Case Digests - Contracts

CASE DIGESTS - CONTRACTS
Case: George Batchelder vs. Central Bank of the Philippines, March 29, 1972, J.
Fernando.
Facts: George Batchelder, who is an American citizen but permanently residing in the
Philippines, is engaged in the construction business. Batchelder, in compliance with
Monetary Board Resolution No. 857 (Filipino and resident American contractors
undertaking construction projects in US military bases in the Philippines shall be
authorized to utilize 90% of the proceeds of their contracts for the purchase of
construction equipment, and etc.) and Monetary Board Resolution No. 695 (Agent
bank should, upon compliance with its terms, credit the contractors accounts in pesos,
the buying rate being governed by the appropriate rules and regulations.), surrendered
to the Central Bank through the latters authorized agents, his dollar earnings and
applied with the latter for license to utilize 90% of his surrendered earnings. However,
the Central Bank never heeded to the plaintiffs application arguing that the Monetary
Board Resolutions relied upon simply laid down policy without in any way giving rise
to a valid and binding agreement to which the law should give effect. The trial court
found for Batchelder. On appeal, Central Bank interposed an issue that there was no
such contractual obligation between the parties which will hold Central Bank liable
therefore.
"It is clear from the aforecited provisions of said memorandum that not all imports
against proceeds of contracts entered into prior to April 25, 1960 are entitled to the
preferred buying rate of exchange. Only imports against proceeds of contracts entered
into prior to April 25, 1960, not otherwise classified as dollar-to-dollar transactions,
are entitled to the preferred rate of exchange. It is for this reason that the contractor is
required to first file an application with defendant Central Bank (Import
Department) thru the Authorized Agent Banks, for the purpose of determining
whether the imports against proceeds of contracts entered into prior to April 25, 1960
are classified as dollar-to-dollar transactions (which are not entitled to the preferred
rate of exchange), or not (which are entitled to the preferred rate of exchange), and
that if said imports are entitled to the preferred rate of exchange, defendant Central
Bank would issue a license to the contractor for authority to buy foreign exchange at
the preferred rate for the payment of said imports."
Had there been greater care therefore on the part of the plaintiff to show why in his
opinion he could assert a right in accordance not with a contract binding on the Central
Bank, because there is none, but by virtue of compliance with rules and regulations of
an administrative tribunal, then perhaps a different outcome would have been justified.
The decision of the trial court is dismissed without prejudice.
Issue: Whether there exist a contract between Central Bank and Batchelder, a dollar
earner by virtue of the Monetary Board Resolutions of the former.
Case: Republic of the Philippines vs. PLDT, January 27, 1969, J.B.L. Reyes.
Facts: PLDT first entered into an agreement whereby telephone messages, coming
from the US and received by RCAs domestic station could automatically be
transferred to the lines of PLDT and vice versa. Soon after, the Bureau of
Telecommunications set up its own Government Telephone System by utilizing its own
appropriation and equipment and by renting trunk lines of the PLDT to enable
government offices to call private parties. Later on, the 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 RCAs
station to and from local residents. PLDT complained into such agreement. With much
demands for telephone servicing, neither the Bureau and PLDT filled those demands.
Hence, the Bureau had proposed to the PLDT that both enter into an interconnecting
agreement. The PLDT replied positively with condition that the Bureau would submit
to the jurisdiction of Public Service Commission and in consideration of 37 % of the
gross revenues. However, the Bureau disagreeable, commenced a suit against PLDT
praying for judgment commanding PLDT to execute a contract with it. Trial court
ruled for PLDT stating that the Bureau could not compel PLDT to enter into an
agreement with it because both parties were not in agreement.
Held: NO. What was done by the Central Bank was merely to issue in pursuance of its
rule-making power the resolutions. There is no question that the Central Bank as a
public corporation could enter into contracts. It is so provided for among the corporate
powers vested in it. Thus: "The Central Bank is hereby authorized to adopt, alter, and
use a corporate seal which shall be judicially noticed; to make contracts; to lease or
own real personal property, and to sell or otherwise dispose of the same; to sue and be
sued; and otherwise to do and perform any and all things that may be necessary or
proper to carry out the purposes of this Act." No doubt would have arisen therefore if
defendant Central Bank, utilizing a power expressly granted, did enter into a contract
with plaintiff. It could have done so, but it did not do so.
Nor is this to deal unjustly with plaintiff. Defendant Central Bank in its motion to
dismiss before the lower court was quite explicit as to why under the circumstances, no
right could be recognized as possessed by him. As set forth in such pleading:
"We contend that Monetary Board Resolution No. 857, dated June 17, 1960, as
amended by Monetary Board Resolution No. 695, dated April 28, 1961, does not give
right to Filipino and resident American contractors undertaking construction projects in
U.S. military bases to reacquire at the preferred rate ninety per cent (90%) of the
foreign exchange sold or surrendered to defendant Central Bank thru the authorized
agent banks. Nor does said resolution serve as a general authorization or license
granted by the Central Bank to utilize the ninety per cent (90%) of their dollar earnings.
M.B. Resolution No. 857, as amended, merely laid down a general policy on the
utilization of the dollar earnings of Filipino and resident American contractors
undertaking projects in U.S. military bases, ... ."
Further, there is this equally relevant portion in such motion to dismiss:
Issue: Whether or not neither the court nor even the Republic through the Bureau of
Telecommunications can compel PLDT to enter into a contract with the latter.
Held: NO. Parties can not 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, Civil Code of

the Philippines). But the court a quo has apparently overlooked that while the Republic
may not compel the PLDT to celebrate a contract with it, 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.
Case: R. Marino Corpus vs. CA and Juan David, June 30, 1980, J. Makasiar.
Facts: Corpus and Atty. Juan David are intimately related to each other, being close
friends. In fact, Corpus was called by Atty. David as Marino and latter to former as
Juaning. Corpus was once charged with an administrative case by several employees of
Central Bank Export Department of which he is the Director. By reason thereto, he was
suspended and considered resigned. Thru Atty. Alvarez, he filed Petition before CFI of
Manila under Judge Lantin which was dismissed for lack of exhaustion of
administrative remedies. Hence, Atty. David was retained as counsel by Marino
Corpus in a case dismissed by Judge Lantin. Before the SC, David was able to win the
case. With that, Corpus wrote a letter to David and gave the latter a check worth
P2,000. But David replied and gave the check back to Corpus, writing, When I
decided to render professional services in your case, I was motivated by the value to
me of the very intimate relations which you and I have enjoyed xxx and was not
primarily for professional fee xxx. When you shall have obtained a decision which
would have finally resolved the case in your favor, remembering me then will make me
happy. Corpus was able to get a favorable judgment ordering his reinstatement and
payment of back salaries and allowances. Marino Corpus contends that respondent
David is not entitled to attorney's fees because there was no contract to that effect. On
the other hand, respondent David contends that the absence of a formal contract for the
payment of the attorney's fees will not negate the payment thereof because the contract
may be express or implied, and there was an implied understanding between the
petitioner and private respondent that the former will pay the latter attorney's fees when
a final decision shall have been rendered in favor of the petitioner reinstating him to his former position in the Central Bank and paying his back salaries.
Issue: Whether or not there has been a contract between Corpus and Atty. David for
the payment of the latters attorneys fees.
Held: YES. While there was express agreement between petitioner Corpus and
respondent David as regards attorney's fees, the facts of the case support the position of
respondent David that there was at least an implied agreement for the payment of
attorney's fees.
Petitioner's act of giving the check for P2,000.00 through his aforestated April 18, 1962
letter to respondent David indicates petitioner's commitment to pay the former
attorney's fees, which is stressed by expressing that "I wish I could give more but as
you know we were banking on a SC decision reinstating me and reimbursing my back
salaries This last sentiment constitutes a promise to pay more upon his reinstatement
and payment of his back salaries. Petitioner ended his letter that he was "looking
forward to a continuation of the case in the lower court, ... to which the certiorari-
mandamus-quo warranto case was remanded by the Supreme Court for further
proceedings.
Moreover, the payment of attorney's fees to respondent David may also be justified by
virtue of the innominate contract of facio ut des (I do and you give which is based on
the principle that "no one shall unjustly enrich himself at the expense of another."
innominate contracts have been elevated to a codal provision in the New Civil Code by
providing under Article 1307 that such contracts shall be regulated by the stipulations
of the parties, by the general provisions or principles of obligations and contracts, by
the rules governing the most analogous nominate contracts, and by the customs of the
people. The rationale of this article was stated in the 1903 case of Perez vs. Pomar (2
Phil. 982). In that case, the Court sustained the claim of plaintiff Perez for payment of
services rendered against defendant Pomar despite the absence of an express contract to
that effect, thus:
It does not appear that any written contract was entered into between the parties for the
employment of the plaintiff as interpreter, or that any other innominate contract was
entered into but whether the plaintiffs services were solicitedorwhethertheywereoffered
to the defendant for his assistance, inasmuch as these services were accepted and made
use of by the latter, we must consider that there was a tacit and mutual consent as to the
rendition of the services. This gives rise to the obligation upon the person benefited by
the services to make compensation therefor, since the bilateral obligation to render
service as interpreter, on the one hand, and on the other to pay for the service rendered,
is thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil Code).
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... Whether the service was solicited or offered, the fact remains that Perez rendered to
Pomar services as interpreter. As it does not appear that he did this gratuitously, the
duty is imposed upon the defendant, he having accepted the benefit of the service, to
pay a just compensation therefor, by virtue of the innominate contract of facio ut des
implicitly established.
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... because it is a well-known principle of law that no one should permitted to enrich
himself to the damage of another" (emphasis supplied; see also Tolentino, Civil Code
of the Philippines, p. 388, Vol. IV 119621, citing Estate of Reguera vs. Tandra 81 Phil.
404 [1948]; Arroyo vs. Azur 76 Phil. 493119461; and Perez vs. Pomar. 2 Phil. 682
[1903]).
WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance &
Surety Co., Inc. (73 SCRA 564 [1976]) citing the case of Perez v. Pomar, supra thus:
Where one has rendered services to another, and these services are accepted by the
latter, in the absence of proof that the service was rendered gratuitously, it is but just
that he should pay a reasonable remuneration therefor because 'it is a well-known
principle of law, that no one should be permitted to enrich himself to the damage of
another (emphasis supplied).
Case: Daisy Tiu vs. Platinum Plans Phil., Inc., February 28, 2007, J. Quisumbing.
Facts: Daisy Tiu was an employee of Platinum Plans whose business is pre-need
industry. She was the Division Marketing Director from 1987-1989, and later re-hired
as Senior Assistant Vice-President and Territorial Operations Head in charge of its

Hongkong and ASEAN operations, with respect to the latter under a contract of
employment for 5 years. However, stopped reporting to work and eventually became
employed with Professional Pension Plans which is also a pre-need industry, being its
Vice-President for Sales. Hence, Platinum sued Tiu for damages alleging that the latter
violated the non-involvement clause in her contract of employment which provides
that, 8. NON INVOLVEMENT PROVISION The EMPLOYEE further undertakes
that during his/her engagement with EMPLOYER and in case of separation from the
Company, whether voluntary or for cause, he/she shall not, for the next TWO (2) years
thereafter, engage in or be involved with any corporation, association or entity, whether
directly or indirectly, engaged in the same business or belonging to the same pre-need
industry as the EMPLOYER. However, Tiu countered that the non-involvement
clause is unenforceable for being against public policy. The trial court sustained the
validity of the non-involvement clause, stating that a contract in restraint of trade is
valid provided there is a limitation upon either time or place. CA affirmed the trial
courts decision.
Issue: Whether the non-involvement clause in this case is valid.
Held: YES. A non-involvement clause is not necessarily void for being in restraint
of trade as long as there are reasonable limitations as to time, trade, and place.
In this case, the non-involvement clause has a time limit: two years from the time
petitioners employment with respondent ends. It is also limited as to trade, since it
only prohibits petitioner from engaging in any pre-need business akin to respondents.
More significantly, since petitioner was the Senior Assistant Vice-President and
Territorial Operations Head in charge of respondents Hongkong and Asean operations,
she had been privy to confidential and highly sensitive marketing strategies of
respondents business. To allow her to engage in a rival business soon after she leaves
would make respondents trade secrets vulnerable especially in a highly competitive
marketing environment. In sum, we find the non-involvement clause not contrary to
public welfare and not greater than is necessary to afford a fair and reasonable
protection to respondent.
In any event, Article 1306 of the Civil Code provides that parties to a contract 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.
Article 1159 of the same Code also provides that obligations arising from contracts
have the force of law between the contracting parties and should be complied with in
good faith. Courts cannot stipulate for the parties nor amend their agreement where the
same does not contravene law, morals, good customs, public order or public policy, for
to do so would be to alter the real intent of the parties, and would run contrary to the
function of the courts to give force and effect thereto. Not being contrary to public
policy, the non-involvement clause, which petitioner and respondent freely agreed
upon, has the force of law between them, and thus, should be complied with in good
faith
Case: Emeterio Cui vs. Arellano University, May 30, 1961, J. Concepcion.
Facts: Emeterio Cui was enrolled in the College of Law in Arellano University and
finished his law studies up to and including the first semester of fourth year, during
which period, his uncle, Francisco Capistrano, the brother of Cuis mother, was the
dean and legal counsel of such University. Cui enrolled for the last semester of his law
studies in Arellano but failed to pay his tuition fees because his uncle Dean Capistrano
has severed his connection to such school for having accepted the deanship and
chancellorship of the College of Law of Abad Santos University. Cui also transferred
to such latter law school and graduated to such school. It will be noted that during
those years of stay at Arellano, Cui was awarded scholarship grants for scholastic
merits so that his semestral tuition fees were returned to him after the ends of semester
and where his scholarship was granted to him. When Cui applied to take for the Bar
Examination, he needed transcripts of his records in Arellano but the latter denied until
the former will pay back the amount refunded to the former by Arellano citing this
pertinent provision in a contract which Cui signed every after grant of scholarship, "In
consideration of the scholarship granted to me by the University, I hereby waive my
right to transfer to another school without having refunded to the University
(defendant) the equivalent of my scholarship cash. Cui raised his defense into this
Memorandum issued by the Director of Private Schools, as follow:
2. When students are given full or partial scholarships, it is understood that such
scholarships are merited and earned. The amount in tuition and other fees
corresponding to these scholarships should not be subsequently charged to the recipient
students when they decide to quit school or to transfer to another institution.
Scholarships should not be offered merely to attract and keep students in a school.
3. Several complaints have actually been received from students who have enjoyed
scholarships, full or partial, to the effect that they could not transfer to other schools
since their credentials would not be released unless they would pay the fees
corresponding to the period of the scholarships. Where the Bureau believes that the
right of the student to transfer is being denied on this ground, it reserves the right to
authorize such transfer.
Issue: Whether the provision in the Contract between Cui and Arellano University
whereby the former waived his right to transfer to another school without refunding
to the latter the equivalent of his scholarship in cash is valid.
Held: NO. The stipulation whereby student cannot transfer to another school
without refunding scholarship cash is null and void. Scholarship are awarded in
recognition of merit not to keep outstanding students in school to bolster its prestige. In
the understanding of that university scholarships award is a business scheme designed
to increase the business potential of an education institution. Thus conceived it is not
only inconsistent with sound policy but also good morals. But what is morals? Manresa
has this definition. It is good customs; those generally accepted principles of morality
which have received some kind of social and practical confirmation. The practice of
awarding scholarships to attract students and keep them in school is not good customs
nor has it received some kind of social and practical confirmation except in some
private institutions as in Arellano University. The University of the Philippines which
implements Section 5 of Article XIV of the Constitution with reference to the giving of

free scholarships to gifted children, does not require scholars to reimburse the
corresponding value of the scholarships if they transfer to other schools. So also with
the leading colleges and universities of the United States after which our educational
practices or policies are patterned. In these institutions scholarships are granted not to
attract and to keep brilliant students in school for their propaganda mine but to reward
merit or help gifted students in whom society has an established interest or a first lien.
(Emphasis supplied.) In this case, scholarship award is a business scheme designed to
increase the business potential of an educational institution with respect to Arellanos
case.
Case: Ramon Saura vs. Estela Sindico, March 23, 1960, J.B.L. Reyes.
Facts: Ramon E. Saura and Estela P. Sindico were contesting for nomination as the
official candidate of the Nacionalista Party in the fourth district of Pangasinan in the
congressional elections of November 12, 1957. On August 23, 1957, the parties entered
into a written agreement bearing the same date, containing among other matters stated
therein, a pledge that
Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us shall
either run as a rebel or independent candidate after losing in said convention.
In the provincial convention held by the Nacionalista Party on August 31, 1957, Saura
was elected and proclaimed the Party's official congressional candidate for the
aforesaid district of Pangasinan. Nonetheless, Sindico, in disregard of the covenant,
filed, on September 6, 1957, her certificate of candidacy for the same office with the
Commission on Elections, and she openly and actively campaigned for her election.
Wherefore, on October 5, 1957, plaintiff Saura commenced this suit for the recovery of
damages. Upon motion of the defendant, the lower court, in its order of November 19,
1957, dismissed the complaint on the basis that the agreement sued upon is null and
void, in tat (1) the subject matter of the contract, being a public office, is not within the
commerce of man; and (2) the "pledge" was in curtailment of the free exercise of
elective franchise and therefore against public policy. Hence, this appeal.
Issue: Whether or not the agreement between Saura and Sindico is valid.
Held: NO. We agree with the lower court in adjudging the contract or agreement in
question a nullity. Among those that may not be the subject matter (object) of contracts
are certain rights of individuals, which the law and public policy have deemed wise to
exclude from the commerce of man. Among them are the political rights conferred
upon citizens, including, but not limited to, once's right to vote, the right to present
one's candidacy to the people and to be voted to public office, provided, however, that
all the qualifications prescribed by law obtain. Such rights may not, therefore, be
bargained away curtailed with impunity, for they are conferred not for individual or
private benefit or advantage but for the public good and interest.
Constitutional and statutory provision fix the qualifications of persons who may be
eligible for certain elective public offices. Said requirements may neither be enlarged
nor reduced by mere agreements between private parties. A voter possessing all the
qualifications required to fill an office may, by himself or through a political party or
group, present his candidacy without further limitations than those provided by law.
Case: Leal vs. IAC and Vicente Santiago (Substituted by Salud Santiago),
November 5, 1987, J. Sarmiento.
Facts: On March 21, 1941, a document entirely in Spanish language entitled as
Compraventa was executed by Vicente Santiago and his brother Luis Santiago in
favor of Cirilo Leal (the deceased father of herein petitioners), involving the three
parcels of land, as per paragraph (b) thereof states in translation as, "they shall not sell
to others these three lots but only to the seller Vicente Santiago or to his heirs or
successors". However, pursuant to the Compraventa, the title over those three
parcels of land was cancelled and a new one was issued in the name of Cirilo Leal who
immediately took possession and exercised possession and ownership over those lands
which was inherited by herein petitioners after Cirilos death. These parcels of land
were either mortgaged or leased by petitioner-children of Cirilo to their co-petitioners.
However, Vicente Santiago approached the petitioners and offered re-purchase of
subject properties in pursuant to the Compraventa. Trial court dismissed the complaint
for being premature. Court of Appeals under Justice Paras affirmed the trial courts
decision.
Issue: Whether or not the prohibition to sell to third parties pursuant to the
Compraventa is valid.
Held: NO. Contracts are generally binding between the parties, their assigns and heirs;
however, under Art. 1255 of the Civil Code of Spain, which is applicable in this
instance, pacts, clauses, and conditions which are contrary to public order are null and
void, thus, without any binding effect.
Parenthetically, the equivalent provision in the Civil Code of the Philippines is that of
Art. 1306, which states: "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. Public order
signifies the public weal public policy. 5 Essentially, therefore, public order and
public policy mean one and the same thing. Public policy is simply the English
equivalent of "order publico" in Art. 1255 of the Civil Code of Spain. 6
One such condition which is contrary to public policy is the present prohibition to self
to third parties, because the same virtually amounts to a perpetual restriction to the
right of ownership, specifically the owner's right to freely dispose of his properties.
This, we hold that any such prohibition, indefinite and stated 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. In the light of this pronouncement, we grant
the petitioners' prayer for the cancellation of the annotations of this prohibition at the
back of their Transfer Certificates 'Title.
In the case before us, we cannot and any express or implied grant of a right to
repurchase, nor can we infer, from any word or words in the questioned paragraph, the
existence of any such right. The interpretation in the resolution (Justice Sison) is rather
strained. The phrase "in case case" of should be construed to mean "should the buyers
wish to sell which is the plain and simple import of the words, and not "the buyers
should sell," which is clearly a contorted construction of the same phrase. The resort to

Article 1373 of the Civil Code of the Philippines is erroneous. The subject phrase is
patent and unambiguous, hence, it must not be given another interpretation
But even assuming that such a right of repurchase is granted under the "Compraventa,"
the petitioner correctly asserts that the same has already prescribed. Under Art. 1508 of
the Civil Code of Spain (Art,. 1606 of the Civil Code of the Philippines), the right to
redeem or repurchase, in the absence of an express agreement as to time, shall last four
years from the date of the contract. In this case then, the right to repurchase, if it was at
four guaranteed under in the "Compraventa," should have been exercise within four
years from March 21, 1941 (indubitably the date of execution of the contract), or at the
latest in 1945.
In the respondent court's resolution, it is further ruled that the right to repurchase was
given birth by the condition precedent provided for in the phrase "siempre y cuando
estos ultimos pueden hacer la compra" (when the buyer has money to buy). In other
words, it is the respondent court's contention that the right may be exercised only when
the buyer has money to buy. If this were so, the second paragraph of Article 1508
would apply there is agreement as to the time, although it is indefinite, therefore, the
right should be exercised within ten years, because the law does not favor suspended
ownership. Since the alleged right to repurchase was attempted to be exercised by
Vicente Santiago only in 1966, or 25 years from the date of the contract, the said right
has undoubtedly expired.
The law provides that for conventional redemption to take place, the vendor should
reserve, in no uncertain terms, the right to repurchase the thing sold. Thus, the right to
redeem must be expressly stipulated in the contract of sale in order that it may have
legal existence.
Case: Banco Filipino Savings and Mortgage Bank vs. Hon. Navarro and Florante
Del Valle, July 28, 1987, J. Melencio-Herrera.
Facts: On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a
loan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO
FILIPINO1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos,
payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest
annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the
date when CIRCULAR No. 494 was issued by the Central Bank.
Stamped on the promissory note evidencing the loan is an Escalation Clause, reading
as follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event law should be
enacted increasing the lawful rates of interest that may be charged on this particular
kind of loan.
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on
January 2, 1976, the pertinent portion of which reads:
3. The maximum rate of interest, including commissions, premiums, fees and other
charges on loans with maturity of more than seven hundred thirty (730) days, by
banking institutions, including thrift banks and rural banks, or by financial
intermediaries authorized to engage in quasi-banking functions shall be nineteen

percent (19%) per annum.
xxx
xxx
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7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof
shall continue to be governed by the Usury Law, as amended."
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the
BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12%
to 17% per annum effective on March 1, 1976.
Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation
Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO
for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be
declared null and void and that BANCO FILIPINO be ordered to desist from enforcing
the increased rate of interest on the BORROWER's real estate loan.
For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the
BORROWER authorized it to increase the interest rate once a law was passed
increasing the rate of interest and that its authority to increase was provided for by
CIRCULAR No. 494.
In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO
FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's
loan.
* On February 24, 1983, the parties represented by their respective counsel, not only
moved to withdraw the appeal on the ground that it had become moot and academic
"because of recent developments in the rules and regulations of the Central Bank," but
also prayed that "the decision rendered in the Court of First Instance be therefore
vacated and declared of no force and effect as if the case was never filed," since the
parties would like to end this matter once and for all."
However, "considering the subject matter of the controversy in which many persons
similarly situated are interested and because of the need for a definite ruling on the
question," the Court, in its Resolution of February 24, 1983, impleaded the Central
Bank and required it to submit its Comment, and encouraged homeowners similarly
situated as the BORROWER to intervene in the proceedings.
Issue: Whether or not Banco Filipino can increase the interest rate on the loan from
12% to 19% per annum under the Escalation clause.
Held: NO. It is clear from the stipulation between the parties that the interest rate may
be increased "in the event a law should be enacted increasing the lawful rate of interest
that may be charged on this particular kind of loan." " The Escalation Clause was
dependent on an increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a
circular duly issued is not strictly a statute or a law, it has, however, the force and
effect of law."6 (Italics supplied). "An administrative regulation adopted pursuant to
law has the force and effect of law." 7 "That administrative rules and regulations have
the force of law can no longer be questioned. " 8
The distinction between a law and an administrative regulation is recognized in the
Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of

September 24, 1976 (supra). According to the guidelines, for a loan's interest to be
subject to the increases provided in CIRCULAR No. 494, there must be an Escalation
Clause allowing the increase "in the event that any law or Central Bank regulation is
promulgated increasing the maximum interest rate for loans." The guidelines thus
presuppose that a Central Bank regulation is not within the term "any law."
It is now clear that from March 17, 1980, escalation clauses to be valid should
specifically provide: (1) that there can be an increase in interest if increased by
law or by the Monetary Board; and (2) in order for such stipulation to be valid, it
must include a provision for reduction of the stipulated interest "in the event that
the applicable maximum rate of interest is reduced by law or by the Monetary
Board."
Case: Spouses Mariano and Gilda Florendo vs. CA and Land Bank of the
Philippines, December 17, 1996, J. Panganiban.
Facts: Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976
until August 16, 1984 when she voluntarily resigned. However, before her resignation,
she applied for a housing loan of P148,000.00, payable within 25 years from
(respondent bank's) Provident Fund on July 20, 1983. Florendo and Land Bank entered
into a Housing Loan Agreement which the former executed a Real Estate Mortgage
and Promissory Note. Land Bank increased the interest rate from 9% to 17% per
annum pursuant to ManCom Resolution No. 85-08 and Provident Fund Memorandum
Circular proving that,
ManCom (Management Committee) Resolution No. 85-08, together with PF
(Provident Fund) Memorandum Circular No. 85-08, which escalated the interest rates
on outstanding housing loans of bank employees who voluntarily "secede" (resign)
from the Bank; the range of rates varied depending upon the number of years service
rendered by the employees concerned. The rates were made applicable to those who
had previously resigned from the bank as well as those who would be resigning in the
future.
And the same increase being stated in the real estate mortgage as follows,
The rate of interest charged on the obligation secured by this mortgage. . ., shall be
subject, during the life of this contract, to such an increase/decrease in accordance with
prevailing rules, regulations and circulars of the Central Bank of the Philippines as the
Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and
subject to the condition that the increase/decrease shall only take effect on the date of
effectivity of said increase/decrease and shall only apply to the remaining balance of
the loan.
Florendo protested such increase. The trial court ruled in favor of the bank. However,
Florendo argued that, the increased rate of interest is onerous and was imposed
unilaterally, without the consent of the borrower-spouses. And that there is in fact no
Central Bank rule, regulation or other issuance which would have triggered an
application of the escalation clause as to her factual situation.
Issue: Whether or not the bank has valid and legal basis to impose an increased
interest rate on the petitioners housing loan.
Held: NO. In the case at bar, the loan was perfected on July 20, 1983. PD No. 116
became effective on January 29, 1973. CB Circular No. 416 was issued on July 29,
1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December
1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to
the Usury Law, as amended, was promulgated in 1982. These and other relevant CB
issuances had already come into existence prior to the perfection of the housing loan
agreement and mortgage contract, and thus it may be said that these regulations had
been taken into consideration by the contracting parties when they first entered into
their loan contract. In light of the CB issuances in force at that time, respondent bank
was fully aware that it could have imposed an interest rate higher than 9% per annum
rate for the housing loans of its employees, but it did not. In the subject loan, the
respondent bank knowingly agreed that the interest rate on petitioners' loan shall
remain at 9% p.a. unless a CB issuance is passed authorizing an increase (or decrease)
in the rate on such employee loans and the Provident Fund Board of Trustees acts
accordingly. Thus, as far as the parties were concerned, all other onerous factors, such
as employee resignations, which could have been used to trigger an application of the
escalation clause were considered barred or waived. If the intention were otherwise,
they especially respondent bank should have included such factors in their loan
agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the
Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances,
since paragraph (f) of the mortgage contract very categorically specifies that any
interest rate increase be in accordance with "prevailing rules, regulations and circulars
of the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco
Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact,
the said escalation clause further provides that the increased interest rate "shall only
take effect on the date of effectivity of (the) increase/decrease" authorized by the CB
rule, regulation or circular. Without such CB issuance, any proposed increased rate will
never become effective.
We have already mentioned (and now reiterate our holding in several
cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered
ineffective. Thus, petitioners' contention that the escalation clause is violative of the
said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral determination and
imposition of increased interest rates by the herein respondent bank is obviously
violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil
Code. As this Court held in PNB: 16
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda,
Inc., 21 SCRA 555). Hence, even assuming that the . . . loan agreement between the
PNB and the private respondent gave the PNB a license (although in fact there was
none) to increase the interest rate at will during the term of the loan, that license would
have been null and void for being violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement with the character of a contract of

