CIVREV Digest Compilation

CIVIL LAW REVIEW 2: Contracts
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MetroBank v. Rosales
G.R. No. 183204, January 13, 2014
Sources of Obligation
Doctrine: The "Hold Out" clause applies only if there is a
valid and existing obligation arising from any of the
sources of obligation enumerated in Article 1157 of the
Civil Code, to wit: law, contracts, quasi-contracts, delict,
and quasi-delict
OBLIGATIONS
Facts: Petitioner Metropolitan Bank and Trust Company is a

domestic banking corporation duly organized and existing under
the laws of the Philippines. Respondent Ana Grace Rosales
(Rosales) is the owner of China Golden Bridge Travel Services, a
travel agency. Respondent Yo Yuk To is the mother of
respondent Rosales. In May 2002, respondent Rosales
accompanied her client Liu Chiu Fang, a Taiwanese National
applying for a retirees visa from the Philippine Leisure and
Retirement Authority (PLRA), to petitioners branch in Escolta
to open a savings account, as required by the PLRA. Since Liu
Chiu Fang could speak only in Mandarin, respondent Rosales
acted as an interpreter for her.
Fang has another account with the bank in which she withdrew
the money to be used in opening the new savings account in
Escolta. Petitioner claims that it was the deception employed by
respondent Rosales that caused petitioners employees to
release Liu Chiu Fangs funds to the impostor. Petitioner issued
a "Hold Out" order against respondents accounts and through
its Special Audit Department Head Antonio Ivan Aguirre, filed
before the Office of the Prosecutor of Manila a criminal case for
Estafa through False Pretences, Misrepresentation, Deceit, and
Use of Falsified Documents against respondent Rosales.
Petitioner accused respondent Rosales and an unidentified
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woman as the ones responsible for the unauthorized and

fraudulent withdrawal of US$75,000.00 from Liu Chiu Fangs
dollar account with petitioners Escolta Branch.
Respondents filed a Complaint for Breach of Obligation and
Contract with Damages, against petitioner. Respondents alleged
that they attempted several times to withdraw their deposits but
were unable to because petitioner had placed their accounts
under "Hold Out" status. No explanation, however, was given by
petitioner as to why it issued the "Hold Out" order. Thus, they
prayed that the "Hold Out" order be lifted and that they be
allowed to withdraw their deposits.
In this case, petitioner failed to show that respondents have an

obligation to it under any law, contract, quasi-contract, delict, or
quasi-delict. And although a criminal case was filed by
petitioner against respondent Rosales, this is not enough reason
for petitioner to issue a "Hold Out" order as the case is still
pending and no final judgment of conviction has been rendered
against respondent Rosales. In fact, it is significant to note that
at the time petitioner issued the "Hold Out" order, the criminal
complaint had not yet been filed. Thus, considering that
respondent Rosales is not liable under any of the five sources of
obligation, there was no legal basis for petitioner to issue the
"Hold Out" order.
Issue: Whether petitioner breached its contract with

respondents because they had placed the respondents accounts
under Hold Out status.
Ruling: The "Hold Out" clause does not apply to the case.
Generally, the Bank may, at any time in its discretion and with
or without notice to all of the Depositors, assert a lien on any
balance of the Account and apply all or any part thereof against
any indebtedness, matured or unmatured, that may then be
owing to the Bank by any or all of the Depositors. It is
understood that if said indebtedness is only owing from any of
the Depositors, then this provision (hold out clause) constitutes
the consent by all of the depositors to have the Account answer
for the said indebtedness to the extent of the equal share of the
debtor in the amount credited to the Account
However, the "Hold Out" clause applies only if there is a valid
and existing obligation arising from any of the sources of
obligation enumerated in Article 1157 of the Civil Code, to wit:
law, contracts, quasi-contracts, delict, and quasi-delict.

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PSBA v CA (1992)
DOCTRINE:
In other words, a contractual relation is a condition
sine qua non to the school's liability. The
negligence of the school cannot exist independently of
the contract, unless the negligence occurs under the
circumstances set out in Article 21 of the Civil Code.
This Court is not unmindful of the attendant difficulties posed
by the obligation of schools, above-mentioned, for
conceptually a school, like a common carrier, cannot
be an insurer of its students against all risks.
Article 2180, in conjunction with Article 2176 of the Civil Code,

establishes the rule of in loco parentis.
Article 2180 plainly provides that the damage should have been
caused or inflicted by pupils or students of he educational
institution sought to be held liable for the acts of its pupils or
students while in its custody. However, this material
situation does not exist in the present case for, as
earlier indicated, the assailants of Carlitos were not
students of the PSBA, for whose acts the school could
be made liable.
However, does the appellate court's failure to consider such
material facts mean the exculpation of the petitioners from
liability?
FACTS: Carlitos Bautista, a 3rd year student of PSBA majoring

in commerce, was stabbed by outsiders while on the 2 nd floor
premises of the school. The parents of the deceased filed a suit
for damages against the school and its officers.
When an academic institution accepts students for

enrollment, there is established a contract between them,
resulting in bilateral obligations which both parties are
bound to comply with.
The parents want the defendants liable for the victims

demise due to their alleged negligence, recklessness and
lack of security precautions, means and methods before,
during and after the attack on the victim.
Because the circumstances of the present case

evince a contractual relation between the PSBA
and Carlitos Bautista, the rules on quasi-delict
do not really govern. A perusal of Article 2176 shows
that obligations arising from quasi-delicts or tort, also
known as extra-contractual obligations, arise only
between parties not otherwise bound by contract,
whether express or implied.
The petitioners avert that academic institutions are

beyond the ambit of the rule as stated under art 2180 of
the Civil Code.
The trial court favored the parents. The CA affirmed the
trial courts ruling and primarily anchored its decision on
the law of quasi-delicts in Art 2176 and 2180.
ISSUE: Whether the school should be liable for the
death of its student.
HELD: YES, but not under the law on quasi-delicts
In the circumstances obtaining in the case at bar, however, there

is, as yet, no finding that the contract between the
school and Bautista had been breached thru the
former's negligence in providing proper security
measures. This would be for the trial court to determine. And,
even if there be a finding of negligence, the same could give rise
generally to a breach of contractual obligation only.
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Using the test of Cangco, supra, the negligence of the

school would not be relevant absent a contract. In fact,
that negligence becomes material only because of the
contractual relation between PSBA and Bautista.
In other words, a contractual relation is a
condition sine qua non to the school's liability.
The negligence of the school cannot exist independently
of the contract, unless the negligence occurs under the
circumstances set out in Article 21 of the Civil Code.
This Court is not unmindful of the attendant difficulties posed
by the obligation of schools, above-mentioned, for conceptually
a school, like a common carrier, cannot be an insurer of its
students against all risks. This is specially true in the
populous student communities of the so-called "university belt"
in Manila where there have been reported several incidents
ranging from gang wars to other forms of hooliganism.
Cruz v Gruspe
Sources: Contract
Facts: A mini bus owned and operated by Rodolfo Cruz and
driven by Arturo Davin collided with the car of Atty. Delfin
Gruspe. Cruz, along with Leonardo Ibias, went to Gruspes
office, apologized for the incident, and executed a Joint Affidavit
of Undertaking promising jointly and severally to replace the
Gruspes damaged car in 20 days, or until November 15, 1999, of
the same model and of at least the same quality; or,
alternatively, they would pay the cost of Gruspes car amounting
to P350,000.00, with interest per month for any delayed
payment after November 15, 1999, until fully paid. When Cruz
and Leonardo failed to comply with their undertaking, Gruspe
filed a complaint for collection of sum of money against them
before the RTC.
Cruz and Leonardo denied Gruspes allegation, claiming that
Gruspe, a lawyer, prepared the Joint Affidavit of Undertaking
and forced them to affix their signatures thereon, without
explaining and informing them of its contents; Cruz affixed his
signature so that his mini bus could be released as it was his
only means of income; Leonardo, a barangay official,
accompanied Cruz to Gruspes office for the release of the mini
bus, but was also deceived into signing the Joint Affidavit of
Undertaking.
RTC ruled in favor of Gruspe. CA affirmed the RTC decision. It
declared that despite its title, the Joint Affidavit of Undertaking
is a contract, as it has all the essential elements of consent,
object certain, and consideration required under Article 1318.
CA further said that Cruz and Leonardo failed to present
evidence to support their contention of vitiated consent. By
signing the Joint Affidavit of Undertaking, they voluntarily
assumed the obligation for the damage they caused to Gruspes
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car; Leonardo, who was not a party to the incident, could have
refused to sign the affidavit, but he did not.
Cruz and Esperanza (Leonardos widow) assail the CA ruling,
contending that the Joint Affidavit of Undertaking is not a
contract that can be the basis of an obligation to pay a sum of
money in favor of Gruspe. They consider an affidavit as different
from a contract: an affidavits purpose is simply to attest to facts
that are within his knowledge, while a contract requires that
there be a meeting of the minds between the two contracting
parties. Even if the Joint Affidavit of Undertaking was
considered as a contract, Cruz and Esperanza claim that it is
invalid because Cruz and Leonardos consent thereto was
vitiated; the contract was prepared by Gruspe who is a lawyer,
and its contents were never explained to them. Moreover, Cruz
and Leonardo were simply forced to affix their signatures,
otherwise, the mini van would not be released. Also, they claim
that prior to the filing of the complaint for sum of money,
Gruspe did not make any demand upon them. Hence, pursuant
to Article 1169, they could not be considered in default. Without
this demand, Cruz and Esperanza contend that Gruspe could not
yet take any action.
There is also no merit to the argument of vitiated consent. An

allegation of vitiated consent must be proven by preponderance
of evidence; Cruz and Leonardo failed to support their
allegation. Although the undertaking in the affidavit appears to
be onerous and lopsided, this does not necessarily prove the
alleged vitiation of consent. They, in fact, admitted the
genuineness and due execution of the Joint Affidavit and
Undertaking when they said that they signed the same to secure
possession of their vehicle. If they truly believed that the vehicle
had been illegally impounded, they could have refused to sign
the Joint Affidavit of Undertaking and filed a complaint, but
they did not. That the release of their mini bus was conditioned
on their signing the Joint Affidavit of Undertaking does not, by
itself, indicate that their consent was forced they may have
given it grudgingly, but it is not indicative of a vitiated consent
that is a ground for the annulment of a contract.
Issue: Whether or not the joint affidavit of undertaking may be

the source of obligation of the petitioners.
Ruling: Yes. The Joint Affidavit of Undertaking contains
stipulations characteristic of a contract. The Joint Affidavit
contained a stipulation where Cruz and Leonardo promised to
replace the damaged car of Gruspe, 20 days from October 25,
1999 or up to November 15, 1999, of the same model and of at
least the same quality. In the event that they cannot replace the
car within the same period, they would pay the cost of Gruspes
car in the total amount of P350,000.00, with interest at 12% per
month for any delayed payment after November 15, 1999, until
fully paid. These are simple terms that both Cruz and Leonardo
could easily understand.
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ACE Foods, Inc. v. Micro Pacific

G.R. No. 200602, December 11, 2013
Topic: Contract, NCC 1159
Doctrine: A contract is what the law defines it to be, taking
into consideration its essential elements, and not what
the contracting parties call it. The real nature of a
contract may be determined from the express terms of
the written agreement and from the contemporaneous
and subsequent acts of the contracting parties.
However, in the construction or interpretation of an
instrument, the intention of the parties is primordial
and is to be pursued. The denomination or title given by
the parties in their contract is not conclusive of the
nature of its contents.
Facts: ACE Foods is a domestic corporation engaged in the
trading and distribution of consumer goods in wholesale and
retail bases, while MTCL is one engaged in the supply of
computer hardware and equipment.
On September 26, 2001, MTCL sent a letter-proposal for the
delivery and sale of the subject products to be installed at
various offices of ACE Foods. Aside from the itemization of the
products offered for sale, the said proposal further provides for
the following terms, viz.:
TERMS : Thirty (30) days upon delivery
VALIDITY : Prices are based on current dollar rate and subject
to changes without prior notice.
DELIVERY : Immediate delivery for items on stock, otherwise
thirty (30) to forty-five days upon receipt of [Purchase Order]
WARRANTY : One (1) year on parts and services. Accessories

not included in warranty.
On October 29, 2001, ACE Foods accepted MTCLs proposal and
accordingly issued Purchase Order No. 100023 (Purchase
Order) for the subject products amounting to P646,464.00
(purchase price). Thereafter, or on March 4, 2002, MTCL
delivered the said products to ACE Foods as reflected in Invoice
No. 7733 (Invoice Receipt). The fine print of the invoice
states, inter alia, that "[t]itle to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full
compliance of the terms and conditions of above and payment of
the price" (title reservation stipulation). After delivery, the
subject products were then installed and configured in ACE
Foodss premises. MTCLs demands against ACE Foods to pay
the purchase price, however, remained unheeded. Instead of
paying the purchase price, ACE Foods sent MTCL a Letter dated
September 19, 2002, stating that it "ha[s] been returning the
[subject products] to [MTCL] thru [its] sales representative Mr.
Mark Anteola who has agreed to pull out the said [products] but
had failed to do so up to now."
Eventually, or on October 16, 2002, ACE Foods lodged a
Complaint against MTCL before the RTC, praying that the latter
pull out from its premises the subject products since MTCL
breached its "after delivery services" obligations to it,
particularly, to: (a) install and configure the subject products;
(b) submit a cost benefit study to justify the purchase of the
subject products; and (c) train ACE Foodss technicians on how
to use and maintain the subject products. ACE Foods likewise
claimed that the subject products MTCL delivered are defective
and not working.
For
its
part,
MTCL,
in
its
Answer
with
Counterclaim, maintained that it had duly complied with its
obligations to ACE Foods and that the subject products were in
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good working condition when they were delivered, installed and

configured in ACE Foodss premises. Thereafter, MTCL even
conducted
a
training
course
for
ACE
Foodss
representatives/employees; MTCL, however, alleged that there
was actually no agreement as to the purported "after delivery
services." Further, MTCL posited that ACE Foods refused and
failed to pay the purchase price for the subject products despite
the latters use of the same for a period of nine (9) months. As
such, MTCL prayed that ACE Foods be compelled to pay the
purchase price, as well as damages related to the transaction.
A contract of sale may be absolute or conditional. (Emphasis

supplied)
ISSUE: Whether or not ACE Foods is liable to pay Micro Pacific
In contrast, a contract to sell is defined as a bilateral contract

whereby the prospective seller, while expressly reserving the
ownership of the property despite delivery thereof to the
prospective buyer, binds himself to sell the property exclusively
to the prospective buyer upon fulfillment of the condition agreed
upon, i.e., the full payment of the purchase price. A contract to
sell may not even be considered as a conditional contract of
sale where the seller may likewise reserve title to the property
subject of the sale until the fulfillment of a suspensive condition,
because in a conditional contract of sale, the first element of
consent is present, although it is conditioned upon the
happening of a contingent event which may or may not occur.
HELD: Yes
RATIO: A contract is what the law defines it to be, taking into
consideration its essential elements, and not what the
contracting parties call it. The real nature of a contract may be
determined from the express terms of the written agreement
and from the contemporaneous and subsequent acts of the
contracting parties. However, in the construction or
interpretation of an instrument, the intention of the parties
is primordial and is to be pursued. The denomination or
title given by the parties in their contract is not conclusive of the
The very essence of a contract of sale is the transfer of
ownership in exchange for a price paid or
promised. This may be gleaned from Article 1458 of the Civil
Code which defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership and to deliver a
determinate thing, and the other to pay therefor a price
certain in money or its equivalent.
Corollary thereto, a contract of sale is classified as

a consensual contract, which means that the sale is perfected
by mere consent. No particular form is required for its validity.
Upon perfection of the contract, the parties may reciprocally
demand performance, i.e., the vendee may compel transfer of
ownership of the object of the sale, and the vendor may require
the vendee to pay the thing sold.
In this case, the Court concurs with the CA that the parties have
agreed to a contract of sale and not to a contract to sell as
adjudged by the RTC. Bearing in mind its consensual nature, a
contract of sale had been perfected at the precise moment ACE
Foods, as evinced by its act of sending MTCL the Purchase
Order, accepted the latters proposal to sell the subject products
in consideration of the purchase price of P646,464.00. From
that point in time, the reciprocal obligations of the parties i.e.,
on the one hand, of MTCL to deliver the said products to ACE
Foods, and, on the other hand, of ACE Foods to pay the
purchase price therefor within thirty (30) days from delivery
already arose and consequently may be demanded.
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Locsin II v. Mekeni Food Corporation

December 9, 2013
Topic: Quasi Contract
Doctrine: Article 2142 of the Civil Code clarifies that there are
certain lawful, voluntary and unilateral acts which give
rise to the juridical relation of quasi-contract, to the end
that no one shall be unjustly enriched or benefited at the
expense of another. In the absence of specific terms and
conditions governing the car plan arrangement between
the petitioner and Mekeni, a quasi-contractual relation
was created between them.
Facts: Respondent Mekeni is the employer of petitioner Locsin.
When the latter was hired he was offered a car plan, under
which of the cost of the vehicle is to be paid by the company
and the other to be deducted from petitioners salary.
Petitioner began working on March 17, 2004, the car furnished
to him is a used Honda Civic valued at P280,000. Petitioner
paid for his 50% share through salary deductions of P5,000 each
month.
Subsequently, petitioner resigned effective February 25, 2006.
By then, a total of P112,500 had been deducted from his
monthly salary and applied as part of the employees share in
the car plan. In his resignation letter, petitioner made an offer to
purchase his service vehicle by paying the outstanding balance
thereon. However, the parties could not agree on the terms of
the proposed purchase. Petitioner thus returned the vehicle to
Mekeni on May 2, 2006.
Petitioner made personal and written follow-ups but to no avail.
Mekeni even replied that the company car plan benefit applied
only to employees who have been with the company for five
years. On May 3, 2007, petitioner filed against Mekeni a
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complaint for recovery of monetary claims and recovery of

monthly salary deductions which were earmarked for his costsharing in the car plan with the NLRC.
Labor Arbiter: Judgment is rendered directing Mekeni
to turn-over to petitioner the vehicle upon his payment of the
sum of P100,435.84.
On appeal; NLRC: LA reversed and set aside and
ordering Mekeni to pay petitioner monetary claims and
REIMBURSEMENT of petitioners payment under the car plan
agreement in the amount of P112,500 and the equivalent share
of the company as part of the petitioners benefit under the car
plan 50/50 sharing amounting to P112,500. It ruled that
petitioners amortization payments on his service vehicle should
be reimbursed; if not, UNJUST ENRICHMENT would result, as
the vehicle remained in the possession and ownership of
Mekeni. In addition, Mekenis share in the monthly car plan
should likewise be awarded to petitioner because it forms part of
the latters benefits under the car plan.
CA; Petition for Certiorari: GRANTED. Resolution of
NLRC, modified. Reimbursement of petitioners payment under
the car plan and payment to him to Mekenis 50% share are
DELETED. The CA applied the ruling in Elisco Tool
Manufacturing Corporation v. CA wherein it held that there
should be no reimbursement because there are stipulations in
the car plan agreements to the effect that should the
employment of the employee concerned be terminated before all
installments are fully paid, the vehicle will be taken by the
employer and all installments paid shall be considered rentals
per agreement. So in the absence of stipulation in the car plan
agreement between Mekeni and petitioner, the CA treated
petitioners monthly contributions as rentals for the use of his
service vehicle for the duration of his employment. Moreover, it
ruled that petitioner cannot recover Mekenis share in the
purchase price as this would constitute UNJUST

ENRICHMENT on the part of petitioner at Mekenis expense.
Issue: WON the petitioner is entitled to refund of all amounts
applied to the cost of the service vehicle under the car plan.
Held: YES, but only to his monthly contributions in the
car plan agreement.
From the evidence on record, it is seen that the Mekeni car plan
offered to petitioner was subject to no other term or condition
than that Mekeni shall cover one-half of its value, and petitioner
shall in turn pay the other half through deductions from his
monthly salary. Mekeni has not shown, by documentary
evidence or otherwise, that there are other terms and conditions
governing its car plan agreement with petitioner. There is no
evidence to suggest that if petitioner failed to completely cover
one-half of the cost of the vehicle, then all the deductions from
his salary going to the cost of the vehicle will be treated as
rentals for his use thereof while working with Mekeni, and shall
not be refunded. Indeed, there is no such stipulation or
arrangement between them. Thus, the CAs reliance on Elisco
Tool is without basis, and its conclusions arrived at in the
questioned decision are manifestly mistaken. It was a patent
error for the appellate court to assume that, even in the absence
of express stipulation, petitioners payments on the car plan may
be considered as rentals which need not be returned.
Indeed, the Court cannot allow that payments made on the car
plan should be forfeited by Mekeni and treated simply as rentals
for petitioners use of the company service vehicle. Nor may they
be retained by it as purported loan payments, as it would have
this Court believe. In the first place, there is precisely no
stipulation to such effect in their agreement. Secondly, it may
not be said that the car plan arrangement between the parties
was a benefit that the petitioner enjoyed; on the contrary, it was
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an absolute necessity in Mekenis business operations, which

benefited it to the fullest extent.
In light of the foregoing, it is unfair to deny petitioner a refund
of all his contributions to the car plan. Under Article 22 of the
Civil Code, every person who through an act of performance by
another, or any other means, acquires or comes into possession
of something at the expense of the latter without just or legal
ground, shall return the same to him. Article 2142 of the same
Code likewise clarifies that there are certain lawful, voluntary
and unilateral acts which give rise to the juridical relation of
quasi-contract, to the end that no one shall be unjustly enriched
or benefited at the expense of another. In the absence of specific
terms and conditions governing the car plan arrangement
between the petitioner and Mekeni, a quasi-contractual relation
was created between them. Consequently, Mekeni may not
enrich itself by charging petitioner for the use of its vehicle
which is otherwise absolutely necessary to the full and effective
promotion of its business. It may not, under the claim that
petitioners payments constitute rents for the use of the
company vehicle, refuse to refund what petitioner had paid, for
the reasons that the car plan did not carry such a condition; the
subject vehicle is an old car that is substantially, if not fully,
depreciated; the car plan arrangement benefited Mekeni for the
most part; and any personal benefit obtained by petitioner from
using the vehicle was merely incidental.
Conversely, petitioner cannot recover the monetary value of
Mekenis counterpart contribution to the cost of the vehicle; that
is not property or money that belongs to him, nor was it
intended to be given to him in lieu of the car plan.
Barredo v Garcia
73 Phil. 607 (1942)
Quasi-Delict
Doctrine: A quasi-delict is a separate legal institution under
the Civil Code, with a substantivity of its own, and
individuality that is entirely apart and independent
from a delict or crime
Facts: At about 1:30am on May 3, 1936, Fontanillas taxi
collided with a kalesa thereby killing the 16 year old
Faustino Garcia.
In the criminal action, the parents of the victim reserved their
right to file a separate civil action. After conviction of the driver
with the charge of homicide thru reckless imprudence, they
proceeded to file a separate civil action against the taxi-owner
based on Article 2180 of the New Civil Code. The taxi-owner met
this with the argument that the driver having been convicted of
criminal negligence, Article 100 in relation to Articles 102-o3 of
the Revised Penal Code should govern his liability, which,
pursuant to said provisions is only subsidiary, but since the
driver has not been sued in a civil action and his property not
yet exhausted, the plaintiffs have no recourse against him.
Issue: Whether or not Barredo is just subsidiarily liable.
Ruling: The Court, in said case, ruled in favor of the plaintiff,
holding that a quasi-delict is a separate legal institution under
the Civil Code, with a substantivity of its own, and individuality
that is entirely apart and independent from a delict or crime.
He is primarily liable under Article 1903 which is a separate civil
action against negligent employers. Garcia is well within his
rights in suing Barredo. He reserved his right to file a separate
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civil action and this is more expeditious because by the time of

the SC judgment Fontanilla is already serving his sentence and
has no property. It was also proven that Barredo is negligent in
hiring his employees because it was shown that Fontanilla had
had multiple traffic infractions already before he hired him
something he failed to overcome during hearing. Had Garcia not
reserved his right to file a separate civil action, Barredo would
have only been subsidiarily liable. Further, Barredo is not being
sued for damages arising from a criminal act (his drivers
negligence) but rather for his own negligence in selecting his
employee (Article 1903).
Gutierrez v Gutierrez (1931)

Malcolm, J.
Re: Quasi-delict
FACTS
In its broader aspects, the case is one of two drivers approaching
a narrow bridge from opposite directions, with neither being
willing to slow up and give the right of way to the other, with the
inevitable result of a collision and an accident.
On February 2, 1930, a passenger truck and an automobile of
private ownership collided while attempting to pass each other
on the Talon bridge on the Manila South Road in the
municipality of Las Pias. The driver of the car is an 18 y/o boy,
son of the cars owners.
Trial court found that both the boy and the driver of the autobus
were negligent by which neither of them were willing to slow up
and give the right of way to the other. Plaintiff is the passenger
of the bus who as a result of the incident fractured his right leg.
Thus, plaintiff sued the boy, his parents as owners of the car, the
bus driver and its owner for damages. The trial court ruled in
favor of plaintiff. Hence, this appeal.
ISSUE: What are the bases of the parties liabilities?
HELD
The case is dealing with the civil liability of parties for
obligations that arise from fault or negligence.
For the boy, it is his father who is liable (based on culpa
aquiliana) to the plaintiff because of the following conditions:
1. first, the car was of general use of the family,
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2. second, the boy was authorized or designated by his

father to run the car,
3. third, at the time of the collision the car is used for the
purpose not of the childs pleasure but that of the other
members of the car owners family members.
The theory of the law is that the running of the machine by a
child to carry other members of the family is within the scope
of the owners business, so that he is liable for the negligence
of the child because of the relationship of master and
servant. For the chauffer and the bus owner (based on culpa
contractual), their liability rests upon the contract (the safety
that is assured by the operator upon the passenger) whereas
that degree of care expected from the chauffer is lacking.
The liability of the owner of the truck, and of his
chauffeur rests on a different basis, namely, that of contract
which, we think, has been sufficiently demonstrated by the
allegations of the complaint, not controverted, and the evidence.
The reason for this conclusion reaches to the findings of the trial
court concerning the position of the truck on the bridge, the
speed in operating the machine, and the lack of care employed
by the chauffeur.
Llana v Biong
Quasi-delict
Doctrine: Under Art. 2176, the elements necessary to establish
a quasi-delict case are: (1) damages to the plaintiff; (2)
negligence, by act or omission, of the defendant or by
some person for whose acts the defendant must respond,
was guilty; and (3) the connection of cause and effect
between such negligence and the damages. These
elements show that the source of obligation in a quasidelict case is the breach or omission of mutual duties
that civilized society imposes upon its members, or
which arise from non-contractual relations of certain
members of society to others.
Facts: On March 30, 2000, Juan dela Llana was driving a car
with his sister, Dra. Leila dela Llana, seated at the front
passenger seat. Juan stopped the car when the signal light
turned red. A dump truck suddenly rammed the cars rear end,
violently pushing the car forward. Due to the impact, the cars
rear end collapsed and its rear windshield was shattered. Glass
splinters flew, puncturing Leila. Apart from these minor
wounds, Leila did not appear to have suffered from any other
visible physical injuries. It was reported that the truck driver,
Joel Primero, employee of Rebecca Biong, was recklessly
imprudent in driving the truck.
In the first week of May 2000, Leila began to feel mild to
moderate pain on the left side of her neck and shoulder. The
pain became more intense as days passed by. Her injury became
more severe. Her health deteriorated to the extent that she could
no longer move her left arm. On June 9, 2000, she consulted
with Dr. Rosalinda Milla, a rehabilitation medicine specialist.
Dr. Milla told her that she suffered from a whiplash injury. Dr.
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Milla required her to undergo physical therapy to alleviate her

condition.
Leila, on October 16, 2000, demanded from Rebecca
compensation for her injuries, but Rebecca refused to pay. Thus,
on May 8, 2001, Leila sued Rebecca for damages before the
RTC. She alleged that she lost the mobility of her arm as a result
of the vehicular accident and claimed compensation for medical
expenses and for lost income. In defense, Rebecca maintained
that Leila had no cause of action against her as no reasonable
relation existed between the vehicular accident and Dra. dela
Llanas injury. She pointed out that Dra. dela Llanas illness
became manifest 1 month and 1 week from the date of the
vehicular accident.
The RTC ruled in favor of Dra. dela Llana and held that the
proximate cause of Dra. dela Llanas whiplash injury to be Joels
reckless driving. CA reversed the RTC ruling. It held that Dra.
dela Llana failed to establish a reasonable connection between
the vehicular accident and her whiplash injury by
preponderance of evidence.
Issue: Whether Joels reckless driving is the proximate cause of
Dra. dela Llanas whiplash injury.
Ruling: No. Article 2176 provides that "[w]hoever by act or
omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual relation
between the parties, is a quasi-delict." Based on the requisites,
Dra. dela Llana must first establish by preponderance of
evidence the 3 elements of quasi-delict before we determine
Rebeccas liability as Joels employer. She should show the chain
of causation between Joels reckless driving and her whiplash
injury. Only after she has laid this foundation can the
presumption - that Rebecca did not exercise the diligence of a
good father of a family in the selection and supervision of Joel -
arise. Once negligence, the damages and the proximate

causation are established, this Court can then proceed with the
application and the interpretation of the 5th paragraph of
Article 2180. Under Article 2176, in relation with the 5th
paragraph of Article 2180, "an action predicated on an
employees act or omission may be instituted against the
employer who is held liable for the negligent act or omission
committed by his employee." The rationale for these graduated
levels of analyses is that it is essentially the wrongful or
negligent act or omission itself which creates the vinculum juris
in extra-contractual obligations.
In civil cases, a party who alleges a fact has the burden of
proving it. The burden of proving the proximate causation
between Joels negligence and Leilas whiplash injury rests on
Leila. Leila anchors her claim mainly on 3 pieces of evidence: (1)
the pictures of her damaged car, (2) the medical certificate, and
(3) her testimonial evidence. However, none of these pieces of
evidence show the causal relation between the vehicular
accident and the whiplash injury.
A. The pictures of the damaged car only demonstrate the impact
of the collision - These pictures indeed demonstrate the impact
of the collision. However, it is a far-fetched assumption that the
whiplash injury can also be inferred from these pictures.
B. The medical certificate cannot be considered because it was
not admitted in evidence - Even if we consider the medical
certificate, the medical certificate has no probative value for
being hearsay. It is a basic rule that evidence, whether oral or
documentary, is hearsay if its probative value is not based on the
personal knowledge of the witness but on the knowledge of
another person who is not on the witness stand.
C. Dra. dela Llanas opinion that Joels negligence caused her
whiplash injury has no probative value - Leila was the lone
physician-witness during trial. She merely testified as an
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ordinary witness. Despite the fact that Leila is a physician and

even assuming that she is an expert in neurology, we cannot give
weight to her opinion that Joels reckless driving caused her
whiplash injury without violating the rules on evidence. There is
a substantial difference between an ordinary witness and an
expert witness. Leilas medical opinion cannot be given
probative value for the reason that she was not presented as an
expert witness. As an ordinary witness, she was not competent
to testify on the nature, and the cause and effects of whiplash
injury. Furthermore, we emphasize that Leila, during trial,
nonetheless did not provide a medical explanation on the nature
as well as the cause and effects of whiplash injury in her
testimony.
The Supreme Court cannot take judicial notice that vehicular
accidents cause whiplash injuries - This proportion is not public
knowledge, or is capable of unquestionable demonstration, or
ought to be known to judges because of their judicial functions.
We have no expertise in the field of medicine. Justices and
judges are only tasked to apply and interpret the law on the
basis of the parties pieces of evidence and their corresponding
legal arguments.
Chavez v Gonzales
32 SCRA 547, April 30, 1970
TOPIC: Nature and Effects of Obligations; Kinds of
Prestations; To do, NCC 1167
Doctrine: Where the defendant virtually admitted nonperformance of the contract by returning the typewriter
that he was obliged to repair in a non-working
condition, with essential parts missing, Article 1197 of
the Civil Code of the Philippines cannot be invoked. The
fixing of a period would thus be a mere formality and
would serve no purpose than to delay.
Facts: "In the early part of July, 1963, the plaintiff delivered to
the defendant, who is a typewriter repairer, a portable
typewriter for routine cleaning and servicing. The defendant was
not able to finish the job after some time despite repeated
reminders made by the plaintiff. The defendant merely gave
assurances, but failed to comply with the same. In October,
1963, the defendant asked from the plaintiff the sum of P6.00
for the purchase of spare parts, which amount the plaintiff gave
to the defendant. On October 26, 1963, after getting exasperated
with the delay of the repair of the typewriter, the plaintiff went
to the house of the defendant and asked for the return of the
typewriter. The defendant delivered the typewriter in a wrapped
package. On reaching home, the plaintiff examined the
typewriter returned to him by the defendant and found out that
the same was in shambles, with the interior cover and some
parts and screws missing. On October 29, 1963. the plaintiff sent
a letter to the defendant formally demanding the return of the
missing parts, the interior cover and the sum of P6.00 (Exhibit
D). The following day, the defendant returned to the plaintiff
some of the missing parts, the interior cover and the P6.00.
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"On August 29, 1964, the plaintiff had his typewriter repaired by
Freixas Business Machines, and the repair job cost him a total of
P89.85, including labor and materials (Exhibit C).
"On August 23, 1965, the plaintiff commenced this action before
the City Court of Manila, demanding from the defendant the
payment of P90.00 as actual and compensatory damages,
P100.00 for temperate damages, P500.00 for moral damages,
and P500.00 as attorneys fees.
appealed decision. For such contravention, as appellant

contends, he is liable under Article 1167 of the Civil Code. jam
quot, for the cost of executing the obligation in a proper manner.
The cost of the execution of the obligation in this case should be
the cost of the labor or service expended in the repair of the
typewriter, which is in the amount of P58.75. because the
obligation or contract was to repair it.
"In his answer as well as in his testimony given before this court,
the defendant made no denials of the facts narrated above,
except the claim of the plaintiff that the typewriter was delivered
to the defendant through a certain Julio Bocalin, which the
defendant denied allegedly because the typewriter was delivered
to him personally by the plaintiff.
"The repair done on the typewriter by Freixas Business
Machines with the total cost of P89.85 should not, however, be
fully chargeable against the defendant. The repair invoice,
Exhibit C, shows that the missing parts had a total value of only
P31.10.
"WHEREFORE, judgment is hereby rendered ordering the
defendant to pay the plaintiff the sum of P31.10, and the costs of
suit.
"SO ORDERED."
Issue: Whether or not defendant should be liable not only for
the cost of the materials but also for the whole cost of expenses
for the repair of the machine.
Held: Yes
Ratio: It is clear that the defendant-appellee contravened the
tenor of his obligation because he not only did not repair the
typewriter but returned it "in shambles", according to the
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Tanguilig v. CA
(January 2, 1997)
Topic: Kinds of Prestations; Obligations to do
Doctrine: If an obligation is not part of the contract then
there is no legal nor factual basis by which the Court can
impose an obligation to a party who did not expressly
assume nor ratify the same.
Facts: Jacinto Tanguilig, owner of JMT Engineering and
General merchandise, was contracted by Vicente Herce to
construct a windmill for P 60,000. Herce paid P30,000 down
payment, an instalment of P15,000, and left a balance of
P15,000. Petitioner Tanguilig filed a complaint for non-payment
of the remaining balance. Respondent answered saying that he
already paid remaining balance to San Pedro General
Merchandising Inc., a third party who constructed the deep well
connected to the windmill. Also, respondent claimed that
P15,000 balance should be offset since the windmill collapsed
after a strong wind hit it.
Respondent contends that since petitioner did not have the
capacity to install the deep well the latter agreed to have a third
party do the work the cost of which was to be deducted from the
contract price. He presented Guillermo Pili of SPGMI who
declared that petitioner Tanguilig approached him with a letter
from respondent Herce Jr. asking him to build a deep well pump
as "part of the price/contract which Engineer (Herce) had with
Mr. Tanguilig."
Trial Court: Deep well was NOT PART of the contract
and that there is NO clear showing that there is defect in the
construction.
CA: REVERSED TC decision. Deep well was part of the

contract. Petitioner Tanguilig should reconstruct the windmill.
Issues: 1) WON the deep well was part of the contract thus will
for part of Tanguiligs obligation to construct.
Held: NO
There is absolutely no mention in the two (2) documents that a
deep well pump is a component of the proposed windmill
system. The contract prices fixed in both proposals cover only
the features specifically described therein and no other. The
words "deep well" and "deep well pump merely describe the
type of deep well pump for which the proposed windmill would
be suitable. For if the real intent of petitioner was to include a
deep well in the agreement to construct a windmill, he would
have used instead the conjunctions "and" or "with". It is a
cardinal rule in the interpretation of contracts that the intention
of the parties shall be accorded primordial consideration and, in
case of doubt, their contemporaneous and subsequent acts shall
be principally considered. The circumstances in this case only
show that the construction of the well by SPGMI was for the sole
account of respondent and that petitioner merely supervised the
installation of the well because the windmill was to be connected
to it. There is no legal nor factual basis by which this Court can
impose upon petitioner an obligation he did not expressly
assume nor ratify.
The claim of Pili that Herce Jr. wrote him a letter is
unsubstantiated. The alleged letter was never presented in court
by private respondent for reasons known only to him thus
respondent cannot claim the benefit of the law concerning
"payments made by a third person. The Civil Code provisions
do not apply in the instant case because no creditor-debtor
relationship between petitioner and Guillermo Pili and/or
SPGMI has been established regarding the construction of the
deep well. Specifically, witness Pili did not testify that he
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entered into a contract with petitioner for the construction of

respondent's deep well. If SPGMI was really commissioned by
petitioner to construct the deep well, an agreement particularly
to this effect should have been entered into.
Woodhouse v Halili
93 Phil 526 (1953)
Fraud
Doctrine: The incidental fraud does not render the
contract null and void but only such as to hold
the plaintiff liable for damages.
Facts:
The Plaintiff entered into an agreement with the defendant for
the establishment of a partnership for bottling and distribution
of Mission soft drinks. Before the partnership was actually
established the defendant required the plaintiff to secure an
exclusive franchise for the said venture.
In behalf of the said partnership and upon obtaining the said
exclusive franchise the defendant stipulated to pay the plaintiff
30% of the profits. The plaintiff sought to obtain the said
exclusive franchise but was only given a temporary one,
subject only to 30 days. The parties then proceeded with the
signing of the agreement. The partnership was still not initiated,
only the agreement to work with each other, with the plaintiff as
manager and the defendant as financer, was established.
Together the two parties went to the US to formally sign the
contract of franchise with Mission Dry Corporation. The
defendant then found out about the temporary franchise right
given
to
the
plaintiff,
different
from
the
exclusive franchise rights they stipulated in their contract.
When the operations of the business began he was paid P 2,000

and was allowed the use of a car. But in the next month, the pay
was decreased to P 1,000 and the car was withdrawn from him.
The plaintiff demanded the execution of the partnership, but the
defendant excused himself, saying that there was no hurry to do
so. The Court of First Instance ordered the defendant to render
an accounting of the profits and to pay the plaintiff 15% of such
amount. It also held that execution of the contract of
partnership cannot be enforced upon the defendant and
that fraud as alleged by the defendant was also not proved.
Hence the present action.
Issues: Whether the representation of the plaintiff in saying
that he had exclusive franchise rights rather than the actual
temporary right he possessed invalidated the contract
Ruling: Fraud was undoubtedly employed by the plaintiff to
secure the consent of the defendant to enter into the
contract with him by representing himself as holder of
exclusive franchise rights when in fact he only holds a
temporary franchise right good for 30 days. The fraud employed
was not such as to render the contract null and void but only
such as to hold the plaintiff liable for damages. Such fraud is
merely
incidental
(dolo
incidental)
and
not
the
causal fraud (dolo causante) that is detrimental to a contract. It
does not invalidate the contract since fraud was only employed
to secure the 30% stipulated share from the partnership.
The 15% that the Trial court ordered the defendant to pay the
plaintiff is deemed to be the appropriate and reasonable. Such
amount was the spontaneous reaction of the defendant upon
knowledge of the misrepresentation of the plaintiff and amounts
to the virtual modification of their contract.
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Geraldez v CA (1994)
Regalado, J.
Re: Fraud
FACTS: An action for damages by reason of contractual breach
was filed by petitioner Lydia L. Geraldez against private
respondent Kenstar Travel Corporation.
Sometime in October 1989, Petitioner came to know about
private respondent from numerous advertisements in
newspapers of general circulation regarding tours in Europe.
She then contacted private respondent by phone and the latter
sent its representative, who gave her the brochure for the tour
and later discussed its highlights. The European tours offered
were classified into four, and petitioner chose the classification
denominated as "VOLARE 3" covering a 22-day tour of Europe
for S2,990.00. She paid the total equivalent amount of
P190,000.00 charged by private respondent for her and her
sister, Dolores. Petitioner claimed that, during the tour, she was
very uneasy and disappointed when it turned out that, contrary
to what was stated in the brochure, there was no European tour
manager for their group of tourists, the hotels in which she and
the group stayed were not first-class, the UGC Leather Factory
which was specifically added as a highlight of the tour was not
visited, and the Filipino lady tour guide by private respondent
was a first timer, that is, she was performing her duties and
responsibilities as such for the first time.
other party would not have entered into the contract. Dolo
incidente, or incidental fraud which is referred to in Article
1344, are those, which are not serious in character and without
which the other party would still have entered into the contract.
Dolo causante determines or is the essential cause of the
consent, while dolo incidente refers only to some particular or
accident of the obligations. The effects of dolo causante are the
nullity of the contract and the indemnification of damages, and
dolo incidente also obliges the person employing it to pay
damages.
In either case, whether private respondent has committed dolo
causante or dolo incidente by making misrepresentations in its
contracts with petitioner and other members of the tour group,
whichdeceptions became patent in the light of after-events
when, contrary to its representations, it employed an
inexperienced tour guide, housed the tourist group in
substandard hotels, and reneged on its promise of a European
tour manager and the visit to the leather factory, it is
indubitably liable for damages to petitioner.
ISSUE Whether the respondent company committed fraud in

order for the petitioner to enter into the contract.
HELD: This fraud or dolo, which is present or employed at the
time of birth or perfection of a contract, may either be dolo
causante or dolo incidente. The first, or causal fraud referred to
in Article 1338, are those deceptions or misrepresentations of a
serious character employed by one party and without which the
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Metropolitan Fabrics, Inc. (MFI) v. Prosperity

Irregularity in the performance: attributable to the debtor: fraud
(dolo)
Doctrine: Fraud cannot be presumed but must be proved by
clear and convincing evidence. Whoever alleges fraud
affecting a transaction must substantiate his allegation,
because a person is always presumed to take ordinary
care of his concerns, and private transactions are
similarly presumed to have been fair and regular. To be
remembered is that mere allegation is definitely not
evidence; hence, it must be proved by sufficient
evidence.
Facts: In July 1984, MFI sought from PCRI a loan. PCRI was
represented by Domingo Ang, its president, and his son Caleb,
vicepresident. The parties knew each other because they
belonged to the same family association. Caleb recommended
the approval of the P3.44 million with an interest ranging from
24% to 26% per annum and a term of between 5-10 years. It
sufficed for Caleb that Enrique was a wellrespected Chinese
businessman, that he was the president of their Chinese family
association, and that he had other businesses aside from MFI.
On August 3, 1984, even before the signing of the mortgage and
loan documents, PCRI released the loan to MFI. It found that
the blank loan forms, consisting of the real estate mortgage
contract, promissory note, comprehensive surety agreement and
disclosure statement, which Domingo himself handed to
Enrique, had no entries specifying the rate of interest and
schedules of amortization. To reciprocate the gesture of PCRI,
Enrique, together with his wife Natividad Africa, vicepresident,
and son Edmundo signed the blank forms at their office. The
signing was allegedly witnessed by Vicky, Ellen and Alice, all
surnamed Ang, without any PCRI representative present.
Immediately thereafter, Enrique and Vicky proceeded to the

PCRI office.
It was in order to return the trust of Domingo and Caleb and
their gesture of the early release of the loan that Enrique and
Vicky entrusted to them their 7 titles of land. She testified that
they left it to defendants to choose from among the 7 titles those
which would be sufficient to secure the loan. It was agreed that
once PCRI had chosen the lots to be covered by the mortgage,
the defendants would return the remaining titles to the
plaintiffs. The plaintiffs delivered to PCRI 24 checks, bearing no
dates and amounts, to cover the amortization payments, all
signed in blank by Enrique and Natividad.
In September 1984, the first amortization check bounced for
insufficient fund due to MFIs continuing business losses. It was
then that the appellees allegedly learned that PCRI had filled up
the 24 blank checks with dates and amounts that reflected a 35%
interest rate per annum, instead of just 24%, and a 2year
repayment period, instead of 10 years.
Plaintiffs repeatedly asked the defendants to return the rest of
the titles in excess of the required collateral to which defendants
allegedly routinely responded that their committee was still
studying the matter. Caleb assured Vicky that PCRI would also
lower the rate of interest to conform to prevailing commercial
rate.
Talks were held between Domingo and Enrique as well as
between Vicky and Caleb concerning the possible offsetting of
the loan by ceding some of their properties to PCRI.
Domingo and Caleb tried to appease the plaintiffs by assuring
them that they would return the rest of the titles anytime they
would need them, and that they could use them to secure
another loan from them or from another financing company.
They would also reconsider the 35% interest rate, but when the
discussion shifted to the offsetting of the properties to pay the
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loan, the defendants standard answer was that they were still
awaiting the feedback of their committee.
On September 4, 1986, Enrique received a Notice of Sheriffs
Sale, announcing the auction of the 7 lots due to unpaid
indebtedness of P10.5 million. Vicky insisted that prior to the
auction notice, they never received any statement or demand
letter from the defendants to pay P10.5 million, nor did the
defendants inform them of the intended foreclosure. The last
statement they received was dated February 12, 1986, and
showed amount due of only P4,167,472.71. Vicky recalled that
from June 1, 1986 to July 1986, they held several meetings to
discuss the options available to them to repay their loan, such as
the offsetting of their rent collectibles and properties to cover
the amortizations and the loan balance.
MFI protested the foreclosure, and the auction was reset after
they assured PCRI that they had found a serious buyer for 3 of
the lots. In the meeting held at defendants office, the buyer,
Winston Wang of Asia Cotton was present. It was agreed to
release the mortgage upon payment of P3.5 million. Wang
would pay to MFI P500,000.00 as downpayment, which MFI
would in turn pay to PCRI as partial settlement of the P3.5
million loan. Winston Wang was given 15 days to pay the
P500,000.00.
On January 19, 1987, Wang confronted Vicky about their sale
agreement and PCRIs refusal to accept their P3 million
payment, because according to Caleb, the 3 lots had been
foreclosed. Vicky was shocked, because the agreed period to pay
the P3 million was to lapse on January 13, 1987 yet.
At the auction sale on October 27, 1986, PCRI was the sole
bidder for P6.5 million. Discussions continued on the agreement
to release 3 lots for P3.5 million. The reduction of interest rate
and charges and the condonation of the attorneys fees for the
foreclosure proceedings were also sought.
Petitioners insist that respondents committed fraud when the

officers of Metropolitan were made to sign the deed of real
estate mortgage in blank.
Issue: Whether or not petitioners clearly and convincingly
establish their allegation of fraud in the execution of the deed of
real estate mortgage.
Ruling: No. According to Article 1338, there is fraud when one
of the contracting parties, through insidious words or
machinations, induces the other to enter into the contract that,
without the inducement, he would not have agreed to. Yet,
fraud, to vitiate consent, must be the causal (dolo causante), not
merely the incidental (dolo incidente), inducement to the
making of the contract. Causal fraud is defined as a deception
employed by one party prior to or simultaneous to the contract
in order to secure the consent of the other.
Fraud cannot be presumed but must be proved by clear and
convincing evidence. Whoever alleges fraud affecting a
transaction must substantiate his allegation, because a person is
always presumed to take ordinary care of his concerns, and
private transactions are similarly presumed to have been fair
and regular. To be remembered is that mere allegation is
definitely not evidence; hence, it must be proved by sufficient
evidence.
The contested deed of real estate mortgage was a public
document by virtue of its being acknowledged before a notary
public. As a notarized document, the deed carried the
evidentiary weight conferred upon it with respect to its due
execution, and had in its favor the presumption of regularity.
Hence, it was admissible in evidence without further proof of its
authenticity, and was entitled to full faith and credit upon its
face. To rebut its authenticity and genuineness, the contrary
evidence must be clear, convincing and more than merely
preponderant; otherwise, the deed should be upheld.
20

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Petitioners failed to adduce clear and convincing evidence

against the genuineness and authenticity of the deed. Their
actuations even demonstrated that their transaction with
respondents had been regular and at armslength, belying the
intervention of fraud.
respondents on the partial redemption of three of the 7 lots.

They also took the trouble of finding a buyer (Mr. Winston
Wang of Asia Cotton) of some of the lots. Had the mortgage
been fraudulent, they could have instead instituted a complaint
to nullify the real estate mortgage and the foreclosure sale.
The evidence adduced by Vicky Ang, the lone witness for

petitioners, tried to cast doubt on the contents and due
execution of the deed of real estate mortgage by pointing to
certain irregularities. But she could not be effective for the
purpose because she had not been among the signatories of the
deed. The signatories were father Enrique Ang, her mother
Natividad Africa, and her brother Edmundo Ang, none of whom
came forward to testify against the deed, or otherwise to assail
the genuineness and due execution of the deed by any other
means. They would have been in the better position than Vicky
to substantiate the allegation of fraud if that was the case. Their
silence reflected the inanity of the allegation of fraud by Vicky.
And, lastly, Vickys own letters to respondents had an apologetic

tenor, and was seeking leniency from them. Such tenor and tone
of her communications were antithetical to her allegation of
having been the victim of their fraudulent acts.
These circumstances tended to indicate that fraud was not
attendant during the transactions between the parties. As
between the duly executed real estate mortgage and the
unsubstantiated allegations of fraud, the Court affords greater
weight to the former.
Secondly, petitioners freely and voluntarily surrendered to

respondents the 7 TCTs of their lots. Such surrender of the TCTs
evinced their intention to offer the lots as collateral for the
performance of their obligations contracted with respondents.
They thereby confirmed the genuineness and due execution of
the deed of real estate mortgage. Surely, they would not have
surrendered the TCTs had their intention been otherwise.
Thirdly, another circumstance belying the commission of fraud
by respondents was petitioners pleading with respondents for
the resetting of foreclosure sale of the properties after receiving
the notice of the impending sale. As a result, the sale was reset
thrice. Had the mortgage and its foreclosure been unreasonable
or fraudulent, petitioners should have instead resolutely
contested respondents move to foreclose.
Fourthly, even after their properties were eventually sold as the
consequence of the foreclosure, petitioners negotiated with
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Surviving Heirs v Lindo Et Al.

G.R. No. 208232, March 10, 2014
TOPIC: Irregularity in Performance; Fraud; Effects of
Fraud; Specific Performance
Doctrine: Having fully participated in all stages of the case,
and even invoking the RTCs authority by asking for
affirmative reliefs, respondents can no longer assail the
jurisdiction of the said trial court. Simply put,
considering the extent of their participation in the case,
they are, as they should be, considered estopped from
raising lack of jurisdiction as a ground for the dismissal
of the action.
Facts: Alfredo R. Bautista (Bautista), petitioners predecessor,
inherited in 1983 a free-patent land located in Poblacion, Lupon,
Davao Oriental and covered by Original Certificate of Title
(OCT) No. (1572) P-6144. A few years later, he subdivided the
property and sold it to several vendees, herein respondents, via
a notarized deed of absolute sale dated May 30, 1991. Two
months later, OCT No. (1572) P-6144 was canceled and Transfer
Certificates of Title (TCTs) were issued in favor of the vendees.
Three years after the sale, or on August 5, 1994, Bautista filed a
complaint for repurchase against respondents before the RTC,
Branch 32, Lupon, Davao Oriental, docketed as Civil Case No.
1798, anchoring his cause of action on Section 119 of
Commonwealth Act No. (CA) 141, otherwise known as the
"Public Land Act," which reads:
SECTION 119. Every conveyance of land acquired under the free
patent or homestead provisions, when proper, shall be subject to
repurchase by the applicant, his widow, or legal heirs, within a
period of five years from the date of the conveyance.
Respondents, in their Answer, raised lack of cause of action,

estoppel, prescription, and laches, as defenses. Meanwhile,
during the pendency of the case, Bautista died and was
substituted by petitioner Epifania G. Bautista (Epifania).
Respondents Francisco and Welhilmina Lindo later entered into
a compromise agreement with petitioners, whereby they agreed
to cede to Epifania a three thousand two hundred and thirty
square meter (3,230 sq.m.)-portion of the property as well as to
waive, abandon, surrender, and withdraw all claims and
counterclaims against each other. The compromise was
approved by the RTC in its Decision dated January 27, 2011.
Other respondents, however, filed a Motion to Dismiss dated
February 4, 2013, alleging that the complaint failed to state the
value of the property sought to be recovered. Moreover, they
asserted that the total selling price of all the properties is only
sixteen thousand five hundred pesos (PhP 16,500), and the
selling price or market value of a property is always higher than
its assessed value. Since Batas Pambansa Blg. (BP) 129, as
amended, grants jurisdiction to the RTCs over civil actions
involving title to or possession of real property or interest
therein where the assessed value is more than PhP 20,000, then
the RTC has no jurisdiction over the complaint in question since
the property which Bautista seeks to repurchase is below the
PhP 20,000 jurisdictional ceiling. RTC dismissed case due to
lack of jurisdiction.
Issue: Whether or not it is correct for the RTC to have
dismissed the case
Held: No
Ratio: Here, we note that aside from the belated filing of the
motion to dismissit having been filed nine (9) years from the
filing of the complaintrespondents actively participated in the
proceedings through the following acts:
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1. By filing their Answer and Opposition to the Prayer for

Injunction dated September 29, 1994 whereby they even
interposed counterclaims, specifically: PhP 501,000 for
unpaid survey accounts, PhP 100,000 each as litigation
expenses, PhP 200,000 and PhP 3,000 per daily
appearance by way of attorneys fees, PhP 500,000 as
moral damages, PhP 100,000 by way of exemplary
damages, and costs of suit;
2. By participating in Pre-trial;
3. By moving for the postponement of their presentation
of evidence;
4. By presenting their witness; and
5. By submitting the compromise agreement for approval.
Having fully participated in all stages of the case, and even
invoking the RTCs authority by asking for affirmative reliefs,
respondents can no longer assail the jurisdiction of the said trial
court. Simply put, considering the extent of their participation
in the case, they are, as they should be, considered estopped
from raising lack of jurisdiction as a ground for the dismissal of
the action.
Boysaw v. Interphil Promotions

(March 20, 1987)
Topic: Rescission
Doctrine: Where one party did not perform the undertaking
which he was bound by the terms of the agreement to
perform, he is not entitled to insist upon the
performance of the contract by the other party, or
recover damages by reason of his own breach.
Facts: Petitioner Solomon Boysaw, signed with defendant
Interphil Promotions, Inc., a contract to engage Gabriel "Flash"
Elorde in a boxing contest for the junior lightweight
championship of the world. It was stipulated that Boysaw would
not, prior to the date of the boxing contest, engage in any other
such contest without the written consent of Interphil.
Thereafter, Interphil signed Gabriel "Flash" Elorde to a similar
agreementthat is, to engage Boysaw in a title fight.
The managerial rights over Boysaw was assigned and eventually
reassigned to petitioner Alfredo Yulo, Jr. without the consent of
Interphil in violation of their contract. When informed of the
change, Interphil referred the matter to the Games and
Amusement Board culminating to a decision by the board to
approve a new date for the match. Yulo protested against the
new date even when another proposed date was within the 30day allowable postponements.
Both Boysaw and Yulo filed for breach of contract when the fight
contemplated in the original boxing contract did not materialize.
Issue: WON the offending party may, in a reciprocal obligation,
compel the other party for specific performance.
Held: NO.
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The evidence established that the contract was violated by

Boysaw when, without the approval or consent of Interphil, he
fought a boxing match in Las Vegas. Another violation was the
assignment and transfer of the managerial rights over Boysaw
without the knowledge or consent of Interphil. While the
contract imposed no penalty for such violation, this does not
grant any of the parties the unbridled liberty to breach it with
impunity. Our law on contracts recognizes the principle that
actionable injury inheres in every contractual breach.
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner
contravene the terms thereof, are liable for damages. Article
1170, Civil Code.
Under the law, when a contract is unlawfully novated by an

applicable and unilateral substitution of the obligor by another,
the aggrieved creditor is not bound to deal with the substitute.
However, from the evidence, it is clear that the Interphil, instead
of availing themselves of the options given to them by law of
rescission or refusal to recognize the substitute obligor, really
wanted to postpone the fight date owing to an injury that Elorde
sustained in a recent bout. That Interphil had justification to
renegotiate the original contract, particularly the fight date is
undeniable from the facts. Under the circumstances, Interphil's
desire to postpone the fight date could neither be unlawful nor
unreasonable.
The power to rescind obligations is implied, in reciprocal ones,

in case one of the obligors should not comply with what is
incumbent upon him. Article 1191, Civil Code.
The contract in question gave rise to reciprocal obligations.
Reciprocal obligations are those which arise from the same
cause, and in which each party is a debtor and a creditor of the
other, such that the obligation of one is dependent upon the
obligation of the other. They are to be performed
simultaneously, so that the performance of one is conditioned
upon the simultaneous fulfillment of the other. Tolentino,
Civil Code of the Philippines, Vol. IV, p. 175.
The power to rescind is given to the injured party.
Where the plaintiff is the party who did not perform the
undertaking which he was bound by the terms of the agreement
to perform, he is not entitled to insist upon the performance of
the contract by the defendant, or recover damages by reason of
his own breach. Seva vs. Alfredo Berwin, 48 Phil. 581.
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U.P. v De los Angeles

35 SCRA 365 (1970)
Rescission
Doctrine: There is nothing in the law that prohibits the
parties from entering into agreement that violation of
the terms of the contract would cause cancellation
thereof, even without court intervention. In other words,
it is not always necessary for the injured party to resort
to court for rescission of the contract.
Facts: On November 2, 1960, UP and ALUMCO entered into a
logging agreement whereby the latter was granted exclusive
authority to cut, collect and remove timber from the Land Grant
for a period starting from the date of agreement to December 31,
1965, extendible for a period of 5 years by mutual agreement.
On December 8, 1964, ALUMCO incurred an unpaid account of
P219,362.94. Despite repeated demands, ALUMCO still failed to
pay, so UP sent a notice to rescind the logging agreement. On
the other hand, ALUMCO executed an instrument entitled
Acknowledgment of Debt and Proposed Manner of Payments.
It was approved by the president of UP, which stipulated the
following:
o In the event that the payments called for are not
sufficient to liquidate the foregoing indebtedness,
the balance outstanding after the said payments
have been applied shall be paid by the debtor in
full no later than June 30, 1965.
o In the event that the debtor fails to comply with
any of its promises, the Debtor agrees without
reservation that Creditor shall have the right to
consider the Logging Agreement rescinded,

without the necessity of any judicial suit
ALUMCO continued its logging operations, but again incurred
an unpaid account. On July 19,1965, UP informed ALUMCO
that it had, as of that date, considered rescinded and of no
further legal effect the logging agreement, and that UP had
already taken steps to have another concessionaire take over the
logging operation.
ALUMCO filed a petition to enjoin UP from conducting the
bidding. The lower court ruled in favor of ALUMCO, hence, this
appeal.
Issue: Can petitioner UP treat its contract with ALUMCO
rescinded, and may disregard the same before any judicial
pronouncement to that effect?
Ruling: Yes. In the first place, UP and ALUMCO had expressly
stipulated that upon default by the debtor, UP has the right and
the power to consider the Logging Agreement of December 2,
1960 as rescinded without the necessity of any judicial suit.
As to such special stipulation and in connection with Article 1191
of the Civil Code, the Supreme Court, stated in Froilan vs. Pan
Oriental Shipping Co:
o There is nothing in the law that prohibits the
parties from entering into agreement that violation
of the terms of the contract would cause
cancellation thereof, even without court
intervention. In other words, it is not always
necessary for the injured party to resort to court
for rescission of the contract.
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Vda de Mistica v Naguiat (2003)

Panganiban, J.
Re: Rescission
FACTS: Eulalio Mistica is the owner of a parcel of land located
at Malhacan, Meycauayan, Bulacan. A portion thereof was
leased to respondent Naguiat. Consequently, Mistica entered
into a contract to sell with respondent over a portion of lot
containing an area of 200 sq. mtrs.
The agreement was reduced to writing in a document entitled
Kasulatan sa Pagbibilihan P20k as the total purchase; P2k
upon signing;P18k to be paid within 10yrs; In case non
payment, vendee shall pay an interest of 12% per annum.
Pursuant to said agreement, respondent gave a down payment
of P2K & made another partial payment of P1K & thereafter
failed to make any payments.
Eulalio Mistica died sometime in Oct. 1986. Petitioner claims
that she is entitled to rescind the Contract under Article 1191 of
the Civil Code, because respondents committed a substantial
breach when they did not pay the balance of the purchase price
within the ten-year period.
ISSUE: Whether petitioner is entitled to rescind the contract?
NO
Whether the contract is in the nature of a potestative obligation?
NO
HELD: Petitioner is not entitled to rescind the
contract
the Civil Code, the right to rescind an obligation is

predicated on the violation of the reciprocity between
parties, brought about by a breach of faith by one of
them. Rescission, however, is allowed only where the
breach is substantial and fundamental to the fulfillment
of the obligation.
In the present case, the failure of respondents to pay the balance
of the purchase price within ten years from the execution of the
Deed did not amount to a substantial breach. In the Kasulatan,
it was stipulated that payment could be made even after ten
years from the execution of the Contract, provided the vendee
paid 12 percent interest. The stipulations of the contract
constitute the law between the parties; thus, courts have no
alternative but to enforce them as agreed upon and written.
Petitioner never made any demand for the balance of the
purchase price. Petitioner even refused the payment tendered by
respondents during her husbands funeral, thus showing that
she was not exactly blameless for the lapse of the ten-year
period. Had she accepted the tender, payment would have been
made well within the agreed period.
Contract is not in the nature of a potestative
obligation
The Kasulatan does not allow it to be converted to a potestative
obligation. First, nowhere is it stated in the Deed that payment
of the purchase price is dependent upon whether respondents
want to pay it or not. Second, the fact that they already made
partial payment thereof only shows that the parties intended to
be bound by the Kasulatan.
In a contract of sale, the remedy of an unpaid seller is either

specific performance or rescission. Under Article 1191 of
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Fil-Estate Golf and Development, Inc. (FEGDI)

Vertex Sales and Trading, Inc.
Rescission
Doctrine: FEGDI failed to deliver to Vertex the stock
certificates within a reasonable time from the point the
shares should have been delivered. This was a
substantial breach of their contract that entitles Vertex
the right to rescind the sale. It is not entirely correct to
say that a sale had already been consummated as
Vertex already enjoyed the rights a shareholder can
exercise. The enjoyment of these rights cannot suffice
where the law, by its express terms, requires a specific
form to transfer ownership.
Facts:
FEGDI is a stock corporation whose primary business is the
development of golf courses. FELI is a stock corporation
engaged in real estate development. FEGDI was the developer of
the Forest Hills Golf and Country Club (Forest Hills) and, in
consideration for its financing support and construction efforts,
was issued several shares of stock of Forest Hills.
In August 1997, FEGDI sold, on installment, to RS Asuncion
Construction Corporation (RSACC) one Class "C" Common
Share of Forest Hills for P1,100,000. Prior to the full payment of
the purchase price, RSACC sold, on February 11, 1999, the Class
"C" Common Share to Vertex. RSACC advised FEGDI of the sale
to Vertex and FEGDI, in turn, instructed Forest Hills to
recognize Vertex as a shareholder. For this reason, Vertex
enjoyed membership privileges in Forest Hills.
demanding the issuance of a stock certificate in its name. FELI

replied, initially requested Vertex to first pay the necessary fees
for the transfer. Although Vertex complied with the request, no
certificate was issued. This prompted Vertex to make a final
demand on March 17, 2001. As the demand went unheeded,
Vertex filed on January 7, 2002 a Complaint for Rescission with
Damages and Attachment against FEGDI, FELI and Forest
Hills. It averred that the petitioners defaulted in their obligation
as sellers when they failed and refused to issue the stock
certificate covering the subject share despite repeated demands.
Vertex prayed for the rescission of the sale and demanded the
reimbursement of the amount it paid (or P1,100,000), plus
interest. During the pendency of the rescission action (or on
January 23, 2002), a certificate of stock was issued in Vertexs
name, but Vertex refused to accept it.
The RTC dismissed the complaint for insufficiency of evidence.
It ruled that delay in the issuance of stock certificates does not
warrant rescission of the contract as this constituted a mere
casual or slight breach. It also observed that notwithstanding
the delay in the issuance of the stock certificate, the sale had
already been consummated; the issuance of the stock certificate
is just a collateral matter to the sale and the stock certificate is
not essential to "the creation of the relation of shareholder."
CA reversed the RTC and rescinded the sale of the share. Citing
Section 63 of the Corporation Code, the CA held that there can
be no valid transfer of shares where there is no delivery of the
stock certificate. It considered the prolonged issuance of the
stock certificate a substantial breach that served as basis for
Vertex to rescind the sale.
Issue: Whether the delay in the issuance of a stock certificate
can be considered a substantial breach as to warrant rescission
of the contract of sale.
Despite Vertexs full payment, the share remained in the name

of FEGDI. 17 months after the sale, Vertex wrote FEDGI a letter
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Ruling: Yes. Physical delivery is necessary to transfer

ownership of stocks. Vertex fully paid the purchase price by
February 11, 1999 but the stock certificate was only delivered on
January 23, 2002 after Vertex filed an action for rescission
against FEGDI. Under these facts, considered in relation to the
governing law [Corporation Code, Sec. 63], FEGDI clearly failed
to deliver the stock certificates, representing the shares of stock
purchased by Vertex, within a reasonable time from the point
the shares should have been delivered. This was a substantial
breach of their contract that entitles Vertex the right to rescind
the sale under Article 1191 of the Civil Code. It is not entirely
correct to say that a sale had already been consummated as
Vertex already enjoyed the rights a shareholder can exercise.
The enjoyment of these rights cannot suffice where the law, by
its express terms, requires a specific form to transfer ownership.
"Mutual restitution is required in cases involving rescission
under Article 1191" of the Civil Code; such restitution is
necessary to bring back the parties to their original situation
prior to the inception of the contract. Accordingly, the amount
paid to FEGDI by reason of the sale should be returned to
Vertex.

Malcolm, J.
Re: Quasi-delict
FACTS: In its broader aspects, the case is one of two drivers
approaching a narrow bridge from opposite directions, with
neither being willing to slow up and give the right of way to the
other, with the inevitable result of a collision and an accident.
On February 2, 1930, a passenger truck and an automobile of
private ownership collided while attempting to pass each other
on the Talon bridge on the Manila South Road in the
municipality of Las Pias. The driver of the car is an 18 y/o boy,
son of the cars owners.
Trial court found that both the boy and the driver of the autobus
were negligent by which neither of them were willing to slow up
and give the right of way to the other. Plaintiff is the passenger
of the bus who as a result of the incident fractured his right leg.
Thus, plaintiff sued the boy, his parents as owners of the car, the
bus driver and its owner for damages. The trial court ruled in
favor of plaintiff. Hence, this appeal.
ISSUE: What are the bases of the parties liabilities?
HELD: The case is dealing with the civil liability of parties for
obligations that arise from fault or negligence.
For the boy, it is his father who is liable (based on culpa
aquiliana) to the plaintiff because of the following conditions:
4. first, the car was of general use of the family,
5. second, the boy was authorized or designated by his
father to run the car,
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6. third, at the time of the collision the car is used for the
purpose not of the childs pleasure but that of the other
members of the car owners family members.
Vasquez v. Borja (1944)

Topic: Negligence; Effects
The theory of the law is that the running of the machine by a

child to carry other members of the family is within the scope
of the owners business, so that he is liable for the negligence
of the child because of the relationship of master and
servant. For the chauffer and the bus owner (based on culpa
contractual), their liability rests upon the contract (the safety
that is assured by the operator upon the passenger) whereas
that degree of care expected from the chauffer is lacking.
Doctrine: The fact that the corporation, acting thru Vazquez

as its manager, was guilty of negligence in the
fulfillment of the contract did not make Vazquez
principally or even subsidiarily liable for such
negligence. Since it was the corporations contract, its
non-fulfillment, whether due to negligence or fault or to
any other cause, made the corporation and not its agent
liable.
The liability of the owner of the truck, and of his

chauffeur rests on a different basis, namely, that of contract
which, we think, has been sufficiently demonstrated by the
allegations of the complaint, not controverted, and the evidence.
The reason for this conclusion reaches to the findings of the trial
court concerning the position of the truck on the bridge, the
speed in operating the machine, and the lack of care employed
by the chauffeur.
Facts: In 1932, Francisco De Borja entered into a contract of

sale with the NVSD (Natividad-Vasquez Sabani Development
Co., Inc.). The subject of the sale was 4,000 cavans of rice
valued at Php2.10 per cavan. On behalf of the company, the
contract was executed by Antonio Vasquez as the companys
acting president. NVSD only delivered 2,488 cavans and failed
and refused despite demand to deliver the rest hence De Borja
incurred damages (apparently, NVSD was insolvent). He then
sue Vasquez for payment of damages.
Issue: WON Vasquez is liable for damages.
Held: NO.
Vasquez is not party to the contract as it was NVSD which De
Borja contracted with. It is well known that a corporation is an
artificial being invested by law with a personality of its own,
separate and distinct from that of its stockholders and from that
of its officers who manage and run its affairs. The mere fact that
its personality is owing to a legal fiction and that it necessarily
has to act thru its agents, does not make the latter personally
liable on a contract duly entered into, or for an act lawfully
performed, by them for an in its behalf.
29

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The fact that the corporation, acting thru Vazquez as its

manager, was guilty of negligence in the fulfillment of the
contract did not make Vazquez principally or even subsidiarily
liable for such negligence. Since it was the corporations
contract, its non-fulfillment, whether due to negligence or fault
or to any other cause, made the corporation and not its agent
liable.
Justice Paras, dissenting:
Vasquez as president of NVSD is liable for damages. Vasquez, as
acting president and manager of NVSD, and with full knowledge
of the then insolvent status of his company, agreed to sell to De
Borja 4,000 cavans of palay. Further, NVSD was soon
thereafter dissolved.
Federal Builders v Foundation Specialists

G.R. No. 194507, September 8, 2014
Negligence
Facts: On August 20, 1990, Federal Builders, Inc. (FBI) entered
into an agreement with Foundation Specialists, Inc. (FSI)
whereby the latter, as sub-contractor, undertook the
construction of the diaphragm wall, capping beam, and guide
walls of the Trafalgar Plaza located at Salcedo Village, Makati
City.
FSI filed a complaint for Sum of Money against FBI before the
RTC of Makati City seeking to collect the amount of One Million
Six Hundred Thirty-Five Thousand Two Hundred Seventy-Eight
Pesos and Ninety-One Centavos (P1,635,278.91), representing
Billings No. 3 and 4, with accrued interest from August 1, 1991
plus moral and exemplary damages with attorneys fees. In its
complaint, FSI alleged that FBI refused to pay said amount
despite demand and its completion of ninety-seven percent
(97%) of the contracted works.
In its Answer with Counterclaim, FBI claimed that FSI
completed only eighty-five percent (85%) of the contracted
works, failing to finish the diaphragm wall and component
works in accordance with the plans and specifications and
abandoning the jobsite. FBI maintains that because of FSIs
inadequacy, its schedule in finishing the Project has been
delayed resulting in the Project owners deferment of its own
progress billings. It further interposed counterclaims for
amounts it spent for the remedial works on the alleged defects in
FSIs work. FBI is claiming P8,582,756.29 representing
the cost of the measures it undertook to rectify the
alleged defects.
After evaluating the evidence of both parties, the RTC ruled in
favor of FSI awarding the sum of P1,024,600.00 representing
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billings 3 and 4, less the amount of P33,354.40 plus 12% legal

interest from August 30, 1991;The sum of P279,585.00
representing the cost of undelivered cement; the sum of
P200,000.00 as attorneys fees; and the cost of suit.
On appeal, the CA affirmed the Decision of the lower court, but
deleted the sum of P279,585.00 representing the cost of
undelivered cement and reduced the award of attorneys fees to
50,000.00. In its Decision, the CA explained that FSI failed to
substantiate how and in what manner it incurred the cost of
cement by stressing that its claim was not supported by actual
receipts. Also, it found that while the trial court did not err in
awarding attorneys fees, the same should be reduced for being
unconscionable and excessive. It also dismissed FBIs
counterclaim.
must necessarily fail. In fact, as the lower court noted, at the

time when FBI had evaluated FSIs works, it did not
categorically pose any objection thereto.
Thus, in the absence of any record to otherwise prove FSIs
neglect in the fulfilment of its obligations under the contract,
this Court shall refrain from reversing the findings of the lower
courts, which are fully supported by and deducible from, the
evidence on record. FBI failed to present any evidence to justify
its refusal to pay FSI for the works it was contracted to perform.
As such, the court do not see any reason to deviate from the
assailed rulings.
Issue: Whether or not the CA committed an error when it

dismissed the counterclaim of the petitioner notwithstanding
the overwhelming evidence supporting its claim of
P8,582,756.29 as actual damages.
Ruling: It is clear from the case that contrary to the allegations
of FBI, FSI had indeed completed its assigned obligations, with
the exception of certain assigned tasks, which was due to the
failure of FBI to fulfil its end of the bargain.
It can similarly be deduced that the defects FBI complained of,
such as the misaligned diaphragm wall and the erroneous
location of the rebar dowels, were not only anticipated by the
parties, having stipulated alternative plans to remedy the same,
but more importantly, are also attributable to the very actions of
FBI.
Accordingly, considering that the alleged defects in FSIs
contracted works were not so much due to the fault or
negligence of the FSI, but were satisfactorily proven to be caused
by FBIs own acts, FBIs claim of P8,582,756.29 representing the
cost of the measures it undertook to rectify the alleged defects
31

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SSS
vs. Moonwalk Development

Corporation (1993)
Campos, Jr. J.
and
Housing
Re: Delay
DOCTRINE: Default begins from the moment the creditor
demands the performance of the obligation.
FACTS: Plaintiff SSS approved the application of Defendant
Moonwalk for a loan of P30,000,000 for the purpose of
developing and constructing a housing project. Out of
P30,000,000 approved loan, the sum of P9,595,000 was
released to defendant Moonwalk.
A third Amendment Deed of Mortgage was executed for the
payment of the amount of P9,595,000. Moonwalk made a total
payment of P23,657,901.84 to SSS for the loan principal of
P12,254,700. After settlement of the account, SSS issued to
Moonwalk the release of Mortgage for Moonwalks Mortgaged
properties. In letter to Moonwalk, SSS alleged that it committed
an honest mistake in releasing defendant.
In this case, although there were late amortizations there was no

demand made by SSS for the payment of the penalty hence
Moonwalk is not in delay in the payment of the penalty. No
delay occurred and there was no occasion when the penalty
became demandable and enforceable.
Since there was no default in the performance of the main
obligation-payment of the loan- SSS was never entitled to
recover any penalty. If the demand for the payment of the
penalty was made prior to the extinguishment of the obligation
which are:
1. The principal obligation
2. The interest of 12% on the principal obligation
3. The penalty of 12% for late payment for after demand,
Moonwalk would be in delay and therefore liable for the
penalty.
That Moonwalk has still 12% penalty for failure to pay on time
the amortization which is in the penal clause of the contract.
Moonwalks counsel told SSS that it had completely paid its
obligation to SSS and therefore there is no recovery of any
penalty.
ISSUE: Is the penalty demandable
extinguishment of the principal obligation?
even
after
the
HELD: No. There has been a waiver of the penal clause as it

was not demanded before the full obligation was fully paid and
extinguished. Default begins from the moment the creditor
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Abella v Gonzaga
Mora solvendi
Doctrine: Although there was a delay in the performance of
the plaintiffs obligation to pay the installments, he is
still considered to have complied with his obligation
since the defendant accepted the formers late payments.
Facts: On February, 1921, the defendant, Mariano Gonzaga,
agreed to purchase 70 parcels of land from the Mandaluyong
Estate, including lot No. 9. Gonzaga made several payments on
account of said 70 parcels of land. On December 16, 1922,
Gonzaga agreed with the owners of the Mandaluyong Estate to
apply P13,563.20 of the amount he had paid to the payment in
full of the price of 22 parcels of land, and these terms were set
out in the deed executed on that date, December 16, 1922. It was
also agreed to apply the P652.50, the balance of the amount paid
by Gonzaga, to the payment of a portion of the price of the 48
remaining parcels of land, another deed of sale having been
executed in favor of Gonzaga by Messrs. Whitaker and Ortigas,
whereby Gonzaga bound himself to pay the balance of the price.
Gonzaga entered into a contract of lease with Cirili Abella
(lessee), including a stipulation as follows: In consideration of
P1,392.92 which the tenant has now paid, and his promise to
pay the rent of the remaining 19 quarters at the periods fixed in
the preceding clause, the owner undertakes at the termination of
this contract to transfer free of charge to the tenant the full
ownership of the leased property, provided the tenant has made
the aforesaid payments.
against the defendant, requiring the transfer of the land to the

plaintiff.
Issue: Whether or not the delayed payment of the plaintiff
results into non-performance.
Ruling: No. The land was a part of the estate denominated the
Mandaluyong Estate. The defendant had an understanding with
the owners to purchase a large tract of it including the land in
question. Pending proceedings for the registration of the land
which the defendant desired to purchase, he entered into an
agreement with the plaintiff evidenced by the contract called
"Special Contract of Lease." The parties had agreed upon the
sale of the land for about P7,000. The plaintiff then paid
P1,392.92, and the remainder was to be paid in 5 yearly
installments of P1,114,34 each. These installments were paid.
Some of these yearly payments were delayed
somewhat, but the defendant admitted the payment
for, as the plaintiff stated, he agreed to pay 10%
interest upon the arrearage, and this statement was
admitted by the court below. Since the plaintiff has fulfilled
his obligations under that contract of sale called "Special
Contract of Lease," he may compel the defendant to execute the
proper deed of transfer of the full ownership of the property in
question.
The plaintiff demands specific performance of the contract. The

defendant contends in his answer that the conditions have not
been complied with, but violated by the plaintiff, who made the
last payment over a year after the obligation had become due,
that is, on March 27, 1927, instead of March 5, 1926. CFI ruled
33

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Foundation v Santos (2004)

G.R. No. 153004, Nov. 4, 2004
TOPIC: Delay; Kinds of Delay; Mora Solvendi; NCC
1169
Doctrine: The two-year period must be counted from the date
of execution of the compromise agreement, and not on
the judicial approval of the compromise agreement.
Facts: Ernesto V. Santos and Santos Ventura Hocorma
Foundation, Inc. (SVHFI) were the plaintiff and defendant,
respectively, in several civil cases filed in different courts in the
Philippines. On October 26, 1990, the parties executed a
Compromise Agreement which amicably ended all their pending
litigations.
In compliance with the Compromise Agreement, respondent
Santos moved for the dismissal of the aforesaid civil cases. He
also caused the lifting of the notices of lis pendens on the real
properties involved. For its part, petitioner SVHFI, paid P1.5
million to respondent Santos, leaving a balance of P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange
Livelihood Corporation two real properties, which were
previously subjects of lis pendens. Discovering the disposition
made by the petitioner, respondent Santos sent a letter to the
petitioner demanding the payment of the remaining P13 million,
which was ignored by the latter. Meanwhile, on September 30,
1991, the Regional Trial Court of Makati City, Branch 62, issued
a Decision6approving the compromise agreement.
On October 28, 1992, respondent Santos sent another letter to
petitioner inquiring when it would pay the balance of P13
million. There was no response from petitioner. Consequently,
respondent Santos applied with the Regional Trial Court of

Makati City, Branch 62, for the issuance of a writ of execution of
its compromise judgment dated September 30, 1991. The RTC
granted the writ. Thus, on March 10, 1993, the Sheriff levied on
the real properties of petitioner, which were formerly subjects of
the lis pendens. Petitioner, however, filed numerous motions to
block the enforcement of the said writ. The challenge of the
execution of the aforesaid compromise judgment even reached
the Supreme Court. All these efforts, however, were futile.
On November 22, 1994, petitioner's real properties located in
Mabalacat, Pampanga were auctioned. In the said auction,
Riverland, Inc. was the highest bidder for P12 million and it was
issued a Certificate of Sale covering the real properties subject of
the auction sale. Subsequently, another auction sale was held on
February 8, 1995, for the sale of real properties of petitioner in
Bacolod City. Again, Riverland, Inc. was the highest bidder. The
Certificates of Sale issued for both properties provided for the
right of redemption within one year from the date of registration
of the said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for
Declaratory Relief and Damages alleging that there was delay on
the part of petitioner in paying the balance of P13 million. They
further alleged that under the Compromise Agreement, the
obligation became due on October 26, 1992, but payment of the
remaining P12 million was effected only on November 22, 1994.
Thus, respondents prayed that petitioner be ordered to pay legal
interest on the obligation, penalty, attorney's fees and costs of
litigation. Furthermore, they prayed that the aforesaid sales be
declared final and not subject to legal redemption.
In its Answer, petitioner countered that respondents have no
cause of action against it since it had fully paid its obligation to
the latter. It further claimed that the alleged delay in the
payment of the balance was due to its valid exercise of its rights
34

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to protect its interests as provided under the Rules. Petitioner

counterclaimed for attorney's fees and exemplary damages.
On October 4, 1996, the trial court rendered a
Decision dismissing herein respondents' complaint and ordering
them to pay attorney's fees and exemplary damages to
petitioner. Respondents then appealed to the Court of Appeals.
The appellate court reversed the ruling of the trial court.
Issue: Whether or not respondents are entitled to legal interest
Held: Yes
Ratio: The two-year period must be counted from October 26,
1990, the date of execution of the compromise agreement, and
not on the judicial approval of the compromise agreement on
September 30, 1991. When respondents wrote a demand letter
to petitioner on October 28, 1992, the obligation was already
due and demandable. When the petitioner failed to pay its due
obligation after the demand was made, it incurred delay.
Article 1169 of the New Civil Code provides:
Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
[Emphasis supplied]
In the case at bar, the obligation was already due and

demandable after the lapse of the two-year period from the
execution of the contract. The two-year period ended on October
26, 1992. When the respondents gave a demand letter on
October 28, 1992, to the petitioner, the obligation was already
due and demandable. Furthermore, the obligation is liquidated
because the debtor knows precisely how much he is to pay and
when he is to pay it.
The second requisite is also present. Petitioner delayed in the
performance. It was able to fully settle its outstanding balance
only on February 8, 1995, which is more than two years after the
extra-judicial demand. Moreover, it filed several motions and
elevated adverse resolutions to the appellate court to hinder the
execution of a final and executory judgment, and further delay
the fulfillment of its obligation.
Third, the demand letter sent to the petitioner on October 28,
1992, was in accordance with an extra-judicial demand
contemplated by law.
Verily, the petitioner is liable for damages for the delay in the
performance of its obligation. This is provided for in Article
1170 of the New Civil Code.
Delay as used in this article is synonymous to default or mora

which means delay in the fulfillment of obligations. It is the nonfulfillment of the obligation with respect to time.
In order for the debtor to be in default, it is necessary that the
following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance
judicially or extrajudicially.
35

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Vasquez v. Ayala Corp. (2004)

(November 19, 2004)
Topic: Delay; Kinds; Mora Solvendi
Doctrine: Obligations for whose fulfillment a day certain has
been fixed shall be demandable only when that day
comes. Thus without a certain date on when the
obligation must be fulfilled there will be no cause for
delay, unless such circumstance will fall under the
exceptions provided under 1169.
Facts: April 23, 1981, spouses Vasquez entered into a
Memorandum of Agreement (MOA) with AYALA Corporation
with Ayala buying from the Vazquez spouses, all of the latters
shares of stock in Conduit Development, Inc. The main asset of
Conduit was a 49.9 hectare property in Ayala Alabang which was
then being developed by Conduit under a development plan
where the land was divided into Villages 1, 2 and 3 of the Don
Vicente Village. The development was then being undertaken
for Conduit by G.P. Construction and Development Corp. Under
the MOA, Ayala was to develop the entire property, less what
was defined as the Retained Area consisting of 18,736 square
meters. Ayala agreed to offer 4 lots adjacent to the retained area
for sale to the Vazquez spouses at the prevailing price at the time
of purchase.
Pertinent provision in the MOA:
5.7. The BUYER hereby commits that it
will develop the RemainingProperty into a
first class residential subdivision of the same
class asits New Alabang Subdivision, and that
it intends to complete the firstphase under its
amended development plan within three (3)
years fromthe date of this Agreement. x x x
After the execution of the MOA, Ayala caused the suspension of

work on Village 1 of the Don Vicente Project. Because of this
there were suits between the subcontractor Lancer, GP
Construction and Ayala but were later terminated on February
19, 1987 after Ayala paid both Lancer and GP Construction.
Vasquez spouses then sent several reminder letters of the
approaching so-called deadline on Ayalas obligation to sell 4
lots to them. However, no demand after April 23, 1984, was ever
made by the Vasquez spouses for Ayala to sell the 4 lots. One of
the letters signed by their authorized agent, Engr. Eduardo
Turla, categorically stated that they expected development of
Phase 1 to be completed by February 19, 1990, three years from
the settlement of the legal problems with the previous
contractor. By early 1990 Ayala finished the development of the
vicinity of the 4 lots to be offered for sale. The four lots were
then offered to be sold to the Vasquez spouses at the prevailing
price in 1990. This was rejected by the Vasquez spouses who
wanted to pay at 1984 prices.
Issue: WON Ayala corporation is in default for failure to finish
the development of the phase in question within 3 years.
Held: NO.
Art. 1169 states that those obliged to deliver or to do something
incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their
obligation. In order that the debtor may be in default it is
necessary that the following requisites be present: (1) that the
obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires
the performance judicially or extrajudicially.
Under Article 1193 of the Civil Code, obligations for whose
fulfillment a day certain has been fixed shall be demandable
only when that day comes. There was no fixed date in the MOA,
and the demand letters which were mere reminders were sent
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Atty Tizon
even before three years could pass after the signing. Since the
MOA does not specify a period for the development of the
subject lots, petitioners should have petitioned the court to fix
the period in accordance with Article 1197 of the Civil Code. As
no such action was filed by petitioners, their complaint for
specific performance was premature, the obligation not being
demandable at that point. Accordingly, AYALA Corporation
cannot likewise be said to have delayed performance of the
obligation. Moreover, a representative of the spouses even told
AYALA that the date of reckoning shall be from the date the case
with lancer was finished.
Agner v BPI (2013)

G.R. No. 182963, June 3, 2013
Delay Mora Solvendi
Doctrine: The Civil Code in Article 1169 provides that one
incurs in delay or is in default from the time the obligor
demands the fulfillment of the obligation from the
obligee. However, the law expressly provides that
demand is not necessary under certain circumstances,
and one of these circumstances is when the parties
expressly waive demand. Hence, since the co-signors
expressly waived demand in the promissory notes,
demand was unnecessary for them to be in default.
Facts: Petitioners spouses Deo Agner and Maricon Agner
executed a Promissory Note with Chattel Mortgage in favor of
Citimotors, Inc. The contract provides, among others, that: for
receiving the amount of Php834, 768.00, petitioners shall pay
Php 17,391.00 every 15th day of each succeeding month until
fully paid; the loan is secured by a 2001 Mitsubishi Adventure
Super Sport; and an interest of 6% per month shall be imposed
for failure to pay each installment on or before the stated due
date.
On the same day, Citimotors, Inc. assigned all its rights, title and
interests in the Promissory Note with Chattel Mortgage to ABN
AMRO Savings Bank, Inc. (ABN AMRO), which, on May 31,
2002, likewise assigned the same to respondent BPI Family
Savings Bank, Inc.
For failure to pay four successive installments, respondent,
through counsel, sent to petitioners a demand letter, declaring
the entire obligation as due and demandable and requiring to
37

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pay Php576,664.04, or surrender the mortgaged vehicle

immediately upon receiving the letter. 6 As the demand was left
unheeded, respondent filed an action for Replevin and Damages
before the RTC.
A writ of replevin was issued. Despite this, the subject vehicle
was not seized. Trial on the merits ensued. The RTC ruled for
the respondent and ordered petitioners to jointly and severally
pay the amount of Php576,664.04 plus interest at the rate of
72% per annum from August 20, 2002 until fully paid, and the
costs of suit.
Petitioners appealed the decision to the Court of Appeals (CA),
but the CA affirmed the lower courts decision and,
subsequently, denied the motion for reconsideration; hence, this
petition.
Issue: Whether or not the petitioner cannot be considered to
have defaulted in payment for lack of competent proof that they
received the demand letter. And whether or not the
respondents remedy of resorting to both actions of replevin and
collection of sum of money is contrary to the provision of Article
1484 of the Civil Code.
Ruling: On the first issue, the records bear that both verbal and
written demands were in fact made by respondent prior to the
institution of the case against petitioners. Even assuming, for
arguments sake, that no demand letter was sent by respondent,
there is really no need for it because petitioners legally waived
the necessity of notice or demand in the Promissory Note with
Chattel Mortgage, which they voluntarily and knowingly signed
in favor of respondents predecessor-in-interest. Said contract
expressly stipulates that in case of failure to pay, no prior notice
or demand, is required and the debt immediately becomes due
and payable.
The Civil Code in Article 1169 provides that one incurs in delay
or is in default from the time the obligor demands the
fulfillment of the obligation from the obligee. However, the law
expressly provides that demand is not necessary under certain
circumstances, and one of these circumstances is when the
parties expressly waive demand. Hence, since the co-signors
expressly waived demand in the promissory notes, demand was
unnecessary for them to be in default.
Further, the Court even ruled in Navarro v. Escobido 15 that prior
demand is not a condition precedent to an action for a writ of
replevin, since there is nothing in Section 2, Rule 60 of the Rules
of Court that requires the applicant to make a demand on the
possessor of the property before an action for a writ of replevin
could be filed.
As to the second issue, the court ruled that the remedies
provided for in Art. 1484 are alternative, not cumulative. The
exercise of one bars the exercise of the others.. Here, the vehicle
subject matter of this case was never recovered and delivered to
respondent despite the issuance of a writ of replevin. As there
was no seizure that transpired, it cannot be said that petitioners
were deprived of the use and enjoyment of the mortgaged
vehicle or that respondent pursued, commenced or concluded
its actual foreclosure. The trial court, therefore, rightfully
granted the alternative prayer for sum of money, which is
equivalent to the remedy of "exacting fulfillment of the
obligation." Certainly, there is no double recovery or unjust
enrichment to speak of.
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Claudina Vda. De Villaruel v Manila Motor (1958)

Reyes, JBL.
Re: Mora accipiendi
DOCTRINE: Refusal to accept the current rentals without
qualification placed them in default. As a result, they had to
bear all supervening risks of accidental injury or destruction of
the leased premises.
FACTS: On May 31, 1940, the plaintiffs Villaruel and defendant
Manila Motor Co. Inc. entered into a contract whereby the
defendant agreed to lease plaintiffs building premises. On
October 31, 1940, the leased premises were placed in the
possession of the defendant until the invasion of 1941. The
Japanese military occupied and used the property leased as part
of their quarters from June, 1942 to March, 1945, in which no
payment of rentals were made.
Upon the liberation of the said city, the American forces
occupied the same buildings that were vacated by the Japanese.
When the United States gave up the occupancy of the premises,
defendant decided to exercise their option to renew the contract,
in which they agreed. However, before resuming the collection
of rentals, Dr. Alfredo Villaruel upon advice demanded payment
of rentals corresponding to the time the Japanese military
occupied the leased premises, but the defendant refused to pay.
As a result plaintiff gave notice seeking the rescission of the
contract and the payment of rentals from June, 1942 to March,
1945; this was rejected by the defendant. Despite the fact the
defendant under new branch manager paid to plaintiff the sum
of P350 for the rent, the plaintiff still demanded for rents in
arrears and for the rescission of the contract of lease.
The plaintiff commenced an action before the CFC of Neg.

