that since the PLDT knew, or ought to have known, at the time that their use by the Bureau
was to be public throughout the Islands, hence the Bureau was neither guilty of fraud, abuse, or misuse of the poles of the PLDT; and,
in view of serious public prejudice that would result from the disconnection of the trunk lines, declared the preliminary injunction
permanent, although it dismissed both the complaint and the counterclaims. Both parties appealed.

ISSUE: WON the CFI is correct in rendering judgment that it could not compel the PLDT to enter into an agreement with the Bureau
because the parties were not in agreement.

HELD:
1. Yes. The SC agree with the court below that parties cannot be coerced to enter into a contract where no agreement is had between
them as to the principal terms and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our
contractual system, and by express provision of the statute, a contract may be annulled if tainted by violence, intimidation or undue
influence (Articles 1306, 1336, 1337, NCC).
2. But the court a quo has apparently overlooked the Republic may, in the exercise of the sovereign power of eminent domain, require
the telephone company to permit interconnection of the government telephone system and that of the PLDT, as the needs of the
government service may require, subject to the payment of just compensation to be determined by the court.
3. It is clear that the main reason for the objection of the PLDT lies in the fact that said appellant did not expect that the Bureau's
telephone system would expand with such rapidity as it has done; but this expansion is no ground for the discontinuance of the service
agreed upon. In the ultimate analysis, the true objection of the PLDT to continue the link between its network and that of the
Government is that the latter competes "parasitically" (sic) with its own telephone services; and that the PLDT's right to just
compensation for the services rendered to the Government telephone system and its users is herein recognized and preserved, the
objections of defendant-appellant are without merit. To uphold the PLDT's contention is to subordinate the needs of the general public
to the right of the PLDT to derive profit from the future.
4. The decision of the CFI is affirmed except for the dismissal of the petition of the Republic to compel the PLDT to continue servicing
the Government telephone system upon such terms, and for a compensation, that the trial court may determine to be just. The case is
remanded to the court of origin for further hearings and other proceedings not inconsistent with this opinion.

13. Azcuna vs Court of Appeals

Art. 1306. The contracting parties may established such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

Facts
Melquiades Azcuna Jr. had one-year lease contract, renewable upon agreement, with Ernesto Barcelona for occupying three
units owned by the latter. Came expiration of the date of lease without an agreed renewal thereof coupled with the Azcuna’s failure to
surrender the leased units despite demands, Barcelona filed before the MTC an ejectment case. MTC and Court of Appeals rendered
judgment in favor of Barcelona, ordering Azcuna to vacate the premises. Azcuna came before the Supreme Court not to contest the
ouster but rather the amount of monthly rental he was adjudged to pay at 3,000.00 Php per day. Azcuna invoked several jurisprudences
which laid down the principle that “damages that can be recovered in an ejectment suit are the fair rental value or the reasonable
compensation for the use and occupation of the real property. Other damages must be claimed in an ordinary action.

Issue

Whether the 3,000Php per day award contrary to law.

Held

No, the 3,000. PHP per day award is not contrary to law as the amount was agreed upon the parties as liquidated damages. Paragraph
10 of the lease contract stipulates that the lessor has the right to charge 1,000Php per day when the lessee fails to deliver the premises
vacant and unencumbered. This entitles Barcelona to claim the stipulated amount by way of damages over and above other damages
still legally due to him.

The freedom of the contracting parties to make stipulates in their contract provided they are not contrary to law, morals, good customs,
public order or public policy is settled. There is nothing immoral or illegal with the penalty clause of the lease contract which does not
appear to have been forced upon or fraudulently foisted on Azcuna.

14 – MANILA BAY CLUB CORP. VS. CA

Art. 1306. The contracting parties may established such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

Petitioners – Manila Bay Club Corp.

Respondent – CA & Sabeniano et al

Case- Petition to review the assailed CA decision in affirming the decision of the RTC Makati with modifications.

Facts:
 Sabenianos as owners-lessors and Manila Bay Club Corporation as lessee executed ten-year lease contract.
 But the lease agreement was short-lived because the Sabenianos unilaterally terminated the lease due to the following
contract violations:
(a) For unpaid accumulated rentals in arrears;
(b) For using the leased premises for gambling and prostitution; and
(c) Failure to insure the leased building.
 They invoked the "Special Clause" of the lease contract that in case the MBCC fail or neglect to perform or comply with the
stipulations, the lease contract shall become automatically terminated and cancelled and the said premises shall be peacefully vacated
by the LESSEE.
 The trial court abandoned the first two grounds for lack of sufficient evidence, but found MBCC violated the "insurance clause"
(paragraph 22) of the contract, which CA affirmed.
 MBCC argued that Sabenianos cannot unilaterally rescind the lease contract because its purported violation of the "insurance
clause" was merely slight or casual.