adhesion, where the parties do not bargain on equal footing, the weaker party's (the
debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs.
Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable trap for
the weaker party whom the courts of justice must protect against abuse and imposition.
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda
Florendo as a former bank employee was very knowledgeable concerning respondent
bank's lending rates and procedures, and therefore, petitioners were "on an equal
footing" with respondent bank as far as the subject loan contract was concerned. That
may have been true insofar as entering into the original loan agreement and mortgage
contract was concerned. However, that does not hold true when it comes to the
determination and imposition of escalated rates of interest as unilaterally provided in
the ManCom Resolution, where she had no voice at all in its preparation and
application.
To allay fears that respondent bank will inordinately be prejudiced by being stuck with
this "sweetheart loan" at patently concessionary interest rates, which according to
respondent bank is the "sweetest deal" anyone could obtain and is an act of generosity
considering that in 1985 lending rates in the banking industry were peaking well over
30% p.a., 17 we need only point out that the bank had the option to impose in its loan
contracts the condition that resignation of an employee-borrower would be a ground
for escalation. The fact is it did not. Hence, it must live with such omission.
Case: Aniceto Saludo Jr. vs. Security Bank Corporation, October 13, 2010, J.
Perez.
Facts: On 30 May 1996, Booklight was extended an omnibus line credit facility3 by
SBC in the amount of P10,000,000.00. Said loan was covered by a Credit Agreement 4
and a Continuing Suretyship5 with petitioner as surety, both documents dated 1 August
1996, to secure full payment and performance of the obligations arising from the credit
accommodation.
Booklight drew several availments of the approved credit facility from 1996 to 1997
and faithfully complied with the terms of the loan. On 30 October 1997, SBC approved
the renewal of credit facility of Booklight in the amount of P10,000,000.00 under the
prevailing security lending rate.6 From August 3 to 14, 1998, Booklight executed nine
(9) promissory notes7 in favor of SBC in the aggregate amount of P9,652,725.00. For
failure to settle the loans upon maturity, demands8 were made on Booklight and
petitioner for the payment of the obligation but the duo failed to pay. As of 15 May
2000, the obligation of Booklight stood at P10,487,875.41, inclusive of interest past
due and penalty.9
On 16 June 2000, SBC filed against Booklight and herein petitioner an action for
collection of sum of money with the RTC. RTC ruled that Saludo is jointly and
severally liable with Booklight. CA affirmed in toto. Saludo argued that the Continuing
Suretyship is a contract of adhesion and that its participation thereto is only his signing
the same.
Issue: Whether or not a lawyer can be excused from liability by arguing that the
contract is one of a contract of adhesion.
Held: NO. The lameness of petitioners stand is pointed up by his attempt to escape
from liability by labelling the Continuing Suretyship as a contract of adhesion.
A contract of adhesion is defined as one in which one of the parties imposes a readymade form of contract, which the other party may accept or reject, but which the latter
cannot modify. One party prepares the stipulation in the contract, while the other party
merely affixes his signature or his adhesion thereto, giving no room for negotiation
and depriving the latter of the opportunity to bargain on equal footing.
A contract of adhesion presupposes that the party adhering to the contract is a weaker
party. That cannot be said of petitioner. He is a lawyer. He is deemed knowledgeable of
the legal implications of the contract that he is signing.
It must be borne in mind, however, that contracts of adhesion are not invalid per se.
Contracts of adhesion, where one party imposes a ready-made form of contract on the
other, are not entirely prohibited. The one who adheres to the contract is, in reality, free
to reject it entirely; if he adheres, he gives his consent.
Case: Metropolitan Bank and Trust Company vs. Rogelio Reynado and Jose
Adrandea, August 9, 2010, J. Del Castillo.
Facts: On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged
respondents before the Office of the City Prosecutor of Manila with the crime of estafa
under Article 315, paragraph 1(b) of the Revised Penal Code. In the affidavit of
petitioners audit officer, Antonio Ivan S. Aguirre, it was alleged that the special audit
conducted on the cash and lending operations of its Port Area branch uncovered
anomalous/fraudulent transactions perpetrated by respondents in connivance with
client Universal Converter Philippines, Inc. (Universal). In their defense, respondents
denied responsibility in the anomalous transactions with Universal and claimed that
they only intended to help the Port Area branch solicit and increase its deposit accounts
and daily transactions.
Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt
Settlement Agreement whereby the latter acknowledged its indebtedness to the former
in the total amount of P50,990,976.27 as of February 4, 1997 and undertook to pay the
same in bi-monthly amortizations in the sum of P300,000.00 starting January 15,
1997, covered by postdated checks, plus balloon payment of the remaining principal
balance and interest and other charges, if any, on December 31, 2001. The City
Prosecutor and DOJ dismissed the case. Hence, Metrobank filed a petition for certiorari
and mandamus to CA. CA likewise affirmed the decisions of the City Prosecutor and
DOJ stating that, while novation does not extinguish criminal liability, it may prevent
the rise of such liability as long as it occurs prior to the filing of the criminal
information in court.
Issue: Whether or not the Debt Settlement Agreement between Metropolitan Bank
and Trust Company and Universal is tantamount to a novation of obligation by the
latter to the former which extinguishes the criminal liability for Estafa by the latter.
Held: NO. Initially, it is best to emphasize that novation is not one of the grounds
prescribed by the Revised Penal Code for the extinguishment of criminal liability. In a
catena of cases, it was ruled that criminal liability for estafa is not affected by a

compromise or novation of contract. In Firaza v. People and Recuerdo v. People, this
Court ruled that in a crime of estafa, reimbursement or belated payment to the offended
party of the money swindled by the accused does not extinguish the criminal liability
of the latter. We also held in People v. Moreno and in People v. Ladera that criminal
liability for estafa is not affected by compromise or novation of contract, for it is a
public offense which must be prosecuted and punished by the Government on its own
motion even though complete reparation should have been made of the damage
suffered by the offended party. Similarly in the case of Metropolitan Bank and Trust
Company v. Tonda cited by petitioner, we held that in a crime of estafa,
reimbursement of or compromise as to the amount misappropriated, after the
commission of the crime, affects only the civil liability of the offender, and not his
criminal liability.
Thus, the doctrine that evolved from the aforecited cases is that a compromise or
settlement entered into after the commission of the crime does not extinguish accuseds
liability for estafa. Neither will the same bar the prosecution of said crime.
Accordingly, in such a situation, as in this case, the complaint for estafa against
respondents should not be dismissed just because petitioner entered into a Debt
Settlement Agreement with Universal. Even the OSG arrived at the same conclusion:
Contrary to the conclusion of public respondent, the Debt Settlement Agreement
entered into between petitioner and Universal Converter Philippines extinguishes
merely the civil aspect of the latters liability as a corporate entity but not the criminal
liability of the persons who actually committed the crime of estafa against petitioner
Metrobank. x x x
Case: Prudential Bank and Trust Company (BPI) vs. Liwayway Abasolo,
September 27, 2010, J. Carpio Morales.
Facts: Leonor Valenzuela-Rosales inherited two parcels of land in Laguna which upon
her death were inherited by her heirs thereby appointing Liwayway Abasolo as their
agent thru the SPA empowering the latter to sell the properties. One, Corazon
Marasigan expressed her interest in buying that same properties but because she had no
money yet she suggested the idea of first mortgaging the properties to Prudential Bank
and the proceeds of which would be paid directly to Abasolo. On consultation with
Prudential Banks employee named Norberto Mendiola, a Deed of Absolute Sale was
executed thereby transferring to Marasigan the property with assurance that the
proceeds thereof would be paid directly to Abasolo. When all went well with the loan,
in the absence of a written request for a bank guarantee, the PBTC released the
proceeds of the loan to Marasigan, whom latter despite repeated demands failedto pay
the purchase price of the properties. Marasigan only paid in kind but never the entire
purchase price. Hence, Abasolo filed a complaint for collection of sum of money and
annulment of sale and mortgage with damages. Marasigan, however, denied the
existence of any agreement that the proceeds be paid to Abasolo and that the payment
in kind was already sufficient. RTC ruled in favor of Abasolo ordering PBTC to pay
Abasolo in the event that Marasigan failed to pay. CA affirmed.
Issue: Whether or not PBTC would be subsidiarily liable to Abasolo in the absence
of any contractual relationship between the two.
Held: NO. In the absence of a lender-borrower relationship between petitioner and

Liwayway, there is no inherent obligation of petitioner to release the proceeds of the
loan to her. To a banking institution, well-defined lending policies and sound lending
practices are essential to perform its lending function effectively and minimize the risk
inherent in any extension of credit. In order to identify and monitor loans that a bank
has extended, a system of documentation is necessary. Under this fold falls the
issuance by a bank of a guarantee which is essentially a promise to repay the liabilities
of a debtor, in this case Corazon. It would be contrary to established banking practice if
Mendiola issued a bank guarantee, even if no request to that effect was made.
The principle of relativity of contracts in Article 1311 of the Civil Code supports
petitioners cause:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except
in case where the rights and obligations arising from the contract are not transmissible
by their nature, or by stipulation or by provision of law. The heir is not liable beyond
the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand
its fulfillment provided he communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third
person. (underscoring supplied)
For Liwayway to prove her claim against petitioner, a clear and deliberate act of
conferring a favor upon her must be present. A written request would have sufficed to
prove this, given the nature of a banking business, not to mention the amount involved.
Since it has not been established that petitioner had an obligation to Liwayway, there is
no breach to speak of. Liwayways claim should only be directed against Corazon.
Petitioner cannot thus be held subisidiarily liable.
Case: Asian Cathay Finance and Leasing Corporation vs. Spouses Cesario
Gravador and Norma De Vera and Spouses Dumigpi, July 5, 2010, J. Nachura.
Facts: Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of
Eight Hundred Thousand Pesos (P800,000.00) to respondent Cesario Gravador, with
respondents Norma de Vera and Emma Concepcion Dumigpi as co-makers. The loan
was payable in sixty (60) monthly installments of P24,400.00 each. To secure the loan,
respondent Cesario executed a real estate mortgage5 over his property in Sta. Maria,
Bulacan. Respondents paid the initial installment due in November 1999. However,
they were unable to pay the subsequent ones. Hence, petitioner filed a petition for
extrajudicial foreclosure of mortgage. Respondent, however, filed a suit for annulment
of such mortgage claiming that the real estate mortgage is null and void. They pointed
out that the mortgage does not make reference to the promissory note dated October
22, 1999. The promissory note does not specify the maturity date of the loan, the
interest rate, and the mode of payment; and it illegally imposed liquidated damages.
The real estate mortgage, on the other hand, contains a provision on the waiver of the
mortgagors right of redemption, a provision that is contrary to law and public policy.
Respondents added that ACFLC violated Republic Act No. 3765, or the Truth in
Lending Act, in the disclosure statement that should be issued to the borrower. RTC

denied the application for TRO by respondent and thereafter dismissed the complaint
sustaining the validity of the promissory note and real estate mortgage stating among
others that, respondents are well-educated individuals who could not feign naivet in
the execution of the loan documents. It, therefore, rejected respondents claim that
ACFLC deceived them into signing the promissory note, disclosure statement, and
deed of real estate mortgage. The RTC further held that the alleged defects in the
promissory note and in the deed of real estate mortgage are too insubstantial to warrant
the nullification of the mortgage. It added that a promissory note is not one of the
essential elements of a mortgage; thus, reference to a promissory note is neither
indispensable nor imperative for the validity of the mortgage. CA reversed the trial
courts decision.
whereby Laigo was to undertake the development of the property into a subdivision.
Laigo, on the other hand, entered into a contract with Lumanlan to construct for the
home buyers, 20 houses on the subdivision. Another contract was entered into between
Laigo and Velasco for construction of the houses. However, when neither Laigo nor
the individual home buyers paid for the home constructed, Velasco wrote the GSIS to
intercede for the unpaid accounts of the home buyers. Contracts that were subsequently
entered into by Laigo include that of Delos Santos, Galang and Lumbang. However,
GSIS categorically denied that the firm has clear legal ground against Laigo having no
privity of contract between petitioners. With the same plight, herein petitioners filed a
case against GSIS. The latter however, presented a defense through the execution of
Deed of Quitclaim and Undertaking by Laigo Realty.
Issue: Whether or not the subject promissory note and real estate mortgage is one of
contract of adhesion.
Issue: Whether there is contractual privity between GSIS and Lumanlan and
Velasco.
Held: YES. The supposed waiver by the mortgagors was contained in a statement
made in fine print in the REM. It was made in the form and language prepared by
[petitioner]ACFLC while the [respondents] merely affixed their signatures or adhesion
thereto. It thus partakes of the nature of a contract of adhesion. It is settled that doubts
in the interpretation of stipulations in contracts of adhesion should be resolved against
the party that prepared them. This principle especially holds true with regard to
waivers, which are not presumed, but which must be clearly and convincingly shown.
[Petitioner] ACFLC presented no evidence hence it failed to show the efficacy of this
waiver.
Moreover, to say that the mortgagors right of redemption may be waived through a
fine print in a mortgage contract is, in the last analysis, tantamount to placing at the
mortgagees absolute disposal the property foreclosed. It would render practically
nugatory this right that is provided by law for the mortgagor for reasons of public
policy. A contract of adhesion may be struck down as void and unenforceable for being
subversive to public policy, when the weaker party is completely deprived of the
opportunity to bargain on equal footing.
Held: YES. What is more, the reliance of GSIS on the Deed of Quitclaim of May 7,
1970 is to Our mind misplaced. We have analyzed this document carefully, and We are
of the considered view that it is actually evidence against GSIS. Even if what is
unnatural in ordinary business or industrial experience were assumed, that is, that GSIS
was unaware all along during the period of their construction of the work then being
done by petitioners - albeit it is possible there was no express consent given to - by and
thru the aforementioned deed of quitclaim, GSIS agreed to receive and did actually
receive the benefits of what petitioners had accomplished or would accomplish under
their contracts with Laigo., So much so, that the dispositive portion of the quitclaim
dead does not really relieve GSIS from liability to petitioners. Properly viewed, GSIS
virtually assumed under said deed, liability in regard to claims like those of
petitioners who might not be paid by Laigo albeit said liability has been made subject
to the reservation that it could seek indemnity from Laigo.
GSIS received Alta Farms' proposal about the conversion of their piggery project into a
subdivision (in which Laigo Realty's participation was mentioned) as early as February
5, 1970. It was only in November, 1970 that it issued its "cease and desist" order. From
all indications, the jobs of petitioners were already practically finished then. And in the
Joint Manifestation filed by the parties with the trial court as late as February 20, 1976,
GSIS made it clear that "defendant (GSIS) up to the present has not collected from the
house owners of the 63 houses built by the plaintiffs notwithstanding the foreclosure
proceedings and consolidation 6f ownership." Again, it is thus obvious that GSIS
assumed ownership of the houses built by petitioners and was benefited by the same,
and the fact that it has not collected any payment from the "house owners" or the
construction of the houses respectively occupied by them is of no moment insofar as its
liability to petitioners is concerned. Surely, it is not pretended that those "house
owners" would be allowed to enrich themselves at the expense of petitioners. Indeed,
the term "house owners" is inappropriate, if only because in Paragraph 16 of its
Comment on the petition herein, GSIS unequivocally state that "GSIS foreclosed the
properties including all improvements (the houses in 1970" and, thereby, became the
owner of said houses.
Case: Pepito Velasco, et al. vs. CA and GSIS, January 28, 1980, J. Barredo.
Facts: Sometime on November 10, 1965, Alta Farms secured from the GSIS a Three
Million Two Hundred Fifty Five Thousand Pesos (P3,255,000.00) loan and an
additional loan of Five Million Sixty-Two Thousand Pesos (P5,062,000.00) on October
5, 1967, to finance a piggery project. These loans were secured by two mortgage. Alta
Farms defaulted in the payment of its amortizations presumably because of this that
Alta Farms executed a Deed of Sale With Assumption of Mortgage with Asian
Engineering Corporation on July 10, 1969 but without the previous consent or
approval of the GSIS and in direct violation of the provisions of the mortgage
contracts. Even without the approval of the Deed of Sale With Assumption of
Mortgage by the GSIS, Asian Engineering Corporation executed an Exclusive Sales
Agency, Management and Administration Contract in favor of Laigo Realty
Corporation, with the intention of converting the piggery farm into a subdivision. And
on October 20, 1969, Asian Engineering executed another contract with Laigo,

Case: George Kauffman vs. PNB, Sept. 29, 1921, J. Street.
Facts: George A. Kauffman, was the president of a domestic corporation engaged
chiefly in the exportation of hemp from the Philippine Islands and known as the
Philippine Fiber and Produce Company, of which company the plaintiff apparently
held in his own right nearly the entire issue of capital stock. On February 5, 1918, the
board of directors of said company, declared a dividend of P100,000 from its surplus
earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000.
This amount was accordingly placed to his credit on the books of the company, and so
remained until in October of the same year when an unsuccessful effort was made to
transmit the whole, or a greater part thereof, to the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the
Philippine Fiber and Produce Company, presented himself in the exchange department
of the Philippine National Bank in Manila and requested that a telegraphic transfer of
$45,000 should be made to the plaintiff in New York City, upon account of the
Philippine Fiber and Produce Company. Upon receiving this telegraphic message, the
bank's representative in New York sent a cable message in reply suggesting the
advisability of withholding this money from Kauffman, in view of his reluctance to
accept certain bills of the Philippine Fiber and Produce Company. The Philippine
National Bank acquiesced in this and on October 11 dispatched to its New York
agency another message to withhold the Kauffman payment as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled
to Kauffman in New York, advising him that $45,000 had been placed to his credit in
the New York agency of the Philippine National Bank; and in response to this advice
Kauffman presented himself at the office of the Philippine National Bank in New York
City on October 15, 1918, and demanded the money. By this time, however, the
message from the Philippine National Bank of October 11, directing the withholding of
payment had been received in New York, and payment was therefore refused.
Hence, Kauffman instituted a suit before the CFI of Manila to recover the sum.
Issue: Whether or not Kauffman has right of action against PNB.
Held: YES. In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an
elaborate dissertation upon the history and interpretation of the paragraph above quoted
and so complete is the discussion contained in that opinion that it would be idle for us
here to go over the same matter. Suffice it to say that Justice Trent, speaking for the
court in that case, sums up its conclusions upon the conditions governing the right of
the person for whose benefit a contract is made to maintain an action for the breach
thereof in the following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine
whether the interest of a third person in a contract is a stipulation pour autrui, or
merely an incidental interest, is to rely upon the intention of the parties as disclosed by
their contract.
If a third person claims an enforcible interest in the contract, the question must be
settled by determining whether the contracting parties desired to tender him such an
interest. Did they deliberately insert terms in their agreement with the avowed purpose
of conferring a favor upon such third person? In resolving this question, of course, the
ordinary rules of construction and interpretation of writings must be observed. (Uy

Tam and Uy Yet vs. Leonard, supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour
autrui, it matters not whether the stipulation is in the nature of a gift or whether there
is an obligation owing from the promise to the third person. That no such obligation
exists may in some degree assist in determining whether the parties intended to benefit
a third person, whether they stipulated for him." (Uy Tam and Uy Yet vs. Leonard,
supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain the
present action is clear enough; for it is undeniable that the bank's promise to cause a
definite sum of money to be paid to the plaintiff in New York City is a stipulation in
his favor within the meaning of the paragraph above quoted; and the circumstances
under which that promise was given disclose an evident intention on the part of the
contracting parties that the plaintiff should have the money upon demand in New York
City. The recognition of this unqualified right in the plaintiff to receive the money
implies in our opinion the right in him to maintain an action to recover it; and indeed if
the provision in question were not applicable to the facts now before us, it would be
difficult to conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce
compliance with a stipulation in his favor must signify his acceptance before it has
been revoked. In this case the plaintiff clearly signified his acceptance to the bank by
demanding payment; and although the Philippine National Bank had already directed
its New York agency to withhold payment when this demand was made, the rights of
the plaintiff cannot be considered to as there used, must be understood to imply
revocation by the mutual consent of the contracting parties, or at least by direction of
the party purchasing he exchange.
Case: Bonifacio Brothers Inc., et al. vs. Enrique Mora, et al., May 29, 1967, J.
Castro.
Facts: Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QCmortgaged the same to the H.S. Reyes, Inc., with the condition that the former would
insure the automobile with the latter as beneficiary. The automobile was thereafter
insured on June 23, 1959 with the State Bonding & Insurance Co., Inc., and motor car
insurance policy A-0615 was issued to Enrique Mora. During the effectivity of the
insurance contract, the car met with an accident. The insurance company then assigned
the accident to the Bayne Adjustment Co. for investigation and appraisal of the
damage. Enrique Mora, without the knowledge and consent of the H.S. Reyes, Inc.,
authorized the Bonifacio Bros. Inc. to furnish the labor and materials, some of which
were supplied by the Ayala Auto Parts Co. For the cost of labor and materials, Enrique
Mora was billed at P2,102.73 through the H.H. Bayne Adjustment Co. In the
meantime, the car was delivered to Enrique Mora without the consent of the H.S.
Reyes, Inc., and without payment to the Bonifacio Bros. Inc. and the Ayala Auto Parts
Co. of the cost of repairs and materials. Upon the theory that the insurance proceeds
should be paid directly to them, the Bonifacio Bros. Inc. and the Ayala Auto Parts Co.
filed on May 8, 1961 a complaint with the Municipal Court of Manila against Enrique
10

Mora and the State Bonding & Insurance Co., Inc. for the collection of the sum of
P2,002.73.
Issue: Whether or not the stipulation, arrangement or grant is revocable at the

option of the co-heirs.
Issue: Whether there is privity of contract between the Bonifacio Bros. Inc. and the
Ayala Auto Parts Co. on the one hand and the insurance company on the other.
Held: NO. We find that the trial court erred in holding that the stipulation,
arrangement or grant (Exhibit O-1) is revocable at the option of the co-owners. While a
stipulation in favor of a third person has no binding effect in itself before its acceptance
by the party favored, the law does not provide when the third person must make his
acceptance. As a rule, there is no time at such third person has after the time until the
stipulation is revoked. Here, We find that the Church accepted the stipulation in its
favor before it is sought to be revoked by some of the co-owners, namely the
petitioners-appellants herein. It is not disputed that from the time of the with of Doa
Encarnacion Florentino in 1941, as had always been the case since time immemorial up
to a year before the firing of their application in May 1964, the Church had been
enjoying the benefits of the stipulation. The enjoyment of benefits flowing therefrom
for almost seventeen years without question from any quarters can only be construed as
an implied acceptance by the Church of the stipulation pour autrui before its
revocation.
We hold that said stipulation is a stipulation pour autrui. A stipulation pour autrui is a
stipulation in favor of a third person conferring a clear and deliberate favor upon him,
and which stipulation is merely a part of a contract entered into by the parties, neither
of whom acted as agent of the third person, and such third person and demand its
fulfillment provoked that he communicates his to the obligor before it is revoked. The
requisites are: (1) that the stipulation in favor of a third person should be a part, not the
whole, of the contract; (2) that the favorable stipulation should not be conditioned or
compensated by any kind of obligation whatever; and (3) neither of the contracting
bears the legal represented or authorization of third person.
To constitute a valid stipulation pour autrui it must be the purpose and intent of the
stipulating parties to benefit the third and it is not sufficient that the third person may
be incidentally benefited by the stipulation. The fairest test to determine whether the
interest of third person in a contract is a stipulation pour autrui or merely an incidental
interest, is to rely upon the intention of the parties as disclosed by their contract. In
applying this test, it meters not whether the stipulation is in the nature of a gift or
whether there is an obligation owing from the promisee to the third person. That no
such obsorption exists may in some degree assist in determining whether the parties
intended to benefit a third person.
Held: NO. In this connection, this Court has laid down the rule that the fairest test to
determine whether the interest of a third person in a contract is a stipulation pour autrui
or merely an incidental interest, is to rely upon the intention of the parties as disclosed
by their contract.4 In the instant case the insurance contract does not contain any words
or clauses to disclose an intent to give any benefit to any repairmen or materialmen in
case of repair of the car in question. The parties to the insurance contract omitted such
stipulation, which is a circumstance that supports the said conclusion. On the other
hand, the "loss payable" clause of the insurance policy stipulates that "Loss, if any, is
payable to H.S. Reyes, Inc." indicating that it was only the H.S. Reyes, Inc. which they
intended to benefit.
We likewise observe from the brief of the State Bonding & Insurance Company that it
has vehemently opposed the assertion or pretension of the appellants that they are privy
to the contract. If it were the intention of the insurance company to make itself liable to
the repair shop or materialmen, it could have easily inserted in the contract a stipulation
to that effect. To hold now that the original parties to the insurance contract intended to
confer upon the appellants the benefit claimed by them would require us to ignore the
indespensable requisite that a stipulation pour autrui must be clearly expressed by the
parties, which we cannot do.
As regards paragraph 4 of the insurance contract, a perusal thereof would show that
instead of establishing privity between the appellants and the insurance company, such
stipulation merely establishes the procedure that the insured has to follow in order to be
entitled to indemnity for repair. This paragraph therefore should not be construed as
bringing into existence in favor of the appellants a right of action against the insurance
company as such intention can never be inferred therefrom.
Case : Miguel Florentino, et al. vs. Salvador Encarnacion, et al., Sept. 30, 1977, J.
Guerrero.
Facts: Just after the death of Encarnacion FIorentino in 1941 up to last year and as had
always been the case since time immomorial the products of the land made subject
matter of this land has been used in answering for the payment for the religious
functions specified in the Deed Extrajudicial Partition belated August 24, 1947. This
arrangement about the products answering for the comment of expenses for religions
functions as mentioned above was not registered in the office of the Register of Deeds
under Act No 3344, Act 496 or and, other system of registration. The heirs, however,
of Encarnacion filed with CFI of Ilocos Sur an application for registration of a parcel of
agricultural land and the revocation of the said provision in the Deed pertaining to the
products of such land subject to payment of religious functions expenses.
Case: Bank of America NT & SA vs. IAC and Air Cargo and Travel Corporation,
Nov. 11, 1986, J. Melencio-Herrera.
Facts: Plaintiff Air Cargo and Travel Corporation is the owner of Account Number
19842-01-2 with defendant Bank of America. Defendant Toshiyuki Minami, President
of plaintiff corporation in Japan, is the owner of Account Number 24506-01-7 with
defendant Bank. On March 10, 1981, the Bank received a tested telex advise from
Kyowa Bank of Japan stating, ADVISE PAY USDLS 23,595. TO YOUR A/C NBR
24506-01-7 OF A. C. TRAVEL CORPORATION MR. TOSHIYUKO MINAMI and
the Bank Credited the amount of US$23,595.00 to Account Number 24506-07-1
11

(should be 24506-01-7) owned, as aforesaid, by Minami. On March 12, 1981, Minami
withdrew the sum of P180,000.00 the equivalent in Philippine Pesos of the sum of
US$23,595.00 from the Bank on his Account Number 24506-07-1 (should be 2450601-7). According to ACTC in its Comment, in the early part of 1981, it was Tokyo
Tourist Corporation in Japan which applied with Kyowa Bank, Ltd. also based in
Tokyo, Japan, for telegraphic transfer of the sum of US$23,595.00 payable to ACTC's
account with BANKAMERICA, Manila. When the tested telex was received on May
10, 1981, employees of BANKAMERICA noted its patent ambiguity.
Notwithstanding, on the following day, BANKAMERICA credited the amount of
US$23,595.00 to the account of Minami. ACTC claimed that the amount should have
been credited to its account and demanded restitution, but BANKAMERICA refused.
On February 18, 1982, ACTC filed suit for damages against BANKAMERICA and
Minami before the Trial Court in Pasig for the failure of BANKAMERICA to restitute.
Trial court decided in favor of the respondent. CA also affirmed.
Issue: Whether or not there was a stipulation pour autrui.
Held: YES. In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "the
opening of a letter of credit in favor of the exporter becomes ultimately but the result of
a stipulation pour autrui" (27 SCRA 84 [1969]). Similarly, when KYOWA asked
BANK-AMERICA to pay an amount to a beneficiary (either ACTC or Minami),
the contract was between KYOWA and BANK-AMERICA and it had a
stipulation pour autrui.
It is our considered opinion that, in the tested telex, considered either as a patent
ambiguity or as a latent ambiguity, the beneficiary is Minami. The mention of Account
No. 24506-01-7, as well as the name of Minami, has to be given more weight than the
mention of the name of ACTC. BANKAMERICA could not have very well
disregarded that account number. It could also be that the mention of ACTC's name
was a further identification of Minami, to prevent payment to a possible another
"Toshiyuko Minami" who may not be connected with ACTC. On the other hand, it
should be difficult to concede that, in the tested telex, Account No. 24506-01-7 was
erroneously written and should be substituted by Account No. 19842-01-2 in the name
of ACTC.
It should be recalled that the tested telex originated from KYOWA at the behest of
Tokyo Tourist Corporation with whom ACTC had business dealings. Minami, on the
other hand, was the liaison officer of ACTC in Japan. As the entity responsible for the
tested telex was Tokyo Tourist Corporation, it can reasonably be concluded that if it
had intended that the US$23,595.00 should be credited to ACTC, upon learning that
the amount was credited to Minami, it should have gone, together with the
representatives of ACTC, in protest to KYOWA and lodged a protest. Since that was
not done, it could well be that Tokyo Tourist Corporation had really intended its
remittance to be credited to Minami. The identity of the beneficiary should be in
accordance with the identification made by KYOWA, and ACTC cannot question that
identification as it is not a party to the arrangement between KYOWA and
BANKAMERICA (see Manila Railroad Co. vs. Compaia Trasatlantica, 38 Phil. 875
[1918]).
Case: Marimperio Campaia Naviera, S.A. vs. CA and Union Import and Export
Corporation and Philippine Traders Corporation, Dec. 14, 1987, J. Paras.
Facts: In 1964 Philippine Traders Corporation and Union Import and Export
Corporation entered into a joint business venture for the purchase of copra from
Indonesia for sale in Europe. James Liu President and General Manager of the Union
took charge of the European market and the chartering of a vessel to take the copra to
Europe. Peter Yap of Philippine on the other hand, found one P.T. Karkam in Dumai
Sumatra who had around 4,000 tons of copra for sale. Exequiel Toeg of Interocean was
commissioned to look for a vessel and he found the vessel "SS Paxoi" of Marimperio
available. Philippine and Union authorized Toeg to negotiate for its charter but with
instructions to keep confidential the fact that they are the real charterers.
Consequently on March 21, 1965, in London England, a "Uniform Time Charter" for
the hire of vessel "Paxoi" was entered into by the owner, Marimperio Compania
Naviera, S.A. through its agents N. & J. Vlassopulos Ltd. and Matthews Wrightson,
Burbridge, Ltd. to be referred to simply as Matthews, representing Interocean Shipping
Corporation, which was made to appear as charterer, although it merely acted in behalf
of the real charterers, private respondents herein.
The Charterer was however twice in default in its payments which were supposed to
have been done in advance. Hence, Union Import and Export Corporation and
Philippine Traders Corporation filed a complaint with the Court of First Instance of
Manila, Branch VIII, against the Unknown Owners of the Vessel "SS Paxoi" for
specific performance with prayer for preliminary attachment. CFI rendered its decision
in favor of Marimperio and against UIEC. CA affirmed.
Issue: Whether or not UIEC has legal capacity to bring the suit for specific
performance against Marimperio based on the Charter Party.
Held: NO. It is obvious from the disclosure made in the charter party by the authorized
broker, the Overseas Steamship Co., Inc., that the real charterer is the Interocean
Shipping Company (which sublet the vessel to Union Import and Export Corporation
which in turn sublet it to Philippine Traders Corporation).
In a sub-lease, there are two leases and two distinct judicial relations although
intimately connected and related to each other, unlike in a case of assignment of lease,
where the lessee transmits absolutely his right, and his personality disappears; there
only remains in the juridical relation two persons, the lessor and the assignee who is
converted into a lessee (Moreno, Philippine Law Dictionary, 2nd ed., p. 594). In other
words, in a contract of sub-lease, the personality of the lessee does not disappear;
he does not transmit absolutely his rights and obligations to the sub-lessee; and
the sub-lessee generally does not have any direct action against the owner of the
premises as lessor, to require the compliance of the obligations contracted with
the plaintiff as lessee, or vice versa (10 Manresa, Spanish Civil Code, 438).
However, there are at least two instances in the Civil Code which allow the lessor to
bring an action directly (accion directa) against the sub-lessee (use and preservation of
the premises under Art. 1651, and rentals under Article 1652).
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Art. 1651 reads: Without prejudice to his obligation toward the sub-lessor, the sublessee is bound to the lessor for all acts which refer to the use and preservation of the
thing leased in the manner stipulated between the lessor and the lessee.
Article 1652 reads: The sub-lessee is subsidiarily liable to the lessor for any rent due
from the lessee. However, the sub-lessee shall not be responsible beyond the amount of
rent due from him, in accordance with the terms of the sub-lease, at the time of the
extra-judicial demand by the lessor.
Payments of rent in advance by the sub-lessee shall be deemed not to have been made,
so far as the lessor's claim is concerned, unless said payments were effected in virtue of
the custom of the place.
It will be noted however that in said two Articles it is not the sub-lessee, but the lessor,
who can bring the action. In the instant case, it is clear that the sub-lessee as such
cannot maintain the suit they filed with the trial court (See A. Maluenda and Co. v.
Enriquez, 46 Phil. 916).
In the law of agency "with an undisclosed principal, the Civil Code in Article 1883
reads:
If an agent acts in his own name, the principal has no right of action against the persons
with whom the agent has contracted; neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the person with whom he
has contracted, as if the transaction were his own, except when the contract involves
things belonging to the principal.
The provisions of this article shag be understood to be without prejudice to the actions
between the principal and agent.
While in the instant case, the true charterers of the vessel were the private respondents
herein and they chartered the vessel through an intermediary which upon instructions
from them did not disclose their names. Article 1883 cannot help the private
respondents, because although they were the actual principals in the charter of
the vessel, the law does not allow them to bring any action against the adverse
party and vice, versa.
Case: Geo Daywalt vs. La Corporacion De Los Padres Agustinos Recoletos, et al.,
J. Street.
Facts: In the year 1902, Teodorica Endencia, an unmarried woman, resident in the
Province of Mindoro, executed a contract whereby she obligated herself to convey to
Geo. W. Daywalt, a tract of land situated in the barrio of Mangarin, municipality of
Bulalacao, now San Jose, in said province. It was agreed that a deed should be
executed as soon as the title to the land should be perfected by proceedings in the Court
of Land Registration and a Torrens certificate should be produced therefore in the
name of Teodorica Endencia. A decree recognizing the right of Teodorica as owner
was entered in said court in August 1906, but the Torrens certificate was not issued
until later. The second contract was not immediately carried into effect for the reason
that the Torrens certificate was not yet obtainable and in fact said certificate was not
issued until the period of performance contemplated in the contract had expired. The
Torrens certificate was in time issued to Teodorica Endencia, but in the course of the
proceedings relative to the registration of the land, it was found by official survey that
the area of the tract inclosed in the boundaries stated in the contract was about 1.248
hectares of 452 hectares as stated in the contract. In view of this development