Occidental against defendant company. During the pendency of
the case, the leased building was burned down. Because of the
occurrence, plaintiffs demanded reimbursement from the
defendants, but having been refused, they filed a supplemental
complaint to include a 3rd cause of action, the recovery of the
value of the burned building. The trial court rendered judgment
in favor of the plaintiff. Hence the defendants appeal.
ISSUE: Is Manila Motor Co. Inc. liable for the loss of the leased
premises?
HELD: No. Clearly, the lessor's insistence upon collecting the
occupation rentals for 1942-1945 was unwarranted in law.
Hence, their refusal to accept the current rentals without
qualification placed them in default (mora creditoris or
accipiendi) with the result that thereafter, they had to bear all
supervening risks of accidental injury or destruction of the
leased premises. While not expressly declared by the Code of
1889, this result is clearly inferable from the nature and effects
of mora.
In other words, the only effect of the failure to consign the
rentals in court was that the obligation to pay them subsisted
and the lessee remained liable for the amount of the unpaid
contract rent, corresponding to the period from July to
November, 1946; it being undisputed that, from December 1946
up to March 2, 1948, when the commercial buildings were
burned, the defendants appellants have paid the contract rentals
at the rate of P350 per month. But the failure to consign did not
eradicate the default (mora) of the lessors nor the risk of loss
that lay upon them.
39

Atty Tizon
Tengco v CA
Mora Accipiendi
Doctrine: The ownership of the property had been
transferred to the private respondent and the person to
whom payment was offered had no authority to accept
payment. The petitioner should have tendered payment
of the rentals to the private respondent and if that was
not possible, she should have consigned such rentals in
court.
Facts: On 16 September 1976, private respondent, Benjamin
Cifra, Jr., claiming to be the owner of the premises at No. 164
Int Gov. Pascual St., Navotas, Metro Manila, which he had
leased to the petitioner, Emilia Tengco, filed an action for
unlawful detainer with the Municipal Court, to evict the
petitioner for her alleged failure to comply with the terms and
conditions of the lease contract by failing and refusing to pay the
stipulated rentals despite repeated demands. MC ruled against
the petitioner. CFI and CA affirmed.
According to the petitioner: in 1942, petitioner entered into a
verbal lease agreement with Lutgarda Cifra over the premises
which belonged to the latter. Aside from the amount of rentals,
no other condition or term was agreed upon. The rentals were
collected from her residence by the lessor's collector who went
to her house to demand and collect payment from time to time,
with no fixed frequency. In 1974, the lessor's collector stopped
going to the petitioner's residence to collect her rentals, as she
had done in the past. The petitioner waited for the collector to
come but the latter never showed up again in his neighborhood.
Since no demand for payment was made upon her, the
petitioner decided to keep the money until the collector comes
again to demand and collect payment. In May, 1976, petitioner
received a letter from Aurora Recto, sister of private respondent,
informing the former that the latter, was the owner of the
property, was offering the same for sale. In August 1977,
petitioner received another letter, this time from the private
respondent, demanding the surrender of the possession of the
premises, also claiming to be the owner of the property. Upon
receipt of this letter, petitioner went to the residence of the
collector, another sister of the private respondent to whom she
had been paying her rentals, and there tendered payment but
this was refused without any justification.
Issue: Whether or not the private respondent was guilty of
mora accipiendi when his sister refused to accept the proffered
rentals.
Ruling: No. Under the circumstances, the refusal to accept the
proffered rentals is not without justification. The ownership of
the property had been transferred to the private respondent and
the person to whom payment was offered had no authority to
accept payment. It should be noted that the contract of lease
between the petitioner and Lutgarda Cifra, the former owner of
the land, was not in writing and, hence, unrecorded. The Court
has held that a contract of lease executed by the vendor, unless
recorded, ceases to have effect when the property is sold, in the
absence of a contrary agreement. The petitioner cannot claim
ignorance of the transfer of ownerhip of the property because,
by her own account, Aurora Recto and the private respondent, at
various times, had informed her of their respective claims to
ownership of the property occupied by the petitioner. The
petitioner should have tendered payment of the rentals to the
private respondent and if that was not possible, she should have
consigned such rentals in court.
40

Atty Tizon
Central Bank v CA (1985)

139 SCRA 46 (1985)
TOPIC: Delay; Kinds of delay; Compensatio morae
Doctrine: The mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but
'instead it is taken as a breach of the contract by him.
Facts: On April 28, 1965, Island Savings Bank, upon favorable
recommendation of its legal department, approved the loan
application for P80,000.00 of Sulpicio M. Tolentino, who, as a
security for the loan, executed on the same day a real estate
mortgage over his 100-hectare land located in Cubo, Las Nieves,
Agusan, and covered by TCT No. T-305, and which mortgage
was annotated on the said title the next day. The approved loan
application called for a lump sum P80,000.00 loan, repayable in
semi-annual installments for a period of 3 years, with 12%
annual interest. It was required that Sulpicio M. Tolentino shall
use the loan proceeds solely as an additional capital to develop
his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the
P80,000.00 loan was made by the Bank; and Sulpicio M.
Tolentino and his wife Edita Tolentino signed a promissory note
for P17,000.00 at 12% annual interest, payable within 3 years
from the date of execution of the contract at semi-annual
installments of P3,459.00. An advance interest for the
P80,000.00 loan covering a 6-month period amounting to
P4,800.00 was deducted from the partial release of P17,000.00.
But this pre-deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by the Bank
that there was no fund yet available for the release of the
P63,000.00 balance. The Bank, thru its vice-president and
treasurer, promised repeatedly the release of the P63,000.00

balance.
On August 13, 1965, the Monetary Board of the Central Bank,
after finding Island Savings Bank was suffering liquidity
problems, issued Resolution No. 1049.
On June 14, 1968, the Monetary Board, after finding that Island
Savings Bank failed to put up the required capital to restore its
solvency, issued Resolution No. 967 which prohibited Island
Savings Bank from doing business in the Philippines and
instructed the Acting Superintendent of Banks to take charge of
the assets of Island Savings Bank
On August 1, 1968, Island Savings Bank, in view of non-payment
of the P17,000.00 covered by the promissory note, filed an
application for the extra-judicial foreclosure of the real estate
mortgage covering the 100-hectare land of Sulpicio M.
Tolentino; and the sheriff scheduled the auction for January 22,
1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with
the Court of First Instance of Agusan for injunction, specific
performance or rescission and damages with preliminary
injunction, alleging that since Island Savings Bank failed to
deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank
to deliver the P63,000.00 with interest of 12% per annum from
April 28, 1965, and if said balance cannot be delivered, to
rescind the real estate mortgage.
On January 21, 1969, the trial court, upon the filing of a
P5,000.00 surety bond, issued a temporary restraining order
enjoining the Island Savings Bank from continuing with the
foreclosure of the mortgage.
41

Atty Tizon
On January 29, 1969, the trial court admitted the answer in

intervention praying for the dismissal of the petition of Sulpicio
M. Tolentino and the setting aside of the restraining order, filed
by the Central Bank and by the Acting Superintendent of Banks.
On February 15, 1972, the trial court, after trial on the merits
rendered its decision, finding unmeritorious the petition of
Sulpicio M. Tolentino, ordering him to pay Island Savings Bank
the amount of PI 7 000.00 plus legal interest and legal charges
due thereon, and lifting the restraining order so that the sheriff
may proceed with the foreclosure.
On February 11, 1977, the Court of Appeals, on appeal by
Sulpicio M. Tolentino, modified the Court of First Instance
decision by affirming the dismissal of Sulpicio M. Tolentino's
petition for specific performance, but it ruled that Island
Savings Bank can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan.
Issue: Whether or not Island Bank incurred delay
Held: Yes
Ratio: When Island Savings Bank and Sulpicio M. Tolentino
entered into an P80,000.00 loan agreement on April 28, 1965,
they undertook reciprocal obligations. In reciprocal obligations,
the obligation or promise of each party is the consideration for
that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de
Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has
performed or is ready and willing to perform his part of the
contract, the other party who has not performed or is not ready
and willing to perform incurs in delay (Art. 1169 of the Civil
Code). The promise of Sulpicio M. Tolentino to pay was the
consideration for the obligation of Island Savings Bank to
furnish the P80,000.00 loan. When Sulpicio M. Tolentino
executed a real estate mortgage on April 28, 1965, he signified
his willingness to pay the P80,000.00 loan. From such date, the
obligation of Island Savings Bank to furnish the P80,000.00

loan accrued. Thus, the Bank's delay in furnishing the entire
loan started on April 28, 1965, and lasted for a period of 3 years
or when the Monetary Board of the Central Bank issued
Resolution No. 967 on June 14, 1968, which prohibited Island
Savings Bank from doing further business. Such prohibition
made it legally impossible for Island Savings Bank to furnish the
P63,000.00 balance of the P80,000.00 loan. The power of the
Monetary Board to take over insolvent banks for the protection
of the public is recognized by Section 29 of R.A. No. 265, which
took effect on June 15, 1948, the validity of which is not in
question.
The Board Resolution No. 1049 issued on August 13,1965 cannot
interrupt the default of Island Savings Bank in complying with
its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans
and investments, and nowhere did it prohibit island Savings
Bank from releasing the balance of loan agreements previously
contracted. Besides, the mere pecuniary inability to fulfill an
engagement does not discharge the obligation of the contract,
nor does it constitute any defense to a decree of specific
performance (Gutierrez Repide vs. Afzelius and Afzelius, 39
Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is
never an excuse for the non-fulfillment of an obligation but
'instead it is taken as a breach of the contract by him.
42

Atty Tizon
Nakpil v. CA (1986)
Topic: Not attributable to the debtor; Fortuitous event
Doctrine: To be exempt from liability due to an act of God, the
engineer/architect/contractor must not have been
negligent in the construction of the building.
Facts: Private respondents Philippine Bar Association (PBA)
a non-profit organization formed under the corporation law
decided to put up a building in Intramuros, Manila. Hired to
plan the specifications of the building were Juan Nakpil & Sons,
while United Construction was hired to construct it. The
proposal was approved by the Board of Directors and signed by
the President, Ramon Ozaeta. The building was completed in
1966.
In 1968, there was an unusually strong earthquake which caused
the building heavy damage, which led the building to tilt
forward, leading the tenants to vacate the premises. United
Construction took remedial measures to sustain the building.
PBA filed a suit for damages against United Construction, but
United Construction subsequently filed a suit against Nakpil and
Sons, alleging defects in the plans and specifications. Technical
Issues in the case were referred to Mr. Hizon, as a court
appointed Commissioner. PBA moved for the demolition of the
building, but was opposed. PBA eventually paid for the
demolition after the building suffered more damages in 1970
due to previous earthquakes. The Commissioner found that
there were deviations in the specifications and plans, as well as
defects in the construction of the building.
Issue: WON an act of God (fortuitous event) exempts from
liability parties who would otherwise be due to negligence.
Held: NO.
An act of God has been defined as an accident, due directly and

exclusively to natural causes without human intervention, which
by no amount of foresight, pains or care, reasonably to have
been expected, could have been prevented. There is no dispute
that the earthquake which took place in 1968 was a fortuitous
event or an act of God.
Art. 1723 dictates that the engineer/architect and contractor are
liable for damages should the building collapse within 15 years
from completion.
Art. 1174 of the NCC, however, states that no person shall be
responsible for events, which could not be foreseen. But to
exempt the obligor from liability due to an act of God, the
following must occur:
1) Cause of breach must be independent of the will of the
debtor
2) Event must be unforeseeable or unavoidable
3) Event must be such that it would render it impossible
for the debtor to fulfill the obligation
4) Debtor must be free from any participation or
aggravation of the industry to the creditor.
Thus, if upon the happening of a fortuitous event or an act of

God, there concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor of the
obligation as provided for in Article 1170 of the Civil Code,
which results in loss or damage, the obligor cannot escape
liability.
The principle embodied in the act of God doctrine strictly
requires that the act must be one occasioned exclusively by the
violence of nature and all human agencies are to be excluded
43

Atty Tizon
from creating or entering into the cause of the mischief. When

the effect, the cause of which is to be considered, is found to be
in part the result of the participation of man, whether it be from
active intervention or neglect, or failure to act, the whole
occurrence is thereby humanized, as it were, and removed from
the rules applicable to the acts of God.
In the case at bar, although the damage was ultimately caused
by the earthquake which was an act of God, the defects in the
construction, as well as the deviations in the specifications and
plans aggravated the damage, and lessened the preventive
measures that the building would otherwise have had. As
correctly assessed by both courts, the defects in the construction
and in the plans and specifications were the proximate causes
that rendered the PBA building unable to withstand the
earthquake of 1968. For this reason the defendant and thirdparty defendants cannot claim exemption from liability.
Fil-Estate v Ronquillo (2014)

G.R. No. 185789, January 13, 2014
Fortuitous Event
Doctrine: the Asian financial crisis is not a fortuitous event
that would excuse petitioners from performing their
contractual obligation
Facts: Petitioner Fil-Estate Properties, Inc. is the owner and
developer of the Central Park Place Tower while co-petitioner
Fil-Estate Network, Inc. is its authorized marketing agent.
Respondent Spouses Conrado and Maria Victoria Ronquillo
purchased from petitioners a condominium unit for a preselling contract price of FIVE MILLION ONE HUNDRED
SEVENTY-FOUR THOUSAND ONLY (P5,174,000.00). As
agreed upon, respondents paid the full downpayment of
P1,552,200.00 and had been paying the P63,363.33 monthly
amortizations until September 1998.
Upon learning that construction works had stopped,
respondents likewise stopped paying their monthly
amortization. Claiming to have paid a total of P2,198,949.96 to
petitioners, respondents through two (2) successive letters,
demanded a full refund of their payment with interest. When
their demands went unheeded, respondents were constrained to
file a Complaint for Refund and Damages before the Housing
and Land Use Regulatory Board (HLURB).
Respondents
prayed
for
reimbursement/refund
of
P2,198,949.96 representing the total amortization payments,
P200,000.00 as and by way of moral damages, attorneys fees
and other litigation expenses.
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On 21 October 2000, the HLURB issued an Order of Default

against petitioners for failing to file their Answer within the
reglementary period despite service of summons.
Petitioners filed a motion to lift order of default and attached
their position paper attributing the delay in construction to the
1997 Asian financial crisis. Petitioners denied committing fraud
or misrepresentation which could entitle respondents to an
award of moral damages.
Issue: Whether or not the Asian financial crisis constitute a
fortuitous event which would justify delay by petitioners in the
performance of their contractual obligation;
Ruling: According to the Supreme Court, the rulings were
consistent that first, the Asian financial crisis is not a fortuitous
event that would excuse petitioners from performing their
contractual obligation; second, as a result of the breach
committed by petitioners, respondents are entitled to rescind
the contract and to be refunded the amount of amortizations
paid including interest and damages; and third, petitioners are
likewise obligated to pay attorneys fees and the administrative
fine.
The court cannot generalize that the Asian financial crisis in
1997 was unforeseeable and beyond the control of a business
corporation. It is unfortunate that petitioner apparently met
with considerable difficulty e.g. increase cost of materials and
labor, even before the scheduled commencement of its real
estate project as early as 1995. However, a real estate enterprise
engaged in the pre-selling of condominium units is concededly a
master in projections on commodities and currency movements
and business risks. The fluctuating movement of the Philippine
peso in the foreign exchange market is an everyday occurrence,
and fluctuations in currency exchange rates happen everyday,
thus, not an instance of caso fortuito.
In said case, the Court ordered the refund of the total

amortizations paid by respondents plus 6% legal interest
computed from the date of demand. The Court also awarded
attorneys fees.
Khe Hong Cheng v CA (2001)

Kapunan, J.
Re: Accion Pauliana
DOCTRINE: When the law is silent as to when the
prescriptive shall commence, general rule must apply
that it will commence when the moment the action
accrues. An action for rescission must be the last resort
of the creditors and can only be availed after the
creditor had exhausted all the properties.
FACTS: Petitioner is the owner of Butuan Shipping Line. In one
the vessels owned by the petitioner, Philippine Agricultural
Trading Corporation boarded 3,400 bags of copra to be shipped
from Masbate to Dipolog City and which said shipment of copra
was insured by PhilAm.
While on board, the ship sank amounting to total loss of the
shipments. Because of the loss, the insurer paid the damages to
the consignee. Having subrogated the rights of the consignee,
PhilAm instituted a civil case to recover the money paid to the
consignee based on breach of contract of carriage. While the
case was pending, petitioner executed deeds of donations of
parcels of land to his children.
The trial court rendered judgment against the petitioner Ke
Hong Cheng in the civil case on December 29, 1993. After the
decision became final a writ of execution was issued but it was
not served, Therefore an alias writ was was applied for which
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was granted. The sheriff did not found any property under
Butuan Shipping Lines and/or Ke Hong Cheng.
In 1997, PhilAm filed complaint for annulling the deeds of
donation made by herein petitioner to his children and alleged
the donation was to defraud his creditors including PhilAm.
Petitioner filed an answer stating that the action had already
prescribed.
ISSUE: Whether or not the action to rescind the donation had
already prescribed.
HELD: According to the trial court, the period began from
December 29, 1993 when the civil case was resolved. Thus, The
CA maintained that, that the four year period began only on
January 1997, the time when it first learned that the judgment
award could not be satisfied because the Ke Hong Cheng had no
more properties in his name. Article 1389 of the Civil Code
simply provide that "The action to claim rescission must be
commenced within four years." When the law is silent as to
when the prescriptive shall commence, general rule
must apply that it will commence when the moment
the action accrues. An action for rescission must be
the last resort of the creditors and can only be availed
after the creditor had exhausted all the properties. The
herein respondent came to know only in January 1997 about the
unlawful conveyances of the petitioner when together with the
sheriff and counsel were to attach the property of the petitioner
and it was then only when they found out it is no longer in the
name of the petitioner. Since the respondent filed accion
pauliana on February 1997, a month after the discovery that
petitioner had no property in his name to satisfy the judgment,
action for rescission of subject deeds had not yet prescribed.
Siguan v Lim
Accion Pauliana
Doctrine: The action to rescind contracts in fraud of creditors
is known as accion pauliana. For this action to prosper,
the following requisites must be present: (1) the plaintiff
asking for rescission has a credit prior to the alienation,
although demandable later; (2) the debtor has made a
subsequent contract conveying a patrimonial benefit to
a third person; (3) the creditor has no other legal
remedy to satisfy his claim; (4) the act being impugned
is fraudulent; (5) the third person who received the
property conveyed, if it is by onerous title, has been an
accomplice in the fraud.
Facts: On 25 and 26 August 1990, Rosa Lim issued 2 checks
payable to cash. Upon presentment by petitioner with the
drawee bank, the checks were dishonored for the reason
account closed. Demands to make good the checks proved
futile. A criminal case for violation of BP 22 was filed by
petitioner against Lim. RTC convicted Lim as charged. The case
is pending before this Court for review. On 31 July 1990, Lim
was convicted of estafa by the RTC filed by Victoria Suarez. This
decision was affirmed by the CA. However, this Court, acquitted
Lim but held her civilly liable in the amount of P169,000, as
actual damages, plus legal interest.
On 2 July 1991, a Deed of Donation conveying several parcels of
land and purportedly executed by Lim on 10 August 1989 in
favor of her children, Linde, Ingrid and Neil, was registered.
New TCTs were issued in the names of the donees. On 23 June
1993, petitioner filed an accion pauliana against Lim and her
children before the RTC to rescind the Deed of Donation.
Petitioner claimed that Lim fraudulently transferred all her real
property to her children in bad faith and in fraud of creditors,
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Atty Tizon
including her; that Lim conspired with her children in

antedating the Deed of Donation, to petitioners and other
creditors prejudice; and that Lim, at the time of the fraudulent
conveyance, left no sufficient properties to pay her obligations.
RTC ordered the rescission of the deed of donation. CA reversed
the decision of the RTC. It held that 2 of the requisites for filing
an accion pauliana were absent, namely, (1) there must be a
credit existing prior to the celebration of the contract; and (2)
there must be a fraud, or at least the intent to commit fraud, to
the prejudice of the creditor seeking the rescission. The Deed of
Donation, which was executed and acknowledged before a
notary public, appears on its face to have been executed on 10
August 1989. Under Section 23 of Rule 132, the Deed, being a
public document, is evidence of the fact which gave rise to its
execution and of the date thereof. No antedating of the Deed of
Donation was made, there being no convincing evidence on
record to indicate that the notary public and the parties did
antedate it. Since Lims indebtedness to petitioner was incurred
in August 1990, or a year after the execution of the Deed of
Donation, the first requirement for accion pauliana was not met.
Anent petitioners contention that assuming that the Deed was
not antedated it was nevertheless in fraud of creditors because
Suarez became Lims creditor on 8 October 1987, CA found the
same untenable, for the rule is basic that the fraud must
prejudice the creditor seeking the rescission.
Issue: Whether the questioned Deed of Donation was made in
fraud of petitioner and, therefore, rescissible.
Ruling: No. Article 1381 enumerates the contracts which are
rescissible, and among them are those contracts undertaken in
fraud of creditors when the latter cannot in any other manner
collect the claims due them.
The general rule is that rescission requires the existence of
creditors at the time of the alleged fraudulent alienation, and
this must be proved as one of the bases of the judicial

pronouncement setting aside the contract. Without any prior
existing debt, there can neither be injury nor fraud. While it is
necessary that the credit of the plaintiff in the accion pauliana
must exist prior to the fraudulent alienation, the date of the
judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with
retroactive effect to the date when the credit was constituted.
The alleged debt of Lim in favor of petitioner was incurred in
August 1990, while the deed of donation was purportedly
executed on 10 August 1989. We are not convinced with the
allegation of the petitioner that the deed was antedated to make
it appear that it was made prior to petitioners credit. Notably,
that deed is a public document, it having been acknowledged
before a notary public. As such, it is evidence of the fact which
gave rise to its execution and of its date, pursuant to Section 23,
Rule 132. The fact that the Deed was registered only on 2 July
1991 is not enough to overcome the presumption as to the
truthfulness of the statement of the date in the deed, which is 10
August 1989. Petitioners claim against Lim was constituted only
in August 1990, or a year after the alienation. Thus, the first 2
requisites for the rescission of contracts are absent.
Even assuming arguendo that petitioner became a creditor of
Lim prior to the celebration of the contract of donation, still her
action for rescission would not fare well because the third
requisite was not met. Under Article 1381, contracts entered into
in fraud of creditors may be rescinded only when the creditors
cannot in any manner collect the claims due them. Also, Article
1383 provides that the action for rescission is but a subsidiary
remedy which cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation
for the same. The term subsidiary remedy has been defined as
the exhaustion of all remedies by the prejudiced creditor to
collect claims due him before rescission is resorted to. It is,
therefore, essential that the party asking for rescission prove
47

Atty Tizon
that he has exhausted all other legal means to obtain satisfaction

of his claim. Petitioner neither alleged nor proved that she did
so. On this score, her action for the rescission of the deed is not
maintainable even if the fraud charged actually did exist.
The fourth requisite for an accion pauliana to prosper is not
present either.
Article 1387, first paragraph, provides: All contracts by virtue
of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors when
the donor did not reserve sufficient property to pay all debts
contracted before the donation. Likewise, Article 759, second
paragraph, states that the donation is always presumed to be in
fraud of creditors when at the time thereof the donor did not
reserve sufficient property to pay his debts prior to the donation.
For this presumption of fraud to apply, it must be established
that the donor did not leave adequate properties which creditors
might have recourse for the collection of their credits existing
before the execution of the donation.
Petitioners alleged credit existed only a year after the deed of
donation was executed. She cannot, therefore, be said to have
been prejudiced or defrauded by such alienation. Besides, the
evidence disclose that as of 10 August 1989, when the deed of
donation was executed, Lim still had several properties. It was
not sufficiently established that the properties left behind by
Lim were not sufficient to cover her debts existing before the
donation was made. Hence, the presumption of fraud will not
come into play.
Nevertheless, a creditor need not depend solely upon the
presumption laid down in Articles 759 and 1387. Under the
third paragraph of Article 1387, the design to defraud may be
proved in any other manner recognized by the law of evidence.
Thus in the consideration of whether certain transfers are
fraudulent, the Court has laid down specific rules by which the
character of the transaction may be determined. The following

have been denominated by the Court as badges of fraud:
(1) The fact that the consideration of the conveyance is
fictitious or is inadequate;
(2) A transfer made by a debtor after suit has begun and
while it is pending against him;
(3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency;
(5) The transfer of all or nearly all of his property by a
debtor, especially when he is insolvent or greatly
embarrassed financially;
(6) The fact that the transfer is made between father and son,
when there are present other of the above circumstances;
and
(7) The failure of the vendee to take exclusive possession of
all the property.
The above enumeration is not an exclusive list. The
circumstances evidencing fraud are as varied as the men who
perpetrate the fraud in each case. This Court has therefore
declined to define it, reserving the liberty to deal with it under
whatever form it may present itself.
Petitioner failed to discharge the burden of proving any of the
circumstances enumerated above or any other circumstance
from which fraud can be inferred. Accordingly, since the 4
requirements for the rescission of a gratuitous contract are not
present in this case, petitioners action must fail.
Petitioner brings to our attention the 31 July 1990 Decision of
the RTC wherein Lim was held guilty of estafa and was ordered
to pay Victoria Suarez P169,000 for the obligation Lim incurred
48

Atty Tizon
on 8 October 1987. This decision was affirmed by the CA. Upon

appeal, however, this Court acquitted Lim of estafa but held her
civilly liable for P169,000 as actual damages.
It should be noted that the complainant in that case, Victoria
Suarez, albeit a creditor prior to the alienation, is not a party to
this accion pauliana. Article 1384 provides that rescission shall
only be to the extent necessary to cover the damages caused.
Thus, only the creditor who brought the action for rescission can
benefit from the rescission; those who are strangers to the action
cannot benefit from its effects. And the revocation is only to the
extent of the plaintiff creditors unsatisfied credit; as to the
excess, the alienation is maintained. Thus, petitioner cannot
invoke the credit of Suarez to justify rescission of the deed of
donation.
Gaite v Fonacier
2 SCRA 830 (1961)
TOPIC: Kinds of Obligations; According to
Demandability; Conditional Obligations
Facts: Defendant-appellant Fonacier was the owner/holder of
11 iron lode mineral claims, known as the Dawahan Group,
situated in Camrines Norte.
By Deed of Assignment, Respondent constituted and appointed
plaintiff-appellee Gaite as attorney-in-fact to enter into contract
for the exploration and development of the said mining claims
on. On March 1954, petitioner executed a general assignment
conveying the claims into the Larap Iron Mines, which owned
solely
and
belonging
to
him.
Thereafter,
he
underwent development and the exploitation for the mining
claims which he estimates to be approximately 24 metric tons of
iron ore.
However, Fonacier decide to revoke the authority given to Gaite,
whereas respondent assented subject to certain conditions.
Consequently a revocation of Power of Attorney and Contract
was executed transferring P20k plus royalties from the mining
claims, all rights and interest on the road and other
developments done, as well as , the right to use of the business
name, goodwill, records, documents related to the mines.
Furthermore, included in the transfer was the rights and interest
over the 24K+ tons of iron ore that had been extracted. Lastly
the balance of P65K was to be paid for covering the first
shipment of iron ores.
To secure the payment of P65k, respondent executed a surety
bond with himself as principal, the Larap Mines and Smelting
Co. and its stockholder as sureties. Yet, this was refused by
petitioner. Appelle further required another bond underwritten
by a bonding company tosecure the payment of the balance.
49

Atty Tizon
Hence a second bond was produced with Far Eastern Surety as

an additional surety, provided the liability of Far Eastern would
only prosper when there had been an actual sale of the iron ores
of not less than the agreed amount of P65k, moreover, its
liability was to automatically expire on December 1955.
On December 1955, the second bond had expired and no sale
amounting to the stipulation as prior agreed nor had the balance
been paid to petitioner by respondent. Thus such failure,
prompted petitioner to file a complaint in the CFI of Manila for
the payment of the balance and other damages.
The Trial Court ruled in favor of plaintiff ordering defendant to
pay the balance of P65k with interest. Afterwards an appeal was
affected by the respondent where several motions were
presented for resolution: a motion for contempt; two motions to
dismiss the appeal for becoming moot and academic; motion for
a new trial, filed by appellee Gaite. The motion for contempt was
held unmeritorious, while the rest of the motions were held
unnecessary to resolve
Issue: Whether or not the Lower Court erred in holding the
obligation of appellant Fonacier to pay appelle Gaite the balance
of P65k, as one with a period or term and not one with a
suspensive condition; and that the term expired on December
1955
Held: No
Ratio: Error was found, affirming the decision of the lower
court. Gaite acted within his rights in demanding payment and
instituting this action one year from and after the contract was
executed, either because the appellant debtors had impaired the
securities originally given and thereby forfeited any further time
within which to pay; or because the term of payment was
originally of no more than one year, and the balance of P65k,
became due and payable thereafter.
The Lower Court was legally correct in holding the shipment or

sale of the iron ore is not a condition or suspensive to the
payment of the balance of P65k, but was only a suspensive
period or term. What characterizes a conditional obligation is
the fact that its efficacy or obligatory force as distinguished from
its demandability, is subordinated to the happening of a future
and uncertain event; so that if the suspensive condition does not
take place, the parties would stand as if the conditional
obligation had never existed.
The sale of the ore to Fonacier was a sale on credit, and not an
aleatory contract where the transferor, Gaite, would assume the
risk of not being paid at all; and that the previous sale or
shipment of the ore was not a suspensive condition for the
payment of the balance of the agreed price, but was intended
merely to fix the future date of the payment.
While as to the right of Fonacier to insist that Gaite should wait
forthe sale or shipment of the ore before receiving payment; or,
in other words, whether or not they are entitled to take full
advantage of the period granted them for making the payment.
The appellant had indeed have forfeited the right to compel
Gaite to wait for the sale of the ore before receiving payment of
the balance of P65,000.00, because of their failure to renew the
bond of the Far Eastern Surety Company or else replace it with
an equivalent guarantee. The expiration of the bonding
company's undertaking on December 8, 1955 substantially
reduced the security of the vendor's rights as creditor for the
unpaid P65,000.00, a security that Gaite considered essential
and upon which he had insisted when he executed the deed of
sale of the ore to Fonacier (first bond).
Under paragraphs 2 and 3 of Article 1198 of the Civil Code of the
Philippines: ART. 1198. The debtor shall lose every right to make
use of the period: (2) When he does not furnish to the creditor
the guaranties or securities which he has promised. (3) When by
his own acts he has impaired said guaranties or securities after
50

Atty Tizon
their establishment, and when through fortuitous event they

disappear, unless he immediately gives new ones equally
satisfactory.
Appellants' failure to renew or extend the surety company's
bond upon its expiration plainly impaired the securities given to
the creditor (appellee Gaite), unless immediately renewed or
replaced.
Nevertheless, there is no merit in appellants' argument that
Gaite's acceptance of the surety company's bond with full
knowledge that on its face it would automatically expire within
one year was a waiver of its renewal after the expiration date. No
such waiver could have been intended, for Gaite stood to lose
and had nothing to gain barely; and if there was any, it could be
rationally explained only if the appellants had agreed to sell the
ore and pay Gaite before the surety company's bond expired on
December 8, 1955. But in the latter case the defendantsappellants' obligation to pay became absolute after one year
from the transfer of the ore to Fonacier by virtue of the deed,
first bond.
Gonzales v. Heirs of Thomas (1999)

Topic: Kinds of Obligations; According to
Demandability; Conditional Obligations
Doctrine: A condition is every future and uncertain event
upon which an obligation or provision is made to
depend or upon which the acquisition or resolution of
rights is made to depend by those who execute the
juridical act. Without it, the sale of the property under
the contract cannot be perfected, and petitioner cannot
be obliged to purchase such property.
Facts: On December 1, 1983, Paula Ao Cruz together with the
plaintiffs heirs of Thomas and Paula Cruz entered into a contract
of lease with the defendant, Felix L. Gonzales of a half portion of
a land containing an area if 12 hectares, more or less, and an
accretion of 2 hectares, more or less, situated in Rodriguez
Town, Province of Rizal. As stipulated therein:
Paragraph 9 The LESSORS hereby commit themselves and
shall undertake to obtain a separate and distinct TCT over the
herein leased portion to the LESSEE within a reasonable period
of time which shall not in any case exceed four (4) years, after
which a new Contract shall be executed by the herein parties
which shall be the same in all respects with this Contract of
Lease/Purchase insofar as the terms and conditions are
concerned.
The contracts term is for a period of one year upon the signing
thereof. After the period, Gonzales shall purchase the property
P1,000,000.00, 2 years payable with 12% per annum interest
subject to the devalued amount of the Philippine Peso. Gonzales
shall also pay annual rental equivalent to P2,500.00 per hectare,
upon the signing of this contract and that the lessors (CRUZ)
shall undertake to obtain a separate certificate over leased
51

Atty Tizon
portion to the LESSEE within a reasonable period of time which

shall not in any case exceed four (4) years. A new Contract shall
then be executed by the herein parties which shall be the same
in all respects with this Contract of Lease/Purchase insofar as
the terms and conditions are concerned. Under the contract,
Gonzales paid the rental fees but did not choose to exercise the
option of paying the 1,000,000 purchase price. A letter was
issued by one of the heirs to rescind the said contract following
the breach and ordered Gonzales to vacate the premises within
10 days. Gonzales did not vacate. A few days later, Paula Cruz
died. As case was launched in Court by the heirs of Paula Cruz.
buy the land and to pay the sums stated in the contract be
enforced within the period stipulated. Verily, the petitioners
obligation to purchase has not yet ripened and cannot be
enforced until and unless respondents can prove their title to the
property subject of the contract. The Court also held that there
can be no rescission (or resolution) of an obligation as yet nonexistent, because the suspensive condition has not happened.
Issue: WON paragraph 9 of the Lease/Purchase Contract a

condition precedent before petitioner could exercise his option
to buy the property.
Held: YES.
Paragraph 9 required respondents to obtain a separate and
distinct TCT in their names and not in the name of petitioner. It
logically follows that it was a condition precedent to the latters
obligation to purchase and pay for the land.
When an obligation assumed by a party to a contract is expressly
subjected to a condition, the obligation cannot be enforced
against him unless the condition is complied with. Obligatory
force of a conditional obligation is subordinated to the
happening of a future and uncertain event, so that if that event
does not take place, the parties would stand as if the conditional
obligation had never existed.
If a stipulation in a contract admits of several meanings, it shall
be understood as bearing that import most adequate to render it
effectual. An obligation cannot be enforced unless the plaintiff
has fulfilled the condition upon which it is premised. The 9 th
provision was intended to ensure that respondents would have a
valid title over the specific portion they were selling to
petitioner. Only after the title is assured may the obligation to
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Coronel v CA (1996)
Melo, J.
Re: Suspensive condition
DOCTRINE: The case is a contract of sale subject to a
suspensive condition in which consummation is subject
only to the successful transfer of the certificate of title
from the name of petitioners' father, to their names.
Thus, the contract of sale became obligatory.
pendens in the title was annotated after she bought the property
is of no merit. In case of double sale, what finds relevance and
materiality is not whether or not the second buyer was a buyer
in good faith but whether or not said second buyer registers
such second sale in good faith, that is, without knowledge of any
defect in the title of the property sold.
The ruling should be in favor of Alcaraz because Mabanag
registered the property two months after the notice of lis
pendens was annotated in the title and hence, she cannot be a
buyer in good faith.
FACTS: Coronel et al. consummated the sale of his property

located in Quezon City to respondent Alcaraz. Since the title of
the property was still in the name of the deceased father of the
Coronels, they agreed to transfer its title to their name upon
payment of the down payment of 50K and thereafter an absolute
deed of sale will be executed.
Alcarazs mother paid the down payment in behalf of her
daughter and as such, Coronel made the transfer of title to their
name. Notwithstanding this fact, Coronel sold the property to
petitioner Mabanag and rescinded its prior contract with
Alcaraz.
ISSUE: Whether the rescission of the first contract between
Coronel and Alcaraz is valid.
HELD: The case is a contract of sale subject to a suspensive
condition in which consummation is subject only to the
successful transfer of the certificate of title from the name of
petitioners' father, to their names. Thus, the contract of sale
became obligatory.
With regard to double sale, the rule that the first in time,
stronger in right should apply. The contention of the petitioner
that she was a buyer in good faith because the notice of lis
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Atty Tizon
Parks v Prov of Tarlac

Types of conditions: resolutory condition
Doctrine: The characteristic of a condition precedent is that
the acquisition of the right is not effected while said
condition is not complied with or is not deemed
complied with. Meanwhile nothing is acquired and there
is only an expectancy of right. Consequently, when a
condition is imposed, the compliance of which cannot be
effected except when the right is deemed acquired, such
condition cannot be a condition precedent.
Facts: On October 18, 1910, Concepcion Cirer and James Hill,
the owners of parcel of land, donated it perpetually to the
municipality of Tarlac, Province of Tarlac, under certain
conditions specified in the public document in which they made
this donation. The donation was accepted by Santiago de Jesus
in the same document on behalf of the municipal council of
Tarlac of which he was the municipal president. The parcel
donated was later registered in the name of the donee, the
municipality of Tarlac. On January 15, 1921, Cirer and Hill sold
this parcel to plaintiff George Parks. On August 24, 1923, the
municipality of Tarlac transferred the parcel to the Province of
Tarlac which, by reason of this transfer, applied for and
obtained the registration thereof in its name, the corresponding
certificate of title having been issued to it.
Parks, alleging that the conditions of the donation had not been
complied with and invoking the sale of this parcel of land made
by Cirer and Hill in his favor, brought this action against the
Province of Tarlac, the municipality of Tarlac, Cirer and Hill and
prayed that he be declared the absolute owner entitled to the
possession of this parcel, that the transfer of the same by the
municipality of Tarlac to the Province of Tarlac be annulled, and
the transfer certificate issued to the Province of Tarlac cancelled.
Issue: Whether or not the condition that one of the parcels

donated was to be used absolutely and exclusively for the
erection of a central school and the other for a public park is a
condition precedent imposed on the donation.
Ruling: No. Parks contends that a condition precedent having
been imposed in the donation and the same not having been
complied with, the donation never became effective. The
appellant refers to the condition imposed that one of the parcels
donated was to be used absolutely and exclusively for the
erection of a central school and the other for a public park, the
work to commence in both cases within the period of six months
from the date of the ratification by the parties of the document
evidencing the donation.
It is true that this condition has not been complied with. The
allegation, however, that it is a condition precedent is erroneous.
The characteristic of a condition precedent is that the
acquisition of the right is not effected while said condition is not
complied with or is not deemed complied with. Meanwhile
nothing is acquired and there is only an expectancy of right.
Consequently, when a condition is imposed, the compliance of
which cannot be effected except when the right is deemed
acquired, such condition cannot be a condition precedent. In the
present case the condition that a public school be erected and a
public park made of the donated land, work on the same to
commence within 6 months from the date of the ratification of
the donation by the parties, could not be complied with except
after giving effect to the donation. The donee could not do any
work on the donated land if the donation had not really been
effected, because it would be an invasion of another's title, for
the land would have continued to belong to the donor so long as
the condition imposed was not complied with.
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Central Philippines v CA (2995)

246 SCRA 511 (1995)
certificate of title without a fixed period when to comply with

such conditions; 2) Whether or not there is a need to fix the
period for compliance of the condition
TOPIC: Types of Conditions; As to effect on obligation;

Resolutory (condition subsequent)
Held: 1) YES 2)NO
Doctrine: Thus, when a person donates land to another on the

condition that the latter would build upon the land a
school is such a resolutory one. The donation had to be
valid before the fulfillment of the condition.
Ratio: 1)Under Art. 1181, on conditional obligations, the

acquisition of rights as well the extinguishment or loss of those
already acquired shall depend upon the happening of the event
which constitutes the condition. Thus, when a person donates
land to another on the condition that the latter would build
upon the land a school is such a resolutory one. The donation
had to be valid before the fulfillment of the condition. If there
was no fulfillment with the condition such as what obtains in the
instant case, the donation may be revoked & all rights which the
donee may have acquired shall be deemed lost & extinguished.
Facts: In 1939, Don Ramon Lopez Sr. executed a deed of

donation in favor of Central Philippines University together with
the following conditions:
a) The land should be utilized by CPU exclusively for the
establishment & use of medical college;
b) The said college shall not sell transfer or convey to any
3rd party;
c) The said land shall be called Ramon Lopez Campus and
any income from that land shall be put in the fund to be
known as Ramon Lopez Campus Fund.
However, on May 31, 1989, private respondents, who are the
heirs of Don Ramon filed an action for annulment of donation,
reconveyance & damages against CPU for not complying with
the conditions. The heirs also argued that CPU had negotiated
with the NHA to exchange the donated property with another
land owned by the latter.
Petitioner alleged that the right of private respondents to file the
action had prescribed.
Issue: 1) Whether or not petitioner failed to comply the
resolutely conditions annotated at the back of petitioners
More than a reasonable period of fifty (50) years has already

been allowed petitioner to avail of the opportunity to comply
with the condition even if it be burdensome, to make the
donation in its favor forever valid. But, unfortunately, it failed to
do so. Hence, there is no more need to fix the duration of a term
of the obligation when such procedure would be a mere
technicality and formality and would serve no purpose than to
delay or lead to an unnecessary and expensive multiplication of
suits.
Records are clear and facts are undisputed that since the
execution of the deed of donation up to the time of filing of the
instant action, petitioner has failed to comply with its obligation
as donee. Petitioner has slept on its obligation for an
unreasonable length of time. Hence, it is only just and equitable
now to declare the subject donation already ineffective and, for
all purposes, revoked so that petitioner as donee should now
return the donated property to the heirs of the donor, private
respondents herein, by means of reconveyance.
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2) Under Art. 1197, when the obligation does not fix a period but
from its nature & circumstance it can be inferred that the period
was intended, the court may fix the duration thereof because the
fulfillment of the obligation itself cannot be demanded until
after the court has fixed the period for compliance therewith &
such period has arrived. However, this general rule cannot be
applied in this case considering the different set of
circumstances existing more than a reasonable period of 50yrs
has already been allowed to petitioner to avail of the opportunity
to comply but unfortunately, it failed to do so. Hence, there is no
need to fix a period when such procedure would be a mere
technicality & formality & would serve no purpose than to delay
or load to unnecessary and expensive multiplication of suits.
Under Art. 1191, when one of the obligors cannot comply with
what is incumbent upon him, the obligee may seek rescission
before the court unless there is just cause authorizing the fixing
of a period. In the absence of any just cause for the court to
determine the period of compliance there is no more obstacle
for the court to decree recission.
Quijada v. CA (1998)
Topic: Kinds of Obligation; According to
Demandability; Conditional Obligations; As to Effect;
Resolutory
Doctrine: It has been ruled that when a person donates land
to another on the condition that the latter would build
upon the land a school, the condition imposed is not a
condition precedent or a suspensive condition but a
resolutory one.
Facts: On April 5, 1956, Trinidad Quijada and her sisters
executed a deed of conditional donation in favor of the
Municipality of Talacogon, the condition being that the land
shall be used exclusively for the construction of a provincial high
school. Trinidad remained in possession of the land. However,
on July 29, 1962, Trinidad sold the land donated to the
Municipality of Talacogon to respondent Regalado Mondejar.
In 1980, the heirs of Trinidad, herein petitioners, filed a
complaint for forcible entry against the respondent. In 1987, the
proposed campus did not materialize, and the Sangguniang
Bayan enacted a resolution donating back the land to the donor.
In the meantime, respondent Mondejar conveyed portions of the
land to the other respondents. On July 5, 1988, petitioners filed
a complaint for quieting of title, recovery of possession and
ownership of the land.
Issue: WON the sale between Trinidad and Regalado is valid
considering the capacity of the vendor to execute the contract in
view of the conditional deed of donation.
Held: No.
The donation made on April 5, 1956 by Trinidad Quijada and
her brother and sisters was subject to the condition that the
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donated property shall be "used solely and exclusively as a part

of the campus of the proposed Provincial High School in
Talacogon." The donation further provides that should "the
proposed Provincial High School be discontinued or if the same
shall be opened but for some reason or another, the same may in
the future be closed" the donated property shall automatically
revert to the donor. Such condition, not being contrary to law,
morals, good customs, public order or public policy was validly
imposed in the donation.
When the Municipality's acceptance of the donation was made
known to the donor, the former became the new owner of the
donated property -- donation being a mode of acquiring and
transmitting ownership- notwithstanding the condition imposed
by the donee. The donation is perfected once the acceptance by
the donee is made known to the donor. Accordingly, ownership
is immediately transferred to the latter and that ownership will
only revert to the donor if the resolutory condition is not
fulfilled.
herein when the donee-Municipality manifested through a

resolution that it cannot comply with the condition of building a
school and the same was made known to the donor. Only then when the non-fulfillment of the resolutory condition was
brought to the donor's knowledge - that ownership of the
donated property reverted to the donor as provided in the
automatic reversion clause of the deed of donation. The donor
may have an inchoate interest in the donated property during
the time that ownership of the land has not reverted to her.
Such inchoate interest may be the subject of contracts including
a contract of sale. In this case, however, what the donor sold
was the land itself which she no longer owns. It would have
been different if the donor-seller sold her interests over the
property under the deed of donation which is subject to the
possibility of reversion of ownership arising from the nonfulfillment of the resolutory condition.
In this case, that resolutory condition is the construction of the

school. It has been ruled that when a person donates land to
another on the condition that the latter would build upon the
land a school, the condition imposed is not a condition
precedent or a suspensive condition but a resolutory one. Thus,
at the time of the sales made in 1962 towards 1968, the alleged
seller (Trinidad) could not have sold the lots since she had
earlier transferred ownership thereof by virtue of the deed of
donation. So long as the resolutory condition subsists and is
capable of fulfillment, the donation remains effective and the
donee continues to be the owner subject only to the rights of the
donor or his successors-in-interest under the deed of donation.
Since no period was imposed by the donor on when must the
donee comply with the condition, the latter remains the owner
so long as he has tried to comply with the condition within a
reasonable period. Such period, however, became irrelevant
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Lim v CA (1990)
191 SCRA 156 (1990)
Potestative Suspensive Condition
Doctrine: The continuance, effectivity and fulfillment of a
contract of lease cannot be made to depend exclusively
upon the free and uncontrolled choice of the lessee
between continuing the payment of the rentals or not,
completely depriving the owner of any say in the
matter.
Facts: Private respondent entered into a contract of lease with
petitioner for a period of three (3) years, that is, from 1976 to
1979. After the stipulated term expired, private respondent
refused to vacate the premises, hence, petitioner filed an
ejectment suit against the former in the City Court of Manila.
The case was terminated by a judicially approved compromise
agreement of the parties providing in part:
o That the term of the lease shall be renewed every
three years retroacting from October 1979 to
October 1982; after which the above named rental
shall be raised automatically by 20% every three
years for as long as defendant needed the premises
and can meet and pay the said increases, the
defendant to give notice of his intent to renew sixty
(60) days before the expiration of the term;
By reason of said compromise agreement the lease continued
from 1979 to 1982, then from 1982 to 1985. On April 17, 1985,
petitioner advised private respondent that he would no longer
renew the contract effective October, 1985. However, on August
5, 1985, private respondent informed petitioner in writing of his
intention to renew the contract of lease for another term,
commencing November, 1985 to October, 1988. In reply to said

letter, petitioner advised private respondent that he did not
agree to a renewal of the lease contract upon its expiration in
October, 1985.
Because of private respondent's refusal to vacate the premises,
petitioner filed another ejectment suit. In its decision, said court
dismissed the complaint on the grounds that (1) the lease
contract has not expired, being a continuous one the period
whereof depended upon the lessee's need for the premises and
his ability to pay the rents; and (2) the compromise agreement
entered into in the aforesaid Civil Case constitutes res
judicata to the case before it.
Issue: Whether the lease contract has not expired, being a
continuous one the period whereof depended upon the lessee's
need for the premises and his ability to pay the rents; and
whether the compromise agreement entered into in the
aforesaid Civil Case constitutes res judicata to the case before
Ruling: Contrary to the ruling of the lower court, the disputed
stipulation "for as long as the defendant needed the premises
and can meet and pay said increases" is a purely potestative
condition because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the lessee. It is
likewise a suspensive condition because the renewal of the lease,
which gives rise to a new lease, depends upon said condition. It
should be noted that a renewal constitutes a new contract of
lease although with the same terms and conditions as those in
the expired lease. It should also not be overlooked that said
condition is not resolutory in nature because it is not a condition
that terminates the lease contract. The lease contract is for a
definite period of three (3) years upon the expiration of which
the lease automatically terminates.
The invalidity of a condition in a lease contract similar to the
one at bar has been resolved in Encarnacion vs. Baldomar, et
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al. where the court ruled that in an action for ejectment, the
defense interposed by the lessees that the contract of lease
authorized them to continue occupying the premises as long as
they paid the rents is untenable, because it would leave to the
lessees the sole power to determine whether the lease should
continue or not. This, of course, is prohibited by the aforesaid
article of the Civil Code.
The continuance, effectivity and fulfillment of a contract of lease
cannot be made to depend exclusively upon the free and
uncontrolled choice of the lessee between continuing the
payment of the rentals or not, completely depriving the owner of
any say in the matter. Mutuality does not obtain in such a
contract of lease and no equality exists between the lessor and
the lessee since the life of the contract is dictated solely by the
lessee.
As for the second issue, the fourth requisite of res judicata is
lacking. Although there is identity of parties, there is no identity
of subject matter and cause of action. The subject matter in the
first ejectment case is the original lease contract while the
subject matter in the case at bar is the lease created under the
terms provided in the subsequent compromise agreement. The
lease executed in 1978 is one thing; the lease constituted in 1982
by the compromise agreement is another.
There is also no identity, in the causes of action. The test
generally applied to determine the identity of causes of action is
to consider the identity of facts essential to their maintenance,
or whether the same evidence would sustain both causes of
action. In the case at bar, the delict or the wrong in the first case
is different from that in the second, and the evidence that will
support and establish the cause of action in the former will not
suffice to support and establish that in the latter.
Silos v PNB (2014)

Del Castillo, J.
Re: Potestative obligation
DOCTRINE: Any modification in the contract, such as the
interest rates, must be made with the consent of the
contracting parties. In the case of loan agreements, the
rate of interest is a principal condition, if not the most
important component. Thus, any modification thereof
must be mutually agreed upon; otherwise, it has no
binding effect
FACTS: Spouses Silos have been in the business of operating a
department store for two decades. To secure a 1-year revolving
credit line, petitioner Spouses constited a real estate mortgage.
They issued eight promissory notes and signed a credit
agreement.
This July 1989 Credit Agreement contained a stipulation on
interest which provides as follows:
1.03. Interest.
(a) The Loan shall be subject to interest at the
rate of 19.5% per annum. Interest shall be payable in
advance every one hundred twenty days at the rate
prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may
modify the interest rate in the Loan depending
on whatever policy the Bank may adopt in the
future, including without limitation, the shifting from
the floating interest rate system to the fixed interest rate
system, or vice versa. Where the Bank has imposed on the
Loan interest at a rate per annum, which is equal to the
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Banks spread over the current floating interest rate, the

Borrower hereby agrees that the Bank may,
without need of notice to the Borrower, increase
or decrease its spread over the floating interest
rate at any time depending on whatever policy
it may adopt in the future. (Emphases supplied)
relegated to PNB the sole power to fix interest rates based

on arbitrary criteria or factors such as bank policy,
profitability, cost of money, foreign currency values, and
bank administrative costs.
The eight Promissory Notes, on the other hand, contained a

stipulation granting PNB the right to increase or reduce interest
rates within the limits allowed by law or by the
Monetary Board. The Real Estate Mortgage agreement
provided the same right to increase or reduce interest rates at
any time depending on whatever policy PNB may
adopt in the future.
In its Answer, PNB denied that it unilaterally imposed or

fixed interest rates; that petitioners agreed that without
prior notice, PNB may modify interest rates depending on
future policy adopted by it; and that the imposition of
penalties was agreed upon in the Credit Agreement.
The parties made an amendment to credit agreement with the

following stipulation:
1.03. Interest on Line Availments. (a) The Borrowers
agree to pay interest on each Availment from date
of each Availment up to but not including the date of full
payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each
Availment. (Emphases supplied)
The spouses issued 18 promissory notes. the 9 th to 17th
promissory notes provide for the payment of interest at the
rate the Bank may at any time without notice, raise
within the limits allowed by law x x x.
Spouses defaulted on their obligations. The bank foreclosed the
real estate mortgage. Spouses filed for a petition for annulment
of the foreclosure sale and accounting of PNB credit.
Petitioners insist that the interest rate provision in the
Credit Agreement and the Amendment to Credit
Agreement should be declared null and void, for they
ISSUE: Whether the stipulation allowing PNB to increase the

interest rates even without notice and consent from the spouses
is valid.
HELD: Stipulation is invalid. In a number of decided cases,
the Court struck down provisions in credit documents issued by
PNB to, or required of, its borrowers which allow the bank to
increase or decrease interest rates within the limits allowed by
law at any time depending on whatever policy it may adopt in
the future.
1. In Philippine National Bank v. Court of Appeals
(1991), such stipulation and similar ones were declared
in violation of Article 1308 of the Civil Code.
2. Philippine National Bank v. Court of Appeals
(1994), the very same stipulations found in the credit
agreement and the promissory notes prepared and issued
by the respondent were again invalidated.
3. Spouses Almeda v. Court of Appeals (1996), the
Court invalidated the very same provisions in the
respondents prepared Credit Agreement
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4. Philippine National Bank v. Court of Appeals

(1996), the above doctrine was reiterated
5. We made the same pronouncement in a fifth case, New

Sampaguita Builders Construction, Inc. v.
Philippine National Bank
6. Yet again, in a sixth disposition, Philippine National

Bank v. Spouses Rocamora (2009), the above
pronouncements were reiterated to debunk PNBs
repeated reliance on its invalidated contract stipulations
Verily, all these cases, including the present one, involve
identical or similar provisions found in respondents credit
agreements and promissory notes.
These stipulations must be once more invalidated, as was done
in previous cases. The common denominator in these cases is
the lack of agreement of the parties to the imposed
interest rates. For this case, this lack of consent by the
petitioners has been made obvious by the fact that they signed
the promissory notes in blank for the respondent to fill. We find
credible the testimony of Lydia (petitioner) in this respect.
Respondent failed to discredit her; in fact, its witness PNB
Kalibo Branch Manager Aspa admitted that interest rates were
fixed solely by its Treasury Department in Manila, which were
then simply communicated to all PNB branches for
implementation. If this were the case, then this would explain
why petitioners had to sign the promissory notes in blank, since
the imposable interest rates have yet to be determined and fixed
by respondents Treasury Department in Manila.
currency values, bank administrative costs, profitability, and

considerations which affect the banking industry it can be
seen that considerations which affect PNBs borrowers are
ignored. A borrowers current financial state, his feedback or
opinions, the nature and purpose of his borrowings, the effect of
foreign currency values or fluctuations on his business or
borrowing, etc. these are not factors which influence the fixing
of interest rates to be imposed on him. Clearly, respondents
method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost
of money, bank costs, etc. is arbitrary for there is no fixed
standard or margin above or below these considerations.
To repeat what has been said in the above-cited cases, any
modification in the contract, such as the interest rates, must be
made with the consent of the contracting parties. The minds of
all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement.
In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any
modification thereof must be mutually agreed upon; otherwise,
it has no binding effect
Moreover, in Aspas enumeration of the factors that determine

the interest rates PNB fixes such as cost of money, foreign
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Naga Telephone Co., Inc. (NATELCO) v CA

Types of conditions: as to cause: casual
Doctrine: The contract is subject to mixed conditions, that is,
they depend partly on the will of the debtor and partly
on chance, hazard or the will of a third person, which do
not invalidate the subject provision.
Facts: On November 1, 1977, the parties entered into a contract
for the use by petitioners in the operation of its telephone
service the electric light posts of private respondent in Naga
City. In consideration therefor, petitioners agreed to install, free
of charge, 10 telephone connections for the use by private
respondent in several places. Said contract also provided: (a)
That the term or period of this contract shall be as long as the
party of the first part has need for the electric light posts of the
party of the second part it being understood that this contract
shall terminate when for any reason whatsoever, the party of the
second part is forced to stop, abandoned [sic] its operation as a
public service and it becomes necessary to remove the electric
lightpost;
as long as private respondent is in operation. A similar provision

in a contract of lease wherein the parties agreed that the lessee
could stay on the leased premises "for as long as the defendant
needed the premises and can meet and pay said increases" was
held by SC as invalid for being "a purely potestative condition
because it leaves the effectivity and enjoyment of leasehold
rights to the sole and exclusive will of the lessee." Further held
SC: The continuance, effectivity and fulfillment of a contract of
lease cannot be made to depend exclusively upon the free and
uncontrolled choice of the lessee between continuing the
payment of the rentals or not, completely depriving the owner of
any say in the matter. Mutuality does not obtain in such a
contract of lease of no equality exists between the lessor and the
lessee since the life of the contract is dictated solely by the
lessee. According to CA, the same can also be said of the
agreement. There is no mutuality and equality between them
under the subject provision since the life and continuity of said
agreement is made to depend as long as petitioner needs private
respondents electric posts.
Issue: Whether or not the contract was subject to a potestative
condition that is void.
After the contract had been enforced for over 10 years, private
respondent filed on January 2, 1989 with the RTC against
petitioners for reformation of the contract with damages, on the
ground, among others, that it is too one-sided in favor of
petitioners.
Ruling: No. Petitioners allege that there is nothing purely

potestative about the prestations of either party because
petitioner's permission for free use of telephones is not made to
depend purely on their will, neither is private respondent's
permission for free use of its posts dependent purely on its will.
RTC ruled in favor of private respondent. While the contract

appeared to be fair to both parties when it was entered into, it
had become disadvantageous and unfair to private respondent
because of subsequent events and conditions.
Petitioners' allegations must be upheld in this regard. A

potestative condition is a condition, the fulfillment of which
depends upon the sole will of the debtor, in which case, the
conditional obligation is void. Based on this definition,
respondent court's finding that the provision in the contract is a
potestative condition, is correct. However, it must have
overlooked the other conditions in the same provision, to wit:
CA held that the subject stipulation is invalid for being purely

potestative on the part of petitioner as it leaves the continued
effectivity of the agreement to the latter's sole and exclusive will
62

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. . . it being understood that this contract shall terminate when

for any reason whatsoever, the party of the second part (private
respondent) is forced to stop, abandoned (sic) its operation as a
public service and it becomes necessary to remove the electric
light post (sic);
which are casual conditions since they depend on chance,
hazard, or the will of a third person. In sum, the contract is
subject to mixed conditions, that is, they depend partly on the
will of the debtor and partly on chance, hazard or the will of a
third person, which do not invalidate the aforementioned
provision.
Osmena v Rama (1909)

14 Phil 99 (1909)
TOPIC: Types of Conditions; As to cause or Origin;
mixed
(PS: this is the case itself, maikli na sya to digest)
It appears from the record that upon the 15th day of November,
1890, the defendant herein executed and delivered to Victoriano
Osmea the following contract.
"EXHIBIT A.
P200.00.
"CEBU, November 15, 1890.
"I, Doa Cenona Rama, a resident of this city, and of legal age,
have received from Don Victoriano Osmea the sum of two
hundred pesos in cash which I will pay in sugar in the month of
January or February of the coming year, at the price ruling on
the day of delivering the sugar into his warehouses, and I will
pay him interest at the rate of half a cuartillo per month on each
peso, beginning on this date until the day of the settlement; and
if I can not pay in full, a balance shall be struck, showing the
amount outstanding at the end of each June, including interest,
and such balance as may be outstanding against me shall be
considered as capital which I will always pay in sugar, together
with the interest mentioned above. I further promise that I will
sell to the said Seor Osmea all the sugar that I may harvest,
and as a guarantee, pledge as security all of my present and
future property, and as special security the house with tile roof
and ground floor of stone in which I live in Pagina; in proof
whereof, I sign this document, and he shall be entitled to make
claim against me at the expiration of the term stated in this
document.
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(Signed) "CENONA RAMA.

"Witnesses:
"FAUSTO PEALOSA.
"FRANCISCO MEDALLE."
On the 27th day of October, 1891, the defendant executed and
delivered to the said Victoriano Osmea the following contract:
"EXHIBIT B.
"CEBU, October 27, 1891.
"On this date I have asked for a further loan and have received
from Don Victoriano Osmea the sum of seventy pesos in cash,
fifty pesos of which I have loaned to Don Evaristo Peares,
which we will pay in sugar in the month of January of the
coming year according to the former conditions.
(Signed) "CENONA RAMA.
"FROM Don Evaristo Peares P50
"Doa Cenona Rama 20
____
On the 15th day of March, 1902, the plaintiff presented the

contracts to the defendant for payment and she acknowledged
her responsibility upon said contracts by an indorsement upon
them in the following language:jgc:chanrobles.com.ph
"EXHIBIT C.
"CEBU, March 15, 1902.
"On this date I hereby promise, in the presence of two witnesses,
that, if the house of strong materials in which I live in Pagina is
sold, I will pay my indebtedness to Don Tomas Osmea as set
forth in this document.
(Signed) "CENONA RAMA."
The defendant not having paid the amount due on said
contracts; the plaintiff, upon the 26th day of June, 1906,
commenced the present action in the Court of First Instance of
the Province of Cebu. The complaint filed in said cause alleged
the execution and delivery of the above contracts, the demand
for payment, and the failure to pay on the part of the defendant,
and the prayer for a judgment for the amount due on the said
contracts. The defendant answered by filing a general denial and
setting up the special defense of prescription.
"Received Evaristo Peares."
The case was finally brought on to trial in the Court of First

Instance, and the only witness produced during the trial was the
plaintiff himself. The defendant did not offer any proof whatever
in the lower court.
Some time after the execution and delivery of the above

contracts, the said Victoriano Osmea died. In the settlement
and division of the property of his estate the above contracts
became the property of one of his heirs, Agustina Rafols. Later,
the date does not appear, the said Agustina Rafols ceded to the
present plaintiff all of her right and interest in said contracts.
After hearing the evidence adduced during the trial, the lower
court rendered a judgment in favor of the plaintiff and against
the defendant for the sum of P200 with interest at the rate of 18
3/4 per cent per annum, from the 15th day of November, 1890,
and for the sum of P20, with interest at the rate of 18 3/4 per
cent per annum, from the 27th day of October, 1891, until the
P70
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said sums were paid. From this judgment the defendant

appealed.
The lower court found that P50 of the P70 mentioned in Exhibit
B had not been borrowed by the defendant, but by one Evaristo
Peares; therefore the defendant had no responsibility for the
payment of the said P50.
The only questions raised by the appellant were questions of
fact. The appellant alleges that the proof adduced during the
trial of the cause was not sufficient to support the findings of the
lower court. It was suggested during the discussion of the case in
this court that, in the acknowledgment above quoted of the
indebtedness made by the defendant, she imposed the condition
that she would pay the obligation if she sold her house. If that
statement found in her acknowledgment of the indebtedness
should be regarded as a condition, it was a condition which
depended upon her exclusive will, and is, therefore, void. (Art.
1115, Civil Code.) The acknowledgment, therefore, was an
absolute acknowledgment of the obligation and was sufficient to
prevent the statute of limitation from barring the action upon
the original contract.
We are satisfied, from all of the evidence adduced during the
trial, that the judgment of the lower court should be affirmed. So
ordered.
Smith, Bell & Co. v Sotelo Matti (1992)

Demandability; Conditional Obligations; As to cause or
origin; Mixed
Doctrine: When the time of delivery is not fixed in the
contract, time is regarded unessential. In such cases, the
delivery must be made within a reasonable time.
FACTS: Plaintiff Smith, Bell & Co and the defendant Mr.
Vicente Sotel entered into a contract. Plaintiff has to deliver (1)
two steel tanks shipped from New York to Manila within three
or four months, (2) two expellers shipped from SanFrancisco
in the month of September 1918 or as soon as possible, and
(3) two electric motors with approximate delivery within
ninety days. This is not guaranteed.
The tanks arrived at Manila on 27 April 1919; the expellers on 26
October 1918; and the motors on 27 February 1919. Upon
notification from plaintiff, defendant refused to receive any of
the goods or to pay for their price. Plaintiff alleged that the
expellers and motors were in good condition. Plaintiff filed a
complaint against the defendant. The defendant, Mr Sotelo and
intervenor, Manila Oil Refining and By-Products Co., Inc.,
denied the plaintiffs allegations. They allege that due to
plaintiffs delay in the delivery of goods, the intervenor suffered
damages.
The lower court absolved the defendants from the complaint
insofar as the tanks and the electric motors were concerned, but
rendered judgment against them ordering them to receive
expellers and pay the sum of P50,000, with legal interest and
cost. Both parties appealed to the Court.
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ISSUE: What period was fixed for the delivery of the

goods? Did the plaintiff incur delay in the delivery of
goods?
HELD: In all these contracts, there is a final clause as follows:
The sellers are not responsible for delays cause
by fires, riots on land or on the sea, strikes or other
causes known as force majeure entirely beyond the
control of the sellers or their representatives.
When the time of delivery is not fixed in the contract, time is

regarded unessential. In such cases, the delivery must be made
within a reasonable time. Xxx Reasonable time for the delivery
of the goods by the seller is to be determined by circumstances
attending the particular transactions. Whether of not the
delivery of the machinery in litigation was offered to
the defendant within a reasonable time, is a question to
be determined by the court. Xxx The plaintiff has not
been guilty of any delay in the fulfillment of its
obligation.
Under these stipulations, it cannot be said that any definite date

was fixed for the delivery of the goods. xxx. From the record it
appears that thee contracts were executed at the time of the
world war when there existed rigid restrictions on the export
from the united States xxx; hence clauses were inserted in the
contracts, regarding Government regulations, railroading
embargoes, lack of vessel space, the exigencies of the
requirements of the United States Government xxx. At the time
of the execution of the contracts, the parties were not unmindful
of the contingency of the United States Government not
allowing the export of the goods xxx.
We cannot but conclude that the term which parties attempted
to fix is so uncertain that once cannot tell just whether, as a
matter of fact, those articles could be brought to manila or not.
The obligation must be regarded as conditional. The
delivery was subject to a condition the fulfillment of which
depended not only upon the effort of the plaintiff, but upon the
will of third persons who could in no way be compelled to fulfill
the condition. It is sufficiently proven in the record that the
plaintiff has made all the efforts it could possibly be expected to
make under the circumstances, to bring the goods in question to
Manila, as soon as possible. Xxx it is obvious that the
plaintiff has complied with its obligation.
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Rustan Pulp v IAC (1992)

214 SCRA 665 (1992)
Doctrine: A condition which is both potestative (or
facultative) and resolutory may be valid, even though
the saving clause is left to the will of the obligor.
Facts: Petitioner Rustan established a pulp and paper mill in
Baloi, Lano del Norte. Respondent Lluch, who is a holder of a
forest products license, transmitted a letter to petitioner Rustan
for the supply of raw materials by the former to the latter. In
response thereto, petitioner Rustan proposed, among other
things, in the letter-reply:
o That the contract to supply is not exclusive
because Rustan shall have the option to buy from
other suppliers who are qualified and holder of
appropriate government authority or license to sell
and dispose pulp wood.
These prefatory business proposals culminated in the execution,
during the month of April, 1968, of a contract of sale whereby
Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill,
Inc. undertook to pay the price of P30.00 per cubic meter of
pulp wood raw materials to be delivered at the buyer's plant in
Baloi, Lanao del Norte. Of pertinent significance to the issue at
hand are the following stipulations in the bilateral undertaking:
o That BUYER shall have the option to buy from
other SELLERS who are equally qualified and
holders of appropriate government authority or
license to sell or dispose, that BUYER shall not buy
from any other seller whose pulp woods being sold
shall have been established to have emanated from
the
SELLER'S
concession
lumber
and/or
firewood
o And that SELLER has the priority to supply

the pulp wood materials requirement of the
BUYER;
o That the BUYER shall have the right to stop
delivery of the said raw materials by the seller
covered by this contract when supply of the same
shall become sufficient until such time when need
for said raw materials shall have become
necessarily provided, however, that the SELLER is
given sufficient notice.
In the installation of the plant facilities, the technical staff of
Rustan Pulp and Paper Mills, Inc. recommended the acceptance
of deliveries from other suppliers of the pulp wood materials for
which the corresponding deliveries were made. But during the
test run of the pulp mill, the machinery line thereat had major
defects while deliveries of the raw materials piled up, which
prompted the Japanese supplier of the machinery to
recommend the stoppage of the deliveries. The suppliers were
informed to stop deliveries and the letter of similar advice sent
by petitioners to private respondents.
Private respondent Romeo Lluch sought to clarify the tenor of
the letter as to whether stoppage of delivery or termination of
the contract of sale was intended, but the query was not
answered
by
petitioners.
This
alleged
ambiguity
notwithstanding, Lluch and the other suppliers resumed
deliveries after the series of talks between Romeo S. Vergara and
Romeo Lluch.
On January 23, 1969, the complaint for contractual breach was
filed which, but was dismissed. Respondent Court found it
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ironic that petitioners had to exercise the prerogative regarding

the stoppage of deliveries via the letter addressed to Iligan
Diversified Project, Inc. on September 30, 1968 because
petitioners never really stopped accepting deliveries from
private respondents until December 23, 1968.
Issue: Whether or not the petitioner can validly stop accepting
deliveries from private respondents.
Ruling: Insofar as the express discretion on the part of
petitioners is concerned regarding the right of stoppage, the
court ruled that there is clear basis for private respondent's
concern on the deceptive continuation of deliveries inasmuch as
the prerogative suggests a condition solely dependent upon the
will of petitioners.
Petitioners can stop delivery of pulp wood from private
respondents if the supply at the plant is sufficient as ascertained
by petitioners, subject to re-delivery when the need arises as
determined likewise by petitioners. Legal jurisprudence that a
condition which is both potestative (or facultative) and
resolutory may be valid, even though the saving clause is left to
the will of the obligor. However, it cannot be applied in this case
because the petitioners continue to accept deliveries from other
sources.
According to the court, a purely potestative imposition
of this character must be obliterated from the face of
the contract without affecting the rest of the
stipulations considering that the condition relates to
the fulfillment of an already existing obligation and not
to its inception. However, the petitioners are of the
impression that the letter dated September 30, 1968 sent to
private respondents is well within the right of stoppage
guaranteed to them by paragraph 7 of the contract of sale which
was construed by petitioners to be a temporary suspension of
deliveries. There is no doubt that the contract speaks loudly

about petitioners' prerogative but what diminishes the legal
efficacy of such right is the condition attached to it which, as
aforesaid, is dependent exclusively on their will for which
reason, We have no alternative but to treat the controversial
stipulation as inoperative (Article 1306, New Civil Code). It is for
this same reason that the court are not inclined to follow the
interpretation of petitioners that the suspension of delivery was
merely temporary since the nature of the suspension itself is
again conditioned upon petitioner's determination of the
sufficiency of supplies at the plant.
The court also dismissed petitioners' exculpation grounded on
frustration of the commercial object under Article 1267 of the
New Civil Code, because petitioners continued accepting
deliveries from the suppliers. This conduct will estop petitioners
from claiming that the breakdown of the machinery line was an
extraordinary obstacle to their compliance to the prestation. It
was indeed incongruous for petitioners to have sent the letters
calling for suspension and yet, they in effect disregarded their
own advice by accepting the deliveries from the suppliers. The
demeanor of petitioners along this line was sought to be justified
as an act of generous accommodation, which entailed greater
loss to them and "was not motivated by the usual businessman's
obsession with profit" (Page 34, Petition; Page 40, Rollo).
Altruism may be a noble gesture but petitioners' stance in this
respect hardly inspires belief for such an excuse is inconsistent
with a normal business enterprise which takes ordinary care of
its concern in cutting down on expenses (Section 3, (d), Rule
131, Revised Rules of Court). Knowing fully well that they will
encounter difficulty in producing output because of the defective
machinery line, petitioners opted to open the plant to greater
loss, thus compounding the costs by accepting additional supply
to the stockpile. Verily, the petitioner's action when they
acknowledged that "if the plant could not be operated on a
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commercial scale, it would then be illogical for defendant

Rustan to continue accepting deliveries of raw materials."
Romero v CA (1995)
Vitug, J.
Re: mixed condition
DOCTRINE: Mixed condition is dependent not on the will of
the vendor alone but also of third persons like the
squatters
and
government
agencies
and
personnel concerned.
FACTS: Romero, a civil engineer, was engaged in the business
of production, manufacture and exportation of perlite filter aids,
permalite insulation and processed perlite ore. In 1988, he
decided to put up a central warehouse in Metro Manila. Flores
and his wife offered a parcel of land measuring 1,952 square
meters. The lot was covered in a TCT in the name of private
respondent Enriqueta Chua vda. de Ongsiong.
Petitioner visited the property and, except for the presence of
squatters in the area, he found the place suitable for a central
warehouse. Flores called on petitioner with a proposal that
should he advance the amount of P50,000.00 which could be
used in taking up an ejectment case against the squatters,
private respondent would agree to sell the property for only
P800/square meter. Romero agreed.
Later, a "Deed of Conditional Sale" was executed between Flores
and Ongsiong. Purchase price = P1,561,600.00; Down payment
= P50K; Balance = to be paid 45 days after the removal of all the
squatters; upon full payment, Ongsiong shall execute deed of
absolute sale in favor of Romero.
Ongsiong sought to return the P50,000.00 she received from
petitioner since, she said, she could not "get rid of the squatters"
on the lot. She opted to rescind the sale in view of her failure to
get rid of the squatters. Regional Trial Court of Makati rendered
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decision holding that private respondent had no right to rescind

the contract since it was she who "violated her obligation to eject
the squatters from the subject property" and that
petitioner, being the injured party, was the party who could,
under Article 1191 of the Civil Code, rescind the agreement.
This option clearly belongs to petitioner and not to private

respondent. There was no potestative condition on the part of
Ongsiong but a "mixed" condition "dependent not on the will of
the vendor alone but also of third persons like the squatters and
government agencies and personnel concerned."
ISSUE: Is there a perfected contract of sale?
Roman Catholic Archbishop v CA