Issue:
WoN the strict compliance with the "insurance clause" is mandatory to result in the automatic termination and cancellation of
the lease in case of non-observance.
Held:
Yes, the Court finds petitioner's failure to comply with the mandatory requirement of insuring the building shall result in the
automatic termination and cancellation of the lease as stipulated in their contract.
Article 1306 of the New Civil Code provides that the contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy.
In the case at bar, it can be fairly judged from the tenor of the contract that the parties intended mandatory compliance with all
the provisions of the contract. Certainly, there is nothing wrong if the parties to the lease contract agreed on certain mandatory
provisions concerning their respective rights and obligations, such as the procurement of the insurance and the rescission clause.
Thus, the petition is DENIED for lack of merit.

15. Manila Bay Club Corporation v. CA

Art. 1306. The contracting parties may established such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

Facts:

A contract of lease over the subject building was executed by private respondents Sabenianos as owners-lessors, and
petitioner Manila Bay Club Corporation as lessee.
Private respondents unilaterally terminated the lease with the request that petitioner vacate the leased premises and
peacefully surrender its possession, on the ground that the lessee violated the terms stipulated in the Contract of Lease for failure to
insure the building, to pay accumulated rentals in arrears and to issue postdated checks, to pay fees, taxes and other assessments on
the improvements and using the building for gambling and prostitution. They invoked the “Special Clause” of the lease contract as
found in paragraph 19 thereof to justify their action. It states that the lease, in case of non-compliance with any of the agreements, shall
be terminated and cancelled and the said premises shall be peacefully vacated by the lessee and it shall be lawful for the lessor,
without any formal notice or demand to enter into and upon said leased premises.
Aggrieved, petitioner filed for “Specific Performance with
Prayer for Preliminary Injunction and Damages” against private respondents, alleging in substance that private respondents’ unilateral
cancellation of the lease contract was arbitrary and capricious, for petitioner did not violate any of its provisions.
RTC held that the evidence is lacking to prove some the violations committed by the petitioner. However, the trial court found
that petitioner violated the “insurance clause” of the contract. It dismissed the complaint and declared the lease contract terminated. CA
affirmed with modifications.

Issue:
Whether or not the respondents are justified in unilaterally rescinding the lease contract on the ground that the petitioners
violated the insurance clause.

Ruling:
Yes, the respondents can unilaterally rescind the lease contract pursuant to paragraph 19 thereof.
Contracts are respected as the law between the contracting parties, and they may establish such stipulations, clauses, terms
and conditions as they may want to include as long as such agreements are not contrary to law, morals, good customs, public policy or
public order.
It can be fairly judged from the tenor of paragraph 19 that the parties intended mandatory compliance with all the provisions of
the contract. Among such provisions requiring strict observance is the “insurance clause (paragraph 22) which expressly provides that
“the building must be insured and the insurance premium must be for the account of the LESSEE. x x x.” (italics supplied).
Thus, upon petitioner’s failure to comply with the mandatory requirement of paragraph 22, private respondents were well-
within their right to rescind the lease contract by express grant of paragraph 19.

17. Teves vs People’s Homesite and Housing Corporation (PHHC)

Art. 1306. The contracting parties may established such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

Facts:
Encarnacion Teves and her late husband Celestino Teves occupied a portion of land of the Diliman Estate Subdivision, belonging to the
defendant PHHC. Since October 1950, the plaintiff and her late husband have been continuously occupied said portion of land used as
their residential house.

At that time, the portion of land was not intended for subdivision, the plaintiff with the help of Social Welfare Administration made
repeated request with the officials of PHHC for the conversion of the said estate into a subdivision for distribution and sale to the actual
occupants. PHHC acceded the occupants’ petition.

upon due investigation conducted sometime before August, 1951 the Chief of the Sales Division of the PHHC found plaintiff's husband
to be the actual occupant of said land and having been found to be qualified to acquire said land by purchase it was recommended that
the lot be sold to plaintiff's husband. That plaintiff's husband died on March 17, 1957, before the lot was actually sold to him, and so
plaintiff, as successor in interest of her husband, filed an application in her own name to purchase the lot in question.