Teodorica Endencia became reluctant to transfer the whole tract to the purchaser,
asserting that she never intended to sell so large an amount of land and that she had
been misinformed as to its area.
This attitude of hers led to litigation in which Daywalt finally succeeded, upon appeal
to the Supreme Court, in obtaining a decree for specific performance; and Teodorica
Endencia was ordered to convey the entire tract of land to Daywalt pursuant to the
contract of October 3, 1908, which contract was declared to be in full force and effect.
When the Torrens certificate was finally issued in 1909 in favor of Teodorica
Endencia, she delivered it for safekeeping to the defendant corporation, and it was then
taken to Manila where it remained in the custody and under the control of P. Juan
Labarga the procurador and chief official of the defendant corporation, until the deliver
thereof to the plaintiff was made compulsory by reason of the decree of the Supreme
Court in 1914.
Agustines then entered into some arrangement with Endencia with the use of the land.
Daywalt, however, sued Agustines for unlawfully inducing Endencia to refrain from
the performance of her contract for the sale of land in question.
Issue: Whether La Corporacion may be held liable to the vendee, beyond the value of
the use and occupation of the land by colluding with the vendor.
Held: NO. Whatever may be the character of the liability which a stranger to a contract
may incur by advising or assisting one of the parties to evade performance, there is one
proposition upon which all must agree. This is, that the stranger cannot become
more extensively liable in damages for the nonperformance of the contract than
the party in whose behalf he intermeddles. To hold the stranger liable for
damages in excess of those that could be recovered against the immediate party to
the contract would lead to results at once grotesque and unjust. In the case at bar,
as Teodorica Endencia was the party directly bound by the contract, it is obvious that
the liability of the defendant corporation, even admitting that it has made itself
coparticipant in the breach of the contract, can in no even exceed hers. This leads us to
consider at this point the extent of the liability of Teodorica Endencia to the plaintiff by
reason of her failure to surrender the certificate of title and to place the plaintiff in
possession.
It should in the first place be noted that the liability of Teodorica Endencia for damages
resulting from the breach of her contract with Daywalt was a proper subject for
adjudication in the action for specific performance which Daywalt instituted against
her in 1909 and which was litigated by him to a successful conclusion in this court, but
without obtaining any special adjudication with reference to damages. Indemnification
for damages resulting from the breach of a contract is a right inseparably annexed to
every action for the fulfillment of the obligation (art. 1124, Civil Code); and its is clear
that if damages are not sought or recovered in the action to enforce performance they
cannot be recovered in an independent action. As to Teodorica Endencia, therefore, it
should be considered that the right of action to recover damages for the breach of the
contract in question was exhausted in the prior suit. However, her attorneys have not
seen fit to interpose the defense of res judicata in her behalf; and as the defendant
13

corporation was not a party to that action, and such defense could not in any event be
of any avail to it, we proceed to consider the question of the liability of Teodorica
Endencia for damages without refernce to this point.
The most that can be said with refernce to the conduct of Teodorica Endencia is that
she refused to carry out a contract for the sale of certain land and resisted to the last an
action for specific performance in court. The result was that the plaintiff was
prevented during a period of several years from exerting that control over the
property which he was entitled to exert and was meanwhile unable to dispose of
the property advantageously.
Case: C.S. Gilchrist vs. E.A. Cuddy, et al. and Jose Fernandez Espejo and
Mariano Zaldarriaga, Feb. 18, 1915, J. Trent.
Facts: Cuddy, a resident of Manila, was the owner of the "Zigomar;" that Gilchrist was
the owner of a cinematograph theater in Iloilo; that in accordance with the terms of the
contract entered into between Cuddy and Gilchrist the former leased to the latter the
"Zigomar" for exhibition in his (Gilchrist's) theater for the week beginning May 26,
1913; and that Cuddy willfully violate his contract in order that he might accept the
appellant's offer of P350 for the film for the same period. Espejo admitted that he knew
that Cuddy was the owner of the film. He received a letter from his agents in Manila
dated April 26, assuring him that he could not get the film for about six weeks. The
arrangement between Cuddy and the appellants for the exhibition of the film by the
latter on the 26th of May were perfected after April 26, so that the six weeks would
include and extend beyond May 26.
Issue: Whether or not there was interference.
Held: YES. In the case at bar the only motive for the interference with the Gilchrist
Cuddy contract on the part of the appellants was a desire to make a profit by exhibiting
the film in their theater. There was no malice beyond this desire; but this fact does
not relieve them of the legal liability for interfering with that contract and causing
its breach. It is, therefore, clear, under the above authorities, that they were liable
to Gilchrist for the damages caused by their acts, unless they are relieved from
such liability by reason of the fact that they did not know at the time the identity
of the original lessee (Gilchrist) of the film.
The liability of the appellants arises from unlawful acts and not from contractual
obligations, as they were under no such obligations to induce Cuddy to violate his
contract with Gilchrist. So that if the action of Gilchrist had been one for damages, it
would be governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902 of that
code provides that a person who, by act or omission, causes damages to another when
there is fault or negligence, shall be obliged to repair the damage do done. There is
nothing in this article which requires as a condition precedent to the liability of a tortfeasor that he must know the identity of a person to whom he causes damages. In fact,
the chapter wherein this article is found clearly shows that no such knowledge is
required in order that the injured party may recover for the damage suffered.
But the fact that the appellants' interference with the Gilchrist contract was actionable
did not of itself entitle Gilchrist to sue out an injunction against them.
Case: Estate of K.H. Hemady, deceased vs. Luzon Surety Co., Inc., Nov. 28, 1956,
J.B.L. Reyes.
Facts: The Luzon Surety Co. had filed a claim against the Estate based on twenty
different indemnity agreements, or counter bonds, each subscribed by a distinct
principal and by the deceased K. H. Hemady, a surety solidary guarantor) in all of
them, in consideration of the Luzon Surety Co.s of having guaranteed, the various
principals in favor of different creditors. The Luzon Surety Co., prayed for allowance,
as a contingent claim, of the value of the twenty bonds it had executed in consideration
of the counterbonds, and further asked for judgment for the unpaid premiums and
documentary stamps affixed to the bonds, with 12 per cent interest thereon. The lower
court dismissed the claims of Luzon Surety stating,
(1) that the premiums due and cost of documentary stamps were not contemplated
under the indemnity agreements to be a part of the undertaking of the guarantor
(Hemady), since they were not liabilities incurred after the execution of the
counterbonds; and
(2) that whatever losses may occur after Hemadys death, are not chargeable to his
estate, because upon his death he ceased to be guarantor.
Issue: Whether or not Luzon Surety can file against the estate a contingent claim for
reimbursement.
Held: YES. Our conclusion is that the solidary guarantors liability is not extinguished
by his death, and that in such event, the Luzon Surety Co., had the right to file against
the estate a contingent claim for reimbursement. It becomes unnecessary now to
discuss the estates liability for premiums and stamp taxes, because irrespective of the
solution to this question, the Luzon Suretys claim did state a cause of action, and its
dismissal was erroneous.
The foregoing concept is confirmed by the next Article 2057, that runs as follows:
ART. 2057. If the guarantor should be convicted in first instance of a crime
involving dishonesty or should become insolvent, the creditor may demand another
who has all the qualifications required in the preceding article. The case is excepted
where the creditor has required and stipulated that a specified person should be
guarantor.
From this article it should be immediately apparent that the supervening dishonesty of
the guarantor (that is to say, the disappearance of his integrity after he has become
bound) does not terminate the contract but merely entitles the creditor to demand a
replacement of the guarantor. But the step remains optional in the creditor: it is his
right, not his duty; he may waive it if he chooses, and hold the guarantor to his bargain.
Hence Article 2057 of the present Civil Code is incompatible with the trial courts
stand that the requirement of integrity in the guarantor or surety makes the latters
undertaking strictly personal, so linked to his individuality that the guaranty
automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co.
not being rendered intransmissible due to the nature of the undertaking, nor by the
stipulations of the contracts themselves, nor by provision of law, his eventual liability
14

thereunder necessarily passed upon his death to his heirs. The contracts, therefore, give
rise to contingent claims provable against his estate under section 5, Rule 87 (2 Moran,
1952 ed., p. 437; Gaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
The most common example of the contigent claim is that which arises when a person
is bound as surety or guarantor for a principal who is insolvent or dead. Under the
ordinary contract of suretyship the surety has no claim whatever against his principal
until he himself pays something by way of satisfaction upon the obligation which is
secured. When he does this, there instantly arises in favor of the surety the right to
compel the principal to exonerate the surety. But until the surety has contributed
something to the payment of the debt, or has performed the secured obligation in whole
or in part, he has no right of action against anybody no claim that could be reduced
to judgment. (May vs. Vann, 15 Pla., 553; Gibson vs. Mithell, 16 Pla., 519; Maxey vs.
Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7 Baxt. [Tenn.], 119; Ernst vs. Nou,
63 Wis., 134.)
Case Discussions:
Contracts take effect only as between the parties, their assigns and heirs, except in
the case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. While in our
successional system the responsibility of the heirs for the debts of their decedent cannot
exceed the value of the inheritance they receive from him, the principle remains intact
that these heirs succeed not only to the rights of the deceased but also to his
obligations. The principle on which these decisions rest is not affected by the
provisions of the new Code of Civil Procedure, and, in accordance with that principle,
the heirs of a deceased person cannot be held to be third persons in relation to any
contracts touching the real estate of their decedent which comes in to their hands by
right of inheritance; they take such property subject to all the obligations resting
thereon in the hands of him from whom they derive their rights. The binding effect of
contracts upon the heirs of the deceased party is not altered by the provision in our
Rules of Court that money debts of a deceased must be liquidated and paid from his
estate before the residue is distributed among said heirs (Rule 89). The reason is that
whatever payment is thus made from the estate is ultimately a payment by the heirs and
distributees, since the amount of the paid claim in fact diminishes or reduces the shares
that the heirs would have been entitled to receive.
General rule: A partys contractual rights and obligations are transmissible to the
successors. Ratio: The rule is a consequence of the progressive depersonalization of
patrimonial rights and duties that, as observed by Victorio Polacco, has characterized
the history of these institutions. From the Roman concept of a relation from person to
person, the obligation has evolved into a relation from patrimony to patrimony, with
the persons occupying only a representative position, barring those rare cases where
the obligation is strictly personal, i.e., is contracted intuitu personae, in consideration
of its performance by a specific person and by no other. The transition is marked by the
disappearance of the imprisonment for debt.
Exceptions:
1.
2.
3.
The nature of the obligation of the surety or guarantor does not warrant the
conclusion that his peculiar individual qualities are contemplated as a
principal inducement for the contract.
Intransmissibility by stipulation of the parties. Being exceptional and contrary
to the general rule, this intransmissibility should not be easily implied, but
must be expressly established, or at the very least, clearly inferable from the
provisions of the contract itself, and the text of the agreements sued upon
nowhere indicate that they are non-transferable. Because under the law
(Article 1311), a person who enters into a contract is deemed to have
contracted for himself and his heirs and assigns, it is unnecessary for him to
expressly stipulate to that effect; hence, his failure to do so is no sign that he
intended his bargain to terminate upon his death. Similarly, that the Luzon
Surety Co., did not require bondsman Hemady to execute a mortgage
indicates nothing more than the companys faith and confidence in the
financial stability of the surety, but not that his obligation was strictly
personal.
Not transmissible by operation of law.
a. The provision makes reference to those cases where the law
expresses that the rights or obligations are extinguished by death, as
is the case in legal support (Article 300), parental authority (Article
327), usufruct (Article 603), contracts for a piece of work (Article
1726), partnership (Article 1830 and agency (Article 1919). By
contract, the articles of the Civil Code that regulate guaranty or
suretyship (Articles 2047 to 2084) contain no provision that the
guaranty is extinguished upon the death of the guarantor or the
surety.
Case: So Ping Bun vs. CA and Tek Hua Enterprises Corp. and Manuel Tiong,
September 21, 1999, J. Quisumbing.
Facts: In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok,
entered into lease agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI). Subjects
of four (4) lease contracts were premises located at Nos. 930, 930-Int., 924-B and 924C, Soler Street, Binondo, Manila. Tek Hua used the areas to store its textiles. The
contracts each had a one-year term. They provided that should the lessee continue to
occupy the premises after the term, the lease shall be on a month-to-month basis.
When the contracts expired, the parties did not renew the contracts, but Tek Hua
continued to occupy the premises. In 1976, Tek Hua Trading Co. was dissolved. Later,
the original members of Tek Hua Trading Co. including Manuel C. Tiong, formed Tek
Hua Enterprising Corp., herein respondent corporation.
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's
grandson, petitioner So Ping Bun, occupied the warehouse for his own textile business,
Trendsetter Marketing.
On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises,
informing the latter of the 25% increase in rent effective September 1, 1989. The rent
increase was later on reduced to 20% effective January 1, 1990, upon other lessees'
demand. Again on December 1, 1990, the lessor implemented a 30% rent increase.
15

Enclosed in these letters were new lease contracts for signing. DCCSI warned that
failure of the lessee to accomplish the contracts shall be deemed as lack of interest on
the lessee's part, and agreement to the termination of the lease. Private respondents did
not answer any of these letters. Still, the lease contracts were not rescinded.
Petitioner refused to vacate. On March 4, 1992, petitioner requested formal contracts of
lease with DCCSI in favor Trendsetter Marketing. So Ping Bun claimed that after the
death of his grandfather, So Pek Giok, he had been occupying the premises for his
textile business and religiously paid rent. DCCSI acceded to petitioner's request. The
lease contracts in favor of Trendsetter were executed. In the suit for injunction, private
respondents pressed for the nullification of the lease contracts between DCCSI and
petitioner. They also claimed damages. Trial court ruled in annulling the contract of
lease between So Ping Bun and Dee. CA upheld trial courts decision.
Issue: Whether or not So Ping Bun is guilty of tortuous interference of contract.
Held: YES. The elements of tort interference are:
(1) existence of a valid contract;
(2) knowledge on the part of the third person of the existence of contract; and
(3) interference of the third person is without legal justification or excuse.
A duty which the law of torts is concerned with is respect for the property of others,
and a cause of action ex delicto may be predicated upon an unlawful interference by
one person of the enjoyment by the other of his private property. This may pertain to a
situation where a third person induces a party to renege on or violate his undertaking
under a contract. In the case before us, petitioner's Trendsetter Marketing asked DCCSI
to execute lease contracts in its favor, and as a result petitioner deprived respondent
corporation of the latter's property right. Clearly, and as correctly viewed by the
appellate court, the three elements of tort interference above-mentioned are present in
the instant case.
Authorities debate on whether interference may be justified where the defendant acts
for the sole purpose of furthering his own financial or economic interest. One view is
that, as a general rule, justification for interfering with the business relations of another
exists where the actor's motive is to benefit himself. Such justification does not exist
where his sole motive is to cause harm to the other. Added to this, some authorities
believe that it is not necessary that the interferer's interest outweigh that of the party
whose rights are invaded, and that an individual acts under an economic interest that is
substantial, not merely de minimis, such that wrongful and malicious motives are
negatived, for he acts in self-protection. Moreover justification for protecting one's
financial position should not be made to depend on a comparison of his economic
interest in the subject matter with that of others. It is sufficient if the impetus of his
conduct lies in a proper business interest rather than in wrongful motives.
As early as Gilchrist vs. Cuddy, we held that where there was no malice in the
interference of a contract, and the impulse behind one's conduct lies in a proper
business interest rather than in wrongful motives, a party cannot be a malicious
interferer. Where the alleged interferer is financially interested, and such interest
motivates his conduct, it cannot be said that he is an officious or malicious
intermeddler.
In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to
lease the warehouse to his enterprise at the expense of respondent corporation. Though
petitioner took interest in the property of respondent corporation and benefited from it,
nothing on record imputes deliberate wrongful motives or malice on him.
Case: Nicolas Sanchez vs. Severina Rigos, June 14, 1972, J. Concepcion.
Facts: On April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos
executed an instrument entitled "Option to Purchase," whereby Mrs. Rigos "agreed,
promised and committed ... to sell" to Sanchez the sum of P1,510.00, a parcel of land
situated in the barrios of Abar and Sibot, municipality of San Jose, province of Nueva
Ecija, within two (2) years from said date with the understanding that said option shall
be deemed "terminated and elapsed," if "Sanchez shall fail to exercise his right to buy
the property" within the stipulated period. Inasmuch as several tenders of payment of
the sum of Pl,510.00, made by Sanchez within said period, were rejected by Mrs.
Rigos, on March 12, 1963, the former deposited said amount with the Court of First
Instance of Nueva Ecija and commenced against the latter the present action, for
specific performance and damages. Rigos contended that the contract between the
parties "is a unilateral promise to sell, and the same being unsupported by any valuable
consideration, by force of the New Civil Code, is null and void". Accordingly, on
February 28, 1964, the lower court rendered judgment for Sanchez, ordering Mrs.
Rigos to accept the sum judicially consigned by him and to execute, in his favor, the
requisite deed of conveyance.
Issue: Whether or not there was a perfected contract of sale.
Held: YES. However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua
Hian Tek, 8 decided later that Southwestern Sugar & Molasses Co. v. Atlantic Gulf &
Pacific Co., 9 saw no distinction between Articles 1324 and 1479 of the Civil Code and
applied the former where a unilateral promise to sell similar to the one sued upon here
was involved, treating such promise as an option which, although not binding as a
contract in itself for lack of a separate consideration, nevertheless generated a bilateral
contract of purchase and sale upon acceptance. Speaking through Associate Justice,
later Chief Justice, Cesar Bengzon, this Court said:
Furthermore, an option is unilateral: a promise to sell at the price fixed whenever the
offeree should decide to exercise his option within the specified time. After accepting
the promise and before he exercises his option, the holder of the option is not bound to
buy. He is free either to buy or not to buy later. In this case, however, upon accepting
herein petitioner's offer a bilateral promise to sell and to buy ensued, and the
respondent ipso facto assumed the obligation of a purchaser. He did not just get the
right subsequently to buy or not to buy. It was not a mere option then; it was a bilateral
contract of sale.
Lastly, even supposing that Exh. A granted an option which is not binding for lack of
consideration, the authorities hold that:
"If the option is given without a consideration, it is a mere offer of a contract of sale,
which is not binding until accepted. If, however, acceptance is made before a
withdrawal, it constitutes a binding contract of sale, even though the option was not
16