Types of conditions: As to possibility possible and
impossible
HELD: YES. A sale is at once perfected when a person (the

seller) obligates himself, for a price certain, to deliver and
to transfer ownership of a specified thing or right to another (the
buyer) over which the latter agrees. (BILATERAL and
RECIPROCAL CHARACTERISTIC OF SALE).
In determining the real character of the contract, the title given
to it by the parties is not as much significant as its substance.
For example, a deed of sale, although denominated as a deed of
conditional sale, may be treated as absolute in nature, if title to
the property sold is not reserved in the vendor or if the vendor is
not granted the right to unilaterally rescind the contract
predicated on the fulfillment or non-fulfillment, as the case may
be, of the prescribed condition. From the moment the contract is
perfected, the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage and law. Under the agreement,
private respondent is obligated to evict the squatters on
the property. The ejectment of the squatters is a condition the
operative act of which sets into motion the period of compliance
by petitioner of his own obligation, i .e to pay the balance of the
purchase price. Private respondents failure "to remove the
squatters from the property" within the stipulated period gives
petitioner the right to either refuse to proceed with the
agreement or waive that condition in consonance with Article
Doctrine: The prohibition in the deed of donation against the

alienation of the property for 100 years, being an
unreasonable emasculation and denial of an integral
attribute of ownership, should be declared as an illegal
or impossible condition within the contemplation of
Article 727. Thus, as stated in said statutory provision,
such condition shall be considered as not imposed.
Facts: On November 29, 1984, private respondents filed a
complaint for nullification of deed of donation, rescission of
contract and reconveyance of real property with damages
against petitioners Florencio and Soledad Ignao and the Roman
Catholic Bishop of Imus, Cavite, together with the Roman
Catholic Archbishop of Manila, before the RTC. Private
respondents alleged that on August 23, 1930, the spouses
Eusebio de Castro and Martina Rieta executed a deed of
donation in favor of Roman Catholic Archbishop of Manila
covering a parcel of land. The deed of donation provides that the
donee shall not dispose or sell the property within 100 years
from the execution of the deed of donation, otherwise a violation
of such condition would render ipso facto null and void the deed
of donation and the property would revert to the estate of the
donors. On June 30, 1980, while still within the prohibitive
period to dispose of the property, petitioner Roman Catholic
Bishop of Imus executed a deed of absolute sale of the property
in favor of petitioners Ignao.
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It is the contention of petitioners that the cause of action of

private respondents has already prescribed, invoking Article 764
of the Civil Code which provides that "(t)he donation shall be
revoked at the instance of the donor, when the donee fails to
comply with any of the conditions which the former imposed
upon the latter," and that "(t)his action shall prescribe after four
years from the non-compliance with the condition, may be
transmitted to the heirs of the donor, and may be exercised
against the donee's heirs.
Issue: Whether or not the condition that the property donated
should not be sold within a period of 100 years from the date of
execution of the deed of donation is valid.
Ruling: No. Said condition constitutes an undue restriction on
the rights arising from ownership of petitioners and is,
therefore, contrary to public policy.
Donation, as a mode of acquiring ownership, results in an
effective transfer of title over the property from the donor to the
donee. Once a donation is accepted, the donee becomes the
absolute owner of the property donated. Although the donor
may impose certain conditions in the deed of donation, the same
must not be contrary to law, morals, good customs, public order
and public policy. The condition imposed in the deed of
donation constitutes a patently unreasonable and undue
restriction on the right of the donee to dispose of the property
donated, which right is an indispensable attribute of ownership.
Such a prohibition against alienation, in order to be valid, must
not be perpetual or for an unreasonable period of time.
It is significant that the provisions therein regarding a testator

also necessarily involve, in the main, the devolution of property
by gratuitous title hence, as is generally the case of donations,
being an act of liberality, the imposition of an unreasonable
period of prohibition to alienate the property should be deemed
anathema to the basic and actual intent of either the donor or
testator. For that reason, the regulatory arm of the law is or
must be interposed to prevent an unreasonable departure from
the normative policy expressed in Articles 494 and 870 of the
Code.
The prohibition in the deed of donation against the alienation of
the property for an entire century, being an unreasonable
emasculation and denial of an integral attribute of ownership,
should be declared as an illegal or impossible condition within
the contemplation of Article 727. Consequently, as specifically
stated in said statutory provision, such condition shall be
considered as not imposed. No reliance may accordingly be
placed on said prohibitory paragraph in the deed of donation.
The net result is that, absent said proscription, the deed of sale
supposedly constitutive of the cause of action for the
nullification of the deed of donation is not in truth violative of
the latter hence, for lack of cause of action, the case for private
respondents must fail.
Certain provisions of the Civil Code illustrative of the aforesaid

policy may be considered applicable by analogy. Under the third
paragraph of Article 494, a donor or testator may prohibit
partition for a period which shall not exceed 20 years. Article
870 declares that the dispositions of the testator declaring all or
part of the estate inalienable for more than 20 years are void.
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Araneta v Phil. Sugar Estates Development Co. (1967)

20 SCRA 330 (1967)
TOPIC: Obligations with a term. Types of period/term;
as to source
Doctrine: Even on the assumption that the court should have
found that no reasonable time or no period at all had
been fixed (and the trial court's amended decision
nowhere declared any such fact) still, the complaint not
having sought that the Court should set a period, the
court could not proceed to do so unless the complaint
included it as first amended
Facts: J. M. Tuason & Co., Inc. is the owner of a big tract land
situated in Quezon City, and on July 28, 1950, [through
Gregorio Araneta, Inc.] sold a portion thereof to Philippine
Sugar Estates Development Co., Ltd.
The parties stipulated, among in the contract of purchase and
sale with mortgage, that the buyer will build on the said parcel
land the Sto. Domingo Church and Convent while the seller for
its part will construct streets. But the seller, Gregorio Araneta,
Inc., which began constructing the streets, is unable to finish the
construction of the street in the Northeast side because a certain
third-party, by the name of Manuel Abundo, who has been
physically occupying a middle part thereof, refused to vacate the
same;
Both buyer and seller know of the presence of squatters that
may hamper the construction of the streets by the seller. On
May 7, 1958, Philippine Sugar Estates Development Co., Lt. filed
its complaint against J. M. Tuason & Co., Inc., and instance,
seeking to compel the latter to comply with their obligation, as
stipulated in the above-mentioned deed of sale, and/or to pay
damages in the event they failed or refused to perform said

obligation.
The lower court and the appellate court ruled in favor of Phil.
Sugar estates, and gave defendant Gregorio Araneta, Inc., a
period of two (2) years from notice hereof, within which to
comply with its obligation under the contract, Annex "A".
Gregorio Araneta, Inc. resorted to a petition for review by
certiorari to this Court.
Issue: Whether or not there is a period fixed?
Held: Yes
Ratio: The fixing of a period by the courts under Article 1197 of
the Civil Code of the Philippines is sought to be justified on the
basis that petitioner (defendant below) placed the absence of a
period in issue by pleading in its answer that the contract with
respondent Philippine Sugar Estates Development Co., Ltd. gave
petitioner Gregorio Araneta, Inc. "reasonable time within which
to comply with its obligation to construct and complete the
streets." If the contract so provided, then there was a period
fixed, a "reasonable time;" and all that the court should have
done was to determine if that reasonable time had already
elapsed when suit was filed if it had passed, then the court
should declare that petitioner had breached the contract,
Was it within the powers of the lower court to set the
performance of the obligation in two years time?
NO. Even on the assumption that the court should have found
that no reasonable time or no period at all had been fixed (and
the trial court's amended decision nowhere declared any such
fact) still, the complaint not having sought that the Court should
set a period, the court could not proceed to do so unless the
complaint included it as first amended;
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Granting, however, that it lay within the Court's power to fix the
period of performance, still the amended decision is defective in
that no basis is stated to support the conclusion that the period
should be set at two years after finality of the judgment. The list
paragraph of Article 1197 is clear that the period cannot be set
arbitrarily. The law expressly prescribes that the Court shall
determine such period as may under the circumstances been
probably contemplated by the parties.
It must be recalled that Article 1197 of the Civil Code involves a
two-step process. The Court must first determine that "the
obligation does not fix a period" (or that the period is made to
depend upon the will of the debtor)," but from the nature and
the circumstances it can be inferred that a period was intended"
(Art. 1197, pars. 1 and 2). This preliminary point settled, the
Court must then proceed to the second step, and decide what
period was "probably contemplated by the parties" (Do., par. 3).
So that, ultimately, the Court can not fix a period merely
because in its opinion it is or should be reasonable, but must set
the time that the parties are shown to have intended. As the
record stands, the trial Court appears to have pulled the twoyear period set in its decision out of thin air, since no
circumstances are mentioned to support it. Plainly, this is not
warranted by the Civil Code.
Does reasonable time mean that the date of performance
would be indefinite?
The Court of Appeals objected to this conclusion that it would
render the date of performance indefinite. Yet, the
circumstances admit no other reasonable view; and this very
indefiniteness is what explains why the agreement did not
specify any exact periods or dates of performance.
Central Philippines v. CA (1995)

Demandability; Obligation with a Term
Doctrine: Exception to the general rule that the court
may fix the period: There is no need to fix a period
when such procedure would be a mere technicality &
formality & would serve no purpose than to delay or
load to unnecessary and expensive multiplication of
suits
Facts: In 1939, Don Ramon Lopez Sr. executed a deed of
donation in favor of CPU together with the following conditions:
a) The land should be utilized by CPU exclusively for the
establishment & use of medical college;
b) The said college shall not sell transfer or convey to any
3rd party;
c) The said land shall be called Ramon Lopez Campus
and any income from that land shall be put in the fund to
be known as Ramon Lopez Campus Fund.
However, on May 31, 1989, private respondents, who are the
heirs of Don Ramon filed an action for annulment of donation,
reconveyance & damages against CPU for not complying with
the conditions. The heirs also argued that CPU had negotiated
with the NHA to exchange the donated property with another
land owned by the latter.
Petitioner alleged that the right of private respondents to file the
action had prescribed.
Issue: WON there is a need to fix the period for compliance of
the condition.
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Lafarge Cement v Continental Cement (2004)

Held: NO.
Under Art. 1197, when the obligation does not fix a period but
from its nature & circumstance it can be inferred that the period
was intended, the court may fix the duration thereof because the
fulfillment of the obligation itself cannot be demanded until
after the court has fixed the period for compliance therewith &
such period has arrived. However, this general rule cannot be
applied in this case considering the different set of
circumstances existing more than a reasonable period of 50yrs
has already been allowed to petitioner to avail of the opportunity
to comply but unfortunately, it failed to do so. Hence, there is no
need to fix a period when such procedure would be a mere
technicality & formality & would serve no purpose than to delay
or load to unnecessary and expensive multiplication of suits.
Under Art. 1191, when one of the obligors cannot comply with
what is incumbent upon him, the obligee may seek rescission
before the court unless there is just cause authorizing the fixing
of a period. In the absence of any just cause for the court to
determine the period of compliance there is no more obstacle
for the court to decree rescission.
Solidary Obligation
Doctrine: A solidary debtor may, in actions filed by the
creditor, avail itself of all defenses which are derived
from the nature of the obligation and of those which are
personal to him, or pertain to his own share. With
respect to those which personally belong to the others,
he may avail himself thereof only as regards that part of
the debt for which the latter are responsible.
Facts: Petitioner Lafarge Cement Philippines, Inc. (Lafarge) -on behalf of its affiliates and other qualified entities, including
Petitioner Luzon Continental Land Corporation (LCLC) -agreed to purchase the cement business of Respondent
Continental Cement Corporation (CCC). Both parties entered
into a Sale and Purchase Agreement (SPA). At the time of the
foregoing transactions, petitioners were well aware that CCC
had a case pending with the Supreme Court.
In anticipation of the liability that the High Tribunal might
adjudge against CCC, the parties, under Clause 2 (c) of the SPA,
allegedly agreed to retain from the purchase price a portion of
the contract price in the amount of P117,020,846.84 -- the
equivalent of US$2,799,140. This amount was to be deposited
in an interest-bearing account in the First National City Bank of
New York (Citibank) for payment to APT.
However, petitioners allegedly refused to apply the sum to the
payment to APT, the repeated instructions of Respondent CCC.
Fearful that nonpayment to APT would result in the foreclosure,
not just of its properties covered by the SPA with Lafarge but of
several other properties as well, CCC filed before them a
Complaint with Application for Preliminary Attachment
against petitioners. The Complaint prayed, among others, that
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petitioners be directed to pay the APT Retained Amount

referred to in Clause 2 (c) of the SPA.
Petitioners moved to dismiss the Complaint on the ground that
it violated the prohibition on forum-shopping. Respondent CCC
had allegedly made the same claim it was raising in another
action, which involved the same parties and which was filed
earlier before the International Chamber of Commerce. After
the trial court denied the Motion to Dismiss, petitioners elevated
the matter before the Court of Appeals.
In the meantime, to avoid being in default and without prejudice
to the outcome of their appeal, petitioners filed their Answer
and Compulsory Counterclaims ad Cautelam before the trial
court. In their Answer, they denied the allegations in the
Complaint. They prayed -- by way of compulsory
counterclaims against Respondent CCC, its majority
stockholder and president Gregory T. Lim, and its
corporate secretary Anthony A. Mariano -- for the sums
of
(a) P2,700,000
each
as
actual
damages,
(b) P100,000,000 each as exemplary damages,
(c) P100,000,000 each as moral damages, and
(d) P5,000,000 each as attorneys fees plus costs of
suit.
Petitioners alleged that CCC, through Lim and Mariano, had
filed the baseless Complaint in Civil Case No. Q-00-41103 and
procured the Writ of Attachment in bad faith. Relying on this
Courts pronouncement in Sapugay v. CA, petitioners prayed
that both Lim and Mariano be held jointly and solidarily liable
with Respondent CCC.
On behalf of Lim and Mariano who had yet to file any
responsive pleading, CCC moved to dismiss petitioners
compulsory counterclaims on grounds that essentially
constituted the very issues for resolution in the instant
Petition.
On May 22, 2002, the Regional Trial Court of Quezon City

(Branch 80) dismissed petitioners counterclaims for several
reasons, among which were the following: a) the counterclaims
against Respondents Lim and Mariano were not compulsory; b)
the ruling in Sapugay was not applicable; and c) petitioners
Answer with Counterclaims violated procedural rules on the
proper joinder of causes of action.
Issue: Whether or not the RTC gravely erred in ruling
petitioners counterclaims against Respondents Lim
Mariano are not compulsory; and whether or not
counterclaim for damages against Respondents CCC, Lim
Mariano is joint and solidary, in character.
that
and
the
and
Ruling: In relation to the first issue, the court held using the
compelling test of compulsoriness, that, clearly, the recovery
of petitioners counterclaims is contingent upon the case filed by
respondents; thus, conducting separate trials thereon will result
in a substantial duplication of the time and effort of the court
and the parties.
On the second issue, the court cited that obligations may be
classified as either joint or solidary. Joint or jointly or
conjoint
means mancum or mancomunada or pro
rata obligation; on the other hand, solidary obligations may be
used interchangeably with joint and several or several. Thus,
petitioners usage of the term joint and solidary is confusing
and ambiguous.
The ambiguity in petitioners counterclaims notwithstanding,
respondents liability, if proven, is solidary. This characterization
finds basis in Article 1207 of the Civil Code, which provides that
obligations are generally considered joint, except when otherwise
expressly stated or when the law or the nature of the obligation
requires solidarity. However, obligations arising from tort are, by
their nature, always solidary
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In a joint obligation, each obligor answers only for a part of

the whole liability; in a solidary or joint and several
obligation, the relationship between the active and the passive
subjects is so close that each of them must comply with or
demand the fulfillment of the whole obligation. The fact that the
liability sought against the CCC is for specific performance and
tort, while that sought against the individual respondents is
based solely on tort does not negate the solidary nature of their
liability for tortuous acts alleged in the counterclaims. Article
1211 of the Civil Code is explicit on this point:
o Solidarity may exist although the creditors and
the debtors may not be bound in the same manner
and by the same periods and conditions.
The solidary character of respondents alleged liability is
precisely why credence cannot be given to petitioners assertion.
According to such assertion, Respondent CCC cannot move to
dismiss the counterclaims on grounds that pertain solely to its
individual co-debtors. In cases filed by the creditor, a solidary
debtor may invoke defenses arising from the nature of the
obligation, from circumstances personal to it, or even from
those personal to its co-debtors. Article 1222 of the Civil Code
provides:
o A solidary debtor may, in actions filed by the
creditor, avail itself of all defenses which are
derived from the nature of the obligation and of
those which are personal to him, or pertain to his
own share. With respect to those which
personally belong to the others, he may
avail himself thereof only as regards that
part of the debt for which the latter are
responsible.
The act of Respondent CCC as a solidary debtor -- that of filing a

motion to dismiss the counterclaim on grounds that pertain only
to its individual co-debtors -- is therefore allowed.
However, a perusal of its Motion to Dismiss the counterclaims
shows that Respondent CCC filed it on behalf of Co-respondents
Lim and Mariano; it did not pray that the counterclaim against
it be dismissed. Be that as it may, Respondent CCC cannot be
declared in default. Jurisprudence teaches that if the issues
raised in the compulsory counterclaim are so intertwined with
the allegations in the complaint, such issues are deemed
automatically joined. Counterclaims that are only for damages
and attorneys fees and that arise from the filing of the
complaint shall be considered as special defenses and need not
be answered.
While Respondent CCC can move to dismiss the counterclaims
against it by raising grounds that pertain to individual
defendants Lim and Mariano, it cannot file the same Motion on
their behalf for the simple reason that it lacks the requisite
authority to do so. A corporation has a legal personality entirely
separate and distinct from that of its officers and cannot act for
and on their behalf, without being so authorized. Thus, unless
expressly adopted by Lim and Mariano, the Motion to Dismiss
the compulsory counterclaim filed by Respondent CCC has no
force and effect as to them.
Respondent CCC or any of the three solidary debtors (CCC, Lim
or Mariano) may include, in a Motion to Dismiss, defenses
available to their co-defendants; nevertheless, the same Motion
cannot be deemed to have been filed on behalf of the said codefendants.
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Rivelisa Realty v First Sta. Clara (2014)

Perlas-Bernabe, J.
Re: According to Sanction for Breach
DOCTRINE: Quantum meruit means that, in an action for
work and labor, payment shall be made in such amount
as the plaintiff reasonably deserves
FACTS: Rivelisa Realty entered into a JVA with First Sta. Clara
for the construction and development of a residential
subdivision located in Cabanatuan City (project). According to
its terms:
First Sta. Clara was to assume the horizontal

development works in the remaining 69% undeveloped
portion of the project owned by Rivelisa Realty, and
complete the same within twelve (12) months from
signing.
During the course of the project, First Sta. Clara hired a

subcontractor to perform the horizontal development work as
well as the additional works on the riprap and the elevation of
the road embankment. Since First Sta. Clara ran out of funds
after only two (2) months of construction, Rivelisa Realty was
forced to shoulder part of the payment due to the
subcontractor.
First Sta. Clara manifested its intention to back out from the
JVA and to discontinue operations when Rivelisa Realty refused
to advance any more funds until 60% of the project had been
accomplished. Rivelisa Realty readily agreed to release First Sta.
Clara from the JVA and estimated its actual accomplishment
at P4,000,000.00. First Sta. Clara, however, insisted on a
valuation of its accomplished works at P 4,578,142.10, which,
less the cash advances and subcontractors fees, should leave a
net reimbursable amount of P3,000,000.00 in its favor.
Upon its completion, 60% of the total subdivided lots

shall be transferred in the name of First Sta. Clara.
Also, since 31% of the project had been previously

developed by Rivelisa Realty which was assessed to have
an aggregate worth of P10,000,000.00, it was agreed that
First Sta. Clara should initially use its own resources (in
the same aggregate amount of P10,000,000.00) before it
can start claiming additional funds from the pre-sale of
the 31% developed lots.
Rivelisa Realty agreed to reimburse First Sta. Clara the amount

of P3,000,000.00, emphasizing that the amount is actually over
and beyond its obligation under the JVA. However, the
reimbursable amount of P 3,000,000.00 remained unpaid
despite several demands. Hence, First Sta. Clara filed a
complaint for rescission of the JVA against Rivelisa Realty
before the RTC, claiming the payment of damages for breach of
contract and delay in the performance of an obligation. For its
part, Rivelisa Realty asserted that it was not obligated to pay
First Sta. Clara any amount at all since the latter had even failed
to comply with its obligation to initially spend the equivalent
amount of P10,000,000.00 on the project before being entitled
to cash payments.
40% of the cost of additional works not originally part of

the JVA was to be shouldered by Rivelisa Realty, while
60% by First Sta. Clara.
RTC dismissed the complaint. CA overturned the lower courts

decision and ruled that First Sta. Clara is entitled to
compensation.
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ISSUE: Whether First Sta. Clara is entitled to compensation for

the development works it had accomplished although it failed to
fulfill its entire obligation under the agreement.
Lambert v Fox
HELD: YES. The Court concurs with the CA that First

Sta. Clara is entitled to be compensated for the
development works it had accomplished on the project
based on the principle of quantum meruit. Case law
instructs that under this principle, a contractor is allowed to
recover the reasonable value of the thing or services rendered
despite the lack of a written contract, in order to avoid unjust
enrichment. Quantum meruit means that, in an action for work
and labor, payment shall be made in such amount as the
plaintiff reasonably deserves. The measure of recovery should
relate to the reasonable value of the services performed because
the principle aims to prevent undue enrichment based on the
equitable postulate that it is unjust for a person to retain any
benefit without paying for it. In this case, it is undisputed that
First Sta. Clara already performed certain works on the project
with an estimated value of P4,578, 152.10. Clearly, to completely
deny it payment for the same would result in Rivelisa Realty's
unjust enrichment at the former' s expense. Besides, as may be
gleaned from the parties' correspondence, Rivelisa Realty
obligated itself to unconditionally reimburse First Sta. Clara the
amount of P3,000,000.00 (representing First Sta. Clara's
valuation of its accomplished works at P4,578,152.10, less the
cash advances and subcontractor's fees) after the JV A had
already been terminated by them through mutual assent. As
such, Rivelisa Realty cannot unilaterally renege on its promise
by citing First Sta. Clara's non-fulfillment of the terms and
conditions of the terminated JVA. For all these reasons, the CA'
s ruling must be upheld.
Doctrine: The party to whom payment of the penalty is to be

made is entitled to recover the sum stipulated without the
necessity of proving damages.
Obligations with a penal clause
Facts: In 1911, the creditors of John R. Edgar & Co., including

the plaintiff and the defendant, agreed to take over the business,
incorporate it and accept stock therein in payment of their
respective credits. The plaintiff and the defendant became the 2
largest stockholders in the new corporation called John R. Edgar
& Co., Inc. After the incorporation was completed, plaintiff and
defendant entered into an agreement wherein the parties
mutually and reciprocally agree not to sell, transfer, or otherwise
dispose of any part of their present holdings of stock, till after 1
year. Either party violating this agreement shall pay to the other
P1,000 as liquidated damages, unless previous consent in
writing to such sale, transfer, or other disposition be obtained.
The defendant Fox on October 19, 1911, sold his stock to E. C.
McCullough, a strong competitor. This sale was made by the
defendant against the protest of the plaintiff and with the
warning that he would be held liable under the contract. In fact,
the defendant offered to sell his shares of stock to the plaintiff
for the same sum that McCullough was paying them less P1,000,
the penalty specified in the contract. The trial court ruled in
favor of Fox.
Fox urges that the plaintiff cannot recover because he did not
prove damages, and cites numerous American authorities to the
effect that because stipulations for liquidated damages are
generally in excess of actual damages and so work a hardship
upon the party in default, courts are strongly inclined to treat all
such agreements as imposing a penalty and to allow a recovery
for actual damages only. He also cites authorities holding that a
penalty, as such, will not be enforced and that the party suing, in
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spite of the penalty assigned, will be put to his proof to

demonstrate the damages actually suffered by reason of
defendants wrongful act or omission.
SSS Moonwalk
Issue: Whether or not plaintiff may recover only upon proof of

damages.
TOPIC: According to Sanction for Breach; Obligations

with a Penal Clause, NCC 2226-2228
Ruling: No. In this jurisdiction penalties provided in contracts

of this character are enforced. It is the rule that parties who are
competent to contract may make such agreements within the
limitations of the law and public policy as they desire, and that
the courts will enforce them according to their terms. The only
case recognized by the Civil Code in which the court is
authorized to intervene for the purpose of reducing a penalty
stipulated in the contract is when the principal obligation has
been partly or irregularly fulfilled and the court can see that the
person demanding the penalty has received the benefit of such
or irregular performance. In such case the court is authorized to
reduce the penalty to the extent of the benefits received by the
party enforcing the penalty.
Doctrine: There has been a waiver of the penal clause as it

was not demanded before the full obligation was fully paid and
extinguished.
In this jurisdiction, there is no difference between a penalty and

liquidated damages, so far as legal results are concerned.
Whatever differences exists between them as a matter of
language, they are treated the same legally. In either case the
party to whom payment is to be made is entitled to recover the
sum stipulated without the necessity of proving damages.
Indeed one of the primary purposes in fixing a penalty or in
liquidating damages, is to avoid such necessity.
G.R. No. 73345, April 7, 1993
Facts: "On February 20, 1980, the Social Security System, SSS
for brevity, filed a complaint in the Court of First Instance of
Rizal against Moonwalk Development & Housing Corporation,
Moonwalk for short, alleging that the former had committed an
error in failing to compute the 12% interest due on delayed
payments on the loan of Moonwalk resulting in a chain of
errors in the application of payments made by Moonwalk and, in
an unpaid balance on the principal loan agreement in the
amount of P7,053.77 and, also in not reflecting in its statement
or account an unpaid balance on the said penalties for delayed
payments in the amount of P7,517,178.21 as of October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS
had the opportunity to ascertain the truth but failed to do so.
The trial court set the case for pre-trial at which pre-trial
conference, the court issued an order giving both parties thirty
(30) days within which to submit a stipulation of facts.
The Order of October 6, 1980 dismissing the complaint followed
the submission by the parties on September 19, 1980 of the
following stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of
defendant Moonwalk for an interim loan in the amount of
THIRTY MILLION PESOS (P30,000,000.00) for the purpose of
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developing and constructing a housing project in the provinces

of Rizal and Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS
(P30,000,000.00), the sum of P9,595,000.00 was released to
defendant Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on
December 18, 1973 Annex `D' providing for restructuring of the
payment of the released amount of P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother
and daughter respectively, under paragraph 5 of the aforesaid
Third Amended Deed of First Mortgage substituted Associated
Construction and Surveys Corporation, Philippine Model
Homes Development Corporation, Mariano Z. Velarde and
Eusebio T. Ramos, as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the
amount of P2,659,700.00, made to defendant Moonwalk,
defendant Moonwalk delivered to the plaintiff a promissory note
for TWELVE MILLION TWO HUNDRED FIFTY FOUR
THOUSAND SEVEN HUNDRED PESOS (P12,254,700.00)
Annex `E', signed by Eusebio T. Ramos, and the said Rosita U.
Alberto and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS
for the loan principal of P12,254,700.00 released to it. The last
payment made by Moonwalk in the amount of P15,004,905.74
were based on the Statement of Account, Annex "F" prepared by
plaintiff SSS for defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff
issued to defendant Moonwalk the Release of Mortgage for
Moonwalk's mortgaged properties in Cavite and Rizal, Annexes
'G' and 'H' on October 9, 1979 and October 11, 1979 respectively.
"8. In letters to defendant Moonwalk, dated November 28, 1979

and followed up by another letter dated December 17, 1979,
plaintiff alleged that it committed an honest mistake in releasing
defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told
plaintiff that it had completely paid its obligations to SSS;
"10. The genuineness and due execution of the documents
marked as Annex (sic) 'A' to 'O' inclusive, of the Complaint and
the letter dated December 21, 1979 of the defendant's counsel to
the plaintiff are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing
the complaint on the ground that the obligation was already
extinguished by the payment by Moonwalk of its indebtedness
to SSS and by the latter's act of cancelling the real estate
mortgages executed in its favor by defendant Moonwalk. The
Motion for Reconsideration filed by SSS with the trial court was
likewise dismissed by the latter.
These orders were appealed to the Intermediate Appellate
Court. Respondent Court reduced the errors assigned by the SSS
into this issue: ". . . are defendants-appellees, namely,
Moonwalk Development and Housing Corporation, Rosita U.
Alberto, Rosita U. Alberto, JMA House, Inc. still liable for the
unpaid penalties as claimed by plaintiff-appellant or is their
obligation extinguished?" 3 As We have stated earlier, the
respondent Court held that Moonwalk's obligation was
extinguished and affirmed the trial court.
Issue: Whether or not the penalty is demandable even after the
extinguishment of the principal obligation?
Held: No
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Ratio: There has been a waiver of the penal clause as it was not
demanded before the full obligation was fully paid and
extinguished.
Default begins from the moment the creditor demands the
performance of the obligation. In this case, although there were
late amortizations there was no demand made by SSS for the
payment of the penalty hence Moonwalk is not in delay in the
payment of the penalty. No delay occurred and there was no
occasion when the penalty became demandable and enforceable.
Since there was no default in the performance of the main
obligation-payment of the loan- SSS was never entitled to
recover any penalty.
If the demand for the payment of the penalty was made prior to
the extinguishment of the obligation which are: 1. the principal
obligation 2. The interest of 12% on the principal obligation
3.The penalty of 12% for late payment for after demand,
Moonwalk would be in delay and therefore liable for the penalty.
Robes-Francisco v. CFI (October 30, 2978)

Topic: Obligations with a Penal Clause
Doctrine: To be considered an obligation with a penal clause,
the clause must actually convey a penalty. Otherwise, Art. 1226
of the Civil Code is not applicable.
Facts: May 1962- petitioner company agreed to sell a parcel of
land to Lolita Millan worth P3,864 payable in installments. She
complied with her obligation finishing the payment on
December 21, 1971. She made repeated demands for the
company to execute the deed of sale and transfer certificate title.
It was stipulated in their contract that this should be done
within six months after the full payment was made. If not, the
vendee is entitled to refund with4% interest per annum. The
company failed to comply so Millan filed against them for
specific performance and damages. She asked that the deed of
absolute sale be executed as well as the transfer certificate title,
or if not, pay her the present value of the land which was around
P27,000, and to pay her for damages.
Petitioner contends that the deed of absolute sale executed
between the parties stipulates that should the vendor fail to
issue the transfer certificate of title within six months from the
date of full payment, it shall refund to the vendee the total
amount paid for with interest at the rate of 4% per annum,
hence, the vendee is bound by the terms of the provision and
cannot recover more than what is agreed upon. Presumably,
petitioner in invoking Article 1226 of the Civil Code which
provides that in obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to
the contrary.
During trial, the court found that the company could not execute
the deed of sale nor the transfer certificate title because the
same land was mortgaged to the GSIS to secure a prior
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obligation of P10,000,000. Millan asks for the compensatory

damages despite the return rate of 4%interest in the contract.
Issue: WON Millan should be entitled to the P27,000 nominal
damages despite the stipulation in the contract of the 4%
interest in the event of delay or failure to deliver.
Held: No.
The foregoing argument of petitioner is totally devoid of merit.
We would agree with petitioner if the clause in question were to
be considered as a penal clause. Nevertheless, for very obvious
reasons, said clause does not convey any penalty, for even
without it, pursuant to Article 2209 of the Civil Code, the vendee
would be entitled to recover the amount paid by her with legal
rate of interest which is even more than the 4% provided for in
the clause.
It is therefore inconceivable that the aforecited provision in the
deed of sale is a penal clause which will preclude an award of
damages to the vendee Millan. In fact the clause is so worded as
to work to the advantage of petitioner corporation.
Though Millan failed to present evidence on the amount of
damage caused to her, she is still entitled to nominal damages
because her right to acquire the land she bought was violated. As
the company acted in neglect, they are to be held liable for
damages to Millan. However, her right to claim the damages is
limited because the contract already covers for compensatory
damages in such an occasion of non-performance on the part of
the company.
Metro Concast Steel Corp., et al. v. Allied Bank

Corporation
G.R. No. 177921, December 4, 2013
Extinguishment of Obligation
FACTS
Article 1231 of the Civil Code states that obligations are
extinguished either by payment or performance, the loss of the
thing due, the condonation or remission of the debt, the
confusion or merger of the rights of creditor and debtor,
compensation or novation.
Metro Concast, a engaged in the business of manufacturing
steel, through its officers, obtained several loans from Allied
Bank.
Petitioners failed to settle their obligations, hence, Allied Bank,
sent them demand letters, seeking payment of the total amount
of P51,064,093.62, but to no avail. Thus, Allied Bank was
prompted to file a complaint for collection of sum of
money (subject complaint) against petitioners before the RTC.
In order to settle their debts with Allied Bank, petitioners
offered the sale of Metro Concasts remaining assets, consisting
of machineries and equipment, to Allied Bank, which the latter,
however, refused. Instead, Allied Bank advised them to sell the
equipment and apply the proceeds of the sale to their
outstanding obligations. Accordingly, petitioners offered the
equipment for sale, but since there were no takers, the
equipment was reduced into ferro scrap or scrap metal over the
years.
In 2002, Peakstar Oil Corporation (Peakstar), expressed interest
in buying the scrap metal. During the negotiations with
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Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a

member of Allied Banks legal department, acted as the latters
agent. Eventually, with the alleged conformity of Allied Bank,
through Atty. Saw, a Memorandum of Agreement dated
November 8, 2002 (MoA) was drawn between Metro Concast,
represented by petitioner and Peakstar.
Unfortunately, Peakstar reneged on all its obligations under the
MoA. Now, petitioners essentially argue that their loan
obligations to Allied Bank had already been extinguished due to
Peakstars failure to perform its own obligations to Metro
Concast pursuant to the MoA.
Issue:
Whether the loan obligations incurred by the petitioners under
the subject promissory note and various trust receipts have
already been extinguished.
contracts should be treated separately and distinctly

from each other, such that the existence, performance or
breach of one would not depend on the existence,
performance or breach of the other.
In the foregoing respect, the issue on whether or not Allied
Bank expressed its conformity to the assets sale transaction
between Metro Concast and Peakstar (as evidenced by the MoA)
is actually irrelevant to the issues related to petitioners loan
obligations to the bank. Besides, as the CA pointed out, the fact
of Allied Banks representation has not been proven in this case
and hence, cannot be deemed as a sustainable defense to
exculpate petitioners from their loan obligations to Allied Bank.
Now, anent petitioners reliance on force majeure, suffice it to
state that Peakstars breach of its obligations to Metro Concast
arising from the MoA cannot be classified as a fortuitous event
under jurisprudential formulation.
Ruling:
Article 1231 of the Civil Code states that obligations are
extinguished either by payment or performance, the loss of the
thing due, the condonation or remission of the debt, the
confusion or merger of the rights of creditor and debtor,
compensation or novation.
At the outset, the Court must dispel the notion that the MoA
would have any relevance to the performance of petitioners
obligations to Allied Bank. The MoA is a sale of assets contract,
while petitioners obligations to Allied Bank arose from various
loan transactions.
Absent any showing that the terms and conditions of the latter
transactions have been, in any way, modified or
novated by the terms and conditions in the MoA, said
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ARCO Pulp v Lim (2014)

Leonen, J.
Re: Extinguishment of obligations
DOCTRINE
Novation must be stated in clear and unequivocal terms to
extinguish an obligation. It cannot be presumed and
may be implied only if the old and new contracts are
incompatible on every point.
FACTS
Dan T. Lim works in the business of supplying scrap papers,
cartons, and other raw materials, under the name Quality Paper
and Plastic Products, Enterprises, to factories engaged in the
paper mill business. He delivered scrap paper to ARCO. The
parties allegedly agreed that Arco Pulp and Paper would either
pay Dan T. Lim the value of the raw materials or deliver to him
their finished products of equivalent value.
Dan T. Lim alleged that when he delivered the raw materials,
Arco Pulp and Paper issued a post-dated check. The check was
however dishonored.
Arco Pulp and Paper and a certain Eric Sy executed a
memorandum of agreement where Arco Pulp and Paper bound
themselves to deliver their finished products to Megapack
Container Corporation, owned by Eric Sy, for his account.
According to the memorandum, the raw materials would be
supplied by Lim, through his company, Quality Paper and
Plastic Products.
Lim sent a letter to Arco Pulp and Paper demanding payment of
the amount of 7,220,968.31, but no payment was made to him.
Lim sued ARCO for collection of sum of money. RTC dismissed
the case on the basis that when ARCO and Eric Sy entered into
the memorandum of agreement, novation took place, which
extinguished Arco Pulp and Papers obligation to Lim. CA
overturned the decision, hence this case.
Petitioners argue that the execution of the memorandum of
agreement constituted a novation of the original obligation since
Eric Sy became the new debtor of respondent. Respondent, on
the other hand, argues that the Court of Appeals was correct in
ruling that there was no proper novation in this case.
ISSUE
Whether the obligation between the parties was extinguished by
novation
HELD
The memorandum ofagreement did not constitutea
novation of the originalcontract. The trial court
erroneously ruled that the execution of the memorandum of
agreement constituted a novation of the contract between the
parties. When petitioner Arco Pulp and Paper opted instead to
deliver the finished products to a third person, it did not novate
the original obligation between the parties.
Novation extinguishes an obligation between two parties when
there is a substitution of objects or debtors or when there is
subrogation of the creditor. It occurs only when the new
contract declares so "in unequivocal terms" or that "the old and
the new obligations be on every point incompatible with each
other."
In general, there are two modes of substituting the person of the
debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from and may even be
made without the knowledge of the debtor, since it consists of
a third persons assumption of the obligation. As such, it
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logically requires the consent of the third person and the

creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons
are necessary. Both modes of substitution by the debtor require
the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive
when an old obligation is terminated by the creation of a new
one that takes the place of the former. It is merely modificatory
when the old obligation subsists to the extent that it remains
compatible with the amendatory agreement. Whether extinctive
or modificatory, novation is made either by changing the object
or the principal conditions, referred to as objective or real
novation; or by substituting the person of the debtor or
subrogating a third person to the rights of the creditor, an act
known as subjective or personal novation. For novation to take
place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the
new obligation declares in unequivocal terms that the old
obligation is extinguished. It is implied when the new obligation
is incompatible with the old one on every point. The test of
incompatibility is whether the two obligations can stand
together, each one with its own independent existence.
Because novation requires that it be clear and unequivocal, it is
never presumed, thus:
In the civil law setting, novatio is literally construed as to
make new. So it is deeply rooted in the Roman Law

jurisprudence, the principle novatio non praesumitur
that novation is never presumed.At bottom, for
novation tobe a jural reality, its animus must be ever
present, debitum pro debito basically extinguishing the
old obligation for the new one. (Emphasis supplied)
There is nothing in the memorandum of agreement that
states that with its execution, the obligation of petitioner
Arco Pulp and Paper to respondent would be
extinguished. It also does not state that Eric Sy somehow
substituted petitioner Arco Pulp and Paper as
respondents debtor. It merely shows that petitioner Arco
Pulp and Paper opted to deliver the finished products to a
third person instead.
The consent of the creditor must also be secured for the
novation to be valid:
Novation must be expressly consented to. Moreover, the
conflicting intention and acts of the parties underscore the
absence of any express disclosure or circumstances with which
to deduce a clear and unequivocal intent by the parties to novate
the old agreement. (Emphasis supplied)
In this case, respondent was not privy to the memorandum of
agreement, thus, his conformity to the contract need not be
secured. This is clear from the first line of the memorandum,
which states:
Per meeting held at ARCO, April 18, 2007, it has been
mutually agreed between Mrs. Candida A. Santos and Mr.
Eric Sy. . . .
If the memorandum of agreement was intended to novate the
original agreement between the parties, respondent must have
first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and
unequivocal terms that it has replaced the original obligation of
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petitioner Arco Pulp and Paper to respondent. Neither of these

circumstances is present in this case.
Petitioner Arco Pulp and Papers act of tendering partial
payment to respondent also conflicts with their alleged intent to
pass on their obligation to Eric Sy. When respondent sent his
letter of demand to petitioner Arco Pulp and Paper, and not to
Eric Sy, it showed that the former neither acknowledged nor
consented to the latter as his new debtor. These acts, when
taken together, clearly show that novation did not take place.
Since there was no novation, petitioner Arco Pulp and Papers
obligation to respondent remains valid and existing. Petitioner
Arco Pulp and Paper, therefore, must still pay respondent the
full amount of P7,220,968.31.
PNB v Dee
Dacion en pago
Facts:
Teresita Tan Dee bought from Prime East Properties Inc. (PEPI)
a residential lot. PEPI assigned its rights over a property to the
Armed Forces of the Philippines-Retirement and Separation
Benefits System, Inc. (AFP-RSBS), which included the property
purchased by Dee. PEPI obtained a loan from PNB, secured by a
mortgage over several properties, including Dees property.
After Dees full payment of the purchase price, a deed of sale was
executed by PEPI and AFP-RSBS in Dees favor. Dee sought
from PNB the delivery of the owners duplicate title over the
property, to no avail. Thus, she filed with the HLURB a
complaint for specific performance to compel delivery of the
TCT by PNB, PEPI and AFP-RSBS, among others. HLURB ruled
in favor of Dee, which was affirmed by its Board of
Commissioners. On appeal, the Board of Commissioners
decision was affirmed by the OP. Hence, PNB filed a petition for
review with the CA, which, in turn, affirmed the OP decision.
PEPI claims that the title over the property is one of the
properties due for release by PNB as it has already been the
subject of a MOA and dacion en pago entered into between
them. The agreement was reached after PEPI filed a petition for
rehabilitation, and contained the stipulation that PNB agreed to
release the mortgage lien on fully paid mortgaged properties
upon the issuance of the certificates of title over the dacioned
properties.
Issue:
Whether or not PNB may be compelled to deliver the owners
duplicate title over the property.
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Ruling:
Yes. The RTC order approved PEPIs modified Rehabilitation
Plan, which included the settlement of the latters unpaid
obligations to its creditors by way of dacion of real properties.
RTC also incorporated certain measures that were not included
in PEPIs plan, one of which is that "[t]itles to the lots which
have been fully paid shall be released to the purchasers within
90 days after the dacion to the secured creditors has been
completed." The agreement stipulated that as partial settlement
of PEPIs obligation with PNB, PEPI absolutely and irrevocably
conveys by way of "dacion en pago" the properties listed therein,
which included the lot purchased by Dee. PNB also committed
to release its mortgage lien on fully paid Mortgaged Properties
upon issuance of the certificates of title over the Dacioned
Properties in the name of PNB. PNB undertook to cause the
transfer of the certificates of title over the Dacioned Properties
and the release of the Mortgaged Properties with reasonable
dispatch.
There is nothing on record showing that the MOA has been

nullified or is the subject of pending litigation; hence, it carries
with it the presumption of validity. Consequently, the execution
of the dation in payment effectively extinguished PEPIs loan
obligation to PNB insofar as it covers the value of the property
purchased by Dee. This negates PNBs claim that PEPI must first
redeem the property before it can cancel or release the
mortgage. As it now stands, PNB already stepped into the shoes
of PEPI and there is no more reason for PNB to refuse the
cancellation or release of the mortgage, for in accepting the
assigned properties as payment of the obligation, the bank has
assumed the risk that some of the assigned properties are
covered by contracts to sell which must be honored under PD
957. Whatever claims the petitioner has against PEPI and AFPRSBS, monetary or otherwise, should not prejudice the rights
and interests of Dee over the property, which she has already
fully paid for.
Dacion en pago or dation in payment is the delivery and

transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of
the obligation. It is a mode of extinguishing an existing
obligation and partakes the nature of sale as the
creditor is really buying the thing or property of the
debtor, the payment for which is to be charged against
the debtors debt. Dation in payment extinguishes the
obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as
may be proved, unless the parties by agreement
express or implied, or by their silence consider the
thing as equivalent to the obligation, in which case the
obligation is totally extinguished.
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Magbanua v Uy (2005)
G.R. No. 161003. May 6, 2005
TOPIC: Novation
Doctrine: Rights may be waived through a compromise
agreement, notwithstanding a final judgment that has
already settledthe rights of the contracting parties. To
be binding, the compromise must be shown to have been
voluntarily,freely and intelligently executed by the
parties, who had full knowledge of the judgment.
Furthermore, it must not be contrary to law, morals,
good customs and public policy.
Facts:
As a final consequence of the final and executory decision
of the Supreme Court in Rizalino P. Uy v. Nationa lLabor
Relations Commission, et. al. (GR No. 117983, September 6,
1996), hearings were conducted to determine the amount of
wage differentials due the eight (8) complainants therein, now
[petitioners]. As computed, the award amounted to
P1,487,312.69 x x x.
On February 3, 1997, [petitioners] filed a Motion for
Issuance of Writ of Execution.
On May 19, 1997, [respondent] Rizalino Uy filed a
Manifestation requesting that the cases be terminated and
closed, stating that the judgment award as computed had been
complied with to the satisfaction of [petitioners].Said
Manifestation was also signed by the eight (8) [petitioners].
Together with the Manifestation is a Joint Affidavit dated May 5,
1997 of [petitioners], attesting to the receipt of payment from
[respondent] and waiving all other benefits due them in
connection with their complaint.
On June 3, 1997, [petitioners] filed an Urgent Motion for

Issuance of Writ of Execution wherein they confirmed that each
of them received P40,000 from [respondent] on May 2, 1997.
On June 9, 1997, [respondent] opposed the motion on the
ground that the judgment award had been fully satisfied. In
their Reply, [petitioners] claimed that they received only partial
payments of the judgment award.
On October 20, 1997, six of the eight petitioners filed a
Manifestation requesting that the cases be considered closed
and terminated as they are already satisfied of what they have
received from respondent. Together with said Manifestation is a
Joint Affidavit in the local dialect, of the six petitioners attesting
that they have no more collectible amount from respondent and
if there is any, they are abandoning and waiving the same.
Labor Arbiter: issued an order denying the motion for
issuance of writ of execution.
NLRC: reversed, holding that a final and executory
judgment can no longer be altered and that quitclaims
and releases are normally frowned upon as contrary to
public policy.
CA: held that compromise agreements may be entered
into even after a final judgment. Thus, petitioners validly
released respondent from any claims, upon the voluntary
execution of a waiver pursuant to the compromise
agreement.
Issues:
Whether or not the final and executory judgment of the
Supreme Court could be subject to compromise settlement;
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Whether or not the petitioners affidavit waiving their

awards in the labor case executed without the assistance of their
counsel and labor arbiter is valid
Held:
1. Yes
A compromise agreement is a contract whereby the
parties make reciprocal concessions in order to resolve their
differences and thus avoid or put an end to a lawsuit. The issue
involving the validity of a compromise agreement
notwithstanding a final judgment is not novel. Jesalva v.
Bautista upheld a compromise agreement that covered cases
pending trial, on appeal, and with final judgment. The Court
noted that Article 2040 impliedly allowed such agreements;
there was no limitation as to when these should be entered into.
There is no justification to disallow a compromise agreement,
solely because it was entered into after final judgment. The
validity of the agreement is determined by compliance with the
requisites and principles of contracts, not by when it was
entered into.
As provided by the law on contracts, a valid compromise
must have the following elements: (1) the consent of the parties
to the compromise, (2) an object certain that is the subject
matter of the compromise, and (3) the cause of the obligation
that is established.
In the present factual milieu, compliance with the

elements of a valid contract is not in issue. Petitioners do not
challenge the factual finding that they entered into a
compromise agreement with respondent. There are no
allegations of vitiated consent. Instead, petitioners base their
argument on the sole fact that the agreement was executed
despite a final judgment, which the Court had previously ruled

to be allowed by law.
The principle of novation supports the validity of a
compromise after final judgment. Novation, a mode of
extinguishing an obligation, is done by changing the object or
principal condition of an obligation, substituting the person of
the debtor, or surrogating a third person in the exercise of the
rights of the creditor. For an obligation to be extinguished by
another, the law requires either of these two conditions: (1) the
substitution is unequivocally declared, or (2) the old and the
new obligations are incompatible on every point. A compromise
of a final judgment operates as a novation of the judgment
obligation, upon compliance with either requisite. In the present
case, the incompatibility of the final judgment with the
compromise agreement is evident, because the latter was
precisely entered into to supersede the former.
2. Yes
The presence or the absence of counsel when a waiver is
executed does not determine its validity. There is no law
requiring the presence of a counsel to validate a waiver. The test
is whether it was executed voluntarily, freely and intelligently;
and whether the consideration for it was credible and
reasonable. Where there is clear proof that a waiver was
wangled from an unsuspecting or a gullible person, the law must
step in to annul such transaction. In the present case,
petitioners failed to present any evidence to show that their
consent had been vitiated. The law is silent with regard to the
procedure for approving a waiver after a case has been
terminated. Relevant, however, is this reference to the NLRCs
New Rules of Procedure: Should the parties arrive at any
agreement as to the whole or any part of the dispute, the same
shall be reduced to writing and signed by the parties and their
respective counsel, or authorized representative, if any, before
the Labor Arbiter. The settlement shall be approved by the
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Labor Arbiter after being satisfied that it was voluntarily entered

into by the parties and after having explained to them the terms
and consequences thereof. A compromise agreement entered
into by the parties not in the presence of the Labor Arbiter
before whom the case is pending shall be approved by him, if
after confronting the parties, particularly the complainants, he is
satisfied that they understand the terms and conditions of the
settlement and that it was entered into freely and voluntarily by
them and the agreement is not contrary to law, morals, and
public policy. This provision refers to proceedings in a
mandatory/conciliation conference during the initial stage of
the litigation. Such provision should be made applicable to the
proceedings in the pre-execution conference, for which the
procedure for approving a waiver after final judgment is not
stated. There is no reason to make a distinction between the
proceedings in mandatory/conciliation and those in preexecution conferences.
Phil. Charter v. Petroleum (2012)

Topic: As to prestation; Novation
Doctrine: Novation of a contract is never presumed. In the
absence of an express agreement, novation takes place
only when the old and the new obligations are
Facts: On January 27, 1999, respondent Petroleum Distributors
and Services Corporation (PDSC), through its president,
Conrado P. Limcaco, entered into a building contract with N.C.
Francia Construction Corporation (FCC), represented by its
president and chief executive officer, Emmanuel T. Francia, for
the construction of a four-story commercial and parking
complex located at MIA Road corner Domestic Road, Pasay City,
known as Park N Fly Building (Park N Fly). Under the contract,
FCC agreed to undertake the construction of Park N Fly for the
price of 45,522,197.72.
The parties agreed that the construction work would begin on
February 1, 1999. Under the Project Evaluation and Review
Technique Critical Path Method (PERT-CPM), the project was
divided into two stages: Phase 1 of the construction work would
be finished on May 17, 1999 and Phase 2 would begin on May 18,
1999 and finish on October 20, 1999. The project should be
turned over by October 21, 1999. It was further stipulated that in
the event FCC failed to finish the project within the period
specified, liquidated damages equivalent to 1/10 of 1% of the
contract price for every day of delay shall accrue in favor of
PDSC.
To ensure compliance with its obligation, FCCs individual
officers signed the Undertaking of Surety holding themselves
personally liable for the accountabilities of FCC. Also, FCC
procured Performance Bond amounting to 6,828,329.00 from
petitioner Philippine Charter Insurance Corporation (PCIC) to
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secure full and faithful performance of its obligation under the

Building Contract.
a complaint impleading PCIC, claiming coverage under

Performance Bond No. 31915 in the amount of 6,828,329.66.
The construction of the Park N Fly started on February 1, 1999.

Pursuant to the Building Contract, PDSC sourced out
construction materials and subcontracted various phases of the
work to help obtain the lowest cost of the construction and
speed up the work of the project. These resulted in the reduction
of the contract price. During the Phase 1 of the project, PDSC
noticed that FCC was sixteen (16) days behind schedule. In a
Letter, it reminded FCC to catch up with the schedule of the
projected work path, or it would impose the penalty of 1/10 of
the 1% of the contract price. The problem, however, was not
addressed, as the delay increased to 30 days and ballooned to 60
days.
The PCIC denied liability contending that the contract was

novated without its consent.
Consequently, on September 10, 1999, FCC executed a deed of

assignment, assigning a portion of its receivables from Caltex
Philippines, Inc. (Caltex), and a chattel mortgage, conveying
some of its construction equipment to PDSC as additional
security for the faithful compliance with its obligation.
On even date, PDSC and FCC likewise executed a memorandum
of agreement (MOA), wherein the parties agreed to revise the
work schedule of the project. As a consequence, Performance
Bond No. 31915 was extended up to March 2, 2000.
For failure of FCC to accomplish the project within the agreed
completion period, PDSC, in a letter informing FCC that it was
terminating their contract based on Article 12, Paragraph 12.1 of
the Building Contract. Subsequently, PDSC sent demand letters
to FCC and its officers for the payment of liquidated damages
amounting to 9,149,962.02 for the delay. In the same manner,
PDSC wrote PCIC asking for remuneration pursuant to
Performance Bond No. 31915. Despite notice, PDSC did not
receive any reply from either FCC or PCIC, constraining it to file
Issue: WON the principal contract was novated when PDSC

and FCC executed the September 10, 1999 MOA, without
informing the surety, which, in effect, extinguished its
obligation.
Held: NO.
A surety agreement has two types of relationship: (1) the
principal relationship between the obligee and the obligor; and
(2) the accessory surety relationship between the principal and
the surety. The obligee accepts the suretys solidary undertaking
to pay if the obligor does not pay. Such acceptance, however,
does not change in any material way the obligees relationship
with the principal obligor. Neither does it make the surety an
active party in the principal obligor-obligee relationship. It
follows, therefore, that the acceptance does not give the surety
the right to intervene in the principal contract. The suretys role
arises only upon the obligors default, at which time, it can be
directly held liable by the obligee for payment as a solidary
obligor.
Furthermore, in order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and new
obligation be in every point incompatible with each other.
Novation of a contract is never presumed. In the absence of an
express agreement, novation takes place only when the old and
the new obligations are incompatible on every point.
Undoubtedly, a surety is released from its obligation when there
is a material alteration of the principal contract in connection
with which the bond is given, such as a change which imposes a
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new obligation on the promising party, or which takes away

some obligation already imposed, or one which changes the
legal effect of the original contract and not merely its form. In
this case, however, no new contract was concluded and
perfected between PDSC and FCC. A reading of the September
10, 1999 MOA reveals that only the revision of the work
schedule originally agreed upon was the subject thereof. The
parties saw the need to adjust the work schedule because of the
various subcontracting made by PDSC. In fact, it was specifically
stated in the MOA that all other terms and conditions of the
Building Contract of 27 January 1999 not inconsistent herewith
shall remain in full force and effect. There was no new
contract/agreement which could be considered to have
substituted the Building Contract.
ACE Foods, Inc. v. Micro Pacific (2013)

G.R. No. 200602, December 11, 2013
Topic: Contract, NCC 1159
Doctrine: Novation is never presumed, and the animus
novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that
are too clear and unequivocal to be mistaken
Facts:
ACE Foods is a domestic corporation engaged in the trading and
distribution of consumer goods in wholesale and retail
bases, while MTCL is one engaged in the supply of computer
hardware and equipment.
On September 26, 2001, MTCL sent a letter-proposal for the
delivery and sale of the subject products to be installed at
various offices of ACE Foods. Aside from the itemization of the
products offered for sale, the said proposal further provides for
the following terms, viz.:
TERMS : Thirty (30) days upon delivery
VALIDITY : Prices are based on current dollar rate and
subject to changes without prior notice.
DELIVERY : Immediate delivery for items on stock,
otherwise thirty (30) to forty-five days upon receipt of
[Purchase Order]
WARRANTY : One (1) year on parts and services.
Accessories not included in warranty.
On October 29, 2001, ACE Foods accepted MTCLs proposal and
accordingly issued Purchase Order No. 100023 (Purchase
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Order) for the subject products amounting to P646,464.00

(purchase price). Thereafter, or on March 4, 2002, MTCL
delivered the said products to ACE Foods as reflected in Invoice
No. 7733 (Invoice Receipt). The fine print of the invoice
states, inter alia, that "[t]itle to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full
compliance of the terms and conditions of above and payment of
the price" (title reservation stipulation). After delivery, the
subject products were then installed and configured in ACE
Foodss premises. MTCLs demands against ACE Foods to pay
the purchase price, however, remained unheeded. Instead of
paying the purchase price, ACE Foods sent MTCL a Letter dated
September 19, 2002, stating that it "ha[s] been returning the
[subject products] to [MTCL] thru [its] sales representative Mr.
Mark Anteola who has agreed to pull out the said [products] but
had failed to do so up to now."
Eventually, or on October 16, 2002, ACE Foods lodged a
Complaint against MTCL before the RTC, praying that the latter
pull out from its premises the subject products since MTCL
breached its "after delivery services" obligations to it,
particularly, to: (a) install and configure the subject products;
(b) submit a cost benefit study to justify the purchase of the
subject products; and (c) train ACE Foodss technicians on how
to use and maintain the subject products. ACE Foods likewise
claimed that the subject products MTCL delivered are defective
and not working.
For
its
part,
MTCL,
in
its
Answer
with
Counterclaim, maintained that it had duly complied with its
obligations to ACE Foods and that the subject products were in
good working condition when they were delivered, installed and
configured in ACE Foodss premises. Thereafter, MTCL even
conducted
a
training
course
for
ACE
Foodss
representatives/employees; MTCL, however, alleged that there
was actually no agreement as to the purported "after delivery
services." Further, MTCL posited that ACE Foods refused and

failed to pay the purchase price for the subject products despite
the latters use of the same for a period of nine (9) months. As
such, MTCL prayed that ACE Foods be compelled to pay the
purchase price, as well as damages related to the transaction.
ISSUE: Whether or not ACE Foods is liable to pay Micro Pacific
HELD: Yes
A contract is what the law defines it to be, taking into
determined from the express terms of the written agreement
and from the contemporaneous and subsequent acts of the
contracting parties. However, in the construction or
interpretation of an instrument, the intention of the parties
is primordial and is to be pursued. The denomination or
title given by the parties in their contract is not conclusive of the
The very essence of a contract of sale is the transfer of
ownership in exchange for a price paid or
promised. This may be gleaned from Article 1458 of the Civil
Code which defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting
parties obligates himself to transfer the ownership and to
deliver a determinate thing, and the other to pay
therefor a price certain in money or its
equivalent.
A contract of sale may be absolute or conditional.
Corollary thereto, a contract of sale is classified as
a consensual contract, which means that the sale is perfected
by mere consent. No particular form is required for its validity.
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Upon perfection of the contract, the parties may reciprocally

demand performance, i.e., the vendee may compel transfer of
ownership of the object of the sale, and the vendor may require
the vendee to pay the thing sold.
In contrast, a contract to sell is defined as a bilateral contract
whereby the prospective seller, while expressly reserving the
ownership of the property despite delivery thereof to the
prospective buyer, binds himself to sell the property exclusively
to the prospective buyer upon fulfillment of the condition agreed
upon, i.e., the full payment of the purchase price. A contract to
sell may not even be considered as a conditional contract of
sale where the seller may likewise reserve title to the property
subject of the sale until the fulfillment of a suspensive condition,
because in a conditional contract of sale, the first element of
consent is present, although it is conditioned upon the
happening of a contingent event which may or may not occur.
stipulation, changed the complexion of the transaction from a

contract of sale into a contract to sell. Records are bereft of any
showing that the said stipulation novated the contract of sale
between the parties which, to repeat, already existed at the
precise moment ACE Foods accepted MTCLs proposal. To be
sure, novation, in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old
obligation subsists to the extent it remains compatible with the
amendatory agreement. In either case, however, novation is
never presumed, and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by
their acts that are too clear and unequivocal to be mistaken.
In this case, the Court concurs with the CA that the parties have
agreed to a contract of sale and not to a contract to sell as
adjudged by the RTC. Bearing in mind its consensual nature, a
contract of sale had been perfected at the precise moment ACE
Foods, as evinced by its act of sending MTCL the Purchase
Order, accepted the latters proposal to sell the subject products
in consideration of the purchase price of P646,464.00. From
that point in time, the reciprocal obligations of the parties i.e.,
on the one hand, of MTCL to deliver the said products to ACE
Foods, and, on the other hand, of ACE Foods to pay the
purchase price therefor within thirty (30) days from delivery
already arose and consequently may be demanded.
On the issue of novation:
The Court must dispel the notion that the stipulation anent
MTCLs reservation of ownership of the subject products as
reflected in the Invoice Receipt, i.e., the title reservation
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Leonen, J.
Re: Extinguishment of obligations
DOCTRINE
extinguish an obligation. It cannot be presumed and
may be implied only if the old and new contracts are
FACTS
Dan T. Lim works in the business of supplying scrap papers,
cartons, and other raw materials, under the name Quality Paper
and Plastic Products, Enterprises, to factories engaged in the
paper mill business. He delivered scrap paper to ARCO. The
parties allegedly agreed that Arco Pulp and Paper would either
pay Dan T. Lim the value of the raw materials or deliver to him
their finished products of equivalent value.
Dan T. Lim alleged that when he delivered the raw materials,
Arco Pulp and Paper issued a post-dated check. The check was
however dishonored.
Arco Pulp and Paper and a certain Eric Sy executed a
memorandum of agreement where Arco Pulp and Paper bound
themselves to deliver their finished products to Megapack
Container Corporation, owned by Eric Sy, for his account.
According to the memorandum, the raw materials would be
supplied by Lim, through his company, Quality Paper and
Plastic Products.
Lim sent a letter to Arco Pulp and Paper demanding payment of
the amount of 7,220,968.31, but no payment was made to him.
Lim sued ARCO for collection of sum of money. RTC dismissed
the case on the basis that when ARCO and Eric Sy entered into
the memorandum of agreement, novation took place, which
extinguished Arco Pulp and Papers obligation to Lim. CA
overturned the decision, hence this case.
Petitioners argue that the execution of the memorandum of

agreement constituted a novation of the original obligation since
Eric Sy became the new debtor of respondent. Respondent, on
the other hand, argues that the Court of Appeals was correct in
ruling that there was no proper novation in this case.
ISSUE: Whether the obligation between the parties was
extinguished by novation
HELD
The memorandum ofagreement did not constitutea
novation of the originalcontract. The trial court
erroneously ruled that the execution of the memorandum of
agreement constituted a novation of the contract between the
parties. When petitioner Arco Pulp and Paper opted instead to
deliver the finished products to a third person, it did not novate
the original obligation between the parties.
Novation extinguishes an obligation between two parties when
there is a substitution of objects or debtors or when there is
subrogation of the creditor. It occurs only when the new
contract declares so "in unequivocal terms" or that "the old and
the new obligations be on every point incompatible with each
other."
In general, there are two modes of substituting the person of the
debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from and may even be
made without the knowledge of the debtor, since it consists of
a third persons assumption of the obligation. As such, it
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logically requires the consent of the third person and the

assumes the obligation; thus, the consent of these three persons
are necessary. Both modes of substitution by the debtor require
the consent of the creditor.
known as subjective or personal novation. For novation to take
place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
incompatibility is whether the two obligations can stand
together, each one with its own independent existence.
never presumed, thus:
In the civil law setting, novatio is literally construed as to
make new. So it is deeply rooted in the Roman Law

jurisprudence, the principle novatio non praesumitur
that novation is never presumed.At bottom, for
novation tobe a jural reality, its animus must be ever
present, debitum pro debito basically extinguishing the
old obligation for the new one. (Emphasis supplied)
There is nothing in the memorandum of agreement that
states that with its execution, the obligation of petitioner
Arco Pulp and Paper to respondent would be
extinguished. It also does not state that Eric Sy somehow
substituted petitioner Arco Pulp and Paper as
respondents debtor. It merely shows that petitioner Arco
Pulp and Paper opted to deliver the finished products to a
third person instead.
novation to be valid:
Novation must be expressly consented to. Moreover, the
conflicting intention and acts of the parties underscore the
absence of any express disclosure or circumstances with which
to deduce a clear and unequivocal intent by the parties to novate
the old agreement. (Emphasis supplied)
In this case, respondent was not privy to the memorandum of
agreement, thus, his conformity to the contract need not be
secured. This is clear from the first line of the memorandum,
which states:
Per meeting held at ARCO, April 18, 2007, it has been
mutually agreed between Mrs. Candida A. Santos and Mr.
Eric Sy. . . .
If the memorandum of agreement was intended to novate the
original agreement between the parties, respondent must have
first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and
unequivocal terms that it has replaced the original obligation of
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petitioner Arco Pulp and Paper to respondent. Neither of these

Petitioner Arco Pulp and Papers act of tendering partial
payment to respondent also conflicts with their alleged intent to
pass on their obligation to Eric Sy. When respondent sent his
letter of demand to petitioner Arco Pulp and Paper, and not to
Eric Sy, it showed that the former neither acknowledged nor
consented to the latter as his new debtor. These acts, when
taken together, clearly show that novation did not take place.
Since there was no novation, petitioner Arco Pulp and Papers
obligation to respondent remains valid and existing. Petitioner
Arco Pulp and Paper, therefore, must still pay respondent the
full amount of P7,220,968.31.
Philippine Commercial International Bank (PCIB) v

Franco
Time and place of performance
Facts:
Arturo Franco filed an action for damages against PCIB, alleging
that he secured from PCIB trust indenture certificates and that
despite demands, PCIB refused to return to Franco the trust
amounts, plus interest. Francos request for payment was denied
because all outstanding PCIBank trust indenture accounts were
converted into common trust certificates, so that all such
PCIBank trust indenture certificates have been rendered "null
and void." RTC ruled in favor of Franco. Considering that the 4
TICs have not been replaced or cancelled, the RTC held that the
relationship of express trust between PCIB and Franco still
subsists at the time the latter demanded the withdrawal of his
funds under them. CA affirmed the RTC, holding that PCIB
failed to adduce any documentary evidence to establish the
alleged fact that the 4 TICs were already paid or cancelled, or
that Francos participation therein was already withdrawn.
Issue:
Whether or not the allegation of payment by PCIB on the subject
trust certificate indentures extinguishes its obligation.
Ruling:
No. Jurisprudence abounds that, in civil cases, one who pleads
payment has the burden of proving it. Even where the plaintiff
must allege non-payment, the general rule is that the burden
rests on the defendant to prove payment, rather than on the
plaintiff to prove non-payment. When the creditor is in
possession of the document of credit, he need not prove nonpayment for it is presumed. The creditor's possession of the
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evidence of debt is proof that the debt has not been discharged
by payment.
In this case, respondent's possession of the original copies of the
subject TICs strongly supports his claim that petitioner Bank's
obligation to return the principal plus interest of the money
placement has not been extinguished. The TICs in the hands of
respondent is a proof of indebtedness and a prima facie
evidence that they have not been paid. Petitioner Bank could
have easily presented documentary evidence to dispute the
claim, but it did not. In its omission, it may be reasonably
deduced that no evidence to that effect really exist. Worse, the
testimonies of petitioner Bank's own witnesses, reinforce, rather
than belie, respondent's allegations of non-payment.
Filinvest v Philippine Acetylene

111Scra 421 (1982)
TOPIC: DACION EN PAGO
Facts:
The Philippine Acetylene Co., Inc. purchased from one
Alexander Lim, as evidenced by a Deed of Sale, a motor vehicle
described as Chevorlet, 1969 model, paying a down payment
and the balance payable at 34 monthly installments. As security
for the payment of said promissory note, PAC executed a chattel
mortgage over the same motor vehicle in favor of said Alexander
Lim.-Subsequently, Alexander Lim assigned to the Filinvest
Finance Corporation all his rights, title, and interests in the
promissory note and chattel mortgage by virtue of a Deed of
Assignment.
Thereafter, the Filinvest Finance Corporation, as a
consequence of its merger with the Credit and Development
Corporation assigned to the new corporation, Filinvest Credit
Corporation, all its rights, title, and interests on the aforesaid
promissory note and chattel mortgage, which, in effect, the
payment of the unpaid balance owed by PAC to Alexander Lim
was financed by Filinvest Credit Corporation such that Lim
became fully paid. PAC failed to comply with the terms and
conditions set forth in the promissory note and chattel mortgage
since it had defaulted in the payment of nine successive
installments. Filinvest Credit Corporation then sent a demand
letter whereby its counsel demanded "that you (appellant) remit
the aforesaid amount in full in addition to stipulated interest
and charges or return the mortgaged property to my client at its
office at 2133 Taft Avenue, Malate, Manila within five (5) days
from date of this letter during office hours. "
Replying thereto, PAC, thru its assistant generalmanager, wrote back advising Filinvest Credit Corporation of its
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decision to "return the mortgaged property, which return shall

be in full satisfaction of its indebtedness pursuant to Article
1484 of the New Civil Code." Accordingly, the mortgaged vehicle
was returned Filinvest Credit Corporation to the together with
the document "Voluntary Surrender with Special Power of
Attorney To Sell" executed by PAC. Filinvest Credit Corporation
wrote a letter to PAC informing the latter that Filinvest Credit
Corporation cannot sell the motor vehicle as there were unpaid
taxes on the said vehicle. On the last portion of the said letter,
Filinvest Credit Corporation requested the PAC to update its
account by paying the installments in arrears and accruing
interest. Filinvest Credit Corporation, in a letter, offered to
deliver back the motor vehicle to the PAC but the latter refused
to accept it, so Filinvest Credit Corporation instituted an action
for collection of a sum of money with damages.
In its answer, PAC, while admitting the material
allegations of the Filinvest Credit Corporations complaint, avers
that Filinvest Credit Corporation has no cause of action against
it since its obligation towards the Filinvest Credit Corporation
was extinguished when in compliance with the Filinvest Credit
Corporation's demand letter, it returned the mortgaged property
to the Filinvest Credit Corporation, and that assuming arguendo
that the return of the property did not extinguish its obligation,
it was nonetheless justified in refusing payment since the
Filinvest Credit Corporation is not entitled to recover the same
due to the breach of warranty committed by the original vendorassignor Alexander Lim.
LC: Ordered PAC to pay the outstanding unpaid obligation and
to accept the delivery of the motor vehicle subject of the chattel
mortgage.
Issue:
Whether or not the return the return of the mortgaged

property by the mortgagor to the mortgagee constituted dacion
en pago or Dation in payment.
Held:
The mere return of the mortgaged motor vehicle by the
mortgagor, PAC, to the mortgagee, Filinvest Credit Corporation,
does not constitute dation in payment or dacion en pago in the
absence, express or implied of the true intention of the parties.
Dacion en pago, according to Manresa, is the
transmission of the ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of
obligation. In dacion en pago, as a special mode of payment, the
debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. The undertaking
really partakes in one sense of the nature of sale, that is, the
creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtor's debt. As
such, the essential elements of a contract of sale, namely,
consent, object certain, and cause or consideration must be
present. In its modern concept, what actually takes place in
dacion en pago is an objective novation of the obligation where
the thing offered as an accepted equivalent of the performance
of an obligation is considered as the object of the contract of
sale, while the debt is considered as the purchase price.
In any case, common consent is an essential prerequisite,
be it sale or innovation to have the effect of totally extinguishing
the debt or obligation.-The evidence on the record fails to show
that the mortgagee, the herein appellee, consented, or at least
intended, that the mere delivery to, and acceptance by him, of
the mortgaged motor vehicle be construed as actual payment,
more specifically dation in payment or dacion en pago.
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The fact that the mortgaged motor vehicle was delivered

to him does not necessarily mean that ownership thereof, as
juridically contemplated by dacion en pago, was transferred
from appellant to appellee. In the absence of clear consent of
appellee to the proferred special mode of payment, there can be
no transfer of ownership of the mortgaged motor vehicle from
appellant to appellee. If at all, only transfer of possession of the
mortgaged motor vehicle took place, for it is quite possible that
appellee, as mortgagee, merely wanted to secure possession to
forestall the loss, destruction, fraudulent transfer of the vehicle
to third persons, or its being rendered valueless if left in the
hands of the appellant.
Tan Shuy v. Sps. Maulawin (F2012)

Topic: Dacion En Pago
Doctrine: Dation in payment extinguishes the obligation to
the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless
the parties by agreement express or implied, or by
their silence consider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished.
Facts: Tan Shuy is engaged in the business of buying copra and
corn in the 4th district of Quezon Province. According to his son,
Vicente Tan, whenever they would buy copra or corn from crop
sellers, they would prepare and issue a pesada1 in their favor.
When a pesada contained the annotation pd on the total
amount of the purchase price, it meant that the crop delivered
had already been paid for by Tan Shuy.
Guillermo Maulawin is a farmer businessman engaged in buying
and selling copra and corn. On July 10, 1997, Tan Shuy extended
a loan of P420K to Guillermo. In consideration thereof,
Guillermo obligated himself to pay the loan and to sell lucad or
copra to petitioner. Below is a reproduction of the contract:
No
2567
Lopez, Quezon
1997
July 10,
Tinanggap
ko
kay
G.
TAN
SHUY
ang
halagang
. (P420,000.00) salaping Filipino. Inaako ko na
isusulit sa kanya ang aking LUCAD
at babayaran ko ang nasabing halaga. Kung hindi ako
makasulit ng LUCAD o makabayad bago sumapit ang ., 19 maaari niya
akong ibigay sa may kapangyarihan. Kung ang pagsisingilan ay makakarating sa Juzgado ay
1
A pesada is a document containing details of the transaction,

including the date of sale, the weight of the crop delivered, the
trucking cost, and the net price of the crop
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sinasagutan ko ang
lahat ng kaniyang gugol.

[Sgd. by respondent]
.
P................
Lagda
The transactions between Tan Shuy and Guillermo were coursed

through Tan Shuys daughter Elena. She served as cashier in the
business of Tan Shuy, who primarily prepared and issued the
pesada. When shes absent, Vicente would issue the pesada.
Vicente also helped Tan Shuy in buying copra and granting
loans to customers [copra sellers]. According to him, part of
their agreement with Guillermo was that they would put the
annotation sulong on the pesada when partial payment on the
loan had been made. But despite repeated demands, Guillermo
remitted only P23k in August 1998 and P5.5k in October 1998,
or atotal of P28.5K. Claiming that Maulawin had an outstanding
balance of P391.5K and convinced that he no longer had any
intention to pay, Ran Shuy went to the Lupon Tagapamayapa.
Failing to reach a settlement, he filed acomplaint before the
RTC.
Maulawins Arguments:
1. Loan had already been paid in full.
2. He continuously delivered and sold copra to petitioner
from April 1998 to April 1999. An oral arrangement that
the net proceeds thereof shall be applied as installment
payments for the loan was made. His deliveries amounted
to P420,537.68 worth of copra.
3. To bolster his claim, he presented copies of pesadas
issued by Elena and Vicente. The pesadas did not contain
the notation "pd," which meant that actual payment of

the net proceeds from copra deliveries was not given to
him, but was instead applied as loanpayment.
4. Tan Shuy filed a complaint because he got angry when
Maulawin sold copra to other copra buyers.
RTC: The net proceeds from Guillermo's copra deliveries
-represented in the pesadas, which did not bear the notation
"pd" should be applied as installment payments for the loan. It
Gave credence to the pesadas, as their due execution and
authenticity was established by Elena and Vicente. But the RTC
did not credit the net proceeds from 12 pesadas, as they were
deliveries for corn and not copra. Guillermo testified that it was
the net proceeds from the copra deliveries to be applied as
installment payment for the loan. Thus, P41,585.25, which
corresponded to the net proceeds from corn deliveries, should
be deducted from the amount of P420,537.68claimed by
Guillermo to be the total value of his copra deliveries. There
exists, therefore, a balance of P41,047.57 in Guillermos loan.
CA: Affrirmed RTC
Issue: WON the delivery of copra amounted to installment
payments for the loan obtained by Guillermo from Tan Shuy.
Held: YES.
Tan Shuys Arguments:
Guillermo undertook two separate obligations: 1) Pay for the
loan in cash; and 2) Sell lucad or copra. Since the written
agreement did not specifically provide for the application of the
net proceeds from the deliveries for the loan, Tan Shuy argues
that he cannot be compelled to accept copra as payment for the
loan. The pesadas did not specifically indicate that the net
proceeds from the copra deliver is were to be used as installment
payments for the loan. Guillermos copra deliveries were duly
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paid in cash. The pesadas were in fact documentary receipts for

those payments.
There was partial payment every time Guillermo delivered copra

to Tan Shuy, whenever he chose not to collect the net proceeds
of his copra deliveries, and instead applied the collectible as
installment payments for his loan from Tan Shuy.
Supreme Court Ruling:

Pursuant to Art. 1232 of the Civil Code, an obligation is
extinguished by payment or performance. There is payment
when there is delivery of money or performance of an obligation.
Art. 1245 provides for a special mode of payment known as
dation in payment.
Dation in payment extinguishes the obligation to the extent of
the value of the thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties by agreement
express or implied, or by their silence consider the thing as
equivalent to the obligation, in which case the obligation is
totally extinguished. In this regard, the RTC made the following
findings:
a) Pesadas from April 1998 to April 1999shows that
Guillermo only gets the payments for trucking while the
total amount which represent the total purchase price for
the copras that he delivered to the plaintiff were all given
to Elena Tan Shuy as installments for the loan he owed to
plaintiff. Such claim was bolstered by the testimony of
Apolinario Cario which affirmed that he also sold copras
to the plaintiff Tan Shuy. Guillermo also said that he
incurred indebtedness to Tan Shuy and whenever he
delivered copras the amount of the copras sold were
applied as payments to his loan.
The CA fully subscribed to the findings of the RTC. The
subsequent arrangement between Tan Shuy and Guillermo can
thus be considered as one in the nature of dation in payment.
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Reparations Commission
Fishing (1978)
Application of Payment
Universal
Deep
Sea
Doctrine: The rules contained in Articles 1252 to 1254 of

judgment, Civil Code apply to a person owing several
debts of judgment, same kind to a single creditor. They
cannot be made applicable to a person whose obligation
as a mere surety is both contingent and singular, which
in this case is the full and faithful compliance with the
terms of the contract of conditional purchase and sale of
reparations goods.
Facts:
The Reparations Commission awarded six (6) trawl boats

to the Universal Deep-Sea Fishing Corporation which
were delivered two at a time, each delivery being covered
by a Contract of Conditional Purchase and Sale providing
for identical schedules of payments.
The first installment representing 10% of the total cost

was to be paid 24 months after delivery and the balance
of the total cost to be paid in ten (10) equal installments,
which, in the schedule were numbered as "1", "2", "3",
etc., the first of which was due one year after the first
installment.
When the Reparations Commission sued Universal and

its surety to recover various amounts of money due under
the contracts, they claimed that the amounts were not yet
due and demandable.
Universal alleged that there was an obscurity in the terms

of the contracts in question which was caused by the
plaintiff as to the amounts and due dates of the first
installments which should have been first fixed before the

creditor could demand its payment from the debtor,
specifically referring to the schedule of payments which
allegedly indicated two (2) due dates for the payment of
the first installment.
Issue:
Whether there was an obscurity in the terms of the contracts
which was caused by the plaintiff as to the amounts and due
dates of the first installments which should have been first fixed
before the creditor could demand its payment from the debtor
Ruling:
The Supreme Court found the terms of the contracts clear and
left no doubt as to the intent of the contracting parties that the
first installment due 24 months after delivery was different from
the first ten (10) equal yearly installment of the balance of
the purchase price (which are not designated as "first", "second",
"third", etc., installments).
The obligation included the payment, not only of the first
installment in the amount of P53,643.00, but also of the ten (10)
equal yearly installments of P56,597.20 per annum. The amount
of P10,000.00 was, indeed, deducted from judgment, amount of
P53,643.00, but then judgment, first of judgment, ten (10) equal
yearly installments had also accrued, hence, no error was
committed in holding judgment, surety company to judgment,
full extent of its undertaking.
The rules contained in Articles 1252 to 1254 of judgment, Civil
Code apply to a person owing several debts of judgment, same
kind to a single creditor. They cannot be made applicable to a
person whose obligation as a mere surety is both contingent and
singular, which in this case is the full and faithful compliance
with the terms of the contract of conditional purchase and sale
of reparations goods.
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Paculdo v Regalado (2000)

Pardo, J.
Re: Application of Payment
DOCTRINE
Under the law, if the debtor did not declare at the time he made
the payment to which of his debts with the creditor the
payment is to be applied, the law provided the
guideline; i.e. no payment is to be applied to a debt
which is not yet due and the payment has to be applied
first to the debt which is most onerous to the debtor.
FACTS: On December 27, 1990, petitioner Nereo Paculdo and
respondent Bonifacio Regalado entered into a contract of lease
over a parcel of land with a wet market building, located at
Fairview Park, Quezon City. The contract was for twenty five
(25) years, commencing on January 1, 1991 and ending on
December 27, 2015. For the first five (5) years of the contract
beginning December 27, 1990, Nereo would pay a monthly
rental of P450,000, payable within the first five (5) days of each
month with a 2% penalty for every month of late payment.
Aside from the above lease, petitioner leased eleven (11) other
property from the respondent, ten (10) of which were located
within the Fairview compound, while the eleventh was located
along Quirino Highway Quezon City. Petitioner also purchased
from respondent eight (8) units of heavy equipment and
vehicles in the aggregate amount of Php 1, 020,000.
On account of petitioners failure to pay P361, 895.55 in rental
for the month of May, 1992, and the monthly rental of P450,
000.00 for the months of June and July 1992, the respondent
sent two demand letters to petitioner demanding payment of the
back rentals, and if no payment was made within fifteen (15)
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days from the receipt of the letter, it would cause the

cancellation of the lease contract.
objection, as evidenced by his signature signifying his

conformity thereto.
Without the knowledge of petitioner, on August 3, 1992,

respondent mortgaged the land subject of the lease contract,
including the improvements which petitioner introduced into
the land amounting to P35, 000,000.00, to Monte de Piedad
Savings Bank, as a security for a loan.
Meanwhile, in an earlier letter, dated July 15, 1991,

respondent informed petitioner that the payment was to
be applied not only to petitioners accounts under the
subject land and the Quirino lot but also to heavy
equipment bought by the latter from respondent. Unlike
in the November letter, the July letter did not contain the
signature of petitioner.
On August 12, 1992, and the subsequent dates thereafter,

respondent refused to accept petitioners daily rental payments.
Subsequently, petitioner filed an action for injunction and
damages seeking to enjoin respondents from disturbing his
possession of the property subject of the lease contract. On the
same day, respondent also filed a complaint for ejectment
against petitioner.
The lower court rendered a decision in favor of the respondent,
which was affirmed in toto by the Court of Appeals.
ISSUE
Whether the petitioner was truly in arrears in the payment of
rentals on the subject property at the time of the filing of the
complaint for ejectment.
HELD
NO, the petitioner was not in arrears in the payment
of rentals on the subject property at the time of the
filing of the complaint for ejectment.
As found by the lower court there was a letter sent by
respondent to herein petitioner, dated November 19,
1991, which states that petitioners security deposit for
the Quirino lot, be applied as partial payment for his
account under the subject lot as well as to the real estate
taxes on the Quirino lot. Petitioner interposed no
Petitioner submits that his silence is not consent but is in fact a

rejection. As provided in Article 1252 of the Civil Code,
the right to specify which among his various
obligations to the same creditor is to be satisfied first
rest with the debtor.
In the case at bar, at the time petitioner made the payment, he
made it clear to respondent that they were to be applied to his
rental obligations on the Fairview wet market property. Though
he entered into various contracts and obligations with
respondent, all the payments made, about P11,000,000.00 were
to be applied to rental and security deposit on the Fairview wet
market property. However, respondent applied a big portion of
the amount paid by petitioner to the satisfaction of an obligation
which was not yet due and demandable- the payment of the
eight heavy equipment.
the payment to which of his debts with the creditor the payment
is to be applied, the law provided the guideline; i.e. no payment
is to be applied to a debt which is not yet due and the payment
has to be applied first to the debt which is most onerous to the
debtor.
The lease over the Fairview wet market is the most onerous to
the petitioner in the case at bar.
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Petition granted.
Meat Packing Corporation of the Philippines (MPCP)

v Sandiganbayan
Tender of payment and consignation
Facts:
MPCP is a corporation wholly owned by the GSIS. It is the
owner of 3 parcels of land, as well as the meat processing and
packing plant thereon. MPCP and the Philippine Integrated
Meat Corporation (PIMECO) entered into an Agreement
whereby MPCP leased to PIMECO, under a lease-purchase
arrangement, its property. The Agreement contained rescission
clauses.
On March 17, 1986, the PCGG sequestered all the assets,
properties and records of PIMECO. The sequestration included
the meat packing plant and the lease-purchase agreement.
MPCP gave notice to PIMECO of the rescission of the leasepurchase agreement on the ground, among others, of nonpayment of rentals of more than P2,000,000 for the year 1986.
GSIS asked the PCGG to exclude the meat packing plant from
the sequestered assets of PIMECO, inasmuch as the same is
owned by MPCP. PCGG denied the request. MPCP sought the
turnover to it of the meat packing plant on the ground that the
lease-purchase agreement had already been rescinded. PCGG
acceded to this request.
Meanwhile, PCGG instituted with the Sandiganbayan a
complaint for reconveyance, reversion, accounting, restitution
and damages, entitled, "Republic vs Peter Sabido, et al." The
complaint alleged that Sabido obtained, under favored and very
liberal terms, huge loans from the GSIS in favor of PIMECO,
was beneficially held and controlled by defendants Sabido et al.
Sabido filed an Urgent Manifestation and Motion, alleging that,
according to newspaper accounts, PCGG had already turned
over the management and operation of PIMECO to the
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GSIS/MPCP. Thus, he prayed that the transfer of the

management, control and possession of PIMECO to GSIS be
declared null and void ab initio for having been done without
the approval of the Sandiganbayan. Sandiganbayan received a
letter from members of the PIMECO Labor Union, praying for
the maintenance of the status quo to enable PIMECO to
continue its business operations and to ensure their continuity
of work and security of tenure. Sandiganbayan issued a TRO
commanding the PCGG to cease and desist from enforcing the
contemplated turnover to MPCP. Sandiganbayan, finding that
the PCGG committed grave abuse of authority, power and
discretion in unilaterally terminating the lease-purchase
agreement of PIMECO with MPCP and in turning over its
management, control and operation to the latter, ordered the
issuance of a writ of preliminary injunction. PCGG filed a
Motion for Reconsideration, which the Sandiganbayan granted.
Thereafter, the Sandiganbayan declared the turn-over of the
meat packing plant to GSIS null and void.
PIMECO filed with the Sandiganbayan a petition entitled,
PIMECO vs MPCP and PCGG," captioned as for "Declaratory
Relief and Other Similar Remedies. PIMECO alleged that from
1981 to 1985, PIMECO has been regularly paying the annual
rentals; and that prior to its sequestration in January 1986,
PIMECO was able to pay MPCP P846,269.70. However, after its
sequestration, the PCGG Management Team that took over the
plant became erratic and irregular in its payments of the annual
rentals to MPCP, thus presenting the danger that PIMECO may
be declared in default in the payment of rentals equivalent to 3
annual installments and causing the cancellation of the leasepurchase agreement. Hence, PIMECO prayed for a declaration
that it is no longer bound by the provisions of the rescission
clause of the lease-purchase agreement.
In the meantime, PCGG tendered to MPCP 2 checks (total of
P5,000,000), representing partial payment of accrued rentals
on the meat packing plant, which MPCP refused to accept on the
theory that the lease-purchase agreement had been rescinded.