that thereafter plaintiff made repeated and insistent requests and representations with the officials and personnel of the Sales Division
of the PHHC to process and forward her application to the Board of Directors of the PHHC for approval, but said officials and personnel
ignored the requests and representations of the plaintiff

Instead of respecting plaintiff's preferential right, and in spite of the fact that the officials and personnel of the PHHC knew that plaintiff
was the actual occupant of the lot, and without giving notice to the plaintiff that a party was applying to purchase the same lot, the
PHHC sold the same Lot to defendant Melisenda L. Santos who applied for it only on February 23, 1961 through an agent

On January 12, 1962, a deed of sale of the lot -- with the full price actually paid was executed, and shortly thereafter, or on January 23,
1962, Transfer Certificate of Title No. 95976 covering the lot was issued by the Register of Deeds of Quezon City in favor of said
defendant. The complaint contains allegations that the plaintiff was fraudulently deprive of her preferential right to buy the lot in
question, and that defendant Melisenda L. Santos was able to secure the approval of her application to purchase the lot and the
execution of the deed of sale in her favor through the help of an influential politician.

Teves filed a complaint praying to declare the deed of sale in favor, and the transfer certificate of title issued in the name of defendant
Melisenda L. Santos null and void, and directing defendant PHHC to execute in favor of plaintiff the corresponding deed of sale over
the lot

PHHC and Santos filed separate motion to dismiss the case based principally upon the ground that the complaint states no cause of
action. The lower court dismiss the complaint stating that the plaintiff was not a party to the deed of sale executed between the PHHC
and defendant Melisenda L. Santos, she cannot maintain an action to annul the same. Motion for reconsideration is likewise denied.

Issue:

Whether or not the lower court erred in dismissing the complaint on the alleged ground of failure to state a cause of action against the
PHHC and Santos?

Held:

Yes. A cause of action is defined as "an act or omission of one party in violation of the legal right or rights of the other; and its essential
elements are legal right of the plaintiff, correlative obligation of the defendant, and act or omission of the defendant in violation of said
legal right."

The defendants were aware of plaintiff's right, and that defendants had committed acts in violation of plaintiff's rights; and such being
the case, the plaintiff is entitled to a relief as against the defendants. The plaintiff is seeking the declaration of the nullity of the deed of
sale not as a party in the deed, or because she is obliged principally or subsidiarily under the deed, but because she has an interest
that is affected by the deed.
This Supreme Court has held that a person who is not a party obliged principally or subsidiarily in a contract may exercise an action for
nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show the detriment which
would positively result to him from the contract in which he had no intervention.

19. Lao Lim v CA

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
Facts

Private respondent (Villavicencio) entered into a contract of lease with petitioner for a period of three (3) years, that is, from 1976 to
1979. After the stipulated term expired, private respondent refused to vacate the premises. Hence, petitioner (Lao Lim) filed an
ejectment suit against Villacencio.

The case was however terminated due to the parties entered into a compromise agreement providing

“ lease shall be renewed every three years retroacting from October 1979 to October 1982; after which the abovenamed 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;”

On April 25, 1965 Lao Lim informed respondent Villvicencio that he would no longer renew the contract effective October, 1985.
Respondent however would like to renew the lease.

On January 15, 1986, because of private respondent’s refusal to vacate the premises, petitioner filed another ejectment suit.

RTC Ruling:

Dismissed the petition due to the following grounds

(1) the lease contract has not expired, being a continuous one the period whereof depended upon the lessee’s need for the premises
and his ability to pay the rents;

(2) the compromise agreement entered into in the aforesaid Civil Case No. 051063-CV constitutes res judicata to the case before it

Likewise, Petition was also denied by the Court of Appeals.

Issue:

Whether the insisted continued lease of the property would violate the mutuality of parties under Article 1308 of the Civil Code.

Held:

The Supreme Court that the ruling of respondent court, the disputed stipulation “for as long as the defendant needed the premises and
can meet and pay said increases” is a purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to
the sole and exclusive will of the lessee.