supported by a sufficient consideration. ... . (77 Corpus Juris Secundum, p. 652. See
also 27 Ruling Case Law 339 and cases cited.)
"It can be taken for granted, as contended by the defendant, that the option contract was
not valid for lack of consideration. But it was, at least, an offer to sell, which was
accepted by letter, and of the acceptance the offerer had knowledge before said offer
was withdrawn. The concurrence of both acts the offer and the acceptance could
at all events have generated a contract, if none there was before (arts. 1254 and 1262 of
the Civil Code)." (Zayco vs. Serra, 44 Phil. 331.)
In other words, since there may be no valid contract without a cause or
consideration, the promisor is not bound by his promise and may, accordingly,
withdraw it. Pending notice of its withdrawal, his accepted promise partakes,
however, of the nature of an offer to sell which, if accepted, results in a perfected
contract of sale.
Case: Tong Brothers Co vs. IAC and Juliano and Company, Dec. 21, 1987, J.
Gutierrez Jr.
Facts: The petitioner is a registered general partnership engaged in the construction
and repair of vessels with drydocking facilities at Recodo Zamboanga del Sur while the
private respondent is a domestic corporation engaged in the coastwise shipping
industry operating for that purpose the vessel M/S Zamboanga-J.
Sometime in December, 1974, the private respondent allegedly contracted with the
petitioner the annual drydocking and repair of the Zamboanga-J. On the ground that the
petitioner did not complete and execute all the work necessary, essential and
indispensable to rendering the vessel seaworthy resulting in its deterioration and total
loss, the private respondent filed a complaint against the petitioner for specific
performance and damages with the Court of First Instance of Cotabato.
The petitioner denied that there was a perfected contract to repair Zamboanga-J
between the two parties.
Issue: Whether or not there was a perfected contract between the petitioner and the
private respondents to repair the vessel Zamboanga-J.
Held: NO. There was not yet a meeting of the minds as to the cause of the contract.
The cause of a contract has been defined "as the essential reason which moves the
contracting parties to enter into it (8 Manresa, 5th Edition, p. 450). In other words, the
cause is the immediate, direct and proximate reason which justifies the creation of an
obligation thru the will of the contracting parties (3 Castan, 4th Edition, p. 347)."
(General Enterprises, Inc. v. Lianga Bay Logging Co., Inc., 11 SCRA 733, 739). For
the private respondent, the cause of the contract was the repair of its vessel
Zamboanga-J while for the petitioner the cause would be its commitment to repair the
vessel and make it seaworthy. The telegrams dated January 17, January 20, and
January 28, 1975 sent by the petitioner to the private respondent, however,
indicate that the former had not accepted the repair of Zamboanga-J, the reason
being that the extent of the repair to be made necessitated a major expense so that
the petitioner insisted on the presence of the private respondent for evaluation
before it accepted the repair of the wooden vessel. That the petitioner had not yet
consented to the contract is evident when on January 28, 1975, it sent a telegram
stating: "... NO AGREEMENT AS TO THE EX TENT OF REPAIRS AND PAYMENT
WILL UNDOCK VESSEL." The fact that the private respondent who received this
telegram ignored it, confirms that there was no perfected contract to repair ZamboangaJ.
It is to be noted that despite its knowledge of Zamboanga-J having been undocked as
early as February 7, 1975 when the petitioner sent a telegram advising that
Zamboanga-J undocked already, " the private respondent took no action to save its
vessel. Instead, its officers and crew were ordered ashore and the vessel was left to rot
and decay in the sea of Zamboanga. It was only on July 28, 1975, after the lapse of
almost six months, that the private respondent tried to recover the value of its vessel
from the petitioner.
Under the circumstances, we rule that the proximate cause of the total loss of
Zamboanga-J was the negligence of the private respondent. Breach of contract by the
appellant could not have been the proximate cause as there was no perfected contract
between the parties to repair Zamboanga-J. Hence, the private respondent is not
entitled to recover damages against the private respondent.
Case: Lorenzo Velasco and Socorro Velasco vs. CA and Magdalena Estate, Inc.,
June 29, 1973, J. Castro.
Facts: This is a suit for specific performance filed by Lorenzo Velasco against the
Magdalena Estate, Inc. on the allegation that on November 29, 1962 the plaintiff and
the defendant had entered into a contract of sale by virtue of which the defendant
offered to sell the plaintiff and the plaintiff in turn agreed to buy a parcel of land at No.
39 corner 6th Street and Pacific Avenue, New Manila, this City, for the total purchase
price of P100,000.00. It is alleged by the plaintiff that the agreement was that the
plaintiff was to give a down payment of P10,000.00 to be followed by P20,000.00 and
the balance of P70,000.00 would be paid in installments, the equal monthly
amortization of which was to be determined as soon as the P30,000.00 down payment
had been completed. It is further alleged that the plaintiff paid down payment of
P10,000.00 on November 29, 1962 as per receipt No. 207848 and that when on January
8, 1964 he tendered to the defendant the payment of the additional P20,000.00 to
complete the P30,000.00 the defendant refused to accept and that eventually it likewise
refused to execute a formal deed of sale obviously agreed upon. The plaintiff demands
P25,000.00 exemplary damages, P2,000.00 actual damages and P7,000.00 attorney's
fees.
The defendant, in its Answer, denies that it has had any direct dealings, much less,
contractual relations with the plaintiff regarding the property in question, and
contends that the alleged contract is entirely unenforceable under the Statute of
Frauds.
Issue: Whether or not a contract of sale was perfected although the parties did not
agree yet as to the manner of payment.
Held: NO. It is not difficult to glean from the aforequoted averments that the
petitioners themselves admit that they and the respondent still had to meet and agree on
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how and when the down-payment and the installment payments were to be paid. Such
being the situation, it cannot, therefore, be said that a definite and firm sales agreement
between the parties had been perfected over the lot in question. Indeed, this Court has
already ruled before that a definite agreement on the manner of payment of the
purchase price is an essential element in the formation of a binding and unforceable
contract of sale. 3 The fact, therefore, that the petitioners delivered to the respondent the
sum of P10,000 as part of the down-payment that they had to pay cannot be considered
as sufficient proof of the perfection of any purchase and sale agreement between the
parties herein under article 1482 of the new Civil Code, as the petitioners themselves
admit that some essential matter the terms of payment still had to be mutually
covenanted.
Case: Pentacapital Investment Corp. vs. Makilito Mahinay, July 5, 2010, J.
Nachura.
Facts: Petitioner filed a complaint for a sum of money against respondent Makilito
Mahinay based on two separate loans obtained by the latter, amounting to
P1,520,000.00 and P416,800.00, or a total amount of P1,936,800.00. These loans were
evidenced by two promissory notes dated February 23, 1996. Despite repeated
demands, respondent failed to pay the loans, hence, the complaint. In his Answer with
Compulsory Counterclaim, respondent claimed that petitioner had no cause of action
because the promissory notes on which its complaint was based were subject to a
condition that did not occur. While admitting that he indeed signed the promissory
notes, he insisted that he never took out a loan and that the notes were not intended to
be evidences of indebtedness. By way of counterclaim, respondent prayed for the
payment of moral and exemplary damages plus attorneys fees. In this case, respondent
denied liability on the ground that the promissory notes lacked consideration as he did
not receive the proceeds of the loan.
Issue: Whether or not the respondent is bound by the promissory note.
Held: YES. In its complaint for sum of money, petitioner prayed that respondent be
ordered to pay his obligation amounting to P1,936,800.00 plus interest and penalty
charges, and attorneys fees. This obligation was evidenced by two promissory notes
executed by respondent. Respondent, however, denied liability on the ground that his
obligation was subject to a condition that did not occur. He explained that the
promissory notes were dependent upon the happening of a remote event that the parties
tried to anticipate at the time they transacted with each other, and the event did not
happen.36 He further insisted that he did not receive the proceeds of the loan. To
ascertain whether or not respondent is bound by the promissory notes, it must be
established that all the elements of a contract of loan are present. Like any other
contract, a contract of loan is subject to the rules governing the requisites and validity
of contracts in general. It is elementary in this jurisdiction that what determines the
validity of a contract, in general, is the presence of the following elements: (1) consent
of the contracting parties; (2) object certain which is the subject matter of the contract;
and (3) cause of the obligation which is established.
Under Article 1354 of the Civil Code, it is presumed that consideration exists and
is lawful unless the debtor proves the contrary. Moreover, under Section 3, Rule
131 of the Rules of Court, the following are disputable presumptions: (1) private
transactions have been fair and regular; (2) the ordinary course of business has
been followed; and (3) there was sufficient consideration for a contract. A
presumption may operate against an adversary who has not introduced proof to rebut it.
The effect of a legal presumption upon a burden of proof is to create the necessity of
presenting evidence to meet the legal presumption or the prima facie case created
thereby, and which, if no proof to the contrary is presented and offered, will prevail.
The burden of proof remains where it is, but by the presumption, the one who has
that burden is relieved for the time being from introducing evidence in support of
the averment, because the presumption stands in the place of evidence unless
rebutted.
In the present case, as proof of his claim of lack of consideration, respondent denied
under oath that he owed petitioner a single centavo. He added that he did not apply for
a loan and that when he signed the promissory notes, they were all blank forms and all
the blank spaces were to be filled up only if the sale transaction over the subject
properties would not push through because of a possible adverse decision in the civil
cases involving them (the properties). He thus posits that since the sale pushed through,
the promissory notes did not become effective. Contrary to the conclusions of the RTC
and the CA, we find such proof insufficient to overcome the presumption of
consideration. The presumption that a contract has sufficient consideration cannot be
overthrown by the bare, uncorroborated and self-serving assertion of respondent that it
has no consideration. The alleged lack of consideration must be shown by
preponderance of evidence.
Case: Agustino Ong Yiu vs. CA and Philippine Air Lines, Inc., June 29, 1979, J.
Melencio-Herrera.
Facts: On August 26, 1967, petitioner was a fare paying passenger of respondent
Philippine Air Lines, Inc. (PAL), on board Flight No. 463-R, from Mactan Cebu,
bound for Butuan City. He was scheduled to attend the trial of Civil Case No. 1005 and
Spec. Procs. No. 1125 in the Court of First Instance, Branch II, thereat, set for hearing
on August 28-31, 1967. As a passenger, he checked in one piece of luggage, a blue
"maleta" for which he was issued Claim Check No. 2106-R. The plane left Mactan
Airport, Cebu, at about 1:00 o'clock P.M., and arrived at Bancasi airport, Butuan City,
at past 2:00 o'clock P.M., of the same day. Upon arrival, petitioner claimed his luggage
but it could not be found. The next day, the missing luggage was delivered to him but
with folder containing certain exhibits, transcripts and private documents in Civil Case
No. 1005 and Sp. Procs. No. 1126 were missing, aside from two gift items for his
parents-in-law. Petitioner refused to accept the luggage. Dagorro returned it to the
porter clerk, Maximo Gomez, who sealed it and forwarded the same to PAL Cebu.
Meanwhile, petitioner asked for postponement of the hearing of Civil Case No. 1005
due to loss of his documents, which was granted by the Court. Hence, Ong filed a
complaint against PAL for damages for breach of contract of transportation. Trial court
found PAL to have acted in bad faith and awarded moral damages amounting to 80,000
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and exemplary damages, 30,000, with attorneys fees, 5,000. However, CA only found
PAL guilty of simple negligence and revered the decision of trial court granting moral
and exemplary damages to Ong but ordered PAL to pay Ong the sum of 100.00, the
baggage liability assumed by the former under the condition of carriage at the back
of the ticket.
Issue: Whether or not Ong and PAL entered into a contract which limited PALs
liability on lost documents of Ong.
Held: YES. We agree with the foregoing finding. The pertinent Condition of Carriage
printed at the back of the plane ticket reads:
8. BAGGAGE LIABILITY ... The total liability of the Carrier for lost or damaged
baggage of the passenger is LIMITED TO P100.00 for each ticket unless a passenger
declares a higher valuation in excess of P100.00, but not in excess, however, of a total
valuation of P1,000.00 and additional charges are paid pursuant to Carrier's tariffs.
There is no dispute that petitioner did not declare any higher value for his luggage,
much less did he pay any additional transportation charge.
But petitioner argues that there is nothing in the evidence to show that he had actually
entered into a contract with PAL limiting the latter's liability for loss or delay of the
baggage of its passengers, and that Article 1750* of the Civil Code has not been
complied with.
While it may be true that petitioner had not signed the plane ticket, he is nevertheless
bound by the provisions thereof. "Such provisions have been held to be a part of the
contract of carriage, and valid and binding upon the passenger regardless of the latter's
lack of knowledge or assent to the regulation". It is what is known as a contract of
"adhesion", in regards which it has been said that contracts of adhesion wherein one
party imposes a ready made form of contract on the other, as the plane ticket in the case
at bar, are contracts not entirely prohibited. The one who adheres to the contract is in
reality free to reject it entirely; if he adheres, he gives his consent. And as held in
Randolph v. American Airlines, 103 Ohio App. 172, 144 N.E. 2d 878; Rosenchein vs.
Trans World Airlines, Inc., 349 S.W. 2d 483, "a contract limiting liability upon an
agreed valuation does not offend against the policy of the law forbidding one from
contracting against his own negligence.
Considering, therefore, that petitioner had failed to declare a higher value for his
baggage, he cannot be permitted a recovery in excess of P100.00.Besides, passengers
are advised not to place valuable items inside their baggage but "to avail of our Vcargo service ". I t is likewise to be noted that there is nothing in the evidence to show
the actual value of the goods allegedly lost by petitioner.
Case: Weldon Construction Corp. vs. CA and Manuel Cancio, Oct. 12, 1987, J.
Cortes.
Facts: In 1961 Lucio Lee, whose name was later changed to Lucio Lee Rodriguez, was
doing business under the trade name Weldon Construction, the predecessor-in-interest
of the herein petitioner, WELDON CONSTRUCTION CORPORATION. The latter
corporation was incorporated in July, 1963 as a closed corporation composed of Lucio
Tee (owner of Weldon Construction), his wife, his sister and the latter's husband, and a
cousin. The assets of Weldon Construction were transferred to, and its liabilities
assumed by the new corporation. Hence, the instant case was brought by WELDON
CONSTRUCTION CORPORATION as successor-in-interest of Weldon Construction
and Lucio Lee.
Prior to March 7, 1961, Lucio Lee drafted plans for a theater-apartment building which
private respondent Cancio intended to put up. Thereafter, on March 7, 1961, he
submitted to the latter a proposal for the supervision of the construction of said
building on commission basis. The proposal was signed not by Lee but by his office
manager, Antonio Wong. The private respondent never affixed his signature on the
document.
Among the provisions Contained in the proposal was the setting up of a revolving fund
of P10,000.00 Pesos for the costs and expenditures to be incurred in the construction of
the building, such as materials and labor among others. The fund was to be replenished
by the owner of the building from time to time (Id). The proposal also provided for the
payment to Weldon Construction of a commission of ten per cent (10%) of the total
cost of the building.
Issue: Whether or not the contract providing for the commission of Weldon was
perfected.
Held: NO. In view of all the foregoing considerations this Court finds that the
agreement between the parties is the contract of construction for a stipulated price
which is akin to a contract for a piece of work defined in the aforequoted article. Both
parties having fully performed their reciprocal obligations in accordance with said
contract, petitioner is estopped from invoking an entirely different agreement so as to
demand additional consideration. Once a contract has been consummated, there is
nothing left to be done or to be demanded by the parties thereto. All obligations arising
from the contract are extinguished.
As set by the parties, the consideration for the construction of the Gay Theater building
is P600,000.00 Pesos which amount has been fully paid by the private respondent.
There is no basis for the petitioner's demand for the payment of P62,378.83 Pesos
as commission of ten per cent (10%) of the total cost of construction.
The first proposal submitted by Weldon Construction for rendering service under a
contract of supervision (Exhibit "A") is simply that, a proposal. It never attained
perfection as the contract between the parties. Only an absolute or unqualified
acceptance of a definite offer manifests the consent necessary to perfect a contract
(Article 1319, New Civil Code). The advance payment of P10,000.00 Pesos was not an
unqualified acceptance of the offer contained in the first proposal (Exhibit "A") as in
fact an entirely new proposal (Exhibit "4") was submitted by Weldon Construction
subsequently. If, as claimed by the petitioner, the parties had already agreed upon a
contract of supervision under Exhibit "A," why then was a second proposal made? Res
ipsa loquitur. The existence of the second proposal belies the perfection of any contract
arising from the first proposal .
Case: C & C Commercial Corp. vs. Antonio Menor (Acting as Gen. Manager of
National Waterworks and Sewerage Authority) and Members of the Committee on
Pre-qualification, NAWASA, Jan. 27, 1983, J. Aquino.
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Facts: Judge Cloribel of the Court of First Instance of Manila in his decision dated
March 1, 1967 in Civil Case No. 66750, a mandamus case, ordered the Acting General
Manager of the National Waterworks and Sewerage Authority and the members of the
Committee on Pre-Qualification to allow C & C Commercial Corporation to participate
as a qualified bidder in the public bidding for the supply of asbestos cement pressure
pipes to the Nawasa in spite of the fact that it had a pending tax case and had no tax
clearance certificate. By virtue of that judgment, which became final because the
Nawasa did not appeal, C & C Commercial Corporation took part in the bidding. When
the bids were opened on May 18, 1967, it was found to be the lowest bidder. Judge
Cloribel in his order of August 23, 1967 granted the motion and ordered Menor and
the other Nawasa officials to award within ten days from notice the contract to C &
C Commercial Corporation as the lowest bidder. From that order, the Nawasa
appealed to this Court. Judge Cloribel approved its record on appeal in his order of
November 9, 1967. Realizing that the appeal would delay the award and that another
bidder might be given the contract, C & C Commercial Corporation filed in the lower
court another petition for mandamus dated November 21, 1967 wherein it prayed that
the Nawasa Board of Directors, its Committee of Awards and Menor, its acting general
manager, be restrained from awarding the contract to another bidder and that they be
ordered to award the contract to C & C Commercial Corporation.
Issue: Whether or not NAWASA can be compelled to award the contract to C & C as
the lowest bidder thereof.
Held: NO. It was not the ministerial duty of the Nawasa officials to award the contract
to C & C Commercial Corporation even if it was the lowest bidder, The Nawasa in its
addendum No.1 to the invitation to bid dated July 6, 1966 reserved the right "to reject
the bid of any bidder" (p. 35, Record on Appeal).
Therefore, a bidder whose bid is rejected has no cause for complaint nor a right to
dispute the award to another bidder (Esguerra & Sons vs. Aytona, 114 Phil. 1189;
Surigao Mineral Reservation Board vs. Cloribel, L-27072, July 31, 1968, 24 SCRA
491).
It should be noted that "advertisements for bidders are simply invitations to make
proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless
the contrary appears" (Art. 1326, Civil Code). No such contrary intention appears in
this case. Moreover, the Nawasa was justified in not awarding the contract- to C & C
Commercial Corporation because it had no tax clearance certificate. It had a pending
tax case in the Bureau of Internal Revenue. The award to C & C Commercial
Corporation would be in gross contravention of Administrative Order No. 66.
That was the ruling in Nawasa vs. Reyes, L-28597, February 29, 1968, 22 SCRA 905,
where the bidder was also the appellee herein, C & C Commercial Corporation. It was
held therein that C & C Commercial Corporation was disqualified under the said order
to take part in the bidding to supply the Nawasa with steel pipes because it had
"tremendous tax liabilities".
Case: Vicente Tang vs. CA and Phil. American Life Insurance Company (PALIC),
May 25, 1979, J. Abad Santos.
Facts: On September 25, 1965, Lee See Guat, a widow, 61 years old, and an illiterate
who spoke only Chinese, applied for an insurance on her life for P60,000 with the
respondent Company. The application consisted of two parts, both in the English
language. The second part of her application dealt with her state of health and because
her answers indicated that she was healthy, the Company issued her Policy No.
0690397, effective October 23, 1965, with her nephew Vicente E. Tang, herein
Petitioner, as her beneficiary,
On November 15, 1965, Lee See Guat again applied with the respondent Company for
an additional insurance on her life for P40,000. Considering that her first application
had just been approved, no further medical examination was made. On April 20, 1966,
Lee See Guat died of lung cancer. Thereafter, the beneficiary of the two policies,
Vicente E. Tang claimed for their face value in the amount of P100,000 which the
insurance company refused to pay on the ground that the insured was guilty of
concealment and misrepresentation at the time she applied for the two policies. Hence,
the filing of Civil Case No. 90062 in the Court of First Instance of Manila which
dismissed the claim because of the concealment practised by the insured in violation of
the Insurance Law. CA affirmed the decision of the CFI.
Issue: Whether or not it is PALICs obligation to explain the terms of the contract to
an illiterate insured.
Held: NO. It should be noted that under Art. 1332 above quoted, the obligation to
show that the terms of the contract had been fully explained to the party who is unable
to read or understand the language of the contract, when fraud or mistake is alleged,
devolves on the party seeking to enforce it. Here the insurance company is not seeking
to enforce the contracts; on the contrary, it is seeking to avoid their performance. It is
petitioner who is seeking to enforce them even as fraud or mistake is not alleged.
Accordingly, respondent company was under no obligation to prove that the terms of
the insurance contracts were fully explained to the other party. Even if we were to say
that the insurer is the one seeking the performance of the contracts by avoiding paying
the claim, it has to be noted as above stated that there has been no imputation of
mistake or fraud by the illiterate insured whose personality is represented by her
beneficiary the petitioner herein. In sum, Art. 1332 is inapplicable to the case at bar.
Considering the findings of both the CFI and Court of Appeals that the insured was
guilty of concealment as to her state of health, we have to affirm.
Case: Juanito Cario and Cirila Vicencio vs. CA and Pablo Encabo, Juanita De
los Santos and Land Authority, July 31, 1987, J. Padilla.
Facts: On 22 January 1954, Pablo Encabo formally applied with the Land Estates
Division, Bureau of Lands, to purchase a parcel of land designated as Lot 1, Block 4,
Plan Psd-24819, which was a part of the Tuason Estate purchased by the government
pursuant to the provisions of Commonwealth Act No. 539, for resale to bona fide
tenants or occupants who are qualified to own public land in the Philippines.
Thereafter, Encabo, through petitioner Cirila Vicencio, supposedly as "agent, " came to
an agreement with Josue Quesada transferring rights over the lot to the latter,
conditioned on approval by the Land Tenure Administration (LTA, for short). The
20

transfer of rights by Encabo to Quesada was not put in writing but payment of the price
for the rights transferred was evidenced by receipts. In November (undated) 1958,
Encabo executed a Deed of Sale of House and Transfer of Rights (Exh. "D-1"),
purportedly conveying to herein petitioners (Juanito Cario and Cirila Vicencio), his
rights over the lot, subject to approval of the LTA. On 17 December 1958, Encabo
wrote a letter to the LTA (Exh. "1") requesting permission to transfer his rights. On 19
April 1960, Juanito Cario filed a petition with the LTA seeking approval of the
transfer to herein petitioners of rights to the lot in question on the basis of the Deed of
Sale of House and Transfer of Rights executed by Pablo Encabo (Exh. "D-1"). The
petition of Juanito Cario was docketed as LTA Case No. 490, to which respondent
Pablo Encabo objected and filed an Answer in opposition thereto. LTA ruled in
maintaining the status quo. Cario appealed to Office of the President and refused to
give up possession of the land. Hence, Encobo filed an action in CFI of Manila
declaring them as owners. Lower court favored Encobo. CA affirmed.
Issue: Whether or not Deed of Sale of House and Transfer of Rights on which the
petitioners have based their application over the questioned lot is simulated and
therefore an inexistent deed of sale.
Held: YES. This Court finds that there is substantial and convincing evidence that
Exhibit "D-1" was a simulated deed of sale and transfer of rights, to warrant the
affirmance of the decision of the respondent Court of Appeals. The characteristic of
simulation is the fact that the apparent contract is not really desired or intended to
produce legal effects nor in any way alter the judicial situation of the parties. 13 Under
the circumstances surrounding their transaction, the parties knew that the document
Exhibit "D-1" was at once fictitious and simulated where none of the parties intended
to be bound thereby. Strongly indicative of the simulated character of Exhibit ,"D-1" is
the fact that the Carios could not produce the receipts evidencing their alleged
payments to the Land Authority for the disputed lot, nor were they able to produce the
Agreement to Sell.
Contracts of sale are void and produce no effect whatsoever where the price, which
appears therein as paid, has in fact never been paid by the vendee to the vendor. A sale
of land without consideration, but intended merely to protect a party to a joint venture
for the cash advances he was to make for the realty subdivision that the parties wanted
to put up, is null and void. The law is clear on this matter. The Civil Code provides:
Art. 1409. The following contracts are inexistent and void from the beginning:
xxx
xxx
xxx
(2) Those which are absolutely simulated or fictitious;
xxx
xxx
xxx
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.
Furthermore, even without going into the merits and/or validity of Exhibit "D-1", it is
clear that there has been no legal transfer of rights in favor of the Carios because
neither the LTA nor the Land Authority has approved or given due course to such
transfer of rights.25 The LTA never waived its right to approve the transfer of rights. It
only ruled that the status quo will be maintained so long as the Court has not yet ruled
on the authenticity of document Exhibit "D-1". The ownership of the lot by the Carios
is still contingent on the approval of the LTA upon their compliance with all the
requirements of the latter. Since no approval or due course has yet been given by the
LTA or LA to such transfer of rights, the document Exhibit "D-1" is not enforceable
against the latter.
Case: Manuel Lagunzad vs. Maria Soto Vda. De Gonzales and CA, Aug. 6, 1979, J.
Melencio-Herrera.
Facts: The present controversy stems from a "Licensing Agreement" entered into by
and between petitioner Manuel M. Lagunzad and private respondent Maria Soto Vda.
de Gonzales on October 5, 1961, which contract petitioner claims to be null and void
for having been entered into by him under duress, intimidation and undue influence.
The antecedental facts follow: Sometime in August, 1961, petitioner Manuel
Lagunzad, a newspaperman, began the production of a movie entitled "The Moises
Padilla Story" under the name of his own business outfit, the "MML Productions." It
was based mainly on the copyrighted but unpublished book of Atty. Ernesto
Rodriguez, Jr., entitled "The Long Dark Night in Negros" subtitled "The Moises
Padilla Story," the rights to which petitioner had purchased from Atty. Rodriguez in the
amount of P2,000.00.
The book narrates the events which culminated in the murder of Moises Padilla
sometime between November 11 and November 17, 1951. Padilla was then a
mayoralty candidate of the Nacionalista Party (then the minority party) for the
Municipality of Magallon, Negros Occidental, during the November, 1951 elections.
Governor Rafael Lacson, a member of the Liberal Party then in power and his men
were tried and convicted for that murder in People vs. Lacson, et al. In the book,
Moises Padilla is portrayed as "a martyr in contemporary political history."
Although the emphasis of the movie was on the public life of Moises Padilla, there
were portions which dealt with his private and family life including the portrayal in
some scenes, of his mother, Maria Soto Vda. de Gonzales, private respondent herein,
and of one "Auring" as his girl friend. On October 3, 1961, petitioner received a
telephone call from one Mrs. Nelly Amante, half-sister of Moises Padilla, objecting to
the filming of the movie and the "exploitation" of his life.
On October 5, 1961, Mrs. Amante, for and in behalf of her mother, private respondent,
demanded in writing for certain changes, corrections and deletions in the movie. 5
Petitioner contends that he acceded to the demands because he had already invested
heavily in the picture to the extent of mortgaging his properties, 6 in addition to the fact
that he had to meet the scheduled target date of the premiere showing.
On the same date, October 5, 1961, after some bargaining as to the amount to be paid,
which was P50,000.00 at first, then reduced to P20,000.00, 7 petitioner and private
respondent, represented by her daughters and Atty. Ernesto Rodriguez, at the law office
of Jalandoni and Jamir, executed a "Licensing Agreement". Petitioner takes the
position that he was pressured into signing the Agreement because of private
respondent's demand, through Mrs. Amante, for payment for the "exploitation" of the
life story of Moises Padilla, otherwise, she would "call a press conference declaring the
whole picture as a fake, fraud and a hoax and would denounce the whole thing in the
press, radio, television and that they were going to Court to stop the picture." Because
21

petitioner refused to pay any additional amounts pursuant to the Agreement, on
December 22, 1961, private respondent instituted the present suit against him. The trial
court favored respondent. CA affirmed.
Issues:
(1) Whether or not the Licensing Agreement was null and void.
(2) Whether or not the consent of Petitioner in entering into such Licensing
Agreement was procured with duress, intimidation and undue influence.
Held:
(1) NO. Neither do we agree with petitioner's submission that the Licensing Agreement
is null and void for lack of, or for having an illegal cause or consideration. While it is
true that petitioner had purchased the rights to the book entitled "The Moises Padilla
Story," that did not dispense with the need for prior consent and authority from the
deceased heirs to portray publicly episodes in said deceased's life and in that of his
mother and the members of his family. As held in Schuyler v. Curtis, 14 "a privilege
may be given the surviving relatives of a deceased person to protect his memory, but
the privilege exists for the benefit of the living, to protect their feelings and to prevent a
violation of their own rights in the character and memory of the deceased."
Petitioner's averment that private respondent did not have any property right over the
life of Moises Padilla since the latter was a public figure, is neither well taken. Being a
public figure ipso facto does not automatically destroy in toto a person's right to
privacy. The right to invade a person's privacy to disseminate public information does
not extend to a fictional or novelized representation of a person, no matter how public a
figure he or she may be. 15 In the case at bar, while it is true that petitioner exerted
efforts to present a true-to-life story of Moises Padilla, petitioner admits that he
included a little romance in the film because without it, it would be a drab story of
torture and brutality.
(2) NO. We also find it difficult to sustain petitioner's posture that his consent to the
Licensing Agreement was procured thru duress, intimidation and undue influence
exerted on him by private respondent and her daughters at a time when he had
exhausted his financial resources, the premiere showing of the picture was imminent,
and "time was of the essence." As held in Martinez vs. Hongkong & Shanghai Bank, 17
it is necessary to distinguish between real duress and the motive which is present when
one gives his consent reluctantly. A contract is valid even though one of the parties
entered into it against his own wish and desires, or even against his better judgment. In
legal effect, there is no difference between a contract wherein one of the contracting
parties exchanges one condition for another because he looks for greater profit or gain
by reason of such change, and an agreement wherein one of the contracting parties
agrees to accept the lesser of two disadvantages. In either case, he makes a choice free
and untramelled and must accordingly abide by it. The Licensing Agreement has the
force of law between the contracting parties and since its provisions are not contrary to
law, morals, good customs, public order or public policy (Art. 1306, Civil Code),
petitioner Should comply with it in good faith.
Case: Liam Law vs. Olympic sawmill Co. and Elino Lee Chi, May 28, 1984, J.
Melencio-Herrera.
Facts: On or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to
defendant partnership and defendant Elino Lee Chi, as the managing partner. The loan
became ultimately due on January 31, 1960, but was not paid on that date, with the
debtors asking for an extension of three months, or up to April 30, 1960.
On March 17, 1960, the parties executed another loan document. Payment of the
P10,000.00 was extended to April 30, 1960, but the obligation was increased by
P6,000.00. Defendants again failed to pay their obligation by April 30, 1960 and, on
September 23, 1960, plaintiff instituted this collection case. Defendants admitted the
P10,000.00 principal obligation, but claimed that the additional P6,000.00 constituted
usurious interest. Trial court favored Law and ordered herein respondents to pay the
former, the principal amount of 10,000 plus 6,000 by way of liquidated damages.
Issue: Whether or not the additional P6,000 is recoverable.
Held: YES. Under Article 1354 of the Civil Code, in regards to the agreement of the
parties relative to the P6,000.00 obligation, "it is presumed that it exists and is lawful,
unless the debtor proves the contrary". No evidentiary hearing having been held, it has
to be concluded that defendants had not proven that the P6,000.00 obligation was
illegal. Confirming the Trial Court's finding, we view the P6,000.00 obligation as
liquidated damages suffered by plaintiff, as of March 17, 1960, representing loss of
interest income, attorney's fees and incidentals.
Case: Lao Sok vs. Lydia Sabaysabay, et al., Aug. 9, 1985, J. Gutierrez Jr.
Facts: Petitioner Lao Sok owned and operated the Shelton Department Store located at
Carriedo Street, Quiapo, Manila. Private respondents, Lydia Sabaysabay, Amparo
Mangulat, Rosita Salviejo, Nenita Ruinata, Vilma Capillo and Virginia Sanorjo were
all salesladies of the department store with a daily wage of P14.00 each. On October
12, 1980, petitioner's store was razed by fire. He did not report the loss of jobs of the
salesladies which resulted from the burning of his department store to the Regional
Office of the Ministry of Labor. Petitioner promised the private respondents that he
would transfer them to his other department stores. Several weeks passed but petitioner
still did not fulfill his promise. The petitioner, however, told the respondents that he
would give them their separation pay and other benefits due them as soon as he
collected the insurance proceeds arising from his burned store. The private respondents
accepted this offer of the petitioner.
Petitioner later collected the proceeds of his insurance but he did not give the private
respondents their separation pay and other benefits. Neither did he employ them in his
other stores as earlier promised. On May 14, 1981, the private respondents filed a
complaint with the Ministry of Labor and Employment charging the petitioner with
illegal dismissal and non-payment of their separation pay, allowance and incentive
leave pay. Labor Arbiter favored herein respondents. NLRC affirmed.
Issue: Whether or not a contract was perfected between the sales ladies and Lao Sok
in payment of formers separation pay.
22

Held: YES. Lao Sok made an offer which was duly accepted by the private
respondents. There was, therefore, a meeting of the minds between two parties
whereby one bound himself with respect to the other, to give something or to render
some service (Article 1305, Civil Code). By the unconditional acceptance of the offer
that they would be paid separation pay, a contract was therefore perfected. Petitioner
contends that the contract though orally made is unenforceable since it does not comply
with the Statute of Frauds. This contention has no merit.
Contracts in whatever form they may have been entered into are binding on the parties
unless form is essential for the validity and enforceability of that particular contract.
(See Lopez v. Auditor General, 20 SCRA 655). We held in Shaffer v. Palma (22 SCRA
934):
xxx xxx xxx
... Whether the agreement is in writing or not is a question of evidence. Nevertheless,
even granting that the agreement is not in writing, this circumstance does not militate
against the validity or enforceability of said agreement, because contracts are binding
upon the parties in whatever form they may have been entered into unless the law
requires otherwise. (Article 1356, Civil Code; Lopez v. The Auditor General, et al., L25859, July 13, 1967; Pilar Gil Vdan de Murciano v. The Auditor General, et al., 103
Phil. 907). It is true that Article 1358 of the Civil Code provides that contracts
involving more than P500.00 must appear in writing, but nothing is said therein that
such requirement is necessary for their validity or enforceability. It has been held that
the writing required under Article 1358 is merely for convenience, (Thunga Chui v.
Que Bentac, 2 Phil. 561; Ng Hoc v. Tong Ho, 52 0,G., 4396) and so the agreement
alleged in the amended complaint in the present case can be enforced even if it may not
be in writing.
The requirement of writing for the offer made by Lao Sok is only for convenience and
not enforceability. In fact, the petitioner could be compelled to put the offer in writing,
a step no longer necessary now because of this petition.
Case: Meliton Gallardo and Teresa Villanueva vs. IAC and Marta Villanueva, et
al., Oct. 29, 1987, J. Paras.
Facts: A parcel of land situated in Cavinti, Laguna was owned and registered in the
name of late Pedro Villanueva. Herein petitioners claimed that the aforestated land was
sold to them in a private document, an unnotarized deed of sale written in Tagalog that
was allegedly by the late Villanueva. Subsequently, the Original Certificate of Title
was cancelled on the basis of the private document of sale (Exhibit "B") and a new
certificate of title was issued in the name of the petitioners. However, during the
Second World War, the records as well as the Office of the Register of Deeds of
Laguna, where the original of their new transfer certificate of title was kept, were
completely burned. Accordingly, by virtue of an Affidavit of Reconstitution dated
December 2, 1958 (Record on Appeal, Annex "DD," pp. 41-42) and upon presentation
of the Owner's Duplicate Certificate of Title, the title was administratively
reconstituted and the Register of Deeds of Laguna issued Transfer Certificate of Title
No. RT-6293 (No. 23350) in the name of the petitioners (Record on Appeal, Annex
"B", pp. 7). On November 17, 1976, defendant Marta Villanueva together with Pedro
Villanueva, Jr., and Restituto R. Villanueva executed and filed an Affidavit of Adverse
Claim with the Office of the Register of Deeds of Laguna. petitioners instituted court
suit against the private respondent and her husband, Dr. Marcelo S. Agana, Sr. by filing
a complaint for Quieting of Title and Damages with the Court of First Instance of
Laguna. CFI of Laguna declared the deed of sale void ab initio. IAC affirmed.
Petitioners claim that the sale although not in a public document, is nevertheless valid
and binding citing this Court's rulings in the cases of Cauto v. Cortes, 8 Phil. 459, 460;
Guerrero v. Miguel, 10 Phil. 52, 53; Bucton v. Gabar 55 SCRA 499 wherein this Court
ruled that even a verbal contract of sale of real estate produces legal effects between
the parties.
Issue: Whether or not the unnotarized deed of sale purportedly executed on August
10, 1937 by the primitive owner Pedro Villanueva, in favor of petitioners, can be
considered as a valid instrument for effecting the alienation by way of sale of a
parcel of land registerd under the Torrens System.
Held: NO. True, as argued by appellants, a private conveyance of registered property
is valid as between the parties. However, the only right the vendee of registered
property in a private document is to compel through court processes the vendor to
execute a deed of conveyance sufficient in law for purposes of registration. Plaintiffsappellants' reliance on Article 1356 of the Civil Code is unfortunate. The general rule
enunciated in said Art. 1356 is that contracts are obligatory, in whatever form they may
have been entered, provided all the essential requisites for their validity are present.
The next sentence provides the exception, requiring a contract to be in some form when
the law so requires for validity or enforceability. Said law is Section 127 of Act 496
which requires, among other things, that the conveyance be executed "before the judge
of a court of record or clerk of a court of record or a notary public or a justice of the
peace, who shall certify such acknowledgment substantially in form next hereinafter
stated."
Such law was violated in this case. The action of the Register of Deeds of Laguna in
allowing the registration of the private deed of sale was unauthorized and did not lend a
bit of validity to the defective private document of sale.
Upon consideration of the facts and circumstances surrounding the execution of the
assailed document, the trial court found that said private document (Exhibit "B") was
null and void and that it was signed by somebody else not Pedro Villanueva. Such
findings of fact besides being based on the records, were sustained by the Court of
Appeals.
Case: Lim Yhi Luya vs. CA and Hind Sugar Company, Sept.11, 1980, J. Guerrero.
Facts: Petitioner Lim Yhi Luya is a businessman, resident of Lingayen, Pangasinan
where he operates a grocery store, hardware store and gasoline station. Private
respondent Hind Sugar Company is engaged in the manufacturing and marketing of
sugar, its principal office located in Manaoag, Pangasinan. Vice President and General
Manager of respondent company is Atty. Emiliano Abalos. His assistant is Generoso
Bongato, while the cashier and accountant of the company is Teodoro Garcia.
23