Thus, the PCGG filed an Urgent Motion praying that the
Sandiganbayan order MPCP to accept the tendered amount.
MPCP alleged that its lease-purchase agreement with PIMECO
has been rescinded; and that PIMECO was in arrears in the
payment of rentals in the amount of P12,378,171.06, which is
more than the equivalent of 3 cumulative rentals at the annual
rate of P3,346,269.70.
The Sandiganbayan held that the tender of payment has been
validly made. To rule otherwise would be unfair and unjust to
PIMECO considering that during the time the PCGG had
possession and control of the sequestered assets and records,
PIMECO was not in the position to take steps necessary for the
preservation and conservation of those assets and records.
Meanwhile, Sandiganbayan dismissed the petition for
declaratory relief, it appearing that while the unpaid rentals as
of January 27, 1991 have reached P7,530,036.21, PCGGs tender
of payment and consignation of P5,000,000.00 averted the
accumulation of the unpaid rentals to 3 yearly rentalsinstallments. Consequently, the petition for declaratory relief
has become moot and academic.
Hence, MPCP brought this petition for certiorari, mandamus
and prohibition, arguing in fine that the PCGG is in estoppel
because it has already admitted that the lease-purchase
agreement between MPCP and PIMECO has been rescinded.
Issue:
Whether or not the lease-purchase agreement between MPCP
and PIMECO has been validly rescinded, making the
Sandiganbayans approval of the consignation by PCGG as
payment for back rentals or accrued amortizations on the meat
packing plant, after the MPCP refused the tender of payment of
the same, improper.
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(5) When the title of the obligation has been lost.
Ruling:
No. Consignation is the act of depositing the thing due with the
court or judicial authorities whenever the creditor cannot accept
or refuses to accept payment, and it generally requires a prior
tender of payment. It should be distinguished from tender of
payment. Tender is the antecedent of consignation, that is, an
act preparatory to the consignation, which is the principal, and
from which are derived the immediate consequences which the
debtor desires or seeks to obtain. Tender of payment may be
extrajudicial, while consignation is necessarily judicial, and the
priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. Tender
and consignation, where validly made, produces the effect of
payment and extinguishes the obligation.
If the creditor to whom tender of payment has been made
refuses without just cause to accept it, the debtor shall be
released from responsibility by the consignation of the thing or
sum due.
Consignation alone shall produce the same effect in the
following cases:
(1) When the creditor is absent or unknown, or does not
appear at the place of payment;
(2) When he is incapacitated to receive the payment at the
time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to
collect;
There was prior tender by PCGG of the amount of

P5,000,000.00 for payment of the rentals in arrears. MPCPs
refusal to accept the same, on the ground merely that its leasepurchase agreement with PIMECO had been rescinded, was
unjustified. From January 29, 1986 to January 30, 1990,
PIMECO paid, and GSIS/MPCP received, several amounts due
under the lease-purchase agreement, such as annual
amortizations or rentals, advances, insurance, and taxes, in total
sum of P15,921,205.83. Surely, the acceptance by MPCP and
GSIS of such payments for rentals and amortizations negates
any rescission of the lease-purchase agreement.
In support of its contention that the lease-purchase agreement
has been rescinded, MPCP makes reference to the resolutions of
the PCGG turning over to the GSIS the meat packing complex
and the land on which it is situated. MPCP argues that PCGG
was estopped from taking a contrary position. A closer perusal
of the resolutions, however, readily shows that the turn-over was
explicitly made dependent on certain conditions precedent,
among which was the approval by the Sandiganbayan and the
execution of a MOA between PCGG and MPCP. A MOA was in
fact executed on April 28, 1989, although the same suffers from
formal and substantial infirmities. However, no approval was
sought from the Sandiganbayan. On the contrary, the
Sandiganbayan, in its Resolution declaring the turn-over null
and void, refused to honor the PCGG resolutions, reasoning
thus:
First, what was approved by the PCGG in its resolutions of
September 20, 1988, and January 24, 1989, is the transfer of the
"meat packing complex including the land located at Barrio
Ugong, Pasig, Metro Manila," and not "the management and
operation of PIMECO." It is, however, the latter that the
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Memorandum of Agreement, executed on April 28, 1989,

pursuant to the said resolutions, transferred to the GSIS.
Second, the second resolution made the turnover of the "meat
packing complex including the land located at Barrio Ugong,
Pasig Metro Manila," "upon compliance with these conditions,
to be implemented by the [PCGG] Operations and Legal
Departments: . . . (b) approval by the Sandiganbayan . . ." Until
now, however, no motion has been presented to secure that
approval, and none can be expected because the same
Memorandum of Agreement changed the requirement of
approval to "(t)he Sandiganbayan shall be advised of this
Agreement." Even the advice stipulated has never been given by
the PCGG.
and directive for MPCP to accept the tendered payment, the

lease-purchase agreement could not be said to have been
rescinded.
Since the MOA was executed by one PCGG commissioner only,

the same cannot validly amend the resolutions passed by the
PCGG itself. Consequently, the turnover of the management and
operation of PIMECO, which, of course, include the meat
packing complex and the land of which it stands, stipulated in
the MOA, cannot be legally enforced. Needless to say, the
commissioners should be the first to abide by the PCGGs
resolutions.
Under the terms of the lease-purchase agreement, the amount of
arrears in rentals or amortizations must be equivalent to the
cumulative sum of three annual installments, in order to
warrant the rescission of the contract. Therefore, it must be
shown that PIMECO failed to pay the aggregate amount of at
least P10,038,809.10 before the lease-purchase agreement can
be deemed automatically cancelled. Assuming in the extreme
that, as alleged by MPCP, the arrears at the time of tender on
January 30, 1991 amounted to P12,578,171.00,40 the tender and
consignation of the sum of P5,000,000.00, which had the effect
of payment, reduced the back rentals to only P7,578,171.00, an
amount less than the equivalent of three annual installments.
Thus, with the Sandiganbayans approval of the consignation
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Sps. Cacyurin v AFPMB (2013)

G.R. No. 171298, April 15, 2013
Topic: Tender of Payment and consignation
Doctrine: Besides, as earlier stated, Article 1256 authorizes
consignation alone, without need of prior tender of
payment, where the ground for consignation is that the
creditor is unknown, or does not appear at the place of
payment; or is incapacitated to receive the payment at
the time it is due; or when, without just cause, he refuses
to give a receipt; or when two or more persons claim the
same right to collect; or when the title of the obligation
has been lost.
Facts:
Petitioner Oscar Cacayorin filed an application with
AFPMBAI to purchase a piece of property which the latter
owned in Puerto Princesa City, through a loan facility.
On July 4, 1994, Oscar and his wife and the Rural Bank of San
Teodoro executed a Loan and Mortgage Agreement with the
former as borrowers and the Rural Bank as lender, under the
auspices of Pag-IBIG or Home Development Mutual Funds
Home Financing Program.
The Rural Bank issued an August 22, 1994 letter of
guaranty6 informing AFPMBAI that the proceeds of petitioners
approved loan in the amount of P77,418.00 shall be released to
AFPMBAI after title to the property is transferred in petitioners
name and after the registration and annotation of the parties
mortgage agreement.
AFPMBAI executed in petitioners favor a Deed of Absolute Sale,

and a new title was issued in their name, with the corresponding
annotation of their mortgage agreement with the Rural Bank.
Unfortunately, the Pag-IBIG loan facility did not push
through and the Rural Bank closed and was placed under
receivership by the Philippine Deposit Insurance Corporation
(PDIC). Meanwhile, AFPMBAI somehow was able to take
possession of petitioners loan documents and the title, while
petitioners were unable to pay the loan/consideration for the
property.
AFPMBAI made oral and written demands to petitioners.
In July 2003, petitioners filed a Complaint for
consignation of loan payment, recovery of title and cancellation
of mortgage annotation against AFPMBAI, PDIC and the
Register of Deeds of Puerto Princesa City. Petitioners alleged in
their Complaint that as a result of the Rural Banks closure and
PDICs claim that their loan papers could not be located, they
were left in a quandary as to where they should tender full
payment of the loan and how to secure cancellation of the
mortgage annotation on title of the land.
AFPMBAI filed a Motion to Dismiss13 claiming that
petitioners Complaint falls within the jurisdiction of the
Housing and Land Use Regulatory Board (HLURB) and not the
Puerto Princesa RTC, as it was filed by petitioners in their
capacity as buyers of a subdivision lot and it prays for specific
performance of contractual and legal obligations decreed under
PD 957. It added that since no prior valid tender of payment was
made by petitioners, the consignation case was fatally defective
and susceptible to dismissal.
L.C.: dismissed AFPMBAI motion
C.A.: reversed decision and sided with AFPMBAI
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Issue:
1)Whether or not consignation is proper
2) Whether or not RTC has jurisdiction
Held:
1) Applying Article 1256 to the petitioners case as
shaped by the allegations in their Complaint, the
Court finds that a case for consignation has been
made out, as it now appears that there are two entities
which petitioners must deal with in order to fully
secure their title to the property: 1) the Rural Bank
(through PDIC), which is the apparent creditor under
the July 4, 1994 Loan and Mortgage Agreement; and
2) AFPMBAI, which is currently in possession of the
loan documents and the certificate of title, and the
one making demands upon petitioners to pay. Clearly,
the allegations in the Complaint present a situation
where the creditor is unknown, or that two or more
entities appear to possess the same right to collect
from petitioners. Whatever transpired between the
Rural Bank or PDIC and AFPMBAI in respect of
petitioners loan account, if any, such that AFPMBAI
came into possession of the loan documents and TCT
No. 37017, it appears that petitioners were not
informed thereof, nor made privy thereto.
due at the disposal of judicial authority, before whom

the tender of payment shall be proved, in a proper
case, and the announcement of the consignation in
other cases. The consignation having been made, the
interested parties shall also be notified thereof.
The above provision clearly precludes consignation in
venues other than the courts. Elsewhere, what may be
made is a valid tender of payment, but not
consignation. The two, however, are to be
distinguished. Tender of payment must be
distinguished from consignation. Tender is the
antecedent of consignation, that is, an act preparatory
to the consignation, which is the principal, and from
which are derived the immediate consequences which
the debtor desires or seeks to obtain. Tender of
payment may be extrajudicial, while consignation is
necessarily judicial, and the priority of the first is the
attempt to make a private settlement before
proceeding to the solemnities of consignation. (8
Manresa 325). While it may be true that petitioners
claim relates to the terms and conditions of the sale of
AFPMBAIs subdivision lot, this is overshadowed by
the fact that since the Complaint in Civil Case No.
3812 pleads a case for consignation, the HLURB is
without jurisdiction to try it, as such case may only be
tried by the regular courts.
2) On the question of jurisdiction, petitioners case

should be tried in the Puerto Princesa RTC, and not
the HLURB. Consignation is necessarily judicial, as
the Civil Code itself provides that consignation shall
be made by depositing the thing or things due at the
disposal of judicial authority, thus: Art. 1258.
Consignation shall be made by depositing the things
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Spouses Nameal and Lourdes Bonrostro v. Spouses

Juan and Constancia Luna (2013)
Topic: Tender of Payment and consignation
Doctrine: For a tender of payment to take effect it must be
accompanied by the means of payment and debtor must
take immediate step to make a consignation.
Facts: Constancia Luna, as buyer, entered into a contract to
sell with Bliss Development Corporation involving a house
located in Quezon City. A year after, Luna sold it to Lourdes
Bonrostro under the ff. terms:
The stipulated price of P1,250,000.00 shall be paid by the
VENDEE to the VENDOR in the following manner:
(a) P200,000.00 upon signing x x x the Contract To Sell,
(b) P300,000.00 payable on or before April 30, 1993,
(c) P330,000.00 payable on or before July 31, 1993,
(d) P417,000.00 payable to the New Capitol Estate, for
15 years at [P6,867.12] a month
x x x In the event the VENDEE fails to pay the second
installment on time, [t]he VENDEE will pay starting May 1, 1993
a 2% interest on the P300,000.00 monthly. Likewise, in the
event the VENDEE fails to pay the amount of P630,000.00 on
the stipulated time, this CONTRACT TO SELL shall likewise be
deemed cancelled and rescinded and x x x 5% of the total
contract price [of] P1,250,000.00 shall be deemed forfeited in
favor of the VENDOR. Unpaid monthly amortization shall
likewise be deducted from the initial down payment in favor of
the VENDOR.
After execution of the contract, Bonrostro took possession of the

property. However, except for P200,000.00 downpayment, she
failed to pay subsequent amortization. Luna then filed before
the RTC a Complaint for Rescission of Contract and Damages.
This is a petition for review on certiorari assailing the decision of
CA affirming with modification the decision of RTC in favor
herein respondents.
Issue: Whether or not delay in the payment of installment is a
substantial breach of obligation as to warrant its rescission.
Ruling: No, in a contract to sell, payment of the price is a
positive suspensive condition. Failure of which is not a breach of
contract warranting rescission under Article 1191 of the Civil
Code, but rather just an event that prevents the supposed seller
from being bound to convey title to the supposed buyer. The
contract to sell entered by the parties refers to real property on
installment basis, in which Art. 1191 cannot apply since they are
governed by the Maceda Law. However, there being no breach,
Bonrostro is still not excused from being made liable for interest
on the installments due from the date of default until fully paid.
Tender of payment, a manifestation by the debtor of a desire to
comply with or pay an obligation, asserted by Bonrostro for the
accrual of interest to be suspended is not a valid defense because
for a tender of payment to take effect it must be accompanied by
the means of payment and debtor must take immediate step to
make a consignation, the deposit of the proper amount with a
judicial authority, then interest is suspended from the time of
such tender.
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Del Carmen v Sabordo (2014)

G.R. No. 181723, Aug. 11, 2014
Consignation
Doctrine: It is settled that compliance with the requisites of a
valid consignation is mandatory. Failure to comply
strictly with any of the requisites will render the
consignation void. One of these requisites is a valid prior
tender of payment.
Facts:
Subsequently, the Suico spouses and their business partners
failed to pay their loan obligations forcing DBP to foreclose the
mortgage. After the Suico spouses and their partners failed to
redeem the foreclosed properties, DBP consolidated its
ownership over the same.
Nonetheless, DBP later allowed the Suico spouses and Reginald
and Beatriz Flores (Flores spouses), as substitutes for Juliana
Del Rosario, to repurchase the subject lots by way of a
conditional sale for the sum of P240,571.00.
The Suico and Flores spouses were able to pay the
downpayment and the first monthly amortization, but no
monthly installments were made thereafter. Threatened with
the cancellation of the conditional sale, the Suico and Flores
spouses sold their rights over the said properties to herein
respondents Restituto and Mima Sabordo, subject to the
condition that the latter shall pay the balance of the sale price.
Subsequently, respondents were able to repurchase the
foreclosed properties of the Suico and Flores spouses.
Respondents Restituto Sabordo (Restituto) filed with the then
Court of First Instance of Negros Occidental an original action
for declaratory relief with damages and prayer for a writ of

preliminary injunction raising the issue of whether or not the
Suico spouses have the right to recover from respondents Lots
506 and 514. The court ruled that the petioners can exercise
their option to purchase or redeem the subject lots from
respondents by paying the sum of P127,500.00.
In the meantime, Toribio Suico (Toribio) died leaving his
widow, Eufrocina, and several others, including herein
petitioner, as legal heirs. Later, they discovered that
respondents mortgaged Lots 506 and 514 with Republic Planters
Bank (RPB) as security for a loan which, subsequently, became
delinquent.
Thereafter, claiming that they are ready with the payment of
P127,500.00, but alleging that they cannot determine as to
whom such payment shall be made, petitioner and her co-heirs
filed a Complaint with the RTC of San Carlos City, Negros
Occidental seeking to compel herein respondents and RPB to
interplead and litigate between themselves their respective
interests on the abovementioned sum of money. The Complaint
also prayed that respondents be directed to substitute Lots 506
and 514 with other real estate properties as collateral for their
outstanding obligation with RPB and that the latter be ordered
to accept the substitute collateral and release the mortgage on
Lots 506 and 514. Upon filing of their complaint, the heirs
of Toribio deposited the amount of P127,500.00 with
the RTC of San Carlos City, Branch 59.
Respondents filed their Answer with Counterclaim praying for
the dismissal of the above Complaint on the grounds that (1)
the action for interpleader was improper since RPB is
not laying any claim on the sum of P127,500.00; (2)
that the period within which the complainants are
allowed to purchase Lots 506 and 514 had already
expired; (3) that there was no valid consignation, and
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(4) that the case is barred by litis pendencia or res

judicata.
Issue: Whether the consignation made by the petitioners was a
judicial deposit based on a final judgment and, as such, does not
require compliance with the requirements of Articles 1256 and
Ruling:
The petition lacks merit. In the instant case, petitioner and her
co-heirs, upon making the deposit with the RTC, did not ask the
trial court that respondents be notified to receive the amount
that they have deposited. In fact, there was no tender of
payment. Instead, what petitioner and her co-heirs prayed for is
that respondents and RPB be directed to interplead with one
another to determine their alleged espective rights over the
consigned amount; that respondents be likewise directed to
substitute the subject lots with other real properties as collateral
for their loan with RPB and that RPB be also directed to accept
the substitute real properties as collateral for the said loan.
Nonetheless, the trial court correctly ruled that interpleader is
not the proper remedy because RPB did not make any claim
whatsoever over the amount consigned by petitioner and her coheirs with the court.
It is settled that compliance with the requisites of a valid
consignation is mandatory. Failure to comply strictly with any of
the requisites will render the consignation void. One of these
requisites is a valid prior tender of payment.
Under Article 1256, the only instances where prior tender of
payment is excused are: (1) when the creditor is absent or
unknown, or does not appear at the place of payment; (2) when
the creditor is incapacitated to receive the payment at the time it
is due; (3) when, without just cause, the creditor refuses to give
a receipt; (4) when two or more persons claim the same right to
collect; and (5) when the title of the obligation has been lost.
None of these instances are present in the instant case. Hence,

the fact that the subject lots are in danger of being foreclosed
does not excuse petitioner and her co-heirs from tendering
payment to respondents, as directed by the court.
Yam v CA (1999)
Mendoza, J.
Re: Condonation or remission of debt
DOCTRINE
Art. 1270, par. 2 of the Civil Code provides that express
condonation must comply with the forms of donation.
Art. 748, par. 3 provides that the donation and
acceptance of a movable, the value of which exceeds
P5,000.00, must be made in writing, otherwise the same
shall be void. In this connection, under Art. 417, par. 1,
obligations, actually referring to credits, are considered
movable property.
FACTS
Petitioners obtained an IGLF loan from private respondent in
the amount of P300,000 with interest, monthly penalty,
monthly service charge and attorneys fees. It was secured by a
chattel mortgage on their printing machineries. On April 2,
1985, private respondent was placed under receivership by the
Central Bank. On July 31, 1986, petitioners paid private
respondent P410,854.47 by means of a check corresponding to
the principal amount of P295,469.47 and the interest of
P165,385 less the partial payment of P50,000.00. It was
received by the Central Bank-appointed in-house examiner
Cristina Destajo who made a notation on the voucher: full
payment of IGLF loan. Private respondent filed a collection
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case against petitioners when the latter failed to pay the

remaining balance of P266,146.88 plus interests, penalties and
service charges on the loan.
Petitioners, in their answer, claimed that Carlos Sobrepeas,
president of private respondent, after the corporation had been
placed under receivership, agreed to waive or condone the
penalties and service charges provided that they pay the
principal and interest on the loan on or before July 30, 1986 to
which they complied with. Petitioners added that the fact of full
payment was reflected in the voucher accompanying the check
which bore the notation: full payment of IGLF. Judgment was
rendered by the trial court in favor of private respondent. The
same was affirmed on appeal by the Court of Appeals. Hence,
petitioners resorted to this action.
IGLF loan of P500,000.00.

The appointment of a receiver operates to suspend the authority
of a corporation and of its directors and officers over its
properties and effects, such authority being reposed in the
receiver. Thus, Sobrepeas had no authority to condone the
debt.
The notation on the voucher covering the check payment
wherein the in-house examiner made a notation of full payment
of IGLF loan does not bind private respondent. It would have
been different if the notation appeared in the receipt issued by
the corporation through its receiver, which would then be an
admission against interest.
ISSUE: Whether there was condonation.

HELD: There was no condonation. Express condonation
under Article 1270 of the Civil Code must comply with the forms
of donation. Where the value of the movable exceeds P5,000.00
as in this case, the donation and acceptance must be made in
writing, otherwise the same shall be void.
Nonetheless, petitioners insist that the voucher covering the
Pilipinas Bank check for P410,854.47, containing the notation
that the amount is in full payment of IGLF loan, constitutes
documentary evidence of such oral agreement. This contention
is without merit. The notation in full payment of IGLF loan
merely states petitioners' intention in making the payment, but
in no way does it bind private respondent. It would have been a
different matter if the notation appeared in a receipt issued by
respondent corporation, through its receiver, because then it
would be an admission against interest. Indeed, if private
respondent really condoned the amount in question, petitioners
should have asked for a certificate of full payment from
respondent corporation, as they did in the case of their first
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Gan Tion v CA
Compensation
Facts:
Ong Wan Sieng was a tenant in certain premises owned by Gan
Tion. In 1961, Gan filed an ejectment case against Ong, alleging
non-payment of rents for August and September 1961, at
P180/month, or P360 altogether. Ong said that the agreed
monthly rental was only P160, which he had offered to but was
refused by Gan. Gan obtained a favorable judgment in the
municipal court (of Manila), but upon appeal, the CFI reversed
the judgment, dismissed the complaint, and ordered Gan to pay
Ong P500 as attorney's fees.
Gan served notice on Ong that he was increasing the rent to
P180 a month, effective November 1st, and at the same time
demanded the rents in arrears at the old rate in the aggregate
amount of P4,320, corresponding to the period August 1961 to
October 1963.
the real creditor with respect to the sum of P500 was the
defendant's counsel.
Issue:
Whether or not there has been legal compensation between Gan
Tion and Ong Wan Sieng.
Ruling:
Yes. This is not an accurate statement of the nature of an award
for attorney's fees. The award is made in favor of the litigant, not
of his counsel, and is justified by way of indemnity for damages
recoverable by the former in the cases enumerated in Article
2208 of the Civil Code. It is the litigant, not his counsel, who is
the judgment creditor and who may enforce the judgment by
execution. Such credit, therefore, may properly be the subject of
legal compensation. It would be unjust to compel petitioner to
pay his debt for P500 when admittedly his creditor is indebted
to him for more than P4,000.
In the meantime, Ong was able to obtain a writ of execution of

the judgment for attorney's fees in his favor. Gan went on
certiorari to the CA, where he pleaded legal compensation,
claiming that Ong was indebted to him in the sum of P4,320 for
unpaid rents. The CA accepted the petition but eventually
decided for Ong, holding that although " Ong is indebted to the
petitioner for unpaid rentals in an amount of more than
P4,000.00," the sum of P500 could not be the subject of legal
compensation, it being a "trust fund for the benefit of the
lawyer, which would have to be turned over by the client to his
counsel." The requisites of legal compensation, namely, that the
parties must be creditors and debtors of each other in their own
right (Art. 1278, Civil Code) and that each one of them must be
bound principally and at the same time be a principal creditor of
the other (Art. 1279), are not present in the instant case, since
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Mirasol v Ca (2001)
351 SCRA 44(2001)
TOPIC: Compensation
Doctrine: compensation cannot take place where one claim,
as in the instant case, is still the subject of litigation, as
the same cannot be deemed liquidated.
Facts:
The Mirasols are sugarland owners and planters
.Philippine National Bank (PNB) financed the Mirasols' sugar
production venture FROM 1973-1975 under a crop loan
financing scheme. The Mirasols signed Credit Agreements, a
Chattel Mortgage on Standing Crops, and a Real Estate
Mortgage in favor of PNB. The Chattel Mortgage empowered
PNB to negotiate and sell the latter's sugar and to apply the
proceeds to the payment of their obligations to it.
President Marcos issued PD 579 in November, 1974
authorizing Philippine Exchange Co., Inc. (PHILEX) to purchase
sugar allocated for export and authorized PNB to finance
PHILEX's purchases. The decree directed that whatever profit
PHILEX might realize was to be remitted to the government.
Believing that the proceeds were more than enough to pay their
obligations, petitioners asked PNB for an accounting of the
proceeds which it ignored.
Petitioners continued to avail of other loans from PNB
and to make unfunded withdrawals from their accounts with
said bank. PNB asked petitioners to settle their due and
demandable accounts. As a result, petitioners, conveyed to PNB
real properties by way of dacion en pago still leaving an unpaid
amount. PNB proceeded to extrajudicially foreclose the
mortgaged properties. PNB still had a deficiency claim.
Petitioners continued to ask PNB to account for the proceeds,

insisting that said proceeds, if properly liquidated, could offset
their outstanding obligations. PNB remained adamant in its
stance that under P.D. No. 579, there was nothing to account
since under said law, all earnings from the export sales of sugar
pertained to the National Government. On August 9, 1979, the
Mirasols filed a suit for accounting, specific performance, and
damages against PNB.
Issue: Whether or not there is a valid compensation between
the parties
Held:
Petitioners now claim that the dacion en pago and the
foreclosure of their mortgaged properties were void for want of
consideration. Petitioners insist that the loans granted them by
PNB from 1975 to 1982 had been fully paid by virtue of legal
compensation. Hence, the foreclosure was invalid and of no
effect, since the mortgages were already fully discharged. It is
also averred that they agreed to the dacion only by virtue of a
martial law Arrest, Search, and Seizure Order (ASSO).
We find petitioners arguments unpersuasive. Both the
lower court and the appellate court found that the Mirasols
admitted that they were indebted to PNB in the sum stated in
the latters counterclaim. Petitioners nonetheless insist that the
same can be offset by the unliquidated amounts owed them by
PNB for crop years 1973-74 and 1974-75. Petitioners argument
has no basis in law. For legal compensation to take place, the
requirements set forth in Articles 1278 and 1279 of the Civil
Code must be present. Said articles read as follows:
Art. 1278. Compensation shall take place when two persons, in
their own right, are creditors and debtors of each other.
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Art. 1279. In order that compensation may be proper, it is

necessary:
(1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
Thus, as correctly found by the Court of Appeals, there was

nothing with which PNB was supposed to have off-set Mirasols
admitted indebtedness.
Second, compensation cannot take place where one claim,
as in the instant case, is still the subject of litigation, as the same
cannot be deemed liquidated.
With respect to the duress allegedly employed by PNB,
which impugned petitioners consent to the dacion en pago,
both the trial court and the Court of Appeals found that there
was no evidence to support said claim. Factual findings of the
trial court, affirmed by the appellate court, are conclusive upon
this Court.
(5) That over neither of them there be any retention or

controversy, commenced by third persons and
communicated in due time to the debtor.
In the present case, set-off or compensation cannot take
place between the parties because:
First, neither of the parties are mutually creditors and
debtors of each other. Under P.D. No. 579, neither PNB nor
PHILEX could retain any difference claimed by the Mirasols in
the price of sugar sold by the two firms. P.D. No. 579 prescribed
where the profits from the sales are to be paid, to wit:
SECTION 7. x x x After deducting its commission of two and
one-half (2-1/2%) percent of gross sales, the balance of the
proceeds of sugar trading operations for every crop year shall be
set aside by the Philippine Exchange Company, Inc,. as profits
which shall be paid to a special fund of the National
Government subject to the disposition of the President for
public purposes.
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Jesus M. Montemayor v Vicente D. Millora (2011)

(July 27, 2011)
Topic: Compensation
Doctrine: A debt is liquidated when its existence and amount
are determined. It is not necessary that it be admitted by
the debtor. Nor is it necessary that the credit appear in a
final judgment in order that it can be considered as
liquidated; it is enough that its exact amount is known.
And a debt is considered liquidated, not only when it is
expressed already in definite figures which do not
require verification, but also when the determination of
the exact amount depends only on a simple arithmetical
operation
Facts: On July 24, 1990, respondent Atty. Vicente D. Millora
obtained a loan of P400,000 from petitioner Dr. Jesus M.
Montemayor as evidenced by a promissory note executed by
Vicente. On August 10, 1990, the parties executed a loan
contract wherein it was provided that the loan has a stipulated
monthly interest of 2% and that Vicente had already paid the
amount of P100,000 as well as the P8,000.00 representing the
interest for the period July 24 to August 23, 1990.
Subsequently and with Vicentes consent, the interest rate was
increased to3.5% or P10,500 a month. From March 24, 1991 to
July 23, 1991, or for a period of four months, Vicente was
supposed to pay P42,000 as interest but was able to pay only
P24,000. This was the last payment Vicente made. Jesus made
several demands for Vicente to settle his obligation but to no
avail.
Thus, on August 17, 1993, Jesus filed before the RTC of Quezon
City a Complaint for Sum of Money against Vicente which was
docketed as Civil Case No. Q-93-17255. On October 19, 1993,
Vicente filed his Answer interposing a counterclaim for

attorneys fees of not less than P500,000. Vicente claimed that
he handled several cases for Jesus but he was summarily
dismissed from handling them when the instant complaint for
sum of money was filed.
Issue: Whether compensation can properly be applied despite
the absence of a specific amount in the decision representing
respondents counterclaim against the specific amount of award
mentioned in the decision in favor of the petitioner.
Held: YES
For legal compensation to take place, the requirements set forth
in Articles 1278 and 1279 of the Civil Code, quoted below, must
be present. ARTICLE 1278. Compensation shall take place when
two persons, in their own right, are creditors and debtors of
each other.
ARTICLE 1279. In order that compensation may be proper, it is
necessary: (1) That each one of the obligors be bound
principally, and that he be at the same time a principal creditor
of the other; (2) That both debts consist in a sum of money, or if
the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated; (3) That the
two debts be due; 4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in
due time to the debtor.
When the defendant, who has an unliquidated claim, sets it up
by way of counterclaim, and a judgment is rendered liquidating
such claim, it can be compensated against the plaintiffs claim
from the moment it is liquidated by judgment. We have restated
this in Solinap v. Hon. Del Rosario where we held that
compensation takes place only if both obligations are liquidated.
In the instant case, both obligations are liquidated. Vicente has
the obligation to pay his debt due to Jesus in the amount of
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P300,000 with interest at the rate of 12% per annum counted

from the filing of the instant complaint on August 17, 1993 until
fully paid. Jesus, on the other hand, has the obligation to pay
attorneys fees which the RTC had already determined to be
equivalent to whatever amount recoverable from Vicente. The
said attorneys fees were awarded by the RTC on the
counterclaim of Vicente on the basis of "quantum meruit" for
the legal services he previously rendered to Jesus.
Union Bank v DBP (2014)

G.R. No. 191555, January 20, 2014
Compensation
Doctrine: The petition is bereft of merit. Compensation is
defined as a mode of extinguishing obligations whereby
two persons in their capacity as principals are mutual
debtors and creditors of each other with respect to
equally liquidated and demandable obligations to which
no retention or controversy has been timely commenced
and communicated by third parties
Facts: (I copied the entire facts of the case since it
involves 4 other cases)
Foodmasters, Inc. (FI) had outstanding loan obligations to both
Union Banks predecessor-in-interest, Bancom Development
Corporation (Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a
Deed of Cession of Property In Payment of Debt 7(dacion en
pago) whereby the former ceded in favor of the latter certain
properties (including a processing plant in Marilao, Bulacan
[processing plant]) in consideration of the following: (a) the full
and complete satisfaction of FIs loan obligations to DBP; and
(b) the direct assumption by DBP of FIs obligations to Bancom
in the amount ofP17,000,000.00 (assumed obligations).
On the same day, DBP, as the new owner of the processing
plant, leased back9 for 20 years the said property to FI (Lease
Agreement) which was, in turn, obliged to pay monthly rentals
to be shared by DBP and Bancom.
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DBP also entered into a separate agreement with Bancom

(Assumption Agreement) whereby the former: (a) confirmed its
assumption of FIs obligations to Bancom; and (b) undertook to
remit up to 30% of any and all rentals due from FI to Bancom
(subject rentals) which would serve as payment of the assumed
obligations, to be paid in monthly installments. The pertinent
portions of the Assumption Agreement reads as follows:
WHEREAS, DBP has agreed and firmly committed in favor of
Bancom that the above obligations to Bancom which DBP has
assumed shall be settled, paid and/or liquidated by DBP out of a
portion of the lease rentals or part of the proceeds of sale of
those properties of the Assignors conveyed to DBP pursuant to
the [Deed of Cession of Property in Payment of Debt dated May
21, 1979] and which are the subject of [the Lease Agreement]
made and executed by and between DBP and [FI], the last
hereafter referred to as the "Lessee" to be effective as of July 31,
1978.
xxxx
4. DBP hereby covenants and undertakes that the amount up to
30% of any and all rentals due from the Lessee pursuant to the
Lease Agreement shall be remitted by DBP to Bancom at the
latters offices at Pasay Road, Makati, Metro Manila within five
(5) days from due dates thereof, and applied in payment of the
Assumed Obligations. Likewise, the amount up to 30% of the
proceeds from any sale of the Leased Properties shall within the
same period above, be remitted by DBP to Bancom and applied
in payment or prepayment of the Assumed Obligations. x x x.
Any balance of the Assumed Obligations after application of the
entire rentals and or the entire sales proceeds actually received
by Bancom on the Leased Properties shall be paid by DBP to
Bancom not later than December 29, 1998. (Emphases supplied)
Meanwhile, on May 23, 1979, FI assigned its leasehold rights

under the Lease Agreement to Foodmasters Worldwide, Inc.
(FW);11 while on May 9, 1984, Bancom conveyed all its
receivables, including, among others, DBPs assumed
obligations, to Union Bank.12
Claiming that the subject rentals have not been duly remitted
despite its repeated demands, Union Bank filed, on June 20,
1984, a collection case against DBP before the RTC, docketed as
Civil Case No. 7648.13 In opposition, DBP countered, among
others, that the obligations it assumed were payable only out of
the rental payments made by FI. Thus, since FI had yet to pay
the same, DBPs obligation to Union Bank had not arisen. 14 In
addition, DBP sought to implead FW as third party-defendant in
its capacity as FIs assignee and, thus, should be held liable to
Union Bank.15
In the interim, or on May 6, 1988, DBP filed a motion to dismiss
on the ground that it had ceased to be a real-party-in-interest
due to the supervening transfer of its rights, title and interests
over the subject matter to the Asset Privatization Trust (APT).
Said motion was, however, denied by the RTC in an Order dated
May 27, 1988.16
The RTC Ruling in Civil Case No. 7648
Finding the complaint to be meritorious, the RTC, in a
Decision17 dated May 8, 1990, ordered: (a) DBP to pay Union
Bank the sum of P4,019,033.59, representing the amount of the
subject rentals (which, again, constitutes 30% of FIs [now
FWs] total rental debt), including interest until fully paid; and
(b) FW, as third-party defendant, to indemnify DBP, as thirdparty plaintiff, for its payments of the subject rentals to Union
Bank. It ruled that there lies no evidence which would show that
DBPs receipt of the rental payments from FW is a condition
precedent to the formers obligation to remit the subject rentals
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under the Lease Agreement. Thus, when DBP failed to remit the
subject rentals to Union Bank, it defaulted on its assumed
obligations.18 DBP then elevated the case on appeal before the
CA, docketed as CA-G.R. CV No. 35866.
The CA Ruling in CA-G.R. CV No. 35866
In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the
CA set aside the RTCs ruling, and consequently ordered: (a) FW
to pay DBP the amount of P32,441,401.85 representing the total
rental debt incurred under the Lease Agreement,
including P10,000.00 as attorneys fees; and (b) DBP, after
having been paid by FW its unpaid rentals, to remit 30% thereof
(i.e., the subject rentals) to Union Bank.20
It rejected Union Banks claim that DBP has the direct
obligation to remit the subject rentals not only from FWs rental
payments but also out of its own resources since said claim
contravened the "plain meaning" of the Assumption Agreement
which specifies that the payment of the assumed obligations
shall be made "out of the portion of the lease rentals or part of
the proceeds of the sale of those properties of [FI] conveyed to
DBP."21 It also construed the phrase under the Assumption
Agreement that DBP is obligated to "pay any balance of the
Assumed Obligations after application of the entire rentals
and/or the entire sales proceeds actually received by [Union
Bank] on the Leased Properties . . . not later than December 29,
1998" to mean that the lease rentals must first be applied to the
payment of the assumed obligations in the amount
of P17,000,000.00, and that DBP would have to pay out of its
own money only in case the lease rentals were insufficient,
having only until December 29, 1998 to do so. Nevertheless, the
monthly installments in satisfaction of the assumed obligations
would still have to be first sourced from said lease rentals as
stipulated in the assumption agreement. 22 In view of the
foregoing, the CA ruled that DBP did not default in its
obligations to remit the subject rentals to Union Bank precisely

because it had yet to receive the rental payments of FW.23
Separately, the CA upheld the RTCs denial of DBPs motion to
dismiss for the reason that the transfer of its rights, title and
interests over the subject matter to the APT occurred pendente
lite, and, as such, the substitution of parties is largely
discretionary on the part of the court.
At odds with the CAs ruling, Union Bank and DBP filed separate
petitions for review on certiorari before the Court, respectively
docketed as G.R. Nos. 115963 and 119112, which were thereafter
consolidated.
The Courts Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a Resolution 24 dated
December 13, 1995. First, it upheld the CAs finding that while
DBP directly assumed FIs obligations to Union Bank, DBP was
only obliged to remit to the latter 30% of the lease rentals
collected from FW, from which any deficiency was to be settled
by DBP not later than December 29, 1998. 25 Similarly, the Court
agreed with the CA that the denial of DBPs motion to dismiss
was proper since substitution of parties, in case of transfers
pendente lite, is merely discretionary on the part of the court,
adding further that the proposed substitution of APT will
amount to a novation of debtor which cannot be done without
the consent of the creditor.26
On August 2, 2000, the Courts resolution became final and
executory.27
The RTC Execution Proceedings
On May 16, 2001, Union Bank filed a motion for
execution28 before the RTC, praying that DBP be directed to pay
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the amount of P9,732,420.555 which represents the amount of

the subject rentals (i.e., 30% of the FWs total rental debt in the
amount of P32,441,401.85). DBP opposed29 Union Banks
motion, contending that it sought to effectively vary the
dispositive portion of the CAs May 27, 1994 Decision in CA-G.R.
CV No. 35866. Also, on September 12, 2001, DBP filed its own
motion for execution against FW, citing the same CA decision as
its basis.
In a Consolidated Order30 dated October 15, 2001 (Order of
Execution), the RTC granted both motions for execution. Anent
Union Banks motion, the RTC opined that the CAs ruling that
DBPs payment to Union Bank shall be demandable only upon
payment of FW must be viewed in light of the date when the
same was rendered. It noted that the CA decision was
promulgated only on May 27, 1994, which was before the
December 29, 1998 due date within which DBP had to fully pay
its obligation to Union Bank under the Assumption Agreement.
Since the latter period had already lapsed, "[i]t would, thus, be
too strained to argue that payment by DBP of its assumed
obligation[s] shall be dependent on [FWs] ability, if not
availability, to pay."31 In similar regard, the RTC granted DBPs
motion for execution against FW since its liability to Union
Bank and DBP remained undisputed.
As a result, a writ of execution32 dated October 15, 2001 (October
15, 2001 Writ of Execution) and, thereafter, a notice of
garnishment33 against DBP were issued. Records, however, do
not show that the same writ was implemented against FW.
DBP filed a motion for reconsideration 34 from the Execution
Order, averring that the latter issuance varied the import of the
CAs May 27, 1994 Decision in CA-G.R. CV No. 35866 in that it
prematurely ordered DBP to pay the assumed obligations to
Union Bank before FWs payment. The motion was, however,
denied on December 5, 2001.35 Thus, DBPs deposits were
eventually garnished.36 Aggrieved, DBP filed a petition for

certiorari37 before the CA, docketed as CA-G.R. SP No. 68300.
The CA Ruling in CA-G.R. SP No. 68300
In a Decision38 dated July 26, 2002, the CA dismissed DBPs
petition, finding that the RTC did not abuse its discretion when
it issued the October 15, 2001 Writ of Execution. It upheld the
RTCs observation that there was "nothing wrong in the manner
how [said writ] was implemented," as well as "in the zealousness
and promptitude exhibited by Union Bank" in moving for the
same. DBP appealed the CAs ruling before the Court, which was
docketed as G.R. No. 155838.
The Courts Ruling in G.R. No. 155838
In a Decision39 dated January 13, 2004 (January 13, 2004
Decision), the Court granted DBPs appeal, and thereby reversed
and set aside the CAs ruling in CA-G.R. SP No. 68300. It found
significant points of variance between the CAs May 27, 1994
Decision in CA-G.R. CV No. 35866, and the RTCs Order of
Execution/October 15, 2001 Writ of Execution. It ruled that
both the body and the dispositive portion of the same decision
acknowledged that DBPs obligation to Union Bank for
remittance of the lease payments is contingent on FWs prior
payment to DBP, and that any deficiency DBP had to pay by
December 29, 1998 as per the Assumption Agreement cannot be
determined until after the satisfaction of FWs own rental
obligations to DBP. Accordingly, the Court: (a) nullified the
October 15, 2001 Writ of Execution and all related issuances
thereto; and (b) ordered Union Bank to return to DBP the
amounts it received pursuant to the said writ. 40 Dissatisfied,
Union Bank moved for reconsideration which was, however,
denied by the Court in a Resolution dated March 24, 2004 with
finality. Thus, the January 13, 2004 Decision attained finality on
April 30, 2004.41 Thereafter, DBP moved for the execution of the
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said decision before the RTC. After numerous efforts on the part
of Union Bank proved futile, the RTC issued a writ of execution
(September 6, 2005 Writ of Execution), ordering Union Bank to
return to DBP all funds it received pursuant to the October 15,
2001 Writ of Execution.42
Union Banks Motion to Affirm Legal Compensation
On September 13, 2005, Union Bank filed a Manifestation and
Motion to Affirm Legal Compensation,43 praying that the RTC
apply legal compensation between itself and DBP in order to
offset the return of the funds it previously received from DBP.
Union Bank anchored its motion on two grounds which were
allegedly not in existence prior to or during trial, namely: (a) on
December 29, 1998, DBPs assumed obligations became due and
demandable;44 and (b) considering that FWI became nonoperational and non-existent, DBP became primarily liable to
the balance of its assumed obligation, which as of Union Banks
computation
after
its
claimed
set-off,
amounted
toP1,849,391.87.45
On November 9, 2005, the RTC issued an Order 46 denying the
above-mentioned motion for lack of merit, holding that Union
Banks stated grounds were already addressed by the Court in
the January 13, 2004 Decision in G.R. No. 155838. With Union
Banks motion for reconsideration therefrom having been
denied, it filed a petition for certiorari 47 with the CA, docketed as
CA-G.R. SP No. 93833.
Pending resolution, Union Bank issued Managers Check48 No.
099-0003192363
dated
April
21,
2006
amounting
toP52,427,250.00 in favor of DBP, in satisfaction of the Writ of
Execution dated September 6, 2005 Writ of Execution. DBP,
however, averred that Union Bank still has a balance
of P756,372.39 representing a portion of the garnished funds of
DBP,49 which means that said obligation had not been

completely extinguished.
The CA Ruling in CA-G.R. SP No. 93833
In a Decision50 dated November 3, 2009, the CA dismissed
Union Banks petition, finding no grave abuse of discretion on
the RTCs part. It affirmed the denial of its motion to affirm
legal compensation considering that: (a) the RTC only
implemented the Courts January 13, 2004 Decision in G.R. No.
155838 which by then had already attained finality; (b) DBP is
not a debtor of Union Bank; and (c) there is neither a
demandable nor liquidated debt from DBP to Union Bank. 51
Undaunted, Union Bank moved for reconsideration which was,
however, denied in a Resolution52 dated February 26, 2010;
hence, the instant petition.
Issue:
The sole issue for the Courts resolution is whether or not

the CA correctly upheld the denial of Union Banks
motion to affirm legal compensation.
Ruling:
The petition is bereft of merit. Compensation is defined

as a mode of extinguishing obligations whereby two
persons in their capacity as principals are mutual debtors
and creditors of each other with respect to equally
liquidated and demandable obligations to which no
retention or controversy has been timely commenced and
communicated by third parties. 53 The requisites therefor
are provided under Article 1279 of the Civil Code which
reads as follows:
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o Art. 1279. In order that compensation may be

proper, it is necessary:
(1)That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other;(2) That both debts consist in a sum of
money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the
latter has been stated;(3) That the two debts be due;
(4) That they be liquidated and demandable;(5) That
over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.
The rule on legal compensation is stated in Article 1290

of the Civil Code which provides that "[w]hen all the
requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the
compensation."
In this case, Union Bank filed a motion to seek

affirmation that legal compensation had taken place in
order to effectively offset (a) its own obligation to return
the funds it previously received from DBP as directed
under the September 6, 2005 Writ of Execution with (b)
DBPs assumed obligations under the Assumption
Agreement.
However, legal compensation could not have taken place

between these debts for the apparent reason that
requisites 3 and 4 under Article 1279 of the Civil Code are
not present. Since DBPs assumed obligations to Union
Bank for remittance of the lease payments are in the
Courts words in its Decision dated January 13, 2004 in
G.R. No. 155838 " contingent on the prior payment

thereof by [FW] to DBP," it cannot be said that both debts
are due (requisite 3 of Article 1279 of the Civil Code).
Also, in the same ruling, the Court observed that any
deficiency that DBP had to make up (by December 29,
1998 as per the Assumption Agreement) for the full
satisfaction of the assumed obligations cannot be
determined until after the satisfaction of Foodmasters
obligation to DBP." In this regard, it cannot be concluded
that the same debt had already been liquidated, and
thereby became demandable (requisite 4 of Article 1279
of the Civil Code).
In fine, since requisites 3 and 4 of Article 1279 of the Civil

Code have not concurred in this case, no legal
compensation could have taken place between the abovestated debts pursuant to Article 1290 of the Civil Code.
Perforce, the petition must be denied, and the denial of
Union Banks motion to affirm legal compensation
sustained.
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First United Constructors Corp v Bayanihan

Automotive (2014)
Beramin, J.
Re: Compensation
DOCTRINE
A debt is liquidated when its existence and amount are
determined.
Legal compensation takes place when the requirements set
forth in Article 1278 and Article 1279 of the Civil Code.
Article 1290 of the Civil Code provides that when all the
requisites mentioned in Article 1279 of the Civil Code are
present, compensation takes effect by operation of law,
and extinguishes both debts to the concurrent amount.
FACTS
Petitioners First United Constructors Corporation and Blue Star
Construction Corporation were associate construction firms
sharing financial resources, equipment and technical personnel
on a case-to-case basis. From May 27, 1992 to July 8, 1992, they
ordered six units of dump trucks from the respondent. On
September 19, 1992, FUCC ordered from the respondent one
unit of Hino Prime Mover and ordered again on September 29,
1992, one unit of Isuzu Transit Mixer. For the two purchases,
FUCC partially paid in cash, and the balance through post-dated
checks. Upon presentment of the checks for payment, the
respondent learned that FUCC had ordered the payment
stopped. The respondent immediately demanded the full
settlement of their obligation from the petitioners, but to no
avail. The petitioners informed the respondent that they were
withholding payment of the checks due to the breakdown of one
of the dump trucks they had earlier purchased from respondent.
The petitioners submit that they were justified in stopping the

payment of the two checks due to the respondents breach of
warranty by refusing to repair or replace the defective second
dump truck earlier purchased; that the withholding of payments
was an effective exercise of their right of recoupment as allowed
by Article 1599(1) of the Civil Code; xxx that recoupment should
not be restrictively interpreted but should include the concept of
compensation or set-off between two parties who had claims
arising from different transactions; and that the series of
purchases and the obligations arising therefrom, being interrelated, could be considered as a single and ongoing transaction
for all intents and purposes.
The respondent counters that the petitioners could not refuse to
pay the balance of the purchase price of the Hino Prime Mover
and the Isuzu Transit Mixer on the basis of the right of
recoupment under Article 1599 of the Civil Code; that the
buyers remedy of recoupment related only to the same
transaction; and that compensation was not proper
because the claims of the petitioners as alleged in
their counterclaim were not liquidated and
demandable.
As to whether petitioners could avail themselves of
compensation, both the RTC and CA ruled that they could not
because the claims of petitioners against respondent were not
liquidated and demandable.
ISSUE
Whether petitioners could avail themselves of compensation
HELD: YES.
Recoupment (reconvencion) is the act of rebating or recouping a
part of a claim upon which one is sued by means of a legal or
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Atty Tizon
equitable right resulting from a counterclaim arising out of the

same transaction. It is the setting up of a demand arising from
the same transaction as the plaintiffs claim, to abate or reduce
that claim. The legal basis for recoupment by the buyer is the
first paragraph of Article 1599 of the Civil Code.
Legal
compensation
takes
place
when
the
requirements set forth in Article 1278 and Article 1279
of the Civil Code
Considering that preponderant evidence showing that
petitioners had spent the amount of P71,350.00 for the repairs
and spare parts of the second dump truck within the warranty
period of three months supported the finding of the two lower
courts, the Court accepts their finding. Verily, factual findings of
the trial court, when affirmed by the CA, are conclusive on the
Court when supported by the evidence on record.
determined. Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the plaintiffs
claim from the moment it is liquidated by judgment. Article
1290 of the Civil Code provides that when all the requisites
mentioned in Article 1279 of the Civil Code are present,
compensation takes effect by operation of law, and extinguishes
both debts to the concurrent amount. With petitioners expenses
for the repair of the dump truck being already established and
determined with certainty by the lower courts, it follows that
legal compensation could take place because all the
requirements were present. Hence, the amount of P71,350.00
should be set off against petitioners unpaid obligation of
P735,000.00, leaving a balance of P663,650.00, the amount
petitioners still owed to respondent.
Starbright Sales Enterprises, Inc. (SSE) v Philippine

Realty Corporation
Novation: Subjective/personal
Facts:
On April 17, 1988, Ramon Licup wrote Msgr. Domingo Cirilos,
offering to buy 3 parcels of land that The Holy See and
Philippine Realty Corporation (PRC) owned for P1,240 per
square meter. Licup accepted the responsibility for removing the
illegal settlers on the land and enclosed a check for P100,000 to
"close the transaction." He undertook to pay the balance of the
purchase price upon presentation of the title for transfer and
once the property has been cleared of its occupants. Cirilos,
representing The Holy See and PRC, signed his name on the
conforme portion of the letter and accepted the check. But the
check could not be encashed due to Licups stop-order payment.
Licup wrote Cirilos, requesting that the titles to the land be
instead transferred to SSE. He enclosed a new check for the
same amount. SSEs representatives, Mr. and Mrs. Cu, did not
sign the letter.
Cirilos wrote SSE, requesting it to remove the occupants on the
property and, should it decide not to do this, Cirilos would
return to it the P100,000 that he received. SSE replied with an
"updated proposal." It would be willing to comply with Cirilos
condition provided the purchase price is lowered to P1,150 per
square meter. Cirilos wrote back, rejecting the updated
proposal. He gave SSE 7 days within which to buy the property
at P1,400 per square meter, otherwise, Cirilos would take it that
SSE has lost interest in the same. He enclosed a check for
P100,000 in his letter as refund of what he earlier received.
SSE wrote Cirilos that they already had a perfected contract of
sale in the April 17, 1988 letter which he signed so he could no
longer impose amendments such as the removal of the informal
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settlers at the buyers expense and the increase in the purchase

price. SSE claimed that it got no reply from Cirilos and that the
next thing they knew, the land had been sold to Tropicana
Properties. SSE demanded rescission of that sale. Meanwhile,
Tropicana Properties sold parcels of land to Standard Realty.
Its demand for rescission unheeded, SSE filed a complaint for
annulment of sale and reconveyance with damages before the
RTC. RTC treated the April 17, 1988 letter between Licum and
Cirilos as a perfected contract of sale between the parties. Cirilos
attempted to change the terms of contract and return SSEs
initial deposit but the parties reached no agreement regarding
such change. Since such agreement was wanting, the original
terms provided in the April 17, 1988 letter continued to bind the
parties. CA reversed the RTC decision. It held that no perfected
contract can be gleaned from the April 17, 1988 letter. The
subsequent exchange of letters between SSE and Cirilos show
that the parties were grappling with the terms of the sale. Cirilos
made no unconditional acceptance that would give rise to a
perfected contract. As to the P100,000 given to Cirilos, the CA
considered it an option money that secured for SSE only the
privilege to buy the property even if Licup called it a "deposit."
Issue:
Whether or not there is a perfected contract of sale between SSE
and the land owners, represented by Msgr. Cirilos, giving the
former a right to demand for rescission.
Ruling:
No. The April 17, 1988 letter constituted a perfected contract.
When Msgr. Cirilos affixed his signature on that letter, he
expressed his conformity to the terms of Licups offer appearing
on it. There was meeting of the minds as to the object and
consideration of the contract. But when Licup ordered a stoppayment on his deposit and proposed in his April 26, 1988 letter
to Msgr. Cirilos that the property be instead transferred to SSE,
a subjective novation took place. A subjective novation results

through substitution of the person of the debtor or through
subrogation of a third person to the rights of the creditor. To
accomplish a subjective novation through change in the person
of the debtor, the old debtor needs to be expressly released from
the obligation and the third person or new debtor needs to
assume his place in the relation. Novation serves 2 functions
one is to extinguish an existing obligation, the other to
substitute a new one in its place requiring concurrence of 4
requisites: 1) a previous valid obligation; 2) an agreement of all
parties concerned to a new contract; 3) the extinguishment of
the old obligation; and 4) the birth of a valid new obligation.
Licup and Cirilos affixed their signatures on the original
agreement embodied in Licups letter of April 26, 1988. No
similar letter agreement can be found between SSE and Cirilos.
The proposed substitution of Licup by SSE opened the
negotiation stage for a new contract of sale as between SSE and
the owners. The succeeding exchange of letters between Mr.
Stephen Cu, SSEs representative, and Cirilos attests to an
unfinished negotiation. Cirilos referred to his discussion with
SSE regarding the purchase as a "pending transaction." Cu, on
the other hand, regarded SSEs first letter to Cirilos as an
"updated proposal." This proposal took up 2 issues: which party
would undertake to evict the occupants on the property and how
much must the consideration be for the property. These are
clear indications that there was no meeting of the minds
between the parties. As it turned out, the parties reached no
consensus regarding these issues, thus producing no perfected
sale between them.
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S.C. Megaworld Construction vs. Engr. Luis U. Parada

(2013)
G.R. No. 183804, September 11, 2013
Topic: Novation; subjective or personal
Doctrine: Novation is never presumed but must be clearly
and unequivocally shown.
Facts:
S.C. Megaworld Construction and Development
Corporation (petitioner) bought electrical lighting materials
from Gentile Industries, a sole proprietorship owned by
Engineer Luis U. Parada (respondent), for its Read-Rite project
in Canlubang, Laguna. The petitioner was unable to pay for the
above purchase on due date, but blamed it on its failure to
collect under its sub-contract with the Enviro Kleen. It was
however able to persuade Enviro Kleen to agree to settle its
above
purchase,
but
after
paying
the
respondent P250,000.00, Enviro Kleen stopped making further
payments, leaving an outstanding balance of P816,627.00. It
also ignored the various demands of the respondent, who then
filed a suit in the RTC to collect from the petitioner the said
balance.
The petitioner in its answer denied liability, claiming that
it was released from its indebtedness to the respondent by
reason of the novation of their contract, which, it reasoned, took
place when the latter accepted the partial payment of Enviro
Kleen in its behalf, and thereby acquiesced to the substitution of
Enviro Kleen as the new debtor in the petitioners place. After
trial, the RTC rendered judgment in favor of the respondent.
On appeal to the CA, the petitioner maintained that the
trial court erred in ruling that no novation of the contract took
place through the substitution of Enviro Kleen as the new

debtor. But for the first time, it further argued that the trial
court should have dismissed the complaint for failure of the
respondent to implead Genlite Industries as "a proper party in
interest", as provided in Section 2 of Rule 3 of the 1997 Rules of
Civil Procedure.
In Section 1(g) of Rule 16 of the Rules of Court, it is also
provided that the defendant may move to dismiss the suit on the
ground that it was not brought in the name of or against the real
party in interest, with the effect that the complaint is then
deemed to state no cause of action.
In dismissing the appeal, the CA noted that the petitioner
in its answer below raised only the defense of novation, and that
at no stage in the proceedings did it raise the question of
whether the suit was brought in the name of the real party in
interest. Moreover, the appellate court found from the sales
invoices and receipts that the respondent is the sole proprietor
of Genlite Industries, and therefore the real party-plaintiff. Said
the CA:
Settled is the rule that litigants cannot raise an issue for the first
time on appeal as this would contravene the basic rules of fair
play and justice.
In any event, there is no question that respondent
Engr.Luis U. Parada is the proprietor of Genlite Industries, as
shown on the sales invoice and delivery receipts. There is also no
question that a special power of attorney was executed by
respondent Engr.Luis U. Parada in favor of Engr. Leonardo A.
Parada authorizing the latter to file a complaint against the
petitioner.
The petitioner also contended that a binding novation of
the purchase contract between the parties took place when the
respondent accepted the partial payment of Enviro Kleen
of P250,000.00 in its behalf, and thus acquiesced to the
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substitution by Enviro Kleen of the petitioner as the new debtor.

But the CA noted that there is nothing in the two (2) letters of
the respondent to Enviro Kleen, which would imply that he
consented to the alleged novation, and, particularly, that he
intended to release the petitioner from its primary obligation to
pay him for its purchase of lighting materials. The appellate
court cited the RTCs finding that the respondent informed
Enviro Kleen in his first letter that he had served notice to the
petitioner that he would take legal action against it for its
overdue account, and that he retained his option to pull out the
lighting materials and charge the petitioner for any damage they
might sustain during the pull-out.
Respondent has served notice to the petitioner that
unless the overdue account is paid, the matter will be referred to
its lawyers and there may be a pull-out of the delivered lighting
fixtures. It was likewise stated therein that incidental damages
that may result to the structure in the course of the pull-out will
be to the account of the petitioner.
The CA concurred with the RTC that by retaining his
option to seek satisfaction from the petitioner, any acquiescence
which the respondent had made was limited to merely accepting
Enviro Kleen as an additional debtor from whom he could
demand payment, but without releasing the petitioner as the
principal debtor from its debt to him.
On motion for reconsideration, the petitioner raised for the first
time the issue of the validity of the verification and certification
of non-forum shopping attached to the complaint. CA denied the
said motion for lack of merit.
Issue: Whether or not there was novation between the parties
Held:
Novation is a mode of extinguishing an obligation by
changing its objects or principal obligations, by substituting a
new debtor in place of the old one, or by subrogating a third

person to the rights of the creditor. It is "the substitution of a
new contract, debt, or obligation for an existing one between the
same or different parties."
Thus, in order to change the person of the debtor, the
former debtor must be expressly released from the obligation,
and the third person or new debtor must assume the formers
place in the contractual relation. Article 1293 speaks of
substitution of the debtor, which may either be in the form of
expromision or delegacion, as seems to be the case here. In both
cases, the old debtor must be released from the obligation,
otherwise, there is no valid novation.
From the circumstances obtaining below, we can infer no
clear and unequivocal consent by the respondent to the release
of the petitioner from the obligation to pay the cost of the
lighting materials.
It is evident from the two (2) aforesaid letters that there
is no indication of the respondents intention to release the
petitioner from its obligation to pay and to transfer it to Enviro
Kleen Technologies, Inc. The acquiescence of Enviro Kleen
Technologies, Inc. to assume the obligation of the petitioner to
pay the unpaid balance of [P]816,627.00 to the respondent
when there is clearly no agreement to release the petitioner will
result merely to the addition of debtors and not novation.
Hence, the creditor can still enforce the obligation against the
original debtor.
The settled rule is that novation is never presumed, but
must be clearly and unequivocally shown. In order for a new
agreement to supersede the old one, the parties to a contract
must expressly agree that they are abrogating their old contract
in favor of a new one. Thus, the mere substitution of debtors will
not result innovation, and the fact that the creditor accepts
payments from a third person, who has assumed the obligation,
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will result merely in the addition of debtors and not novation,

and the creditor may enforce the obligation against both
debtors. If there is no agreement as to solidarity, the first and
new debtors are considered obligated jointly.
Topic: Novation; Subjective or personal
The trial court found that the respondent never agreed to

release the petitioner from its obligation, and this conclusion
was upheld by the CA. We generally accord utmost respect and
great weight to factual findings of the trial court and the CA,
unless there appears in the record some fact or circumstance of
weight and influence which has been overlooked, or the
significance of which has been misinterpreted, that if considered
would have affected the result of the case.We find no such
oversight in the appreciation of the facts below, nor such a
misinterpretation thereof, as would otherwise provide a clear
and unequivocal showing that a novation has occurred in the
contract between the parties resulting in the release of the
petitioner.
Doctrine: Novation, a mode of extinguishing an obligation, is

done by changing the object or principal condition of an
obligation, substituting the person of the debtor, or
surrogating a third person in the exercise of the rights of
the creditor. For an obligation to be extinguished by
another, the law requires either of these two conditions:
(1) the substitution is unequivocally declared, or (2) the
old and the new obligations are incompatible on every
point. A compromise of a final judgment operates as a
novation of the judgment obligation, upon compliance
with either requisite. In the present case, the
incompatibility of the final judgment with the
compromise agreement is evident, because the latter
was precisely entered into to supersede the former.
Facts: As a final consequence of the final and executory
decision of the Supreme Court in Rizalino P. Uy v. NLRC
hearings were conducted to determine the amount of wage
differentials due the eight complainants therein, now
petitioners. As computed, the award amounted to
P1,487,312.69. On February 3, 1997, petitioners filed a Motion
for Issuance of Writ of Execution.
On May 19, 1997, respondent Rizalino Uy filed a Manifestation
requesting that the cases be terminated and closed, stating that
the judgment award as computed had been complied with to the
satisfaction of petitioners. Said Manifestation was also signed by
the eight petitioners. Together with the Manifestation is a Joint
Affidavit dated May 5, 1997 of petitioners, attesting to the
receipt of payment from [respondent] and waiving all other
benefits due them in connection with their complaint.
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On June 3, 1997, petitioners filed an Urgent Motion for Issuance

of Writ of Execution wherein they confirmed that each of them
received P40,000 from respondent on May 2, 1997.On June 9,
1997, respondent opposed the motion on the ground that the
judgment award had been fully satisfied. In their Reply,
petitioners claimed that they received only partial payments of
the judgment award.
Labor Arbiter issued an order denying the motion for issuance
of writ of execution.
NLRC: reversed, holding that a final and executory
judgment can no longer be altered and that quitclaims
and releases are normally frowned upon as contrary to
public policy.
CA: held that compromise agreements may be entered
into even after a final judgment. Thus, petitioners validly
released respondent from any claims, upon the voluntary
execution of a waiver pursuant to the compromise
agreement.
determined by compliance with the requisites and principles of

contracts, not by when it was entered into.
As provided by the law on contracts, a valid compromise must
have the following elements: (1) the consent of the parties to the
compromise, (2) an object certain that is the subject matter of
the compromise, and (3) the cause of the obligation that is
established.
In the present factual milieu, compliance with the elements of a
valid contract is not in issue. Petitioners did not challenge the
factual finding that they entered into a compromise agreement
with respondent. There are no allegations of vitiated consent.
Instead, petitioners based their argument on the sole fact that
the agreement was executed despite a final judgment, which the
Court had previously ruled to be allowed by law.
The principle of novation supports the validity of a compromise
after final judgment.
Issue: Whether or not the final and executory judgment of the

Supreme Court could be subject to compromise settlement.
Held: YES.
A compromise agreement is a contract whereby the parties make
reciprocal concessions in order to resolve their differences and
thus avoid or put an end to a lawsuit. The issue involving the
validity of a compromise agreement notwithstanding a final
judgment is not novel. Jesalva v. Bautista upheld a compromise
agreement that covered cases pending trial, on appeal, and with
final judgment. The Court noted that Article 2040 impliedly
allowed such agreements; there was no limitation as to when
these should be entered into. There is no justification to disallow
a compromise agreement, solely because it was entered into
after final judgment. The validity of the agreement is
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Phil. Charter v Petroleum (2012)

G.R. No. 180898, April 18, 2012
Novation
Doctrine: In order that an obligation may be extinguished by
another which substitutes the same, it is imperative that
it be so declared in unequivocal terms, or that the old
and new obligation be in every point incompatible with
each other. Novation of a contract is never presumed. In
the absence of an express agreement, novation takes
place only when the old and the new obligations are
and speed up the work of the project. These resulted in the

reduction of the contract price.
FCC was behind schedule and despite notice from the

problem, was not addressed, as the delay increased to 30
days and ballooned to 60 days.
Consequently, FCC executed a deed of assignment, assigning

a portion of its receivables from Caltex Philippines,
Inc. (Caltex), and a chattel mortgage, conveying some of its
construction equipment to PDSC as additional security for
the faithful compliance with its obligation.
On even date, PDSC and FCC likewise executed a

memorandum of agreement (MOA), wherein the parties
agreed to revise the work schedule of the project. As a
consequence, Performance Bond No. 31915 was extended up
to March 2, 2000.
For failure of FCC to accomplish the project within the

agreed completion period, PDSC, informed FCC that it was
terminating their. Subsequently, PDSC sent demand
letters to FCC and its officers for the payment of liquidated
damages amounting to 9,149,962.02 for the delay. In the
same manner, PDSC wrote PCIC asking for remuneration
pursuant to Performance Bond No. 31915.
Despite notice, PDSC did not receive any reply from either
FCC or PCIC, constraining it to file a complaint for damages,
recovery of possession of personal property and/or
foreclosure of mortgage with prayer for the issuance of a writ
of replevin and writ of attachment, against FCC and its
officers before the RTC. PDSC later filed a supplemental
complaint impleading PCIC, claiming coverage under
Performance Bond No. 31915 in the amount of
6,828,329.66.
Facts:
Respondent
Petroleum
Distributors
and
Services
Corporation (PDSCentered into a building contract with N.C.
Francia
Construction
Corporation (FCC),
for
the
construction of a four-story commercial and parking
complex located at MIA Road corner Domestic Road, Pasay
City, known as Park N Fly Building (Park N Fly). Under the
contract, FCC agreed to undertake the construction of Park
N Fly for the price of 45,522,197.72.3
To ensure compliance with its obligation, FCC procured

Performance Bond No. 31915 amounting to 6,828,329.00
from
petitioner
Philippine
Charter
Insurance
Corporation (PCIC) to secure full and faithful performance of
its obligation under the Building Contract.
The construction of the Park N Fly started on February 1,

1999. Pursuant to the Building Contract, PDSC sourced out
construction materials and subcontracted various phases of
the work to help obtain the lowest cost of the construction
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with regard to FCC and the other parties in the case. Hence,
the Court shall limit its discussion to the liability of PCIC.
In its Amended Answer with affirmative defense and

counterclaim, FCC admitted that it entered into a contract
with PDSC for the construction of the Park N Fly building.
It, however, asserted that due to outsourcing of different
materials and subcontracting of various phases of works
made by PDSC, the contract price was invariably reduced to
19,809,822.12.
Issue:
FCC denied any liability to PDSC claiming that any such

claim by the latter had been waived, abandoned or otherwise
extinguished by the execution of the September 10,
1999 MOA. FCC claimed that in the said MOA, PDSC
assumed all the obligations originally reposed upon it.
Ruling:
For its part, PCIC averred that as a surety, it was not liable as
a principal obligor; that its liability under the bond was
conditional and subsidiary and that it could be made liable
only upon FCCs default of its obligation in the Building
Contract up to the extent of the terms and conditions of the
bond. PCIC also alleged that its obligation under the
performance bond was terminated when it expired
on October 15, 1999 and the extension of the performance
bond until March 2, 2000 was not binding as it was made
without its knowledge and consent. Nonetheless, in the event
that PCIC would be made liable, its liability should be in
proportion to the liabilities of the other sureties.
The RTC rendered its Decision in favor of PDSC. The RTC
found FCC guilty of delay when it failed to finish and turn
over the project. It pronounced FCC and PCIC jointly and
severally liable and ordered them to pay PDSC the amount of
9,000,000.00 as damages and 50,000.00 as attorneys
fees plus interest.
The CA also ruled in favor of PDSC. Thereafter, only PCIC
appealed the CAs decision. It became final and executory
The issues before the Court are (1) whether or not PCIC is
liable for liquidated damages under the performance
bond; (2) whether or not the September 10, 1999 MOA
executed by PDSC and FCC extinguished PCICs liability
under the performance bond
By the language of the performance bond issued by PCIC,

it guaranteed the full and faithful compliance by FCC of
its obligations in the construction of the Park N Fly. In
fact, the primary purpose for the acquisition of the
performance bond was to guarantee to PDSC that the
project would proceed in accordance with the terms and
conditions of the contract and to ensure the payment of a
sum of money in case the contractor would fail in the full
performance of the contract. This guaranty made by PCIC
gave PDSC the right to proceed against it (PCIC)
following FCCs non-compliance with its obligation.
The Court also found untenable the contention of PCIC

that the principal contract was novated when PDSC and
FCC executed the September 10, 1999 MOA, without
informing the surety, which, in effect, extinguished its
obligation.
A surety agreement has two types of relationship: (1) the

principal relationship between the obligee and the
obligor; and (2) the accessory surety relationship between
the principal and the surety. The obligee accepts the
suretys solidary undertaking to pay if the obligor does
not pay. Such acceptance, however, does not change in
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Atty Tizon
any material way the obligees relationship with the

principal obligor. Neither does it make the surety an
active party in the principal obligor-obligee relationship.
It follows, therefore, that the acceptance does not give the
surety the right to intervene in the principal contract. The
suretys role arises only upon the obligors default, at
which time, it can be directly held liable by the obligee for
payment as a solidary obligor.
Furthermore, in order that an obligation may be

extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or
that the old and new obligation be in every point
incompatible with each other. Novation of a contract is
never presumed. In the absence of an express agreement,
novation takes place only when the old and the new
obligations are incompatible on every point.
Undoubtedly, a surety is released from its obligation

when there is a material alteration of the principal
contract in connection with which the bond is given, such
as a change which imposes a new obligation on the
promising party, or which takes away some obligation
already imposed, or one which changes the legal effect of
the original contract and not merely its form.
In this case, however, no new contract was concluded and

perfected between PDSC and FCC. A reading of
the September 10, 1999 MOA reveals that only the
revision of the work schedule originally agreed upon was
the subject thereof. The parties saw the need to adjust the
work schedule because of the various subcontracting
made by PDSC. In fact, it was specifically stated in the
MOA that all other terms and conditions of the Building
Contract of 27 January 1999 not inconsistent herewith
shall remain in full force and effect. There was no new
contract/agreement which could be considered to have

substituted the Building Contract.
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Arco Pulp and Paper Company, Inc. v Lim

Novation: Subjective/personal
Facts:
Quality Paper and Plastic Products, Enterprises, owned by Dan
Lim, delivered scrap papers worth 7,220,968.31 to Arco Pulp.
The parties allegedly agreed that Arco Pulp would either pay
Lim the value of the raw materials or deliver to him their
finished products of equivalent value. Arco Pulp and Eric Sy
executed a MOA where Arco Pulp bound themselves to deliver
their finished products to Megapack Container Corp., owned by
Sy, for his account. The MOA also stated that the raw materials
would be supplied by Lim.
Lim sent a letter to Arco Pulp demanding payment, but no
payment was made to him. Lim filed a complaint for collection
of sum of money with the RTC. RTC ruled against Lim, holding
that when Arco Pulp and Sy entered into the MOA, novation
took place, which extinguished Arco Pulps obligation to Lim.
On appeal, Lim argued that novation did not take place since the
MOA between Arco Pulp and Sy was an exclusive and private
agreement between them. CA reversed and set aside the RTC
judgment. Petitioners argue that the execution of the MOA
constituted a novation of the original obligation since Sy became
the new debtor of Lim. They also argue that when Lim allowed
them to deliver the finished products to Eric Sy, the original
obligation was novated.
Issue: Whether or not the memorandum of agreement
constituted a novation of the original contract.
Ruling:
No. When Arco Pulp opted instead to deliver the finished
products to a third person, it did not novate the original
obligation between the parties. Novation extinguishes an
obligation between 2 parties when there is a substitution of

objects or debtors or when there is subrogation of the creditor.
It occurs only when the new contract declares so "in unequivocal
terms" or that "the old and the new obligations be on every point
incompatible with each other."
Garcia v. Llamas: There are 2 modes of substituting the person
of the debtor: (1) expromision and (2) delegacion. In
expromision, the initiative for the change does not come from,
and may even be made without the knowledge of, the debtor,
since it consists of a third persons assumption of the obligation.
As such, it requires the consent of the third person and the
assumes the obligation; thus, the consent of these 3 persons are
necessary. Both modes of substitution by the debtor
require the consent of the creditor.
known as subjective or personal novation. The following
requisites must concur: 1) There must be a previous
valid obligation; 2) The parties concerned must agree
to a new contract; 3) The old contract must be
extinguished; 4) There must be a valid new contract.
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Atty Tizon
incompatibility is whether the two obligations can

stand together, each one with its own independent
existence.
never presumed. For novation to be a jural reality, its animus
must be ever present, debitum pro debito basically
extinguishing the old obligation for the new one. There is
nothing in the MOA that states that with its execution, the
obligation of Arco Pulp to Lim would be extinguished. It also
does not state that Sy somehow substituted Arco Pulp as Lims
debtor. It merely shows that Arco Pulp opted to deliver the
finished products to a third person instead.
novation to be valid: Novation must be expressly
consented to. Moreover, the conflicting intention and acts of
the parties underscore the absence of any express disclosure or
circumstances with which to deduce a clear and unequivocal
intent by the parties to novate the old agreement. Lim was not
privy to the MOA, thus, his conformity to the contract need not
be secured. This is clear from the first line of the memorandum,
which states: Per meeting held at ARCO, April 18, 2007, it has
been mutually agreed between Mrs. Candida A. Santos and Mr.
Eric Sy. . . . If the MOA was intended to novate the original
agreement between the parties, Lim must have first agreed to
the substitution of Sy as his new debtor. The MOA must also
state in clear and unequivocal terms that it has replaced the
original obligation of Arco Pulp to Lim. Neither of these
Arco Pulps act of tendering partial payment to Lim also
conflicts with their alleged intent to pass on their obligation to
Sy. When Lim sent his letter of demand to Arco Pulp, and not to
Sy, it showed that Lim neither acknowledged nor consented to
Sy as his new debtor. These acts, when taken together, clearly
show that novation did not take place.
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Saura v DBP (1972)

April 27, 1972
After 9 years, Saura Inc, commenced an actin against

DBP for damages, alleging failure on the latter to comply with its
obligations to release the loan applied for an approved.
Topic: Mutual desistance
Issue: Whether or not there was a perfected contract
Doctrine: Mutual Desistance is a concept that derives from

the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause
its extinguishment.
Held:
Facts:
In July 1952, Saura, Inc., applied to Rehabilitation
Finance Corp., now DBP, for an industrial loan of P500,000 to
be used for the construction of a factory building, to pay the
balance of the jute mill machinery and equipment and as
additional working capital. Prior to the loan the jute mill
machinery has already been purchased on the strengthe of the
letter of credit extended by Prudential Bank, and to secure its
release without paying a draft, Saura Inc., executed a trust
receipt in favor of said bank. RFC approved the loan of 500,000
but thereafter Saura Inc., requested that it be reduced to
300,000. However, on June 1954 FR Halling cancelled its
representation, as such, Saura Inc., requested RFC to restore the
loan of P500,000. RFC then passed Resolution No. 9083
restoring the loan to its original amount of 500,000 with the
condition that the raw materials needed by the company to carry
out its operation are available in the immediate vicinity and that
there should be an increased production of the raw materials to
provide adequately for the requirement of the factory. Saura Inc.
did not pursue the matter further. Instead, it requested RFC to
cancel the mortgage, and so, on June 17 1955 RFC executed the
corresponding deed of cancellation and delivered it to Ramon F.
Saura.
There was indeed a perfected consensual contract. Article

1934 provides: An accepted promise to deliver something by
way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not be
perfected until delivery of the object of the contract.
There was undoubtedly offer and acceptance in the case.
The application of Saura, Inc. for a loan of P500,000.00 was
approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. The defendant failed to
fulfill its obligation and the plaintiff is therefore entitled to
recover damages.
When an application for a loan of money was approved by
resolution of the respondent corporation and the responding
mortgage was executed and registered, there arises a perfected
consensual contract.
However, it should be noted that RFC imposed two
conditions (availability of raw materials and increased
production) when it restored the loan to the original amount of
P500,000.00.
Saura, Inc. obviously was in no position to comply with
RFCs conditions. So instead of doing so and insisting that the
loan be released as agreed upon, Saura, Inc. asked that the
mortgage be cancelled. The action thus taken by both parties
was in the nature of mutual desistance which is a mode of
extinguishing obligations. It is a concept that derives from the
principle that since mutual agreement can create a contract,
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mutual disagreement
extinguishment.
by
the
parties
can
cause
its
NATELCO VS. CA (1994)