As the court ruled in the case of Encarnacion vs. Baldomar, et al.,

“(i)f this defense were to be allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the
owner would never be able to discontinue it; conversely, although the owner should desire the lease to continue, the lessees could
effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the rentals

The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled
choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter.
Mutuality does not obtain in such a contract of lease and no equality exists between the lessor and the lessee since the life of the
contract is dictated solely by the lessee

20. Jespajo Realty Corporation vs CA

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

FACTS OF THE CASE:

The subject of this controversy is an apartment building located at 619 Asuncion Street, Binondo, Manila and owned by Jespajo Realty
Corporation. On February 1, 1985, said corporation, represented by its President, Jesus L. Uy, entered into separate contracts of lease
with Tan Te Gutierrez and Co Tong. Pursuant to the contract, Tan Te occupied room No. 217 of the subject building at a monthly rent of
P847.00 while Co Teng occupied the Penthouse at a monthly rent of P910.00. The terms of the contract among others are the
following:
‘PERIOD OF LEASE- The lease period shall be effective as of February 1, 1985 and shall continue for an indefinite period provided the
lessee is up-to-date in the payment of his monthly rentals. The LESSEE may, at his option, terminate this contract any time by giving
sixty (60) days prior written notice of termination to the LESSOR.
‘However, violation of any of the terms and conditions of this contract shall be a sufficient ground for termination thereof by the
LESSOR.
RENT INCREASE - For the duration of this contract, the LESSEE agrees to an automatic 20% yearly increase in the monthly rentals.’
“Since the effectivity of the lease agreement on February 1985, the lessees religiously paid their respective monthly rentals together
with the 20% yearly increase in the monthly rentals as stipulated in the contract. On January 2, 1990, the lessor corporation sent a
written notice to the lessees informing them of the formers’ intention to increase the monthly rentals on the occupied premises to
P3,500.00 monthly effective February 1, 1990. The lessees through its counsel in a letter dated March 10, 1990 manifested their
opposition alleging that the same is in contravention of the terms of the contract of lease as agreed upon. Due to the opposition and
the failure of the lessees to pay the increased monthly rentals in the amount of P3,500.00, the lessor through its counsel in a letter
dated April 10,1990 demanded that the lessees vacate the premises and pay the amount of P7,000.00 corresponding to the months of
February and March, 1990.
“The lessees exerted effort to pay the rentals due for the months of February and March 1990 at the monthly rate stipulated in the
contract but was refused by the lessor so that on May 2, 1990, they instituted before the Metropolitan Trial Court of Manila, Branch 16 a
case for consignation.
“In the said complaint, plaintiffs alleged that the amount of P2,107.60 and P2,264.40 are the monthly rental obligations of Tan Te and
Co Tong respectively. They sought to consign with the court their monthly rental obligations at the rate above mentioned for the months
of February up to April 1990. Additionally, they prayed that the court issue an order directing the defendant to honor the terms and
conditions of the lease.
“It is to be noted that on February 6, 1991, the trial judge in the consignation case issued an order allowing the plaintiffs therein to
deposit with the City Treasurer of Manila the amount of P33,480.28 for Co Tong and the amount of P32,710.32 for Tan Te Gutierrez
representing their respective rentals for thirteen (13) months from February, 1990 to January, 1991. This order however is without
prejudice to the final outcome of the case. Plaintiffs duly complied with the order as evidenced by an official receipts in the name of
Tan Te Gutierrez and Co Tong, respectively, issued by the City Treasurer on February 11, 1991.
“On November 15, 1990, or more than six (6) months from the filing of the case for consignation, the lessor instituted an ejectment suit
against the lessees before the Metropolitan Trial Court of Manila Branch 20. The court in its decision dated May 10, 1991 rendered a
decision dismissing the ejectment suit for lack of merit.
Jespajo Realty Corporation then appealed to the Regional Trial Court which ruled in its favour.
The Court is fully convinced that the sum demanded by appellant as increase in appellees monthly rentals to the premises which they
are renting from appellant is very reasonable considering that the leased premises are located in the commercial and business section
of Manila in Binondo. It is also undisputed that appellant has a 24-hour security unit over the property as well as parking spaces and
provisions for electricity, water and telephone services.
However, said RTC decision was reversed by the Court of Appeals.
Be that as it may, We find that it was the private respondent who, in fact, violated the lease agreement by charging petitioners a
monthly rental of P3,500.00, well in excess of the rental stipulated in the lease contract. We see in the refusal of private respondent to
accept the rental being offered by petitioners, a scheme to place petitioners in default of their rental payments. However, said scheme
was waylaid by petitioners’ consignation of the rentals due from them.
ISSUE: Whether or not the stipulation for an indefinite period in the contract of lease binding only on the lessor and can be exercised
only by the lessee renders it void for lack of mutuality.
RULING:
No. The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of
mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to
continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the
new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the
property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape
liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality exists
between the lessor and the lessee since they remain with the same faculties in respect to fulfilment.
The contention of the petitioner that a provision in a contract that the lease period shall subsist for ‘an indefinite period provided the
lessee is up-to-date in the payment of his monthly rentals’ is contrary to Art. 1308 of the Civil Code is not plausible.
Article 1256 [now art. 1308] of the Civil Code creates no impediment to the insertion in a contract for personal service of a resolutory
condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen, does not make
either the validity or the fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of
cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of the option is as much in the
fulfillment of the contract as any other act which may have been the subject of agreement.
Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of contracts. This binding effect of a contract
on both parties is based on the principle that the obligations arising from contracts have the force of law between the contracting
parties, and there must be mutuality between them based essentially on their equality under which it is repugnant to have one party
bound by the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a condition
which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory restrictions, valid
and binding on the parties. This option, which is provided in the same lease agreement, is fundamentally part of the consideration in
the contract and is no different from any other provision of the lease carrying an undertaking on the part of the lessor to act conditioned
on the performance by the lessee.
Moreover, the express provision in the lease agreement of the parties that violation of any of the terms and conditions of the contract
shall be sufficient ground for termination thereof by the lessor, removes the contract from the application of Article 1308.