Petitioner and private respondent since 1958 have had business dealings with each
other, the company selling sugar to the petitioner and the latter has been supplying the
company with diesoline, gasoline, muriatic acid, sulfuric acid, other supplies and
materials ordered on credit. On November 12, 1970, petitioner received a telegram
from Manager Abalos in the following tenor: "Please come tomorrow morning without
fail." (Exh. "B"). The following day, November 13, 1970, petitioner proceeded to the
company and in the office of Manager Abalos, the latter offered to sell sugar at P37.00
per picul. The parties agreed to the purchase of 4,085 piculs of sugar at P35.00 per
picul. With the terms as follows: TERMS: CASH UPON SIGNING OF THIS
CONTRACT. Between November 13, 1970 to January 27, 1971, petitioner withdrew
from the company warehouse in varying quantities a total amount of 3,735 piculs under
substitute delivery orders, leaving a balance of 350 piculs undelivered.
On January 22, 1971, the question of payment cropped out between the parties.
Petitioner claimed that he had paid P142,975.00 to the company officials, Cashier
Garcia and Manager Abalos on November 13. 1970 and as proof of his payment, he
referred to the contract, particularly to the stipulation stating "Terms: Cash upon sing
of this contract." Respondent company officials denied the claim of the petitioner,
alleging that petitioner never paid for the sugar on November 13, 1970 or at any time
thereafter. An audit report or examination of the books of the company made by
External Auditor Victorino Daroya showed no payment by petitioner.
On May 17, 1971, petitioner, as plaintiff below, filed the complaint against the
defendant Hind Sugar Company stating 6 causes of actions. The trial court favored
Lim. But CA reversed.
Issue: Whether or not payment has already been made.
Held: YES. Considering the admitted fact that the contract of sale (Exhibit "A") was
prepared in the office of respondent company by Generoso Bongato, Assistant to the
Manager of the company, upon instruction of General Manager Emiliano L. Abalos
who is a lawyer, and We are now confronted with the varying or conflicting
interpretations of the parties thereto, the respondent company contending that the
stipulation "Terms: Cash upon signing of this contract" does not mean that the
agreement was a cash transaction because no money was paid by the petitioner at the
time of the signing thereof, whereas the petitioner insists that it was a cash transaction
inasmuch as he paid cash amounting to P142,975.00 upon the signing of the contract,
the payment having been made at around 1:30 in the afternoon of November 13, 1970
to the cashier, Teodoro Garcia, and Manager Abalos although the sale was agreed to in
the morning of the same day, November 13, 1970, the conflicting interpretations have
shrouded the stipulation with ambiguity or vagueness. Then, the cardinal rule should
and must apply, which is that the interpretation shall not favor the party who caused the
ambiguity (Art. 1377, New Civil Code). We rule that in the instant case, the
interpretation to be taken shall not favor the respondent company since it is the
party who caused the ambiguity in its preparation.
We do not agree with the meaning of the provision in the contract ascribed by the
respondent court in its decision that: "Stated in another way, the provision of the
Contract in question means that the payment of the P142,975.00 IS TO FOLLOW or IS
TO BE MADE (and NOT WAS MADE) upon the signing of said contract." As already
drafted or drawn up, complete and finalized with all the signatures thereon of the
contracting parties and presented in court as Exhibit "A" without any change
whatsoever in the mode of payment, such provision plainly and simply means that the
payment was in CASH, and not on CREDIT. The ambiguity raised by the use of the
words or phrases in the questioned provision must be resolved and interpreted against
the respondent company.
In truth the stipulation in the contract which reads: "Terms: Cash upon signing of this
contract" is very clear and simple in its meaning, leaving no doubt in Our minds upon
the intention of the contracting parties, hence, the first rule of contract interpretation
that the literal meaning of its stipulation shall control, is the governing rule at hand.
Resorting to Webster's Third New International Dictionary, p. 2515, for the definition
of the word "upon" which literally means, among others, "10a (1): immediately
following on; very soon after; ... b: on the occasion of at the time of; ... " the clear
import of the stipulation is that payment was made on the occasion of or at the time of
the signing of the contract and not that payment will follow the signing. We must adopt
the former meaning because it is such an interpretation that would most adequately
render the contract effectual, following Article 1373 of the New Civil Code which
provides:
Art. 1373. If some stipulation of any contract should admit of several meanings, it shall
be understood as bearing that import which is most adequate to render it effectua.
The evidence for the petitioner establishes that after paying the cash consideration to
Cashier Garcia and Manager Abalos, the parties signed the contract and thereafter a
signed copy of said contract was given to petitioner and also the four (4) delivery
orders covering the 4,085 piculs of sugar sold. The questioned stipulation recites
exactly the act of payment which is the paying of the money on the occasion of or at
the time of the signing. Respondent would have Us believe that the stipulation does not
mean what it conveys because petitioner has not paid cash after the signing of the
contract nor at any time thereafter. We cannot agree with the respondent for otherwise
the sanctity of the written contract can easily be violated and impugned, for otherwise
oral testimony would prevail over a written document to vary, alter or modify the
written terms, and most importantly, respondent's interpretation would render the
stipulation ineffectual as a mere agreement.
Case: Republic of the Philippines vs. Carmen M. Vda. De Castellvi, et al., Aug. 15,
1974, J. Zaldivar.
Facts : Plaintiff-appellant, the Republic of the Philippines, (hereinafter referred to as
the Republic) filed, on June 26, 1959, a complaint for eminent domain against
defendant-appellee, Carmen M. Vda. de Castellvi, judicial administratrix of the estate
of the late Alfonso de Castellvi (hereinafter referred to as Castellvi), over a parcel of
land situated in the barrio of San Jose, Floridablanca, Pampanga. In its complaint, the
Republic alleged, among other things, that the fair market value of the abovementioned lands, according to the Committee on Appraisal for the Province of
Pampanga, was not more than P2,000 per hectare, or a total market value of
P259,669.10; and prayed, that the provisional value of the lands be fixed at
P259.669.10, that the court authorizes plaintiff to take immediate possession of the
24

lands upon deposit of that amount with the Provincial Treasurer of Pampanga; that the
court appoints three commissioners to ascertain and report to the court the just
compensation for the property sought to be expropriated, and that the court issues
thereafter a final order of condemnation.
On June 29, 1959 the trial court issued an order fixing the provisional value of the
lands at P259,669.10.
In her "motion to dismiss" filed on July 14, 1959, Castellvi alleged, among other
things, that the land under her administration, being a residential land, had a fair market
value of P15.00 per square meter, so it had a total market value of P11,389,485.00; that
the Republic, through the Armed Forces of the Philippines, particularly the Philippine
Air Force, had been, despite repeated demands, illegally occupying her property since
July 1, 1956, thereby preventing her from using and disposing of it, thus causing her
damages by way of unrealized profits. This defendant prayed that the complaint be
dismissed, or that the Republic be ordered to pay her P15.00 per square meter, or a
total of P11,389,485.00, plus interest thereon at 6% per annum from July 1, 1956; that
the Republic be ordered to pay her P5,000,000.00 as unrealized profits, and the costs of
the suit. The Republic argues that the "taking" should be reckoned from the year 1947
when by virtue of a special lease agreement between the Republic and appellee
Castellvi, the former was granted the "right and privilege" to buy the property
should the lessor wish to terminate the lease, and that in the event of such sale, it was
stipulated that the fair market value should be as of the time of occupancy; and that the
permanent improvements amounting to more that half a million pesos constructed
during a period of twelve years on the land, subject of expropriation, were indicative of
an agreed pattern of permanency and stability of occupancy by the Philippine Air Force
in the interest of national Security.
Issue : Whether or not the value of the land should be computed at the time when the
Republic occupied the land as lessee.
Held : NO. The Republic's claim that it had the "right and privilege" to buy the
property at the value that it had at the time when it first occupied the property as lessee
nowhere appears in the lease contract. What was agreed expressly in paragraph No. 5
of the lease agreement was that, should the lessor require the lessee to return the
premises in the same condition as at the time the same was first occupied by the AFP,
the lessee would have the "right and privilege" (or option) of paying the lessor what it
would fairly cost to put the premises in the same condition as it was at the
commencement of the lease, in lieu of the lessee's performance of the undertaking to
put the land in said condition. The "fair value" at the time of occupancy, mentioned in
the lease agreement, does not refer to the value of the property if bought by the lessee,
but refers to the cost of restoring the property in the same condition as of the time when
the lessee took possession of the property. Such fair value cannot refer to the purchase
price, for purchase was never intended by the parties to the lease contract. It is a rule in
the interpretation of contracts that "However general the terms of a contract may be,
they shall not be understood to comprehend things that are distinct and cases that are
different from those upon which the parties intended to agree" (Art. 1372, Civil Code).
Case : Eastern Shipping Lines, Inc. Vs. Margarine-Verkaufs-Union GmbH, Sept.

27, 1979, J. Teehankee. (Acting)
Facts: Respondent corporation, a West German corporation not engaged in business in
the Philippines, was the consignee of 500 long tons of Philippine copra in bulk with a
total value of US$ 108,750.00 shipped from Cebu City on board petitioner's (a
Philippine corporation) vessel, the SS "EASTERN PLANET" for discharge at
Hamburg, Germany. Petitioner's bill of lading for the cargo provided as follows:
... Except as otherwise stated herein and in - the Charter Party, this contract shag be
governed by the laws of the Flag of the Ship carrying the goods. In case of average,
same shall be adjusted according to York-Antwerp Rules of 1950.
While the vessel was off Gibraltar, a fire broke out aboard the and caused water
damage to the copra shipment in the amount of US$ 591.38. Petitioner corporation
rejected respondent's claim for payment of the and respondent filed on June 18, 1966 in
the Manila court of first instance its complaint against petitioner as defendant for
recovery of the same and US$ 250.00 - attorney's fees and expenses of litigation.
After trial, the lower court rejected petitioner's defense that did not exceed 5% of
respondent's interest in the cargo it was not liable under Philippine Law for the damage
which I rendered judgment on April 25, 1969 "ordering the defendant, Eastern
Shipping Lines, Inc. to pay to the plaintiff, Margarine-Verkaufs-Union GMBH, the
sum of US$ 591.38, with interest at the legal rate from the date of the filing of the
complaint until fully paid, plus US$ 250.00 as attorney's fees and the costs of the suit."
In this review on questions of law, petitioner reiterates as its first assignment t of error
its submittal that Article 848 of the Code of Commerce 1 which would bar claims for
averages not exceeding 5% of the claimant's interest should be applied rather than the
lower court's ruling that petitioner's bill of lading expressly contained "an agreement to
the contrary," i.e. for the application of the York-Antwerp Rules which provide for
respondent's fun recovery of the damage loss.
Issue: Whether Article 848 of the Code of Commerce which would bar claims for
averages not exceeding 5% of the claimants interest should be applied.
Held: NO. We hold that the lower court correctly ruled the cited codal article to be
"not applicable in this particular case for the reason that the bill of lading
(Exhibit "F") contains "an agreement to the contrary" for it is expressly provided
in the last sentence of the first paragraph (Exhibit "1-A") that "In case of
average, same shall be adjusted according to York-Antwerp Rules of 1950." The
insertion of said condition is expressly authorized by Commonwealth Act No. 65
which has adopted in toto the U.S. Carriage of Goods by Sea Act. Now, it has not been
shown that said rules limit the recovery of damage to cases within a certain percentage
or proportion that said damage may bear to claimant's interest either in the vessel or
cargo as provided in Article 848 of the Code of Commerce On the contrary, Rule 3 of
said York-Antwerp Rules expressly states that "Damage done to a ship and cargo, or
either of them, by water or otherwise, including damage by breaching or scuttling a
burning ship, in extinguishing a fire on board the ship, shall be made good as general
average. ... "
25

There is a clear and irreconcilable inconsistency between the York-Antwerp Rules
expressly adopted by the parties as their contract under the bill of lading which sustains
respondent's claim and the codal article cited by petitioner which would bar the same.
Furthermore, as correctly contended by respondent, what is here involved is a contract
of adhesion as embodied in the printed bill of lading issued by petitioner for the
shipment to which respondent as the consignee merely adhered, having no choice in
the matter, and consequently, any ambiguity therein must be construed against
petitioner as the author.
RESCISSIBLE CONTRACTS
Case: Isidora Cabaliw and Soledad Sadorra vs. Sotero Sadorra, et al., June 11,
1975,
Facts: Isidora Cabaliw was the wife of Benigno Sadorra by his second marriage
solemnized on May 5, 1915, before the Justice of the Peace of Bayambang,
Pangasinan. This couple had a daughter named Soledad Sadorra. During their
marriage, the spouses acquired two (2) parcels of land situated in Iniangan, Dupax,
Nueva Vizcaya. Having been abandoned by her husband, Isidora Cabaliw instituted an
action for support with the Court of First Instance of Manila, entitled "Isidora Cabaliw
de Orden versus Benigno Sadorra" docketed therein as Civil Case No. 43193. On
January 30, 1933, judgment was rendered requiring Benigno Sadorra to pay his wife,
Isidora Cabaliw, the amount of P75.00 a month in terms of support as of January 1,
1933, and P150.00 in concept of attorney's fees and the costs.
Unknown to Isidora Cabaliw, on August 19, 1933, Benigno Sadorra executed two (2)
deeds of sale over the two parcels of land above described in favor of his son-in-law,
Sotero Sadorra, the latter being married to Encarnacion Sadorra, a daughter of Benigno
Sadorra by his first marriage. Because of the failure of her husband to comply with the
judgment of support, Isidora Cabaliw filed in Civil Case 43192 a motion to cite
Benigno Sadorra for contempt and the Court of First Instance of Manila in its Order of
May 12, 1937, authorized Isidora to take possession of the conjugal property, to
administer the same, and to avail herself of the fruits thereof in payment of the monthly
support in arrears. With this order of the Court, Isidora proceeded to Nueva Vizcaya to
take possession of the aforementioned parcels of land, and it was then that she
discovered that her husband had sold them to his son-in-law Sotero. On February 1,
1940, Isidora filed with the Court of First Instance of Nueva Vizcaya Civil Case No.
449 against her husband and Sotero Sadorra for the recovery of the lands in question on
the ground that the sale was fictitious; at the same time a notice of lis pendens was filed
with the Register of Deeds of Nueva Vizcaya.
In May of 1940, Benigno Sadorra died.
Issue: Whether or not the sale by Benigno to Sotero Sadorra was valid.
Held: NO. The facts narrated in the first portion of this Decision which are not
disputed, convincingly show or prove that the conveyances made by Benigno Sadorra
in favor of his son-in-law were fraudulent. For the heart of the matter is that about
seven months after a judgment was rendered against him in Civil Case No. 43192 of
the Court of First Instance of Manila and without paying any part of that judgment,
Benigno Sadorra sold the only two parcels of land belonging to the conjugal
partnership to his son-in-law. Such a sale even if made for a valuable consideration is
presumed to be in fraud of the judgment creditor who in this case happens to be the
offended wife.
Article 1297 of the old Civil Code which was the law in force at the time of the
transaction provides:
Contracts by virtue of which the debtor alienates property by gratuitous title
are presumed to be made in fraud of creditors.
Alienations by onerous title are also presumed fraudulent when made by
persons against whom some judgment has been rendered in any instance or
some writ of attachment has been issued. The decision or attachment need not
refer to the property alienated and need not have been obtained by the party
seeking rescission. (emphasis supplied)
The above-quoted legal provision was totally disregarded by the appellate court, and
there lies its basic error.
Furthermore, the presumption of fraud established by the law in favor of petitioners is
bolstered by other indicia of bad faith on the part of the vendor and vendee. Thus (1)
the vendee is the son-in-law of the vendor. In the early case ofRegalado vs.
Luchsinger & Co., 5 Phil. 625, this Court held that the close relationship between the
vendor and the vendee is one of the known badges of fraud. (2) At the time of the
conveyance, the vendee, Sotero, was living with his father-in-law, the vendor, and he
knew that there was a judgment directing the latter to give a monthly support to his
wife Isidora and that his father-in-law was avoiding payment and execution of the
judgment. 6 (3) It was known to the vendee that his father-in-law had no properties
other than those two parcels of land which were being sold to him. 7 The fact that a
vendor transfers all of his property to a third person when there is a judgment against
him is a strong indication of a scheme to defraud one who may have a valid interest
over his properties.
CASE: HONGKONG AND SHANGHAI BANKING CORPORATION VS.

RALPH PAULI AND SPOUSES SALLY GARGANERA AND MATEO
GARGANERA, MAY 30, 1988, J. GRIO-AQUINO.
Facts: On June 14, 1957, the Hongkong & Shanghai Banking Corporation filed a
complaint against the defendant Ralph Pauli, to collect the sum of P258,964.15. The
decision having become final, the Bank endeavored to execute it but the writs of
execution were returned unsatisfied because no leviable assets of Pauli could be located
by the sheriffs.
Unknown to the Hongkong & Shanghai Bank, Pauli had on January 8, 1957 purchased
from the Philippine National Bank (PNB) a sugar cane plantation known as Hacienda
Riverside (Lot No. 693 of Saravia Cadastre, Negros Occidental). To avoid discovery of
the transaction by his creditors, he did not register the deed of Sale. Six years later, on
March 1, 1963, he fraudulently sold the hacienda to his daughter, defendant-appellee
Sally Garganera, and her husband Mateo Garganera. The sale was registered on March
5, 1963. Transfer Certificate of Title No. 34425 was issued to the Garganeras.
26

Having discovered that the sugar plantation belonged to Paul, the Hongkong and
Shanghai Bank filed on January 13, 1969 in the Court of First Instance of Manila a
complaint for revival of the 1962 judgment in its favor in Civil Case No. 32799.
However, Pauli and Garganera filed a motion to dismiss on the ground of prescription
and res judicata. Trial court granted the motion and was affirmed by the CA.
Issues:
(1) Whether or not the action for annulment of sale has prescribed.
(2) Whether or not res judicata applies in the case at bar.
Held:
(1) YES. When a transaction involves registered land, the four-year period fixed in
Article 1391 within winch to bring an action for annulment of the deed, shall be
computed from the registration of the conveyance (March 5, 1963) on the familiar
theory that the registration of the document is constructive notice of the conveyance to
the whole world (Armentia vs. Patriarca, 18 SCRA 1253; Avecilla vs. Yatco, 103 Phil.
666).
Plaintiff's submission that the four-year period commenced to run from the date when
the Bank obtained actual knowledge of the fraudulent sale of Pauli's land to the
Garganeras (sometime in 1969) and that hence the four-year period for bringing an
action to annul the sale had not yet expired when it filed the action for annullment on
February 17, 1971, is unacceptable. That theory would diminish public faith in the
integrity of torrens titles and impair commercial transactions involving registered lands
for it would render uncertain the computation of the period for the prescription of such
actions.
(2) NO. Civil Case No. 465, the action for annulment of the Sale is not barred by res
judicata, specifically, the prior judgment in Civil Case No. 75319, for revival of the
judgment in the collection suit, Civil Case No. 32799, for the subject matter and causes
of action in the two cases are different. The three (3) Identities required for the
application of the bar by prior judgment: Identity of parties, of subject matter and
causes of action, are lacking.
VOIDABLE CONTRACTS
CASE: EDUARDO FELIPE, ET AL. VS. HEIRS OF MAXIMO ALDON, FEB.

16, 1983, J. ABAD SANTOS.
Facts: Maximo Aldon married Gimena Almosara in 1936. The spouses bought several
pieces of land sometime between 1948 and 1950. In 1960-62, the lands were divided
into three lots, 1370, 1371 and 1415 of the San Jacinto Public Land Subdivision, San
Jacinto, Masbate.
In 1951, Gimena Almosara sold the lots to the spouses Eduardo Felipe and Hermogena
V. Felipe. The sale was made without the consent of her husband, Maximo.
On April 26, 1976, the heirs of Maximo Aldon, namely his widow Gimena and their
children Sofia and Salvador Aldon, filed a complaint in the Court of First Instance of
Masbate against the Felipes. The complaint which was docketed as Civil Case No.
2372 alleged that the plaintiffs were the owners of Lots 1370, 1371 and 1415; that they
had orally mortgaged the same to the defendants; and an offer to redeem the mortgage
had been refused so they filed the complaint in order to recover the three parcels of
land.
The defendants asserted that they had acquired the lots from the plaintiffs by purchase
and subsequent delivery to them. The trial court favored the Felipes as lawful owners
thereto. However, it was reversed by CA. Hence, this petition.
Issue: Whether or not the sale of land to the Felipes by one of the spouses is voidable.
Held: YES. The view that the contract made by Gimena is a voidable contract is
supported by the legal provision that contracts entered by the husband without
the consent of the wife when such consent is required, are annullable at her
instance during the marriage and within ten years from the transaction
questioned. (Art. 173, Civil Code.)
According to Art. 1390 of the Civil Code, among the voidable contracts are "[T]hose
where one of the parties is incapable of giving consent to the contract." (Par. 1.) In the
instant case-Gimena had no capacity to give consent to the contract of sale. The
capacity to give consent belonged not even to the husband alone but to both spouses.
Gimena's contract is not rescissible for in such contract all the essential elements are
untainted but Gimena's consent was tainted. Neither can the contract be classified as
unenforceable because it does not fit any of those described in Art. 1403 of the Civil
Code. And finally, the contract cannot be void or inexistent because it is not one of
those mentioned in Art. 1409 of the Civil Code. By process of elimination, it must
perforce be a voidable contract.
The voidable contract of Gimena was subject to annulment by her husband only during
the marriage because he was the victim who had an interest in the contract. Gimena,
who was the party responsible for the defect, could not ask for its annulment. Their
children could not likewise seek the annulment of the contract while the marriage
subsisted because they merely had an inchoate right to the lands sold.
The termination of the marriage and the dissolution of the conjugal partnership by the
death of Maximo Aldon did not improve the situation of Gimena. What she could not
do during the marriage, she could not do thereafter. The case of Sofia and Salvador
Aldon is different. After the death of Maximo they acquired the right to question the
defective contract insofar as it deprived them of their hereditary rights in their father's
share in the lands. The father's share is one-half (1/2) of the lands and their share is
two-thirds (2/3) thereof, one-third (1/3) pertaining to the widow.
CASE: HOUSE INTERNATIONAL BUILDING TENANTS ASSOCIATION,

INC. VS. IAC, CENTERTOWN MARKETING CORP., ET AL.,
Facts: Petitioner House International Building Tenants Association, Inc.
(ASSOCIATION, for short) is a domestic non-stock, non-profit civic corporation,
whose incorporators, directors and members constitute the great majority of more than
a hundred heads of families who are tenants of long and good standing of the 14-storey
House International Building located at 777 Ongpin Street, Binondo, Manila. The land
and the improvements thereon were formerly owned by Atty. Felipe Ang who
mortgaged the same to the Government Service Insurance System (hereinafter referred
to as GSIS) to secure payment of an obligation. After foreclosure of the mortgage and
for failure of Ang to exercise his right of redemption over the foreclosed property, the
27

ownership thereof was consolidated with the GSIS which subsequently sold it to
Centertown Marketing Corporation (CENTERTOWN, for short) in a deed of
conditional sale, without notice to the tenants of the building and without securing the
prior clearance of the then Ministry of Human Settlements.
As CENTERTOWN was not authorized by its Articles of Incorporation to engage in
the real estate business, it organized a sister corporation, with almost an the same
incorporators and stockholders, as CENTERTOWN'S, under the corporate name of
Manila Towers Development Corporation (TOWERS, for short) for the primary
purpose of engaging in the real estate business. Subsequently, CENTERTOWN
assigned to its sister corporation TOWERS all its rights and obligations under the Deed
of Conditional Sale, with the consent and approval of the GSIS.
Thereafter, herein petitioner filed a complaint with the Regional Trial Court of Manila
against CENTERTOWN, TOWERS and GSIS for annulment of the deed of
conditional sale and the subsequent assignment thereof by CENTERTOWN to
TOWERS. The complaint alleged in part that the Deed of Conditional Sale is null and
void ab initio for being ultra vires, since defendant CENTERTOWN is not qualified to
acquire real estate property or to engage in real estate transactions. The court a quo
dismissed the complaint and was affirmed by CA.
Issue: Whether or not House International Building Tenants Association can sue for
annulment of the deed of conditional sale between GSIS and Centertown.
Held: NO. The main thrust of the petitioner's challenge on the validity of the
conditional sale is that the contract is ultra vires because the respondent
CENTERTOWN is not qualified to acquire properties under its Articles of
Incorporation. The petitioner has confused a void contract with an ultra vires contract
which is merely voidable.
We agree with the Court of Appeals that on this issue the provision of Art. 1397 of the
Civil Code is in point, thus:
Art. 1397. The action for the annulment of contracts may be instituted by all
who are thereby obliged principally or subsidiarily.
Petitioner is neither a party nor a privy to the Deed of Conditional Sale and the
assignment thereof: thus, it cannot assail the validity of the said contracts. In Ibaez vs.
Hongkong and Shanghai Bank, we said:
From these legal provisions it is deduced that it is the interest had in a given
contract, that is the determining reason of the right which lies in favor of the
party obligated principally or subsidiarily to enable him to bring an action for
the nullity of the contract in which he intervened, and, therefore, he who has
no right in a contract is not entitled to prosecute an action for nullity, for,
according to the precedents established by the courts, the person who is not a
party to a contract, nor has any cause of action or representation from those
who intervened therein, is manifestly without right of action and personality
such as to enable him to assail the validity of the contract. (Decisions of the
supreme court of Spain, of April 18, 1901, and November 23, 1903,
pronounced in cases requiring an application of the preinserted article 1302
of the Civil Code.) (22 Phil. 572; 584).
UNENFORCEABLE CONTRACTS
CASE: MARTA ORTEGA VS. DANIEL LEONARDO, MAY 28, 1958, J.

BENGZON.
Facts: Marta Ortega and Daniel Leonardo had an oral contract of sale of a parcel of
land occupied by the former located at San Andres, Malate Manila. Defendant,
however, also asserted a similar right, alleging occupancy of a portion of the land
subsequent to plaintiff's. During the investigation of such conflicting interests,
defendant asked plaintiff to desist from pressing her claim and definitely promised that
if and when he succeeded in getting title to Lot I , he would sell to her a portion thereof
with an area of 55.60 square meters (particularly described) at the rate of P25.00 per
square meter, provided she paid for the surveying and subdivision of the Lot and
provided further that after he acquired title, she could continue holding the lot as tenant
by paying a monthly rental of P10.00 until said portion shall have been segregated and
the purchase price fully paid. Plaintiff accepted defendant's offer, and desisted from
further claiming Lot I.
However, when defendant finally acquired title thereto; and that relying upon their
agreement, plaintiff caused the survey and segregation of the portion which defendant
had promised to sell incurring expenses therefor, said portion being now designated as
Lot I-B in a duly prepared and approved subdivision plan. On July 1954, after the plans
of subdivision and segregation of the lot had been approved by the Bureau of Lands,
plaintiff tendered to defendant the purchase price which the latter refused to accept,
without cause or reason. Hence, Ortega sued Leonardo for specific performance. The
latter argued that the oral contract of sale is unenforceable.
Issue: Whether or not the oral contract of sale is unenforceable.
Held: NO. It is admitted by both parties that an oral agreement to sell a piece of land is
not enforceable. (Art. 1403, Civil Code, Section 21, Rule 123, Rules of Court.)
Plaintiff, however, argues that the contract in question, although verbal, was partially
performed because plaintiff desisted from claiming the portion of lot I in question due
to the promise of defendant to transfer said portion to her after the issuance of title to
defendant. The court thinks that even granting that plaintiff really desisted to claim not
on oral promise to sell made by defendant, the oral promise to sell cannot be enforced.
The desistance to claim is not a part of the contract of sale of the land. Only in essential
part of the executory contract will, if it has already been performed, make the verbal
contract enforceable, payment of price being an essential part of the contract of sale.
the above means that partial performance of a sale contract occurs only when part of
the purchase price is paid, it surely constitutes a defective statement of the law.
American Jurisprudence in its title "Statute of Frauds" lists other acts of partial
performance, such as possession, the making of improvements, rendition of services,
payment of taxes, relinquishment of rights, etc.
Thus, it is stated that "The continuance in possession may, in a proper case, be
sufficiently referable to the parol contract of sale to constitute a part performance
thereof. There may be additional acts or peculiar circumstances which sufficiently refer
the possession to the contract. . . . Continued possession under an oral contract of sale,
by one already in possession as a tenant, has been held a sufficient part performance,
where accompanied by other acts which characterize the continued possession and
28

refer it to the contract of purchase. Hence, as there was partial performance, the
principle excluding parol contracts for the sale of realty, does not apply.
CASE: ROSARIO CARBONNEL VS. JOSE PONCIO, RAMON INFANTE AND

EMMA INFANTE, MAY 12, 1958,
Facts: Jose Poncio is the owner of a parcel of land which both Rosario Carbonell and
Emma Infante offered to buy. When Poncio was unable to keep up with the
installments due on his mortgage, he approached Carbonell and offered to sell the lot to
the latter which the latter accepted with the proposed price of 9.50 per square meter
which Poncio accepted. Carbonell and Poncio executed a document. And Carbonell
paid Poncio 200 (out of P647). However, when Carbonell was about to pay the
balance, Poncio told Carbonell that he could not proceed with the sale because he sold
it already to Infante for P3,535 (for the assumption of his mortgage with Republic
Savings Bank). Carbonell sued Poncio and Infante to recover the land. Trial court
dismissed the complaint upon the ground that Carbonells cause of action is
unenforceable.
Issue: Whether or not the sale of house and lot to Infante by Poncio was valid.
Held: We are of the opinion and so hold that the appeal is well taken. It is well settled
in this jurisdiction that the Statute of Frauds is applicable only to executory
contracts (Facturan vs. Sabanal, 81 Phil., 512), not to contracts that are totally or
partially performed (Almirol, et al., vs. Monserrat, 48 Phil., 67, 70; Robles vs.
Lizarraga Hermanos, 50 Phil., 387; Diana vs. Macalibo, 74 Phil., 70).
Subject to a rule to the contrary followed in a few jurisdictions, it is the
accepted view that part performance of a parol contract for the sale of real
estate has the effect, subject to certain conditions concerning the nature and
extent of the acts constituting performance and the right to equitable relief
generally, of taking such contract from the operation of the statute of frauds,
so that chancery may decree its specific performance or grant other equitable
relief. It is well settled in Great Britain and in this country, with the exception
of a few states, that a sufficient part performance by the purchaser under a
parol contract for the sale of real estate removes the contract from the
operation of the statute of frauds. (49 Am. Jur. 722-723.)
In the words of former Chief Justice Moran: "The reason is simple. In executory
contracts there is a wide field for fraud because unless they be in writing there is no
palpable evidence of the intention of the contracting parties. The statute has precisely
been enacted to prevent fraud." (Comments on the Rules of Court, by Moran, Vol. III
[1957 ed.], p. 178.) However, if a contract has been totally or partially performed, the
exclusion of parol evidence would promote fraud or bad faith, for it would enable the
defendant to keep the benefits already denied by him from the transaction in litigation,
and, at the same time, evade the obligations, responsibilities or liabilities assumed or
contracted by him thereby.
For obvious reasons, it is not enough for a party to allege partial performance in order
to hold that there has been such performance and to render a decision declaring that the
Statute of Frauds is inapplicable. But neither is such party required to establish such
partial performance by documentary proof before he could have the opportunity to
introduce oral testimony on the transaction. Indeed, such oral testimony would usually
be unnecessary if there were documents proving partial performance. Thus, the
rejection of any and all testimonial evidence on partial performance, would nullify the
rule that the Statute of Frauds is inapplicable to contracts which have been partly
executed, and lead to the very evils that the statute seeks to prevent.
Hence, Carbonell then had superior right over Infante. The private document entitled,
Contract for lot which I bought from Jose Poncio was not such memorandum in
writing within the purview of the Statute of Frauds. The memorandum merely states
that Poncio is allowed to stay in the property which he had sold to Carbonell. There is
no mention of the essential elements of a contract of sale. Hence, from the terms of the
contract, the sale of the property is already an accomplished act.
CASE: BIENVENIDO BABAO, ET AL. VS. FLORENCIO PEREZ, ET AL.,