Topic: Rebus Sic Stantibus (1267)
Doctrine: Article 1267 states in our law the doctrine of
unforseen events. This is said to be based on the
discredited theory of rebus sic stantibus in public
international law; under this theory, the parties
stipulate in the light of certain prevailing conditions,
and once these conditions cease to exist the contract also
ceases to exist.
FACTS: Petitioner Naga Telephone Co., Inc. (NATELCO) is a
telephone company rendering local as well as long distance
telephone service in Naga City while private respondent
Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a
private corporation established for the purpose of operating an
electric power service in the same city. The parties entered into a
contract for the use by petitioners in the operation of its
telephone service the electric light posts of private respondent in
Naga City. In consideration therefor, petitioners agreed to
install, free of charge, ten (10) telephone connections for the use
by private respondent.
Said contract also provided:
(a) That the term or period of this contract shall be as long
as the party of the first part has need for the electric
light posts of the party of the second part it being
understood that this contract shall terminate when for
any reason whatsoever, the party of the second part is
forced to stop, abandoned its operation as a public
service and it becomes necessary to remove the electric
lightpost.
After the contract had been enforced for over ten (10) years,
private respondent filed on with the RTC of Naga City against
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petitioners for reformation of the contract with damages, on the

ground that it is too one-sided in favor of petitioners. As second
cause of action, private respondent alleged that starting with the
year 1981, petitioners have used 319 posts in the towns of Pili,
Canaman, Magarao and Milaor, Camarines Sur, all outside Naga
City, without any contract with it; that at the rate of P10.00 per
post, petitioners should pay private respondent for the use
thereof the total amount of P267,960.00 from 1981 up to the
filing of its complaint; and that petitioners had refused to pay
private respondent said amount despite demands. And as third
cause of action, private respondent complained about the poor
servicing by petitioners of the ten (10) telephone units which
had caused it great inconvenience and damages to the tune of
not less than P100,000.00.
In petitioners' answer to the first cause of action, they averred
that it should be dismissed because (1) it does not sufficiently
state a cause of action for reformation of contract; (2) it is
barred by prescription, the same having been filed more than
ten (10) years after the execution of the contract; and (3) it is
barred by estoppel, since private respondent seeks to enforce the
contract in the same action. Regarding the second cause of
action, petitioners claimed that private respondent had asked
for telephone lines in areas outside Naga City for which its posts
were used by them. And with respect to the third cause of action,
petitioners claimed, that their telephone service had been
categorized by the National Telecommunication Corporation as
"very high" and of "superior quality."
The trial court found, as regards private respondent's first cause
of action, that while the contract appeared to be fair to both
parties when it was entered into by them during the first year of
private respondent's operation and when its Board of Directors
did not yet have any experience in that business, it had become
disadvantageous and unfair to private respondent because of
subsequent events and conditions, particularly the increase in
the volume of the subscribers of petitioners for more than ten

(10) years without the corresponding increase in the number of
telephone connections to private respondent free of charge. The
trial court concluded that while in an action for reformation of
contract, it cannot make another contract for the parties, it can,
however, for reasons of justice and equity, order that the
contract be reformed to abolish the inequities therein. As
regards the second cause of action, the trial court held that for
reason of equity, the contract should be reformed by including
therein the provision that for the use of private respondent's
posts outside Naga City, petitioners should pay a monthly rental
of P10.00 per post, the payment to start on the date this case
was filed, or on January 2, 1989, and private respondent should
also pay petitioners the monthly dues on its telephone
connections located outside Naga City beginning January, 1989.
And with respect to private respondent's third cause of action,
the trial court found the claim not sufficiently proved.
Petitioners appealed to respondent Court of Appeals. CA
affirmed the decision of the trial court, but based on different
grounds to wit: (1) that Article 1267 of the New Civil Code is
applicable and (2) that the contract was subject to a potestative
condition which rendered said condition void.
ISSUE: Whether article 1267 applicable.
HELD: YES ARTICLE 1267, EVEN THOUGH NEVER RAISED
BEFORE, IS APPLICABLE.
ARTICLE 1267: Art. 1267. When the service has become
so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be
released therefrom, in whole or in part.
Taking into consideration the rationale behind this provision,
the term "service" should be understood as referring to the
"performance" of the obligation. In the present case, the
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obligation of private respondent consists in allowing petitioners

to use its posts in Naga City, which is the service contemplated
in said article. Furthermore, a bare reading of this article reveals
that it is not a requirement thereunder that the contract be for
future service with future unusual change. According to Senator
Arturo M. Tolentino, Article 1267 states in our law the doctrine
of unforseen events. This is said to be based on the discredited
theory of rebus sic stantibus in public international law; under
this theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist the contract
also ceases to exist. Considering practical needs and the
demands of equity and good faith, the disappearance of the basis
of a contract gives rise to a right to relief in favor of the party
prejudiced.
The SC agreed with respondent court that the allegations in
private respondent's complaint and the evidence it has
presented sufficiently made out a cause of action under Article
1267. We, therefore, release the parties from their correlative
obligations under the contract. However, our disposition of the
present controversy does not end here. We have to take into
account the possible consequences of merely releasing the
parties therefrom: petitioners will remove the telephone
wires/cables in the posts of private respondent, resulting in
disruption of their service to the public; while private
respondent, in consonance with the contract will return all the
telephone units to petitioners, causing prejudice to its business.
We shall not allow such eventuality. Rather, we require, as
ordered by the trial court: 1) petitioners to pay private
respondent for the use of its posts in Naga City and in the towns
of Milaor, Canaman, Magarao and Pili, Camarines Sur and in
other places where petitioners use private respondent's posts,
the sum of ten (P10.00) pesos per post, per month, beginning
January, 1989; and 2) private respondent to pay petitioner the
monthly dues of all its telephones at the same rate being paid by
the public beginning January, 1989. The peculiar circumstances
of the present case, as distinguished further from the Occea
case, necessitates exercise of our equity jurisdiction. 13 By way

of emphasis, we reiterate the rationalization of respondent court
that:
. . . In affirming said ruling, we are not making a new contract for the parties
herein, but we find it necessary to do so in order not to disrupt the basic and
essential services being rendered by both parties herein to the public and to
avoid unjust enrichment by appellant at the expense of plaintiff . . . .
PNCC vs. CA (1997)

Doctrine: This article, which enunciates the doctrine of
unforeseen events, is not an absolute application of the
principle of rebus sic stantibus, which would endanger
the security of contractual relations. The parties to the
contract must be presumed to have assumed the risks of
unfavorable developments. It is therefore only in
absolutely exceptional changes of circumstances that
equity demands assistance for the debtor.
Facts:
On 18 November 1985, petitioner Philippine National

Construction Corporation (PNCC) executed a contract of
lease with private respondents, stipulating to pay rent for
the use of land, at the monthly rate of P 20,000.00
payable yearly in advance.
The said land is to be used by petitioner as site for a rock

crushing plant. The term of lease is for five years,
commencing on the date of issuance of an industrial
clearance by the Ministry of Human Settlements
(Ministry).
On 7 January 1986 PNCC obtained a Temporary Use

Permit from the Ministry for the proposed rock crushing
project. Nine days later private respondents wrote to
PNCC, asking for the first annual rental, and assuring
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Atty Tizon
that they have stopped considering proposals of other

aggregates plants in favor of PNCC.
In reply, PNCC argued that the contract must commence

on the date of issuance by the Ministry of an industrial
clearance in their favor. It also expressed its desire to
terminate the contract it executed with respondents, due
to financial, as well as technical difficulties.
PNCC asserts that it was not able to use and enjoy the
land and is not entitled to pay damages cited by the
court. However, respondents suffered damages because
of its inability to use the premises. Respondents are
entitled to indemnification under Art. 1659 of the Civil
Code.
The principle of rebus sic stantibus neither fits in with

the facts of the case. Under this theory, the parties
stipulate in the light of certain prevailing conditions, and
once these conditions cease to exist the contract also
ceases to exist. This theory is said to be the basis of
Article 1267 of the Civil Code, which provides:
Respondents refused to accede to PNCCs request for pre

termination and on 19 May 1986, instituted an action
against PNCC for Specific Performance with Damages.
Trial court ruled in favor of respondents and ordered
PNCC to pay rentals for two years, with legal interests
plus attorneys fees. The Court of Appeals affirmed the
decision of the trial court upon appeal by PNCC; hence,
this case.
Issues: Whether PNCC should be released from its contract

with respondents due to unforeseen events and causes beyond
its control.
o ART. 1267. When the service has become so

difficult as to be manifestly beyond the
contemplation of the parties, the obligor may
also be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen

events, is not an absolute application of the principle
of rebus sic stantibus, which would endanger the security
of contractual relations. The parties to the contract must
be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely
exceptional changes of circumstances that equity
demands assistance for the debtor.
In this case, petitioner wants this Court to believe that

the abrupt change in the political climate of the country
after the EDSA Revolution and its poor financial
condition rendered the performance of the lease
contract impractical and inimical to the corporate
survival of the petitioner.
Ruling:
PNCC cites Art. 1266, asserting that it should be released

from the obligatory force of the contract because its
purpose did not materialize due to unforeseen events and
causes beyond its control. However, this article applies
only to obligations to do and not to give, while
obligation arising out of said contract is an obligation to
do. Further, PNCC executed the contract with open eyes
on the deteriorating conditions of the country and mere
pecuniary inability to fulfill an engagement does not
discharge a contractual obligation. The unforeseen
events and causes beyond its control cited by PNCC are
not the legal and physical impossibilities contemplated in
Art. 1266.
142

Atty Tizon
Osmena v SSS (2007)

Garcia, J
Re: Rebus Sic Stantibus
DOCTRINE
When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, total or partial
release from a prestation and from the counterprestation is allowed.
Under the theory of rebus sic stantibus, the parties stipulate in
the light of certain prevailing conditions, and once these
conditions cease to exist, the contract also ceases to
exist.
FACTS
SSS took steps to liquefy its long term investments and diversify
them into higher yielding and less volatile investments. Among
its assets determined as needing to be liquefied were its
shareholdings in EPCIB. Albeit there were other interested
parties, only Banco de Oro Universal Bank (BDO) and its
investment subsidiary, respondent BDO Capital, appeared in
earnest to acquire the shares in question.
In the final draft of the Share Purchase Agreement (SPA), the
parties mutually agreed to the purchase by the BDO Capital and
the sale by SSS of all the latters EPCIB shares at the closing
date at the specified price of P43.50 per share or a total of
P8,171,383,258.50. COA and DOJ approved the proposed SPA.
The records do not show whether or not any interested group/s
submitted bids. The bottom line, however, is that even before
the bid envelopes, if any, could be opened, the herein petitioners
commenced the instant special civil action for certiorari, setting

their sights primarily on the legality of the Swiss Challenge
angle and a provision in the Instruction to Bidders under which
the SSS undertakes to offer the Shares to BDO should no bidder
or prospective bidder qualifies. Under the Swiss Challenge
format, one of the bidders is given the option or preferential
right to match the winning bid.
SSC (Social Security Commission) issued a resolution approving
the proposed sale of the entire equity stake of the SSS in
Equitable PCI Bank, Inc. (EPCIB or EPCI) through the Swiss
Challenge bidding procedure. Petitioners filed a petition for
certiorari and prohibition of the resolution by SSC.
Pending consideration of the petition, supervening events and
corporate movements transpired that radically altered the
factual complexion of the case. BDO made public its intent to
merge with EPCIB. Under what BDO termed as Merger of
Equals, EPCIB shareholders would get 1.6 BDO shares for every
EPCIB share. Owing to the foregoing developments, the Court,
on October 3, 2006, issued a Resolution requiring the parties to
CONFIRM news reports that price of subject shares has been
agreed upon at P92; and if so, to MANIFEST whether this case
has become moot.
It appears that BDO, or BDO-EPCI, Inc. to be precise, has since
issued BDO common shares to respondent SSS corresponding to
the number of its former EPCIB shareholdings under the ratio
and exchange procedure prescribed in the Plan of Merger. In
net effect, SSS, once the owner of a block of EPCIB shares, is
now a large stockholder of BDO-EPCI, Inc.
ISSUE
Whether parties were released from the agreement due
to supervening events.
HELD: Yes. The petition has become moot.
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Atty Tizon
It cannot be overemphasized, however, that the Shares, as a

necessary consequence of the BDO-EPCIB merger which saw
EPCIB being absorbed by the surviving BDO, have been
transferred to BDO and converted into BDO common
shares under the exchange ratio set forth in the BDO-EPCIB
Plan of Merger. As thus converted, the subject Shares are no
longer equity security issuances of the now defunct EPCIB, but
those of BDO-EPCI, which, needless to stress, is a totally
separate and distinct entity from what used to be EPCIB. In net
effect, therefore, the 187.84 Million EPCIB common shares are
now lost or inexistent. And in this regard, the Court takes
judicial notice of the disappearance of EPCIB stocks from the
local bourse listing. Instead, BDO-EPCI Stocks are presently
listed and being traded in the PSE.
Under the law on obligations and contracts, the obligation to
give a determinate thing is extinguished if the object is lost
without the fault of the debtor. And per Art. 1192 (2) of the Civil
Code, a thing is considered lost when it perishes or disappears in
such a way that it cannot be recovered. In a very real sense, the
interplay of the ensuing factors: a) the BDO-EPCIB merger; and
b) the cancellation of subject Shares and their replacement by
totally new common shares of BDO, has rendered the erstwhile
187.84 million EPCIB shares of SSS unrecoverable in the
contemplation of the adverted Civil Code provision.
SSS and BDO/BDO Capital as to render the fulfillment of any of

the obligations that each may have agreed to undertake under
either the Letter-Agreement, the SPA or the Swiss Challenge
package legally impossible. When the service has become
so difficult as to be manifestly beyond the
contemplation of the parties, total or partial release
from a prestation and from the counter-prestation is
allowed.
Under the theory of rebus sic stantibus, the parties
stipulate in the light of certain prevailing conditions,
and once these conditions cease to exist, the contract
also ceases to exist. Upon the facts obtaining in this case, it is
abundantly clear that the conditions in which SSS and BDO
Capital and/or BDO executed the Letter-Agreement upon which
the pricing component at P43.50 per share of the Invitation
to Bid was predicated, have ceased to exist. Accordingly, the
implementation of the Letter- Agreement or of the challenged
Res. Nos. 428 and 485 cannot plausibly push through, even if
the central figures in this case are so minded.
With the above consideration, respondent SSS or SSC cannot,

under any circumstance, cause the implementation of the
assailed resolutions, let alone proceed with the planned
disposition of the Shares, be it via the traditional competitive
bidding or the challenged public bidding with a Swiss
Challenge feature.
At any rate, the moot-and-academic angle would still hold sway
even if it were to be assumed hypothetically that the subject
Shares are still existing. This is so, for the supervening BDOEPCIB merger has so effected changes in the circumstances of
144

Atty Tizon
So v Food Fest Land, Inc.

Rebus sic stantibus
Facts:
Food Fest entered into a Contract of Lease with Daniel So.
Before forging the lease contract, the parties entered into a
preliminary agreement: The lease shall not become binding
upon us unless and until the government agencies concerned
shall authorize, permit or license us to open and maintain our
business at the proposed Lease Premises. We shall promptly
make an application for permits, licenses and authority for our
business and shall exercise due diligence to obtain it, provided,
however, that you shall assist us by submitting such documents
and papers and comply with such other requirements as the
governmental agencies may impose. We shall give notice to you
when the permits, license and authorities have been obtained.
We shall also notify you if any of the required permits, licenses
and authorities shall not be be (sic) given or granted within
fifteen days (15) from your conform (sic)hereto. In such case, the
agreement may be canceled and all rights and obligations
hereunder shall cease.
While Food Fest was able to secure the necessary licenses and
permits for 1999, it failed to commence business operations. For
the 2000, Food Fests application for renewal of barangay
business clearance was held in abeyance until further study of
its kitchen facilities. As the barangay business clearance is a
prerequisite to the processing of other permits, licenses and
authority by the city government, Food Fest was unable to
operate. Food Fest communicated its intent to terminate the
lease contract to So who, however, did not accede and instead
offered to help Food Fest secure authorization from the
barangay.
So later sent a demand letter to Food Fest for the payment of
rental arrearages and reiterated his offer to help it secure
clearance from the barangay. Food Fest demurred to the offer.

So again demanded payment of rentals from Food Fest. Food
Fest denied any liability, however, and started to remove its
fixtures and equipment from the premises. So sent Food Fest a
Final Notice of Termination with demand to pay and to vacate.
So filed a complaint for ejectment and damages against Food
Fest before the MeTC.
MeTC ruled in favor of So. RTC reversed the MeTC Decision.
RTC held that Food Fests failure to secure the authority to
commence business operations resulted in the termination of its
contractual obligations to So, including the obligation to pay
rent. However, CA declared that Food Fests obligation to pay
rent was not extinguished upon its failure to secure permits to
operate.
Issue:
Whether or not Food Fest is released from its responsibility to
pay rentals when it failed to secure the authority to commence
business operations, under the principle of rebus sic stantibus.
Ruling:
No. Article 1267, which enunciates the doctrine of unforeseen
events, is not, however, an absolute application of the principle
of rebus sic stantibus, which would endanger the security of
contractual relations. The parties to the contract must be
presumed to have assumed the risks of unfavorable
developments. It is only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.
Food Fest claims that its failure to secure the necessary business
permits and licenses rendered the impossibility and nonmaterialization of its purpose in entering into the contract of
lease, in support of which it cites the earlier-quoted portion of
the preliminary agreement dated July 1, 1999 of the parties.
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Atty Tizon
The cause or essential purpose in a contract of lease is the use or

enjoyment of a thing. A partys motive or particular purpose in
entering into a contract does not affect the validity or existence
of the contract; an exception is when the realization of such
motive or particular purpose has been made a condition upon
which the contract is made to depend. The exception does not
apply here.
It is clear that the condition set forth in the preliminary
agreement pertains to the initial application of Food Fest for the
permits, licenses and authority to operate. It should not be
construed to apply to Food Fests subsequent applications.
Consider the following qualification in the preliminary
agreement: We shall also notify you if any of the required
permits, licenses and authorities shall not be be (sic) given or
granted within fifteen days (15) from your conform (sic) hereto.
In such case, the agreement may be canceled and all rights and
obligations hereunder shall cease.
CONTRACTS
Food Fest was able to secure the permits, licenses and authority
to operate when the lease contract was executed. Its failure to
renew these permits, licenses and authority for the succeeding
year, does not, however, suffice to declare the lease functus
officio, nor can it be construed as an unforeseen event to
warrant the application of Article 1267.
Contracts, once perfected, are binding between the contracting
parties. Obligations arising therefrom have the force of law and
should be complied with in good faith. Food Fest cannot renege
from the obligations it has freely assumed when it signed the
lease contract.
146

Atty Tizon
Heirs of Intac v CA
G.R. No. 17321, October 11, 2012
Topic: Contracts; General Provisions; Definition
DOCTRINE: If the parties state a false cause in the contract to
conceal their real agreement, the contract is only
relatively simulated and the parties are still bound by
their real agreement. In absolute simulation, there is a
colorable contract but it has no substance as the parties
have no intention to be bound by it.
FACTS:
Ireneo Mendoza (Ireneo), married to Salvacion Fermin
(Salvacion), was the owner of the subject property, presently
covered by TCT No. 242655. Ireneo had two children:
respondents Josefina and Martina (respondents), Salvacion
being their stepmother. When he was still alive, Ireneo, also
took care of his niece, Angelina, since she was three years old
until she got married. The property was then covered by TCT
No. 106530. On October 25, 1977, Ireneo, with the consent of
Salvacion, executed a deed of absolute sale of the property in
favor of Angelina and her husband, Mario (Spouses Intac).
Despite the sale, Ireneo and his family, including the
respondents, continued staying in the premises and paying the
realty taxes. After Ireneo died intestate in 1982, his widow and
the respondents remained in the premises. After Salvacion died,
respondents still maintained their residence there. Up to the
present, they are in the premises, paying the real estate taxes
thereon, leasing out portions of the property, and collecting the
rentals.
The controversy arose when respondents sought the cancellation
of TCT No. 242655, claiming that the sale was only simulated
and, therefore, void. Spouses Intac resisted, claiming that it was
a valid sale for a consideration. The complaint prayed not only

for the cancellation of the title, but also for its reconveyance to
them. Pending litigation, Mario died on May 20, 1995 and was
substituted by his heirs, his surviving spouse, Angelina, and
their children, namely, Rafael, Kristina, Ma. Tricia Margarita,
Mario, and Pocholo.
The heirs of Ireneo, the respondents in this case, alleged that: 1.
When Ireneo was still alive, Spouses Intac borrowed the title of
the property (TCT No. 106530) from him to be used as collateral
for a loan from a financing institution; 2. they objected because
the title would be placed in the names of said spouses and it
would then appear that the couple owned the property; that
Ireneo, however, tried to appease them, telling them not to
worry because Angelina would not take advantage of the
situation considering that he took care of her for a very long
time; that during his lifetime, he informed them that the subject
property would be equally divided among them after his death;
and 3. that respondents were the ones paying the real estate
taxes over said property.
Spouses Intac countered, among others, that the subject
property had been transferred to them based on a valid deed of
absolute sale and for a valuable consideration; that the action to
annul the deed of absolute sale had already prescribed; that the
stay of respondents in the subject premises was only by
tolerance during Ireneos lifetime because they were not yet in
need of it at that time; and that despite respondents knowledge
about the sale that took place on October 25, 1977, respondents
still filed an action against them.
RTC ruled in favor of the respondents saying that the sale to the
spouses Intac was null and void. The CA also ruled that there
was no consideration in the sale to the spouses Intac and that
the contract was one for equitable mortgage.
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Atty Tizon
ISSUE: Whether the deed of absolute sale was simulated or a

valid contract.
HELD:
A contract, as defined in the Civil Code, is a meeting of minds,
with respect to the other, to give something or to render some
service. Article 1318 provides:
Art. 1318. There is no contract unless the following requisites
concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the
contract;
(3) Cause of the obligation which is established.
Accordingly, for a contract to be valid, it must have three
essential 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.
All these elements must be present to constitute a valid contract.
Consent is essential to the existence of a contract; and where it
is wanting, the contract is non-existent. In a contract of sale, its
perfection is consummated at the moment there is a meeting of
the minds upon the thing that is the object of the contract and
upon the price. Consent is manifested by the meeting of the offer
and the acceptance of the thing and the cause, which are to
constitute the contract.
In this case, the CA ruled that the deed of sale executed by
Ireneo and Salvacion was absolutely simulated for lack of
consideration and cause and, therefore, void, as provided
by Articles 1345 and 1346 of the Civil Code.
If the parties state a false cause in the contract to conceal

their real agreement, the contract is only relatively simulated
and the parties are still bound by their real agreement. Hence,
where the essential requisites of a contract are present and the
simulation refers only to the content or terms of the contract,
the agreement is absolutely binding and enforceable between
the parties and their successors in interest.
In absolute simulation, there is a colorable contract but it
has no substance as the parties have no intention to be bound by
it. "The main characteristic of an absolute simulation is that the
apparent contract is not really desired or intended to produce
legal effect or in any way alter the juridical situation of the
parties." "As a result, an absolutely simulated or fictitious
contract is void, and the parties may recover from each other
what they may have given under the contract."
In the case at bench, the Court is one with the courts
below that no valid sale of the subject property actually took
place between the alleged vendors, Ireneo and Salvacion; and
the alleged vendees, Spouses Intac. There was simply no
consideration and no intent to sell it.
The deed of sale executed is void. It was an

absolute simulation. Court made a distinction
between absolute and relative simulation.
There was total lack of consideration, thus

absolute simulation.
Spouses did not give proof that they paid for it.
There is a missing element in the contract:

consent; lack of consideration
148

Atty Tizon
MIAA v. Avia (2012)

Topic: Definition of Contracts
DOCTRINE: In construing a contract, the provisions thereof
should not be read in isolation, but in relation to each
other and in their entirety so as to render them effective,
having in mind the intention of the parties and the
purpose to be achieved. In other words, the stipulations
in a contract and other contract documents should be
interpreted together with the end in view of giving effect
to all.
FACTS: In September 1990, petitioner Manila International
Airport Authority (MIAA) entered into a contract of lease
with herein respondent Avia Filipinas International Corporation
(AFIC), wherein MIAA allowed AFIC to use specific portions of
land as well as facilities within NAIA exclusively for the latter's
aircraft repair station and chartering operations. The contract
was for 1 year, beginning September 1, 1990 until August 31,
1991, with a monthly rental of P6,580.00.
In December 1990, MIAA issued AO No. 1, Series of 1990, which
revised the rates of dues, charges, fees or assessments for the
use of its properties, facilities and services within the airport
complex. The AO was made effective on December 1, 1990. As a
consequence, the monthly rentals due from AFIC was increased
to P15,996.50. Nonetheless, MIAA did not require AFIC to pay
the new rental fee. Thus, it continued to pay the original fee of
P6,580.00.
After the expiration of the contract, AFIC continued to use and
occupy the leased premises giving rise to an implied lease
contract on a monthly basis. AFIC kept on paying the original
rental fee without protest on the part of MIAA.
Three years after the expiration of the original contract of lease,

MIAA informed AFIC, through a billing statement dated
October 6, 1994, that the monthly rental over the subject
premises was increased to P15,966.50 beginning September 1,
1991, which is the date immediately following the expiration of
the original contract of lease. MIAA sought recovery of the
difference between the increased rental rate and the original
rental fee amounting to a total of P347,300.50 covering 37
months between September 1, 1991 and September 31, 1994.
Beginning October 1994, AFIC paid the increased rental fee.
However, it refused to pay the lump sum of P347,300.50 sought
to be recovered by MIAA. For the continued refusal of AFIC to
pay the said lump sum, its employees were denied access to the
leased premises from July 1, 1997 until March 11, 1998. This,
notwithstanding, AFIC continued paying its rentals.
AFIC then filed with the RTC of Quezon City a Complaint for
damages with injunction against MIAA seeking uninterrupted
access to the leased premises, recovery of actual and exemplary
damages, refund of its monthly rentals with interest at the time
that it was denied access to the area being rented as well as
attorney's fees.
MIAA Contention
MIAA contends that, as an administrative agency possessed of
quasi-legislative and quasi-judicial powers as provided for in its
charter, it is empowered to make rules and regulations and to
levy fees and charges; that its issuance of AO No. 1, Series of
1990 is pursuant to the exercise of the abovementioned powers;
that by signing the lease contract, respondent AFIC
already agreed and gave its consent to any further
increase in rental rates; as such, the provisions of the lease
contract being cited by the CA which provides that any
amendment, alteration or modification [of the lease contract]
shall not be valid and binding, unless and until made in writing
and signed by the parties thereto is deemed complied with
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Atty Tizon
because respondent already consented to having any subsequent

amendments to AO No. 1 automatically incorporated in the lease
contract; that the above-quoted provisions should not also be
interpreted as having the effect of limiting the authority of
MIAA to impose new rental rates in accordance with its
authority under its charter.
RTC: Ruled in favor of AFIC. It found that MIAA is not
entitled to apply the increase in rentals against AFIC and that
MIAA is not entitled to padlock the leased premises.
CA: Affirmed RTC with Modification.
Issue: Whether the CA correctly interpreted the provisions of
the lease contract in line with the provisions of the civil code and
existing jurisprudence on contracts.
HELD: YES. The contention of the petitioner lacks merit.
Article 1306 of the Civil Code provides that the contracting
parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public
policy. Moreover, Article 1374 of the Civil Code clearly provides
that the various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may
result from all of them taken jointly.
between petitioner and respondent. It is true that Article II,

Paragraph 2.04 of the Contract of Lease states that any
subsequent amendment to AO No. 4, Series of 1982, which will
effect a decrease or escalation of the monthly rental or impose
new and additional fees and charges, including but not limited
to government/MIAA circulars, rules and regulation to this
effect, shall be deemed incorporated herein and shall
automatically amend this Contract insofar as the monthly rental
is concerned. However, the Court agrees with the CA that such
provision of the lease contract should not be read in isolation.
Rather, it should be read together with the provisions of Article
VIII, Paragraph 8.13, which provide that any amendment,
alteration or modification of the Contract shall not be
valid and binding, unless and until made in writing
and signed by the parties thereto.
It is clear from the foregoing that the intention of the
parties is to subject such amendment to the
conformity of both petitioner and respondent. In
the instant case, there is no showing that respondent gave
his acquiescence to the said amendment or modification
of the contract.
Indeed, in construing a contract, the provisions thereof should

not be read in isolation, but in relation to each other and in their
entirety so as to render them effective, having in mind the
intention of the parties and the purpose to be achieved. In other
words, the stipulations in a contract and other contract
documents should be interpreted together with the end in view
of giving effect to all.
The situation is different with respect to the payments of the

increased rental fee made by respondent beginning October
1994 because by then the amendment to the contract was made
in writing through a bill sent by petitioner to respondent. The
fact that respondent subsequently settled the said bill proves
that he acceded to the increase in rental fee. The same may not
be said with respect to the questioned rental fees sought to be
recovered by petitioner between September 1991 and September
1994 because no bill was made and forwarded to respondent on
the basis of which it could have given or withheld its conformity
thereto.
In the present case, the Court finds nothing repugnant to law

with respect to the questioned provisions of the contract of lease
It may not be amiss to point out that during such period,

respondent continued to pay and petitioner kept on receiving
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Atty Tizon
the original rental fee of P6,580.00 without any reservations or

protests from the latter. Neither did petitioner indicate in the
official receipts it issued that the payments made by respondent
constitute only partial fulfillment of the latter's obligations.
Article 1235 of the Civil Code clearly states that when the
obligee accepts the performance knowing its incompleteness or
irregularity, and without expressing any protest or objection, the
obligation is deemed fully complied with. For failing to make
any protest or objection, petitioner is already estopped from
seeking recovery of the amount claimed.
Heirs of Uy v Castillo (2013)

FACTS:
Executed in exchange for the legal services of Atty. Zepeda and
the financial assistance to be extended by Manuel, the
Agreement involves respondents transfer of 40% of the avails of
the suit, in the event of a favorable judgment in Civil Case No.
8085. While concededly subject to the same suspensive
condition, a Kasunduan was concluded by respondents with
Manuel alone, for the purpose of selling in favor of the latter
60% of their share in the subject parcels for the agreed price of
P180,000.00
Petitioners commenced the instant suit with the filing of their
complaint for specific performance and damages against the
respondents and respondent. Faulting respondents with
unjustified refusal to comply with their obligation under the
Kasunduan,
On 27 January 2005, the RTC rendered a decision finding the
Kasunduan valid and binding between respondents and
petitioners who had the right to demand its fulfillment as
Manuels successors-in-interest.
Respondents sought the complete reversal of the appealed
decision on the ground that the Agreement and the Kasunduan
were null and void.
On 23 January 2007, the CA rendered the herein assailed
decision, setting aside the RTCs decision, upon the following
findings and conclusions, to wit: (a) the Agreement and
Kasunduan are byproducts of the partnership between Atty.
Zepeda and Manuel who, as a non-lawyer, was not authorized to
practice law; (b) the Agreement is void under Article 1491 (5) of
the Civil Code of the Philippines which prohibits lawyers from
acquiring properties which are the objects of the litigation in
which they have taken part; (c) jointly designed to completely
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Atty Tizon
deprive respondents of the subject parcels, the Agreement and

the Kasunduan are invalid and unconscionable; and (d) without
prejudice to his liability for violation of the Canons of
Professional Responsibility, Atty. Zepeda can file an action to
collect attorneys fees based on quantum meruit.
ISSUE: Whether the agreement and kasunduan is void ab
inititio for beign contrary to law and public policy and for being
violative of art. 1491 of the NCC and the canons of professional
responsibility.
RULING: Admittedly, Article 1491 (5) of the Civil Code
prohibits lawyers from acquiring by purchase or assignment the
property or rights involved which are the object of the litigation
in which they intervene by virtue of their profession. The CA lost
sight of the fact, however, that the prohibition applies only during
the pendency of the suit and generally does not cover contracts
for contingent fees where the transfer takes effect only after the
finality of a favorable judgment.
Although executed on the same day, it cannot likewise be
gainsaid that the Agreement and the Kasunduan are
independent contracts, with parties, objects and causes different
from that of the other. Defined as a meeting of the minds
between two persons whereby one binds himself, with respect to
the other to give something or to render some service, a contract
requires the concurrence of the following requisites: (a) consent
of the contracting parties; (b) object certain which is the subject
matter of the contract; and, (c) cause of the obligation which is
established. Executed in exchange for the legal services of Atty.
Zepeda and the financial assistance to be extended by Manuel,
the Agreement concerned respondents transfer of 40% of the
avails of the suit, in the event of a favorable judgment in Civil
Case No. 8085. While concededly subject to the same suspensive
condition, the Kasunduan was, in contrast, concluded by
respondents with Manuel alone, for the purpose of selling in
favor of the latter 60% of their share in the subject parcels for
the agreed price of P180,000.00. Given these clear distinctions,

petitioners correctly argue that the CA reversibly erred in not
determining the validity of the Kasunduan independent from
that of the Agreement.
Viewed in the light of the autonomous nature of contracts
enunciated under Article 1306 of the Civil Code, on the other
hand, we find that the Kasunduan was correctly found by the
RTC to be a valid and binding contract between the parties.
Already partially executed with respondents receipt
of P1,000.00 from Manuel upon the execution thereof, the
Kasunduan simply concerned the sale of the formers 60% share
in the subject parcel, less the 1,750-square meter portion to be
retained, for the agreed consideration of P180,000.00. As a
notarized document that carries the evidentiary weight
conferred upon it with respect to its due execution, the
Kasunduan was shown to have been signed by respondents with
full knowledge of its contents, as may be gleaned from the
testimonies elicited from Philip and Leovina.
In the absence of any showing, however, that the parties were
able to agree on new stipulations that would modify their
agreement, we find that petitioners and respondents are bound
by the original terms embodied in the Kasunduan. Obligations
arising from contracts, after all, have the force of law between
the contracting parties who are expected to abide in good faith
with their contractual commitments, not weasel out of
them. Moreover, when the terms of the contract are clear and
leave no doubt as to the intention of the contracting parties, the
rule is settled that the literal meaning of its stipulations should
govern. In such cases, courts have no authority to alter a
contract by construction or to make a new contract for the
parties. Since their duty is confined to the interpretation of the
one which the parties have made for themselves without regard
to its wisdom or folly, it has been ruled that courts cannot
supply material stipulations or read into the contract words it
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does not contain. Indeed, courts will not relieve a party from the
adverse effects of an unwise or unfavorable contract freely
entered into
RS. Tomas v Rizal Cement (2012)

Peralta, J.
Re: Obligatory force of contracts
DOCTRINE: For petitioner, the contract entered into may
have turned out to be an unwise investment, but there is
no one to blame but petitioner for plunging into an
undertaking without fully studying it in its entirety.
FACTS
The case stemmed from an action for sum of money or damages
arising from breach of contract. The contract involved in this
case refers to the rewinding and conversion of one unit of
transformer to be installed and energized to supply respondents
power requirements. This project was embodied in three (3) job
orders, all of which were awarded to petitioner who represented
itself to be capable, competent, and duly licensed to handle the
projects. As agreed upon by the parties, the projects were to be
completed within 120 days from the effectivity of the contract.
Petitioner, however, failed to complete the projects within the
agreed period allegedly because of misrepresentation and fraud
committed by respondent as to the true nature of the subject
transformer. Petitioner sent three letters. The first letter
requests for extension due to the availability of materials
(copper sheets), which petitioner still has to import. Second
letter requests for another extension for the completion of the
transformer. In the third letter, petitioner raised that
transformer needs more repair than expected. While petitioner
wanted to complete the project, respondent expressed its desire
to terminate the contract plus claimed for the refund.
Respondent contracted Geostar to complete the project
commenced by Petitioner.
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The trial court found that respondent indeed failed to inform

petitioner of the true condition of the transformer which
amounted to fraud thereby justifying the latters failure to
complete the projects. The CA, however, had a different
conclusion and decided in favor of respondent.
Petitioner tried to exempt itself from the consequences of said
breach by passing the fault to respondent. It explained that its
failure to complete the project was due to the misrepresentation
of the respondent. It claimed that more time and money were
needed, because the condition of the subject transformer was
worse than the representations of respondent.
ISSUE
Whether petitioners defense of misrepresentation and need
for more time and money tenable?
HELD: NO.
There was not only a delay but a failure to complete the projects
as stated in the contract; that petitioner could not complete the
projects because it did not have the materials needed; and that it
is in need of financial assistance.
As the Court sees it, the bid submitted by petitioner may have
been sufficient to be declared the winner but it failed to
anticipate all expenses necessary to complete the projects. When
it incurred expenses it failed to foresee, it began requesting for
price adjustment to cover the cost of high voltage bushing and
difference in cost of copper sheet and rectangular
wire. However, the scope of work presented by respondent
specifically stated that the wires to be used shall be pure copper
and that there was a need to supply new bushings for the
complete rewinding and conversion of 3125 KVA to 4 MVA
Transformer. In other words, petitioner was aware that there
was a need for complete replacement of windings to copper and

of secondary bushings. It is, therefore, improper for
petitioner to ask for additional amount to answer for
the expenses that were already part and parcel of the
undertaking it was bound to perform. For petitioner,
the contract entered into may have turned out to be
an unwise investment, but there is no one to blame but
petitioner for plunging into an undertaking without
fully studying it in its entirety.
The Court likewise notes that petitioner repeatedly asked for
extension allegedly because it needed to import the materials
and that the same could not be delivered on time. Petitioner also
repeatedly requested that respondent make a direct payment to
the suppliers notwithstanding the fact that it contracted with
respondent for the supply of labor, materials, and technical
supervision. It is, therefore, expected that petitioner would be
responsible in paying its suppliers because respondent is not
privy to their (petitioner and its suppliers) contract. This is
especially true in this case since respondent had already made
advance payments to petitioner. It appears, therefore, that in
offering its bid, the source and cost of materials were not
seriously taken into consideration. It appears, further, that
petitioner had a hard time in fulfilling its obligations under the
contract that is why it asked for financial assistance from
respondent. This is contrary to petitioners representation that it
was capable, competent, and duly licensed to handle the
projects.
This lack of evidence, coupled with petitioners failure to raise
the same at the earliest opportunity, belies petitioners claim
that it could not complete the projects because the subject
transformer could no longer be repaired.
Assuming for the sake of argument that the subject transformer
was indeed in a damaged condition even before the bidding
which makes it impossible for petitioner to perform its
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obligations under the contract, we also agree with the CA that

petitioner failed to prove that respondent was guilty of bad faith,
fraud, deceit or misrepresentation.
(5) that the evidence presented by petitioner were

inadequate to prove that the subject transformer could no
longer be repaired; and
Bad faith does not simply connote bad judgment or negligence;

it imports a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of a known duty through
some motive or interest or ill will that partakes of the nature of
fraud. Fraud has been defined to include an inducement through
insidious machination. Insidious machination refers to a
deceitful scheme or plot with an evil or devious purpose. Deceit
exists where the party, with intent to deceive, conceals or omits
to state material facts and, by reason of such omission or
concealment, the other party was induced to give consent that
would not otherwise have been given. These are allegations of
fact that demand clear and convincing proof. They are serious
accusations that can be so conveniently and casually invoked,
and that is why they are never presumed. In this case, the
evidence presented is insufficient to prove that respondent acted
in bad faith or fraudulently in dealing with petitioner.
(6) that there was no evidence to show that respondent was

in bad faith, acted fraudulently, or guilty of deceit and
misrepresentation in dealing with petitioner.
In sum, the evidence presented by the parties lead to the

following conclusions:
(1) that the projects were not completed by petitioner;
(2) that petitioner was given the opportunity to inspect the
subject transformer;
(3) that petitioner failed to thoroughly study the entirety of
the projects before it offered its bid;
(4) that petitioner failed to complete the projects because of
the unavailability of the required materials and that
petitioner needed financial assistance;
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PNB v Manalo
Mutuality
Doctrine: Any stipulation on interest unilaterally imposed
and increased by Banks shall be struck down as
violative of the principle of mutuality of contracts.
FACTS: Respondent Spouses Enrique Manalo and Rosalinda
Jacinto applied for an All-Purpose Credit Facility in the amount
of P1,000,000 with PNB. After PNB granted their application,
they executed a REM in favor of PNB over their property as
security for the loan. The credit facility was renewed and
increased several times over the years. It was agreed upon that
the Spouses would make monthly payments on the interest.
After the Spouses failed to settle their unpaid account despite
demands, PNB foreclosed the mortgage.
The Spouses Manalo instituted this action for the nullification of
the foreclosure proceedings. RTC ruled in favor of PNB. It that
the Spouses Manalos "contract of adhesion" argument was
unfounded because they had still accepted the terms and
conditions of their credit agreement with PNB and had exerted
efforts to pay their obligation; that the Spouses Manalo were
now estopped from questioning the interest rates unilaterally
imposed by PNB because they had paid at those rates for three
years without protest; and that their allegation about PNB
violating the notice and publication requirements during the
foreclosure proceedings was untenable because personal notice
to the mortgagee was not required under Act No. 3135.
CA held that PNB could not unilaterally increase the rate of

interest considering that the credit agreements specifically
provided that prior notice was required before an increase in
interest rate could be effected. It found that PNB did not adduce
proof showing that the Spouses Manalo had been notified before
the increased interest rates were imposed; and that PNBs
unilateral imposition of the increased interest rate was null and
void for being violative of the principle of mutuality of contracts
enshrined in Article 1308. Reinforcing its "contract of adhesion"
conclusion, it added that the Spouses Manalos being in dire
need of money rendered them to be not on an equal footing with
PNB. Consequently, the CA, relying on Eastern Shipping Lines
v. CA, fixed the interest rate to be paid by the Spouses Manalo at
12% per annum, computed from their default.
ISSUE: Whether there was mutuality of consent in the
imposition of interest rates on the respondent spouses loan.
HELD: No. The credit agreement executed succinctly stipulated
that the loan would be subjected to interest at a rate
"determined by the Bank to be its prime rate plus applicable
spread, prevailing at the current month." This stipulation was
carried over to or adopted by the subsequent renewals of the
credit agreement. PNB thereby arrogated unto itself the sole
prerogative to determine and increase the interest rates imposed
on the Spouses Manalo. Such a unilateral determination of the
interest rates contravened the principle of mutuality of contracts
embodied in Article 1308.
A contract where there is no mutuality between the parties
partakes of the nature of a contract of adhesion, and any
obscurity will be construed against the party who prepared the
contract, the latter being presumed the stronger party to the
agreement, and who caused the obscurity. PNB should then
suffer the consequences of its failure to specifically indicate the
rates of interest in the credit agreement. In Philippine Savings
Bank v. Castillo: The unilateral determination and imposition
of the increased rates is violative of the principle of mutuality of
contracts under Article 1308 xxx Any contract which appears to
be heavily weighed in favor of one of the parties so as to lead to
an unconscionable result, thus partaking of the nature of a
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contract of adhesion, is void. Any stipulation regarding the

validity or compliance of the contract left solely to the will of one
of the parties is likewise invalid.
PNB could not also justify the increases it had effected on the
interest rates by citing the fact that the Spouses Manalo had
paid the interests without protest, and had renewed the loan
several times. A borrower is not estopped from assailing the
unilateral increase in the interest made by the lender since no
one who receives a proposal to change a contract, to which he is
a party, is obliged to answer the same and said partys silence
cannot be construed as an acceptance thereof.
Lastly, the credit agreements had explicitly provided that prior
notice would be necessary before PNB could increase the
interest rates. In failing to notify the Spouses Manalo before
imposing the increased rates of interest, therefore, PNB violated
the stipulations of the very contract that it had prepared. Hence,
the varying interest rates imposed by PNB have to be vacated
and declared null and void, and in their place an interest rate of
12% per annum computed from their default is fixed pursuant to
the ruling in Eastern Shipping Lines, Inc. v. CA.
Silos v PNB (2014)

G.R. No. 181045, July 2, 2014
Topic: Mutuality
DOCTRINE: Contract changes must be made with the
consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification,
especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture.
Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
FACTS: Spouses Eduardo and Lydia Silos (petitioners) have
been in business for about two decades of operating a
department store and buying and selling of ready-to-wear
apparel. To secure a one-year revolving credit line of
P150,000.00 obtained from PNB, petitioners constituted in
August 1987 a Real Estate Mortgage over a lot in Kalibo, Aklan.
In July 1988, the credit line was increased to P1.8 million and
the mortgage was correspondingly increased to P1.8
million. And in July 1989, a Supplement to the Existing Real
Estate Mortgage was executed to cover the same credit line,
which was increased to P2.5 million, and additional security was
given. Petitioners issued eight Promissory Notes and signed a
Credit Agreement.
There are interest stipulations as follows:
a. The Borrower agrees that the Bank may modify the
interest rate in the Loan depending on whatever
policy the Bank may adopt in the future
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b. the Borrower hereby agrees that the Bank may,

without need of notice to the Borrower, increase or
decrease its spread over the floating interest rate at
any time depending on whatever policy it may adopt
in the future.
The petitioners religiously paid the loans. The interest
varied because of the stipulation. In August 1991, an
Amendment to the Credit Agreement was executed by the
parties, with the following stipulation regarding interest:
c. Interest on Line Availments. (a) The Borrowers agree
to pay interest on each Availment from date of each
Availment up to but not including the date of full
payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each
Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners
issued in favor of PNB the following 18 Promissory Notes.
The 9th up to the 17th promissory notes provide for the
payment of interest at the rate the Bank may at any time
without notice, raise within the limits allowed by law. On the
other hand, the 18th up to the 26th promissory notes
including PN 9707237, which is the 26 th promissory note
carried the following provision:
d. x x x For this purpose, I/We agree that the rate of
interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with
prior notice to the Borrower in the event of changes in
interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines, or in the Banks
overall cost of funds. I/We hereby agree that in the
event I/we are not agreeable to the interest rate fixed
for any Interest Period, I/we shall have the option to
prepay the loan or credit facility without penalty

within ten (10) calendar days from the Interest Setting
Date
In 1997, petitioners faltered when the interest rates
soared due to the Asian financial crisis. Petitioners sole
outstanding promissory note for P2.5 million PN 9707237
executed in July 1997 and due 120 days later or on October 28,
1997 became past due, and despite repeated demands,
petitioners failed to make good on the note. PNB foreclosed on
the mortgage because of the non-payment.
More than a year later, or on March 24, 2000, petitioners
filed Civil Case No. 5975, seeking annulment of the foreclosure
sale and an accounting of the PNB credit.
Trial court dismissed the civil case.
The CA modified the decision on interest rate and
attorneys fees, but the still affirmed the trial court decision.
ISSUE: Whether Credit Agreement entered into by the parties
is valid
HELD: No, P.D. No. 1684 and C.B. Circular No. 905 no more
than allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall accrue on a
loan or forbearance of money, goods or credits. In fine, they can
agree to adjust, upward or downward, the interest previously
stipulated. However, contrary to the stubborn insistence of
petitioner bank, the said law and circular did not authorize
either party to unilaterally raise the interest rate without the
others consent. It is basic that there can be no contract in the
true sense in the absence of the element of agreement, or of
mutual assent of the parties. If this assent is wanting on the part
of the one who contracts, his act has no more efficacy than if it
had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of
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the contracting parties. The minds of all the parties must meet
as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts,
it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of
any binding effect.
We cannot countenance petitioner banks posturing that
the escalation clause at bench gives it unbridled right to
unilaterally upwardly adjust the interest on private respondents
loan. That would completely take away from private
respondents the right to assent to an important modification in
their agreement, and would negate the element of mutuality in
contracts. In Philippine National Bank v. Court of Appeals, et
al., 196 SCRA 536, 544-545 (1991) we held x x x The unilateral
action of the PNB in increasing the interest rate on the private
respondents loan violated the mutuality of contracts ordained
in Article 1308 of the Civil Code
PNB v. Dee, Et Al. (2014)

Topic: Characteristics of Contracts; Relativity
DOCTRINE: The basic principle of relativity of contracts is
that contracts can only bind the parties who entered
into it, and cannot favor or prejudice a third person,
even if he is aware of such contract and has acted with
knowledge thereof Where there is no privity of
contract, there is likewise no obligation or liability to
speak about.
FACTS: Sometime in July 1994, respondent Teresita Tan Dee
bought from respondent Prime East Properties Inc. (PEPI) on
an installment basis a residential lot located in Binangonan,
Rizal. Subsequently, PEPI assigned its rights over its property
on August 1996 to respondent AFPRSBS, which included the
property purchased by Dee.
Thereafter, PEPI obtained a P205,000,000.00 loan from
petitioner PNB, secured by a mortgage over several properties,
including Dees property. The mortgage was cleared by the
HLURB on September 18, 1996.
After Dees full payment of the purchase price, a deed of sale was
executed by respondents PEPI and AFPRSBS on July 1998 in
Dees favor. Consequently, Dee sought from the petitioner the
delivery of the owners duplicate title over the property, to no
avail. Thus, she filed with the HLURB a complaint for specific
performance to compel delivery of TCT by the petitioner, PEPI
and AFPRSBS, among others.
PNBs Contention
The petitioner claims that it has a valid mortgage over Dees
property, which was part of the property mortgaged by PEPI to
it to secure its loan obligation, and that Dee and PEPI are bound
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by such mortgage. The petitioner also argues that it is not privy

to the transactions between the subdivision project buyers and
PEPI, and has no obligation to perform any of their respective
undertakings under their contract.
payment of the purchase price. In a contract of sale, the parties

obligations are plain and simple. The law obliges the vendor to
transfer the ownership of and to deliver the thing that is the
object of sale.
HLURB: Ruled in favor of Dee directing PNB to

cancel/release the mortgage and surrender/release the title to
Dee. Ordering also PEPI and AFB-RSBS to deliver the title of the
subject lit in the name of Dee free from all liens and
encumberances.
On the other hand, the principal obligation of a vendee is to pay

the full purchase price at the agreed time. Based on the final
contract of sale between them, the obligation of PEPI, as owners
and vendors of Lot 12, Block 21A, Village East Executive
Homes, is to transfer the ownership of and to deliver Lot 12,
Block 21A to Dee, who, in turn, shall pay, and has in fact paid,
the full purchase price of the property. There is nothing in the
decision of the HLURB, as affirmed by the OP and the CA, which
shows that the petitioner is being ordered to assume the
obligation of any of the respondents. There is also nothing in the
HLURB decision, which validates the petitioners claim that the
mortgage has been nullified. The order of cancellation/release of
the mortgage is simply a consequence of Dees full payment of
the purchase price, as mandated by Section 25 of P.D. No. 957.
Board of Commissioners: AFFIRMED HLURB.

Office of the President: AFFIRMED Board of
Commissioners.
CA: AFFIRMED Office of the President
ISSUE: WON PNB is privy to the contract between respondent
Dee and PEPI.
HELD: NO.
The petitioner is correct in arguing that it is not obliged to
perform any of the undertaking of respondent PEPI and AFP
RSBS in its transactions with Dee because it is not a privy
thereto. The basic principle of relativity of contracts is that
contracts can only bind the parties who entered into it, and
cannot favor or prejudice a third person, even if he is aware of
such contract and has acted with knowledge thereof.
Where there is no privity of contract, there is likewise no
obligation or liability to speak about.
The petitioner, however, is not being tasked to undertake the
obligations of PEPI and AFPRSBS. In this case, there are two
phases involved in the transactions between respondents PEPI
and Dee the first phase is the contract to sell, which eventually
became the second phase, the absolute sale, after Dees full
It must be stressed that the mortgage contract between PEPI

and the petitioner is merely an accessory contract to the
principal threeyear loan takeout from the petitioner by PEPI
for its expansion project. It need not be belaboured that a
mortgage is an accessory undertaking to secure the fulfillment of
a principal obligation, and it does not affect the ownership of
the property as it is nothing more than a lien thereon serving as
security for a debt.
Note that at the time PEPI mortgaged the property to the
petitioner, the prevailing contract between respondents PEPI
and Dee was still the Contract to Sell, as Dee was yet to fully pay
the purchase price of the property. On this point, PEPI was
acting fully well within its right when it mortgaged the property
to the petitioner, for in a contract to sell, ownership is retained
by the seller and is not to pass until full payment of the purchase
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price.30 In other words, at the time of the mortgage, PEPI was

still the owner of the property.
Nevertheless, despite the apparent validity of the mortgage
between the petitioner and PEPI, the former is still bound to
respect the transactions between respondents PEPI and Dee.
The petitioner was well aware that the properties mortgaged by
PEPI were also the subject of existing contracts to sell with other
buyers. While it may be that the petitioner is protected by Act
No. 3135, as amended, it cannot claim any superior right as
against the installment buyers. This is because the contract
between the respondents is protected by P.D. No. 957, a social
justice measure enacted primarily to protect innocent lot buyers.
Malbarosa v CA (2003)
G.R. No. 125761
FACTS: Here in petitioner was the president and general
manager of Philtectic Corp., a subsidiary of respondent SEADC.
Being an officer, he was issued a car and membership in the
Architectural Center. One day he intimidated with the vicechairman of the BoD of respondent his desire to retire and he
requested that his incentive compensation be paid to him as
president of Philtectic. He then tendered his resignation to said
VP. One of the officer met with petitioner and informed him that
he will get roughly around P395k.
Following his resignation, the VP sent a letter-offer to petitioner
stating therein acceptance of petitioners resignation and
advised him that he is entitled to P251k as his incentive
compensation. In the same letter, the VP proposed the
satisfaction of his incentive by giving him the car the company
issued and the membership in the Architectural Center will be
transferred to him, instead of cash. Petitioner was required by
respondent through the VP to affix his signature in the letter if
he was agreeable to the proposal. The letter was given to the
petitioner by the officer who told him that he was supposed to
get P395k.Petitioner was dismayed when he received the letteroffer and refused to sign it as required by respondent if he was
agreeable to it.
Two weeks later, respondent company demanded the return the
car and turn over the membership in the Architectural Center.
Petitioner wrote the counsel of respondent telling him that he
cannot comply with the demand since he already accepted the
offer fourteen (14) days after it was made. In his letter, he
enclosed a Xerox of the original with his affixed signature as
required.
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With his refusal, respondent instituted an action for recovery

with replevin. In his Answer to the complaint, the petitioner, as
defendant therein, alleged that he had already agreed on March
28, 1990 to the March 14, 1990 Letter-offer of the respondent,
the plaintiff therein, and had notified the said plaintiff of his
acceptance; hence, he had the right to the possession of the car.
After the trial, judgment was rendered against petitioner. The
trial court opined that there existed no perfected contract
between the petitioner and the respondent on the latters March
14, 1990 Letter-offer for failure of the petitioner to effectively
notify the respondent of his acceptance of said letter-offer before
the respondent withdrew the same. He appealed to the CA
which affirmed the decision of the trial court. Hence, this
present appeal.
ISSUES:
Whether or not there was a valid acceptance on his part

of the March 14, 1990 Letter-offer of the respondent?
Whether or not there was an effective withdrawal by the
respondent of said letter-offer?
HELD: No. Under Article 1319 of the New Civil Code, the
consent by a party is manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are to
constitute the contract. An offer may be reached at any time
until it is accepted. An offer that is not accepted does not give
rise to a consent. To produce a contract, there must be
acceptance of the offer which may be express or implied but
must not qualify the terms of the offer. The acceptance must be
absolute, unconditional and without variance of any sort from
the offer. The acceptance of an offer must be made known to the
offeror. Unless the offeror knows of the acceptance, there is no
meeting of the minds of the parties, no real concurrence of offer
and acceptance.
The offeror may withdraw its offer and revoke the same before
acceptance thereof by the offeree. The contract is perfected only
from the time an acceptance of an offer is made known to the
offeror. If an offeror prescribes the exclusive manner in which
acceptance of his offer shall be indicated by the offeree, an
acceptance of the offer in the manner prescribed will bind the
offeror. On the other hand, an attempt on the part of the offeree
to accept the offer in a different manner does not bind the
offeror as the absence of the meeting of the minds on the altered
type of acceptance.
An offer made inter praesentes must be accepted immediately. If
the parties intended that there should be an express acceptance,
the contract will be perfected only upon knowledge by the
offeror of the express acceptance by the offeree of the offer. An
acceptance which is not made in the manner prescribed by the
offeror is not effective but constitutes a counter-offer which the
offeror may accept or reject.
The contract is not perfected if the offeror revokes or withdraws
its offer and the revocation or withdrawal of the offeror is the
first to reach the offeree.
In the case at bar, the respondent made its offer through its VP.
On March 16, the officer handed over the original letter-offer to
petitioner. The respondent required the petitioner to accept by
affixing his signature and the date in the letter offer, thus
foreclosing an implied acceptance or any other mode of
acceptance. And it is for a fact that the petitioner did not accept
or reject the offer for he needed time to decide whether to accept
or reject. Although the petitioner claims that he had affixed his
conformity to the letter-offer on March 28, 1990, the petitioner
failed to transmit the said copy to the respondent. It was only on
April 7, 1990 when the petitioner appended to his letter to the
respondent a copy of the said March 14, 1990 Letter-offer
bearing his conformity that he notified the respondent of his
acceptance to said offer. But then, the respondent, through
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Philtectic Corporation, had already withdrawn its offer and had

already notified the petitioner of said withdrawal via
respondents letter dated April 4, 1990 which was delivered to
the petitioner on the same day. Indubitably, there was no
contract perfected by the parties on the March 14, 1990 Letteroffer of the respondent.
On the second issue. It is necessarily so because there was no
need for the respondent to withdraw its offer because the
petitioner had already rejected the respondents offer on March
16, 1990 when the petitioner received the original of the March
14, 1990 Letter-offer of the respondent without the petitioner
affixing his signature on the space therefor.
Capalla v Comelec (2012)

Re: Autonomy of Will
Peralta, J (CJ Sereno concurs)
DOCTRINE The subsequent contract in question is not an
extension of the previous AES Contract, but a new one.
And not being an ordinary contract but a procurement
by the government, RA 9184 or the Government
Procurement Reform Act applies. Section 10 of said law
requires for the validity of every government
procurement that competitive bidding be conducted.
However, such changes must not constitute substantial
or material amendments that would alter the basic
parameters of the contract and would constitute a
denial to the other bidders of the opportunity to bid on
the same terms.
FACTS: On July 10, 2009, the Comelec and Smartmatic-TIM
entered into a Contract for the Provision of an Automated
Election System for the May 10, 2010 Synchronized National
and Local Elections,(AES Contract). The contract between the
Comelec and Smartmatic-TIM was one of lease of the AES with
option to purchase (OTP) the goods listed in the contract. In
said contract, the Comelec was given until December 31, 2010
within which to exercise the option. In September 2010, the
Comelec partially exercised its OTP 920 units of PCOS machines
with corresponding canvassing/consolidation system (CCS) for
the special elections in certain areas in the provinces of Basilan,
Lanao del Sur and Bulacan. In a letter dated December 18, 2010,
Smartmatic-TIM, through its Chairman Flores, proposed a
temporary extension of the option period on the remaining
PCOS machines until March 31, 2011, waiving the storage costs
and covering the maintenance costs. The Comelec did not
exercise the option within the extended period. Several
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extensions were given for the Comelec to exercise the OTP until
its final extension on March 31, 2012.
On March 29, 2012, the Comelec issued a Resolution resolving
to accept Smartmatic-TIMs offer to extend the period to
exercise the OTP until March 31, 2012 and to authorize
Chairman Brillantes to sign for and on behalf of the Comelec the
Agreement on the Extension of the OTP Under the AES Contract
(Extension Agreement). Comelec again issued a Resolution
resolving to approve the Deed of Sale between the Comelec and
Smartmatic-TIM to purchase the latters PCOS machines to be
used in the upcoming May 2013 elections and to authorize
Chairman Brillantes to sign the Deed of Sale for and on behalf of
the Comelec. The Deed of Sale was forthwith executed.
Petitioners assail the constitutionality of the Comelec
Resolutions on the grounds that the option period provided for
in the AES contract had already lapsed; that the extension of the
option period and the exercise of the option without competitive
public bidding contravene the provisions of RA 9184; and that
the Comelec purchased the machines in contravention of the
standards laid down in RA 9369. On the other hand,
respondents argue on the validity of the subject transaction
based on the grounds that there is no prohibition either in the
contract or provision of law for it to extend the option period;
that the OTP is not an independent contract in itself, but is a
provision contained in the valid and existing AES contract that
had already satisfied the public bidding requirements of RA
9184; and that exercising the option was the most advantageous
option of the Comelec.
ISSUE: Whether the extension of OTP is an independent
contract itself, thus must go through public bidding.
HELD: No public bidding necessary.
Clearly, under the AES Contract, the Comelec was given until
December 31, 2010 within which to exercise the OTP the subject
goods listed therein including the PCOS machines. The option
was, however, not exercised within said period. But the parties
later entered into an extension agreement giving the Comelec
until March 31, 2012 within which to exercise it. With the
extension of the period, the Comelec validly exercised the option
and eventually entered into a contract of sale of the subject
goods. The extension of the option period, the subsequent
exercise thereof, and the eventual execution of the Deed of Sale
became the subjects of the petitions challenging their validity in
light of the contractual stipulations of respondents and the
provisions of RA 9184.
In our June 13, 2012 Decision, we decided in favor of
respondents and placed a stamp of validity on the assailed
resolutions and transactions entered into. Based on the AES
Contract, we sustained the parties right to amend the same by
extending the option period. Considering that the performance
security had not been released to Smartmatic-TIM, the contract
was still effective which can still be amended by the mutual
agreement of the parties, such amendment being reduced in
writing. To be sure, the option contract is embodied in the AES
Contract whereby the Comelec was given the right to decide
whether or not to buy the subject goods listed therein under the
terms and conditions also agreed upon by the parties. As we
simply held in the assailed decision:
While the contract indeed specifically required the Comelec to
notify Smartmatic-TIM of its OTP the subject goods until
December 31, 2010, a reading of the other provisions of the AES
contract would show that the parties are given the right to
amend the contract which may include the period within which
to exercise the option. There is, likewise, no prohibition on the
extension of the period, provided that the contract is still
effective.
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The Comelec still retains P50M of the amount due SmartmaticTIM as performance security, which indicates that the AES
contract is still effective and not yet terminated. Consequently,
pursuant to Article 19 of the contract, the provisions thereof may
still be amended by mutual agreement of the parties provided
said amendment is in writing and signed by the parties.
Considering, however, that the AES contract is not an
ordinary contract as it involves procurement by a
government agency, the rights and obligations of the
parties are governed not only by the Civil Code but
also by RA 9184. A winning bidder is not precluded
from modifying or amending certain provisions of the
contract bidded upon. However, such changes must not
constitute substantial or material amendments that would alter
the basic parameters of the contract and would constitute a
denial to the other bidders of the opportunity to bid on the same
terms.
purchase of services under the AES contract was considered part

of the purchase price. For the Comelec to own the subject goods,
it was required to pay only P2,130,635,048.15. If the Comelec
did not exercise the option, the rentals already paid would just
be one of the government expenses for the past election and
would be of no use to future elections.
The conclusions held by the Court in Power Sector Assets and

Liabilities Management Corporation (PSALM) v. Pozzolanic
Philippines Incorporated and Agan, Jr. v. Philippine
International Air Terminals Co., Inc., (PIATCO) cannot be
applied in the present case. First, Smartmatic-TIM was not
granted additional right that was not previously available to the
other bidders. The bidders were apprised that aside from the
lease of goods and purchase of services, their proposals should
include an OTP the subject goods. Second, the amendment of
the AES contract is not substantial. The approved budget for the
contract was P11,223,618,400.00 charged against the
supplemental appropriations for election modernization. Bids
were, therefore, accepted provided that they did not exceed said
amount. The competitive public bidding conducted for the AES
contract was sufficient. A new public bidding would be a
superfluity. Lastly, the amendment of the AES contract is more
advantageous to the Comelec and the public because the
P7,191,484,739.48 rentals paid for the lease of goods and
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Rosenstock v Burke
Essential elements of a contract
FACTS: Edwin Burke owned a motor yacht which he acquired
for the purpose of selling. Plaintiff H. W. Elser began
negotiations with Burke for the purchase of the yacht. This yacht
was mortgaged to the Asia Banking Corporation to secure the
payment of a debt which was due and unpaid since a year prior
thereto, contracted by Burke in favor of said bank of which
Avery was then the manager. The plan of Elser was to organize a
yacht club and sell it afterwards the yacht. Burke obtained from
Elser an option in writing in the following terms: For the
purpose of organizing a yacht club, I am confirming my verbal
offer to you of the motor yacht, at P120,000.
Elser proposed to Burke to make a voyage on board the yacht to
the south, with prominent businessmen for the purpose of
making an advantageous sale. As the yacht needed some repairs,
and as Burke said that he had no funds to make said repairs,
Esler paid almost all their amount. It has been stipulated that
Elser was not to pay anything for the use of the yacht. Once the
yacht was repaired, Elser gave receptions on board, and on
March 6, 1922, made his pleasure voyage to the south, coming
back on March 23. Elser never accepted the offer of Burke for
the purchase of the yacht contained in the letter of option of
February 12, 1922. Elser believed that it was convenient to
replace the engine of the yacht with a new one which would cost
P20,000. Elser had negotiated with Avery for another loan of
P20,000 with which to purchase this new engine. On March 31,
Elser informed Burke that after he had tried to obtain from
Avery said new loan, and that he was not disposed to purchase
the vessel for more than P70,000, Avery had told him that he
was not in position to give one cent more. Elser suggested to
Burke that he should speak with Avery. Burke, after an interview
with Avery, answered Elser that he had arrived at an agreement
with Avery about the sale of the yacht to Elser for P80,000, the
yacht to be mortgaged to secure payment thereof. On April 1,

Elser informed Burke that he was not inclined to accept this
proposition. On the morning of April 3, Burke called Elser to
speak with him about the matter and as a result of the interview
held between them, Elser in the presence of Burke wrote a letter
addressed to the latter which is literally as follows: xxx In
connection with the yacht, I am in position and am willing to
entertain the purchase of it under the following terms: xxx
Burke took this letter to the Asia Banking Corporation. Both
Burke and Avery signed at the bottom of the letter of Elser. On
April 5, Elser sent Burke another letter, telling him that in view
of the attitude of Avery as to the loan of P20,000 in connection
with the installation of a new engine in the yacht, it was
impossible for him to take charge of the boat and he made
delivery thereof to Burke. On April 8, Burke answered Elser that
as he had accepted, with the consent of the Asia Banking,
through Avery, the offer for the purchase of the yacht made by
Elser in his April 3 letter, he made demand on him for the
performance thereof.
Elser brings this action against Burke to recover the value of the
repairs made on the yacht. Burke alleges that the agreement he
had with Elser about these repairs was that the latter was to pay
for them for his own account in exchange of the gratuitous use
of the yacht. Alleging that Elser purchased the vessel in
accordance with his letter of April 3, Burke prays as a crosscomplaint that Elser be compelled to comply with the terms of
this contract and to pay damages.
ISSUE: Whether April 3, 1922 letter was a definite offer to
purchase resulting in a perfected contract.
HELD: No. This letter begins as follows: "In connection with
the yacht Bronzewing, I am in position and am willing to
entertain the purchase of it under the following terms . . . ." The
whole question is reduced to determining what the intention of
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the plaintiff was in using that language. To convey the idea of a

resolution to purchase, a man of ordinary intelligence and
common culture would use these clear and simple words, I offer
to purchase, I want to purchase, I am in position to purchase.
And the stronger is the reason why the plaintiff should have
expressed his intention in the same way, because, according to
the defendant, he was a prosperous and progressive merchant.
It must be presumed that a man in his transactions in good faith
uses the best means of expressing his mind that his intelligence
and culture permit so as to convey and exteriorize his will
faithfully and unequivocally. But the plaintiff instead of using in
his letter the expression, I want to purchase, I offer to purchase,
I am in position to purchase, or other similar language of easy
and unequivocal meaning, used this other, I am in position and
am willing to entertain the purchase of the yacht. The word
"entertain" applied to an act does not mean the resolution to
perform said act, but simply a position to deliberate for deciding
to perform or not to perform said act. Taking into account only
the literal and technical meaning of the word "entertain," it
seems to us clear that the letter of the plaintiff cannot be
interpreted as a definite offer to purchase the yacht, but simply a
position to deliberate whether or not he would purchase the
yacht. It was but a mere invitation to a proposal being made to
him, which might be accepted by him or not.
Furthermore there are other circumstances which show that in
writing this letter it was really not the intention of the plaintiff to
make a definite offer. The plaintiff never thought of acquiring
the yacht for his personal use, but for the purpose of selling it to
another or to acquire it for another, thereby obtaining some gain
from the transaction, and it can be said that the only thing the
plaintiff wanted in connection with this yacht was that the
defendant should procure its sale, naturally with some profit for
himself. For this reason the original idea of the plaintiff was to
organize a yacht club that would afterwards acquire the yacht
through him, realizing some gain from the sale. This accounts
for the fact that the plaintiff was not in a position to make a
definite offer to purchase, he being sure to be able to resell the

yacht to another, and this explains why he did not say in his
letter of April 3 that he was in position to purchase the yacht,
but only to entertain this purchase.
On the other hand, the plaintiff thought it necessary to replace
the engine of the yacht with a new one and has been negotiating
with Avery a loan to make the replacement. When the plaintiff
wrote his April 3 letter, he knew that Avery was not in position
to grant this loan. According to this, the resolution of the
plaintiff to acquire the yacht depended upon him being able to
replace the engine, and this, in turn, depended upon the plaintiff
being successful in obtaining the sum that the new engine was to
cost. This accounts also for the fact that the plaintiff was not in
position to make a definite offer.
But above all, there is in the record positive proof that in writing
this letter of April 3, the plaintiff had no intention to make
thereby a definite offer. This letter was written by his
stenographer in his office and in the presence of the defendant
who has been there precisely for the purpose of speaking about
this purchase. According to the plaintiff, when he was dictating
that part wherein he said that he was in position to entertain the
purchase of the yacht, the defendant interrupted him and
suggested the elimination of the word entertain and the
substitution therefor of a definite offer, but after a discussion
between them, during which the plaintiff clearly said that he was
not in position to make a definite offer, the word entertain now
appearing in the letter was preserved. The stenographer and
another employee of the plaintiff, who were present, corroborate
this statement of the plaintiff.
The lower court seems to have been impressed by the
consideration that it was anomalous for the plaintiff to write
that letter if his purpose was only to indicate to the defendant
that he wanted the latter to make a proposal which the plaintiff
might reject or accept. We see nothing anomalous in this. A
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proposition may be acceptable in itself, but its acceptance may

depend on other circumstances; thus one may say that a
determinate proposition is acceptable, and yet he may not be in
a position to accept the same at the moment.
The letter of the plaintiff not containing a definite offer but a
mere invitation to an offer being made to him, the acceptance of
the defendant placed at the bottom of this letter has not other
meaning than that of accepting the proposition to make this
offer, as must have been understood by the plaintiff.
Sanchez v Rigos (1972)

45 SCRA 368
Topic: Elements of a Contract; Essential; Acceptance
Doctrine:
FACTS:
In an instrument entitled "Option to Purchase," executed on
April 3, 1961, defendant-appellant Severina Rigos "agreed,
promised and committed ... to sell" to plaintiff-appellee Nicolas
Sanchez for the sum of P1,510.00 within two (2) years from said
date, a parcel of land situated in the barrios of Abar and Sibot,
San Jose, Nueva Ecija. It was agreed 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. On March 12, 1963, Sanchez deposited the sum of
Pl,510.00 with the CFI of Nueva Ecija and filed an action for
specific performance and damages against Rigos for the latters
refusal to accept several tenders of payment that Sanchez made
to purchase the subject land.
Defendant Rigos contended that the contract between them was
only 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." Plaintiff Sanchez, on the other
hand, alleged in his compliant that, by virtue of the option under
consideration, "defendant agreed and committed to sell" and
"the plaintiff agreed and committed to buy" the land described
in the option. The lower court rendered judgment in favor of
Sanchez and ordered Rigos to accept the sum Sanchez judicially
consigned, and to execute in his favor the requisite deed of
conveyance. The Court of Appeals certified the case at bar to the
Supreme Court for it involves a question purely of law.
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ISSUE: Whether there was a contract to buy and sell between

the parties or only a mere unilateral promise to sell
HELD:
The Court said that the plaintiff (Sanchez) is his complaint
alleges that under the Annex A (copy of the contract), the
defendant agreed and committed to sell and the plaintiff
agreed and committed to buy said property making it
reciprocally demandable pursuant to the first paragraph of Art.
1479.
The Court debunked this theory by saying that the option did
not impose upon the plaintiff the obligation to purchase the
property. It was not a contract to buy and sell, it clearly states
that there is a commitment to sell the land for P1510.00 but no
indication of a consideration distinct from the price stipulated
for the sale of the land.
The Court said that the LC presumed the existence of this
consideration using NCC 1354:
NCC 1354: Although the cause is not stated in the
contract, it is presumed that it exists and is lawful, unless
the debtor proves the contrary. (1277)
However the Court said that, 1354 pertains to contracts in
general, while 1479 refer to sales, or more specifically, to an
accepted unilateral promise to buy or to sell. With 1479
controlling the case at bar
In order that said unilateral promise be binding upon the
promisor, Art. 1479 requires the concurrence of a condition and
that the promise be supported by a consideration distinct from
the price, which is absent in this case.
Defendant has explicitly pleaded the absence of this
consideration and the plaintiff (Sanchez), by joining in the
petition for the judgment of the pleadings, has impliedly

admitted the truth of her defense, as held in Bauermann vs.
Casas: One who prays for judgment on the pleadings without
offering proof as to the truth of his own allegations, and without
giving the opposing party an opportunity to introduce evidence,
must be understood to admit the truth of all the material and
relevant allegations of the opposing party, and to rest his motion
for judgment on those allegations taken together with such of
his own as are admitted in the pleadings.
The decision cited a case:
Southwestern Sugar Molasses Co. vs. Atlantic Gulf and Pacific
Co.:
In this case, the appellants main contention is that the option
granted to the appellee to sell to him/her Barge no. 10 has no
legal effect bec. it is not supported by any consideration and
invokes NCC 1479. On the other hand, appellee maintains and
invokes NCC 1324: When the offerer has allowed the offeree a
certain period to accept, the offer may be withdrawn any time
before acceptance by communicating such withdrawal, except
when the option is founded upon consideration as something
paid or promised.
Decision: SC said that while it is true that under article
1324 of the new Civil Code, the general rule regarding
offer and acceptance is that, when the offerer gives to
the offeree a certain period to accept, "the offer may be
withdrawn at any time before acceptance" except when
the option is founded upon consideration, but this
general rule must be interpreted as modified by the
provision of article 1479 above referred to, which
applies to "a promise to buy and sell" specifically. As
already stated, this rule requires that a promise to sell to
be valid must be supported by a consideration distinct
from the price.
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The Court cited another case, however, which is the justification

for their ruling in favour of Sanchez and said that there is no
distinction between 1324 and 1479. Atkins, Kroll and Co., Inc. v.
Cua Hian Tek:
Decision: 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.
IN OTHER WORDS, since there is no valid consideration,
offerer is not bound to promise and may widthraw it. However,
pending notice of his withdrawal, if his offer is ACCEPTED, the
contract of sale has been PERFECTED. Moreover, the decision
in Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific
Co., holding that Art. 1324 is modified by Art. 1479 of the Civil
Code, in effect, considers the latter as an exception to the
former, and exceptions are not favored, unless the intention to
the contrary is clear, and it is not so, insofar as said two (2)
articles are concerned.
What is more, the reference, in both the second paragraph of
Art. 1479 and Art. 1324, to an option or promise supported by or
founded upon a consideration, strongly suggests that the two (2)
provisions intended to enforce or implement the same principle.
Decision in Southwestern is abandoned, Atkins is applied.
Capalla v. COMELEC (2012)

Topic: Characteristics of Contracts; Autonomy of Will
DOCTRINE: Sereno, concurring: In the construction of an
instrument, the intention of the parties is to be pursued.
The true agreement of the parties may be proved, as
against the terms and stipulations appearing in a
written contract where a mistake or imperfection of the
writing, or its failure to express the true intent and
agreement of the parties, is put in issue by the pleadings,
or there is an intrinsic ambiguity in the writing. When
the true intent and agreement of the parties is
established, it must be given effect and prevail over the
bare words of the written contract.
FACTS: Pursuant to its authority to use an Automated Election
System (AES), the COMELEC posted and published an
invitation to apply for eligibility and to bid for the 2010 Poll
Automation Project. COMELEC awarded the contract for the
project to respondent Smartmatic-TIM. Thereafter, COMELEC
and Smartmatic-TIM entered into a Contract for the Provision
of an Automated Election System for the May 10, 2010
Synchronized National and Local Elections (AES Contract, for
brevity). The contract between the COMELEC and SmartmaticTIM was one of lease of the AES with option to purchase (OTP)
the goods listed in the contract. In said contract, the COMELEC
was given until December 31, 2010 within which to exercise the
option. In a letter, Smartmatic-TIM, through its Chairman Cesar
Flores, proposed a temporary extension of the option period to
buy the PCOS machines until March 31, 2011. The COMELEC
did not exercise the option within the extended period. Several
extensions were given for the COMELEC to exercise the OTP
until its final extension on March 31, 2012.
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On March 29, 2012, COMELEC issued a resolution resolving to

accept Smartmatic-TIMs offer to extend the period to exercise
the OTP until March 31, 2012. Archbishop Capalla, et al. thus
assailed the validity and constitutionality of the COMELEC
Resolutions for the purchase of the subject PCOS machines as
well as the Extension Agreement and the Deed of Sale covering
said goods mainly on the ground that the option period provided
for in the AES contract between the COMELEC and SmartmaticTIM had already lapsed and, thus, could no longer be extended,
such extension being prohibited by the contract.
ISSUE: Whether or not the unilateral extension of the option
period which Smartmatic-TIM granted to COMELEC and which
the latter accepted constitutes circumvention of the law on
public bidding.
A winning bidder is not precluded from modifying or amending

certain provisions of the contract bidded upon. However, such
changes must not constitute substantial or material
amendments that would alter the basic parameters of the
contract and would constitute a denial to the other bidders of
the opportunity to bid on the same terms. The determination of
whether or not a modification or amendment of a contract
bidded out constitutes a substantial amendment rests on
whether the contract, when taken as a whole, would contain
substantially different terms and conditions that would have the
effect of altering the technical and/or financial proposals
previously submitted by the other bidders. The modifications in
the contract executed between the government and the winning
bidder must be such as to render the executed contract to be an
entirely different contract from the one bidded upon.
HELD: NO. It is a basic rule in the interpretation of contracts

that an instrument must be construed so as to give effect to all
the provisions of the contract. In essence, the contract must be
read and taken as a whole. While the contract indeed specifically
required the COMELEC to notify Smartmatic-TIM of its OTP
the subject goods until December 31, 2010, a reading of the
other provisions of the AES contract would show that the parties
are given the right to amend the contract which may include the
period within which to exercise the option. There is, likewise, no
prohibition on the extension of the period, provided that the
contract is still effective.
Smartmatic-TIM was not granted additional right that was not

previously available to the other bidders. Admittedly, the AES
contract was awarded to Smartmatic-TIM after compliance with
all the requirements of a competitive public bidding. Although
the AES contract was amended after the award of the contract to
Smartmatic-TIM, the amendment only pertains to the period
within which the COMELEC could exercise the option because
of its failure to exercise the same prior to the deadline originally
agreed upon by the parties.
Considering, however, that the AES contract is not an ordinary

contract as it involves procurement by a government agency, the
rights and obligations of the parties are governed not only by the
Civil Code but also by RA 9184. In this jurisdiction, public
bidding is the established procedure in the grant of government
contracts. The award of public contracts, through public
bidding, is a matter of public policy. The parties are, therefore,
not at full liberty to amend or modify the provisions of the
contract bidded upon.
The Treatment of Options, Extensions of

Time for their Exercise, and their
Revival Under Contract Law
Sereno, Concurring
Had the parties been both private entities, then there

would have been either no legal dispute on the validity of the
exercise of an option that was renewed after its expiry, or, the
legal dispute would have been quite easy to resolve. This is
because our law on contracts is quite straightforward on this
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matter. It is our government procurement laws and regulations

that have complicated the legal issues we need to resolve.
First, the Civil Code is quite emphatic about respecting
the autonomy of the wills of the parties:
Art. 1306. The contracting parties may
establish such stipulations, clauses, terms and
conditions as they may deem convenient,
provided they are not contrary to law, morals,
good customs, public order, or public policy.
Among the stipulations that the parties can agree on is an
option granted by one party in favor of the other (Art. 1324,
Civil Code). Samples of such contractually created options can
be found in some articles of the Civil Code, such as: (a) an
option to buy, which is embedded in a lease of personal
property (Art. 1485) and (b) sales on consignment in which the
buyer has the option to return the goods or pay the price thereof
(Art. 1502).
Second. A contract when validly executed has the legal
effect of binding the party who has undertaken to give
something or to render some service (Art. 1305). By binding,
we mean that a legally enforceable right is created in favor of the
person who is to receive the thing or the service. This right
has the force of law between the contracting parties (Art. 1159,
Civil Code).
Conversely, if the person who possesses the right to
demand the performance of the undertaking to give or to render
a service, can demand the performance thereof, he or
she can also waive the same. This waiver has the effect of
extinguishing the obligation. A waiver is the abandonment or
voluntary forfeiture of a right. It operates in the same manner
as a condonation or remission of a debt under Articles 1231(3),
and 1270-1274 of the Civil Code.
Examples of valid waivers can be found in the following

articles of the Civil Code: (a) a waiver evidenced by the delivery
of a document evidencing a credit (Art. 1271); (b) the waiver of a
right to assail a voidable contract through an act ratifying the
contract (Art. 1393); (c) the waiver of a condition in a sales
contract (Art. 1545).
Third, if an option is conditioned on its exercise within a
period, then this condition that consists in a period or a
deadline for its exercise can itself be waived. In a contract of
sale, for example, where the obligation of either party . . . is
subject to any condition which is not performed, such party may
refuse to proceed with the contract or he may waive
performance of the condition. (Art. 1545, Civil Code)
Fourth, this waiver of a condition that consists in a
deadline can be made by the party in whose favor the deadline
was constituted. Under Article 1196 of the Civil Code,
[w]henever in an obligation a period is designated, it is
presumed to have been established for the benefit of both the
creditor and the debtor, unless from the tenor of the same or
other circumstances, it should appear that the period has been
established in favor of one or of the other. An option that
expires on a fixed date is an obligation with a resolutory period
that take[s] effect at once, but terminate[s] upon arrival of the
day certain. An offeror can also always withdraw an option
under Article 1324 of the Civil Code, with the converse
implication that he or she can always extend the period for the
acceptance of the offer.
Thus, an option to purchase exercisable within a fixed
period, embedded in a lease contract, expires after that fixed
period, because the lapse thereof is a resolutory condition that
extinguishes the option to purchase. Both parties can agree
to waive the resolutory condition, however, in the form
of an extension of the period for performance, under
the very clear provisions of the Civil Code. This accounts
172

Atty Tizon
for the commonness of renewed or revived options in private

commercial agreements, such as leases, sales, joint ventures,
intellectual property rights contracts, etc.
and prevail over the bare words of the written

contract.
The legal disputes that will arise in these situations would

be easy to resolve. Because both parties agreed to revive or
renew an expired option, their agreement binds both of them;
and neither can assail the agreement simply on the ground that
the original option period has expired, and this extension
agreement has the force of law between them.
That the parties have the ability to revive dead or
terminated contracts is so basic a rule that it has consistently
and implicitly been understood to be so by this Court. In two
injunction cases, the Court restated its understanding
that a dead or terminated contract can always be
revived or renewed by mutual agreement of the parties.
The termination of a contract is not like the death of a
natural being. It is the will and the mutual understanding of the
parties, rather than the form and solemnities, that prevail in
contract interpretation. Thus, a contract that on its face expires
can, by the mutual contracting action of the parties, even be
pronounced by the court to be continuing simply because the
parties consider it to be so continuing. As the eminent scholar
on contracts put it:
In the construction of an instrument, the
intention of the parties is to be pursued. The true
agreement of the parties may be proved, as against
the terms and stipulations appearing in a written
contract where a mistake or imperfection of the
writing, or its failure to express the true intent and
agreement of the parties, is put in issue by the
pleadings, or there is an intrinsic ambiguity in the
writing. When the true intent and agreement of
the parties is established, it must be given effect
173