27. Ravago Equipment Rental vs CA

Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to
represent him.
A contract entered into in the name of another by one who has no authority of legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or impliedly; by the person on whose behalf it has been
executed, before it is revoked by the other contradicting party

Facts:
On 10 October 1990, Ravago entered into a Lease Contract with herein private respondent Alcolex Corporation ("Alcolex") , one (1)
unit Caterpillar Diesel Generator. The lease contract includes the following stipulations:
1. Alcolex shall pay P120,000 rental permonth
2. price shall be for "use, non-use or standby" of the generator unit or "for 200 operating hours within the period whichever
comes first"
3. Operation in excess of 200 hours shall be charged P600.00 per hour; one month is to be computed at eight (8) hours per
day for 25 days
4. If the generator is to be used on a holiday or a Sunday, a minimum of eight (8) hours per day shall be charged.
The total rental/charges due from Alcolex amounted to P1,l72,406.50, of which only P525,437.50 had been paid. Ravago therefore
prays that Alcolex be ordered to pay the balance of P646,969.00 as well as exemplary damages, attorney's fees and costs of suit.
Alcolex denied the execution of the lease contract. Mr. Edgardo Chua who signed the contract for Alcolex was not authorized by the
corporation since he was merely a messenger who was dismissed even before he could complete his probationary employment status.
Alcolex further alleged that the payment made already represented the full payment of the obligation.

The trial court rendered a decision ordering Alcolex to pay the unpaid amount plus, exemplary damages and attorneys’ fee. On
appeal,CA set aside the decision of the trial court and dismissing the complaint filed therein. Ravago's motion for reconsideration was
denied, hence, this present petition for review and citing the following error.
1. COURT ERRED IN CONSIDERING AN ISSUE WHICH WAS RAISED FOR THE FIRST TIME ON APPEAL
(the issue of the veracity of the overtime charges for the use of the generator was never raised by Alcolex before the trial
court)
2. COURT ERRED IN HOLDING THAT PETITIONER FAILED TO PROVE ITS CLAIM AGAINST PRIVATE RESPONDENT

Issue:
1. Whether or not Alcolex is liable to pay overtime charges for the use of the generator leased from Ravago?
2. Whether or not the contract is enforceable against Alcolex?

Held:

1. No. The complaint before the trial court having been filed by herein petitioner Ravago, the burden of proving Alcolex's liability
for overtime use of the leased generator lies with petitioner. As noted by the Court of Appeals, the person who prepared the
statement of account against Alcolex was not presented in court. Moreover, said statement of account does not per se prove
actual overtime use by Alcolex of the generator. Ravago's failure to prove by preponderance of evidence the liability of Alcolex
for overtime charges precludes an award in its favor for overtime charges.

2. Yes, the contract is enforceable against respondent Alcolex. Alcolex cannot assail the enforceability of the rental contract on
the ground that Edgardo Chua, who signed the contract for Alcolex, had no authority to bind the corporation. The CA held that
the contract was impliedly ratified when the generator subject of the contract was used by Alcolex for its operations. Thus,
under Article 1317 of the Civil Code, which provides that:

Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law
a right to represent him.

A contract entered into in the name of another by one who has no authority of legal representation, or who has acted beyond
his powers, shall be unenforceable, unless it is ratified, expressly or impliedly; by the person on whose behalf it has
been executed, before it is revoked by the other contradicting party.