DEC. 28, 1957, J. BAUTISTA ANGELO.
Facts: Plaintiff is the judicial administrator of the estate of the late Santiago Babao
while defendant Florencio Perez is the judicial administrator of the estate of the late
Celestina Perez. Celestina Perez was in her lifetime the owner of the parcel of land in
question which was not registered either under Act 496 or under the Spanish Mortgage
law. Sometime in 1924 when the deceased Santiago Babao married Maria Cleofe
Perez, niece of Celestina Perez, the latter and the former entered into a verbal
agreement whereby Santiago Babao bound himself to improve the land by leveling and
clearing all the forest trees standing thereon and planting in lieu there of coconuts, rice,
corn and other crops such as bananas and bamboo trees, and to act at the same time as
administrator thereof during the lifetime of Celestina Perez, all expenses for labor, and
materials to be at his cost, in consideration of which Celestina in turn bound herself to
convey to Santiago Babao or, his wife of land, together with all the improvements
thereon upon her death. Pursuant to said verbal agreement, Santiago Babao in 1924 left
his job as administrator of the Llana Estate in San Juan, Batangas for which he was
receiving a salary of P150 a month, and started leveling and clearing the land having
planted in an area of 50 hectares 50,000 coconuts trees, and rice and corn in another
area of 70 hectares, leaving out only 50 hectares unimproved, all of which having been
administered by him from 1924 to 1946. However, in the violation of the aforesaid
verbal agreement, Celestina Perez, acting through Leovigildo Perez, to whom she
extended a power of Attorney to sell, sold few days before she died about 127
hectares of the land in question in consequence of which Santiago Babao was
deprived of the possession and administration thereof from 1945. Said sales are
fictitious and were made clear violation of the oral agreement made between Celestina
Perez and Santiago Babao and as such the same are null and void. Hence, Babao sued
the estate of Celestina for the recovery of his share on the land.
Issue: Whether or not the verbal agreement between Santiago Babao and Celestina
Perez is enforceable.
Held: NO. This statute, formerly incorporated as Section 21 of Rule 123 of our Rules
of Court, is now found in Article 1403 of the new Civil Code, which provides, in so far
as pertinent to this case, as follows:
29

In the following cases an agreement hereafter made shall be enforceable by
action unless the same, or some note or memorandum thereof, be in writing,
and subscribed by the party charged or by his agent, evidence therefore, of the
agreement cannot be received without the writing, or secondary evidence of
its contents;
(a) An agreement that by its terms is not to be performed within a year from
the making thereof.
(e) An agreement . . . for the sale of real property or of an interest therein.
Appellants contends that the alleged verbal agreement falls under the paragraphs (a)
and (c) above-quoted because the same may be considered as an agreement which by
its terms is not to be performed within one year from the making thereof, or one which
involves a sale of real property or of an interest therein. If this premise is correct,
appellants contend, then the trial court erred in allowing the introduction of parole
evidence to prove the alleged agreement over the vigorous objection of counsel for
appellants.
That the alleged verbal agreement is one which by its terms is not to be performed
within one year is very apparent from the allegations of the complaint. Thus, it is
therein alleged that the agreement was allegedly made in 1924 and by its terms
Santiago Babao bound himself (1) to improve all the forest trees and planting thereon
coconuts, rice, corn and other crops such as bananas and bamboo trees, and (2) to act at
the same time as administrator of said land and improvements during the lifetime to
Celestina Perez. And in consideration of such undertaking, Celestina Perez "bound
herself to give and deliver, either to Santiago Babao or his wife Cleofe Perez, one-half
() of the whole area of said land as improved with all the improvements thereon upon
her death". It is also alleged in the complaint that Celestina Perez died on August 24,
1947, or 23 years after the making of the alleged agreement while Santiago Babao died
on January 6, 1948. From the above terms, therefore, it is not difficult to see that the
undertaking assumed by Santiago Babao which was to clear, level and plant to coconut
trees and other plants 156 hectares of forest land could not be accomplished in one
year. In fact, the alleged improvements were supposedly accomplished during the
lifetime of Celestina, which lasted over a period of 23 years, and even then not all was
cleared and planted but only a portion thereof. Another part of his undertaking is that
he is to administer the land during the lifetime of Celestina, and as we have already
said, her death occurred 23 years after the agreement.
CASE: FELIPE CABAGUE AND GERONIMO CABAGUE VS. MATIAS

AUXILIO AND SOCORRO AUXILIO, NOV. 26,
Facts: Felipe Cabague and his son Geronimo sued the defendant Matias Auxilio and
his daughter Socorro to recover damages resulting from defendants' refusal to carry out
the previously agreed marriage between Socorro and Geronimo.
The complaint alleged, in short: (a) that defendants promised such marriage to
plaintiffs, provided the latter would improve the defendants' house in Basud and spend
for the wedding feast and the needs of the bride; (b) that relying upon such promises
plaintiffs made the improvement and spent P700; and (c) that without cause defendants
refused to honor their pledged word.
The defendants moved to dismiss, arguing that the contract was oral, unenforceable
under the rule of evidence hereinbefore mentioned. And the court dismissed the case.
On appeal to the Court of First Instance, the plaintiffs reproduced their complaint and
defendants reiterated their motion to dismiss.
Issues:
(1) Whether or not Geronimo may sue Socorro for damages for the alleged
breach of mutual promise to marry.
(2) Whether Felipes action may prosper in enforcing an agreement in
consideration of marriage.
Held:
(1) YES. For breach of that mutual promise to marry, Geronimo may sue Socorro
for damages. This is such action, and evidence of such mutual promise is
admissible.
(2) NO. However Felipe Cabague's action may not prosper, because it is to
enforce an agreement in consideration of marriage. Evidently as to Felipe
Cabague and Matias Auxilio this action could not be maintained on the theory
of "mutual promise to marry". Neither may it be regarded as action by Felipe
against Socorro "on a mutual promise to marry."
CASE: SUGA SOTTO YUVIENCO, ET AL. VS. HON. DACUYCUY, DELY
RODRIGUEZ, ET AL., MAY 27, 1981,
Facts: The petitioners, thru Pedro Gamboa, owned the Sotto property (land and
building) situated at Tacloban City are willing to sell such property to private
respondents (Yao King Ong) with the following terms, I am therefore gluing you and
the rest of the occupants until July 31, 1978 within it which to decide whether you want
to buy the property. If I do not hear from you by July 31, I will offer or close the deal
with the other interested buyer. Xxx" The private respondents accepted the same
stating, PROPOSAL ACCEPTED ARRIVING TUESDAY MORNING WITH
CONTRACT PREPARE PAYMENT BANK DRAFT. Nonetheless, the alleged
subsequent agreement about the P2 M down and P4.5 M in 90 days may at best be
deemed as a distinct cause of action. And placed against the insistence of petitioners, as
demonstrated in the two deeds of sale taken by Atty. Gamboa to Tacloban, Annexes 9
and 10 of the answer of herein respondents, that there was no agreement about 90 days,
an issue of fact arose, which could warrant a trial in order for the trial court to
determine whether or not there was such an agreement about the balance being payable
in 90 days instead of the 30 days stipulated in Annexes 9 and 10 above-referred to.
Hence, private respondent filed a suit for specific performance.
Issue: Whether herein Private Respondents claim is enforceable.
Held: NO. Our conclusion, therefore, is that although there was no perfected contract
of sale in the light of the letter of Atty. Gamboa of July 12, 1978 and the letter-reply
thereto of Yao; it being doubtful whether or not, under Article 1319 of the Civil Code,
the said letter may be deemed as an offer to sell that is "certain", and more, the Yao
telegram is far from being an "absolute" acceptance under said article, still there
appears to be a cause of action alleged in Paragraphs 8 to 12 of the respondents'
complaint, considering it is alleged therein that subsequent to the telegram of Yao, it
was agreed that the petitioners would sell the property to respondents for P6.5 M, by
paving P2 M down and the balance in 90 days and which agreement was allegedly
30

violated when in the deeds prepared by Atty. Gamboa and taken to Tacloban, only 30
days were given to respondents.
Hence, looking at the pose of respondents that there was a perfected agreement of
purchase and sale between them and petitioners under which they would pay in
installments of P2 M down and P4.5 M within ninety 90) days afterwards it is evident
that such oral contract involving the "sale of real property" comes squarely under the
Statute of Frauds (Article 1403, No. 2(e), Civil Code.)
CASE: OLEGARIO CLARIN VS. ALBERTO RULONA, FEB. 20, 1984, J.

GUTIRREZ, JR.
Facts: Petitioner sold ten hectares of his share of the disputed lot to him for P2,500.00.
The conditions of the sale were that a downpayment of P1,000.00 was to be made and
then the balance of P1,500.00 was to be paid in monthly installment of P100.00.
Respondent delivered to the petitioner a downpayment of P800.00 and on the first
week of June the amount of P200.00 was also delivered thereby completing the
downpayment of P1,000.00. On the first week of August, another delivery was made
by the respondent in the amount of P100.00 as payment for the first installment.
Respondent further alleged that despite repeated demands to let the sale continue and
for the petitioner to take back the six postal money orders, the latter refused to comply.
In his answer, the petitioner alleged that while it is true that he had a projected contract
of sale of a portion of land with the respondent, such was subject to the following
conditions: (1) that the contract would be realized only if his co-heirs would give
their consent to the sale of a specific portion of their common inheritance from the
late Aniceto Clarin before partition of the said common property and (2) that should
his co-heirs refuse to give their consent, the projected contract would be discontinued
or would not be realized. Petitioner further contended that the respondent knew fully
well the above terms and accepted them as conditions precedent to the perfection or
consummation of the contract; that respondent delivered the amount of P1,000.00 as
earnest money, subject to the above conditions and that the amount was returned by the
petitioner upon his learning definitely that his co-heirs and co-owners refused to give
their consent to the projected sale.
Respondent Rulona filed a complaint for specific performance and recovery of
improvements on the ground that the petitioner and his wife violated the terms of the
agreement of sale by returning by their own volition and without the consent of
plaintiff, the amount of P1,100.00 in six postal money orders, covering the
downpayment of P1,000.00 and first installment of P100.00. Trial court rendered
judgment in favor of respondent. CA sustained.
Issue: Whether or not the contract of sale was perfected.
Held: YES. While it is true that Exhibits A and B are, in themselves, not contracts of
sale, they are, however, clear evidence that a contract of sale was perfected between
the petitioner and the respondent and that such contract had already been
partially fulfilled and executed. A contract of sale is perfected at the moment there is
a meeting of minds upon the thing which is the object of the contract and upon the
price. (Article 1475, Civil Code; Phil. Virginia Tobacco Administration v. De los
Angeles, 87 SCRA 210). Such contract is binding in whatever form it may have
been entered into. (Lopez v. Auditor General, 20 SCRA 655).
Construing Exhibits A and B together, it can be seen that the petitioner agreed to sell
and the respondent agreed to buy a definite object, that is, ten hectares of land which is
part and parcel of Lot 20 PLD No. 4, owned in common by the petitioner and his
sisters although the boundaries of the ten hectares would be delineated at a later date.
The parties also agreed on a definite price which is P2,500.00. Exhibit B further shows
that the petitioner has received from the respondent as initial payment, the amount of
P800.00. Hence, it cannot be denied that there was a perfected contract of sale between
the parties and that such contract was already partially executed when the petitioner
received the initial payment of P800.00. The latters acceptance of the payment clearly
showed his consent to the contract thereby precluding him from rejecting its binding
effect. (See Federation of United Namarco Distributors, Inc. v. National Marketing
Corporation, 4 SCRA 884). With the contract being partially executed, the same is
no longer covered by the requirements of the Statute of Frauds in order to be
enforceable. (See Khan v. Asuncion, 19 SCRA 996). Therefore, with the contract
being valid and enforceable, the petitioner cannot avoid his obligation by interposing
that Exhibit A is not a public document. On the contrary, under Article 1357 of the
Civil Code, the petitioner can even be compelled by the respondent to execute a public
document to embody their valid and enforceable contract.
The petitioners contention that he was only forced to receive money from the
respondent due to the insistence of the latter merits little consideration. It is highly
improbable that the respondent would give different sums on separate dates to the
petitioner with no apparent reason, without a binding assurance from the latter that the
disputed lot would be sold to him. We agree with the trial court and the appellate court
that the payments were made in fulfillment of the conditions of the sale, namely, a
downpayment of P1,000.00 and the balance of P1,500.00, to be paid in monthly
installments of P100.00 each.
We, therefore, find no error in the lower courts holding that a contract of sale was
perfected between the petitioner and the respondent and that the sale did not depend on
a condition that the petitioners co-owners would have to agree to the sale.
CASE: BISAYA LAND TRANSPORTATION CO, ANTONIO CUENCO AND
BENJAMIN ROA VS. MARCIANO SANCHEZ, AUG. 31, 1987, J. PADILLA.
Facts: In May 1975, Sanchez was appointed by BISTRANCO as shipping agent in
Butuan City for the vessel M/V Don Mariano. 2 The new Butuan City Agent 3 referred
to in the letter "Exhibit "C" was Marciano Sanchez. Later, on 12 March 1976, when
BISTRANCO was under receivership, Sanchez was appointed by its Receiver, Atty.
Adolfo V. Amor, as acting shipping agent, also for M/V Doa Remedies, in addition to
M/V Doa Filomena, in the port of Butuan City "pending the execution of the formal
contract of agency. 4 When Sanchez was constituted as acting shipping agent, he
received the same commission as his predecessor, one ONG YUI who received 10%
for all freight and passenger revenues coming from Butuan City and 5 % for all freight
going to Butuan. 5
Thereafter, or on 27 July 1976, a formal Contract of Agency, marked as Exhibit "F",
was executed between BISTRANCO, represented by Receiver Atty. Adolfo V. Amor
31

and Marciano C. Sanchez, represented by his authorized representative Exequiel
Aranas. On 30 July 1976, after Sanchez found that Paragraph 16 of the Contract of
agency was quite prejudicial to him, he executed with BISTRANCO a Supplemental
Shipping Agency Contract, marked as Exhibit "G", which was duly signed by Receiver
Atty. Adolfo V. Amor on behalf of BISTRANCO and Marciano C. Sanchez himself. 6
But, both the Contract of Agency and the Supplemental Shipping Agency Contract
were never submitted by Atty. Adolfo Amor to the receivership court for its approval.
While the shipping business of BISTRANCO in Butuan City flourished, evidently to
the mutual benefit of both parties, on 26 December 1979, co-petitioner Benjamin G.
Roa, as Executive Vice-President of BISTRANCO, wrote Sanchez a letter 10 advising
him that, effective 1 January 1980, BISTRANCO would commence operating its
branch office in Butuan City. Realizing that the letter, marked as Exhibit "FF", was in
effect a repudiation of the Contracts, Sanchez filed an action for specific performance
with preliminary injunction and damages with the Regional Trial Court of Cebu City
on 28 December 1979. Trial court rendered judgment in favor of Sanchez and CA
affirmed.
Issue: Whether or not the contracts are unenforceable for want of authority and
approval from the receivership court.
Held: YES. In the case at bar, it is undisputed that Atty. Adolfo Amor was entrusted,
as receiver, with the administration of BISTRANCO and it business. But the act of
entering into a contract is one which requires the authorization of the court which
appointed him receiver. Consequently, the questioned Contracts can rightfully be
classified as unenforceable for having been entered into by one who had acted beyond
his powers, due to Receiver Amor's failure to secure the court's approval of said
Contracts.
These unenforceable Contracts were nevertheless deemed ratified in the case at bar,
based upon the facts and circumstances on record which have led this Court to
conclude that BISTRANCO had actually ratified the questioned Contracts as follows:
(1) Reduce Sanchez commission;
(2) Failure to post a bond;
(3) Informing Sanchez that BISTRANCOis abiding strictly with the terms of the
contract.
VOID OR INEXISTENT CONTRACTS
CASE: VICTORINO HERNANDEZ VS. CA AND SUBSTITUTED HEIRS OF
REV. FR. LUCIO GARCIA, APRIL 27, 1988, J. NARVASA.
Facts: Fr. Garcia 4 applied in 1959 for the registration in his name of Lots 1-A, 1-B,
and 2 of Plan Psu-172410-B in Bo. San Dionisio, Paraaque. His property adjoined
that of Hernandez, and since both estates were once owned by one Andres San
Buenaventura, 5 no dividing boundaries existed thereon until cadastral surveyors from
the Bureau of Lands laid down official monuments to mark the separation of the lots.
These monuments were set along a line which the landowners had previously agreed
upon as representing the correct boundary between their estates. This was in 1956. 6
Unknown to Hernandez, the Advance Plan Psu-172410-B submitted in Fr. Garcia's
behalf to the land registration court in 1959 included 220 square meters of land now
disputed Lots ABC and 4057-A of Lot 1-B. This area fell beyond the stipulated
boundaries of Fr. Garcia's land and encroached pro tanto on the land of Hernandez (on
which, it should be mentioned, his tenants had been living for many years [decades, in
fact] before the date of Fr. Garcia's application). 7 Allegedly lulled into complacency
by the recentness of their agreement as to the limits of their respective properties, and
confident that the visible landmarks installed by the government surveyors precluded
any overstepping of those limits, Hernandez proffered no opposition to Fr. Garcia's
application, leaving the heirs of Andres San Buenaventura as the only oppositors
thereto.
It was not until the court had already ordered the registration of the lots in Fr. Garcia's
name that Hernandez discovered the anomaly in the application. He at once filed a
petition for review of the decree, but in view of the new trial ordered by the court upon
motion of the heirs-oppositors, the petition was dismissed on the ground of
prematurity. 8 The court thereafter adjudged Fr. Garcia as the owner of Lots 1-A and 2
and the heirs-oppositors as owners of Lot 1-B.
On appeal, however, the Court of Appeals declared Fr. Garcia absolute owner, by
acquisitive prescription, of an the lots.
Issue: Whether or not the Statute of Frauds is applicable.
Held: NO. Given the weight they deserve, the recorded facts prove Hernandez's
entitlement to the relief sought. The respondents' reliance on the Statute of Frauds to
secure a contrary judgment is misplaced. The Statute of Frauds finds no application to
this case. Not every agreement "affecting land" must be put in writing to attain
enforceability. Under the Statute of Frauds, Article 1403(2) (e) of the Civil Code, such
formality is only required of contracts involving leases for longer than one year, or for
the sale of real property or of an interest therein. Hernandez's testimony is thus
admissible to establish his agreement with Fr. Garcia as to the boundary of their
estates. It is also to be noted that the presence of Hernandez's tenants on the land within
his side of the border, were this to be reckoned from the "mojones," further buttresses
his claim.
CASE: DOMINGO RUBIAS VS. ISAIAS BATILLER, MAY 29, 1973, J.
TEEHANKEE.
Facts: On August 31, 1964, plaintiff Domingo D. Rubias, a lawyer, filed a suit to
recover the ownership and possession of certain portions of lot under Psu-99791
located in Barrio General Luna, Barotac Viejo, Iloilo which he bought from his fatherin-law, Francisco Militante in 1956 against its present occupant defendant, Isaias
Batiller, who illegally entered said portions of the lot on two occasions in 1945 and
in 1959. Plaintiff prayed also for damages and attorneys fees. (pp. 1-7, Record on
Appeal). In his answer with counter-claim defendant claims the complaint of the
plaintiff does not state a cause of action, the truth of the matter being that he and his
predecessors-in-interest have always been in actual, open and continuous possession
since time immemorial under claim of ownership of the portions of the lot in question.
Issue: Whether or not the contract of sale between appellant and his father-in-law, the
late Francisco Militante over the property subject of Plan Psu-99791 was void because
it was made when plaintiff was counsel of his father-in-law in a land registration case
involving the property in dispute.
32

Held: YES. It is noteworthy that Caltan's rationale for his conclusion that fundamental
consideration of public policy render void and inexistent such expressly prohibited
purchase (e.g. by public officers and employees of government property intrusted to
them and by justices, judges, fiscals and lawyers of property and rights in litigation and
submitted to or handled by them, under Article 1491, paragraphs (4) and (5) of our
Civil Code) has been adopted in a new article of our Civil Code, viz, Article 1409
declaring such prohibited contracts as "inexistent and void from the beginning."
Indeed, the nullity of such prohibited contracts is definite and permanent and cannot be
cured by ratification. The public interest and public policy remain paramount and do
not permit of compromise or ratification. In his aspect, the permanent
disqualification of public and judicial officers and lawyers grounded on public
policy differs from the first three cases of guardians, agents and administrators
(Article 1491, Civil Code), as to whose transactions it had been opined that they
may be "ratified" by means of and in "the form of a new contact, in which cases
its validity shall be determined only by the circumstances at the time the execution
of such new contract. The causes of nullity which have ceased to exist cannot impair
the validity of the new contract. Thus, the object which was illegal at the time of the
first contract, may have already become lawful at the time of the ratification or second
contract; or the service which was impossible may have become possible; or the
intention which could not be ascertained may have been clarified by the parties. The
ratification or second contract would then be valid from its execution; however, it does
not retroact to the date of the first contract."
CASE: BENEDICTO JAVIER, AS ADMINISTRATOR OF THE ESTATE OF

EUSEBIO CRUZ VS. DOMINGA CRUZ, ET AL., NOV. 29, 1977, J.
FERNANDEZ.
Facts: Eusebio Cruz, who died on February 2, 1941 at the age of 100 years without
leaving any will nor compulsory heirs, was the absolute and exclusive owner of a
parcel of mountainous and unimproved land situated in sitio Matogalo, Taytay, Rizal
which he inherited from his forebears, described therein; that during his lifetime,
Eusebio Cruz had been living with one Teodora Santos 'without the sanction of
marriage"; that Teodora Santos had with her as distant relatives and protegees the
brothers Gregorio Cruz and Justo Cruz; that Gregorio Cruz was the father of Delfin
Cruz, deceased husband of defendant Dominga Vda. de Cruz and father of defendants
Leonila, Roman, Eliseo, Leberata and Melecio, all surnamed Cruz; that on January
16, 1941 Delfin Cruz, by means of deceit and in collusion with persons among them
his father Gregorio Cruz made Eusebio Cruz, who could read and write, stamp his
thumbmark on a deed of sale of a portion of the land described in the complaint
consisting of 26,577 square meters for the sum of P700.00 in favor of said Delfin
Cruz; that at that time Delfin Cruz did not have theithin thirty days from submittal of
the case for decision, but the validity of the law cannot be seriously challenged."
Issue: Whether or not the deed of sale was valid.
Held: NO. The undisputed facts of record support the evidence of Javier that the deed
of sale is void and inexistent for lack of consent and consideration. It is a fact that on
January 17, 1941, when the deed was executed, Eusebio was almost 100 years old and
was in a weak condition. With that, it is obvious that Delfincould not have raised the
amount of 700 as consideration of the land supposedly sold to him by Eusebio. The
consideration is not only grossly inadequate but also shocking to the conscience. No
sane person would sell the land for only about 40.00 per hectare. The Court, thence,
found Eusebio not voluntarily affix his thumb mark on the deed of sale.
Case: Potenciano Menil and wife Crispina Nayve vs. CA, Agueda Garan, et al.,
July 31, 1978, J. Guerrero.
Facts: On November 3, 1955, Agueda Garan obtained a homestead patent over the
land in question. On February 4, 1956, Original Certificate of Title No. 220 was issued
by the Register of Deeds of Surigao in her name pursuant to the homestead patent. On
May 7, 1960, within the prohibitive 5-year period, Agueda Garan sold the land to
movant Patenciano Manil for P415.00, as evidenced by a deed of sale bearing the same
date. But, for reasons not revealed in the records, the contracting parties did not
registered the deed of sale in the Registry of Deeds in Surigao. Original Certificate of
Title No. 220 was not cancelled and the land remained registered in the name of
Agueda Garan. On August 30, 1964, Agueda Garan executed another deeds of sale
over the same parcel of land in favor of the same vendee, Potenciano Menil, and for the
same price P415.00. On August 30, 1965, the contracting parties registered the second
deed of sale in the Registry of Deeds in Surigao. Original Certificate of Title No. 220
was cancelled, and Transfer Certificate of Title No. T-60, in lieu thereof, was issued in
the name of Potenciano Menil. On February 28, 1966, Potenciano Menil mortgaged the
land to the Development Bank of the Philippines to secure an agricultural loan which
the former obtained from the latter. Petitioners were in possession of the land in
question until sometime in 1967 when private respondents Agueda Garan, Francisco
Calanias, Miguel Nayve, Jr., Rufo Nayve, and Lucio Calanias forcibly took possession
of the said land, and filed against petitioners Civil Case No. 1692 for "Quieting of
Title" before Branch 11 of the Court of First Instance of Surigao del Norte.
Issue: Whether or not Menil can still recover the land from Garan.
Held: NO. It is not disputed by the parties that the contract of sale executed on May 7,
1960, having been executed less than 5 years from May 7, 1960, the date the
homestead patent was awarded to private respondent Agueda Garan, is null and void
for being violative of Section 118 of C.A. 141 [Public Land Act] which provides:
Sec. 118. Except in favor of the government or any of its branches, units, or
institutions, lands acquired under free patent or homestead provisions shall not
be subject to encumbrance or alienation from the date of the approval of the
application and for a term of five years from and after the date of issuance of
the patent or grant, nor shall they become liable to the satisfaction of any debt
contracted prior to the expiration of said period, but the improvements or
crops on the land may be mortgaged or pledged to qualified persons,
associations, or corporations.
It cannot be claimed that there are two contracts: one which is undisputably null and
void, and another, having been executed after the lapse of the 5-year prohibitory
period, which is valid. The second contract of sale executed on March 3, 1964 is
admittedly a confirmatory deed of sale. Even the petitioners concede this point. 3
33

Inasmuch as the contract of sale executed on May 7, 1960 is void for it is expressly
prohibited or declared void by law [CA- 141, Section 118], it therefore cannot be
confirmed nor ratified. Article 1409 of the New Civil Code states:
(1) Those whose cause, object, or purpose is contrary to law, morals,
good customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the
transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal
object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived.
Further, noteworthy is the fact that the second contract of sale over the said homestead
in favor of the same vendee, petitioner Potenciano Menil, is for the same price of
P415.00. Clearly, the unvarying term of the said contract is ample manifestation that
the same is simulated and that no object or consideration passed between the parties to
the contract. It is evident from the whole record of the case that the homestead had long
been in the possession of the vendees upon the execution of the first contract of sale on
May 7, 1960; likewise, the amount of P415.00 had long been paid to Agueda Garan on
that same occasion. We find no evidence to the contrary.
Case: Director of Lands vs. Silveretra Ababa, et al., Feb. 27, 1979, J. Makasiar.
Facts: The adverse claimant, Atty. Alberto B. Fernandez was retained as counsel by
petitioner, Maximo Abarquez, in Civil Case No. R-6573 of the Court of First Instance
of Cebu, entitled "Maximo Abarquez vs. Agripina Abarquez", for the annulment of a
contract of sale with right of repurchase and for the recovery of the land which was the
subject matter thereof. The Court of First Instance of Cebu rendered a decision on May
29, 1961 adverse to the petitioner and so he appealed to the Court of Appeals.
Litigating as a pauper in the lower court and engaging the services of his lawyer on a
contingent basis, petitioner, liable to compensate his lawyer whom he also retained for
his appeal executed a document on June 10, 1961 in the Cebuano-Visayan dialect
whereby he obliged himself to give to his lawyer one-half (1/2) of whatever he might
recover from Lots 5600 and 5602 should the appeal prosper.
Issue: Whether or not the contract for a contingent fee is prohibited by Article 1491
of the New Civil Code.
Held: NO. This contention is without merit. Article 1491 prohibits only the sale or
assignment between the lawyer and his client, of property which is the subject of
litigation. As WE have already stated. "The prohibition in said article a only to applies
stated: " The prohibition in said article applies only to a sale or assignment to the
lawyer by his client of the property which is the subject of litigation. In other words,
for the prohibition to operate, the sale or t of the property must take place during the
pendency of the litigation involving the property" (Rosario Vda. de Laig vs. Court of
Appeals, et al., L-26882, November 21, 1978).
Likewise, under American Law, the prohibition does not apply to "cases where after
completion of litigation the lawyer accepts on account of his fee, an interest the assets
realized by the litigation" (Drinker, Henry S., Legal Ethics, p. 100 [1953], citing App.
A, 280; N.Y. Ciu 714). "There is a clear distraction between such cases and one in
which the lawyer speculates on the outcome of the matter in which he is employed"
(Drinker, supra, p. 100 citing A.B.A. Op. 279).
A contract for a contingent fee is not covered by Article 1491 because the tranfer
or assignment of the property in litigation takes effect only after the finality of a
favorable judgment. In the instant case, the attorney's fees of Atty. Fernandez,
consisting of one-half (1/2) of whatever Maximo Abarquez might recover from his
share in the lots in question, is contingent upon the success of the appeal. Hence, the
payment of the attorney's fees, that is, the transfer or assignment of one-half (1/2) of
the property in litigation will take place only if the appeal prospers. Therefore, the
tranfer actually takes effect after the finality of a favorable judgment rendered on
appeal and not during the pendency of the litigation involving the property in question.
Consequently, the contract for a contingent fee is not covered by Article 1491.
Case: Francisco Tongkoy (For Estate of Late Luis Tongkoy) vs. CA, Mercedes
Sonora, et al., June 28, 1983, J. Makasiar.
Facts: The first is Lot No. 1397 of the Cadastral Survey of Bacolod, otherwise known
as Hacienda Pulo, containing an area of 727,650 square meters and originally
registered under Original Certificate of Title No. 2947 in the names of Francisco
Tongoy, Jose Tongoy, Ana Tongoy, Teresa Tongoy and Jovita Tongoy in pro-indiviso
equal shares. Said co-owners were all children of the late Juan Aniceto Tongoy. The
second is Lot No. 1395 of the Cadastral Survey of Bacolod, briefly referred to as
Cuaycong property, containing an area of 163,754 square meters, and formerly covered
by Original Certificate of Title No. 2674 in the name of Basilisa Cuaycong.
Of the original registered co-owners of Hacienda Pulo, three died without issue,
namely: Jose Tongoy, who died a widower on March 11, 1961; Ama Tongoy, who also
died single on February 6, 1957, and Teresa Tongoy who also died single on November
3, 1949. The other tpwo registered co-owners, namely, Francisco Tongoy and Jovita
Tongoy, were survived by children. On April 17, 1918, Hacienda Pulo was mortgaged
by its registered co-owners to the Philippine National Bank (PNB), Bacolod Branch, as
security for a loan of P11,000.00 payable in ten (10) years at 8% interest per annum.
The mortgagors however were unable to keep up with the yearly amortizations, as a
result of which the PNB instituted judicial foreclosure proceedings over Hacienda Pulo
on June 18, 1931. To avoid foreclosure, one of the co-owners and mortgagors, Jose
Tongoy, proposed to the PNB an amortization plan that would enable them to
liquidate their account. But, on December 23, 1932, the PNB Branch Manager in
Bacolod advised Jose Tongoy by letter that the latter's proposal was rejected and that
34