Atty Tizon
G.R. No. 125761
FACTS:
Here in petitioner was the president and general manager of
Philtectic Corp., a subsidiary of respondent SEADC. Being an
officer, he was issued a car and membership in the Architectural
Center. One day he intimidated with the vice-chairman of the
BoD of respondent his desire to retire and he requested that his
incentive compensation be paid to him as president of Philtectic.
He then tendered his resignation to said VP. One of the officer
met with petitioner and informed him that he will get roughly
around P395k.
Following his resignation, the VP sent a letter-offer to petitioner
stating therein acceptance of petitioners resignation and
advised him that he is entitled to P251k as his incentive
compensation. In the same letter, the VP proposed the
satisfaction of his incentive by giving him the car the company
issued and the membership in the Architectural Center will be
transferred to him, instead of cash. Petitioner was required by
respondent through the VP to affix his signature in the letter if
he was agreeable to the proposal. The letter was given to the
petitioner by the officer who told him that he was supposed to
get P395k.Petitioner was dismayed when he received the letteroffer and refused to sign it as required by respondent if he was
agreeable to it.
Two weeks later, respondent company demanded the return the
car and turn over the membership in the Architectural Center.
Petitioner wrote the counsel of respondent telling him that he
cannot comply with the demand since he already accepted the
offer fourteen (14) days after it was made. In his letter, he
enclosed a Xerox of the original with his affixed signature as
required.
With his refusal, respondent instituted an action for recovery

with replevin. In his Answer to the complaint, the petitioner, as
defendant therein, alleged that he had already agreed on March
28, 1990 to the March 14, 1990 Letter-offer of the respondent,
the plaintiff therein, and had notified the said plaintiff of his
acceptance; hence, he had the right to the possession of the car.
After the trial, judgment was rendered against petitioner. The
trial court opined that there existed no perfected contract
between the petitioner and the respondent on the latters March
14, 1990 Letter-offer for failure of the petitioner to effectively
notify the respondent of his acceptance of said letter-offer before
the respondent withdrew the same. He appealed to the CA
which affirmed the decision of the trial court. Hence, this
present appeal.
ISSUES: Whether there was a valid acceptance on his part of
the March 14, 1990 Letter-offer of the respondent?
Whether there was an effective withdrawal by the respondent of
said letter-offer?
HELD
No. Under Article 1319 of the New Civil Code, the consent by a
party is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute
the contract. An offer may be reached at any time until it is
accepted. An offer that is not accepted does not give rise to a
consent. To produce a contract, there must be acceptance of the
offer which may be express or implied but must not qualify the
terms of the offer. The acceptance must be absolute,
unconditional and without variance of any sort from the offer.
The acceptance of an offer must be made known to the offeror.
Unless the offeror knows of the acceptance, there is no meeting
of the minds of the parties, no real concurrence of offer and
acceptance.
174

Atty Tizon
The offeror may withdraw its offer and revoke the same before
acceptance thereof by the offeree. The contract is perfected only
from the time an acceptance of an offer is made known to the
offeror. If an offeror prescribes the exclusive manner in which
acceptance of his offer shall be indicated by the offeree, an
acceptance of the offer in the manner prescribed will bind the
offeror. On the other hand, an attempt on the part of the offeree
to accept the offer in a different manner does not bind the
offeror as the absence of the meeting of the minds on the altered
type of acceptance.
An offer made inter praesentes must be accepted immediately. If
the parties intended that there should be an express acceptance,
the contract will be perfected only upon knowledge by the
offeror of the express acceptance by the offeree of the offer. An
acceptance which is not made in the manner prescribed by the
offeror is not effective but constitutes a counter-offer which the
offeror may accept or reject.
Philtectic Corporation, had already withdrawn its offer and had

already notified the petitioner of said withdrawal via
respondents letter dated April 4, 1990 which was delivered to
the petitioner on the same day. Indubitably, there was no
contract perfected by the parties on the March 14, 1990 Letteroffer of the respondent.
On the second issue. It is necessarily so because there was no
need for the respondent to withdraw its offer because the
petitioner had already rejected the respondents offer on March
16, 1990 when the petitioner received the original of the March
14, 1990 Letter-offer of the respondent without the petitioner
affixing his signature on the space therefor.
The contract is not perfected if the offeror revokes or withdraws

its offer and the revocation or withdrawal of the offeror is the
first to reach the offeree.
In the case at bar, the respondent made its offer through its VP.
On March 16, the officer handed over the original letter-offer to
petitioner. The respondent required the petitioner to accept by
affixing his signature and the date in the letter offer, thus
foreclosing an implied acceptance or any other mode of
acceptance. And it is for a fact that the petitioner did not accept
or reject the offer for he needed time to decide whether to accept
or reject. Although the petitioner claims that he had affixed his
conformity to the letter-offer on March 28, 1990, the petitioner
failed to transmit the said copy to the respondent. It was only on
April 7, 1990 when the petitioner appended to his letter to the
respondent a copy of the said March 14, 1990 Letter-offer
bearing his conformity that he notified the respondent of his
acceptance to said offer. But then, the respondent, through
175

Atty Tizon
Traders Royal Bank v Cuison (2009)

Brion, J.
Re: Acceptance; Contracts
DOCTRINE The concurrence of the offer and acceptance is
vital to the birth and the perfection of a contract. The
clear and neat principle is that the offer must be certain
and definite with respect to the cause or consideration
and object of the proposed contract, while the
acceptance of this offer express or implied must be
unmistakable, unqualified, and identical in all respects
to the offer. The required concurrence, however, may
not always be immediately clear and may have to be
read from the attendant circumstances; in fact, a
binding contract may exist between the parties whose
minds have met, although they did not affix their
signatures to any written document.
FACTS
CLCI, through its president Cuison, obtained 2 loans from
Trader Royal Bank. These loans were secured with a real estate
mortgage. CLCI defaulted, prompting the bank to extra
judicially foreclose the property. The bank was the highest
bidder. In a series of written communications between CLCI and
the bank, CLCI manifested its intention to restructure its loan
obligations and to repurchase the subject property. Mrs.
Cuison, the widow and administratrix of the estate of Roman
Cuison Sr., wrote the banks Officer-in-Charge, a letter
indicating her offered terms of repurchase.
CLCI paid the bank P50,000.00 (on August 8, 1986)
and P85,000.00 (on September 3, 1986). The bank received
and regarded these amounts as earnest money for the
repurchase of the subject property. On October 20, 1986, the
bank sent Atty. Roman Cuison, Jr. (Atty. Cuison), as the

president and general manager of CLCI, a letter informing CLCI
of the banks board of directors resolution (TRB Repurchase
Agreement), laying down the conditions for the repurchase of
the subject property. CLCI failed to comply with the terms
notwithstanding the extensions of time given by the bank.
Nevertheless, CLCI tendered a check for P135,091.57 to cover
fifty percent (50%) of the twenty percent (20%) bid price. The
check was dishonored. CLCI tendered an additional
P50,000.00.
On May 29, 1987, the bank sent Atty. Cuison a letter
informing him that the P185,000.00 CLCI paid was
not a deposit, but formed part of the earnest money
under the TRB Repurchase Agreement. On August 28,
1987, Atty. Cuison, by letter, requested that CLCIs outstanding
obligation of P1,221,075.61 (as of July 31, 1987) be reduced to P1
million, and the amount of P221,075.61 be condoned by the
bank. To show its commitment to the request, CLCI paid the
bank P100,000.00 and P200,000.00 on August 28, 1987. The
bank credited both payments as earnest money.
A year later, CLCI inquired about the status of its request. The
bank responded that the request was still under consideration
by the banks Manila office. On September 30, 1988, the bank
informed CLCI that it would resell the subject property and gave
CLCI 15 days to make a formal offer; otherwise, the bank would
sell the subject property to third parties. On October 26, 1988,
CLCI offered to repurchase the subject property for P1.5 million,
given that it had already tendered the amount of P400,000.00
as earnest money.
CLCI subsequently claimed that the bank breached the terms of
repurchase, as it had wrongly considered its payments (in the
amounts ofP140,485.18, P200,000.00 and P100,000.00) as
earnest money, instead of applying them to the purchase price.
Through its counsel, CLCI demanded that the bank rectify the
176

Atty Tizon
repurchase agreement to reflect the true consideration agreed

upon for which the earnest money had been given. The bank did
not act on the demand. Instead, it informed CLCI that the
amounts it received were not earnest money, and that the bank
was willing to return these sums, less the amounts forfeited to
answer for the unremitted rentals on the subject property. CLCI
and Mrs. Cuison, on February 10, 1989, filed with the RTC a
complaint for breach of contract.
Bank argues that the undisputed facts of the case show that
there was no meeting of the minds between the parties given
CLCIs failure to give its consent and conformity to the banks
letter of October 20, 1986, confirmed by the testimony of Atty.
Cuison, no less, when he denied that CLCI consented to the
agreements terms of implementation.
ISSUE Whether there was a perfected contract of repurchase
HELD: YES.
The facts of the present case, although ambivalent in
some respects, point on the whole to the conclusion
that both parties agreed to the repurchase of the
subject property.
A reading of the petitioners letter of October 20, 1986
informing CLCI that the banks board of directors passed a
resolution for the repurchase of [your] property shows that the
tenor of acceptance, except for the repurchase price, was subject
to conditions not identical in all respects with the CLCIs letteroffer of July 31, 1986. In this sense, the banks October 20, 1986
letter was effectively a counter-offer that CLCI must be shown to
have accepted absolutely and unqualifiedly in order to give birth
to a perfected contract. Evidence exists showing that CLCI did
not sign any document to show its conformity with the banks
counter-offer. Testimony also exists explaining why CLCI did
not sign; Atty. Cuison testified that CLCI did not agree with the
implementation of the repurchase transaction since the bank

made a wrong computation.
These indicators notwithstanding, we find that CLCI accepted

the terms of the TRC Repurchase Agreement and thus
unqualifiedly accepted the banks counter-offer under the TRB
Repurchase Agreement and, in fact, partially executed the
agreement,
We counted the following facts, too, as indicators leading to the
conclusion that a perfected contract existed: CLCI did not raise
any objection to the terms and conditions of the TRB
Repurchase Agreement, and instead, unconditionally paid
without protests or objections; CLCIs acknowledgment of their
obligations under the TRB Repurchase Agreement (as shown by
Atty. Cuisons letter of November 29, 1986); and Atty. Cuisons
admission that the TRB Repurchase Agreement was already a
negotiated agreement between CLCI and the bank,
Admittedly, some evidence on record may be argued to point to
the absence of a meeting of the minds (more particularly, the
previous offers made by CLCI to change the payment scheme of
the repurchase of the subject property which was not accepted;
the banks expressed intent to offer the subject property for sale
to third persons at a higher price; and the unaccepted counteroffer by the respondents after the bank increased the purchase
price). These incidents, however, were the results of CLCIs
failure to comply with its obligations to pay the amounts due on
the stipulated time and were made after the parties minds had
met on the terms of the contract. The seemingly contrary
indications, therefore, do not go into and affect the perfection of
the contract; they came after the contract had been perfected
and, as discussed below, were indicative of the banks
cancellation of the repurchase agreement.
177

Atty Tizon
Blas v Santos
Elements of a contract: object
FACTS:
Simeon Blas married Marta Cruz before 1898. They had 3
children. Marta died in 1898, and the following year, Simeon
married Maxima Santos. At the time of this second marriage, no
liquidation of the properties required by Simeon and Marta was
made. Simeon executed a last will and testament. At the time of
the execution of said will, Andres Pascual a son-in-law of the
testator, and Avelina Pascual and others, were present. Andres
had married a descendant by the first marriage. The will was
prepared by Andres, with the help of his nephew Avelino
Pascual. Simeon asked Andres to prepare a document which was
presented in court as Exhibit "A. The reason why Simeon
ordered the preparation of Exhibit "A" was because the
properties that Simeon had acquired during his first marriage
with Marta had not been liquidated and were not separated
from those acquired during the second marriage. Leoncio
Gervacio, son-in-law of Simeon, testified that his children were
claiming from their grandfather Simeon the properties left by
their grandmother Marta. The claim was not pushed through
because they reached into an agreement whereby the parties
agreed that Simeon and Maxima will give 1/2 of the estate of
Simeon.
Exhibit "A" states that the maker (Maxima) had read and knew
the contents of the will of Simeon - she was evidently referring
to the declaration in the will (of Simeon Blas) that his properties
are conjugal properties and one-half thereof belongs to her
(Maxima Santos) as her share of the conjugal assets under the
law. The agreement or promise that Maxima makes in Exhibit
"A" is to hold 1/2 of her said share in the conjugal assets in trust
for the heirs and legatees of her husband in his will, with the
obligation of conveying the same to such of his heirs or legatees
178

Atty Tizon
as she may choose in her last will and testament. Under Exhibit
"A", therefore, Maxima contracted the obligation and promised
to give 1/2 of the properties to the heirs and legatees of Simeon.
Certainly his wife's actual share in the conjugal properties may

not be considered as future inheritance because they were
actually in existence at the time Exhibit "A" was executed.
The court below held that Exhibit "A" cannot it be considered as

a valid and enforceable contract for lack of consideration and
because it deals with future inheritance. Plaintiffs-appellants
argue before us that Exhibit "A" is both a trust agreement and a
contract in the nature of a compromise to avoid litigation.
ISSUE: Whether the object of the compromise is future
inheritance and is therefore, void.
HELD: No. Exhibit "A" is a compromise and at the same time a
contract with a sufficient cause or consideration. It is also
contended that it deals with future inheritance. We do not think
that Exhibit "A" is a contract on future inheritance. It is an
obligation or promise made by the maker to transmit of her
share in the conjugal properties acquired with her husband,
which properties are stated or declared to be conjugal properties
in the will of the husband. The conjugal properties were in
existence at the time of the execution of Exhibit "A" on
December 26, 1936. As a matter of fact, Maxima included these
properties in her inventory of her husband's estate of June 2,
1937. The promise does not refer to any properties that the
maker would inherit upon the death of her husband, because it
is her share in the conjugal assets. That the kind of agreement or
promise contained in Exhibit "A" is not void under Article 1271.
What is prohibited to be the subject matter of a contract under
Article 1271 is " future inheritance." To us future inheritance is
any property or right not in existence or capable of
determination at the time of the contract, that a person may in
the future acquire by succession. The properties subject of the
contract Exhibit "A" are well defined properties, existing at the
time of the agreement, which Simeon declares in his statement
as belonging to his wife as her share in the conjugal partnership.
179

Atty Tizon
Tanedo v CA (1996)
252 SCRA 80
Topic: Elements of a Contract; Essential; Object
DOCTRINE: (n)o contract may be entered into upon a future
inheritance except in cases expressly authorized by law.
FACTS:
Lazardo Taedo executed a notarized deed of absolute sale in
favor of his eldest brother, Ricardo Taedo, and the latters wife,
Teresita Barera, private respondents herein, whereby he
conveyed to the latter in consideration of P1,500.00, one
hectare of whatever share I shall have over Lot No. 191, the said
property being his future inheritance from his parents.
partition executed by the heirs of Matias, which deed included

the land in litigation (Lot 191).
Private respondents, however presented in evidence a Deed of
Revocation of a Deed of Sale , wherein Lazaro revoked the sale
in favor of petitioners for the reason that it was simulated or
fictitious - without any consideration whatsoever.
ISSUE: Whether sale of future inheritance is valid as an object
of a contract
HELD:
The sale made in 1962 involving future inheritance is not really
at issue here. In context, the assailed Decision conceded it may
be legally correct that a contract of sale of anticipated future
inheritance is null and void.
Upon death of his father Matias, Lazaro executed an affidavit of

conformity to reaffirm, respect, acknowledge, and validate the
sale I made in 1962.
But to remove all doubts, we hereby categorically rule that,

pursuant to Article 1347 of the Civil Code, (n)o contract may be
entered into upon a future inheritance except in cases expressly
authorized by law.
Lazaro executed another notarized deed of sale in favor of

private respondents covering his undivided ONE TWELVE
(1/12) of a parcel of land known as Lot 191. He acknowledged
therein his receipt of P 10,000.00 as consideration therefor.
Consequently, said contract made in 1962 is not valid and

cannot be the source of any right nor the creator of any
obligation between the parties.
Ricardo learned that Lazaro sold the same property to his

children, petitioners herein.
Petitioners filed a complaint for rescission (plus damages) of the
deeds of sale executed by Lazaro in favor of private respondents
covering the property inherited by Lazaro from his father.
Petitioners claimed that their father, Lazaro, executed an
Absolute Deed of Sale dated December 29, 1980, conveying to
his ten children his allotted portion under the extrajudicial
180

Atty Tizon
Liguez v. CA (December 15, 1957)

Topic: Essential Elemets of a Contract; Cause
DOCTRINE: A contract to be valid must be based on a legal
cause. However, the burden of proving the illegality of a
cause in an apparent valid contract lies on the one
assailing such validity.
FACTS: Petitioner-appellant Conchita Liguez filed a complaint
against the widow and heirs of the late Salvador P. Lopez to
recover a parcel of land. Liguez 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. The defense
interposed was that the donation was null and void for having
an illicit causa or consideration, which was the plaintiffs
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.
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.
HELD: YES. In the present case, it is scarcely disputable that

Lopez would not have conveyed the property in question had he
known that appellant would refuse to cohabit with him; so that
the cohabitation was an implied condition to the donation, and
being unlawful, necessarily tainted the donation itself.
Here the facts as found by the Court of Appeals (and which we
cannot vary) demonstrate that in making the donation in
question, the late Salvador P. Lopez was not moved exclusively
by the desire to benefit appellant Conchita Liguez, but also to
secure her cohabiting with him, so that he could gratify his
sexual impulses. This is clear from the confession of Lopez to the
witnesses Rodriguez and Ragay, that he was in love with
appellant, but her parents would not agree unless he donated
the land in question to her. Actually, therefore, the donation was
but one part of an onerous transaction (at least with appellant's
parents) that must be viewed in its totality. Thus considered, the
conveyance was clearly predicated upon an illicit causa.
The appellant seeks recovery of the disputed land on the
strength of a donation regular on its face. To defeat its effect, the
appellees must plead and prove that the same is illegal. But such
plea on the part of the Lopez heirs is not receivable, since Lopez,
himself, if living, would be barred from setting up that plea; and
his heirs, as his privies and successors in interest, can have no
better rights than Lopez himself.
ISSUE: WON the deed of donation is void because it was

tainted with illegal cause or consideration, of which donor and
donee were participants.
181

Atty Tizon
Carantes v CA, 76 SCRA 524 (1977)

DOCTRINE: It is total absence of cause or consideration that
renders a contract absolutely void and inexistent.
FACTS:
Mateo Carantes was the original owner of a certain parcel of
land. When he died, he was survived by his wife and six
children. Subsequently, the parcel of land was subjected for
expropriation, and was later on indeed expropriated.
A deed denominated as Assignment of Right of Inheritance was
executed by four of Mateos children assigning Maximo Carantes
their rights to inheritance over the lot. Maximo then sold the
remaining lots to the government and also registered on Mar.
16, 1940 the deed of Assignment of Right to Inheritance. The
still remaining lot was issued in the name of Maximo.
A complaint was filed against Maximo alleging that the deed be
annulled on the ground of fraud. The trial court rendered a
decision stating that plaintiffs right of action has prescribed.
The CA reversed the decision. It also concluded that the deed of
"Assignment of Right to Inheritance" is void ab initio and
inexistent on the grounds that real consent was wanting and
that there is no valid consideration in the said contract.
Article 1409 (2) of the new Civil Code relied upon by the
respondent court provides that contracts "which are absolutely
simulated or fictitious" are inexistent and void from the
beginning. The basic characteristic of simulation is the fact that
the apparent contract is not really desired or intended to
produce legal effects or in any way alter the juridical situation of
the parties.
The respondents' action may not be considered as one to declare
the inexistence of a contract for lack of consideration. It is total
absence of cause or consideration that renders a contract
absolutely void and inexistent. In the case at bar consideration
was not absent. The sum of P1.00 appears in the document as
one of the considerations for the assignment of inheritance. In
addition and this of great legal import the document recites
that the decedent Mateo Carantes had, during his lifetime,
expressed to the signatories to the contract that the property
subject-matter thereof rightly and exclusively belonged to the
petitioner Maximino Carantes. This acknowledgment by the
signatories definitely constitutes valuable consideration for the
contract.
ISSUE: Whether there was a valid cause in the said deed.

HELD: Yes. The SC did not agree with the respondent court's
legal conclusion that the deed of "Assignment of Right to
Inheritance" is void ab initio and inexistent on the grounds that
real consent was wanting and the consideration of P1.00 is so
shocking to the conscience that there was in fact no
consideration, hence, the action for the declaration of the
contract's inexistence does not prescribe pursuant to article 1410
of the new Civil Code.
182

Atty Tizon
Buenaventura v CA (2003)
Carpio, J
Re: Cause; Contracts
c. Thirdly, the deeds of sale do not reflect and express the

true intent of the parties (vendors and vendees);
d. Fourthly, the purported sale of the properties in litis was
the result of a deliberate conspiracy designed to unjustly
deprive the rest of the compulsory heirs (plaintiffs
herein) of their legitime.
DOCTRINE: Failure to pay the consideration is different from

lack of consideration. The former results in a right to
demand the fulfillment or cancellation of the obligation
under an existing valid contract while the latter
prevents the existence of a valid contract.
Petitioners assert that their respondent siblings did not actually

pay the prices stated in the Deeds of Sale to their respondent
father. Thus, petitioners ask the court to declare the Deeds of
Sale void.
FACTS
ISSUE
Defendant spouses Leonardo Joaquin and Feliciana Landrito

are the parents of plaintiffs Consolacion, Nora, Emma and
Natividad as well as of defendants Fidel, Tomas, Artemio,
Clarita,
Felicitas,
Fe,
and
Gavino,
all
surnamed
JOAQUIN. Sought to be declared null and void ab initio are
certain deeds of sale of real property executed by defendant
parents Leonardo Joaquin and Feliciana Landrito in favor of
their co-defendant children and the corresponding certificates of
title issued in their names
Whether the Deeds of Sale are void for lack of consideration
Petitioners allege that the deeds of sale are null and void
because
a. Firstly, there was no actual valid consideration for the
deeds of sale xxx over the properties in litis;
b. Secondly, assuming that there was consideration in the
sums reflected in the questioned deeds, the properties are
more than three-fold times more valuable than the
measly sums appearing therein;
Whether the Deeds of Sale are void for gross inadequacy of price
HELD:
THERE WAS CONSIDERATION
A contract of sale is not a real contract, but a consensual
contract. As a consensual contract, a contract of sale becomes a
binding and valid contract upon the meeting of the minds as to
price. If there is a meeting of the minds of the parties as to the
price, the contract of sale is valid, despite the manner of
payment, or even the breach of that manner of payment. If the
real price is not stated in the contract, then the contract of sale is
valid but subject to reformation. If there is no meeting of the
minds of the parties as to the price, because the price stipulated
in the contract is simulated, then the contract is void. Article
1471 of the Civil Code states that if the price in a contract of sale
is simulated, the sale is void.
It is not the act of payment of price that determines
the validity of a contract of sale. Payment of the price
183

Atty Tizon
has nothing to do with the perfection of

contract. Payment of the price goes into
performance of the contract. Failure to pay
consideration
is
different
from
lack
consideration. The former results in a right
demand the fulfillment or cancellation of
obligation under an existing valid contract while
latter prevents the existence of a valid contract.
the
the
the
of
to
the
the
Petitioners failed to show that the prices in the Deeds of Sale

were absolutely simulated. To prove simulation, petitioners
presented Emma Joaquin Valdozs testimony stating that their
father, respondent Leonardo Joaquin, told her that he would
transfer a lot to her through a deed of sale without need for her
payment of the purchase price. The trial court did not find the
allegation of absolute simulation of price credible. Petitioners
failure to prove absolute simulation of price is magnified by
their lack of knowledge of their respondent siblings financial
capacity to buy the questioned lots. On the other hand, the
Deeds of Sale which petitioners presented as evidence plainly
showed the cost of each lot sold. Not only did respondents
minds meet as to the purchase price, but the real price was also
stated in the Deeds of Sale. As of the filing of the complaint,
respondent siblings have also fully paid the price to their
respondent father.
subject matter of sale. All the respondents believed that they

received the commutative value of what they gave.
In the instant case, the trial court found that the lots were sold
for a valid consideration, and that the defendant children
actually paid the purchase price stipulated in their respective
Deeds of Sale. Actual payment of the purchase price by the
buyer to the seller is a factual finding that is now conclusive
upon us.
LOTS WERE SOLD FOR A VALID CONSIDERATION

Petitioners ask that assuming that there is consideration, the
same is grossly inadequate as to invalidate the Deeds of Sale.
(ART 1355, 1470)
Petitioners failed to prove any of the instances mentioned in
Articles 1355 and 1470 of the Civil Code which would invalidate,
or even affect, the Deeds of Sale. Indeed, there is no
requirement that the price be equal to the exact value of the
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Tinsay v. Yusay
Classification of contracts
FACTS:
the remaining 1/2 interest in favor of the children of Perpetua in

equal shares, the court holding in substance that Juana not
having been a party to the partition made in 1911, her interests
were not affected thereby.
Juan Yusay died, leaving a widow Juana Servando and 5

children, Candido, Numeriana, Jovito, Jovita and Petra. His
estate consisted of his interest in a tract of land situated in Iloilo,
and which was community property of his marriage to Juana.
Jovito purchased the interests of Candido and Numeriana in the
land, thus acquiring a 3/5 interest in the same. Jovito died,
leaving a widow, Perpetua, and 5 minor children. Perpetua,
for herself and in representation of her children,
entered into an agreement in writing with Jovita and
Petra which purported to provide for the partition of
the land and whereby Perpetua and her children were to
occupy the portion to the northeast of Calle Aldeguer and Jovita
and Petra were to have the portion or lot to the southwest of this
street. Jovita and Petra expressly relinquished in favor of the
children of Jovito any and all rights which they might have in
the land.
After the death of Juana, the appellee Jose Tinsay was appointed
administrator of her estate. Jovita and Petra sold lot No. 283 to
Vicente Tad-Y for P20,000. Tinsay filed an amended inventory
in which the P20,000 received by Jovita and Petra from the sale
of lot No. 283 was included as bien colacionable. A scheme for
the distribution of the estate was submitted to the court in which
the P20,000 were brought into collation with the result that the
total value of the estate being only P28,900, according to
inventory, no further share in the estate was assigned to Jovita
and Petra. The scheme of partition was opposed by Jovita and
Petra. The court approved the scheme of partition and declared
the proceeds of the sale of lots Nos. 283 and 744 "fictitiously
collationable" and held that this being in excess of their share of
the inheritance, Jovita and Petra could claim no further
participation in the other property described in the inventory
and in the scheme of partition.
A cadastral survey was made of a section of Iloilo in which the

subject land is situated. The portion allotted to Perpetua and her
children was designed as lot No. 241, with a narrow strip set
aside for the widening of Calle Aldeguer and described as lot No.
713. The portion which under the partition of 1911 fell to the
share of Jovita and Petra was given the lot number 283; a
narrow strip of the same portion along Calle Aldeguer is
numbered 744.
ISSUE:
Juana filed a petition in the cadastral case asking for the

reopening of the case as to lots Nos. 241 and 713 on the ground
that she was the owner of a 1/2 interest in said lots. The petition
for reopening was granted. The 2 lots Nos. 241 and 713 were
decreed in favor of Juana and the children of Jovito in the
proportions of an undivided half interest in favor of Juana and
Whether or not the partition agreement was valid despite lack of

participation on the part of Juana.
HELD: No. Juana not being a party to the partition agreement,
the agreement standing alone was ineffective as against her. The
attempt to partition her land among her heirs, constituting a
partition of a future inheritance was invalid under the second
paragraph of article 1271 and for the same reason the
renunciation of all interest in the land which now constitutes
lots Nos. 241 and 713 made by the appellants in favor of the
children of Jovito would likewise be of no binding force as to the
undivided portion which belonged to Juana. But if the parties
entered into the partition agreement in good faith and treated
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Atty Tizon
all of the land as a present inheritance, and if the appellants on

the strength of the agreement obtained their Torrens title to the
land allotted to them therein, and if Perpetua Sian in reliance on
the appellants renunciation of all interest claimed by her on
behalf of her children in the cadastral case refrained from
presenting any opposition to the appellants claim to the entire
fee in the land assigned to them in the partition agreement and
if the appellants after the death of Juana continued to enjoy the
benefits of the agreement refusing to compensate the heirs of
Jovito for the latters loss of their interest in lots Nos. 283 and
744 through the registration of the lots in the name of the
appellants and the subsequent alienation of the same to
innocent third parties, said appellants are now estopped from
repudiating the partition agreement of 1911 and from claiming
any further interest in lots Nos. 241 and 713. There is, however,
no reason why they should not be allowed to share in the
distribution of the other property left by Juana.
Dizon v Gaborro (1978)

83 SCRA 688
Topic: According to Name
DOCTRINE: We find that the agreement between petitioner
Dizon and respondent Gaborro is one of those inanimate
contracts under Art.1307 of the New Civil Code whereby
petitioner and respondent agreed "to give and to do"
certain rights and obligations respecting the lands and
the mortgage debts of petitioner which would be
acceptable to the bank. but partaking of the nature of
the antichresis insofar as the principal parties,
petitioner Dizon and respondent Gaborro, are
concerned.
FACTS:
The antecedent facts established in the record are not disputed.
Petitioner Jose P. Dizon was the owner of the three (3) parcels of
land, subject matter of this litigation, situated in Mabalacat,
Pampanga, as evidenced by TCT No. 15679.
He constituted a first mortgage lien in favor of the Development
Bank of the Philippines in order to secure a loan in the sum of
P38,000.00 trial a second mortgage lien in favor of the
Philippine National Bank to cure his indebtedness to said bank
in the amount of P93,831.91.
Petitioner Dizon having defaulted in the payment of his debt,
the Development Bank of the Philippines foreclosed the
mortgage extrajudicially pursuant to the provisions of Act No.
3135.
Sometime prior to October 6, 1959 Alfredo G. Gaborro trial Jose
P. Dizon met. Gaborro became interested in the lands of Dizon.
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Atty Tizon
Dizon originally intended to lease to Gaborro the property which

had been lying idle for some time. But as the mortgage was
already foreclosed by the DPB trial the bank in fact purchased
the lands at the foreclosure sale on May 26, 1959, they
abandoned the projected lease. They then entered into the
following contract on October 6, 1959 captioned trial quoted, to
wit: DEED OF SALE WITH ASSUMPTION OF MORTGAGE
possession, the enjoyment and use of the lands until petitioner

can reimburse fully the respondent the amounts paid by the
latter to DBP and PNB, to accomplish the following ends: (a)
payment of the bank obligations; (b) make the lands productive
for the benefit of the possessor, respondent Gaborro, (c) assure
the return of the land to the original owner, petitioner Dizon,
thus rendering equity and fairness to all parties concerned.
The second contract executed the same day, October 6, 1959 is

called Option to Purchase Real Estate.
In view of all these considerations, the law and Jurisprudence,

and the facts established. We find that the agreement between
petitioner Dizon and respondent Gaborro is one of those
inanimate contracts under Art.1307 of the New Civil Code
whereby petitioner and respondent agreed "to give and to do"
certain rights and obligations respecting the lands and the
mortgage debts of petitioner which would be acceptable to the
bank. but partaking of the nature of the antichresis insofar as
the principal parties, petitioner Dizon and respondent Gaborro,
are concerned.
The sum of P131,813.91 which purports to be the consideration

of the sale was not actually paid by Alfredo G. Gaborro to the
petitioner. The said amount represents the aggregate debts of
the petitioner with the Development Bank of the Philippines
trial the Philippine National Bank.After the execution of said
contracts, Alfredo G. Gaborro took possession of the three
parcels of land in question.
Jose P. Dizon instituted a complaint in the Court of First
Instance of Pampanga, Gaborro, alleging that the documents
Deed of Sale With Assumption of Mortgage and the Option to
Purchase Real Estate did not express the true intention and
agreement bet. between the parties.
ISSUE: Whether the deed was of a Deed of Sale with
Assumption of Mortgage', trial Option to Purchase Real Estate
or merely an equitable mortgage or conveyance thereof by way
of security for reimbursement, refund or repayment by
petitioner Jose P. Dizon?
HELD: In the light of the foreclosure proceedings and sale of
the properties, a legal point of primary importance here, as well
as other relevant facts and circumstances, We agree with the
findings of the trial and appellate courts that the true intention
of the parties is that respondent Gaborro would assume and pay
the indebtedness of petitioner Dizon to DBP and PNB, and in
consideration therefor, respondent Gaborro was given the
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Hernaez v. Delos Angeles (1969)

Topic: Form of Contracts
DOCTRINE: Contracts shall be obligatory in whatever form
they may have been entered into, provided all the
essential requisites for their validity are present.
However, when the law requires that a contract
be in some form in order that it may be valid or
enforceable, or that a contract be proved in a
certain way, that requirement is absolute and
indispensable....
FACTS: Marlene Dauden-Hernaez, a movie actress, filed a case
against Hollywood Far East Productions its President and
General Manager, Ramon Valenzuela, to recover P14,700
allegedly the balance due for her services as leading actress in
two motion pictures. The complaint was dismissed by Judge De
Los Angeles mainly because her claim was not supported by a
written document, public or private in violation of Articles 1356
and 1358 of the Civil Code. Upon a motion for reconsideration,
the respondent judged dismissed the same because the
allegations were the same as the first motion.
According to Judge De Los Angeles, the contract sued upon was
not alleged to be in writing when Article 1358 requires it to be so
because the amount involved exceeds P500.
ISSUE: WON a contract for personal services involving more
than P500.00 was either invalid or unenforceable under the last
paragraph of Article 1358.
HELD: NO.
Consistent with the Spanish Civil Code in upholding spirit and
intent of the parties over formalities, in general, contracts are
valid and binding from their perfection regardless of whether

they are oral or written.
However, as provided in the 2nd sentence of Art. 1356:
ART. 1356. Contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential requisites
for their validity are present. However, when the law
requires that a contract be in some form in order that
it may be valid or enforceable, or that a contract be
proved in a certain way, that requirement is absolute
and indispensable....
Thus, the two exceptions to the general rule that the form is
irrelevant to the binding effect of a contract are:
(a) Solemn Contracts - contracts which the law requires to be
in some particular form (writing) in order to make them
valid and enforceable. Examples:
1. Donation of immovable property (Art. 749) which
must be in a public instrument to be valid. In
order "that the donation maybe valid", i.e., existing
or binding.
2. Donation of movables worth more than P5,000
(Art. 748) which must be in writing otherwise they
are void.
(b) Contracts that the law requires to be proved by some
writing (memorandum) of its terms, i.e. those covered by
the old Statute of Frauds, now Article 1403(2) of the Civil
Code.
For the latter example, their existence are not provable by mere
oral testimony (unless wholly or partly executed) and are
required to be in writing to be enforceable by action in court.
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Atty Tizon
However, the contract sued upon (compensation for services)

does not come under either exception. While the last clause of
Article 1358 provides that "all other contracts where the amount
involved exceeds five hundred pesos must appear in writing,
even a private one." Said Article does not provide that the
absence of a written form in this case will make the agreement
invalid or unenforceable.
On the contrary, Article 1357 clearly indicates that contracts
covered by Article 1358 are binding and enforceable by action or
suit despite the absence of writing.
Zamora v Miranda (2012)

G.R. No. 162930,
DOCTRINE: Article 1358 of the Civil Code, which requires the
embodiment of certain contracts in a public instrument,
is only for convenience, and registration of the
instrument only adversely affects third parties. Formal
requirements are, therefore, for the benefit of third
parties. Non-compliance therewith does not adversely
affect the validity of the contract nor the contractual
rights and obligations of the parties thereunder.
FACTS: Petitioner principally prays that she be declared the
owner of the subject property; that respondent Beatriz Miranda
be ordered to execute a deed of sale in her (petitioner's) favor;
and that the sale of the subject property in favor of respondents
Ang be nullified.
The sole evidence relied upon by petitioner to prove her claim of
ownership over the subject property is the receipt dated October
23, 1972 which states:
Rec'd the amount of fifty thousand (P50,000)
pesos from Lagrimas Zamora as payment for the
property at Carmelite, Bajada, Davao City.
Documents for Agdao property follows.
(signed)
Beatriz H. Miranda
The trial court dismissed petitioner's complaint on the ground
that the receipt dated October 23, 1972 (Exhibit "B") is a
worthless piece of paper, which cannot be made the basis of
petitioners claim of ownership over the property as Mr. Arcadio
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Atty Tizon
Ramos, an NBI handwriting expert, established that the

signature appearing on the said receipt is not the signature of
respondent Beatriz Miranda.
The Court of Appeals affirmed the trial court's dismissal

of the complaint.
The Court sustains the decision of the Court of Appeals.
NBI handwriting expert, the trial court and the Court of

Appeals.
ISSUE: Can the receipt dated October 23, 1972 evidencing sale
of real property, being a private document, be a basis of
petitioner's claim over the subject property?
HELD: The general rule is in Article 1358 of the Civil Code
which provides that acts and contracts which have for their
object the transmission of real rights over immovable property
or the sale of real property must appear in a public document. If
the law requires a document or other special form, the
contracting parties may compel each other to observe that form,
once the contract has been perfected.
In Fule v. Court of Appeals, the Court held that Article 1358 of
the Civil Code, which requires the embodiment of certain
contracts in a public instrument, is only for convenience, and
registration of the instrument only adversely affects third
parties. Formal requirements are, therefore, for the benefit of
third parties. Non-compliance therewith does not adversely
affect the validity of the contract nor the contractual rights and
obligations of the parties thereunder.
However, in this case, the trial court dismissed petitioner's
complaint on the ground that the receipt dated October 23, 1972
(Exhibit "B") is not the signature of respondent Beatriz Miranda.
The receipt dated October 23, 1972 cannot prove ownership over
the subject property as respondent Beatriz Miranda's signature
on the receipt, as vendor, has been found to be forged by the
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Garcia v Bisaya (1955)

Reyes, A, J.
Re: Reformation of Contracts
DOCTRINE: In Reformation of contracts, allegation of the
real agreement or intention of parties is essential since
the object sought in an action for reformation is to make
an instrument conform to the real agreement or
intention of the parties.
FACTS
On May 20, 1952, plaintiff filed a Complaint against the
defendants in the Court of First Instance of Oriental Mindoro,
alleging that on November 12, 1938, defendants executed in
favor of plaintiff a deed of sale covering a parcel of land therein
described; that the said land "was erroneously designated by the
parties in the deed of sale as an unregistered land [not
registered under Act 496, nor under the Spanish Mortgage Law]
when in truth and in fact said land is a portion of a big mass of
land registered under Original Certificate of Title No. 6579 in
the Office of the Register of Deeds of Oriental Mindoro"; that
despite persistent demand from plaintiff to have the error
corrected, defendants have refused to do so. Plaintiff, therefore,
prayed for judgment ordering defendants to make the aforesaid
correction in the deed of sale.
Answering the Complaint, defendants denied having executed
the alleged deed of sale and pleaded prescription as a defense.
Traversing the plea of prescription, plaintiff alleged, among
other things, that he "was without knowledge of the error sought
to be corrected at the time the deed of sale was executed and for
many years thereafter," having discovered the said error "only
recently".
Trial court dismissed the case on the basis of prescription.

ISSUE: Whether petition must be dismissed because of
prescription.
HELD: YES, but not because action has prescribed but
because there was no cause of action.
Both appellant and appellees apparently regard the present
action as one for the reformation of an instrument under
Chapter 4, Title II, Book IV of the new Civil Code. Specifically,
the object sought is the correction of an alleged mistake in a
deed of sale covering a piece of land. The action being upon a
written contract, it should prescribe in ten years counted from
the day it could have been instituted. Obviously, appellant
could not have instituted his action to correct an error
in a deed until that error was discovered. There being
nothing in the pleadings to show that the error was discovered
more than ten years before the present action was filed on May
20, 1952, while, on the other hand, there is allegation that the
error was discovered "only recently", We think the action should
not have been dismissed as having already prescribed before the
factual basis for prescription had been established and clarified
by evidence.
We note, however, that appellant's Complaint states
no cause of action, for it fails to allege that the
instrument to the reformed does not express the real
agreement or intention of the parties. Such allegation is
essential since the object sought in an action for reformation is
to make an instrument conform to the real agreement or
intention of the parties. [Art. 1359, new Civil Code; 23 R. C. L.,
par. 2]. But the Complaint does not even allege what the
real agreement or intention was. How then is the Court to
know that the correction sought will make the instrument
conform to what was agreed or intended by the parties? It is not
191

Atty Tizon
the function of the remedy of reformation to make a new

agreement, but to establish and perpetuate the true existing one.
Moreover, Courts do not reform instruments merely for the sake
of reforming them, but only to enable some party to assert right
under them as reformed. [23 R. C. L., par. 2]. If the instrument
in the present case is reformed by making it state that the land
therein conveyed is already covered by a Torrens certificate of
title, what right will the appellant, as vendee, be able to assert
under the reformed instrument when according to himself, or
his counsel states in his brief, said title is in the name of
Torcuata Sandoval, obviously a person other than the vendor?
Would not the sale to him then be ineffective, considering that
he would be in the position of one who knowingly purchased
property not belonging to the vendor?
Perhaps appellant's real grievance is that he has been led to
enter into the contract of sale through fraud or
misrepresentation on the part of the vendor or in the mistaken
belief that, as stated in the deed, the property he was buying was
unregistered land. But if that be the case, Article 1359 of the new
Civil Code expressly provides that "the proper remedy is not
reformation of the instrument but annulment of the contract."
Appellant's complaint, however, does not ask for the annulment
of the deed; neither does it contain allegations essential to an
action for that purpose.
Bentir v Leande
Reformation of Instruments
DOCTRINE: An action for reformation must be brought
within the period prescribed by law, otherwise, it will be
barred by the mere lapse of time.
FACTS:
On May 15, 1992, respondent Leyte Gulf Traders, Inc. filed a
complaint for reformation of instrument, specific performance,
annulment of conditional sale and damages against petitioners
Yolanda Rosello-Bentir and spouses Samuel and Charito
Pormida. Respondent alleged that it entered into a contract of
lease of a parcel of land with Bentir for a period of 20 years
starting May 5, 1968. According to respondent, the lease was
extended for another 4 years or until May 31, 1992. On May 5,
1989, Bentir sold the leased premises to spouses Pormada.
Respondent questioned the sale alleging that it had a right of
first refusal. Rebuffed, it filed a complaint seeking the
reformation of the expired contract of lease on the ground that
its lawyer inadvertently omitted to incorporate in the contract of
lease executed in 1968, the verbal agreement between the
parties that in the event Bentir leases or sells the lot after the
expiration of the lease, respondent has the right to equal the
highest offer.
Petitioners contended that respondent is guilty of laches for not
bringing the case for reformation of the lease contract within the
prescriptive period of 10 years from its execution. RTC
dismissed the complaint. The cause of action to reform the
contract to reflect such right of first refusal, has already
prescribed after 10 years, counted from May 5, 1988 when the
contract of lease incepted. Upon motion for reconsideration,
RTC reversed the order of dismissal on the grounds that the
action for reformation had not yet prescribed and the dismissal
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Atty Tizon
was premature and precipitate, denying respondent of its right

to procedural due process. CA affirmed.
provision, the other terms of the original contract were deemed

revived in the implied new lease.
ISSUE: Whether the complaint for reformation filed by

respondent Leyte Gulf Traders, Inc. has prescribed.
We do not agree. First, if, according to respondent, there was an

agreement between the parties to extend the lease contract for 4
years after the original contract expired in 1988, then Art. 1670
would not apply as this provision speaks of an implied new lease
(tacita reconduccion) where at the end of the contract, the lessee
continues to enjoy the thing leased "with the acquiescence of the
lessor", so that the duration of the lease is "not for the period of
the original contract, but for the time established in Article 1682
and 1687." In other words, if the extended period of lease was
expressly agreed upon by the parties, then the term should be
exactly what the parties stipulated, not more, not less. Second,
even if the supposed 4-year extended lease be considered as an
implied new lease under Art. 1670, "the other terms of the
original contract" contemplated in said provision are only those
terms which are germane to the lessees right of continued
enjoyment of the property leased. The prescriptive period of 10
years provided for in Art. 1144 applies by operation of law, not
by the will of the parties. Therefore, the right of action for
reformation accrued from the date of execution of the contract
of lease in 1968.
RULING: Yes. The remedy of reformation of an instrument is

grounded on the principle of equity where, in order to express
the true intention of the contracting parties, an instrument
already executed is allowed by law to be reformed. The right of
reformation is necessarily an invasion or limitation of the parol
evidence rule since, when a writing is reformed, the result is that
an oral agreement is by court decree made legally effective. The
courts, as the agencies authorized by law to exercise the power
to reform an instrument, must necessarily exercise that power
sparingly and with great caution and zealous care. The remedy
must be subject to limitations as may be provided by law, among
which is laches. It may be barred by lapse of time. The
prescriptive period for actions based upon a written contract
and for reformation of an instrument is 10 years under Article
1144. Prescription is intended to suppress stale and fraudulent
claims arising from transactions which facts had become so
obscure from the lapse of time or defective memory. Respondent
had 10 years from 1968, the time when the contract of lease was
executed, to file an action for reformation. It did so only on May
15, 1992 or 24 years after the cause of action accrued, hence, its
cause of action has become stale, hence, time-barred.
RTC held that the 10-year prescriptive period should be
reckoned not from the execution of the contract of lease in 1968,
but from the date of the alleged 4-year extension of the lease
contract after it expired in 1988. Consequently, when the action
for reformation of instrument was filed in 1992 it was within 10
years from the extended period of the lease. Respondent
theorized that the extended period of lease was an "implied new
lease" within the contemplation of Article 1670, under which
Even if we were to assume for the sake of argument that the

instant action for reformation is not time-barred, respondent
corporations action will still not prosper. Under Section 1, Rule
64 of the New Rules of Court, an action for the reformation of an
instrument is instituted as a special civil action for declaratory
relief. Since the purpose of an action for declaratory relief is to
secure an authoritative statement of the rights and obligations of
the parties for their guidance in the enforcement thereof, or
compliance therewith, and not to settle issues arising from an
alleged breach thereof, it may be entertained only before the
breach or violation of the law or contract to which it refers.
Here, respondent brought the present action for reformation
after an alleged breach or violation of the contract was already
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Atty Tizon
committed by Bentir. Consequently, the remedy of reformation

no longer lies.
Sarming v Dy (2002)
383 SCRA 131
Topic: Reformation of Instruments
DOCTRINE: An action for reformation of instrument under
this provision of law may prosper only upon the
concurrence of the following requisites: (1) there must
have been a meeting of the minds of the parties to the
contact; (2) the instrument does not express the true
intention of the parties; and (3) the failure of the
instrument to express the true intention of the parties is
due to mistake, fraud, inequitable conduct or accident.
FACTS: Petitioners are the successors-in-interest of original
defendant Silveria Flores, while respondents Cresencio Dy and
Ludivina Dy-Chan are the successors-in-interest of the original
plaintiff Alejandra Delfino, the buyer of one of the lots subject of
this case. They were joined in this petition by the successors-ininterest of Isabel, Juan, Hilario, Ruperto, Tomasa, and Luisa
and Trinidad themselves, all surnamed Flores, who were also
the original plaintiffs in the lower court. They are the
descendants of Venancio and Jose, the brothers of the original
defendant Silveria Flores.
In their complaint for reformation of instrument against Silveria
Flores, the original plaintiffs alleged that they, with the
exception of Alejandra Delfino, are the heirs of Valentina Unto
Flores, who owned, among others, Lot 5734, and Lot 4163, both
located at Dumaguete City.
After the death of Valentina Unto Flores, her three children,
namely: Jose, Venancio, and Silveria, took possession of Lot
5734 with each occupying a one-third portion. Upon their death,
their children and grandchildren took possession of their
respective shares. The other parcel, Lot 4163 which is solely
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Atty Tizon
registered under the name of Silveria, was sub-divided between

Silveria and Jose. Two rows of coconut trees planted in the
middle of this lot serves as boundary line.
In January 1956, Luisa, Trinidad, Ruperto and Tomasa,
grandchildren of Jose and now owners of one-half of Lot 4163,
entered into a contract with plaintiff Alejandra Delfino, for the
sale of one-half share of Lot 4163 after offering the same to their
co-owner, Silveria, who declined for lack of money. Silveria did
not object to the sale of said portion to Alejandra Delfino.
Before preparing the document of sale, the late Atty. Deogracias
Pinili, Alejandra's lawyer, called Silveria and the heirs of
Venancio to a conference where Silveria declared that she owned
half of the lot while the other half belonged to the vendors; and
that she was selling her three coconut trees found in the half
portion offered to Alejandra Delfino for P15. When Pinili asked
for the title of the land, Silveria Flores, through her daughter,
Cristita Corsame, delivered Original Certificate of Title No.
4918-A, covering Lot No. 5734, and not the correct title covering
Lot 4163. At that time, the parties knew the location of Lot 4163
but not the OCT Number corresponding to said lot.
Believing that OCT No. 4918-A was the correct title
corresponding to Lot 4163, Pinili prepared a notarized
Settlement of Estate and Sale signed by the parties on January
19, 1956. As a result, OCT No. 4918-A was cancelled and in lieu
thereof, TCT No. 5078 was issued in the names of Silveria Flores
and Alejandra Delfino, with one-half share each. Silveria Flores
was present during the preparation and signing of the deed and
she stated that the title presented covered Lot No. 4163.
Alejandra Delfino immediately took possession and introduced
improvements on the purchased lot, which was actually one-half
of Lot 4163 instead of Lot 5734 as designated in the deed.
Two years later, when Alejandra Delfino purchased the
adjoining portion of the lot she had been occupying, she
discovered that what was designated in the deed, Lot 5734, was
the wrong lot. She sought the assistance of Pinili who
approached Silveria and together they inquired from the
Registry of Deeds about the status of Lot 4163. They found out
that OCT No. 3129-A covering Lot 4163 was still on file.
Alejandra Delfino paid the necessary fees so that the title to Lot
4163 could be released to Silveria Flores, who promised to turn
it over to Pinili for the reformation of the deed of sale. However,
despite repeated demands, Silveria did not do so, prompting
Alejandra and the vendors to file a complaint against Silveria for
reformation of the deed of sale with damages before the
Regional Trial Court of Negros Oriental.
In her answer, Silveria Flores claimed that she was the sole
owner of Lot 4163 as shown by OCT No. 3129-A and
consequently, respondents had no right to sell the lot. According
to her, the contract of sale clearly stated that the property being
sold was Lot 5734, not Lot 4163. She also claimed that
respondents illegally took possession of one-half of Lot 4163.
She thus prayed that she be declared the sole owner of Lot 4163
and be immediately placed in possession thereof. She also asked
for compensatory, moral, and exemplary damages and
attorney's fees.
The case lasted for several years in the trial court due to several
substitutions of parties. The complaint was amended several
times. Moreover, the records had to be reconstituted when the
building where they were kept was razed by fire. But, earnest
efforts for the parties to amicably settle the matters among
themselves were made by the trial court to no avail
Trial Court ruled in favor of respondents, CA Affirmed
ISSUE: Whether reformation of the subject deed is proper by
reason of mistake in designating the correct lot number.
HELD: Reformation is that remedy in equity by means of which
a written instrument is made or construed so as to express or
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conform to the real intention of the parties, as provided in

Article 1359 of the Civil Code.
An action for reformation of instrument under this provision of
law may prosper only upon the concurrence of the following
requisites: (1) there must have been a meeting of the minds of
the parties to the contact; (2) the instrument does not express
the true intention of the parties; and (3) the failure of the
instrument to express the true intention of the parties is due to
mistake, fraud, inequitable conduct or accident.
conclusion of both the Court of Appeals and the trial court,

based on the evidence on record, that Silveria Flores owns only
one-half of Lot 4163. The other half belongs to her brother Jose,
represented now by his grandchildren successors-in-interest. As
such, the latter could rightfully sell the land to Alejandra
Delfino.
All of these requisites, in our view, are present in this case.

There was a meeting of the minds between the parties to the
contract but the deed did not express the true intention of the
parties due to mistake in the designation of the lot subject of the
deed. There is no dispute as to the intention of the parties to sell
the land to Alejandra Delfino but there was a mistake as to the
designation of the lot intended to be sold as stated in the
Settlement of Estate and Sale.
While intentions involve a state of mind which may sometimes
be difficult to decipher, subsequent and contemporaneous acts
of the parties as well as the evidentiary facts as proved and
admitted can be reflective of one's intention. The totality of the
evidence clearly indicates that what was intended to be sold to
Alejandra Delfino was Lot 4163 and not Lot 5734. As found by
both courts below, there are enough bases to support such
conclusion. We particularly note that one of the stipulated facts
during the pre-trial is that one-half of Lot 4163 is in the
possession of plaintiff Alejandra Delfino "since 1956 up to the
present." Now, why would Alejandra occupy and possess onehalf of said lot if it was not the parcel of land which was the
object of the sale to her? Besides, as found by the Court of
Appeals, if it were true that Silveria Flores was the sole owner of
Lot 4163, then she should have objected when Alejandra Delfino
took possession of one-half thereof immediately after the sale.
Additionally, we find no cogent reason to depart from the
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Oria v. McMicking (1912)

Topic: Rescissible Contracts
DOCTRINE:
FACTS: Gutierrez Hermanos brought an action against Oria
Hermanos & Co. for the recovery of sums aggregating in amount
nearly P160,000. Subsequent to the beginning of the above
actions the members of the company of Oria Hermanos & Co.
agreed to dissolved their relation and entered into liquidation.
Oria Hermanos & Co. sold all of its property to Manuel Oria
Gonzalez, the plaintiff in this case. Included in the sale was the
steamship Serantes which is the subject of this litigation.
In determining whether or not the sale in question was
fraudulent as against creditors, these facts must be kept in
mind:
The plaintiff is a young man twenty-five years of age.

There is no pretense whatsoever that he owned any
property or had any business at the time of the sale. On
the contrary it appears without contradiction that, when
the sale took place, he was merely a student without
assets and without gainful occupation.
Plaintiff, at the time of the sale, was fully aware of the two
suits that have already been begun against the company
whose assets he was purchasing and well knew that if said
suits should terminate in favor of the plaintiffs therein
the judgments in which they terminated would have to be
paid out of the property which he was then taking over or
they would not be paid at all.
Under all the circumstances the sale in question was, so

far as the creditors were concerned, without
consideration. To turn over a business worth P274,000 to
an "impecunious and vocationless youth" who knew
absolutely nothing about the business he received, and
whose adaptability to the management of that business
was entirely unknown, without a penny being paid down,
without any security whatsoever, is a proceeding so
unusual, so devoid of care and caution, and so wholly
outside of the well defined lines of ordinary business
transactions, as to startle any person interested in the
concern.
It is certain that the members of the company of Oria

Hermanos & Co. would never have made a similar
contract or executed a similar instrument with a stranger.
The prohibition in the contract against the sale of certain

portions of the property by the plaintiff offers no
protection whatever to the creditors. Such prohibitions is
At the time of said sale the value of the assets of Oria

Hermanos & Co., as stated by the partners themselves,
was P274,000.
That at the time of said sale actions were pending against
said company by one single creditor for sums aggregating
in amount nearly P160,000.
The vendee of said sale was a son of Tomas Oria y Balbas
and a nephew of the other two persons heretofore
mentioned which said three brothers together constituted
all of the members of said company.
Nothing of value seems to have been delivered by the
plaintiff in consideration of said sale and no security
whatsoever was given for the payments therein provided
for.
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not security. The parties who made the original transfer

can waive and release it at pleasure. Such restrictions is
of no value to the creditors of the company. They can not
utilize it for the reduction of their claims or in any other
beneficial ways.
ISSUE: Whether the transfers are fraudulent.
HELD: YES.
The following are some of the circumstances attending sales
which have been dominated by the courts badges of fraud:
The fact that the consideration of the conveyance is

A transfer made by a debtor after suit has been begun and
A sale upon credit by an insolvent debtor;
Evidence of large indebtedness or complete insolvency;
The transfer of all or nearly all of his property by a

The fact that the transfer is made between father and son,
The failure of the vendee to take exclusive possession of

all the property.
which it was made leaves the creditors substantially without

recourse. The property of the company is gone, its income is
gone, the business itself is likely to fail, the property is being
dissipated, and is depreciating in value. As a result, even if the
claims of the creditors should live twelve years and the creditors
themselves wait that long, it more than likely that nothing would
be found to satisfy their claim at the end of the long wait.
Since the records shows that there was no property with which
the judgment in question could be paid, the defendants were
obliged to resort to and levy upon the steamer in suit. The court
below was correct in finding the sale fraudulent and void as to
Gutierrez Hermanos in so far as was necessary to permit the
collection of its judgment. As a corollary, the court below found
that the evidence failed to show that the plaintiff was the owner
or entitled to the possession of the steamer in question at the
time of the levy and sale complained of, or that he was damaged
thereby. Defendant had the right to make the levy and test the
validity of the sale in that way, without first resorting to a direct
action to annul the sale. The creditor may attack the sale by
ignoring it and seizing under his execution the property, or any
necessary portion thereof, which is the subject of the sale.
The case at bar presents every one of the badges of fraud above
enumerated. Tested by the inquiry, does the sale prejudice the
rights of the creditors, the result is clear. The sale in the form in
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Siguan v Lim
Accion Pauliana
Doctrine: The action to rescind contracts in fraud of creditors
is known as accion pauliana. For this action to prosper,
the following requisites must be present: (1) the plaintiff
asking for rescission has a credit prior to the alienation,
although demandable later; (2) the debtor has made a
subsequent contract conveying a patrimonial benefit to
a third person; (3) the creditor has no other legal
remedy to satisfy his claim; (4) the act being impugned
is fraudulent; (5) the third person who received the
property conveyed, if it is by onerous title, has been an
accomplice in the fraud.
FACTS:
On 25 and 26 August 1990, Rosa Lim issued 2 checks payable to
cash. Upon presentment by petitioner with the drawee bank, the
checks were dishonored for the reason account closed.
Demands to make good the checks proved futile. A criminal case
for violation of BP 22 was filed by petitioner against Lim. RTC
convicted Lim as charged. The case is pending before this Court
for review. On 31 July 1990, Lim was convicted of estafa by the
RTC filed by Victoria Suarez. This decision was affirmed by the
CA. However, this Court, acquitted Lim but held her civilly liable
in the amount of P169,000, as actual damages, plus legal
interest.
On 2 July 1991, a Deed of Donation conveying several parcels of
land and purportedly executed by Lim on 10 August 1989 in
favor of her children, Linde, Ingrid and Neil, was registered.
New TCTs were issued in the names of the donees. On 23 June
1993, petitioner filed an accion pauliana against Lim and her
children before the RTC to rescind the Deed of Donation.
Petitioner claimed that Lim fraudulently transferred all her real
property to her children in bad faith and in fraud of creditors,

including her; that Lim conspired with her children in
antedating the Deed of Donation, to petitioners and other
creditors prejudice; and that Lim, at the time of the fraudulent
conveyance, left no sufficient properties to pay her obligations.
RTC ordered the rescission of the deed of donation. CA reversed
the decision of the RTC. It held that 2 of the requisites for filing
an accion pauliana were absent, namely, (1) there must be a
credit existing prior to the celebration of the contract; and (2)
there must be a fraud, or at least the intent to commit fraud, to
the prejudice of the creditor seeking the rescission. The Deed of
Donation, which was executed and acknowledged before a
notary public, appears on its face to have been executed on 10
August 1989. Under Section 23 of Rule 132, the Deed, being a
public document, is evidence of the fact which gave rise to its
execution and of the date thereof. No antedating of the Deed of
Donation was made, there being no convincing evidence on
record to indicate that the notary public and the parties did
antedate it. Since Lims indebtedness to petitioner was incurred
in August 1990, or a year after the execution of the Deed of
Donation, the first requirement for accion pauliana was not met.
Anent petitioners contention that assuming that the Deed was
not antedated it was nevertheless in fraud of creditors because
Suarez became Lims creditor on 8 October 1987, CA found the
same untenable, for the rule is basic that the fraud must
prejudice the creditor seeking the rescission.
ISSUE: Whether the questioned Deed of Donation was made in
fraud of petitioner and, therefore, rescissible.
RULING: No. Article 1381 enumerates the contracts which are
rescissible, and among them are those contracts undertaken in
fraud of creditors when the latter cannot in any other manner
collect the claims due them.
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The general rule is that rescission requires the existence of

creditors at the time of the alleged fraudulent alienation, and
this must be proved as one of the bases of the judicial
pronouncement setting aside the contract. Without any prior
existing debt, there can neither be injury nor fraud. While it is
necessary that the credit of the plaintiff in the accion pauliana
must exist prior to the fraudulent alienation, the date of the
judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with
retroactive effect to the date when the credit was constituted.
the exhaustion of all remedies by the prejudiced creditor to

collect claims due him before rescission is resorted to. It is,
therefore, essential that the party asking for rescission prove
that he has exhausted all other legal means to obtain satisfaction
of his claim. Petitioner neither alleged nor proved that she did
so. On this score, her action for the rescission of the deed is not
maintainable even if the fraud charged actually did exist.
The alleged debt of Lim in favor of petitioner was incurred in

August 1990, while the deed of donation was purportedly
executed on 10 August 1989. We are not convinced with the
allegation of the petitioner that the deed was antedated to make
it appear that it was made prior to petitioners credit. Notably,
that deed is a public document, it having been acknowledged
before a notary public. As such, it is evidence of the fact which
gave rise to its execution and of its date, pursuant to Section 23,
Rule 132. The fact that the Deed was registered only on 2 July
1991 is not enough to overcome the presumption as to the
truthfulness of the statement of the date in the deed, which is 10
August 1989. Petitioners claim against Lim was constituted only
in August 1990, or a year after the alienation. Thus, the first 2
requisites for the rescission of contracts are absent.
Article 1387, first paragraph, provides: All contracts by virtue

of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors when
the donor did not reserve sufficient property to pay all debts
contracted before the donation. Likewise, Article 759, second
paragraph, states that the donation is always presumed to be in
fraud of creditors when at the time thereof the donor did not
reserve sufficient property to pay his debts prior to the donation.
Even assuming arguendo that petitioner became a creditor of

Lim prior to the celebration of the contract of donation, still her
action for rescission would not fare well because the third
requisite was not met. Under Article 1381, contracts entered into
in fraud of creditors may be rescinded only when the creditors
cannot in any manner collect the claims due them. Also, Article
1383 provides that the action for rescission is but a subsidiary
remedy which cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation
for the same. The term subsidiary remedy has been defined as
The fourth requisite for an accion pauliana to prosper is not

present either.
For this presumption of fraud to apply, it must be established

that the donor did not leave adequate properties which creditors
might have recourse for the collection of their credits existing
before the execution of the donation.
Petitioners alleged credit existed only a year after the deed of
donation was executed. She cannot, therefore, be said to have
been prejudiced or defrauded by such alienation. Besides, the
evidence disclose that as of 10 August 1989, when the deed of
donation was executed, Lim still had several properties. It was
not sufficiently established that the properties left behind by
Lim were not sufficient to cover her debts existing before the
donation was made. Hence, the presumption of fraud will not
come into play.
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Atty Tizon
Nevertheless, a creditor need not depend solely upon the

presumption laid down in Articles 759 and 1387. Under the
third paragraph of Article 1387, the design to defraud may be
proved in any other manner recognized by the law of evidence.
Thus in the consideration of whether certain transfers are
fraudulent, the Court has laid down specific rules by which the
character of the transaction may be determined. The following
have been denominated by the Court as badges of fraud:
(1) The fact that the consideration of the conveyance is
(2) A transfer made by a debtor after suit has begun and
(3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency;
(5) The transfer of all or nearly all of his property by a
(6) The fact that the transfer is made between father and son,
and
(7) The failure of the vendee to take exclusive possession of
all the property.
Petitioner brings to our attention the 31 July 1990 Decision of

the RTC wherein Lim was held guilty of estafa and was ordered
to pay Victoria Suarez P169,000 for the obligation Lim incurred
on 8 October 1987. This decision was affirmed by the CA. Upon
appeal, however, this Court acquitted Lim of estafa but held her
civilly liable for P169,000 as actual damages.
It should be noted that the complainant in that case, Victoria
Suarez, albeit a creditor prior to the alienation, is not a party to
this accion pauliana. Article 1384 provides that rescission shall
only be to the extent necessary to cover the damages caused.
Thus, only the creditor who brought the action for rescission can
benefit from the rescission; those who are strangers to the action
cannot benefit from its effects. And the revocation is only to the
extent of the plaintiff creditors unsatisfied credit; as to the
excess, the alienation is maintained. Thus, petitioner cannot
invoke the credit of Suarez to justify rescission of the deed of
donation.
The above enumeration is not an exclusive list. The

circumstances evidencing fraud are as varied as the men who
perpetrate the fraud in each case. This Court has therefore
declined to define it, reserving the liberty to deal with it under
whatever form it may present itself.
Petitioner failed to discharge the burden of proving any of the
circumstances enumerated above or any other circumstance
from which fraud can be inferred. Accordingly, since the 4
requirements for the rescission of a gratuitous contract are not
present in this case, petitioners action must fail.
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Velarde v CA (2001)
Panganiban, J.
Re: Rescissible contracts
DOCTRINE: A substantial breach of a reciprocal obligation,
like failure to pay the price in the manner prescribed by
the contract, entitles the injured party to rescind the
obligation. Rescission abrogates the contract from its
inception and requires a mutual restitution of benefits
received.
FACTS:
David Raymundo (private respondent) is the absolute and
registered owner of a parcel of land, located at 1918 Kamias St.,
Dasmarias Village Makati, together with the house and other
improvements, which was under lease. It was negotiated by
Davids father with plaintiffs Avelina and Mariano Velarde
(petitioners). A Deed of Sale with Assumption of Mortgage was
executed in favor of the plaintiffs. Part of the consideration
of the sale was the vendees assumption to pay the mortgage
obligations of the property sold in the amount of P
1,800,000.00 in favor of the Bank of the Philippine Islands. And
while their application for the assumption of the mortgage
obligations is not yet approved by the mortgagee bank, they
have agreed to pay the mortgage obligations on the property
with the bank in the name of Mr. David Raymundo. It was
further stated that in the event Velardes violate any of the
terms and conditions of the said Deed of Real Estate Mortgage,
they agree that the downpayment P800,000.00, plus all the
payments made with the BPI on the mortgage loan, shall be
forfeited in Favor of Mr. Raymundo, as and by way of
liquidated damages, w/out necessity of notice or any judicial
declaration to that effect, and Mr. Raymundo shall resume total
and complete ownership and possession of the property, and the
same shall be deemed automatically cancelled, signed by the

Velardes.
Pursuant to said agreements, plaintiffs paid BPI the monthly
interest loan for three months but stopped in paying the
mortgage when informed that their application for the
assumption of mortgage was not approved. The defendants
through a counsel, wrote plaintiffs informing the latter that their
non-payment to the mortgagee bank constituted nonperformance of their obligation and the cancellation and
rescission of the intended sale. And after two days, the plaintiffs
responded and advised the vendor that he is willing to pay
provided that Mr. Raymundo: (1) delivers actual possession of
the property to them not later than January 15, 1987 for their
occupancy (2) causes the release of title and mortgage from the
BPI and make the title available and free from any liens and
encumbrances (3) executes an absolute deed of sale in their
favor free from any liens and encumbrances not later than Jan.
21, 1987.
The RTC of Makati dismissed the complaint of the petitioners
against Mr. Raymundo for specific performance, nullity of
cancellation, writ of possession and damages. However, their
Motion for Reconsideration was granted and the Court
instructed petitioners to pay the balance of P 1.8 million to
private respondent who, in turn were ordered to execute a deed
of absolute sale and to surrender possession of the
disputed property to petitioners.
Upon the appeal of the private respondent to the CA, the court
upheld the earlier decision of the RTC regarding the validity of
the rescission made by private respondents.
Petitioners aver that their nonpayment of private
respondents mortgage obligation did not constitute a
breach of contract, considering that their request to
assume the obligation had been disapproved by the
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mortgagee bank. Accordingly, payment of the monthly

amortizations ceased to be their obligation and, instead,
it devolved upon private respondents again.
Petitioners likewise claim that the rescission of the
contract by private respondents was not justified,
inasmuch as the former had signified their willingness to
pay the balance of the purchase price only a little over a
month from the time they were notified of the
disapproval of their application for assumption of
mortgage. Petitioners also aver that the breach of the
contract was not substantial as would warrant a
rescission.
ISSUE: Whether there was a substantial breach of contract that
would entitle its rescission.
HELD: YES. Article 1191 of the New Civil Code applies.
Petitioners did not merely stop paying the mortgage obligations;
they also failed to pay the balance of the purchase price. As
admitted by both parties, their agreement mandated that
petitioners should pay the purchase price balance of P1.8 million
to private respondents in case the request to assume the
mortgage would be disapproved. Thus, on December 15, 1986,
when petitioners received notice of the banks disapproval of
their application to assume respondents mortgage, they should
have paid the balance of the P1.8 million loan.
The right of rescission of a party to an obligation
under Article 1191 of the Civil Code is predicated on a
breach of faith by the other party who violates the
reciprocity between them. The breach contemplated in the
said provision is the obligors failure to comply with an existing
obligation. When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and, in the
absence of any just cause for the court to determine the period
of compliance, the court shall decree the rescission.
In the present case, private respondents validly exercised their
right to rescind the contract, because of the failure of petitioners
to comply with their obligation to pay the balance of the
purchase price. Indubitably, the latter violated the very essence
of reciprocity in the contract of sale, a violation that
consequently gave rise to private respondents right to rescind
the same in accordance with law.
True, petitioners expressed their willingness to pay the balance
of the purchase price one month after it became due; however,
this was not equivalent to actual payment as would constitute a
faithful compliance of their reciprocal obligation. Moreover, the
offer to pay was conditioned on the performance by private
respondents of additional burdens that had not been agreed
upon in the original contract. Thus, it cannot be said that the
breach committed by petitioners was merely slight or casual as
would preclude the exercise of the right to rescind.
The breach committed did not merely consist of a slight delay in
payment or an irregularity; such breach would not normally
defeat the intention of the parties to the contract. Here,
petitioners not only failed to pay the P1.8 million balance, but
they also imposed upon private respondents new obligations as
preconditions to the performance of their own obligation. In
effect, the qualified offer to pay was a repudiation of an existing
obligation, which was legally due and demandable under the
contract of sale. Hence, private respondents were left with the
legal option of seeking rescission to protect their own interest.
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Miguel vs Montanez
Rescissible contracts
DOCTRINE: If the amicable settlement is repudiated by one
party, either expressly or impliedly, the other party has
2 options, namely, to enforce the compromise in
accordance with the LGC or Rules of Court as the case
may be, or to consider it rescinded and insist upon his
original demand.
FACTS:
On February 1, 2001, Jerry Montanez secured a loan payable in 1
year from Crisanta Alcaraz Miguel. Montanez gave as collateral
therefor his house and lot. Due to Montanez failure to pay the
loan, Miguel filed a complaint against Montanez before the
Lupong Tagapamayapa. The parties entered into a Kasunduang
Pag-aayos wherein Montanez agreed to pay his loan in
installments, and in the event the house and lot given as
collateral is sold, Montanez would settle the balance of the loan
in full. However, Montanez still failed to pay, and on December
13, 2004, the Lupong Tagapamayapa issued a certification to file
action in court in favor of Miguel.
On April 7, 2005, Miguel filed before the MeTC a complaint for
Collection of Sum of Money. MeTC ruled in favor of Miguel. RTC
affirmed. However, CA reversed and set aside the RTC decision.
It held that since the parties entered into a Kasunduang Pagaayos before the Lupon ng Barangay, such settlement has the
force and effect of a court judgment, which may be enforced by
execution within 6 months from the date of settlement by the
Lupon ng Barangay, or by court action after the lapse of such
time. Considering that more than 6 months had elapsed from
the date of settlement, the remedy of Miguel was to file an action
for the execution of the Kasunduang Pag-aayos in court and not
for collection of sum of money.
Miguel contends that the CA erred in ruling that she should have
followed the procedure for enforcement of the amicable
settlement, instead of filing a collection case since the cause of
action did not arise from the Kasunduang Pag-aayos but on
Montanez breach of the original loan agreement.
ISSUE: Whether or not a complaint for sum of money is the
proper remedy for the petitioner, notwithstanding the
Kasunduang Pag-aayos.
HELD: Yes. Because Montanez failed to comply with the terms
of the Kasunduang Pag-aayos, said agreement is deemed
rescinded pursuant to Article 2041 and Miguel can insist on his
original demand. The complaint for collection of sum of money
is the proper remedy.
Enforcement by execution of the amicable settlement is only
applicable if the contracting parties have not repudiated such
settlement within 10 days from the date thereof in accordance
with Section 416 of the LGC. If the amicable settlement is
repudiated by one party, either expressly or impliedly, the other
party has 2 options, namely, to enforce the compromise in
accordance with the LGC or Rules of Court as the case may be,
or to consider it rescinded and insist upon his original demand.
This is in accord with Article 2041, which qualifies the broad
application of Article 2037: If one of the parties fails or refuses
to abide by the compromise, the other party may either enforce
the compromise or regard it as rescinded and insist upon his
original demand.
Leonor v. Sycip: Article 2041 does not require an action for
rescission, and the aggrieved party, by the breach of
compromise agreement, may just consider it already rescinded.
Unlike Article 2039, which speaks of "a cause of annulment or
rescission of the compromise" and provides that "the
compromise may be annulled or rescinded, thus suggesting an
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action for annulment or rescission, Article 2041 confers upon

the party concerned, not a "cause" for rescission, or the right to
"demand" the rescission of a compromise, but the authority, not
only to "regard it as rescinded", but, also, to "insist upon his
original demand". He need not seek a judicial declaration of
rescission, for he may "regard" the compromise agreement
already "rescinded".
of money, Miguel obviously chose to rescind the

Kasunduang Pag-aayos.
Chavez v. Court of Appeals: a party's non-compliance with the

amicable settlement paved the way for the application of Article
2041 under which the other party may either enforce the
compromise, following the procedure laid out in the Revised
Katarungang Pambarangay Law, or consider it as rescinded and
insist upon his original demand. The Revised Katarungang
Pambarangay Law provides for a two-tiered mode of
enforcement of an amicable settlement. The mode of
enforcement does not rule out the right of rescission under Art.
2041. The availability of the right of rescission is apparent from
the wording of Sec. 417 itself which provides that the amicable
settlement "may" be enforced by execution by the lupon within 6
months from its date or by action in the appropriate city or
municipal court, if beyond that period. The use of the word
"may" clearly makes the procedure provided in the Revised
Katarungang Pambarangay Law directory or merely optional in
nature.
Montanez did not comply with the terms and
conditions of the Kasunduang Pag-aayos. Such noncompliance may be construed as repudiation because it
denotes that Montanez did not intend to be bound by
the terms thereof, thereby negating the very purpose
for which it was executed. Perforce, Miguel has the
option either to enforce the Kasunduang Pag-aayos, or
to regard it as rescinded and insist upon his original
demand, in accordance with the provision of Article
2041. Having instituted an action for collection of sum
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Baylon (child of ramon from 1st marriage) and Ramon,

Jr., Remo, Eric, Florentino, and Ma. Ruby (children from
2nd wife).
Ada V Baylon (2012)

G .R. No. 182435, August 13, 2012
Topic:
DOCTRINE: Rescission is a remedy granted by law to the
contracting parties and even to third persons, to secure
the reparation of damages caused to them by a contract,
even if it should be valid, by means of the restoration of
things to their condition at the moment prior to the
celebration of said contract. It is a remedy to make
ineffective a contract, validly entered into and therefore
obligatory under normal conditions, by reason of
external causes resulting in a pecuniary prejudice to one
of the contracting parties or their creditors. Contracts
which are rescissible are valid contracts having all the
essential requisites of a contract, but by reason of injury
or damage caused to either of the parties therein or to
third persons are considered defective and, thus, may be
rescinded.The kinds of rescissible contracts, according
to the reason for their susceptibility to rescission, are the
following: first, those which are rescissible because of
lesion or prejudice; second, those which are rescissible
on account of fraud or bad faith; and third, those which,
by special provisions of law, are susceptible to
rescission.
The case involved the estate of Sps. Florentino Baylon

(died Nov. 7, 1961) and Maximina Baylon (died May 5,
1974). They were survived by 6 legitimate children: Rita,
Victoria, Dolores, Panfila, Ramon and Lilia.
Dolores died intestate and without issue. Victoria died

and was survived by daughter Luz Adanza. Ramon died
intestate and was survived by respondent Florante
A complaint for partition, accounting and damages was

filed by petitioners against Florante, Rita and PAnfila
alleging that Sps. Baylon during their lifetime owned 43
parcels of lands in Negros Oriental. And after their death,
Rita claimed all the properties and took possession of it
and appropriated for herself the income of these
properties. And using these incomes she purchased 2
parcels of land (lot 4709 and lot 4706) in Dumaguete
City. Rita also refused to partition the properties left by
sps. Baylon.
Florante, Rita and PAnfila answered saying that Rita only

has 10 lands out of 43 and that the lots purchased by Rita
located in Dumaguete were brought out of Ritas money.
During the pendency of the case, Rita donated lot 4709

and half of lot 4706 to Florante. Unfortunately Rita died
without any issue. Learning of the death of Rita,
petitioners filed a supplemental pleading praying for the
rescission of the donation pursuant to art. 1381(4) of the
civil code. They also alleged that Rita was already sick
and very weak at the time of donation and thus she could
not ahve validly given her consent thereto.
Florante and Panfila opposed the rescission saying that

1381(4) applies only when there is already a prior judicial
decree on who between the contending parties actually
owned the properties under litigation.
RTC ordered the partition of the properties and

rendered rescinded the donation inter vivos made by Rita
to Florante.
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CA reversed the RTC ruling insofar as the decision

regarding the rescission. The CA actually ordered the
remanding of the case to determine who owned lot 4709
and 4706. It also held that before petitioners may file an
action for rescission they must first obtain a favourable
judicial ruling that lot 4709 and 4706 actually belonged
to the estate of sps. baylon and not to rita. Until then an
action for rescission is premature.
ISSUE: Whether the Court of Appeals is correct in ruling that

the donation inter vivos of lot 4709 and 4706 in favor of
Florante may only be rescinded if there is already a judicial
determination that the same actually belonged to the estate of
sps. Baylon?
HELD: YES. The case is REMANDED to the trial court for the
determination of the ownership of Lot No. 4709 and half of Lot
No. 4706 in accordance with this Decision.
Contracts which refer to things
subject of litigation is rescissible
pursuant to Article 1381(4) of the
Civil Code.
Contracts which are rescissible due to fraud or bad faith include
those which involve things under litigation, if they have been
entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority.
Thus, Article 1381(4) of the Civil Code provides:
Art. 1381. The following contracts are rescissible:
xxxx
(4) Those which refer to things under litigation if they
have been entered into by the defendant without the
knowledge and approval of the litigants or of competent
judicial authority.
The rescission of a contract under Article 1381(4) of the Civil

Code only requires the concurrence of the following: first, the
defendant, during the pendency of the case, enters into a
contract which refers to the thing subject of litigation; and
second, the said contract was entered into without the
knowledge and approval of the litigants or of a competent
judicial authority. As long as the foregoing requisites concur, it
becomes the duty of the court to order the rescission of the said
contract.
The reason for this is simple. Article 1381(4) seeks to remedy the
presence of bad faith among the parties to a case and/or any
fraudulent act which they may commit with respect to the thing
subject of litigation.
When a thing is the subject of a judicial controversy, it should
ultimately be bound by whatever disposition the court shall
render. The parties to the case are therefore expected, in
deference to the courts exercise of jurisdiction over the case, to
refrain from doing acts which would dissipate or debase the
thing subject of the litigation or otherwise render the impending
decision therein ineffectual.
There is, then, a restriction on the disposition by the parties of
the thing that is the subject of the litigation. Article 1381(4) of
the Civil Code requires that any contract entered into by a
defendant in a case which refers to things under litigation
should be with the knowledge and approval of the litigants or of
a competent judicial authority.
Further, any disposition of the thing subject of litigation or any
act which tends to render inutile the courts impending
disposition in such case, sans the knowledge and approval of the
litigants or of the court, is unmistakably and irrefutably
indicative of bad faith. Such acts undermine the authority of the
court to lay down the respective rights of the parties in a case
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relative to the thing subject of litigation and bind them to such

determination.
It should be stressed, though, that the defendant in such a case
is not absolutely proscribed from entering into a contract which
refer to things under litigation. If, for instance, a defendant
enters into a contract which conveys the thing under litigation
during the pendency of the case, the conveyance would be valid,
there being no definite disposition yet coming from the court
with respect to the thing subject of litigation. After all,
notwithstanding that the subject thereof is a thing under
litigation, such conveyance is but merely an exercise of
ownership.
This is true even if the defendant effected the conveyance
without the knowledge and approval of the litigants or of a
competent judicial authority. The absence of such knowledge or
approval would not precipitate the invalidity of an otherwise
valid contract. Nevertheless, such contract, though considered
valid, may be rescinded at the instance of the other litigants
pursuant to Article 1381(4) of the Civil Code.
Here, contrary to the CAs disposition, the RTC aptly ordered
the rescission of the donation inter vivos of Lot No. 4709 and
half of Lot No. 4706 in favor of Florante. The petitioners had
sufficiently established the presence of the requisites for the
rescission of a contract pursuant to Article 1381(4) of the Civil
Code. It is undisputed that, at the time they were gratuitously
conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are
among the properties that were the subject of the partition case
then pending with the RTC. It is also undisputed that Rita, then
one of the defendants in the partition case with the RTC, did not
inform nor sought the approval from the petitioners or of the
RTC with regard to the donation inter vivos of the said parcels of
land to Florante.
Although the gratuitous conveyance of the said parcels of land in

favor of Florante was valid, the donation inter vivos of the same
being merely an exercise of ownership, Ritas failure to inform
and seek the approval of the petitioners or the RTC regarding
the conveyance gave the petitioners the right to have the said
donation rescinded pursuant to Article 1381(4) of the Civil Code.
Rescission under Article 1381(4) of
the Civil Code is not preconditioned
upon the judicial determination as
to the ownership of the thing
subject of litigation.
In this regard, we also find the assertion that rescission may
only be had after the RTC had finally determined that the
parcels of land belonged to the estate of Spouses Baylon
intrinsically amiss. The petitioners right to institute the action
for rescission pursuant to Article 1381(4) of the Civil Code is not
preconditioned upon the RTCs determination as to the
ownership of the said parcels of land.
It bears stressing that the right to ask for the rescission of a
contract under Article 1381(4) of the Civil Code is not contingent
upon the final determination of the ownership of the thing
subject of litigation. The primordial purpose of Article 1381(4) of
the Civil Code is to secure the possible effectivity of the
impending judgment by a court with respect to the thing subject
of litigation. It seeks to protect the binding effect of a courts
impending adjudication vis--vis the thing subject of litigation
regardless of which among the contending claims therein would
subsequently be upheld. Accordingly, a definitive judicial
determination with respect to the thing subject of litigation is
not a condition sine qua non before the rescissory action
contemplated under Article 1381(4) of the Civil Code may be
instituted.
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Moreover, conceding that the right to bring the rescissory action

pursuant to Article 1381(4) of the Civil Code is preconditioned
upon a judicial determination with regard to the thing subject
litigation, this would only bring about the very predicament that
the said provision of law seeks to obviate. Assuming arguendo
that a rescissory action under Article 1381(4) of the Civil Code
could only be instituted after the dispute with respect to the
thing subject of litigation is judicially determined, there is the
possibility that the same may had already been conveyed to
third persons acting in good faith, rendering any judicial
determination with regard to the thing subject of litigation
illusory. Surely, this paradoxical eventuality is not what the law
had envisioned.
Even if the donation inter vivos is
validly rescinded, a determination
as to the ownership of the subject
parcels of land is still necessary.
Having established that the RTC had aptly ordered the
rescission of the said donation inter vivos in favor of Florante,
the issue that has to be resolved by this Court is whether there is
still a need to determine the ownership of Lot No. 4709 and half
of Lot No. 4706.
In opting not to make a determination as to the ownership of
Lot No. 4709 and half of Lot No. 4706, the RTC reasoned that
the parties in the proceedings before it constitute not only the
surviving heirs of Spouses Baylon but the surviving heirs of Rita
as well. As intimated earlier, Rita died intestate during the
pendency of the proceedings with the RTC without any issue,
leaving the parties in the proceedings before the RTC as her
surviving heirs. Thus, the RTC insinuated, a definitive
determination as to the ownership of the said parcels of land is
unnecessary since, in any case, the said parcels of land would
ultimately be adjudicated to the parties in the proceedings
before it.
We do not agree.
Admittedly, whoever may be adjudicated as the owner of Lot No.
4709 and half of Lot No. 4706, be it Rita or Spouses Baylon, the
same would ultimately be transmitted to the parties in the
proceedings before the RTC as they are the only surviving heirs
of both Spouses Baylon and Rita. However, the RTC failed to
realize that a definitive adjudication as to the ownership of Lot
No. 4709 and half of Lot No. 4706 is essential in this case as it
affects the authority of the RTC to direct the partition of the said
parcels of land. Simply put, the RTC cannot properly direct the
partition of Lot No. 4709 and half of Lot No. 4706 until and
unless it determines that the said parcels of land indeed form
part of the estate of Spouses Baylon.
It should be stressed that the partition proceedings before the
RTC only covers the properties co-owned by the parties therein
in their respective capacity as the surviving heirs of Spouses
Baylon. Hence, the authority of the RTC to issue an order of
partition in the proceedings before it only affects those
properties which actually belonged to the estate of Spouses
Baylon.
In this regard, if Lot No. 4709 and half of Lot No. 4706, as
unwaveringly claimed by Florante, are indeed exclusively owned
by Rita, then the said parcels of land may not be partitioned
simultaneously with the other properties subject of the partition
case before the RTC. In such case, although the parties in the
case before the RTC are still co-owners of the said parcels of
land, the RTC would not have the authority to direct the
partition of the said parcels of land as the proceedings before it
is only concerned with the estate of Spouses Baylon.
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Caldwallader v. Smith (1907)

Topic: Voidable Contracts:
Whole case: (short lang)
In this action the plaintiff, as assignee of the Pacific Export
Lumber Company, sues for $3,486, United States currency, the
differences between the amount turned over to the company on
account of a cargo of cedar piles consigned to the defendants as
its agents and afterwards bought by them, and the amount
actually received by them on the subsequent sale thereof. The
defendant were allowed by the court below a counterclaim of
$6,993.80, United States currency, from which was deducted
$2,063.16 for the plaintiffs claim, leaving a balance in favor of
the defendants of $4,930.64, for the equipment of which, to wit,
9,861.28 pesos, judgment was entered. The defendants have not
appealed. The plaintiff took several exceptions, but on the
argument its counsel stated that its contention was confined to
the allowance by the trial court of the commissions of the
defendant on selling the piling.
In May 1902, the Pacific Export Lumber Company of Portland
shipped upon the steamer Quito five hundred and eighty-one
(581) piles to the defendant, Henry W. Peabody & Company, at
Manila, on the sale of which before storage the consignees were
to receive a commission of one half of whatever sum was
obtained over $15 for each pile and 5 per cent of the price of the
piles sold after storage. After the arrival of the steamer on
August 2, Peabody and Company wrote the agent of the Pacific
Company at Shanghai that for lack of a demand the piles would
have to be sold at considerably less than $15 apiece; whereupon
the companys agent directed them to make the best possible
offer for the piles, in response to which on August 5 they
telegraphed him an offer of $12 apiece. It was accepted by him
on August 6, in consequence of which the defendant paid the
Pacific Company $6,972.
It afterwards appeared that on July 9 Peabody & Company had

entered into negotiations with the Insular Purchasing Agent for
the sale for the piles at $20 a piece, resulting of August 4 in the
sale to the Government of two hundred and thirteen (213) piles
at $19 each. More of them were afterwards sold to the
Government at the same figure and the remainder to other
parties at carrying prices, the whole realizing to the defendants
$10,41.66, amounting to $3,445.66 above the amount paid by
the defendant to the plaintiff therefor. Thus it is clear that at the
time when the agents were buying from their principal these
piles at $12 apiece on the strength of their representation that
no better price was obtainable, they had already sold a
substantial part of them at $19. In these transactions the
defendant, Smith, Bell & Company, were associated with the
defendants, Henry W. Peabody & Company, who conducted the
negotiations, and are consequently accountable with them.
It is plain that in concealing from their principal the
negotiations with the Government, resulting in a sale
of the piles at 19 a piece and in misrepresenting the
condition of the market, the agents committed a breach
of duty from which they should benefit. The contract of
sale to themselves thereby induced was founded on
their fraud and was subject to annulment by the
aggrieved party. (Civil Code, articles 1265 and 1269.)
Upon annulment the parties should be restored to their
original position by mutual restitution. (Article 1303
and 1306.) Therefore the defendants are not entitled to
retain their commission realized upon the piles
included under the contract so annulled. In respect of
the 213 piles, which at the time of the making of this
contract on August 5 they had already sold under the
original agency, their commission should be allowed.
The court below found the net amount due from the defendants
to the plaintiff for the Quito piles, after deducting the expense of
landing the same and $543.10 commission, was $1,760.88, on
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which it allowed interest at the rate of 6 per cent from March 1,

1903. This amount should be increased by the addition thereto
of the amount of the commission disallowed, to wit, $331.17
giving $2,092.05. Interest computed on this sum to the date of
the entry of judgment below amounts to $359.77, which added
to the principal sum makes $2,241.82, the amount of plaintiffs
claim, which is to be deducted from defendants counterclaim of
$6,993.80, leaving a balance of $4,541.98, equivalent to
9,083.96 pesos, the amount for which judgment below should
have been entered in favor of the defendants.
PNB v. Phil. Vegetable Oil (1927)

Topic: Unenforceable Contract
DOCTRINE: It must be repeated that the mortgage was
executed while a receiver was in charge of the Vegetable
Oil Company. A mortgage accomplished at such a time
by the corporation under receivership and a creditor
would be a nullity.
FACTS: In 1920, the Vegetable Oil Co found itself in financial
straits. It was in debt of approximately P30M. PNB was the
largest creditor, owing the bank P17M. PNB was secured
principally by a real and chattel mortgage for P3.5M. The
Vegetable Oil Co executed another chattel mortgage in favour of
the bank on its vessels Tankerville and HS Everette to guarantee
the payment of sums not to exceed P4M.
Mr. Phil C. Whitaker, the General Manager of the Vegetable Oil
Co., made his first offer to pledge certain private properties to
secure the creditors of the Oil Company. At the instance of Mr.
Whitaker but inspired to action by the PNB, a receiver for the
Oil Company was appointed by the CFI Manila.
During the period when a receiver was in control of the Oil
Company, Creditors transferred to Mr. Whitaker a part of their
claims against the Oil Company via an agreement. PNB was not
a direct party to the agreement although its officials had full
knowledge of its accomplishment and its general manager
placed his OK at the end of the final draft.
PNB obtained a new mortgage from the Oil Company. Shortly
thereafter, the receivership for the Oil Company was terminated
(Feb 28, 1922), the bank suspended the operations of the
Company, and definitely closed its plant.
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The Oil Company interposed with a counterclaim for P6M and

Whitaker presented a complaint in intervention. Trial court
found for PNB, ordering the Company to pay P15,787,454,54,
with legal interest, attorneys fees, and costs, and the usual order
to foreclose the mortgage. Counterclaim and intervention were
dismissed.
ISSUE: WON the Feb 20,1922 mortgage between PNB and the
Company is valid.
HELD: NO.
At the outset, the appellee challenges the right of Phil. C.
Whitaker as intervenor to ask that the mortgage contract
executed by the Vegetable Oil Company be declared null and
void. Appellee is right as to the premises. The Vegetable Oil
Company is the defendant. The corporation has not appealed. At
the same time, it is evident that Phil. C. Whitaker was one of the
largest individual stockholders of the Vegetable Oil Company,
and was until the inauguration of the receivership, exercising
control over and dictating the policy of that company. Out of
twenty-eight thousand shares of the Vegetable Oil Company,
Mr. Whitaker was the owner of 5,893 fully paid shares of the par
value of P100 each. He it was who asked for the appointment of
the receiver. He it was who was the leading figure in the
negotiations between the Vegetable Oil Company, the Philippine
National Bank, and the other creditors. He it was who pledged
his own property to the extent of over P4,000,000 in an
endeavor to assist in the rehabilitation of the Vegetable Oil
Company. He is injuriously affected by the mortgage. In truth,
Mr. Whitaker is more vitally interested in the outcome of this
case than is the Vegetable Oil Company. Conceivably if the
mortgage had been the free act of the Vegetable Oil Company, it
could not be heard to allege its own fraud, and only a creditor
could take advantage of the fraud to intervene to avoid the
conveyance.
It has been said that the mortgage was executed on February 20,
1922. That is undeniable. The allegation of the plaintiff's
complaint is "That the defendant, on the 20th day of February,
1922, duly executed to the plaintiff a mortgage." The mortgage
in question recites: "This mortgage, executed at the City of
Manila, Philippine Islands, this twentieth day of February,
nineteen hundred and twenty-two." However, the mortgage was
not ratified before a notary public until March 8, 1922, and was
not recorded in the registry of property until March 21, 1922.
To add one more date, it will be recalled that the receivership
ended on February 28, 1922. In other words, as partially
interpretative of the situation, the mortgage was executed by the
Philippine National Bank, through its General Manager, and
another corporation before the termination of the receivership
of the said corporation, but was not acknowledged or recorded
until after the termination of the receivership.
In the complaint of Phil. C. Whitaker filed in the Court of First
Instance of Manila in which it was prayed that a receiver be
appointed to take charge of the Philippine Vegetable Oil Co.,
Inc., it was alleged "that the largest individual creditor of said
corporation is the Philippine National Bank, the indebtedness to
which amounts to approximately P16,000,000, a portion of
which indebtedness is secured by mortgage on the major part of
the assets of the corporation." The order of the court appointing
a receiver contained a similar recital. The Philippine National
Bank held the mortgage mentioned, and possibly two others not
mentioned, when the receivership proceedings were initiated.
It must be evident to all that the Philippine National Bank could
legally secure no new mortgage by the accomplishment of
documents between its officials and the officials of the Vegetable
Oil Company while the property of the latter company was in
custodia legis. The Vegetable Oil Company was then inhibited
absolutely from giving a mortgage on its property. The receiver
was not a party to the mortgage. The court had not authorized
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the receiver to consent to the execution of a new mortgage.

Whether the court could have done so is doubtful, but that it
would have thus consented is hardly debatable, considering that
it would desire to protect the rights of all the creditors and not
the rights of one particular creditor. The legal conclusion is
axiomatic.
To all this the appellee as well as the trial court have answered
that while it is true that the document was executed on February
20, 1922, at a time when the properties of the mortgagor were
under receivership, the mortgage was not acknowledged before
a notary public until March 8, 1922, after the court had
determined that the necessity for a receiver no longer existed.
But the additional fact remains that while the mortgage could
not have been executed without the dissolution of the
receivership, such dissolution was apparently secured through
representations made to the court by counsel for the bank that
the bank would continue to finance the operations of the
Vegetable Oil Company. Instead of so doing, the bank within
less than two months after the mortgage was recorded,
withdrew its support from the Vegetable Oil Company, and in
effect closed its establishment. Also it must not be forgotten that
the hands of other creditors were tied pursuant to the creditors'
agreement of June 27, 1921.
unconscionable to allow the bank, after the hands of the other

creditors were tied, virtually to appropriate to itself all the
property of the Vegetable Oil Company.
Whether we consider the action taken as not expressing the free
will of the Vegetable Oil Company, or as disclosing undue
influence on the part of the Philippine National Bank in
procuring the mortgage, or as constituting deceit under the civil
law, or whether we go still further and classify the facts as
constructive fraud, the result is the same. The mortgage is
clearly voidable.
The setting aside of the mortgage of February 20, 1922, will not
necessarily result in the Philippine National Bank being left
without security. It is our understanding that before the
receivership was thought of, the bank was the holder of three
mortgages on the property of the Vegetable Oil Company, the
first dated April 11, 1919, for an uncertain amount; the second,
dated November 18, 1920, for P3,500,000; and the third, dated
January 10, 1921, for P4,000,000. These mortgages remain in
effect and may be foreclosed.
We rule therefore that the Philippine National Bank-Philippine
Vegetable Co., Inc., mortgage of February 20, 1922, has not been
legally executed by the Philippine Vegetable Oil Co., Inc.
To place emphasis on the outstanding facts, it must be repeated

that the mortgage was executed while a receiver was in charge of
the Vegetable Oil Company. A mortgage accomplished at such a
time by the corporation under receivership and a creditor would
be a nullity. The mortgage was definitely perfected subsequent
to the lifting of the receivership pursuant to implied promises
that the bank would continue to operate the Vegetable Oil
Company. It was then accomplished when the Philippine
National Bank was a dominating influence in the affairs of the
Vegetable Oil Company. On the one hand was the Philippine
National Bank in person. On the other hand was the Philippine
National Bank by proxy. Under such circumstances, it would be
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Singsong v. Isabela Sawmill (1979)

Fernandez, J.
Re: Voidable contracts
DOCTRINE: As a rule, a contract cannot be assailed by
one who is not a party thereto. However, when a
contract prejudices the rights of a third person, he may
file an action to annul the contract.
This Court has held that a person, who is not a party obliged
principally or subsidiarily under a contract, may
exercised an action for nullity of the contract if he is
prejudiced in his rights with respect to one of the
contracting parties, and can show detriment which
would positively result to him from the contract in
which he has no intervention.
FACTS
In 1951, defendants Saldajeno, Garibay and Timoteo entered
into a contract of partnership under the firm name Isabela
Sawmill. In 1956 the Oppen, Esteban, Inc. sold to the
partnership a motor truck and two tractors. The partnership was
not able to pay their whole balance even after demand was
made.
One of the partners withdrew from the partnership (Saldajeno).
Garibay and Timoteo entered into a memorandum agreement
and assignment of rights and chattel mortgage in favor of
Saldajeno. This contract was a subject of a separate case. Instead
of terminating the said partnership it was continued by the two
remaining partners under the same firm name.
Plaintiffs, as creditors of Isabela Sawmill, seeked the annulment

of the assignment of right with chattel mortgage entered into by
the withdrawing partner and the remaining partners. The
appellants contend that the chattel mortgage may no longer be
nullified because it had been judicially approved and said chattel
mortgage had been judicially foreclosed.
ISSUE
Whether creditors of Isabela Sawmill may assail the contract
between the withdrawing partner and the remaining partners
despite not being a party to it.
HELD: YES.
It is true that the dissolution of a partnership is caused by any
partner ceasing to be associated in the carrying on of the
business. However, on dissolution, the partnershop is not
terminated but continuous until the winding up to the business.
The remaining partners did not terminate the business of the
partnership "Isabela Sawmill". Instead of winding up the
business of the partnership, they continued the business still in
the name of said partnership. It is expressly stipulated in the
memorandum-agreement that the remaining partners had
constituted themselves as the partnership entity, the "Isabela
Sawmill".
There was no liquidation of the assets of the partnership. The
remaining partners, Leon Garibay and Timoteo Tubungbanua,
continued doing the business of the partnership in the name of
"Isabela Sawmill". They used the properties of said partnership.
The properties mortgaged to Margarita G. Saldajeno by the
remaining partners, Leon Garibay and Timoteo Tubungbanua,
belonged to the partnership "Isabela Sawmill." The appellant,
Margarita G. Saldajeno, was correctly held liable by the trial
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court because she purchased at public auction the properties of

the partnership which were mortgaged to her.
It does not appear that the withdrawal of Margarita G. Saldajeno
from the partnership was published in the newspapers. The
appellees and the public in general had a right to expect that
whatever, credit they extended to Leon Garibay and Timoteo
Tubungbanua doing the business in the name of the partnership
"Isabela Sawmill" could be enforced against the proeprties of
said partnership. The judicial foreclosure of the chattel
mortgage executed in favor of Margarita G. Saldajeno did not
relieve her from liability to the creditors of the partnership.
The appellant, margrita G. Saldajeno, cannot complain. She is
partly to blame for not insisting on the liquidaiton of the assets
of the partnership. She even agreed to let Leon Garibay and
Timoteo Tubungbanua continue doing the business of the
partnership "Isabela Sawmill" by entering into the
memorandum-agreement with them.
Although it may be presumed that Margarita G. Saldajeno had
action in good faith, the appellees aslo acted in good faith in
extending credit to the partnership. Where one of two innocent
persons must suffer, that person who gave occasion for the
damages to be caused must bear the consequences. Had
Margarita G. Saldajeno not entered into the memorandumagreement allowing Leon Garibay and Timoteo Tubungbanua to
continue doing the business of the aprtnership, the applees
would not have been misled into thinking that they were still
dealing with the partnership "Isabela Sawmill". Under the facts,
it is of no moment that technically speaking the partnership
"Isabela Sawmill" was dissolved by the withdrawal therefrom of
Margarita G. Saldajeno. The partnership was not terminated
and it continued doping business through the two remaining
partners.
The contention of the appellant that the appleees cannot bring

an action to annul the chattel mortgage of the propertiesof the
partnership executed by Leon Garibay and Timoteo
Tubungbanua in favor of Margarita G. Saldajeno has no merit.
As a rule, a contract cannot be assailed by one who is
not a party thereto. However, when a contract
prejudices the rights of a third person, he may file an
action to annul the contract.
This Court has held that a person, who is not a party
obliged principally or subsidiarily under a contract,
may exercised an action for nullity of the contract if
he is prejudiced in his rights with respect to one of the
contracting parties, and can show detriment which
would positively result to him from the contract in
which he has no intervention.
The plaintiffs-appellees were prejudiced in their rights by the
execution of the chattel mortgage over the properties of the
partnership "Isabela Sawmill" in favopr of Margarita G.
Saldajeno by the remaining partners, Leon Garibay and Timoteo
Tubungbanua. Hence, said appelees have a right to file the
action to nullify the chattel mortgage in question.
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Metropolitan Fabrics, Incorporated (MFI) v.

Prosperity
Voidable contracts
FACTS:
In July 1984, MFI sought from PCRI a loan. PCRI was
represented by Domingo Ang, its president, and his son Caleb,
vicepresident. The parties knew each other because they
belonged to the same family association. Caleb recommended
the approval of the P3.44 million with an interest ranging from
24% to 26% per annum and a term of between 5-10 years. It
sufficed for Caleb that Enrique was a wellrespected Chinese
businessman, that he was the president of their Chinese family
association, and that he had other businesses aside from MFI.
On August 3, 1984, even before the signing of the mortgage and
loan documents, PCRI released the loan to MFI. It found that
the blank loan forms, consisting of the real estate mortgage
contract, promissory note, comprehensive surety agreement and
disclosure statement, which Domingo himself handed to
Enrique, had no entries specifying the rate of interest and
schedules of amortization. To reciprocate the gesture of PCRI,
Enrique, together with his wife Natividad Africa, vicepresident,
and son Edmundo signed the blank forms at their office. The
signing was allegedly witnessed by Vicky, Ellen and Alice, all
surnamed Ang, without any PCRI representative present.
Immediately thereafter, Enrique and Vicky proceeded to the
PCRI office.
It was in order to return the trust of Domingo and Caleb and
their gesture of the early release of the loan that Enrique and
Vicky entrusted to them their 7 titles of land. She testified that
they left it to defendants to choose from among the 7 titles those
which would be sufficient to secure the loan. It was agreed that
once PCRI had chosen the lots to be covered by the mortgage,
the defendants would return the remaining titles to the

plaintiffs. The plaintiffs delivered to PCRI 24 checks, bearing no
dates and amounts, to cover the amortization payments, all
signed in blank by Enrique and Natividad.
interest rate per annum, instead of just 24%, and a 2year
repayment period, instead of 10 years.
Plaintiffs repeatedly asked the defendants to return the rest of
the titles in excess of the required collateral to which defendants
allegedly routinely responded that their committee was still
studying the matter. Caleb assured Vicky that PCRI would also
rate.
Talks were held between Domingo and Enrique as well as
between Vicky and Caleb concerning the possible offsetting of
the loan by ceding some of their properties to PCRI.
Domingo and Caleb tried to appease the plaintiffs by assuring
them that they would return the rest of the titles anytime they
would need them, and that they could use them to secure
another loan from them or from another financing company.
They would also reconsider the 35% interest rate, but when the
discussion shifted to the offsetting of the properties to pay the
loan, the defendants standard answer was that they were still
awaiting the feedback of their committee.
Sale, announcing the auction of the 7 lots due to unpaid
indebtedness of P10.5 million. Vicky insisted that prior to the
auction notice, they never received any statement or demand
letter from the defendants to pay P10.5 million, nor did the
defendants inform them of the intended foreclosure. The last
216

Atty Tizon
statement they received was dated February 12, 1986, and

showed amount due of only P4,167,472.71. Vicky recalled that
from June 1, 1986 to July 1986, they held several meetings to
discuss the options available to them to repay their loan, such as
the offsetting of their rent collectibles and properties to cover
the amortizations and the loan balance.
MFI protested the foreclosure, and the auction was reset after
they assured PCRI that they had found a serious buyer for 3 of
the lots. In the meeting held at defendants office, the buyer,
Winston Wang of Asia Cotton was present. It was agreed to
release the mortgage upon payment of P3.5 million. Wang
million loan. Winston Wang was given 15 days to pay the
P500,000.00.
On January 19, 1987, Wang confronted Vicky about their sale
agreement and PCRIs refusal to accept their P3 million
payment, because according to Caleb, the 3 lots had been
foreclosed. Vicky was shocked, because the agreed period to pay
the P3 million was to lapse on January 13, 1987 yet.
bidder for P6.5 million. Discussions continued on the agreement
to release 3 lots for P3.5 million. The reduction of interest rate
and charges and the condonation of the attorneys fees for the
foreclosure proceedings were also sought.
Petitioners insist that respondents committed fraud when the
officers of Metropolitan were made to sign the deed of real
estate mortgage in blank.
ISSUE: Whether the mortgage was void or merely voidable.
HELD: Voidable. The original stance of petitioners was that
the deed of real estate mortgage was voidable. In their
complaint, they averred that the deed, albeit in printed form,
was incomplete in essential details, and that Metropolitan,

through Enrique Ang as its president, signed it in good faith and
in absolute confidence. They confirmed their original stance in
their pretrial brief.
Yet, petitioners now claim that the CA committed a reversible
error in not holding that the absence of consent made the deed
of real estate mortgage void, not merely voidable. In effect, they
are now advancing that their consent was not merely vitiated by
means of fraud, but that there was complete absence of consent.
Although they should be estopped from raising this issue for the
first time on appeal, the Court nonetheless opts to consider it
because its resolution is necessary to arrive at a just and
complete resolution of the case.
As the records show, petitioners really agreed to mortgage their
properties as security for their loan, and signed the deed of
mortgage for the purpose. Thereafter, they delivered the TCTs of
the properties subject of the mortgage to respondents.
Consequently, petitioners contention of absence of consent had
no firm moorings. It remained unproved. To begin with, they
neither alleged nor established that they had been forced or
coerced to enter into the mortgage. Also, they had freely and
voluntarily applied for the loan, executed the mortgage contract
and turned over the TCTs of their properties. And, lastly,
contrary to their modified defense of absence of consent, Vicky
Angs testimony tended at best to prove the vitiation of their
consent
through
insidious
words,
machinations
or
misrepresentations amounting to fraud, which showed that the
contract was voidable. Where the consent was given through
fraud, the contract was voidable, not void ab initio. This is
because a voidable or annullable contract is existent, valid and
binding, although it can be annulled due to want of capacity or
because of the vitiated consent of one of the parties.
217

Atty Tizon
With the contract being voidable, petitioners action to annul the

real estate mortgage already prescribed. Article 1390, in relation
to Article 1391 of the Civil Code, provides that if the consent of
the contracting parties was obtained through fraud, the contract
is considered voidable and may be annulled within four years
from the time of the discovery of the fraud. The discovery of
fraud is reckoned from the time the document was registered in
the Register of Deeds in view of the rule that registration was
notice to the whole world. Thus, because the mortgage involving
the seven lots was registered on September 5, 1984, they had
until September 5, 1988 within which to assail the validity of the
mortgage. But their complaint was instituted in the RTC only on
October 10, 1991. Hence, the action, being by then already
prescribed, should be dismissed.
Uy Soo Lim v Tan Unchuan (1918)

38 Phil 552
Topic:
DOCTRINE:
FACTS:
This is an appeal by plaintiff upon the law and the facts, from a
judgment of the Court of First Instance of Cebu, dismissing
on the merits his action for the annulment of a contract by the
terms of which he sold to the defendant Francisca Pastrano all
his interest in the estate of the late Santiago Pastrano Uy Toco.
In 1891, Santiago Pastrano, who had resided continuously in the
Philippines since he came to the Islands . On a visit to China ,
where he stayed for less than a year, he entered into illicit
relations with a Chinese woman, Chan Quieg. He never saw
Chan Quieg again, but received letters from her informing him
that she had borne him a son, Uy Soo Lim, the present plaintiff.
Under the belief that he was his only son, and it was in this
belief that he dictated the provisions of his will.
On March 6, 1901, Santiago Pastrano died in Cebu , leaving a
large estate. The persons who survived him and laid claim to an
interest in the estate, were his wife, Candida Vivares, his
daughters, Francisca Pastrano, and Concepcion Pastrano, Chan
Quieg, and the plaintiff Uy Soo Lim (USL), a minor at the time.
The Pastranos and Quieg filed proceedings impeaching USLs
interest in the will, so USL went to Manila to defend his rights,
He employed as his agent and adviser one Choa Tek Hee (CTH)
and executed a power of atty. He also secured the services of two
attorneys, Major Bishop to represent him in Manila and
Levering, of Cebu, to represent him in Cebu .
218

Atty Tizon
Based on an agreement between the USL and the Pastanos

with the advise of their respective counsels under an the
informal arbitration of 3 designated of friendly advisers
(respectable Chinese merchants), USL executed a deed by
which he relinquished and sold to Francisca Pastrano all his
rights, title, and interest in the estate of the deceased Santiago
Pastrano in consideration of P82,500, of which sum P10,000
was received in cash and the balance was represented by six
promissory notes payable to Choa Tek Hee as attorney in fact for
Uy Soo Lim, the first for P22,500 and the remaining five for
P10,000 each.
Of these notes the first three, were paid to CTH as they fell due.
It appears, however, that he failed to account to the satisfaction
of USL. On March 1913, USL filed a case to revoke the power of
atty and for the accounting of the money received by CTH.
On October 8, 1913, USL turned 21 reaching age of majority. He
continued collecting the payments of the last 3 promissory
deposited in the clerk of courts.
HELD: No. There was no fraud and undue influence. CFI

judgment affirmed.
USL had secured and disposed of the P82,500 awarded to him
before and after he reached the age of majority. He should have
immediately assailed the contract when he came of age instead
of collecting the payments and spending them. The privilege
granted minors of disaffirming their contracts upon reaching
majority is subject to prompt election in the matter.
Jurisprudence state that "In every other case of a right to
disaffirm, the party holding it is required, out of regard to the
rights of those who may be affected by its exercise, to act upon it
within a reasonable time.
Not only should plaintiff have refunded all moneys in his
possession upon filing his action to rescind, but, by insisting
upon receiving and spending such consideration after reaching
majority, knowing the rights conferred upon him by law, he
must be held to have forfeited any right to bring such action.
On, August 24, 1914, USL assailed the deed claiming that it was
voidable on the grounds that his consent was obtained
through undue influence and fraud
CFI dismissed the case stating that USL had not been induced
by deceit, or undue influence to enter into the contract, but did
so deliberately, with full knowledge of the facts, after mature
deliberation and upon the advice of capable counsel. And
although the plaintiff was a minor at the time of the execution of
the contract in question, he not only failed to repudiate the
contract promptly upon reaching his majority but tacitly ratified
it by disposing of the greater part of the proceeds after he
became of age and after he had full knowledge of the facts upon
which he now seeks to disaffirm the agreement.
ISSUE: WON the deed executed by USL is VOIDABLE on the
grounds of fraud and undue influence.
219

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Viloria v. CAI (2012)

Topic: Ratification
DOCTRINE: Implied ratification may take diverse forms,
such as by silence or acquiescence.
FACTS: On or about July 21, 1997 and while in the United
States, Fernando purchased for himself and his wife, Lourdes,
two (2) round trip airline tickets from San Diego, California to
Newark, New Jersey on board Continental Airlines. Fernando
purchased the tickets at US$400.00 each from a travel agency
called Holiday Travel and was attended to by a certain
Margaret Mager (Mager). According to Spouses Viloria,
Fernando agreed to buy the said tickets after Mager informed
them that there were no available seats at Amtrak, an intercity
passenger train service provider in the United States.
Subsequently, Fernando requested Mager to reschedule their
flight to Newark to an earlier date or August 6, 1997. Mager
informed him that flights to Newark via Continental Airlines
were already fully booked and offered the alternative of a round
trip flight via Frontier Air.
As he was having second thoughts on traveling via Frontier Air,
Fernando went to the Greyhound Station where he saw an
Amtrak station nearby. Fernando made inquiries and was told
that there are seats available and he can travel on Amtrak
anytime and any day he pleased. Fernando then purchased two
(2) tickets for Washington, D.C. From Amtrak, Fernando went
to Holiday Travel and confronted Mager with the Amtrak
tickets, telling her that she had misled them into buying the
Continental Airlines tickets by misrepresenting that Amtrak was
already fully booked. Fernando reiterated his demand for a
refund but Mager was firm in her position that the subject
tickets are non-refundable. Upon returning to the Philippines,
Fernando sent a letter to CAI on February 11, 1998, demanding a
refund and alleging that Mager had deluded them into

purchasing the subject tickets.
In a letter dated June 21, 1999, Fernando demanded for the
refund of the subject tickets as he no longer wished to have them
replaced. In addition to the dubious circumstances under which
the subject tickets were issued, Fernando claimed that CAIs act
of charging him with US$1,867.40 for a round trip ticket to Los
Angeles, which other airlines priced at US$856.00, and refusal
to allow him to use Lourdes ticket, breached its undertaking
under its March 24, 1998 letter.
Respondents contention: AI claimed that Spouses
Vilorias allegation of bad faith is negated by its willingness to
issue new tickets to them and to credit the value of the subject
tickets against the value of the new ticket Fernando requested.
CAI argued that Spouses Vilorias sole basis to claim that the
price at which CAI was willing to issue the new tickets is
unconscionable is a piece of hearsay evidence an
advertisement appearing on a newspaper stating that airfares
from Manila to Los Angeles or San Francisco cost
US$818.00.15 Also, the advertisement pertains to airfares in
September 2000 and not to airfares prevailing in June 1999, the
time when Fernando asked CAI to apply the value of the subject
tickets for the purchase of a new one. 16 CAI likewise argued that
it did not undertake to protect Spouses Viloria from any changes
or fluctuations in the prices of airline tickets and its only
obligation was to apply the value of the subject tickets to the
purchase of the newly issued tickets.
ISSUE: Whether spouses Viloria ratified the contract they
decided to exercise their right to use the subject tickets for the
purchase of new ones.
DOCTRINE AND HELD: YES. Even assuming that Magers
representation is causal fraud, the subject contracts have been
impliedly ratified when Spouses Viloria decided to exercise their
220

Atty Tizon
right to use the subject tickets for the purchase of new ones.
Under Article 1392 of the Civil Code, ratification extinguishes
the action to annul a voidable contract.
Ratification of a voidable contract is defined under Article 1393
of the Civil Code as follows:
Art. 1393. Ratification may be effected expressly
or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason
which renders the contract voidable and such
reason having ceased, the person who has a right
to invoke it should execute an act which
necessarily implies an intention to waive his
right.
However, annulment under Article 1390 of the Civil Code and

rescission under Article 1191 are two (2) inconsistent remedies.
In resolution, all the elements to make the contract valid are
present; in annulment, one of the essential elements to a
formation of a contract, which is consent, is absent. In
resolution, the defect is in the consummation stage of the
contract when the parties are in the process of performing their
respective obligations; in annulment, the defect is already
present at the time of the negotiation and perfection stages of
the contract. Accordingly, by pursuing the remedy of rescission
under Article 1191, the Vilorias had impliedly admitted the
validity of the subject contracts, forfeiting their right to demand
their annulment. A party cannot rely on the contract and claim
rights or obligations under it and at the same time impugn its
existence or validity. Indeed, litigants are enjoined from taking
inconsistent positions.
Implied ratification may take diverse forms, such as by silence

or acquiescence; by acts showing approval or adoption of the
contract; or by acceptance and retention of benefits flowing
therefrom. Simultaneous with their demand for a refund on the
ground of Fernandos vitiated consent, Spouses Viloria likewise
asked for a refund based on CAIs supposed bad faith in
reneging on its undertaking to replace the subject tickets with a
round trip ticket from Manila to Los Angeles.
In doing so, Spouses Viloria are actually asking for a rescission
of the subject contracts based on contractual breach. Resolution,
the action referred to in Article 1191, is based on the defendants
breach of faith, a violation of the reciprocity between the
parties37 and in Solar Harvest, Inc. v. Davao Corrugated
Carton Corporation,38 this Court ruled that a claim for a
reimbursement in view of the other partys failure to comply
with his obligations under the contract is one for rescission or
resolution.
221

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ECE Realty and Development Inc. v Rachel Mandap

Voidable contracts: Fraud
FACTS:
In 1995, petitioner started the construction of a condominium
project called Central Park Condominium Building located in
Pasay City. However, printed advertisements were made
indicating therein that the said project was to be built in Makati
City. In December 1995, respondent agreed to buy a unit from
the project by paying a reservation fee and, thereafter,
downpayment and monthly installments. On June 18, 1996,
respondent and the representatives of petitioner executed a
Contract to Sell. In the said Contract, it was indicated that the
condominium project is located in Pasay City.
More than 2 years after the execution of the Contract to Sell,
respondent demanded the return of the payments she made, on
the ground that she subsequently discovered that the
condominium project was being built in Pasay City and not in
Makati City. Instead of answering the letter, petitioner sent her
a written communication informing her that her unit is ready for
inspection and occupancy should she decide to move in.
Treating the letter as a form of denial of her demand for the
return of the sum she had paid to petitioner, respondent filed a
complaint with the Expanded National Capital Region Field
Office (ENCRFO) of the HLURB seeking the annulment of her
contract with petitioner, the return of her payments, and
damages. ENCRFO dismissed the complaint, not finding any
fraud. HLURB and OP affirmed. CA reversed the decision,
holding that petitioner employed fraud and machinations to
induce respondent to enter into a contract with it.
ISSUE: Whether petitioner was guilty of fraud and if so,
whether such fraud is sufficient ground to nullify its contract
with respondent.
RULING: No. Jurisprudence has shown that in order to

constitute fraud that provides basis to annul contracts, it must
fulfill 2 conditions. First, the fraud must be dolo causante or it
must be fraud in obtaining the consent of the party. This is
referred to as causal fraud. The deceit must be serious. The
fraud is serious when it is sufficient to impress, or to lead an
ordinarily prudent person into error; that which cannot deceive
a prudent person cannot be a ground for nullity. The
circumstances of each case should be considered, taking into
account the personal conditions of the victim. Second, the
fraud must be proven by clear and convincing evidence and not
merely by a preponderance thereof.
Petitioner is guilty of false representation of a fact. This is
evidenced by its printed advertisements indicating that its
subject condominium project is located in Makati when, in fact,
it is in Pasay. The Court condemns petitioner's deplorable act of
making misrepresentations in its advertisements and in issuing
a stern warning that a repetition of this act shall be dealt with
more severely.
However, the misrepresentation made by petitioner in its
advertisements does not constitute causal fraud which would
have been a valid basis in annulling the Contract to Sell between
petitioner and respondent. Respondent failed to prove that the
location of the said project was the causal consideration or the
principal inducement which led her into buying her unit in the
said condominium project. Respondent proceeded to sign the
Contract to Sell despite information contained therein that the
condominium is located in Pasay. This only means that she still
agreed to buy the property regardless of the fact that it is located
in a place different from what she was originally informed. If she
had a problem with the property's location, she should not have
signed the Contract to Sell and, instead, immediately raised this
issue with petitioner. It took respondent more than 2 years from
the execution of the Contract to Sell to demand the return of the
amount she paid on the ground that she was misled into
222

Atty Tizon
believing that the property is located in Makati. In the

meantime, she continued to make payments.
In any case, even assuming that petitioners misrepresentation
consists of fraud which could be a ground for annulling their
Contract to Sell, respondent's act of affixing her signature to the
said Contract, after having acquired knowledge of the property's
actual location, can be construed as an implied ratification
thereof.
therefrom.
the action to annul a voidable contract. In addition, Article
1396 of the same Code provides that [r]atification cleanses the
contract from all its defects from the moment it was
constituted.
The Roman Catholic Church vs. Regino Pante (2012)

Brion, J.
Re: contracts: mistake; voidable contract
DOCTRINE: Not every mistake renders a contract
voidable. For mistake as to the qualification of one of the
parties to vitiate consent, two requisites must concur:
1.
2.
the mistake must be either with regard to the identity

or with regard to the qualification of one of the
contracting parties; and
the identity or qualification must have been the
principal consideration for the celebration of the
contract.
FACTS
The Roman Catholic Church, represented by the Archbishop of
Caceres sold a 32-square meter lot to the respondent Regino
Pante, who in the belief of the Church as an actual occupant of
the lot. Terms fixed at a purchase price of P 11,200, a down
payment P 1,120 and a balance payable in three years.
Subsequently, the Church sold a lot to the spouses Rubi, which
included the lot that was previously sold to the respondent
Pante. Then, the spouses Rubi erected a fence along the lot,
including the lot of Pante, which blocked the access of Pante
from their family home to the municipal road. Pante instituted
an action before the RTC to annul the sale between the Church
and spouses Rubi.
The Church contended that Pante misrepresented that they were
the actual occupant of the said lot. Also, the sale was a mistake
that would constitute a voidable contract because Pante made
them believe that he was a qualified occupant and Pante was
aware that they sell lots only to those occupants and residents.
223

Atty Tizon
Pante averred that they were using it as passageway from his

family home to the road, which signifies that he is really using
the actual lot.
The RTC ruled in favor to the Church, for it was a
misrepresentation of Pante and he delayed in the payment of the
lot for he only consigned the balance with the RTC after the
church refused to accept the payments.
Then, the respondent Pante appealed to the appellate court,
which reversed the decision of the RTC and granted the
annulment of the sale. Thus, a petition by the Church was
brought before the certiorari.
ISSUE: Whether the sale was a voidable contract (by mistake)?
HELD: No, the Supreme Court ruled that there were no
misrepresentation made that would vitiate the consent and
render the contract as voidable.
As consent as one of the essential requisites of a valid contract
and such consent should be free, voluntary, willful and a
reasonable understanding of the various obligations that the
parties have assumed for themselves. However if consent is
given through mistake, violence, intimidation, undue influence
and fraud, it would render a contract voidable. On Article 1331
of the Civil Code, mistake could only render a contract voidable
if the following requisites concur: 1. the mistake must be either
with regard to the identity or with regard to the qualification of
one of the contracting parties; and 2. the identity or
qualification must have been the principal consideration for the
celebration of the contract.
respondent Pante, thus it is considered as his RIGHT OF

WAY.
Also, records show that the Parish Priest was aware that Parte
was not an actual occupant and still he allowed the sale to Pante.
So, the Church cannot by any means contend that the Church
was misled by the act of Pante, that there was vitiation of
consent on the said sale.
In Article 1390 of the Civil Code declares that voidable contracts
are binding, unless annulled by a proper court action. From the
time the sale to Pante was made and up until it sold the subject
property to the spouses Rubi, the Church made no move to
reject the contract with Pante; it did not even return the down
payment he paid. The Churchs bad faith in selling the lot to
Rubi without annulling its contract with Pante negates its claim
for damages.
There was no vitiation of consent; therefore, the contract
between the Church and Pante stands valid and existing. The
delay of Pante in paying the full price could not nullify the
contract, since it was a contract of sale (as correctly observed by
the CA). In the terms of the contract, it did not stipulate that the
Church will retain ownership until full payment of the price. The
right to repurchase given to the Church if ever Pante fails to pay
within the grace period provided would have been unnecessary
had ownership not already passed to Pante.
In this case, there is no mistake as to the qualifications as to the

policy of the Church on selling only for those who are occupants
and residents, for neither Pante nor spouses Rubi would qualify
as residents of the said 32-square meter lot, as none of them had
occupied or resided on the lot. The lot is a passageway for the
224

Atty Tizon

Voidable contracts: Fraud
FACTS: In 1995, petitioner started the construction of a
condominium project called Central Park Condominium
Building located in Pasay City. However, printed advertisements
were made indicating therein that the said project was to be
built in Makati City. In December 1995, respondent agreed to
buy a unit from the project by paying a reservation fee and,
thereafter, downpayment and monthly installments. On June
18, 1996, respondent and the representatives of petitioner
executed a Contract to Sell. In the said Contract, it was indicated
that the condominium project is located in Pasay City.
More than 2 years after the execution of the Contract to Sell,
respondent demanded the return of the payments she made, on
the ground that she subsequently discovered that the
condominium project was being built in Pasay City and not in
Makati City. Instead of answering the letter, petitioner sent her
a written communication informing her that her unit is ready for
inspection and occupancy should she decide to move in.
Treating the letter as a form of denial of her demand for the
return of the sum she had paid to petitioner, respondent filed a
complaint with the Expanded National Capital Region Field
Office (ENCRFO) of the HLURB seeking the annulment of her
contract with petitioner, the return of her payments, and
damages. ENCRFO dismissed the complaint, not finding any
fraud. HLURB and OP affirmed. CA reversed the decision,
holding that petitioner employed fraud and machinations to
induce respondent to enter into a contract with it.
ISSUE: Whether petitioner was guilty of fraud and if so,
whether such fraud is sufficient ground to nullify its contract
with respondent.
HELD:
No. Jurisprudence has shown that in order to
constitute fraud that provides basis to annul contracts, it must
fulfill 2 conditions. First, the fraud must be dolo causante or it
must be fraud in obtaining the consent of the party. This is
referred to as causal fraud. The deceit must be serious. The
fraud is serious when it is sufficient to impress, or to lead an
ordinarily prudent person into error; that which cannot deceive
a prudent person cannot be a ground for nullity. The
circumstances of each case should be considered, taking into
account the personal conditions of the victim. Second, the
fraud must be proven by clear and convincing evidence and not
merely by a preponderance thereof.
Petitioner is guilty of false representation of a fact. This is
evidenced by its printed advertisements indicating that its
subject condominium project is located in Makati when, in fact,
it is in Pasay. The Court condemns petitioner's deplorable act of
making misrepresentations in its advertisements and in issuing
a stern warning that a repetition of this act shall be dealt with
more severely.
However, the misrepresentation made by petitioner in its
advertisements does not constitute causal fraud which would
have been a valid basis in annulling the Contract to Sell between
petitioner and respondent. Respondent failed to prove that the
location of the said project was the causal consideration or the
principal inducement which led her into buying her unit in the
said condominium project. Respondent proceeded to sign the
Contract to Sell despite information contained therein that the
condominium is located in Pasay. This only means that she still
agreed to buy the property regardless of the fact that it is located
in a place different from what she was originally informed. If she
had a problem with the property's location, she should not have
signed the Contract to Sell and, instead, immediately raised this
issue with petitioner. It took respondent more than 2 years from
the execution of the Contract to Sell to demand the return of the
amount she paid on the ground that she was misled into
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Atty Tizon
believing that the property is located in Makati. In the

meantime, she continued to make payments.
In any case, even assuming that petitioners misrepresentation
consists of fraud which could be a ground for annulling their
Contract to Sell, respondent's act of affixing her signature to the
said Contract, after having acquired knowledge of the property's
actual location, can be construed as an implied ratification
thereof.
therefrom.
the action to annul a voidable contract. In addition, Article
1396 of the same Code provides that [r]atification cleanses the
contract from all its defects from the moment it was
constituted.
Metropolitan v Prosperity (2014)

G.R. No. 154390, March 17, 2014
Topic:
Doctrine:
FACTS:
Metropolitan Fabrics, Incorporated, a family corporation,
owned a 5.8 hectare industrial compound. Pursuant to a P2
million, 10year 14% per annum loan agreement with Manphil
Investment Corporation (Manphil) dated April 6, 1983, the said
lot was subdivided into 11 lots, with Manphil retaining four lots
as mortgage security. The other seven lots were released to MFI.
In July 1984, MFI sought from PCRI a loan in the amount of
P3,443,330.52, the balance of the cost of its boiler machine, to
prevent its repossession. PCRI, also a familyowned
corporation licensed since 1980 to engage in money lending,
was represented by Domingo Ang (Domingo) its president,
and his son Caleb, vicepresident. The parties knew each other
because they belonged to the same family association, the Lioc
Kui Tong Fraternity.
The decision noted that on the basis only of his interview with
Enrique, feedback from the stockholders and the Chinese
community, as well as information given by his own father
Domingo, and without further checking on the background of
Enrique and his business and requiring him to submit a
company profile and a feasibility study of MFI, Caleb
recommended the approval of the P3.44 million with an interest
ranging from 24% to 26% per annum and a term of between five
and ten years. According to the court, it sufficed for Caleb that
Enrique was a wellrespected Chinese businessman, that he was
the president of their Chinese family association, and that he
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Atty Tizon
had other personal businesses aside from MFI, such as the

Africa Trading.
bearing no dates and amounts, to cover the amortization

payments, all signed in blank by Enrique and Natividad.
The court gave credence testimony of Enriques daughter Vicky

that on August 3, 1984, even before the signing of the mortgage
and loan documents, PCRI released the P3.5 million loan to
MFI. It found that the blank loan forms which Domingo himself
handed to Enrique, had no entries specifying the rate of
interest and schedules of amortization. On the same day, to
reciprocate the gesture of PCRI, Enrique, together with his wife
Natividad Africa, vicepresident, and son Edmundo signed the
blank forms at their office at Tandang Sora Avenue, Novaliches,
Quezon City. The signing was allegedly witnessed by Vicky,
Ellen and Alice, all surnamed Ang, without any PCRI
representative present. Immediately thereafter, Enrique and
Vicky proceeded to the PCRI office.

interest rate per annum, instead of just 24%, and a twoyear
repayment period, instead of 10 years. Vicky avers that her
strong protest caused PCRI to desist from depositing the other
23 checks, and that it was about this time that PCRI finally
furnished MFI with its copy of the promissory note and the
disclosure statement.
The court a quo also accepted Vickys account that it was in

order to return the trust of Domingo and Caleb and their gesture
of the early release of the loan that Enrique and Vicky entrusted
to them their seven (7) titles, with an aggregate area of 3.3665
hectares. She testified that they left it to defendants to choose
from among the 7 titles those which would be sufficient to
secure the P3.5 million. She also admitted, however, that they
had an appraisal report dated June, 1984 of the said properties
made by the Integrated Appraisal Corporation which put the
value of four (4) of the said properties at P6.8 million, now the
subject of the action for reconveyance, while the aggregate value
of all seven lots was P11 million.
Vicky further stated that it was agreed that once PCRI had
chosen the lots to be covered by the mortgage, the defendants
would return the remaining titles to the plaintiffs. Plaintiffs also
secured an additional loan of about P199,000.00 to pay for real
estate taxes and other expenses. Significantly, Vicky testified
that the plaintiffs delivered to PCRI twentyfour (24) checks,
Vicky asserted that plaintiffsappellees found the terms

reflected in the loan documents to be prohibitive, burdensome
and unconscionable, and that had they known them when they
took out the loan on August 3, 1984, they could either have (1)
negotiated/bargained or (2) rejected the terms of the loan and
withdrawn the loan application. Plaintiffs thereafter repeatedly
asked the defendants to return the rest of the titles in excess of
the required collateral to which defendants allegedly routinely
responded that their committee was still studying the matter.
Vicky even added that Caleb assured Vicky that PCRI would also
rate. Meanwhile, due to losses plaintiffs business operations
stopped.
Vicky also testified that talks were held in earnest in 1985
between Domingo and Enrique as well as between Vicky and
Caleb concerning the possible offsetting of the loan by ceding
some of their properties to PCRI. On February 28, 1986, Vicky
wrote to defendants, referring to a meeting held on February 11,
1986 and reiterating her request for the offsetting. The letter
stated that since August, 1985, she had been asking for the
offsetting of their properties against the loan. Caleb had sought
a report on the fair market value of the seven lots. Also, he
227

Atty Tizon
sought the assignment to PCRI of the rentals payable of

plaintiffs tenant, Bethlehem Knitting Company up to 1987.
Vicky admitted that plaintiffs furnished Caleb on March 11, 1986
a copy of the 1984 Appraisal Report prepared by the Integrated
Appraisal Corporation for the offsetting agreement.
PCRIs account statement dated February 12, 1986 showed that
MFIs total loan obligation amounted to P4,167,472.71 (Exh.
G). The March 25, 1986 statement from PCRI, however,
showed that all seven (7) titles were placed as collateral for their
P3.5 million loan. MFI maintained that per their appraisal
report, four of the properties were already worth P6.5 million
while the three other lots were valued around P4.6 million.
Vicky also claimed that Domingo and Caleb tried to appease the
plaintiffs by assuring them that they would return the rest of the
titles anytime they would need them, and that they could use
them to secure another loan from them or from another
financing company. They would also reconsider the 35%
interest rate, but when the discussion shifted to the offsetting of
the properties to pay the loan, the defendants standard answer
was that they were still awaiting the feedback of their
committee.
Sale dated August 29, 1986, announcing the auction of the seven
lots on September 24, 1986 due to unpaid indebtedness of P10.5
million. After Vicky explained to her father Enrique in Chinese
that the defendants were auctioning all their seven lots, he
became frantic, was unable to take his lunch, and remained
silent the whole afternoon. Later that night he fell ill and
became delirious. His blood pressure shot up to 200/100 and
he was rushed to the Metropolitan Hospital where he fell into a
coma and stayed in the intensive care unit for four (4) days.
Vicky claimed that during moments of consciousness, her father
would mutter the names of Domingo and Caleb and that they
were unprofessional and dishonest people. He was discharged

after 6 days.
Vicky insisted that prior to the auction notice, they never
received any statement or demand letter from the defendants to
pay P10.5 million, nor did the defendants inform them of the
intended foreclosure. The last statement they received was
dated February 12, 1986, and showed amount due of only
P4,167,472.71. Vicky recalled that from June 1, 1986 to July
1986, they held several meetings to discuss the options available
to them to repay their loan, such as the offsetting of their rent
collectibles and properties to cover the amortizations and the
loan balance.
MFI protested the foreclosure, and the auction was reset to
October 6, 1986, then to October 16, 1986, and finally October
27, 1986 after they assured PCRI that they had found a serious
buyer for three of the lots. In the meeting held on October 15,
1986 at defendants office, the buyer, Winston Wang of Asia
Cotton and his lawyer, Atty. Ismael Andres were present. It was
agreed to release the mortgage over TCT Nos. 317705, 317706,
and 317707 upon payment of P3.5 million. Winston Wang
million loan. Winston Wang was given 15 days from October 16,
1986 to pay the P500,000.00. Vicky claims that these
agreements were made verbally, although she kept notes and
scribbles of them.
On January 19, 1987, Winston Wang confronted Vicky about
their sale agreement and PCRIs refusal to accept their P3
million payment, because according to Caleb, the three lots had
been foreclosed. Vicky was shocked, because the agreed 60day
period to pay the P3 million was to lapse on January 13, 1987
yet. Caleb himself put the particulars of the P500,000.00
payment in the cash voucher as partial settlement of the loan.
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Atty Tizon
bidder for P6.5 million. Vicky however also admitted that
discussions continued on the agreement to release three lots for
P3.5 million. The reduction of interest rate and charges and the
condonation of the attorneys fees of P300,000.00 for the
foreclosure proceedings were also sought. Present in these
conferences were Enrique and Vicky, Domingo and Caleb,
Winston Wang and his lawyer, Atty. Ismael Andres.
Upon defendants continued failure to honor their agreement,
Atty. Ismael Andres threatened to sue PCRI in a letter dated
February 17, 1987 if they would not accept the P3 million
payment of his client. Atty. Andres also sent them similar letters
dated May 15, August 5 and 7, 1987, and after several more
discussions, the defendants finally agreed to accept the P3
million from Winston Wang, but under these conditions: a)
MFI must pay the P300,000.00 attorneys fees paid for the
foreclosure proceedings and the P190,000.00 for real estate
taxes; b) PCRI shall issue the certificate of redemption over the
three lots; c) plaintiffs shall execute a Memorandum of
Undertaking concerning their right of way over the other
properties, the lots being redeemed being situated along
Tandang Sora Street.
Vicky also testified that although Wang would pay directly to
Caleb, the plaintiffs pursued the transaction because of PCRIs
promised to release the four (4) other remaining properties after
the payment of P3.5 million loan principal as well as the interest
in arrears computed at P3 million, or a total of P6.5).
MFI paid to PCRI P490,000.00 as agreed, and likewise
complied with the required documentation. Winston Wang also
paid the balance of P3 million for the three lots he was buying.
The discussion then turned to how the plaintiffs P3 million
interest arrearages would be settled, which they agreed to be
payable over a period of one year, from October 26, 1987 to
October 26, 1988.
In October, 1988, however, plaintiffs were able to raise only P2

million. After a meeting at defendants office, the period to pay
was extended to October 26, 1989, but subject to 18% interest
per annum, which Caleb however allegedly refused to put in
writing. Plaintiffs were later able to raise P3 million plus
P540,000.00 representing the 18% interest per annum. On
October 26, 1989, Vicky and Enrique tendered the same to Caleb
at his office. Caleb however became furious, and now insisted
that the interest due since 1984 was already P7 million
computed at 35% per annum.
On January 16, 1990 and again on March 5, 1990, PCRI sent the
plaintiffs a letter demanding that they vacate the four remaining
lots. Caleb was also now asking for P10.5 million. On March 19,
1990, Caleb executed an affidavit of nonredemption of TCT
Nos. 317699, 317702, 317703 and 317704. On June 7, 1990, S.G.
del Rosario, PCRIs vicepresident, wrote Vicky reiterating their
demand to vacate the premises and remove pieces of machinery,
equipment and persons therein, which MFI eventually heeded.
Vicky also testified that the news of plaintiffs predicament
spread around the Chinese community and brought the family
great humiliation. Enriques health deteriorated rapidly and he
was hospitalized. On October 9, 1991, they filed the case below.
Meanwhile, Enrique died on November 15, 1993 after one year
and one month at the Metropolitan Hospital. The family spent
P300,000 P400,000 for his funeral and burial expenses.
Plaintiffs now insist that P1 million in moral damages was not
enough for the humiliation they suffered before the Chinese
community, considering that Enrique was then the president of
the Lioc Kui Tong Fraternity while Domingo and Caleb were
members thereof. Plaintiffs were also deprived of the rental
income of P10,000.00 per month and the 10% rental increases
from 1987 to present of their said properties.
229

Atty Tizon
In arguing that the 35% interest rate imposed by PCRI was

exorbitant and without their consent, the plaintiffs cited the
promissory note and amortization schedule in their loan
agreement with Manphil dated April 6, 1983 and with IBAA on
April 21, 1983 which both showed a rate of interest of only 14%
and a tenyear term with two years grace period.
ISSUE: WON there is Fraud
HELD: No, according to Article 1338 of the Civil Code, there is
fraud when one of the contracting parties, through insidious
words or machinations, induces the other to enter into the
contract that, without the inducement, he would not have
agreed to. Yet, fraud, to vitiate consent, must be the causal (dolo
causante), not merely the incidental (dolo incidente),
inducement to the making of the contract. InSamson v. Court of
Appeals, causal fraud is defined as a deception employed by
one party prior to or simultaneous to the contract in order to
secure the consent of the other.
regularity. Hence, it was admissible in evidence without further

proof of its authenticity, and was entitled to full faith and credit
upon its face. To rebut its authenticity and genuineness, the
contrary evidence must be clear, convincing and more than
merely preponderant; otherwise, the deed should be upheld.
Petitioners undeniably failed to adduce clear and convincing
evidence against the genuineness and authenticity of the deed.
Instead, their actuations even demonstrated that their
transaction with respondents had been regular and at arms
length, thereby belying the intervention of fraud.
Fraud cannot be presumed but must be proved by clear and

convincing evidence. Whoever alleges fraud affecting a
private transactions are similarly presumed to have been fair
and regular. To be remembered is that mere allegation is
definitely not evidence; hence, it must be proved by sufficient
evidence.
Did petitioners clearly and convincingly establish their
allegation of fraud in the execution of the deed of real estate
mortgage?
The contested deed of real estate mortgage was a public
document by virtue of its being acknowledged before notary
public Atty. Noemi Ferrer. As a notarized document, the deed
carried the evidentiary weight conferred upon it with respect to
its due execution, and had in its favor the presumption of
230

Atty Tizon

Topic: Unenforceable Contract
DOCTRINE: It must be repeated that the mortgage was
executed while a receiver was in charge of the Vegetable
Oil Company. A mortgage accomplished at such a time
by the corporation under receivership and a creditor
would be a nullity.
FACTS: In 1920, the Vegetable Oil Co found itself in financial
straits. It was in debt of approximately P30M. PNB was the
largest creditor, owing the bank P17M. PNB was secured
principally by a real and chattel mortgage for P3.5M. The
Vegetable Oil Co executed another chattel mortgage in favour of
the bank on its vessels Tankerville and HS Everette to guarantee
the payment of sums not to exceed P4M.
Mr. Phil C. Whitaker, the General Manager of the Vegetable Oil
Co., made his first offer to pledge certain private properties to
secure the creditors of the Oil Company. At the instance of Mr.
Whitaker but inspired to action by the PNB, a receiver for the
Oil Company was appointed by the CFI Manila.
During the period when a receiver was in control of the Oil
Company, Creditors transferred to Mr. Whitaker a part of their
claims against the Oil Company via an agreement. PNB was not
a direct party to the agreement although its officials had full
knowledge of its accomplishment and its general manager
placed his OK at the end of the final draft.
PNB obtained a new mortgage from the Oil Company. Shortly
thereafter, the receivership for the Oil Company was terminated
(Feb 28, 1922), the bank suspended the operations of the
Company, and definitely closed its plant.
The Oil Company interposed with a counterclaim for P6M and

Whitaker presented a complaint in intervention. Trial court
found for PNB, ordering the Company to pay P15,787,454,54,
with legal interest, attorneys fees, and costs, and the usual order
to foreclose the mortgage. Counterclaim and intervention were
dismissed.
ISSUE: WON the Feb 20,1922 mortgage between PNB and the
Company is valid.
HELD: NO.
At the outset, the appellee challenges the right of Phil. C.
Whitaker as intervenor to ask that the mortgage contract
executed by the Vegetable Oil Company be declared null and
void. Appellee is right as to the premises. The Vegetable Oil
Company is the defendant. The corporation has not appealed. At
the same time, it is evident that Phil. C. Whitaker was one of the
largest individual stockholders of the Vegetable Oil Company,
and was until the inauguration of the receivership, exercising
control over and dictating the policy of that company. Out of
twenty-eight thousand shares of the Vegetable Oil Company,
Mr. Whitaker was the owner of 5,893 fully paid shares of the par
value of P100 each. He it was who asked for the appointment of
the receiver. He it was who was the leading figure in the
negotiations between the Vegetable Oil Company, the Philippine
National Bank, and the other creditors. He it was who pledged
his own property to the extent of over P4,000,000 in an
endeavor to assist in the rehabilitation of the Vegetable Oil
Company. He is injuriously affected by the mortgage. In truth,
Mr. Whitaker is more vitally interested in the outcome of this
case than is the Vegetable Oil Company. Conceivably if the
mortgage had been the free act of the Vegetable Oil Company, it
could not be heard to allege its own fraud, and only a creditor
could take advantage of the fraud to intervene to avoid the
conveyance.
231

Atty Tizon
It has been said that the mortgage was executed on February 20,
1922. That is undeniable. The allegation of the plaintiff's
complaint is "That the defendant, on the 20th day of February,
1922, duly executed to the plaintiff a mortgage." The mortgage
in question recites: "This mortgage, executed at the City of
Manila, Philippine Islands, this twentieth day of February,
nineteen hundred and twenty-two." However, the mortgage was
not ratified before a notary public until March 8, 1922, and was
not recorded in the registry of property until March 21, 1922.
To add one more date, it will be recalled that the receivership
ended on February 28, 1922. In other words, as partially
interpretative of the situation, the mortgage was executed by the
Philippine National Bank, through its General Manager, and
another corporation before the termination of the receivership
of the said corporation, but was not acknowledged or recorded
until after the termination of the receivership.
In the complaint of Phil. C. Whitaker filed in the Court of First
Instance of Manila in which it was prayed that a receiver be
appointed to take charge of the Philippine Vegetable Oil Co.,
Inc., it was alleged "that the largest individual creditor of said
corporation is the Philippine National Bank, the indebtedness to
which amounts to approximately P16,000,000, a portion of
which indebtedness is secured by mortgage on the major part of
the assets of the corporation." The order of the court appointing
a receiver contained a similar recital. The Philippine National
Bank held the mortgage mentioned, and possibly two others not
mentioned, when the receivership proceedings were initiated.
It must be evident to all that the Philippine National Bank could
legally secure no new mortgage by the accomplishment of
documents between its officials and the officials of the Vegetable
Oil Company while the property of the latter company was in
custodia legis. The Vegetable Oil Company was then inhibited
absolutely from giving a mortgage on its property. The receiver
was not a party to the mortgage. The court had not authorized
the receiver to consent to the execution of a new mortgage.

Whether the court could have done so is doubtful, but that it
would have thus consented is hardly debatable, considering that
it would desire to protect the rights of all the creditors and not
the rights of one particular creditor. The legal conclusion is
axiomatic.
To all this the appellee as well as the trial court have answered
that while it is true that the document was executed on February
20, 1922, at a time when the properties of the mortgagor were
under receivership, the mortgage was not acknowledged before
a notary public until March 8, 1922, after the court had
determined that the necessity for a receiver no longer existed.
But the additional fact remains that while the mortgage could
not have been executed without the dissolution of the
receivership, such dissolution was apparently secured through
representations made to the court by counsel for the bank that
the bank would continue to finance the operations of the
Vegetable Oil Company. Instead of so doing, the bank within
less than two months after the mortgage was recorded,
withdrew its support from the Vegetable Oil Company, and in
effect closed its establishment. Also it must not be forgotten that
the hands of other creditors were tied pursuant to the creditors'
agreement of June 27, 1921.
To place emphasis on the outstanding facts, it must be repeated
that the mortgage was executed while a receiver was in charge of
the Vegetable Oil Company. A mortgage accomplished at such a
time by the corporation under receivership and a creditor would
be a nullity. The mortgage was definitely perfected subsequent
to the lifting of the receivership pursuant to implied promises
that the bank would continue to operate the Vegetable Oil
Company. It was then accomplished when the Philippine
National Bank was a dominating influence in the affairs of the
Vegetable Oil Company. On the one hand was the Philippine
National Bank in person. On the other hand was the Philippine
National Bank by proxy. Under such circumstances, it would be
232

Atty Tizon
unconscionable to allow the bank, after the hands of the other

creditors were tied, virtually to appropriate to itself all the
property of the Vegetable Oil Company.
Whether we consider the action taken as not expressing the free
will of the Vegetable Oil Company, or as disclosing undue
influence on the part of the Philippine National Bank in
procuring the mortgage, or as constituting deceit under the civil
law, or whether we go still further and classify the facts as
constructive fraud, the result is the same. The mortgage is
clearly voidable.
The setting aside of the mortgage of February 20, 1922, will not
necessarily result in the Philippine National Bank being left
without security. It is our understanding that before the
receivership was thought of, the bank was the holder of three
mortgages on the property of the Vegetable Oil Company, the
first dated April 11, 1919, for an uncertain amount; the second,
dated November 18, 1920, for P3,500,000; and the third, dated
January 10, 1921, for P4,000,000. These mortgages remain in
effect and may be foreclosed.
We rule therefore that the Philippine National Bank-Philippine
Vegetable Co., Inc., mortgage of February 20, 1922, has not been
legally executed by the Philippine Vegetable Oil Co., Inc.
Carbonnel v Poncio, 103 Phil 655 (1958)

DOCTRINE: It is well settled in this jurisdiction that the
Statute of Frauds is applicable only to executory
contracts, not to contracts that are totally
or partially performed.
FACTS:
Plaintiff Rosario Carbonnel alleges that she purchased from
defendant Jose Poncio, at P9.50 a square meter, a parcel of land
excluding the improvements thereon; that plaintiff paid P247.26
on account of the price and assumed Poncio's obligation with
the Republic Savings Bank amounting to P1,177.48, with the
understanding that the balance would be payable upon
execution of the corresponding deed of conveyance;
One of the conditions of the sale was that Poncio would continue
staying in said land for one year, as stated in a document signed
by him. However, Poncio refuses to execute the corresponding
deed of sale, despite repeated demand; Thereafter, Poncio
conveyed the same property to defendants Ramon R. Infante
and Emma L. Infante, who knew, of the first sale to plaintiff
Plaintiff prayed, therefore, that she be declared owner of the
land in question; that the sale to the Infantes be annulled; that
Poncio be required to execute the corresponding deed of
conveyance in plaintiff's favor; that the Register of Deeds of
Rizal be directed to issue the corresponding title in plaintiff's
name; and that defendants be sentenced to pay damages
Defendants moved to dismiss said complaint upon the ground
that plaintiff's claim is unenforceable under the Statute of
Frauds
Poncio alleged that he had consistently turned down several
offers, made by plaintiff, to buy the land in question, at P15 a
233

Atty Tizon
square meter, for he believes that it is worth not less than P20 a
square meter; that Mrs. Infante, likewise, tried to buy the land at
P15 a square meter; that, on or about January 27, 1955, Poncio
was advised by plaintiff that should she decide to buy the
property at P20 a square meter, she would allow him to remain
in the property for one year; that plaintiff then induced Poncio
to sign a document, copy of which is probable, the one appended
to the second amended complaint; that Poncio signed it "relying
upon the statement of the plaintiff that the document was a
permit for him to remain in the premises in the event that
defendant decided to sell the property to the plaintiff at P20 a
square meter"; that on January 30, 1955, Mrs. Infante improved
her offer and he agreed to sell the land and its improvements to
her for P3,535; that Poncio has not lost "his mind," to sell his
property, worth at least P4,000, for the paltry sum of P1,177.48,
the amount of his obligation to the Republic Savings Bank; and
that plaintiff's action is barred by the Statute of Frauds.
ISSUE: Whether the plaintiff's claim is unenforceable under the
Statute of Frauds
RULING: It is well settled in this jurisdiction that the Statute of
Frauds is applicable only to executory contracts, not to contracts
that are totally or partially performed.
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."
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.
The true basis of the doctrine of part performance according to
the overwhelming weight of authority, is that it would be a fraud
upon the plaintiff if the defendant were permitted to escape
performance of his part of the oral agreement after he has
permitted the plaintiff to perform in reliance upon the
agreement. The oral contract is enforced in harmony with the
principle that courts of equity will not allow the statute of frauds
to be used as an instrument of fraud. In other words, the
doctrine of part performance was established for the same
purpose for which, the statute of frauds itself was enacted,
namely, for the prevention of fraud, and arose from the
necessity of preventing the statute from becoming an agent of
fraud for it could not have been the intention of the statue to
enable any party to commit a fraud with impunity.
When the party concerned has pleaded partial performance,
such party is entitled to a reasonable chance to; establish by
parol evidence the truth of this allegation, as well as the contract
itself. "The recognition of the exceptional effect of part
performance in taking an oral contract out of the statute of
frauds involves the principle that oral evidence is admissible in
such cases to prove both the contract and the part performance
of the contract"
234

Atty Tizon
Exhibit A states that Poncio would stay in the land sold by him
to plaintiff for one year, from January 27, 1955, free of charge,
and that, if he cannot find a place where to transfer his house
thereon, he may remain in said lot under such terms as may be
agreed upon. Incidentally, the allegation in Poncio's answer to
the effect that he signed Exhibit A under the belief that it "was a
permit for him to remain in the premises in the event" that "he
decided to sell the property" to the plaintiff at P20 a sq. m." is,
on its face, somewhat difficult to believe. Indeed, if he had not
decided as yet to sell the land to plaintiff, who, had never
increased her offer of P15 a square meter, there was no reason
for Poncio to get said, Permit from her. Upon the other hand, if
plaintiff intended to mislead Poncio, she would have caused
Exhibit A to be drafted, probably in English, instead of taking
the trouble of seeing to it that it was written precisely in his
native dialect, the Batanes. Moreover, Poncio's signature on
Exhibit A suggests that he is neither illiterate nor so ignorant as
to sign a document without reading its contents, apart from the
fact that Meonada had read Exhibit A to him and given him a
copy thereof, before he signed thereon, according to Meonada's
uncontradicted testimony.
Limketkai v CA (1996)
Melo, J.
Re: Unenforceable Contracts
DOCTRINE: The Statute of Frauds, embodied in Article 1403
of the Civil Code of the Philippines, does not require that
the contract itself be written. The plain test of Article
1403, Paragraph (2) is clear that a written note or
memorandum, embodying the essentials of the contract
and signed by the party charged, or his agent suffices to
make the verbal agreement enforceable, taking it out of
the operation of the statute.
FACTS: Phil.Remnants Co. constituted BPI to manage,
administer and sell its real property located in Pasig, Metro
Manila. BPI gave authority to real estate broker Pedro Revilla Jr.
to sell the lot for P1000 per square meter.
Revilla contacted Alfonso Lim of petitioner company who
agreed to buy the land and thereafter was allowed to view the
land. Lim and Alfonso Limketkai went to BPI to confirm the sale
and both finally agreed that the land would be sold for P1000
per square meter. Notwithstanding the agreement, Alfonso
asked BPI if it was possible to pay in terms provided that in case
the term is disapproved, the price shall be paid in cash.
Two or three days later, petitioner learned that its offer to pay
on terms had been frozen. Alfonso Lim went to BPI on July 18,
1988 and tendered the full payment of P33,056,000.00
to Albano. The payment was refused because Albano stated that
the authority to sell that particular piece of property
in Pasig had been withdrawn from his unit.
An action for specific performance with damages was thereupon
filed on August 25, 1988 by petitioner against BPI. In the course
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of the trial, BPI informed the trial court that it had sold the
property under litigation to NBS
ISSUE:
Whether the contract was unenforceable under the statute of
frauds
HELD: Contract was enforceable.
There was already a perfected contract of sale because
both parties already agreed to the sale of P1000/sq.m.
Even if Lim tried to negotiate for a payment in terms, it is
clear that if it be disapproved, the payment will be made
in cash. The perfection of the contract took place when
Aromin and Albano, acting for BPI, agreed to sell and
Alfonso Lim with Albino Limketkai, acting for petitioner
Limketkai, agreed to buy the disputed lot at P1,000.00
per square meter. Aside from this there was the earlier
agreement between petitioner and the authorized broker.
There was a concurrence of offer and acceptance, on the
object, and on the cause thereof.
Regarding the admissibility and competence of the
evidence adduced by petitioner, respondent Court of
Appeals ruled that because the sale involved real
property, the statute of frauds is applicable.
In the instant case, counsel for respondents cross-examined
petitioner's witnesses at length on the contract itself, the
purchase price, the tender of cash payment, the authority of
Aromin and Revilla, and other details of the litigated contract.
Under the Abrenica rule (reiterated in a number of cases,
among them Talosig vs. Vda. de Nieba 43 SCRA 472 [1972]),
even assuming that parol evidence was initially inadmissible,
the same became competent and admissible because of the
cross-examination, which elicited evidence proving the evidence
of a perfected contract. The cross-examination on the contract is
deemed a waiver of the defense of the Statute of Frauds (Vitug,

Compendium of Civil Law and Jurisprudence, 1993 Revised
Edition, supra, p. 563).
Moreover, under Article 1403 of the Civil Code, an exception to
the unenforceability of contracts pursuant to the Statute of
Frauds is the existence of a written note or memorandum
evidencing the contract. The memorandum may be found in
several writings, not necessarily in one document. The
memorandum or memoranda is/are written evidence that such
a contract was entered into.
The Statute of Frauds, embodied in Article 1403 of the Civil
Code of the Philippines, does not require that the contract itself
be written. The plain test of Article 1403, Paragraph (2) is clear
that a written note or memorandum, embodying the essentials
of the contract and signed by the party charged, or his agent
suffices to make the verbal agreement enforceable, taking it out
of the operation of the statute.
In the case at bar, the complaint in its paragraph 3 pleads that
the deal had been closed by letter and telegram (Record on
Appeal, p. 2), and the letter referred to was evidently the one
copy of which was appended as Exhibit A to plaintiffs opposition
to the motion to dismiss. The letter, transcribed above in part,
together with the one marked as Appendix B, constitute an
adequate memorandum of the transaction. They are signed by
the defendant-appellant; refer to the property sold as a Lot in
Puerto Princesa, Palawan, covered by T.C.T. No. 62, give its area
as 1,825 square meters and the purchase price of four (P4.00)
pesos per square meter payable in cash. We have in them,
therefore, all the essential terms of the contract and they satisfy
the requirements of the Statute of Frauds.
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Swedish Match, AB (SMAB) v CA

Unenforceable contract
FACTS:
SMAB had 3 subsidiary corporations in the Philippines: Phimco
Industries, Inc., Provident Tree Farms, Inc., and OTT/Louie
(Phils.), Inc. STORA, the then parent company of SMAB,
decided to sell SMAB of Sweden and SMABs worldwide
products operation to Swedish Match NV of Netherlands,
(SMNV). SMNV initiated steps to sell the businesses. SMNV
adopted a two-pronged strategy, the first being to sell its shares
in Phimco Industries, Inc. and a match company in Brazil. The
other move was to sell at once or in one package all the SMNV
companies worldwide which were engaged in match and lighter
operations thru a global deal.
Ed Enriquez, VP of Swedish Match Sociedad Anonimas (SMSA)
the management company of the Swedish Match groupwas
commissioned and granted full powers to negotiate by SMNV.
Enriquez was held under strict instructions that the sale of
Phimco shares should be executed on or before 30 June 1990, in
view of the tight loan covenants of SMNV. Enriquez came to the
Philippines in November 1989 and informed the Philippine
financial and business circles that the Phimco shares were for
sale. Several interested parties tendered offers to acquire the
Phimco shares, among whom were the AFP Retirement and
Separation Benefits System, respondent ALS Management &
Development Corp and respondent Antonio Litonjua, the
president and general manager of ALS.
Litonjua submitted to SMAB a firm offer to buy all of the latters
shares in Phimco and all of Phimcos shares in Provident Tree
Farm, Inc. and OTT/Louie (Phils.), Inc. for P750,000,000.
Through its CEO, Massimo Rossi, SMAB, informed respondents
that their price offer was below their expectations but urged
them to undertake a comprehensive review and analysis of the

value and profit potentials of the Phimco shares, with the
assurance that respondents would enjoy a certain priority
although several parties had indicated their interest to buy the
shares.
An exchange of correspondence ensued between petitioners and
respondents regarding the projected sale of the Phimco shares.
Litonjua offered to buy the disputed shares, excluding the
lighter division for US$36 million. Litonjua stressed that the bid
amount could be adjusted subject to availability of additional
information and audit verification of the company finances.
Rossi sent his letter dated 11 June 1990, informing Litonjua that
ALS should undertake a due diligence process or pre-acquisition
audit and review of the draft contract for the Match and Forestry
activities of Phimco at ALS convenience. However, Rossi made
it clear that at the completion of the due diligence process, ALS
should submit its final offer in US dollar terms not later than 30
June 1990, for the shares of SMAB corresponding to 96% of the
Match and Forestry activities of Phimco. Rossi added that in
case the global deal presently under negotiation for the
Swedish Match Lights Group would materialize, SMAB would
reimburse up to US$20,000.00 of ALS costs related to the due
diligence process.
Litonjua expressed disappointment at the apparent change in
SMABs approach to the bidding process. He pointed out that he
was earlier advised that one final bidder would be selected from
among the 4 contending groups as of that date and that the
decision would be made by 6 June 1990. He criticized SMABs
decision to accept a new bidder. He informed Rossi that it may
not be possible for them to submit their final bid on 30 June
1990, citing the advice to him of the auditing firm that the
financial statements would not be completed until the end of
July. Litonjua added that he would indicate in their final offer
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more specific details of the payment mechanics and consider the

possibility of signing a conditional sale at that time.
Enriquez sent notice to Litonjua that they would be constrained
to entertain bids from other parties in view of Litonjuas failure
to make a firm commitment for the shares of Swedish Match in
Phimco by 30 June 1990. Rossi informed Litonjua that they
signed a conditional contract with a local group for the disposal
of Phimco. He told Litonjua that his bid would no longer be
considered unless the local group would fail to consummate the
transaction on or before 15 September 1990.
Litonjua asserted that the US$36 million bid which he
submitted on 21 May 1990 was their final bid based on the
financial statements for the year 1989. He pointed out that they
submitted the best bid and they were already finalizing the
terms of the sale. He stressed that they were firmly committed to
their bid of US$36 million and if ever there would be
adjustments in the bid amount, the adjustments were brought
about by SMABs subsequent disclosures and validated
accounts, such as the aspect that only 96% of Phimco shares was
actually being sold and not 100%.
Enriquez advised Litonjua that the proposed sale of SMABs
shares in Phimco with local buyers did not materialize. Enriquez
then invited Litonjua to resume negotiations with SMAB for the
sale of Phimco shares. He indicated that SMAB would be
prepared to negotiate with ALS on an exclusive basis for a
period of 15 days from 26 September 1990 subject to the terms
contained in the letter. If the sale would not be completed at the
end of the 15-day period, SMAB would enter into negotiations
with other buyers.
Litonjua expressed his objections to the totally new set of terms
and conditions for the sale of the Phimco shares. The new offer
constituted an attempt to reopen the already perfected contract
of sale of the shares in his favor. Respondents, as plaintiffs, filed
before the RTC a complaint for specific performance against

defendants, now petitioners. Petitioners averred that
respondents cause of action, if any, was barred by the Statute of
Frauds since there was no written instrument or document
evidencing the alleged sale of the Phimco shares to respondents.
RTC dismissed respondents complaint, ruling that there was no
perfected contract of sale between petitioners and respondents.
The letter dated 11 June 1990, relied upon by respondents,
showed that petitioners did not accept the bid offer of
respondents as the letter was a mere invitation for respondents
to conduct a due diligence process or pre-acquisition audit of
Phimcos match and forestry operations to enable them to
submit their final offer on 30 June 1990. Assuming that
respondents bid was favored by an oral acceptance made in
private by officers of SMAB, such acceptance was merely
preparatory to a formal acceptance by the SMABthe
acceptance that would eventually lead to the execution and
signing of the contract of sale.
CA reversed the RTCs decision. It ruled that the series of
written communications between petitioners and respondents
collectively constitute a sufficient memorandum of their
agreement under Article 1403; thus, respondents complaint
should not have been dismissed on the ground that it was
unenforceable under the Statute of Frauds. Any document or
writing, whether formal or informal, written either for the
purpose of furnishing evidence of the contract or for another
purpose which satisfies all the Statutes requirements as to
contents and signature would be sufficient; and, that two or
more writings properly connected could be considered together.
The letters exchanged by and between the parties, taken
together, were sufficient to establish that an agreement to sell
the disputed shares to respondents was reached.
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Atty Tizon
ISSUE: Whether the exchange of correspondence between the

parties constitutes the note or memorandum within the context
of Article 1403.
Ruling: No. The Statute of Frauds requires certain contracts to

be evidenced by some note or memorandum in order to be
enforceable. The Statute does not deprive the parties of the right
to contract with respect to the matters therein involved, but
merely regulates the formalities of the contract necessary to
render it enforceable. Evidence of the agreement cannot be
received without the writing or a secondary evidence of its
contents.
The Statute, however, simply provides the method by which the
contracts may be proved but does not declare them invalid
because they are not reduced to writing. The effect of noncompliance with the requirement of the Statute is simply that no
action can be enforced unless the requirement is complied with.
Clearly, the form required is for evidentiary purposes only.
Hence, if the parties permit a contract to be proved, without any
objection, it is then just as binding as if the Statute has been
complied with. The purpose of the Statute is to prevent fraud
and perjury in the enforcement of obligations depending for
their evidence on the unassisted memory of witnesses, by
requiring certain contracts and transactions to be evidenced by a
writing signed by the party to be charged.
However, for a note or memorandum to satisfy the Statute, it
must be complete in itself and cannot rest partly in writing and
partly in parol. The note or memorandum must contain the
names of the parties, the terms and conditions of the contract,
and a description of the property sufficient to render it capable
of identification. Such note or memorandum must contain the
essential elements of the contract expressed with certainty that
may be ascertained from the note or memorandum itself, or
some other writing to which it refers or within which it is

connected, without resorting to parol evidence.
Rossis letter dated 11 June 1990, heavily relied upon by

respondents, is not complete in itself. First, it does not indicate
at what price the shares were being sold. Respondents were
supposed to submit their final offer in U.S. dollar terms, at that
after the completion of the due diligence process. The paragraph
undoubtedly proves that there was as yet no definite agreement
as to the price. Second, the letter does not state the mode of
payment of the price. In fact, Litonjua was supposed to indicate
in his final offer how and where payment for the shares was
planned to be made.
The acquisition audit and submission of a comfort letter, even if
considered together, failed to prove the perfection of the
contract. They indicated that the sale was far from concluded.
Respondents conducted the audit as part of the due diligence
process to help them arrive at and make their final offer. On the
other hand, the submission of the comfort letter was merely a
guarantee that respondents had the financial capacity to pay the
price in the event that their bid was accepted by petitioners.
The Statute of Frauds is applicable only to contracts which are
executory and not to those which have been consummated
either totally or partially. 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 derived by him from the transaction in
litigation, and at the same time, evade the obligations,
responsibilities or liabilities assumed or contracted by him
thereby. This rule, however, is predicated on the fact of
ratification of the contract within the meaning of Article 1405
either (1) by failure to object to the presentation of oral evidence
to prove the same, or (2) by the acceptance of benefits under
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them. In the instant case, respondents failed to prove that there

was partial performance of the contract within the purview of
the Statute.
Neri v Heirs of Uy (2012)

G.R. No. 194366, October 2012
Topic:
Doctrine:
FACTS: Anunciacion Neri had seven children: first marriage
with Gonzalo Illut, namely: Eutropia and Victoria and second
marriage with Enrique Neri, namely: Napoleon, Alicia,
Visminda, Douglas and Rosa.
Throughout the marriage of spouses Enrique and Anunciacion,
they acquired several homestead properties located in Samal,
Davao del Norte.
In 1977, Anunciacion died intestate. Enrique, in his personal
capacity and as natural guardian of his minor children Rosa and
Douglas, with Napoleon, Alicia, and Visminda executed an
Extra-Judicial Settlement of the Estate with Absolute Deed of
Sale on 7/7/1979, adjudicating among themselves the said
homestead properties and thereafter, conveying them to the late
spouses Uy for a consideration of P 80,000.00.
In June 1996, the children of Enrique filed a complaint for
annulment of sale of the homestead properties against spouses
Uy before the RTC, assailing the validity of the sale for having
been sold within the prohibited period. The complaint was later
amended to include Eutropia and Victoria additional plaintiffs
for having been excluded and deprived of their legitimes as
children of Anunciacion from her first marriage.
RTC RULING: Rendered the sale void because Eutropia

and Victoria were deprived of their hereditary rights and
that Enrique had no judicial authority to sell the shares of
his minor children, Rosa and Douglas.
CA RULING: Reversed the RTC ruling and declared the
extrajudicial settlement and sale valid. While recognizing
Rosa and Douglas to be minors at that time, they were
deemed to have ratified the sale when they failed to
question it upon reaching the age of majority. It also
found laches to have set in because of their inaction for a
long period of time.
ISSUE: WON the father or mother, as the natural guardian of
the minor under parental authority, has the power to dispose or
encumber the property of the minor?
HELD:
All the petitioners are legitimate children of Anunciacion
from her first and second marriages and consequently, they are
entitled to inherit from her in equal shares, pursuant to Articles
979 and 980 of the Civil Code. In the execution of the ExtraJudicial Settlement of the Estate with Absolute Deed of Sale in
favor of spouses Uy, all the heirs of Anunciacion should have
participated. Considering that Eutropia and Victoria were
admittedly excluded and that then minors Rosa and Douglas
were not properly represented therein, the settlement was not
valid and binding upon them. While the settlement of the estate
is null and void, the subsequent sale of the properties made by
Enrique and his children, Napoleon, Alicia and Visminda, in
favor of the spouses is valid but only with respect to their
proportionate shares. With respect to Rosa and Douglas who
were minors at the time of the execution of the settlement and
sale, their natural guardian and father, Enrique, represented
them in the transaction.
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However, on the basis of the laws prevailing at that time,

Enrique was merely clothed with powers of administration and
bereft of any authority to dispose of their 2/16 shares in the
estate of their mother. Administration includes all acts for the
preservation of the property and the receipt of fruits according
to the natural purpose of the thing.
Any act of disposition or alienation, or any reduction in
the substance of the patrimony of child, exceeds the limits of
administration. Thus, A Father or Mother, as the natural
guardian of the minor under parental authority, does not have
the power to dispose or encumber the property of the latter.
Such power is granted by law only to a judicial guardian of the
wards property and even then only with courts prior approval
secured in accordance with the proceedings set forth by the
Rules of Court.
Consequently, the disputed sale entered into by Enrique
in behalf of his minor children without the proper judicial
authority, unless ratified by them upon reaching the age of
majority, is unenforceable in accordance with Articles1317 and
1403(1) of the Civil Code. However, records show that Napoleon
and Rosa had ratified the extrajudicial settlement of the estate
with absolute deed of sale. In their Joint-Affidavit and
Manifestation before the RTC, they both confirmed, respect
and acknowledge the validity of the Extra-Judicial Settlement of
the Estate with Absolute Deed of Sale in 1979. The ratification
thus purged all the defects existing at the time of its execution
and legitimizing the conveyance of Rosas 1/16 share in the
estate of Anunciacion to spouses Uy. The same, however, is not
true with respect to Douglas for lack of evidence showing
ratification.
Iglesia v. Heirs of Bernardino Taeza (2014)

Topic: Unenforceable Contracts
DOCTRINE: A contract entered into in the name of another
person by one who has been given no authority or legal
representation, or who has acted beyond his powers are
unenforceable unless ratified.
FACTS: The plaintiff-appellee Iglesia Filipina Independiente
(IFI, for brevity), a duly registered religious corporation, was the
owner of a parcel of land situated in Tuguegarao. The said lot is
subdivided as follows: Lot Nos. 3653-A, 3653-B, 3653-C, and
3653-D.
Between 1973 and 1974, the plaintiff-appellee, through its then
Supreme Bishop Rev. Macario Ga, sold Lot 3653-D, with an area
of 15,000 square meters, to one Bienvenido de Guzman. On
February 5, 1976, the other 2 lots were likewise sold by Rev.
Macario Ga, in his capacity as the Supreme Bishop to the
defendant Bernardino Taeza, for the amount of P100,000.00,
through installment, with mortgage to secure the payment of the
balance. Subsequently, the defendant allegedly completed the
payments.
In 1977, a complaint for the annulment of the February 5, 1976
Deed of Sale with Mortgage was filed by the Parish Council of
Tuguegarao, Cagayan, represented by Froilan Calagui and Dante
Santos, the President and the Secretary, respectively, of the
Laymen's Committee against their Supreme Bishop Macario Ga
and the defendant Bernardino Taeza. But said case was later
dismissed.
Meanwhile, the defendant Bernardino Taeza registered the
subject parcels of land. Consequently, TCTs were issued in his
name. The defendant then occupied a portion of the land. The
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Atty Tizon
plaintiff-appellee allegedly demanded the defendant to vacate

the said land which he failed to do.
On November 6, 2001, the court a quo rendered judgment in
favor of the plaintiff-appellee. It held that the deed of sale
executed by and between Rev. Ga and the defendant-appellant is
null and void.
Petitioners contention
Petitioner maintains that there was no consent to the contract of
sale as Supreme Bishop Rev. Ga had no authority to give such
consent. It emphasized that Article IV (a) of their Canons
provides that "All real properties of the Church located or
situated in such parish can be disposed of only with the approval
and conformity of the laymen's committee, the parish priest, the
Diocesan Bishop, with sanction of the Supreme Council, and
finally with the approval of the Supreme Bishop, as
administrator of all the temporalities of the Church." It is
alleged that the sale of the property in question was done
without the required approval and conformity of the entities
mentioned in the Canons; hence, petitioner argues that the sale
was null and void.
In the alternative, petitioner contends that if the contract is not
declared null and void, it should nevertheless be found
unenforceable, as the approval and conformity of the other
entities in their church was not obtained, as required by their
Canons.
ISSUE: WHETHER OR NOT THE COURT OF APPEALS
ERRED IN NOT FINDING THE FEBRUARY 5, 1976 DEED OF
SALE WITH MORTGAGE AS NULL AND VOID; B.)
ASSUMING FOR THE SAKE OF ARGUMENT THAT IT IS NOT
VOID, WHETHER OR NOT THE COURT OF APPEALS ERRED
IN NOT FINDING THE FEBRUARY 5, 1976 DEED OF SALE
WITH MORTGAGE AS UNENFORCEABLE,
HELD: Contract Unenforceable.