the foreclosure suit had to continue. As a matter of fact, the suit was pursued to finality
up to the Supreme Court which affirmed on July 31, 1935 the decision of the CFI
giving the PNB the right to foreclose the mortgage on Hacienda Pulo. In the meantime,
Patricio D. Tongoy and Luis Tongoy executed on April 29, 1933 a Declaration of
Inheritance wherein they declared themselves as the only heirs of the late Francisco
Tongoy and thereby entitled to the latter's share in Hacienda Pulo. On March 13, 1934,
Ana Tongoy, Teresa Tongoy, Mercedes Sonora, Trinidad Sonora, Juan Sonora and
Patricio Tongoy executed an "Escritura de Venta" (Exh. 2 or Exh. W), which by its
terms transferred for consideration their rights and interests over Hacienda Pulo in
favor of Luis D. Tongoy.
Issue: Whether or not the rights of herein respondents over subject properties, which
were the subjects of simulated or fictitious transactions, have already prescribed.
Held: NO. The negative answer to the aforesaid query is found in Articles 1409 and
1410 of the New Civil Code. Said provisions state thus:
xxx xxx xxx
2) Those which are absolutely simulated or fictitious;
xxx xxx xxx
These contracts cannot be ratified. Neither can the right to set up the defense
of illegality be waived (emphasis supplied).
Art. 1410. The action or defense for the declaration of the inexistence of a
contract does not prescribe.
The characteristic of simulation is the fact that the apparent contract is not really
desired nor intended to produce legal effects nor in any way alter the juridical situation
of the parties. Thus, where a person, in order to place his property beyond the reach of
his creditors, simulates a transfer of it to another, he does not really intend to divest
himself of his title and control of the property; hence, the deed of transfer is but a sham.
This characteristic of simulation was defined by this Court in the case of Rodriguez vs.
Rodriguez, No. L-23002, July 31, 1967, 20 SCRA 908.
A void or inexistent contract is one which has no force and effect from the very
beginning, as if it had never been entered into, and which cannot be validated either by
time or by ratification (p. 592, Civil Code of the Philippines, Vol. IV, Tolentino, 1973
Ed.).
A void contract produces no effect whatsoever either against or in favor of anyone;
hence, it does not create, modify or extinguish the juridical relation to which it refers
(p. 594, Tolentino, supra).
The following are the most fundamental characteristics of void or inexistent contracts:
1) As a general rule, they produce no legal effects whatsoever in accordance with the
principle "quod nullum est nullum producit effectum."
2) They are not susceptible of ratification.
3) The right to set up the defense of inexistence or absolute nullity cannot be waived or
renounced.
4) The action or defense for the declaration of their inexistence or absolute nullity is
imprescriptible.
5) The inexistence or absolute nullity of a contract cannot be invoked by a person
whose interests are not directly affected (p. 444, Comments and Jurisprudence on
Obligations and Contracts, Jurado, 1969 Ed.; emphasis supplied).
The nullity of these contracts is definite and cannot be cured by ratification. The nullity
is permanent, even if the cause thereof has ceased to exist, or even when the parties
have complied with the contract spontaneously (p. 595, Tolentino, supra).
In Eugenio vs. Perdido, et al., No. L-7083, May 19, 1955, 97 Phil. 41, this Court thus
reiterated:
Under the existing classification, such contract would be "inexisting"
and the "action or defense for declaration' of such inexistence "does
not prescribe' (Art. 14 10 New Civil Code). While it is true that this
is a new provision of the New Civil Code, it is nevertheless a
principle recognized since Tipton vs. Velasco, 6 Phil. 67 that "mere
lapse of time cannot give efficacy to contracts that are null and void.
Consistently, this Court held that 11 where the sale of a homestead is nun and void, the
action to recover the same does not prescribe because mere lapse of time cannot give
efficacy to the contracts that are null and void and inexistent" (Angeles, et al. vs. Court
of Appeals, et al., No. L-11024, January 31, 1958, 102 Phil. 1006).
Evidently, therefore, the deeds of transfer executed in favor of Luis Tongoy were
from the very beginning absolutely simulated or fictitious, since the same were
made merely for the purpose of restructuring the mortgage over the subject
properties and thus preventing the foreclosure by the PNB.
Considering the law and jurisprudence on simulated or fictitious contracts as
aforestated, the within action for reconveyance instituted by herein respondents which
is anchored on the said simulated deeds of transfer cannot and should not be barred by
prescription. No amount of time could accord validity or efficacy to such fictitious
transactions, the defect of which is permanent.
There is no implied trust that was generated by the simulated transfers; because being
fictitious or simulated, the transfers were null and void ab initio-from the very
beginning and thus vested no rights whatsoever in favor of Luis Tongoy or his heirs.
That which is inexistent cannot give life to anything at all.
Case: Lita Enterprises, Inc. vs. Second Civil Cases Division, IAC, Nicasio Ocampo
and Francisca Garcia, April 27, 1984, J. Escolin.
Facts: Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia,
herein private respondents, purchased in installment from the Delta Motor Sales
Corporation five (5) Toyota Corona Standard cars to be used as taxicabs. Since they
had no franchise to operate taxicabs, they contracted with petitioner Lita Enterprises,
Inc., through its representative, Manuel Concordia, for the use of the latter's certificate
of public convenience in consideration of an initial payment of P1,000.00 and a
monthly rental of P200.00 per taxicab unit. To effectuate said agreement, the aforesaid
cars were registered in the name of petitioner Lita Enterprises, Inc, Possession,
35

however, remained with tile spouses Ocampo who operated and maintained the same
under the name Acme Taxi, petitioner's trade name.
Thereafter, in March 1973, respondent Nicasio Ocampo decided to register his taxicabs
in his name. He requested the manager of petitioner Lita Enterprises, Inc. to turn over
the registration papers to him, but the latter allegedly refused.
Issue: Whether or not the Spouses can recover the cars from Lita Enterprises.
Held: NO. Unquestionably, the parties herein operated under an arrangement,
comonly known as the "kabit system", whereby a person who has been granted a
certificate of convenience allows another person who owns motors vehicles to
operate under such franchise for a fee. A certificate of public convenience is a
special privilege conferred by the government . Abuse of this privilege by the grantees
thereof cannot be countenanced. The "kabit system" has been Identified as one of the
root causes of the prevalence of graft and corruption in the government transportation
offices. In the words of Chief Justice Makalintal, "this is a pernicious system that
cannot be too severely condemned. It constitutes an imposition upon the good faith of
the government.
Although not outrightly penalized as a criminal offense, the "kabit system" is
invariably recognized as being contrary to public policy and, therefore, void and
inexistent under Article 1409 of the Civil Code, It is a fundamental principle that the
court will not aid either party to enforce an illegal contract, but will leave them both
where it finds them. Upon this premise, it was flagrant error on the part of both the trial
and appellate courts to have accorded the parties relief from their predicament. Article
1412 of the Civil Code denies them such aid. It provides:
ART. 1412. if the act in which the unlawful or forbidden cause consists does
not constitute a criminal offense, the following rules shall be observed;
(1) when the fault, is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the
performance of the other's undertaking.
The defect of inexistence of a contract is permanent and incurable, and cannot be cured
by ratification or by prescription. As this Court said in Eugenio v. Perdido, 2 "the mere
lapse of time cannot give efficacy to contracts that are null void."
The principle of in pari delicto is well known not only in this jurisdiction but also in
the United States where common law prevails. Under American jurisdiction, the
doctrine is stated thus: "The proposition is universal that no action arises, in equity or at
law, from an illegal contract; no suit can be maintained for its specific performance, or
to recover the property agreed to be sold or delivered, or damages for its property
agreed to be sold or delivered, or damages for its violation. The rule has sometimes
been laid down as though it was equally universal, that where the parties are in pari
delicto, no affirmative relief of any kind will be given to one against the other."
Although certain exceptions to the rule are provided by law, We see no cogent
reason why the full force of the rule should not be applied in the instant case.
"Ex pacto illicito non oritur actio" [No action arises out of an illicit bargain] is the
tune-honored maxim that must be applied to the parties in the case at bar. Having
entered into an illegal contract, neither can seek relief from the courts, and each must
bear the consequences of his acts.

Case: Francisca Arsenal and Remedios Arsenal vs. IAC, Heirs of Torcuato
Suralta, July 14, 1986, J. Gutierrez Jr.
Facts: On January 7, 1954, the defendant Filomeno Palaos secured OCT No. P-290
(Exh. A) from the Register of Deeds of Bukidnon for Lot 81, Pls-112, consisting of
87,829 sq. m. more or less, situated at former barrio of Kitaotao now a municipality of
Bukidnon, by virtue of Homestead Patent No. V-23602 granted to him.
On September 10, 1957, said Filomeno Palaos and his wife Mahina Lagwas executed
in favor of the plaintiff, Torcuato Suralta, sold four (4) hectares of the land embraced in
his Torrens Certificate for the sum of P 890.00, Philippine Currency, by means of a
deed of acknowledged before a Notary (Exh. C). Plaintiff Suralta immediately took
possession of the four-hectare portion of Lot 81 above-mentioned cultivated and
worked the same openly, continuously and peacefully up to the present time in concept
of owner thereof. He built a house and introduced permanent improvements thereon
now valued at no less than P20,000.00.
Sometime in 1964, the defendant-spouses Francisca Arsenal and Remedio Arsenal
became tenants of an adjoining land owned by Eusebio Pabualan that is separated from
the land in question only by a public road. On March 14, 1967, said Filomeno Palaos
and his wife executed a notarial Deed of Sale (Exh. 1 for the defendant) in
consideration of the amount of P800.00, Philippine Currency, supposedly for the
remaining three (3) hectares of their land without knowing that the document covered
the entirety of Lot 81 including the four-hectare portion previously deeded by them to
the plaintiff. The deed of sale was presented to the Office of the Commission on
National Integration at Malaybalay for approval because Palaos and his wife belong to
the cultural minorities and unlettered. The field representative and inspector of that
office subsequently approved the same (Exh. K and Exh. 2) without inspecting the land
to determine the actual occupants thereon.
On July 11, 1973, the plaintiff presented his Sales Contract in the Office of the Register
of Deeds but it was refused registration for having been executed within the prohibitive
period of five years from the issuance of the patent. In order to cure the defect, he
caused Filomeno Palaos to sign a new Sales Contract (Exh. D) in his favor before
Deputy Clerk of Court Florentina Villanueva covering the same four-hectare portion of
Lot 81. In August 1973, the plaintiff caused the segregation of his portion from the rest
of the land by Geodetic Engineer Benito P. Balbuena, who conducted the subdivision
survey without protest from Francisca Arsenal who was notified thereof. The
subdivision plan (Exh. E) was approved by the Commissioner of Land Registration on
April 18, 1974.
On March 6, 1974, Torcuato Suralta filed a case against Filomeno Palaos, Mahina
Lagwas, Francisca Arsenal, Remedio Arsenal and the Register of Deeds of Bukidnon
for the annulment of Transfer Certificate of Title No. T-7879 issued to the Arsenals
insofar as it covers the four-hectare portion previously sold to him. In answer to the
36

complaint, the Arsenals denied previous knowledge of the sale to Suralta of the land in
question. As a special defense, they assailed the validity of the purchase by Suralta in
1957, pointing to the prohibition contained in the Public Land Law against its
disposal within the period of five years from the issuance of the homestead patent.
They also questioned the legality of the sale made to Suralta in 1957 by Filomeno
Palaos and Mahina Lagwas for not having been approved by the Commission on
National Integration despite the fact that Palaos and his wife belong to the cultural
minorities, are illiterates, and do not understand the English language in which the deed
of sale in favor of Suralta was written.
Issue: Whether or not the contract of sale executed in 1957 between respondents
Palaos and Suralta is null and void.
Held: YES. The law on the matter which is the Public Land Act (Commonwealth Act
No. 141, as amended) provides:
Sec. 118. Except in favor, of the Government or any of its branches, units or
institutions, lands acquired under free patent or homestead provisions shall not be
subject to encumbrance or alienation from the date of the approval of the application
and for a term of five years from and after the date of issuance of the patent or grant
nor shall they become liable to the satisfaction of any debt contracted prior to the
expiration of said period, but the improvements or crops on the land may be mortgaged
or pledged to qualified persons, associations, or corporations.
No alienation, transfer, or conveyance of any homestead after five years and before
twenty-five years after issuance of title shall be valid without the approval of the
Secretary of Agriculture and Natural Resources, which approval shall not be denied
except on constitutional and legal ground (As amended by Com. Act No. 456,
approved June 8, 1939).
xxx xxx xxx
Sec. 120. Conveyance and encumbrance made by persons belonging to the so-called
'non-Christian Filipinos' or national cultural minorities, when proper, shall be valid if
the person making the conveyance or encumbrance is able to read and can understand
the language in which the instrument or conveyance or encumbrance is written.
Conveyances and encumbrances made by illiterate non-Christians or literate nonChristians where the instrument of conveyance is in a language not understood by the
said literate non-Christian shall not be valid unless duly approved by the Chairman of
the Commission on National Integration. (As amended by Rep. Act No. 3872,
approved June 18, 1964).
xxx xxx xxx
Sec. 124. Any acquisition, conveyance, alienation, transfer, or other contract made or
executed in violation of any of the provisions of sections one hundred and eighteen,
one hundred and twenty, one hundred and twenty-one, one hundred and twenty-two,
and one hundred twenty-three of this Act shall be unlawful and null and void from its
execution and shall produce the effect of annulling and cancelling the grant, title,
patent, or permit originally issued, recognized or confirmed, actually or presumptively,
and cause the reversion of the property and its improvements to the State.
The above provisions of law are clear and explicit. A contract which purports of
alienate, transfer, convey or encumber any homestead within the prohibitory period of
five years from the date of the issuance of the patent is void from its execution. In a
number of cases, this Court has held that such provision is mandatory (De los Santos v.
Roman Catholic Church of Midsayap, 94 Phil. 405).
Under the provisions of the Civil Code, a void contract is inexistent from the
beginning. It cannot be ratified neither can the right to set up the defense of its illegality
be waived. (Art. 1409, Civil Code).
To further distinguish this contract from the other kinds of contract, a commentator has
stated that:
The right to set up the nullity of a void or non-existent contract is not limited to the
parties as in the case of annullable or voidable contracts; it is extended to third persons
who are directly affected by the contract. (Tolentino, Civil Code of the Philippines,
Vol. IV, p. 604, [1973]).
Any person may invoke the inexistence of the contract whenever juridical effects
founded thereon are asserted against him. (Id. p. 595).
Concededly, the contract of sale executed between the respondents Palaos and Suralta
in 1957 is void. It was entered into three (3) years and eight (8) months after the grant
of the homestead patent to the respondent Palaos in 1954.
Being void, the foregoing principles and rulings are applicable. Thus, it was erroneous
for the trial court to declare that the benefit of the prohibition in the Public Land Act
"does not inure to any third party." Such a sweeping declaration does not find support
in the law or in precedents. A third person who is directly affected by a void contract
may set up its nullity. In this case, it is precisely the petitioners' interest in the disputed
land which is in question.
As to whether or not the execution by the respondents Palaos and Suralta of another
instrument in 1973 cured the defects in their previous contract, we reiterate the rule that
an alienation or sale of a homestead executed within the five-year prohibitory period is
void and cannot be confirmed or ratified. This Court has on several occasions ruled on
the nature of a confirmatory sale and the public policy which proscribes it. In the case
of Menil v. Court of Appeals (84 SCRA 413), we stated that:
It cannot be claimed that there are two contracts: one which is undisputably null and
void, and another, having been executed after the lapse of the 5-year prohibitory
period, which is valid. The second contract of sale executed on March 3, 1964 is
admittedly a confirmatory deed of sale. Even the petitioners concede this point.
(Record on Appeal, pp. 55-56). Inasmuch as the contract of sale executed on May 7,
1960 is void for it is expressly prohibited or declared void by law (CA 141, Section
118), it therefore cannot be confirmed nor ratified.
Case: Manotok Realty, Inc. vs. CA and Felipe Madlangawa, April 30, 1987, J.
Gutierrez Jr.
37

Facts: The private respondent Felipe Madlangawa claims that he has been occupying a
parcel of land in the Clara de Tambunting de Legarda Subdivision since 1949 upon
permission being obtained from Andres Ladores, then an overseer of the subdivision,
with the understanding that the respondent would eventually buy the lot.
On April 2, 1950, the owner of the lot, Clara Tambunting, died and her entire estate,
including her paraphernal properties which covered the lot occupied by the private
respondent were placed under custodia legis.
On April 22, 1950, the private respondent made a deposit for the said lot in the sum of
P1,500.00 which was received by Vicente Legarda, husband of the late owner. As
evidenced by the receipt issued by Vicente Legarda, the lot consisted of an area of 240
square meters and was sold at P30.00 per square meter. There, thus, remained an
unpaid balance of P5,700.00 but the private respondent did not pay or was unable to
pay this balance because after the death of the testatrix, Clara Tambunting de Legarda,
her heirs could not settle their differences. Apart from the initial deposit, no further
payments were made from 1950.
On April 28, 1950, Don Vicente Legarda was appointed as a special administrator of
the estate. Meanwhile the private respondent remained in possession of the lot in
question.
In its effort to clear the Tambunting Subdivision of its squatters and occupants, the
petitioner caused the publication of several notices in the Manila Times issues of
January 1, 1966 and the Taliba issues of January 2, and March 16, 1966, advising the
occupants to vacate their respective premises, otherwise, court action with damages
would follow. In addition to these notices by publication, the petitioner sent circulars to
the occupants to vacate.
The private respondent was one of the many occupants who refused to vacate the lots
they were occupying, so that on April 26, 1968, the petitioner filed the action below to
recover the said lot.
Issue: Whether or not the sale of the lot to Felipe Madlangawa is valid.
Held: NO. We are, therefore, led to the inevitable conclusion that the sale between
Don Vicente Legarda and the private respondent is void ab initio, the former being
neither an owner nor administrator of the subject property. Such being the case, the sale
cannot be the subject of the ratification by the Philippine Trust Company or the probate
court. As was held in the case of Arsenal v. Intermediate Appellate Court (143 SCRA
40, 49):
Under the provisions of the Civil Code, a void contract is inexistent
from the beginning. It cannot be ratified neither can the right to set
up the defense of its illegality be waived. (Art. 1409, Civil Code .
To further distinguish this contract from the other kinds of contract, a
commentator has stated that.
The right to set up the nullity of a void or nonexistent contract is not limited to the parties as in
the case of annuable or voidable contracts, it is
extended to third persons who are directly affected
by the contract. (Tolentino, Civil Code of the
Philippines, Vol. IV, p. 604, [1973]).

Any person may invoke the inexistence of the
contract whenever juridical affects founded thereon
are asserted against him. (Id. P. 595).
Section 1, Rule 89 of the Revised Rules of Court provides for the procedure on how a
property in custodia legis can be disposed of by sale:
Order of sale of personalty. Upon the application of the executor
or administrator, and on written notice to the heirs and other persons
interested, the court may order the whole or a part of the personal
estate to be sold, if it appears necessary for the purpose of paying
debts, expenses of administration, or legacies, or for the preservation
of the property.
After the appointment of Don Vicente Legarda as administrator of the estate of Dona
Clara Tambunting, he should have applied before the probate court for authority to sell
the disputed property in favor of the private respondent. If the probate court approved
the request, then Don Vicente Legarda would have been able to execute a valid deed of
sale in favor of the respondent. Unfortunately, there was no effort on the part of the
administrator to comply with the above-quoted rule of procedure nor on that of the
respondent to protect his interests or to pay the balance of the installments to the court
appointed administrator.
Case: Cornelia Clanor Vda. De Portugal, et al. Vs. IAC and Hugo C. Portugal,
March 25, 1988, J. Sarmiento.
Facts: Petitioner Cornelia Clanor and her late husband Pascual Portugal, during the
lifetime of the latter, were able to accumulate several parcels of real property. Among
these were a parcel of residential land situated in Poblacion, Gen. Trias, Cavite,
designated as Lot No. 3201, consisting of 2,069 square meters, more or less, and
covered by T.C.T. No. RT-9355, in their names, and an agricultural land located at
Pasong Kawayan, Gen. Trias, Cavite, with an area of 43,587 square meters, more or
less, known as Lot No. 2337, and also registered in their names under T.C.T. No. RT9356 of the Registry of Deeds for the Province of Cavite.
Sometime in January, 1967, the private respondent Hugo Portugal, a son of the
spouses, borrowed from his mother, Cornelia, the certificates of title to the abovementioned parcels of land on the pretext that he had to use them in securing a loan that
he was negotiating. Cornelia, the loving and helpful mother that she was, assented and
delivered the titles to her son. The matter was never again brought up until after
Pascual Portugal died on November 17, 1974. (Cornelia herself died on November 12,
1987.) When the other heirs of the deceased Pascual Portugal, the petitioners herein,
for the purposes of executing an extra-judicial partition of Pascual's estate, wished to
have all the properties of the spouses collated, Cornelia asked the private respondent
for the return of the two titles she previously loaned, Hugo manifested that the said
titles no longer exist. When further questioned, Hugo showed the petitioners Transfer
Certificate of Title T.C.T. No. 23539 registered in his and his brother Emiliano
38

Portugal's names, and which new T.C.T. cancelled the two previous ones. This
falsification was triggered by a deed of sale by which the spouses Pascual Portugal and
Cornelia Clanor purportedly sold for P8,000.00 the two parcels of land adverted to
earlier to their two sons, Hugo and Emiliano. Confronted by his mother of this fraud,
Emiliano denied any participation. And to show his good faith, Emiliano caused the
reconveyance of Lot No. 2337 previously covered by TCT No. RT-9356 and which
was conveyed to him in the void deed of sale. Hugo, on the other hand, refused to make
the necessary restitution thus compelling the petitioners, his mother and his other
brothers and sisters, to institute an action for the annulment of the controversial deed of
sale and the reconveyance of the title over Lot No. 3201 (the residential land).
Issue: Whether or not the deed of sale is valid.
Held: NO. The case at bar is not purely an action for reconveyance based on an
implied or constructive trust. Neither is it one for the annullment of a fraudulent
contract. A closer scrutiny of the records of the case readily supports a finding that
fraud and mistake are not the only vices present in the assailed contract of sale as held
by the trial court. More than these, the alleged contract of sale is vitiated by the total
absence of a valid cause or consideration. The petitioners in their complaint, assert that
they, particularly Cornelia, never knew of the existence of the questioned deed of sale.
They claim that they came to know of the supposed sale only after the private
respondent, upon their repeated entreaties to produce and return the owner's duplicate
copy of the transfer certificate of title covering the two parcels of land, showed to them
the controversial deed. And their claim was immeasurably bolstered when the private
respondent's co-defendant below, his brother Emiliano Portugal, who was allegedly his
co-vendee in the transaction, disclaimed any knowledge or participation therein. If this
is so, and this is not contradicted by the decisions of the courts below, the inevitable
implication of the allegations is that contrary to the recitals found in the assailed deed,
no consideration was ever paid at all by the private respondent. Applying the
provisions of Articles 1350, 1352, and 1409 of the new Civil Code in relation to the
indispensable requisite of a valid cause or consideration in any contract, and what
constitutes a void or inexistent contract, we rule that the disputed deed of sale is void
ab initio or inexistent, not merely voidable. And it is provided in Article 1410 of the
Civil Code, that '(T)he action or defense for the declaration of the inexistence of a
contract does not prescribe.
But even if the action of the petitioners is for reconveyance of the parcel of land based
on an implied or constructive trust, still it has been seasonably filed. For as heretofore
stated, it is now settled that actions of this nature prescribe in ten years, the point of
reference being the date of registration of the deed or the date of the issuance of the
certificate of titIe over the property. 4 In this case, the petitioner commenced the instant
action for reconveyance in the trial court on October 26, 1976, or less than ten years
from January 23, 1967 when the deed of sale was registered with the Register of Deeds.
5
Clearly, even on this basis alone, the present action has not yet prescribed.
Case: Heirs of Spouses Luis Yanas and Maria Aglimot (represented by Abraham
Yanas) vs. Heirs of Spouses Antonio Acaylar, et al., April 25, 1985, J. Aquino Jr.
Facts: This case is about the validity of the sale of land executed by Luis Yanas, an
illiterate Subano. Yanas, also known as Sulung Subano, had occupied, even before
1926, Lot No. 5408 with an area of 13 hectares located at Sitio Dionom (Lower
Gumay), Barrio Sianib, Pinan (Dipolog), Zamboanga del Norte (Exh. L). Through
lawyer Leoncio S. Hamoy, Yanas claimed the lot in the cadastral proceeding.
It is adjacent to the Dionom Creek and is about two kilometers from the national
highway. He planted the land to rice, corn, coconuts and fruit trees. He built houses
thereon. He declared it for tax purposes in his name. Judge Manalac on September 30,
1941 issued Decree No. N-11330 adjudicating Lot No. 5408 to Yanas "married to
Maria Aglimot" (Exh. C).
Lawyer Valeriano S. Concha, Sr., an adjoining owner of Yanas since 1946, who
became clerk of court, testified that Yanas had always occupied the lot since 1946 up to
his death in 1962 (103 tsn June 4, 1970). His son filed an adverse claim for Yanas.
On August 7,1950 Yanas thumbmarked in Dapitan a deed of sale and conveyance
wherein he purportedly sold to Antonio L. Acaylar of Dapitan for P200 his 13-hectare
land. The sale was notarized on the following day, August 8. An instrumental witness
was lawyer Hamoy. The sale was approved by Governor Felipe B. Azcuna on May 15,
1953 or 33 months after the sale.
It is the theory of the heirs of Yanas that that deed of sale is fictitious and fraudulent
because what Yanas thumbmarked on August 7, 1950 was supposed to be a receipt
attesting that he owed Hamoy P 200 for his legal services. Hamoy allegedly taking
advantage of his illiteracy, made Yanas affix his thumbmark to a deed of sale in
English (Exh. 2).
The decree issued by Judge Manalac in 1941 was registered only on June 5, 1954. On
that day, OCT No. 64 was issued to Yanas. On December 21, 1954 Acaylar registered
the 1950 deed of sale. He obtained TCT No. T-3338 (Exh. 5). How Acaylar came to
have possession of the owner's duplicate of OCT No. 64 and why it was not delivered
to Yanas are not shown in the record.
When Yanas discovered that his title was cancelled, he caused on August 28, 1958 an
adverse claim to be annotated on Acaylar's title. He stated in his adverse claim that he
never sold his land and that the price of P200 was grossly inadequate because the land
was worth not less than P6,000 (Exh. D).
Yanas died in 1962. His widow, Maria Aglimot, also a Subano, and his children filed in
1963 an action to declare void Acaylar's title. A notice of lis pendens was annotated on
that title. Aglimot died in 1965. The trial court found the sale to be valid and binding.
The Appellate Court affirmed the trial court's decision. The heirs of Yanas appealed to
this Court.
Issue: Whether or not the deed of sale is valid.
Held: NO. We hold that the sale was fictitious and fraudulent. Among the badges of
fraud and fictitiousness taken collectively are the following: (1) the fact that the sale is
in English, the alleged vendor being illiterate; (2) the fact that his wife did not join in
the sale and that her name is indicated in the deed as "Maria S. Yanas" when the truth
is that her correct name is Maria Aglimot Yanas; (3) the obvious inadequacy of P200 as
price for a 13-hectare land (P15.40 a hectare); (4) the notarization of the sale on the day
following the alleged thumbmarking of the document; (5) the failure to state the
39

boundaries of the lot sold; (6) the fact that the governor approved it more than two
years after the alleged sale; (7) its registration more than three years later, and (8) the
fact that the Acaylars were able to occupy only four hectares out of the 13 hectares and
were eventually forcibly ousted therefrom by the children and agents of the vendor. It
was not a fair and regular transaction done in the ordinary course of business.
The fact that the alleged sale took place in 1950 and the action to have it declared void
or inexistent was filed in 1963 is immaterial. The action or defense for the declaration
of the inexistence of a contract does not prescribe (Art. 1410, Civil Code).
Case: Epifania Sarsosa Vda de Barsobia and Pacita Vallar vs. Victoriano Cuenco,
April 16, 1982, J. Melencio-Herrera.
Facts: On September 5, 1936, Epifania Sarsosa then a widow, sold the land in
controversy to a Chinese, Ong King Po, for the sum of P1,050.00 (Exhibit "B"). Ong
King Po took actual possession and enjoyed the fruits thereof.
On August 5, 1961, Ong King Po sold the litigated property to Victoriano T. Cuenco
(respondent herein), a naturalized Filipino, for the sum of P5,000.00 (Exhibit "A").
Respondent immediately took actual possession and harvested the fruits therefrom.
On March 6, 1962, Epifania "usurped" the controverted property, and on July 26, 1962,
Epifania (through her only daughter and child, Emeteria Barsobia), sold a one-half
(1/2) portion of the land in question to Pacita W. Vallar, the other petitioner herein
(Exhibit "2"). Epifania claimed that it was not her intention to sell the land to Ong King
Po and that she signed the document of sale merely to evidence her indebtedness to the
latter in the amount of P1,050.00. Epifania has been in possession ever since except for
the portion sold to the other petitioner Pacita.
On September 19, 1962, respondent filed a Forcible Entry case against Epifania before
the Municipal Court of Sagay, Camiguin. The case was dismissed for lack of
jurisdiction since, as the laws then stood, the question of possession could not be
properly determined without first settling that of ownership.
On December 27, 1966, respondent instituted before the Court of First Instance of
Misamis Oriental a Complaint for recovery of possession and ownership of the litigated
land, against Epifania and Pacita Vallar (hereinafter referred to simply as petitioners).
In their Answer below, petitioners insisted that they were the owners and possessors of
the litigated land; that its sale to Ong King Po, a Chinese, was inexistent and/or void ab
initio; and that the deed of sale between them was only an evidence of Epifania's
indebtedness to Ong King Po.
Issue: Whether or not the sale of land is valid.
Held: YES. The facts stand, a parcel of coconut land was sold by its Filipino owner,
petitioner Epifania, to a Chinese, Ong King Po, and by the latter to a naturalized
Filipino, respondent herein. In the meantime, the Filipino owner had unilaterally
repudiated the sale she had made to the Chinese and had resold the property to another
Filipino. The basic issue is: Who is the rightful owner of the property?
There should be no question that the sale of the land in question in 1936 by Epifania to
40
6
Ong King Po was inexistent and void from the beginning (Art. 1409 [7], Civil Code)
because it was a contract executed against the mandatory provision of the 1935
Constitution, which is an expression of public policy to conserve lands for the
Filipinos. Said provision reads:
Save in cases of hereditary succession, no private agricultural land
shall be transferred or assigned except to individuals, corporations, or
associations, qualified to acquire or hold lands of the public domain.
7
Had this been a suit between Epifania and Ong King Po, she could have been declared
entitled to the litigated land on the basis, as claimed, of the ruling in Philippine
Banking Corporation vs. Lui She, 8 reading:
... For another thing, and this is not only cogent but also important.
Article 1416 of the Civil Code provides as an exception to the rule on
pari delicto that when the agreement is not illegal per se but is
merely prohibited, and the prohibition by the law is designed for the
protection of the plaintiff, he may, if public policy is thereby
enhanced, recover what he has sold or delivered. ...
But the factual set-up has changed. The litigated property is now in the hands of a
naturalized Filipino. It is no longer owned by a disqualified vendee. Respondent, as a
naturalized citizen, was constitutionally qualified to own the subject property. There
would be no more public policy to be served in allowing petitioner Epifania to recover
the land as it is already in the hands of a qualified person. Applying by analogy the
ruling of this Court in Vasquez vs. Giap and Li Seng Giap & Sons: 9
... if the ban on aliens from acquiring not only agricultural but also
urban lands, as construed by this Court in the Krivenko case, is to
preserve the nation's lands for future generations of Filipinos, that
aim or purpose would not be thwarted but achieved by making lawful
the acquisition of real estate by aliens who became Filipino citizens
by naturalization.
While, strictly speaking, Ong King Po, private respondent's vendor, had no rights of
ownership to transmit, it is likewise inescapable that petitioner Epifania had slept on
her rights for 26 years from 1936 to 1962. By her long inaction or inexcusable neglect,
she should be held barred from asserting her claim to the litigated property (Sotto vs.
Teves,
86 SCRA 157 [1978]).
Case: Vicente Godinez, et al. Vs. Fong Pak Luen, et al., Jan. 27, 1983, J. Gutierrez
Jr.
Facts: On September 30, 1966, the plaintiffs filed a complaint in the Court of First
Instance of Sulu alleging among others that they are the heirs of Jose Godinez who was
married to Martina Alvarez Godinez sometime in 1910; that during the marriage of
their parents the said parents acquired a parcel of land lot No. 94 of Jolo townsite with
an area of 3,665 square meters as evidenced by Original Certificate of Title No. 179 (D

-155) in the name of Jose Godinez; that their mother died sometime in 1938 leaving the
plaintiffs as their sole surviving heirs; that on November 27, 1941, without the
knowledge of the plaintiffs, the said Jose Godinez, for valuable consideration, sold the
aforesaid parcel of land to the defendant Fong Pak Luen, a Chinese citizen, which
transaction is contrary to law and in violation of the Civil Code because the latter being
an alien who is inhibited by law to purchase real property; that Transfer Certificate
Title No. 884 was then issued by the Register of Deeds to the said defendant, which is
null and void ab initio since the transaction constituted a non-existent contract; that on
January 11, 1963, said defendant Fong Pak Luen executed a power of attorney in favor
of his co-defendant Kwan Pun Ming, also an alien, who conveyed and sold the above
described parcel of land to co-defendant Trinidad S. Navata, who is aware of and with
full knowledge that Fong Pak Luen is a Chinese citizen as well as Kwan Pun Ming,
who under the law are prohibited and disqualified to acquire real property in this
jurisdiction; that defendant Fong Pak Luen has not acquired any title or interest in said
parcel of land as the purported contract of sale executed by Jose Godinez alone was
contrary to law and considered non- existent, so much so that the alleged attorney-infact, defendant Kwan Pun Ming had not conveyed any title or interest over said
property and defendant Navata had not acquired anything from said grantor and as a
consequence Transfer Certificate of Title No. 1322, which was issued by the Register
of Deeds in favor of the latter is null and void ab initio,- that since one-half of the said
property is conjugal property inherited by the plaintiffs from their mother, Jose
Godinez could -not have legally conveyed the entire property; that notwithstanding
repeated demands on said defendant to surrender to plaintiffs the said property she
refused and still refuses to do so to the great damage and prejudice of the plaintiffs; and
that they were constrained to engage the services of counsel in the sum of
P2,000.00.1wph1.t The plaintiffs thus pray that they be adjudged as the owners of
the parcel of land in question and that Transfer Certificate of Title RT-90 (T-884)
issued in the name of defendant Fong Pak Luen be declared null and void ab initio,
Issue: Whether or not the contract is null and void.
Held: YES. The meaning of the above provision was fully discussed in Krivenko v.
Register of Deeds of Manila (79 Phil. 461) which also detailed the evolution of the
provision in the public land laws, Act No. 2874 and Commonwealth Act No. 141. The
Krivenko ruling that "under the Constitution aliens may not acquire private or
agricultural lands, including residential lands" is a declaration of an imperative
constitutional policy. Consequently, prescription may never be invoked to defend that
which the Constitution prohibits. However, we see no necessity from the facts of this
case to pass upon the nature of the contract of sale executed by Jose Godinez and Fong
Pak Luen whether void ab initio, illegal per se or merely pro-exhibited.** It is enough
to stress that insofar as the vendee is concerned, prescription is unavailing. But neither
can the vendor or his heirs rely on an argument based on imprescriptibility because the
land sold in 1941 is now in the hands of a Filipino citizen against whom the
constitutional prescription was never intended to apply. The lower court erred in
treating the case as one involving simply the application of the statute of limitations.
From the fact that prescription may not be used to defend a contract which the
Constitution prohibits, it does not necessarily follow that the appellants may be allowed
to recover the property sold to an alien. As earlier mentioned, Fong Pak Luen, the
disqualified alien vendee later sold the same property to Trinidad S. Navata, a Filipino
citizen qualified to acquire real property.
Case : Donato Reyes Yap and Melitona Maravillas vs. Hon. Grageda and Jose
Rico, March 28, 1983, J. Gutierrez Jr.
Facts: On April 12, 1939, Maximino Rico, for and in his own behalf and that of the
minors Maria Rico, Filomeno Rico, Prisco Rico, and Lourdes' Rico, executed a Deed
of Absolute Sale (Annex 'A' to the complaint) over Lot 339 and a portion of Lot 327 in
favor of the petitioner Donato Reyes Yap who was then a Chinese national.
Respondent Jose A. Rico is the eldest son of Maximino Rico, one of the vendors in
Annex 'A'.
Subsequently, the petitioner as vendee caused the registration of the instrument of sale
and the cancellation of Original Certificates of Title Nos. 29332 and 29410 and the
consequent issuance in his favor of Transfer Certificate of Title No. T-2433 covering
the two lots subject matter of the Contract of Sale.
After the lapse of nearly fifteen years from and after the execution of the deed of
absolute sale, Donato Reyes Yap was admitted as a Filipino citizen and allowed to take
his oath of allegiance to the Republic of the Philippines. He was, thereafter, issued
Certificate of Naturalization No. 7, File No. 19 of the Court of First Instance of Albay.
On December 1, 1967, the petitioner ceded the major portion of Lot No. 327 consisting
of 1,078 square meters which he acquired by purchase under the deed of sale in favor
of his engineer son, Felix Yap, who was also a Filipino citizen because of the Filipino
citizenship of his mother and the naturalization of his father Donato Reyes Yap.
Subsequently, Lourdes Rico, aunt and co-heir of respondent Jose A. Rico. sold the
remaining portion of Lot 327 to the petitioner who had his rights thereon duly
registered under Act 496. Petitioner, Donato Reyes Yap, has been in possession of the
lots in question since 1939, openly, publicly, continuously, and adversely in the
concept of owner until the present time. The petitioner has one surviving son by his
first marriage to a Filipino wife. He has five children by his second marriage also to a
Filipina and has a total of 23 grandchildren all of whom are Filipino citizens.
The respondent court considered Section 5, Article XIII of the 1935 Constitution that
"no private agricultural land shall be transferred or assigned except to individuals,
corporations, or associations qualified to acquire or hold lands of the public domain in
the Philippines" to be an absolute and unqualified prohibition and, therefore, ruled that
a conveyance contrary to it would not be validated nor its void nature altered by the
subsequent naturalization of the vendee.
Issue: Whether or not the sale is valid.
Held: YES. The rulings in Vasquez v.Leng Seng Giap et al. (96 Phil. 447) and Sarosa
Vda. de Bersabia v. Cuenco (113 SCRA 547) sustain the petitioner's contentions. We
stated in Sarosa Vda de Bersabia:
There should be no question that the sale of the land in question in
1936 by Epifania to Ong King Po was inexistent and void from the
41

beginning (Art. 1409 [7], Civil Code) because it was a contract
executed against the mandatory provision of the 1935 Constitution,
which is an expression of public policy to conserve lands for the
Filipinos. Said provision reads:
Save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned
except to in. individuals, corporations, or
associations, qualified to acquire or hold lands of
the public domain.
Had this been a suit between Epifania and Ong King Po she could
have been declared entitled to the litigated land on the basis, as
claimed, of the ruling in Philippine Banking Corporation vs. Lui She,
reading:
... For another thing, and this is not only cogent but
also important. Article 1416 of the Civil Code
provides as an exception to the rule on pari delicto
that when the agreement is not illegal per se but is
merely prohibited, and the prohibition by the law is
designed for the protection of the plaintiff, he may,
if public policy is thereby enhanced, recover what
he has sold or delivered. ...
But the factual set-up has changed. The litigated property is now in
the hands of a naturalized Filipino. It is no longer owned by a
disqualified vendee. Respondent, as a naturalized citizen, was
constitutionally qualified to own the subject property. There would
be no more public policy to be served in allowing petitioner Epifania
to recover the land as it is already in the hands of a qualified person.
Applying by analogy the ruling of this Court in Vasquez vs. Giap and
Leng Seng Giap & Sons:
... if the ban on aliens from acquiring not only
agricultural but also urban lands, as construed by
this Court in the Krivenko case, is to preserve the
nation's lands for future generations of Filipinos,
that aim or purpose would not be thwarted but
achieved by making lawful the acquisition of real
estate by aliens who became Filipino citizens by
naturalization.
Only recently, we had occasion to reiterate the above rulings in Vicente Godines v.
Fong Pak Luen, et al. (G.R. No. L-36731, January 27, 1983).
Case: Jesus Pineda vs. Jose Dela Rama and CA, April 28, 1983, J. Gutierrez Jr.
Facts: Dela Rama is a practising lawyer whose services were retained by Pineda for
the purpose of making representations with the chairman and general manager of the
National Rice and Corn Administration (NARIC) to stop or delay the institution of
criminal charges against Pineda who allegedly misappropriated 11,000 cavans of palay
deposited at his ricemill in Concepcion, Tarlac. The NARIC general manager was
allegedly an intimate friend of Dela Rama.
According to Dela Rama, petitioner Pineda has used up all his funds to buy a big
hacienda in Mindoro and, therefore, borrowed the P9,300.00 subject of his complaint
for collection. In addition to filling the suit to collect the loan evidenced by the matured
promissory note, Dela Rama also sued to collect P5,000.00 attorney's fees for legal
services rendered as Pineda's counsel in the case being investigated by NARIC.
The Court of First Instance of Manila decided Civil Case No. 45762 in favor of
petitioner Pineda. The court believed the evidence of Pineda that he signed the
promissory note for P9,300.00 only because Dela Rama had told him that this amount
had already been advanced to grease the palms of the 'Chairman and General Manager
of NARIC in order to save Pineda from criminal prosecution.
Issue: Whether or not Dela Rama can recover from Pineda.
Held: NO. We agree with the trial court which believed Pineda. It is indeed unusual for
a lawyer to lend money to his client whom he had known for only three months, with
no security for the loan and on interest. Dela Rama testified that he did not even know
what Pineda was going to do with the money he borrowed from him. The petitioner had
just purchased a hacienda in Mindoro for P210,000.00, owned sugar and rice lands in
Tarlac of around 800 hectares, and had P60,000.00 deposits in three banks when he
executed the note. It is more logical to believe that Pineda would not borrow P5,000.00
and P4,300.00 five days apart from a man whom he calls a "fixer" and whom he had
known for only three months.
Whether or not the supposed cash advances reached their destination is of no moment.
The consideration for the promissory note - to influence public officers in the
performance of their duties - is contrary to law and public policy. The promissory note
is void ab initio and no cause of action for the collection cases can arise from it.
Case: Conchita Liguez vs. CA and Maria Ngo Vda de Lopez, et al., Dec. 18, 1957,
J.B.L. Reyes.
Facts: The case began upon complaint filed by petitioner-appellant against the widow
and heirs of the late Salvador P. Lopez to recover a parcel of 51.84 hectares of land,
situated in barrio Bogac-Linot, of the municipality of Mati, Province of Davao.
Plaintiff averred to be its legal owner, pursuant to a deed of donation of said land,
executed in her favor by the late owner, Salvador P. Lopez, on 18 May 1943. The
defense interposed was that the donation was null and void for having an illicit causa or
consideration, which was the plaintiff's entering into marital relations with Salvador P.
Lopez, a married man; and that the property had been adjudicated to the appellees as
heirs of Lopez by the court of First Instance, since 1949.
The Court of Appeals found that the deed of donation was prepared by the Justice of
the Peace of Mati, Davao, before whom it was signed and ratified on the date aforesaid.
At the time, the appellant Liguez was a minor, only 16 years of age. While the deed
42

recites
That the DONOR, Salvador P. Lopez, for and in the consideration of his love
and affection for the said DONEE, Conchita Liguez, and also for the good and
valuable services rendered to the DONOR by the DONEE, does by these
presents, voluntarily give grant and donate to the said donee, etc. (Paragraph
2, Exhibit "A")
the Court of Appeals found that when the donation was made, Lopez had been living
with the parents of appellant for barely a month; that the donation was made in view of
the desire of Salvador P. Lopez, a man of mature years, to have sexual relations with
appellant Conchita Liguez; that Lopez had confessed to his love for appellant to the
instrumental witnesses, with the remark that her parents would not allow Lopez to live
with her unless he first donated the land in question; that after the donation, Conchita
Liguez and Salvador P. Lopez lived together in the house that was built upon the
latter's orders, until Lopez was killed on July 1st, 1943, by some guerrillas who
believed him to be pro-Japanese.
It was also ascertained by the Court of Appeals that the donated land originally
belonged to the conjugal partnership of Salvador P. Lopez and his wife, Maria Ngo;
that the latter had met and berated Conchita for living maritally with her husband,
sometime during June of 1943; that the widow and children of Lopez were in
possession of the land and made improvements thereon; that the land was assessed in
the tax rolls first in the name of Lopez and later in that of his widow.; and that the deed
of donation was never recorded.
Upon these facts, the Court of Appeals held that the deed of donation was inoperative,
and null and void (1) because the husband, Lopez, had no right to donate conjugal
property to the plaintiff appellant; and (2) because the donation was tainted with illegal
cause or consideration, of which donor and donee were participants.
Issue: Whether or not the deed of donation is void.
Held: Partly Yes. In our opinion, the Court of Appeals erred in applying to the present
case the pari delicto rule. First, because it can not be said that both parties here had
equal guilt when we consider that as against the deceased Salvador P. Lopez, who was
a man advanced in years and mature experience, the appellant was a mere minor, 16
years of age, when the donation was made; that there is no finding made by the Court
of Appeals that she was fully aware of the terms of the bargain entered into by and
Lopez and her parents; that, her acceptance in the deed of donation (which was
authorized by Article 626 of the Old Civil Code) did not necessarily imply knowledge
of conditions and terms not set forth therein; and that the substance of the testimony of
the instrumental witnesses is that it was the appellant's parents who insisted on the
donation before allowing her to live with Lopez. These facts are more suggestive of
seduction than of immoral bargaining on the part of appellant. It must not be forgotten
that illegality is not presumed, but must be duly and adequately proved.
In the second place, the rule that parties to an illegal contract, if equally guilty, will not
be aided by the law but will both be left where it finds them, has been interpreted by
this Court as barring the party from pleading the illegality of the bargain either as a
cause of action or as a defense. Memo auditor propriam turpitudinem allegans. The
text of the articles makes it plain that the donation made by the husband in
contravention of law is not void in its entirety, but only in so far as it prejudices the
interest of the wife. In this regard, as Manresa points out (Commentaries, 5th Ed., pp.
650-651, 652-653), the law asks no distinction between gratuitous transfers and
conveyances for a consideration.
To determine the prejudice to the widow, it must be shown that the value of her share
in the property donated can not be paid out of the husband's share of the community
profits. The requisite data, however, are not available to us and necessitate a remand of
the records to the court of origin that settled the estate of the late Salvador P. Lopez.
The situation of the children and forced heirs of Lopez approximates that of the widow.
As privies of their parent, they are barred from invoking the illegality of the donation.
But their right to a legitime out of his estate is not thereby affected, since the legitime is
granted them by the law itself, over and above the wishes of the deceased. Hence, the
forced heirs are entitled to have the donation set aside in so far as in officious: i.e., in
excess of the portion of free disposal (Civil Code of 1889, Articles 636, 654) computed
as provided in Articles 818 and 819, and bearing in mind that "collationable gifts"
under Article 818 should include gifts made not only in favor of the forced heirs, but
even those made in favor of strangers, as decided by the Supreme Court of Spain in its
decisions of 4 May 1899 and 16 June 1902. So that in computing the legitimes, the
value of the property to herein appellant, Conchita Liguez, should be considered part of
the donor's estate. Once again, only the court of origin has the requisite date to
determine whether the donation is inofficious or not.
With regard to the improvements in the land in question, the same should be governed
by the rules of accession and possession in good faith, it being undisputed that the
widow and heirs of Lopez were unaware of the donation in favor of the appellant when
the improvements were made.
Case: Philippine Banking Corp (representing the Estate of Justinia Santos Y

Faustino) vs. Lui She (in her own behalf and as administratrix of the intestate
estate of Wong Heng), Dec. 18, 1967, J. Castro.
Facts: On November 15, 1957, the parties entered into the lease contract for 50 years:
that ten days after, that is on November 25, they amended the contract so as to make it
cover the entire property of Justina Santos; that on December 21, less than a month
after, they entered into another contract giving Wong Heng the option to buy the leased
premises should his pending petition for naturalization be granted; that on November
18, 1958, after failing to secure naturalization and after finding that adoption does not
confer the citizenship of the adopting parent on the adopted, the parties entered into
two other contracts extending the lease to 99 years and fixing the period of the option
to buy at 50 years.
which indubitably demonstrate that each of the contracts in question was designed to
carry out Justina Santos' expressed wish to give the land to Wong and thereby in effect
place its ownership in alien hands,1 about which we shall have something more to say
toward the end of this resolution. We concluded that "as the lease contract was part of a
scheme to violate the Constitution it suffers from the same infirmity that renders the
43

other contracts void and can no more be saved from illegality than the rest of the
contracts."
Issue: Whether or not the contract is valid.
Held: NO. As for the 1959 wills, it is said that they manifest a desire to abide by the
law, as is evident from the statement therein that Wong's right to buy the land be
allowed "anytime he or his children should be entitled to buy lands in the Philippines
(i.e., upon becoming Filipino citizens)". It seems obvious, however, that this is nothing
but a reiteration of the substance of the lease contract and conditional option to buy
which in compensation, as our decision demonstrates, amount to a conveyance, the
protestation of compliance with the law notwithstanding. In cases like the one at bar,
motives are seldom avowed and avowals are not always candid. The problem is not,
however, insuperable, especially as in this case the very witnesses for the defendantappellant testified that
Considering her age, ninety (90) years old at the time and her condition, she is
a wealthy woman, it is just natural when she said. "This is what I want and
this will be done." In particular reference to this contract of lease, when I said
"This is not proper, she said 'you just go ahead, you prepare that, I am the
owner, and if there is illegality, I am the only one that can question the
illegality.'"6
The ambition of the old woman before her death, according to her revelation
to me, was to see to it that these properties be enjoyed, even to own them, by
Wong Heng because Doa Justina told me that she did not have any relatives,
near or far, and she considered Wong Heng as a son and his children her
grandchildren; especially her consolation in life was when she would hear the
children reciting prayers in Tagalog.7
She was very emphatic in the care of the seventeen (17) dogs and of the maids who
helped her much, and she told me to see to it that no one could disturb Wong Heng
from those properties. That is why we thought of adoption, believing that thru adoption
Wong Heng might acquired Filipino citizenship, being the adopted child of a Filipino
citizen.
Case: Heirs of Marciana Avila vs. CA and Aladino Ch. Bacarrisas, Nov. 14, 1986,
J. Paras.
Facts: In 1939, the Court of First Instance of Misamis Oriental, as a cadastral court,
adjudicated Lots 594 and 828 of the Cadastral Survey of Cagayan to Paz Chavez. But
because Paz Chavez failed to pay the property taxes of Lot 594, the government offered
the same for sale at a public auction. Marciana G. Avila, a teacher, wife of Leonardo
Avila and the mother of the herein petitioners, participated in and won the bidding.
Despite the provision of Section 579 of the Revised Administrative Code prohibiting
public school teachers from buying delinquent properties, nobody, not even the
government questioned her participation in said auction sale. In fact on February 20,
1940, after the expiration of the redemption period, the Provincial Treasurer executed
in her favor the final bill of sale. (Rollo, pp. 10-11).
Sometime in 1947, OCT Nos. 100 and 101, covering said Lots 594 and 828, were
issued in favor of Paz Chavez. In opposition thereto, private respondents filed a petition
for review of the decrees on August 25, 1947 at the Court of First Instance of Misamis
Oriental, Branch II, in Cadastral Case No. 17, Lot No. 594 entitled "The Director of
Lands, Applicant v. Atanacia Abalde, et al., Claimants in Re: Petition for Review of
Decree, Marciana G. Avila, Petitioner vs. Paz Chavez, Respondents."
Issue: Whether or not the purchase of Avila is valid.
Held: NO. While it is true that Marciana Avila, their mother and predecessor-ininterest, purchased the questioned property at a public auction conducted by the
government; paid the purchase price; and was issued a final bill of sale after the
expiration of the redemption period, it is however undisputed that such purchase was
prohibited under Section 579 of the Revised Administrative Code, as amended, which
provides:
Section 579. Inhibition against purchase of property at tax sale.Official and employees of the Government of the Republic of the
Philippines are prohibited from purchasing, directly or indirectly,
from the Government, any property sold by the Government for the
non-payment of any public tax. Any such purchase by a public
official or employee shall be void.
Thus, the sale to her of Lot 594 is void.
On the other hand, under Article 1409 of the Civil Code, a void contract is inexistent
from the beginning. It cannot be ratified neither can the right to set up the defense of its
illegality be waived. (Arsenal, et al. vs, The Intermediate Appellate Court. et al., G.R.
No. 66696, July 14, 1986). Moreover, Marciana Avila was a party to an illegal
transaction, and therefore, under Art. 1412 of the Civil Code, she cannot recover what
she has given by reason of the contract or ask for the fulfillment of what has been
promised her.
Furthermore, in a registration case, the judgment confirming the title of the applicant
and ordering its registration in his name necessarily carries with it the delivery of
possession which is an inherent element of the right of ownership. (Abulocion et al. v.
CFI of Iloilo, et al., 100 Phil. 553 [1956]). Hence, a writ of possession may be issued
not only against the person who has been defeated in a registration case but also against
anyone unlawfully and adversely occupying the land or any portion thereof during the
land registration proceedings up to the issuance of the final decree. It is the duty of the
registration court to issue said writ when asked for by the successful claimant.
(Demorar v. Ibaez, etc., et al., 97 Phil. 72 [1955]; Abulocion et al v. CFI of Iloilo, et
al., supra).
Under the circumstances, possession cannot be claimed by petitioners, because their
predecessor-in-interest besides being at fault is not the successful claimant in the
registration proceedings and hence not entitled to a writ of possession. As correctly
stated by the Court of Appeals when respondent Court issued the writ of execution as
to Lot 594, there really was no legal basis for the same, for Avila had not secured a
decree, nor a judgment of confirmation of title over said lot.
Case: Teja Marketing And/Or Angel Jaucian vs. IAC and Pedro N. Nale, March 9,
44

1987, J. Paras.
Facts: On May 9, 1975, the defendant bought from the plaintiff a motorcycle with
complete accessories and a sidecar in the total consideration of P8,000.00 as shown by
Invoice No. 144 (Exh. "A"). The records of the LTC show that the motorcycle sold to
the defendant was first mortgaged to the Teja Marketing by Angel Jaucian though the
Teja Marketing and Angel Jaucian are one and the same, because it was made to appear
that way only as the defendant had no franchise of his own and he attached the unit to
the plaintiff's MCH Line. The agreement also of the parties here was for the plaintiff to
undertake the yearly registration of the motorcycle with the Land Transportation
Commission. Pursuant to this agreement the defendant on February 22, 1976 gave the
plaintiff P90.00, the P8.00 would be for the mortgage fee and the P82.00 for the
registration fee of the motorcycle. The plaintiff, however failed to register the
motorcycle on that year on the ground that the defendant failed to comply with some
requirements such as the payment of the insurance premiums and the bringing of the
motorcycle to the LTC for stenciling, the plaintiff saying that the defendant was hiding
the motorcycle from him. Lastly, the plaintiff explained also that though the ownership
of the motorcycle was already transferred to the defendant the vehicle was still
mortgaged with the consent of the defendant to the Rural Bank of Camaligan for the
reason that all motorcycle purchased from the plaintiff on credit was rediscounted with
the bank.
It also appears and the Court so finds that defendant purchased the motorcycle in
question, particularly for the purpose of engaging and using the same in the
transportation business and for this purpose said trimobile unit was attached to the
plaintiffs transportation line who had the franchise, so much so that in the registration
certificate, the plaintiff appears to be the owner of the unit. Furthermore, it appears to
have been agreed, further between the plaintiff and the defendant, that plaintiff would
undertake the yearly registration of the unit in question with the LTC. Thus, for the
registration of the unit for the year 1976, per agreement, the defendant gave to the
plaintiff the amount of P82.00 for its registration, as well as the insurance coverage of
the unit.
Eventually, petitioner Teja Marketing and/or Angel Jaucian filed an action for "Sum of
Money with Damages" against private respondent Pedro N. Nale in the City Court of
Naga City. The City Court rendered judgment in favor of petitioner. CA affirmed.
Issue: Whether or not Teja Marketing can recover from Pedro Nale.
Held: However, as the purchase of the motorcycle for operation as a trimobile under
the franchise of the private respondent Jaucian, pursuant to what is commonly known
as the "kabit system", without the prior approval of the Board of Transportation
(formerly the Public Service Commission) was an illegal transaction involving the
fictitious registration of the motor vehicle in the name of the private respondent so that
he may traffic with the privileges of his franchise, or certificate of public convenience,
to operate a tricycle service, the parties being in pari delicto, neither of them may bring
an action against the other to enforce their illegal contract [Art. 1412 (a), Civil Code].
Unquestionably, the parties herein operated under an arrangement, commonly known
as the "kabit system" whereby a person who has been granted a certificate of public
convenience allows another person who owns motor vehicles to operate under such
franchise for a fee. A certificate of public convenience is a special privilege conferred

by the government. Abuse of this privilege by the grantees thereof cannot be
countenanced. The "kabit system" has been Identified as one of the root causes of the
prevalence of graft and corruption in the government transportation offices.
Although not outrightly penalized as a criminal offense, the kabit system is invariably
recognized as being contrary to public policy and, therefore, void and in existent under
Article 1409 of the Civil Code. It is a fundamental principle that the court will not aid
either party to enforce an illegal contract, but will leave both where it finds then. Upon
this premise it would be error to accord the parties relief from their predicament.
Article 1412 of the Civil Code denies them such aid. It provides:
Art. 1412. If the act in which the unlawful or forbidden cause
consists does not constitute a criminal offense, the following rules
shall be observed:
1. When the fault is on the part of both contracting parties, neither
may recover that he has given by virtue of the contract, or demand,
the performance of the other's undertaking.
The defect of in existence of a contract is permanent and cannot be cured by ratification
or by prescription. The mere lapse of time cannot give efficacy to contracts that are null
and void.
Case: Aurelio Briones vs. Primitivo Cammayo, et al., Oct. 4, 1971, J. Dizon.
Facts: Defendants executed the real estate mortgage, as security for the loan of
P1,200.00 given to defendant Primitivo P. Cammayo upon the usurious agreement that
defendant pays to the plaintiff and that the plaintiff reserve and secure, as in fact
plaintiff reserved and secured himself, out of the alleged loan of P1,500.00 as interest
the sum of P300.00 for one year. That although the mortgage contract was executed for
securing the payment of P1,500.00 for a period of one year, without interest, the truth
and the real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only
the sum of P1,200.00 and withheld the sum of P300.00 which was intended as advance
interest for one year. That on account of said loan of P1,200.00, defendant Primitivo P.
Cammayo paid to the plaintiff during the period from October 1955 to July 1956 the
total sum of P330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as
part payment of the account but as in interest of the said loan for an extension of
another term of one year.
That said contract of loan entered into between plaintiff and defendant Primitivo P.
Cammayo is a usurious contract and is contrary to law, morals, good customs, public
order or public policy and is, therefore, in existent and void from the beginning (Art.
1407 Civil Code) Hence, Aurelio cannot recover the principal obligation.
Issue: Whether the creditor is entitled to collect from the debtor the amount
representing the principal obligation.
Held: YES. We do not agree with such reasoning, Article 1411 of the New Civil Code
is not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said
provision is no warrant for departing from previous interpretation that, as provided in
45

the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally
void only as to the interest.
True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies
where a contract's nullity proceeds from illegality of the cause or object of said
contract.
However, appellants fail to consider that a contract of loan with usurious interest
consists of principal and accessory stipulations; the principal one is to pay the debt; the
accessory stipulation is to pay interest thereon.
And said two stipulations are divisible in the sense that the former can still stand
without the latter. Article 1273, Civil Code, attests to this: "The renunciation of the
principal debt shall extinguish the accessory obligations; but the waiver of the latter
shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of
interest likewise renders a nullity the legal terms as to payments of the principal
debt. Article 1420 of the New Civil Code provides in this regard: "In case of a
divisible contract, if the illegal terms can be separated from the legal ones, the
latter may be enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay
the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not
illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is the only one that is
illegal.
46

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