The first two issues boil down to the question of whether then
Supreme Bishop Rev. Ga is authorized to enter into a contract of
sale in behalf of petitioner.
Petitioner provided in Article IV (a) of its Constitution and
Canons of the Philippine Independent Church, that "all real
properties of the Church located or situated in such parish can
be disposed of only with the approval and conformity of the
laymen's committee, the parish priest, the Diocesan Bishop,
with sanction of the Supreme Council, and finally with the
approval of the Supreme Bishop, as administrator of all the
temporalities of the Church."
Evidently, under petitioner's Canons, any sale of real property
requires not just the consent of the Supreme Bishop but also the
concurrence of the laymen's committee, the parish priest, and
the Diocesan Bishop, as sanctioned by the Supreme Council.
However, petitioner's Canons do not specify in what form the
conformity of the other church entities should be made known.
Thus, as petitioner's witness stated, in practice, such consent or
approval may be assumed as a matter of fact, unless some
opposition is expressed.
Here, the trial court found that the laymen's committee indeed
made its objection to the sale known to the Supreme Bishop.
The Canons require that ALL the church entities listed in Article
IV (a) thereof should give its approval to the transaction. Thus,
when the Supreme Bishop executed the contract of sale of
petitioner's lot despite the opposition made by the laymen's
committee, he acted beyond his powers.
This case clearly falls under the category of unenforceable
contracts mentioned in Article 1403, paragraph (1) of the Civil
Code, which provides, thus:
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Art. 1403. The following contracts are unenforceable, unless

they are ratified:
implied trust for the benefit of the person from whom the
property comes."
(1) Those entered into in the name of another person by one who
has been given no authority or legal representation, or who has
acted beyond his powers;
In Mercado v. Allied Banking Corporation, the Court explained
that:
x x x Unenforceable contracts are those which cannot be
enforced by a proper action in court, unless they are ratified,
because either they are entered into without or in excess of
authority or they do not comply with the statute of frauds or
both of the contracting parties do not possess the required legal
capacity. x x x.
Closely analogous cases of unenforceable contracts are those
where a person signs a deed of extrajudicial partition in behalf
of co-heirs without the latter's authority; where a mother as
judicial guardian of her minor children, executes a deed of
extrajudicial partition wherein she favors one child by giving
him more than his share of the estate to the prejudice of her
other children; and where a person, holding a special power of
attorney, sells a property of his principal that is not included in
said special power of attorney.
In the present case, however, respondents' predecessor-ininterest, Bernardino Taeza, had already obtained a transfer
certificate of title in his name over the property in question.
Since the person supposedly transferring ownership was not
authorized to do so, the property had evidently been acquired by
mistake. In Vda. de Esconde v. Court of Appeals, the Court
affirmed the trial court's ruling that the applicable provision of
law in such cases is Article 1456 of the Civil Code which states
that "[i]f property is acquired through mistake or fraud, the
person obtaining it is, by force of law, considered a trustee of an
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Heirs of Policronio M. Ureta v Heirs of Liberato M.

Ureta
Doctrine: Partition among heirs is not legally deemed a
conveyance of real property resulting in change of
ownership. It is not a transfer of property from one to
the other, but rather, it is a confirmation or ratification
of title or right of property that an heir is renouncing in
favor of another heir who accepts and receives the
inheritance. It is merely a designation and segregation
of that part which belongs to each heir.
FACTS:
Alfonso was financially well-off during his lifetime. He has 14
children. He owned several fishpens, a fishpond, a sari-sari
store, a passenger jeep, and was engaged in the buying and
selling of copra. In order to reduce inheritance tax Alfonso made
it appear that he sold some of his lands to his children.
Accordingly, Alfonso executed four (4) Deeds of Sale covering
several parcels of land in favor of Policronio, Liberato,
Prudencia, and his common-law wife, Valeriana Dela Cruz. The
Deed of Sale executed on October 25, 1969, in favor of
Policronio, covered six parcels of land, which are the properties
in dispute in this case.
Since the sales were only made for taxation purposes and no
monetary consideration was given, Alfonso continued to own,
possess and enjoy the lands and their produce.
On April 19, 1989, Alfonso's heirs executed a Deed of ExtraJudicial Partition, which included all the lands that were
covered by the four (4) deeds of sale that were previously
executed by Alfonso for taxation purposes. Conrado, Policronio's
eldest son, representing the Heirs of Policronio, signed the Deed

of Extra-Judicial Partition in behalf of his co-heirs.
After their father's death, the Heirs of Policronio found tax
declarations in his name covering the six parcels of land. On
June 15, 1995, they obtained a copy of the Deed of Sale executed
on October 25, 1969 by Alfonso in favor of Policronio.
Believing that the six parcels of land belonged to their late
father, and as such, excluded from the Deed of Extra-Judicial
Partition, the Heirs of Policronio sought to amicably settle the
matter with the Heirs of Alfonso. Earnest efforts proving futile,
the Heirs of Policronio filed a Complaint for Declaration of
Ownership, Recovery of Possession, Annulment of Documents,
Partition, and Damages against the Heirs of Alfonso before the
RTC on November 17, 1995
ISSUE: Whether the Deed of Sale was valid; 2. Whether or not
the Deed of Extra-Judicial Partition was valid
HELD:
The Deed of Sale was void because it is simulated as the parties
did not intend to be legally bound by it. As such, it produced no
legal effects and did not alter the juridical situation of the
parties. It is only made to avoid tax purposes. The CA also noted
that Alfonso continued to exercise all the rights of an owner
even after the execution of the Deed of Sale, as it was undisputed
that he remained in possession of the subject parcels of land and
enjoyed their produce until his death.
Two veritable legal presumptions bear on the validity of the
Deed of Sale: (1) that there was sufficient consideration for the
contract; and (2) that it was the result of a fair and regular
private transaction. If shown to hold, these presumptions infer
prima facie the transaction's validity, except that it must yield to
the evidence adduced.
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Atty Tizon
It has been held in several cases that partition among heirs is

not legally deemed a conveyance of real property resulting in
change of ownership. It is not a transfer of property from one to
the other, but rather, it is a confirmation or ratification of title or
right of property that an heir is renouncing in favor of another
heir who accepts and receives the inheritance. It is merely a
designation and segregation of that part which belongs to each
heir. The Deed of Extra-Judicial Partition cannot, therefore, be
considered as an act of strict dominion. Hence, a special power
of attorney is not necessary.
In fact, as between the parties, even an oral partition by the
heirs is valid if no creditors are affected. The requirement of a
written memorandum under the statute of frauds does not apply
to partitions effected by the heirs where no creditors are
involved considering that such transaction is not a conveyance
of property resulting in change of ownership but merely a
designation and segregation of that part which belongs to each
heir.
Formaran v Ong
Perez, J.
Re: Void Contracts
DOCTRINE: The amplitude of foregoing undisputed facts and
circumstances clearly shows that the sale of the land in
question was purely simulated. It is void from the very
beginning (Article 1346, New Civil Code). If the sale was
legitimate, defendant Glenda should have immediately
taken possession of the land, declared in her name for
taxation purposes, registered the sale, paid realty taxes,
introduced improvements therein and should not have
allowed plaintiff to mortgage the land. These omissions
properly militated against defendant Glendas
submission that the sale was legitimate and the
consideration was paid.
FACTS
According to plaintiff (Petitioner Formaran)'s complaint, she
owns the afore-described parcel of land which was donated to
her intervivos by her uncle and aunt, spouses Melquiades
Barraca and Praxedes Casidsid on June 25, 1967. On August 12,
1967 upon the proddings and representation of defendant
(Respondent Ong) Glenda, that she badly needed a collateral for
a loan which she was applying from a bank to equip her dental
clinic, plaintiff made it appear that she sold one-half of the
afore-described parcel of land to the defendant Glenda.
Formaran signed on August 12, 1967 a prepared Deed of
Absolute Sale which Ong brought along with them. The sale was
totally without any consideration and fictitious. Ong did not
pursue with the loan and when Formaran inquired about the
deed of absolute sale, he replied the crampled and threw it away.
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Contrary to plaintiffs agreement with defendant Glenda for the

latter to return the land, defendant Glenda filed a case for
unlawful detainer against the Formaran. Glenda never
demanded actual possession of the land, except she filed an
unlawful detainer case against Formaran.
In an answer filed on December 22, 1997, defendant Glenda
insisted on her ownership over the land in question on account
of a Deed of Absolute Sale executed by the plaintiff in her favor;
and that plaintiffs claim of ownership therefore was virtually
rejected by the Municipal Circuit Trial Court of Ibaja-Nabas,
Ibajay, Aklan, when it decided in her favor the unlawful detainer
case she filed against the plaintiff, docketed therein as Civil Case
No. 183. Defendants are also claiming moral damages and
attorneys fees in view of the filing of the present case against
them.
The Court is in accord with the observation and findings of the

(RTC, Kalibo, Aklan) thus:
The amplitude of foregoing undisputed facts and circumstances
clearly shows that the sale of the land in question was purely
simulated. It is void from the very beginning (Article 1346, New
Civil Code). If the sale was legitimate, defendant Glenda should
have immediately taken possession of the land, declared in her
name for taxation purposes, registered the sale, paid realty
taxes, introduced improvements therein and should not have
allowed plaintiff to mortgage the land. These omissions properly
militated against defendant Glendas submission that the sale
was legitimate and the consideration was paid.
ISSUE: Whether the deed of absolute sale was simulated.

HELD: Yes, deed was simulated, hence void.
The Court believes and so holds that the subject Deed of Sale is
indeed simulated, as it is: (1) totally devoid of consideration; (2)
it was executed on August 12, 1967, less than two months from
the time the subject land was donated to petitioner on June 25,
1967 by no less than the parents of respondent Glenda Ong; (3)
on May 18, 1978, petitioner mortgaged the land to the Aklan
Development Bank for a P23,000.00 loan; (4) from the time of
the alleged sale, petitioner has been in actual possession of the
subject land; (5) the alleged sale was registered on May 25, 1991
or about twenty four (24) years after execution; (6) respondent
Glenda Ong never introduced any improvement on the subject
land; and (7) petitioners house stood on a part of the subject
land. These are facts and circumstances which may be
considered badges of bad faith that tip the balance in favor of
petitioner.
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Constantino v Heirs of Constantino

Void contracts
FACTS:
Pedro Constantino, Sr. is the ancestor of the petitioners and
respondents. Pedro, Sr. was survived by his 6 children: 1) Pedro
Jr., the grandfather of the respondents; xxx 4) Bruno, survived
by his 6 children including petitioner Casimira ConstantinoMaturingan; xx and 6) Santiago, survived by his 5 children
which includes petitioner Oscar Constantino.
Respondents alleged that petitioners asserted their claim of
ownership over the whole parcel of land owned by the late Pedro
Sr., to the exclusion of respondents who are occupying a portion
thereof. Respondents learned that a Tax Declaration in the
name of Oscar and Maxima was unlawfully issued, which in
effect canceled the Tax Declaration in the name of Pedro Sr. The
issuance of the new tax declaration was allegedly due to the
execution of a simulated, fabricated and fictitious document
denominated as "Pagmamana sa Labas ng Hukuman," wherein
the petitioners misrepresented themselves as the sole and only
heirs of Pedro Sr. Subsequently, the land was divided equally
between Oscar and Maxima. The share of Maxima was
eventually conveyed to her sister, Casimira. Thus, respondents
sought to annul the "Pagmamana sa Labas ng Hukuman" as well
as the Tax Declarations.
Petitioners alleged that the respondents have no cause of action
against them considering that the respondents lawful share over
the estate of Pedro Sr., had already been transferred to them as
evidenced by the Deed of Extrajudicial Settlement with Waiver,
executed by Angelo, Maria (mother of respondent Asuncion),
Arcadio and Mercedes, all heirs of Pedro Jr. In the said deed,
respondents adjudicated unto themselves to the exclusion of
other heirs, a parcel of land with an area of 192 sqm by
misrepresenting that they were the only legitimate heirs of

Pedro Sr. Thus, petitioners claimed that in the manner similar
to the "Pagmamana sa Labas ng Hukuman," they asserted their
rights and ownership over the subject 240 sqm lot without
damage to the respondents. Petitioners position was that
the Deed of Extrajudicial Settlement with Waiver was
acquiesced in by the other heirs of Pedro Sr., including
the petitioners, on the understanding that the
respondents would no longer share and participate in
the settlement and partition of the remaining lot
covered by the "Pagmamana sa Labas ng Hukuman."
RTC ruled in favor of the respondents. It held that they are in
pari delicto. CA ruled in favor of the respondents, declaring that
the "Extrajudicial Settlement with Waiver" they executed
covering the 192 sqm lot actually belongs to Pedro Jr., hence,
not part of the estate of Pedro Sr. The respondents did not
adjudicate the 192 sqm lot unto themselves to the exclusion of
all the other heirs of Pedro Sr. Rather, the adjudication in the
document entitled Extrajudicial Settlement with Waiver
pertains to a different property and is valid absent any evidence
to the contrary. Hence, it is erroneous for the RTC to declare the
parties in pari delicto.
ISSUE: Whether the doctrine of in pari delicto is applicable.
HELD: No. Latin for "in equal fault," in pari delicto connotes
that two or more people are at fault or are guilty of a crime.
Neither courts of law nor equity will interpose to grant relief to
the parties, when an illegal agreement has been made, and both
parties stand in pari delicto.
The petition at bench does not speak of an illegal cause of
contract constituting a criminal offense under Article 1411.
Neither can it be said that Article 1412 finds application
although such provision which is part of Title II, Book IV of the
Civil Code speaks of contracts in general, as well as contracts
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which are null and void ab initio pursuant to Article 1409 of the
Civil Code such as the subject contracts, which as claimed, are
violative of the mandatory provision of the law on legitimes.
Finding the inapplicability of the in pari delicto doctrine, Article
1412 that breathes life to the doctrine speaks of the rights and
obligations of the parties to the contract with an illegal cause or
object which does not constitute a criminal offense. It applies to
contracts which are void for illegality of subject matter and not
to contracts rendered void for being simulated, or those in which
the parties do not really intend to be bound thereby. Specifically,
in pari delicto situations involve the parties in one contract who
are both at fault, such that neither can recover nor have any
action against each other.
There are 2 Deeds of extrajudicial assignments unto the
signatories of the portions of the estate of an ancestor common
to them and another set of signatories likewise assigning unto
themselves portions of the same estate. The separate Deeds
came into being out of an identical intention of the signatories in
both to exclude their co-heirs of their rightful share in the entire
estate of Pedro Sr. It was, in reality, an assignment of specific
portions of the estate of Pedro Sr., without resorting to a lawful
partition of estate as both sets of heirs intended to exclude the
other heirs. Clearly, the principle of in pari delicto cannot be
applied. The inapplicability is dictated not only by the fact that 2
deeds, not one contract, are involved, but because of the more
important reason that such an application would result in the
validation of both deeds instead of their nullification as
necessitated by their illegality. It must be emphasized that the
underlying agreement resulting in the execution of the deeds is
nothing but a void agreement. Corollarily, given the character
and nature of the deeds as being void and in existent, it has, as a
consequence, of no force and effect from the beginning, as if it
had never been entered into and which cannot be validated
either by time or ratification.
CPG of the SP. Cadavedo v Lacaya (2014)

G.R. No. 173188, January 15, 2014
Topic:
DOCTRINE:
FACTS:
Spouses Vicente Cadavedo and Benita Arcoy-Cadavedo acquired
a homestead grant over a 230,765-square meter parcel of land
known as Lot 5415 located in Zamboanga del Norte. They were
issued Homestead Patent No. V-15414 on March 13, 1953 and
Original Certificate of Title No. P-376 on July 2, 1953.On
April30, 1955, the spouses Cadavedo sold the subject lot to the
spouses Vicente Ames and Martha Fernandez (the spouses
Ames) Transfer Certificate of Title (TCT) No. T-4792 was
subsequently issued in the name of the spouses Ames.
Spouses Cadavedo filed an action for sum of money and/or
voiding of contract of sale of homestead against Sps Ames after
the latter failed to pay the balance of the purchase price. The
spouses Cadavedo initially engaged the services of Atty. Rosendo
Bandal who, for health reasons, later withdrew from the case; he
was substituted by Atty. Lacaya. The complaint was amended to
assert the nullity of the sale and the issuance of TCT in the
names of the spouses Ames as gross violation of the public land
law. It also stated that Lacaya was hired on a contingency basis:
10. That due to the above circumstances, the plaintiffs were
forced to hire a lawyer on contingent basis and if they become
the prevailing parties in the case at bar, they will pay the sum
of P2,000.00 for attorneys fees.
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RTC upheld the sale to the Sps Ames. While the case was on
appeal, Sps Ames sold the lot to their children and the former
also mortgaged the lot to Development Bank of the Philippines
in the names of their children. CA reversed RTC and declared
the deed of sale, transfer of rights and interest null and void ab
initio. Cadavedos must return the initial payment and revert the
title back to them.
Meanwhile, spouses Ames defaulted in their obligation with the
DBP. So DBP published a notice of foreclosure sale (bearing the
title of Ames children). Atty. Lacaya immediately informed the
spouses Cadavedo of the foreclosure sale and filed an Affidavit
of Third Party Claim. Lacaya also filed a motion for the issuance
of writ of execution with the RTC since the civil case already
attained finality.
Pending resolution on the writ of execution, sps Ames filed a
complaint for Quiting of Title or Enforcement of Civil Rights due
Planters in Good Faith. Lacaya filed a motion to dismiss on the
ground of res judicata and to cancel title under the name of
Ames children.
RTC granted the writ of execution the property was placed in
possession of Sps Cadavedo. Lacaya asked for of the property
as attorneys fees. He caused the subdivision of the subject lot
into two equal portions, based on area, and selected the more
valuable and productive half for himself; and assigned the other
half to the spouses Cadavedo. Unsatisfied with the division,
Vicente and his sons-in-law entered the portion assigned to
Lacaya and ejected them (they filed for an ejectment case). The
latter responded by filing a counter-suit for forcible entry. This
incident occurred while the case for Quieting of Title is still
pending.
Vicente andAtty. Lacaya entered into a compromise agreement
in the ejectment case, re-adjusting the area and portion
obtained by each. Atty. Lacaya acquired 10.5383 hectares

pursuant to the agreement. MTC approved the compromise
This compromise was later assailed by Sps. Cadavedo praying
for ejectment, render an accounting of the produce of this onehalf portion from time of occupation, and to fix the attorneys
fees on a quantum meruit basis, with due consideration of the
expenses that Atty. Lacaya incurred while handling the civil
cases.
Cadavedos executed a Deed of Patition of Estate in favor of their
8 children and not the TCT is under the childrens names.
In the present petition, the petitioners essentially argue that the
CA erred in: (1) granting the attorneys fee consisting of one-half
or 10.5383 hectares of the subject lot to Atty. Lacaya, instead of
confirming the agreed contingent attorneys fees of 2,000.00;
(2) not holding the respondents accountable for the produce,
harvests and income of the 10.5383-hectare portion (that they
obtained from the spouses Cadavedo) from 1988 up to the
present; and (3) upholding the validity of the purported oral
contract (between the spouses Cadavedo and Atty. Lacaya when
it was champertous and dealt with property then still subject of
action for sum of money.
Petitioners argue that stipulations on a lawyers compensation
for professional services, especially those contained in the
pleadings filed in courts, control the amount of the attorneys
fees to which the lawyer shall be entitled and should prevail over
oral agreements. In this case, they agreed that the contingent
attorneys fee was P2,000.00 in cash, not one-half of the subject
lot. This agreement was clearly stipulated in the amended
complaint. Thus, Atty. Lacaya is bound by the expressly
stipulated fee and cannot insist on unilaterally changing its
terms without violating their contract.
One-half portion of the subject lot as contingent attorneys fee is
excessive and unreasonable. The issues involved in the action
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for sum of money, pursuant to which the alleged contingent fee

of one-half of the subject lot was agreed by the parties, were not
novel and did not involve difficult questions of law; neither did
the case require much of Atty. Lacayas time, skill and effort in
research. They point out that the two subsequent civil cases
should not be considered in determining the reasonable
contingent fee to which Atty. Lacaya should be entitled for his
services in Civil Case No. 1721,as those cases had not yet been
instituted at that time. Thus, these cases should not be
considered in fixing the attorneys fees. The petitioners also
claim that the spouses Cadavedo concluded separate agreements
on the expenses and costs for each of these subsequent cases,
and that Atty. Lacaya did not even record any attorneys lien in
the spouses Cadavedos TCT covering the subject lot.
on a contingency basis; the Spouses Cadavedo undertook

to pay their lawyer P2,000.00 as attorneys fees should
the case be decided in their favor. Contrary to the
respondents contention, this stipulation is not in the
nature of a penalty that the court would award the
winning party, to be paid by the losing party. The
stipulation is a representation to the court concerning the
agreement between the spouses Cadavedo and Atty.
Lacaya, on the latters compensation for his services in
the case; it is not the attorneys fees in the nature of
damages which the former prays from the court as an
incident to the main action.
Atty. Lacaya,in taking over the case from Atty. Bandal, agreed to
defray all of the litigation expenses in exchange for one-half of
the subject lot should they win the case. They insist that this
agreement is a champertous contract that is contrary to public
policy, prohibited by law for violation of the fiduciary
relationship between a lawyer and a client.
The compromise agreement in ejectment case did not novate
their original stipulated agreement on the attorneys fees.
ISSUE: Whether the attorneys fee consisting of one-half of the
subject lot is valid and reasonable, and binds the petitioners.
HELD: NO. The compromise granting of the
property to Lacaya is void.
A. Amended Complaint (2,000 as contingent fee) prevails
The spouses Cadavedo and Atty. Lacaya agreed on a

contingent fee of P2,000.00 and not, as asserted by the
latter, one-half of the subject lot. The stipulation
contained in the amended complaint filed by Atty. Lacaya
clearly stated that the spouses Cadavedo hired the former
At this point, we highlight that as observed by both the

RTC and the CA and agreed as well by both parties, the
alleged contingent fee agreement consisting of one-half of
the subject lot was not reduced to writing prior to or, at
most, at the start of Atty. Lacayas engagement as the
spouses Cadavedos counsel in Civil Case No. 1721.An
agreement between the lawyer and his client, providing
for the formers compensation, is subject to the ordinary
rules governing contracts in general. As the rules stand,
controversies involving written and oral agreements on
attorneys fees shall be resolved in favor of the former.
Hence, the contingency fee of P2,000.00 stipulated in the
amended complaint prevails over the alleged oral
contingency fee agreement of one-half of the subject lot.
B. Champertous compromise agreement
Respondents insist that Atty. Lacaya assumed the

litigation
expenses,
without
providing
for
reimbursement, in exchange for a contingency fee
consisting of one-half of the subject lot. This agreement is
champertous and is contrary to public policy. Champerty
is characterized by "the receipt of a share of the proceeds
of the litigation by the intermeddler." Some common law
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court decisions, however, add a second factor in

determining champertous contracts, namely, that the
lawyer must also, "at his own expense maintain, and take
all the risks of, the litigation." The rule of the profession
that forbids a lawyer from contracting with his client for
part of the thing in litigation in exchange for conducting
the case at the lawyers expense is designed to prevent the
lawyer from acquiring an interest between him and his
client. To permit these arrangements is to enable the
lawyer to "acquire additional stake in the outcome of the
action which might lead him to consider his own recovery
rather than that of his client or to accept a settlement
which might take care of his interest in the verdict to the
sacrifice of that of his client in violation of his duty of
undivided fidelity to his clients cause."
Article 1491 (5) of the Civil Code forbids lawyers from

acquiring, by purchase or assignment, the property that
has been the subject of litigation in which they have taken
part by virtue of their profession. The subject lot was still
in litigation when Atty. Lacaya acquired the disputed onehalf portion. We note in this regard the following
established facts:(1)on September 21, 1981, Atty. Lacaya
filed a motion for the issuance of a writ of execution in
Civil Case No. 1721; (2) on September 23, 1981, the
spouses Ames filed Civil Case No. 3352 against the
spouses Cadavedo; (3)on October 16, 1981, the RTC
granted the motion filed for the issuance of a writ of
execution in Civil Case No. 1721 and the spouses
Cadavedo took possession of the subject lot on October
24, 1981; (4) soon after, the subject lot was surveyed and
subdivided into two equal portions, and Atty. Lacaya took
possession of one of the subdivided portions; and (5) on
May 13, 1982, Vicente and Atty. Lacaya executed the
compromise agreement. From these timelines, whether
by virtue of the alleged oral contingent fee agreement or
an agreement subsequently entered into, Atty. Lacaya
acquired the disputed one-half portion (which was after
October 24, 1981) while Action for Quieting of Title and
the motion for the issuance of a writ of execution were
already pending before the lower courts. Similarly, the
compromise agreement, including the subsequent
judicial approval, was effected during the pendency of
Quieting. In all of these, the relationship of a lawyer and a
client still existed between Atty. Lacaya and the spouses
Cadavedo.
Notably, Atty. Lacaya, in undertaking the spouses

Cadavedos cause pursuant to the terms of the alleged
oral contingent fee agreement, in effect, became a coproprietor having an equal, if not more, stake as the
spouses Cadavedo. Again, this is void by reason of public
C. Excessive and unconscionable
The contingent fee of one-half of the subject lot was

allegedly agreed to secure the services of Atty. Lacaya in
the action for sum of money. It was intended for only one
action as the two other civil cases had not yet been
instituted at that time. While the 1st civil case took twelve
years to be finally resolved, that period of time, as
matters then stood, was not a sufficient reason to justify a
large fee in the absence of any showing that special skills
and additional work had been involved. The issue
involved in that case was simple and did not require
extensive skill, effort and research. The issue simply dealt
with the prohibition against the sale of a homestead lot
within five years from its acquisition. As regards
subsequent civil cases, the spouses Cadavedo made
separate arrangements for the costs and expenses for
each of these two cases. Thus, the expenses for the two
subsequent cases had been considered and taken care of.
D. Contravenes 1491(5) NCC
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Atty Tizon
policy; it undermines the fiduciary relationship between

him and his clients.
E. Compromise could not validate or supersede the void oral
contingent fee agreement
The compromise agreement was intended to ratify and

confirm Atty. Lacayas acquisition and possession of the
disputed one-half portion which were made in violation
of Article 1491 (5) of the Civil Code. As earlier discussed,
such acquisition is void; the compromise agreement,
which had for its object a void transaction, should be
void. A contract whose cause, object or purpose is
contrary to law, morals, good customs, public
order or public policy is in existent and void from
the beginning. It can never be ratified nor the
action or defense for the declaration of the in existence of
the contract prescribe;45 and any contract directly
resulting from such illegal contract is likewise
void and in existent.
But Atty. Lacaya is entitled to atty. fees based on quantum

meruit basis: 2 hectares of land or 1/10 portion.
Liguez v. CA (1957)
Topic: Void contracts
cause. However, the burden of proving the illegality of a
cause in an apparent valid contract lies on the one
assailing such validity.
FACTS: Petitioner-appellant Conchita Liguez filed a complaint
against the widow and heirs of the late Salvador P. Lopez to
recover a parcel of land. Liguez 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. The defense
interposed was that the donation was null and void for having
an illicit causa or consideration, which was the plaintiffs
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.
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.
ISSUE: WON the deed of donation is void because it was
tainted with illegal cause or consideration, of which donor and
donee were participants.
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HELD: YES. In the present case, it is scarcely disputable that

Lopez would not have conveyed the property in question had he
known that appellant would refuse to cohabit with him; so that
the cohabitation was an implied condition to the donation, and
being unlawful, necessarily tainted the donation itself.
Here the facts as found by the Court of Appeals (and which we
cannot vary) demonstrate that in making the donation in
question, the late Salvador P. Lopez was not moved exclusively
by the desire to benefit appellant Conchita Liguez, but also to
secure her cohabiting with him, so that he could gratify his
sexual impulses. This is clear from the confession of Lopez to the
witnesses Rodriguez and Ragay, that he was in love with
appellant, but her parents would not agree unless he donated
the land in question to her. Actually, therefore, the donation was
but one part of an onerous transaction (at least with appellant's
parents) that must be viewed in its totality. Thus considered, the
conveyance was clearly predicated upon an illicit causa.
The appellant seeks recovery of the disputed land on the
strength of a donation regular on its face. To defeat its effect, the
appellees must plead and prove that the same is illegal. But such
plea on the part of the Lopez heirs is not receivable, since Lopez,
himself, if living, would be barred from setting up that plea; and
his heirs, as his privies and successors in interest, can have no
better rights than Lopez himself.
Rellosa v Gaw Cheen Hum, (1953)

Doctrine: A party to an illegal contract cannot come into a
court of law and ask to have his illegal objects carried
out. The law will not aid either party to an illegal
agreement; it leaves the parties where it finds them.
FACTS:
Dionisio Rellosa sold to Gaw Chee Hun a parcel of land, together
with the house erected thereon.The vendor remained in
possession of the property under a contract of lease entered into
on the same date between the same parties. Alleging that the
sale was executed subject to the condition that the vendee, being
a Chinese citizen, would obtain the approval of the Japanese
Military Administration in accordance with (seirei) No. 6 issued
on April 2, 1943, by the Japanese authorities
The said approval has not been obtained, and that, even if said
requirement were met, the sale would at all events be void under
article XIII, section 5, of our Constitution
Thereafter, the vendor instituted the present action in the Court
of First Instance of Manila seeking the annulment of the sale as
well as the lease covering the land and the house above
mentioned, and praying that, once the sale and the lease are
declared null and void, the vendee be ordered to return to
vendor the duplicate of the title covering the property, and be
restrained from in any way dispossessing the latter of said
property.
Defendant answered the complaint setting up as special defense
that the sale referred to in the complaint was absolute and
unconditional and was in every respect valid and binding
between the parties, it being not contrary to law, morals and
public order, and that plaintiff is guilty of estoppel in that, by
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having executed a deed of lease over the property, he thereby

recognized the title of defendant to that property.
ISSUE: Whether the petitioner can recover the land sold.
HELD: Petitioner contends that the sale in question cannot
have any validity under the above military directive in view of
the failure of respondent to obtain the requisite approval and it
was error for the Court of Appeals to declare said directive
without any binding effect because the occupation government
could not have issued it under article 43 of the Hague
Regulations which command that laws that are municipal in
character of an occupied territory should be respected and
cannot be ignored unless prevented by military necessity.
However, the court do not believe it necessary to consider now
the question relative to the validity of Seirei No. 6 of the
Japanese Military Administration for the simple reason that in
our opinion the law that should govern the particular
transaction is not the above directive but the Constitution
adopted by the then Republic of the Philippines on September 4,
1943, it appearing that the aforesaid transaction was executed
on February 2, 1944.
The sale in question having been entered into in violation of the
Constitution, the next question to be determined is, can
petitioner have the sale declared null and void and recover the
property considering the effect of the law governing rescission of
contracts? Our answer must of necessity be in the negative
following the doctrine laid down in the case of Trinidad Gonzaga
de Cabauatan, et al. vs. Uy Hoo, et al., 88 Phil. 103, wherein we
made the following pronouncement: "We can, therefore, say
that even if the plaintiffs can still invoke the
Constitution, or the doctrine in the Krivenko Case, to
set aside the sale in question, they are now prevented
from doing so if their purpose is to recover the lands
that they have voluntarily parted with, because of their
guilty knowledge that what they were doing was in

violation of the Constitution. They cannot escape this
conclusion because they are presumed to know the law.
As this court well said: 'A party to an illegal contract
cannot come into a court of law and ask to have his
illegal objects carried out. The law will not aid either
party to an illegal agreement; it leaves the parties
where it finds them.' The rule is expressed in the
maxims: 'Ex dolo malo non oritur actio,' and 'In pari
delicto potior est conditio defendentis.'
The doctrine above adverted to is the one known as In Pari
Delicto. This is well known not only in this jurisdiction but also
in the United States where common law prevails. In the latter
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 the money agreed to be paid, or damages for its
violation. The rule has sometimes been laid down as though it
were equally universal, that where the parties are in pari delicto,
no affirmative relief of any kind will be given to one against the
other."
It is true that this doctrine is subject to one important
limitation, namely, "whenever public policy is considered as
advanced by allowing either party to sue for relief against the
transaction" (idem, p. 733). But not all contracts which are
illegal because opposed to public policy come under this
limitation. The cases in which this limitation may apply only
"include the class of contracts which are intrinsically contrary to
public policy, contracts in which the illegality itself consists in
their opposition to public policy, and any other species of illegal
contracts in which, from their particular circumstances,
incidental and collateral motives of public policy require relief."
Examples of this class of contracts are usurious contracts,
marriage-brokerage contracts and gambling contracts.
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The contract in question does not come under this exception

because it is not intrinsically contrary to public policy, nor one
where the illegality itself consists in its opposition to public
policy. It is illegal not because it is against public policy but
because it is against the Constitution. Nor may it be contended
that to apply the doctrine of pari delicto would be tantamount to
contravening the fundamental policy embodied in the
constitutional prohibition in that it would allow an alien to
remain in the illegal possession of the land, because in this case
the remedy is lodged elsewhere. To adopt the contrary view
would be merely to benefit petitioner and not to enhance public
interest.
Frenzal v Catito (2003)

Callejo, Sr. J.
Re: Void Contracts
DOCTRINE: A contract that violates the Constitution and the
law, is null and void and vests no rights and creates no
obligations. It produces no legal effect at all. The
petitioner, being a party to an illegal contract, cannot
come into a court of law and ask to have his illegal
objective carried out. One who loses his money or
property by knowingly engaging in a contract or
transaction which involves his own moral turpitude
may not maintain an action for his losses. To him who
moves in deliberation and premeditation, the law is
unyielding. The law will not aid either party to an illegal
contract or agreement; it leaves the parties where it
finds them.
FACTS
Alfred, An Australian citizen of German descent, was a pilot of
New Guinea Airlines. He resided in the Philippines starting 1974
and met and wedded a Filipina, Teresita Santos. They separated
in 1981 without Alfred obtaining a divorce.
In 1983, he returned to Australia for a vacation. While in
Australia, he went to Kings Cross, a night spot offering
massages with extra service. There he met Ederlina Catito, a
Filipina masseuse. They enjoyed each other company so much
that Ederlina ended up staying with Alfred at his hotel for 3
days. Alfred gave Ederlina sums of money for her extra services.
Alfred was so enamored with Ederlina that he proposed to her
that they settle in the Philippines and start a business which he
will finance. Ederlina readily accepted. Alfred confessed that he
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was still married but that he will divorce his wife and marry
Ederlina.
Alfred bought the following properties for Ederlina since
he naively thought they would be getting married and live
happily ever after: 1) a building in Ermita for Ederlinas beauty
parlor; and 2) a house and lot in Quezon City. Since Alfred knew
that as foreigner he was disqualified from owning lands in the
Philippines, he agreed that only Ederlinas name would appear
as the buyer of the property and in the title. After all, he was
planning to marry Ederlina.
Alfred decided to stay in the Philippines for good and live with
Ederlina. He returned to Australia and sold his boat and his
television and video business in Papua New Guinea. When
Alfred and Ederlina were in Hong Kong, they opened an account
with HSBC, Kowloon in the name of Ederlina.
Alfred naively also deposited his money to Ederlinas account.
In 1984, Alfred received a letter from a Klaus Muller from
Berlin, Germany. Klaus informed Alfred that he and Ederlina
were married in 1978 and had a blissful married life until Alfred
intruded. Klaus said he knew of Alfred and Ederlinas amorous
relationship and begged Alfred to leave Ederlina alone and to
return her to him. When Alfred confronted Ederlina, she
admitted that she and Klaus were married but assured Alfred
that she would divorce Klaus. Alfred was naively appeased. He
agreed to continue the amorous relationship and wait for the
outcome of Ederlinas petition for divorce. He hired a lawyer in
Germany to help Ederlina divorce Klaus.
In the meantime, Alfred decided to purchase 3 more properties
in Davao City (which included a beach resort) and put them in
the name of Ederlina.
Ederlina had not been able to secure a divorce from Klaus and
their relationship started going downhill. Alfred decided to live
separately from Ederlina and cut off all contacts with her. On
the other hand, Ederlina complained that Alfred had ruined her
life. The last straw for Alfred came on September 2, 1985 when
someone smashed the front and rear windshields of his car and
he suspects Ederlina had a hand in it. Alfred filed cases against
Ederlina to recover the various properties in her name, which he
funded.
ISSUE: Whether the rule on RULE OF IN PARI DELICTO is
applicable.
HELD: YES. Section 14, Article XIV of the 1973 Constitution
provides: Save in cases of hereditary succession, no private
land shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or hold lands
in the public domain.
Lands of the public domain, which include private lands, may be
transferred or conveyed only to individuals or entities qualified
to acquire or hold private lands or lands of the public domain.
Aliens, whether individuals or corporations, have been
disqualified from acquiring lands of the public domain. Hence,
they have also been disqualified from acquiring private lands.
Even if, as claimed by the petitioner, the sales in question were
entered into by him as the real vendee, the said transactions are
in violation of the Constitution; hence, are null and void ab
initio. A contract that violates the Constitution and the law, is
null and void and vests no rights and creates no obligations. It
produces no legal effect at all. The petitioner, being a party to an
illegal contract, cannot come into a court of law and ask to have
his illegal objective carried out. One who loses his money or
property by knowingly engaging in a contract or transaction
which involves his own moral turpitude may not maintain an
action for his losses. To him who moves in deliberation and
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premeditation, the law is unyielding. The law will not aid either
party to an illegal contract or agreement; it leaves the parties
where it finds them. Under Article 1412 of the New Civil Code,
the petitioner cannot have the subject properties deeded to him
or allow him to recover the money he had spent for the purchase
thereof. Equity as a rule will follow the law and will not permit
that to be done indirectly which, because of public policy,
cannot be done directly. Where the wrong of one party equals
that of the other, the defendant is in the stronger position it
signifies that in such a situation, neither a court of equity nor a
court of law will administer a remedy. The rule is expressed in
the maxims: EX DOLO MALO NON ORITUR ACTIO and IN
PARI DELICTO POTIOR EST CONDITIO DEFENDENTIS.
The provision is expressed in the maxim: MEMO CUM
ALTERIUS DETER DETREMENTO PROTEST (No person
should unjustly enrich himself at the expense of another). An
action for recovery of what has been paid without just cause has
been designated as anaccion in rem verso. This provision does
not apply if, as in this case, the action is proscribed by the
Constitution or by the application of the pari delicto doctrine. It
may be unfair and unjust to bar the petitioner from filing
an accion in rem verso over the subject properties, or from
recovering the money he paid for the said properties, but, as
Lord Mansfield stated in the early case of Holman vs. Johnson:
The objection that a contract is immoral or illegal as between
the plaintiff and the defendant, sounds at all times very ill in the
mouth of the defendant. It is not for his sake, however, that the
objection is ever allowed; but it is founded in general principles
of policy, which the defendant has the advantage of, contrary to
the real justice, as between him and the plaintiff.
Gonzalo v Tarnate, Jr.

Void Contracts
DOCTRINE: The doctrine of in pari delicto which stipulates
that the guilty parties to an illegal contract are not
entitled to any relief, cannot prevent a recovery if doing
so violates the public policy against unjust enrichment.
FACTS: After the DPWH had awarded a construction contract
to his company, Gonzalo Construction, Domingo Gonzalo
subcontracted to John Tarnate, Jr. the supply of materials and
labor for the project. Gonzalo executed a deed of assignment
whereby he, as the contractor, was assigning to Tarnate an
amount equivalent to 10% of the total collection from the DPWH
for the project. This 10% retention fee was the rent for Tarnates
equipment that had been utilized in the project. Gonzalo further
authorized Tarnate to use the official receipt of Gonzalo
Construction in the processing of the documents relative to the
collection of the 10% retention fee and in encashing the check to
be issued by the DPWH for that purpose. The deed of
assignment was submitted to the DPWH. During the processing
of the documents for the retention fee, however, Tarnate learned
that Gonzalo had unilaterally rescinded the deed of assignment
by means of an affidavit of cancellation of deed of assignment;
and that the disbursement voucher for the 10% retention fee had
then been issued in the name of Gonzalo, and the retention fee
released to him.
Tarnate brought this suit against Gonzalo for breach of contract.
Gonzalo claimed that Tarnate, having been fully aware of the
illegality and ineffectuality of the deed of assignment from the
time of its execution, could not go to court with unclean hands
to invoke any right based on the invalid deed of assignment or
on the product of such deed of assignment. RTC ruled judgment
in favor of Tarnate. CA affirmed the RTC. CA did not apply the
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doctrine of in pari delicto, explaining that the doctrine applied

only if the fault of one party was more or less equivalent to the
fault of the other party. It found Gonzalo to be more guilty than
Tarnate, whose guilt had been limited to the execution of the 2
illegal contracts while Gonzalo had gone to the extent of
violating the deed of assignment.
holds 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 the
money agreed to be paid, or damages for its violation; and where
the parties are in pari delicto, no affirmative relief of any kind
will be given to one against the other.
ISSUE: Whether relief may be accorded despite the fact that

the parties who entered into the void contract are equally guilty.
Nonetheless, the application of the doctrine of in pari delicto is

not always rigid. An accepted exception arises when its
application contravenes well-established public policy. The
prevention of unjust enrichment is a recognized public policy of
the State under for Article 22. Tarnate provided the equipment,
labor and materials for the project in compliance with his
obligations under the subcontract and the deed of assignment.
Gonzalo as the contractor who received the payment for his
contract with the DPWH as well as the 10% retention fee that
should have been paid to Tarnate pursuant to the deed of
assignment. Considering that Gonzalo refused despite demands
to deliver to Tarnate the 10% retention fee that would have
compensated the latter, Gonzalo would be unjustly enriched at
the expense of Tarnate if the latter was to be barred from
recovering because of the rigid application of the doctrine of in
pari delicto. The prevention of unjust enrichment called for the
exception to apply in Tarnates favor.
HELD: Yes. Every contractor is prohibited from

subcontracting with or assigning to another person any contract
or project that he has with the DPWH unless the DPWH
Secretary has approved the subcontracting or assignment.
Under Article 1409(1), a contract whose cause, object or purpose
is contrary to law is a void or inexistent contract. As such, a void
contract cannot produce a valid one. To the same effect is Article
1422, which declares that "a contract, which is the direct result
of a previous illegal contract, is also void and inexistent."
We do not concur with the CAs finding that the guilt of Tarnate
for violation of Section 6 of PD 1594 was lesser than that of
Gonzalo, for Tarnate had voluntarily entered into the
agreements with Gonzalo. Tarnate also admitted that he did not
participate in the bidding for the project because he knew that
he was not authorized to contract with the DPWH. Given that
Tarnate was a businessman who had represented himself in the
subcontract as "being financially and organizationally sound and
established, with the necessary personnel and equipment for the
performance of the project," he justifiably presumed to be aware
of the illegality of his agreements with Gonzalo. For these
reasons, Tarnate was not less guilty than Gonzalo.
According to Article 1412(1), the guilty parties to an illegal
contract cannot recover from one another and are not entitled to
an affirmative relief because they are in pari delicto or in equal
fault. The doctrine of in pari delicto is a universal doctrine that
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PILTEL v Tecosn (2004)

May 7, 2004
Topic:
DOCTRINE: , the contract herein involved is a contract of
adhesion. But such an agreement is not per
se inefficacious. The rule instead is that, should there be
ambiguities in a contract of adhesion, such ambiguities
are to be construed against the party that prepared it.
If, however, the stipulations are not obscure, but are
clear and leave no doubt on the intention of the parties,
the literal meaning of its stipulations must be held
controlling.
FACTS:
On various dates in 1996, Delfino C. Tecson applied for six (6)
cellular phone subscriptions with petitioner Pilipino Telephone
Corporation (PILTEL)
On 05 April 2001, respondent filed with the RTC of Iligan City,
Lanao Del Norte, a complaint against petitioner for a "Sum of
Money and Damages."
Petitioner moved for the dismissal of the complaint on the
ground of improper venue, citing a common provision in the
mobiline service agreements to the effect that
"Venue of all suits arising from this Agreement or any

other suit directly or indirectly arising from the
relationship between PILTEL and subscriber shall be
in the proper courts of Makati, Metro Manila.
Subscriber hereby expressly waives any other
venues."1
RTC denied motion to dismiss. MR denied.

CA saw no merit in the petition and affirmed the assailed
orders of the trial court. MR denied.
ISSUE: WON the provision in the mobiline service agreements
fixing the venue of all suits arising from the contract is clear and
binding and that the venue of the complaint was improperly
laid.
HELD: Yes, Indeed, the contract herein involved is a contract of
adhesion. But such an agreement is not per
se inefficacious. The rule instead is that, should there
be ambiguities in a contract of adhesion, such
ambiguities are to be construed against the party that
prepared it. If, however, the stipulations are not
obscure, but are clear and leave no doubt on the
intention of the parties, the literal meaning of its
stipulations must be held controlling.4
A contract of adhesion is just as binding as ordinary
contracts. It is true that this Court has, on occasion, struck
down such contracts as being assailable when the weaker party
is left with no choice by the dominant bargaining party and is
thus completely deprived of an opportunity to bargain
effectively. Nevertheless, contracts of adhesion are not
prohibited even as the courts remain careful in
scrutinizing the factual circumstances underlying each
case to determine the respective claims of contending
parties on their efficacy.
In the case at bar, respondent secured six (6) subscription
contracts for cellular phones on various dates. It would be
difficult to assume that, during each of those times, respondent
had no sufficient opportunity to read and go over the terms and
conditions embodied in the agreements. Respondent continued,
in fact, to acquire in the pursuit of his business subsequent
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subscriptions and remained a subscriber of petitioner for quite

sometime.
In Development Bank of the Philippines vs. National
Merchandising Corporation,5 the contracting parties, being of
age and businessmen of experience, were presumed to have
acted with due care and to have signed the assailed documents
with full knowledge of their import. The situation would be no
less true than that which obtains in the instant suit. The
circumstances in Sweet Lines, Inc. vs. Teves,6 wherein this
Court invalidated the venue stipulation contained in the passage
ticket, would appear to be rather peculiar to that case. There, the
Court took note of an acute shortage in inter-island vessels that
left passengers literally scrambling to secure accommodations
and tickets from crowded and congested counters. Hardly,
therefore, were the passengers accorded a real opportunity to
examine the fine prints contained in the tickets, let alone reject
them.
A contract duly executed is the law between the parties, and they
are obliged to comply fully and not selectively with its terms. A
contract of adhesion is no exception.
Alpha Insurance v. Castor (2013)

Topic: Contract of Adhesion
DOCTRINE: A contract of insurance is a contract of adhesion.
So, when the terms of the insurance contract contain
limitations on liability, courts should construe them in
such a way as to preclude the insurer from noncompliance with his obligation.
FACTS: Arsenia Sonia Castor (Castor) obtained a Motor Car
Policy for her Toyota Revo DLX DSL with Alpha Insurance and
Surety Co (Alpha). The contract of insurance obligates the
petitioner to pay the respondent the amount of P630,000 in
case of loss or damage to said vehicle during the period covered.
On April 16, 2007, respondent instructed her driver, Jose Joel
Salazar Lanuza to bring the vehicle to nearby auto-shop for a
tune up. However, Lanuza no longer returned the motor vehicle
and despite diligent efforts to locate the same, said efforts
proved futile. Resultantly, respondent promptly reported the
incident to the police and concomitantly notified petitioner of
the said loss and demanded payment of the insurance proceeds.
Alpha, however, denied the demand of Castor claiming that they
are not liable since the culprit who stole the vehicle is employed
with Castor. Under the Exceptions to Section III of the Policy,
the Company shall not be liable for (4) any malicious damage
caused by the insured, any member of his family or by A
PERSON IN THE INSUREDS SERVICE.
Castor filed a Complaint for Sum of Money with Damages
against Alpha before the Regional Trial Court of Quezon City.
The trial court rendered its decision in favor of Castor which
decision is affirmed in toto by the Court of Appeals. Hence, this
Petition for Review on Certiorari.
260

Atty Tizon
ISSUE: WON the contract of insurance is a contract of

adhesion.
Table of Contents
HELD: YES.
OBLIGATIONS
A contract of insurance is a contract of adhesion. So, when the

terms of the insurance contract contain limitations on liability,
courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation. Thus, in
Eternal Gardens Memorial Park Corporation vs. Philippine
American Life Insurance Company, this Court ruled that it must
be remembered that an insurance contract is a contract of
adhesion which must be construed liberally in favor of the
insured and strictly against the insurer in order to safeguard the
latters interest.
MetroBank v. Rosales
1
Doctrine: The "Hold Out" clause applies only if there is a valid
and existing obligation arising from any of the sources of
obligation enumerated in Article 1157 of the Civil Code, to wit:
law, contracts, quasi-contracts, delict, and quasi-delict
1
The loss of the respondents vehicle is also not excluded under

the insurance policy. The words loss and damage mean
different things in common ordinary usage. The word loss
refers to the act or fact of losing, or failure to keep possession,
while the word damage means deterioration or injury to
property. Therefore, petitioner cannot exclude the loss of
Castors vehicle under the insurance policy under paragraph 4 of
Exceptions to Section III, since the same refers only to
malicious damage, or more specifically, injury to the motor
vehicle caused by a person under the insureds service.
Paragraph 4 clearly does not contemplate loss of property.
PSBA v CA (1992)
3
In other words, a contractual relation is a condition sine
qua non to the school's liability. The negligence of the school
cannot exist independently of the contract, unless the negligence
occurs under the circumstances set out in Article 21 of the Civil
Code.
3
This Court is not unmindful of the attendant difficulties posed by
the obligation of schools, above-mentioned, for conceptually a
school, like a common carrier, cannot be an insurer of its
students against all risks.
3
Cruz v Gruspe
ACE Foods, Inc. v. Micro Pacific

6
Doctrine: A contract is what the law defines it to be, taking into
determined from the express terms of the written agreement and
from the contemporaneous and subsequent acts of the
contracting parties. However, in the construction or interpretation
of an instrument, the intention of the parties is primordial and is
to be pursued. The denomination or title given by the parties in
their contract is not conclusive of the nature of its contents.
6
Locsin II v. Mekeni Food Corporation
8
Doctrine: Article 2142 of the Civil Code clarifies that there are
certain lawful, voluntary and unilateral acts which give rise to the
juridical relation of quasi-contract, to the end that no one shall be
unjustly enriched or benefited at the expense of another. In the
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Atty Tizon
absence of specific terms and conditions governing the car plan

arrangement between the petitioner and Mekeni, a quasicontractual relation was created between them.
8
Barredo v Garcia
10
Doctrine: A quasi-delict is a separate legal institution under the
Civil Code, with a substantivity of its own, and individuality that is
entirely apart and independent from a delict or crime
10
Llana v Biong
12
Doctrine: Under Art. 2176, the elements necessary to establish
a quasi-delict case are: (1) damages to the plaintiff; (2)
negligence, by act or omission, of the defendant or by some
person for whose acts the defendant must respond, was guilty;
and (3) the connection of cause and effect between such
negligence and the damages. These elements show that the
source of obligation in a quasi-delict case is the breach or
omission of mutual duties that civilized society imposes upon its
members, or which arise from non-contractual relations of certain
members of society to others.
12
Chavez v Gonzales
14
Doctrine: Where the defendant virtually admitted nonperformance of the contract by returning the typewriter that he
was obliged to repair in a non-working condition, with essential
parts missing, Article 1197 of the Civil Code of the Philippines
cannot be invoked. The fixing of a period would thus be a mere
formality and would serve no purpose than to delay.
14
Tanguilig v. CA
15
Doctrine: If an obligation is not part of the contract then there is
no legal nor factual basis by which the Court can impose an
obligation to a party who did not expressly assume nor ratify the
same.
15
Woodhouse v Halili
16
Doctrine: The incidental fraud does not render the contract null
and void but only such as to hold the plaintiff liable for damages.
16
Metropolitan Fabrics, Inc. (MFI) v. Prosperity
18
Doctrine: Fraud cannot be presumed but must be proved by

clear and convincing evidence. Whoever alleges fraud affecting a
private transactions are similarly presumed to have been fair and
regular. To be remembered is that mere allegation is definitely
not evidence; hence, it must be proved by sufficient evidence. 18
Surviving Heirs v Lindo Et Al.
21
Doctrine: Having fully participated in all stages of the case, and
even invoking the RTCs authority by asking for affirmative reliefs,
respondents can no longer assail the jurisdiction of the said trial
court. Simply put, considering the extent of their participation in
the case, they are, as they should be, considered estopped from
raising lack of jurisdiction as a ground for the dismissal of the
action.
21
Boysaw v. Interphil Promotions
23
Doctrine: Where one party did not perform the undertaking
which he was bound by the terms of the agreement to perform,
he is not entitled to insist upon the performance of the contract
by the other party, or recover damages by reason of his own
breach.
23
U.P. v De los Angeles
24
Doctrine: There is nothing in the law that prohibits the parties
from entering into agreement that violation of the terms of the
contract would cause cancellation thereof, even without court
intervention. In other words, it is not always necessary for the
injured party to resort to court for rescission of the contract.
24
Vda de Mistica v Naguiat (2003)
25
In a contract of sale, the remedy of an unpaid seller is either
specific performance or rescission. Under Article 1191 of the Civil
Code, the right to rescind an obligation is predicated on the
violation of the reciprocity between parties, brought about by a
breach of faith by one of them. Rescission, however, is allowed
only where the breach is substantial and fundamental to the
fulfillment of the obligation.
25
Fil-Estate Golf and Development, Inc. (FEGDI) v Vertex
Sales and Trading, Inc.
26
262

Atty Tizon
Doctrine: FEGDI failed to deliver to Vertex the stock certificates

within a reasonable time from the point the shares should have
been delivered. This was a substantial breach of their contract
that entitles Vertex the right to rescind the sale. It is not entirely
correct to say that a sale had already been consummated as
Vertex already enjoyed the rights a shareholder can exercise. The
enjoyment of these rights cannot suffice where the law, by its
express terms, requires a specific form to transfer ownership. 26
28
Vasquez v. Borja (1944)

29
Doctrine: The fact that the corporation, acting thru Vazquez as
its manager, was guilty of negligence in the fulfillment of the
contract did not make Vazquez principally or even subsidiarily
liable for such negligence. Since it was the corporations contract,
its non-fulfillment, whether due to negligence or fault or to any
other cause, made the corporation and not its agent liable.
29
there will be no cause for delay, unless such circumstance will fall
under the exceptions provided under 1169.
35
Agner v BPI (2013)
37
Doctrine: The Civil Code in Article 1169 provides that one incurs
in delay or is in default from the time the obligor demands the
fulfillment of the obligation from the obligee. However, the law
expressly provides that demand is not necessary under certain
circumstances, and one of these circumstances is when the
parties expressly waive demand. Hence, since the co-signors
expressly waived demand in the promissory notes, demand was
unnecessary for them to be in default.
37
30
Tengco v CA
39
Doctrine: The ownership of the property had been transferred to
the private respondent and the person to whom payment was
offered had no authority to accept payment. The petitioner
should have tendered payment of the rentals to the private
respondent and if that was not possible, she should have
consigned such rentals in court.
39
SSS vs. Moonwalk Development and Housing Corporation

(1993)
31
DOCTRINE: Default begins from the moment the creditor
31
Central Bank v CA (1985)

40
Doctrine: The mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but 'instead it is
taken as a breach of the contract by him.
40
Abella v Gonzaga
32
Doctrine: Although there was a delay in the performance of the
plaintiffs obligation to pay the installments, he is still considered
to have complied with his obligation since the defendant
accepted the formers late payments.
32
Nakpil v. CA (1986)
42
Doctrine: To be exempt from liability due to an act of God, the
engineer/architect/contractor must not have been negligent in
the construction of the building.
42
Federal Builders v Foundation Specialists
Foundation v Santos (2004)

33
Doctrine: The two-year period must be counted from the date of
execution of the compromise agreement, and not on the judicial
approval of the compromise agreement.
33
Vasquez v. Ayala Corp. (2004)
35
Doctrine: Obligations for whose fulfillment a day certain has
been fixed shall be demandable only when that day comes. Thus
without a certain date on when the obligation must be fulfilled
Fil-Estate v Ronquillo (2014)

44
Doctrine: the Asian financial crisis is not a fortuitous event that
would excuse petitioners from performing their contractual
obligation
44
Khe Hong Cheng v CA (2001)
45
DOCTRINE: When the law is silent as to when the prescriptive
shall commence, general rule must apply that it will commence
when the moment the action accrues. An action for rescission
must be the last resort of the creditors and can only be availed
after the creditor had exhausted all the properties.
45
263

Atty Tizon
Siguan v Lim
46
Doctrine: The action to rescind contracts in fraud of creditors is
known as accion pauliana. For this action to prosper, the
following requisites must be present: (1) the plaintiff asking for
rescission has a credit prior to the alienation, although
demandable later; (2) the debtor has made a subsequent
contract conveying a patrimonial benefit to a third person; (3) the
creditor has no other legal remedy to satisfy his claim; (4) the
act being impugned is fraudulent; (5) the third person who
received the property conveyed, if it is by onerous title, has been
an accomplice in the fraud.
46
Gaite v Fonacier
49
Gonzales v. Heirs of Thomas (1999)

51
Doctrine: A condition is every future and uncertain event upon
which an obligation or provision is made to depend or upon which
the acquisition or resolution of rights is made to depend by those
who execute the juridical act. Without it, the sale of the property
under the contract cannot be perfected, and petitioner cannot be
obliged to purchase such property.
51
Coronel v CA (1996)
52
DOCTRINE: The case is a contract of sale subject to a suspensive
condition in which consummation is subject only to the successful
transfer of the certificate of title from the name of petitioners'
father, to their names. Thus, the contract of sale became
obligatory.
52
Parks v Prov of Tarlac
53
Doctrine: The characteristic of a condition precedent is that the
acquisition of the right is not effected while said condition is not
complied with or is not deemed complied with. Meanwhile
nothing is acquired and there is only an expectancy of right.
Consequently, when a condition is imposed, the compliance of
which cannot be effected except when the right is deemed
acquired, such condition cannot be a condition precedent.
53
Central Philippines v CA (2995)
54
Doctrine: Thus, when a person donates land to another on the
condition that the latter would build upon the land a school is
such a resolutory one. The donation had to be valid before the

fulfillment of the condition.
54
Quijada v. CA (1998)
56
Doctrine: It has been ruled that when a person donates land to
another on the condition that the latter would build upon the land
a school, the condition imposed is not a condition precedent or a
suspensive condition but a resolutory one.
56
Lim v CA (1990)
57
Doctrine: The continuance, effectivity and fulfillment of a
contract of lease cannot be made to depend exclusively upon the
free and uncontrolled choice of the lessee between continuing
the payment of the rentals or not, completely depriving the
owner of any say in the matter.
57
Silos v PNB (2014)
59
DOCTRINE: Any modification in the contract, such as the interest
rates, must be made with the consent of the contracting parties.
In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any
modification thereof must be mutually agreed upon; otherwise, it
has no binding effect
59
Naga Telephone Co., Inc. (NATELCO) v CA
61
Doctrine: The contract is subject to mixed conditions, that is,
they depend partly on the will of the debtor and partly on chance,
hazard or the will of a third person, which do not invalidate the
subject provision.
61
Osmena v Rama (1909)
63
Smith, Bell & Co. v Sotelo Matti (1992)

65
Doctrine: When the time of delivery is not fixed in the contract,
time is regarded unessential. In such cases, the delivery must be
made within a reasonable time.
65
Rustan Pulp v IAC (1992)
66
Doctrine: A condition which is both potestative (or facultative)
and resolutory may be valid, even though the saving clause is left
to the will of the obligor.
66
264

Atty Tizon
Romero v CA (1995)
68
DOCTRINE: Mixed condition is dependent not on the will of the
vendor alone but also of third persons like the squatters and
government agencies and personnel concerned.
68
Roman Catholic Archbishop v CA
69
Doctrine: The prohibition in the deed of donation against the
alienation of the property for 100 years, being an unreasonable
emasculation and denial of an integral attribute of ownership,
should be declared as an illegal or impossible condition within the
contemplation of Article 727. Thus, as stated in said statutory
provision, such condition shall be considered as not imposed. 69
Araneta v Phil. Sugar Estates Development Co. (1967)
71
Doctrine: Even on the assumption that the court should have
found that no reasonable time or no period at all had been fixed
(and the trial court's amended decision nowhere declared any
such fact) still, the complaint not having sought that the Court
should set a period, the court could not proceed to do so unless
the complaint included it as first amended
71
Central Philippines v. CA (1995)
72
Doctrine: Exception to the general rule that the court may
fix the period: There is no need to fix a period when such
procedure would be a mere technicality & formality & would
serve no purpose than to delay or load to unnecessary and
expensive multiplication of suits
72
Lafarge Cement v Continental Cement (2004)
73
Doctrine: A solidary debtor may, in actions filed by the creditor,
avail itself of all defenses which are derived from the nature of
the obligation and of those which are personal to him, or pertain
to his own share. With respect to those which personally belong
to the others, he may avail himself thereof only as regards that
part of the debt for which the latter are responsible.
73
Rivelisa Realty v First Sta. Clara (2014)
76
DOCTRINE: Quantum meruit means that, in an action for work
and labor, payment shall be made in such amount as the plaintiff
reasonably deserves
76
Metro Concast Steel Corp., et al. v. Allied Bank Corporation

81
Absent any showing that the terms and conditions of the latter
transactions have been, in any way, modified or novated by the
terms and conditions in the MoA, said contracts should be treated
separately and distinctly from each other, such that the
existence, performance or breach of one would not depend on
the existence, performance or breach of the other.
82
extinguish an obligation. It cannot be presumed and may be
implied only if the old and new contracts are incompatible on
every point.
83
83
PNB v Dee
85
Dacion en pago or dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the creditor
as an accepted equivalent of the performance of the obligation. It
is a mode of extinguishing an existing obligation and partakes the
nature of sale as the creditor is really buying the thing or
property of the debtor, the payment for which is to be charged
against the debtors debt. Dation in payment extinguishes the
obligation to the extent of the value of the thing delivered, either
as agreed upon by the parties or as may be proved, unless the
parties by agreement express or implied, or by their silence
consider the thing as equivalent to the obligation, in which case
the obligation is totally extinguished.
86
87
Doctrine: Rights may be waived through a compromise
agreement, notwithstanding a final judgment that has already
settledthe rights of the contracting parties. To be binding, the
compromise must be shown to have been voluntarily,freely and
intelligently executed by the parties, who had full knowledge of
the judgment. Furthermore, it must not be contrary to law,
morals, good customs and public policy.
87
Phil. Charter v. Petroleum (2012)
Doctrine: Novation of a contract is never presumed. In the
absence of an express agreement, novation takes place only
89
265

Atty Tizon
when the old and the new obligations are incompatible on every
point.
89
has to be applied first to the debt which is most onerous to the

debtor.
103
ACE Foods, Inc. v. Micro Pacific (2013)

91
Doctrine: Novation is never presumed, and the animus novandi,
whether totally or partially, must appear by express agreement of
the parties, or by their acts that are too clear and unequivocal to
be mistaken
91
Sps. Cacyurin v AFPMB (2013)

109
Doctrine: Besides, as earlier stated, Article 1256 authorizes
consignation alone, without need of prior tender of payment,
where the ground for consignation is that the creditor is
unknown, or does not appear at the place of payment; or is
incapacitated to receive the payment at the time it is due; or
when, without just cause, he refuses to give a receipt; or when
two or more persons claim the same right to collect; or when the
title of the obligation has been lost.
109

extinguish an obligation. It cannot be presumed and may be
implied only if the old and new contracts are incompatible on
every point.
94
94
Philippine Commercial International Bank (PCIB) v Franco 96

Filinvest v Philippine Acetylene
97
Tan Shuy v. Sps. Maulawin (F2012)

99
Doctrine: Dation in payment extinguishes the obligation to the
extent of the value of the thing delivered, either as agreed upon
by the parties or as may be proved, unless the parties by
agreement express or implied, or by their silence consider the
thing as equivalent to the obligation, in which case the obligation
is totally extinguished.
99
Reparations Commission v Universal Deep Sea Fishing
(1978)
102
Doctrine: The rules contained in Articles 1252 to 1254 of
judgment, Civil Code apply to a person owing several debts of
judgment, same kind to a single creditor. They cannot be made
applicable to a person whose obligation as a mere surety is both
contingent and singular, which in this case is the full and faithful
compliance with the terms of the contract of conditional purchase
and sale of reparations goods.
102
Paculdo v Regalado (2000)
103
the payment to which of his debts with the creditor the payment
is to be applied, the law provided the guideline; i.e. no payment
is to be applied to a debt which is not yet due and the payment
Spouses Nameal and Lourdes Bonrostro v. Spouses Juan and

Constancia Luna (2013)
111
Doctrine: For a tender of payment to take effect it must be
accompanied by the means of payment and debtor must take
immediate step to make a consignation.
111
Del Carmen v Sabordo (2014)
112
Doctrine: It is settled that compliance with the requisites of a
valid consignation is mandatory. Failure to comply strictly with
any of the requisites will render the consignation void. One of
these requisites is a valid prior tender of payment.
112
Yam v CA (1999)
113
Art. 1270, par. 2 of the Civil Code provides that express
condonation must comply with the forms of donation. Art. 748,
par. 3 provides that the donation and acceptance of a movable,
the value of which exceeds P5,000.00, must be made in writing,
otherwise the same shall be void. In this connection, under Art.
417, par. 1, obligations, actually referring to credits, are
considered movable property.
113
Gan Tion v CA
115
Mirasol v Ca (2001)
116
Doctrine: compensation cannot take place where one claim, as
in the instant case, is still the subject of litigation, as the same
cannot be deemed liquidated.
116
Jesus M. Montemayor v Vicente D. Millora (2011)
118
266

Atty Tizon
Doctrine: A debt is liquidated when its existence and amount are

determined. It is not necessary that it be admitted by the debtor.
Nor is it necessary that the credit appear in a final judgment in
order that it can be considered as liquidated; it is enough that its
exact amount is known. And a debt is considered liquidated, not
only when it is expressed already in definite figures which do not
require verification, but also when the determination of the exact
amount depends only on a simple arithmetical operation
118
Union Bank v DBP (2014)
119
Doctrine: The petition is bereft of merit. Compensation is
defined as a mode of extinguishing obligations whereby two
persons in their capacity as principals are mutual debtors and
creditors of each other with respect to equally liquidated and
demandable obligations to which no retention or controversy has
been timely commenced and communicated by third parties 119
First United Constructors Corp v Bayanihan Automotive
(2014)
125
determined.
125
Legal compensation takes place when the requirements set forth
in Article 1278 and Article 1279 of the Civil Code. Article 1290 of
the Civil Code provides that when all the requisites mentioned in
Article 1279 of the Civil Code are present, compensation takes
effect by operation of law, and extinguishes both debts to the
concurrent amount.
125
Starbright Sales Enterprises, Inc. (SSE) v Philippine Realty
Corporation
126
S.C. Megaworld Construction vs. Engr. Luis U. Parada (2013)
128
Doctrine: Novation is never presumed but must be clearly and
unequivocally shown.
128
130
Doctrine: Novation, a mode of extinguishing an obligation, is
done by changing the object or principal condition of an
obligation, substituting the person of the debtor, or surrogating a
third person in the exercise of the rights of the creditor. For an
obligation to be extinguished by another, the law requires either
of these two conditions: (1) the substitution is unequivocally

declared, or (2) the old and the new obligations are incompatible
on every point. A compromise of a final judgment operates as a
novation of the judgment obligation, upon compliance with either
requisite. In the present case, the incompatibility of the final
judgment with the compromise agreement is evident, because
the latter was precisely entered into to supersede the former. 130
Phil. Charter v Petroleum (2012)
132
Doctrine: In order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and new obligation
be in every point incompatible with each other. Novation of a
contract is never presumed. In the absence of an express
agreement, novation takes place only when the old and the new
obligations are incompatible on every point.
132
Arco Pulp and Paper Company, Inc. v Lim
134
Saura v DBP (1972)

136
Doctrine: Mutual Desistance is a concept that derives from the
principle that since mutual agreement can create a contract,
mutual disagreement by the parties can cause its
extinguishment.
136
NATELCO VS. CA (1994)
138
Doctrine: Article 1267 states in our law the doctrine of
unforseen events. This is said to be based on the discredited
theory of rebus sic stantibus in public international law; under
this theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist the contract
also ceases to exist.
138
PNCC vs. CA (1997)
140
Doctrine: This article, which enunciates the doctrine of
unforeseen events, is not an absolute application of the principle
of rebus sic stantibus, which would endanger the security of
contractual relations. The parties to the contract must be
presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional
changes of circumstances that equity demands assistance for the
debtor.
140
267

Atty Tizon
Osmena v SSS (2007)

141
When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, total or partial release
from a prestation and from the counter-prestation is allowed. 141
Under the theory of rebus sic stantibus, the parties stipulate in
the light of certain prevailing conditions, and once these
conditions cease to exist, the contract also ceases to exist.
141
CONTRACTS
145
Heirs of Intac v CA
145
DOCTRINE: If the parties state a false cause in the contract to
conceal their real agreement, the contract is only relatively
simulated and the parties are still bound by their real agreement.
In absolute simulation, there is a colorable contract but it has no
substance as the parties have no intention to be bound by it. 145
MIAA v. Avia (2012)
147
DOCTRINE: In construing a contract, the provisions thereof
should not be read in isolation, but in relation to each other and
in their entirety so as to render them effective, having in mind
the intention of the parties and the purpose to be achieved. In
other words, the stipulations in a contract and other contract
documents should be interpreted together with the end in view of
giving effect to all.
147
Heirs of Uy v Castillo (2013)
150
RS. Tomas v Rizal Cement (2012)

152
DOCTRINE: For petitioner, the contract entered into may have
turned out to be an unwise investment, but there is no one to
blame but petitioner for plunging into an undertaking without
fully studying it in its entirety.
152
PNB v Manalo
154
Doctrine: Any stipulation on interest unilaterally imposed and
increased by Banks shall be struck down as violative of the
principle of mutuality of contracts.
154
Silos v PNB (2014)
156
DOCTRINE: Contract changes must be made with the consent of
the contracting parties. The minds of all the parties must meet as
to the proposed modification, especially when it affects an

important aspect of the agreement. In the case of loan contracts,
it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of
any binding effect.
156
PNB v. Dee, Et Al. (2014)
158
DOCTRINE: The basic principle of relativity of contracts is that
contracts can only bind the parties who entered into it, and
cannot favor or prejudice a third person, even if he is aware of
such contract and has acted with knowledge thereof Where
there is no privity of contract, there is likewise no obligation or
liability to speak about.
158
160
Capalla v Comelec (2012)

162
DOCTRINE The subsequent contract in question is not an
extension of the previous AES Contract, but a new one. And not
being an ordinary contract but a procurement by the
government, RA 9184 or the Government Procurement Reform
Act applies. Section 10 of said law requires for the validity of
every government procurement that competitive bidding be
conducted. However, such changes must not constitute
substantial or material amendments that would alter the basic
parameters of the contract and would constitute a denial to the
other bidders of the opportunity to bid on the same terms.
162
Rosenstock v Burke
164
Sanchez v Rigos (1972)
167
Capalla v. COMELEC (2012)

169
DOCTRINE: Sereno, concurring: In the construction of an
instrument, the intention of the parties is to be pursued. The true
agreement of the parties may be proved, as against the terms
and stipulations appearing in a written contract where a mistake
or imperfection of the writing, or its failure to express the true
intent and agreement of the parties, is put in issue by the
pleadings, or there is an intrinsic ambiguity in the writing. When
the true intent and agreement of the parties is established, it
268

Atty Tizon
must be given effect and prevail over the bare words of the
written contract.
169
172
Traders Royal Bank v Cuison (2009)

174
DOCTRINE The concurrence of the offer and acceptance is vital
to the birth and the perfection of a contract. The clear and neat
principle is that the offer must be certain and definite with
respect to the cause or consideration and object of the proposed
contract, while the acceptance of this offer express or implied
must be unmistakable, unqualified, and identical in all respects
to the offer. The required concurrence, however, may not always
be immediately clear and may have to be read from the
attendant circumstances; in fact, a binding contract may exist
between the parties whose minds have met, although they did
not affix their signatures to any written document.
174
Blas v Santos
176
Tanedo v CA (1996)
177
DOCTRINE: (n)o contract may be entered into upon a future
inheritance except in cases expressly authorized by law.
177
Liguez v. CA (December 15, 1957)
178
cause. However, the burden of proving the illegality of a cause in
an apparent valid contract lies on the one assailing such validity.
178
DOCTRINE: We find that the agreement between petitioner

Dizon and respondent Gaborro is one of those inanimate
contracts under Art.1307 of the New Civil Code whereby
petitioner and respondent agreed "to give and to do" certain
rights and obligations respecting the lands and the mortgage
debts of petitioner which would be acceptable to the bank. but
partaking of the nature of the antichresis insofar as the principal
parties, petitioner Dizon and respondent Gaborro, are concerned.
184
Hernaez v. Delos Angeles (1969)
185
DOCTRINE: Contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential requisites
for their validity are present. However, when the law requires
that a contract be in some form in order that it may be
valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and
indispensable....
185
Zamora v Miranda (2012)
187
DOCTRINE: Article 1358 of the Civil Code, which requires the
embodiment of certain contracts in a public instrument, is only
for convenience, and registration of the instrument only
adversely affects third parties. Formal requirements are,
therefore, for the benefit of third parties. Non-compliance
therewith does not adversely affect the validity of the contract
nor the contractual rights and obligations of the parties
thereunder.
187
Carantes v CA, 76 SCRA 524 (1977)

179
DOCTRINE: It is total absence of cause or consideration that
renders a contract absolutely void and inexistent.
179
Garcia v Bisaya (1955)

188
DOCTRINE: In Reformation of contracts, allegation of the real
agreement or intention of parties is essential since the object
sought in an action for reformation is to make an instrument
conform to the real agreement or intention of the parties.
188
Buenaventura v CA (2003)
180
DOCTRINE: Failure to pay the consideration is different from lack
of consideration. The former results in a right to demand the
fulfillment or cancellation of the obligation under an existing valid
contract while the latter prevents the existence of a valid
contract.
180
Bentir v Leande
190
DOCTRINE: An action for reformation must be brought within the
period prescribed by law, otherwise, it will be barred by the mere
lapse of time.
190
Dizon v Gaborro (1978)
Sarming v Dy (2002)
192
184
269

Atty Tizon
DOCTRINE: An action for reformation of instrument under this

provision of law may prosper only upon the concurrence of the
following requisites: (1) there must have been a meeting of the
minds of the parties to the contact; (2) the instrument does not
express the true intention of the parties; and (3) the failure of the
instrument to express the true intention of the parties is due to
mistake, fraud, inequitable conduct or accident.
192
Oria v. McMicking (1912)
194
Siguan v Lim
196
Doctrine: The action to rescind contracts in fraud of creditors is
known as accion pauliana. For this action to prosper, the
following requisites must be present: (1) the plaintiff asking for
rescission has a credit prior to the alienation, although
demandable later; (2) the debtor has made a subsequent
contract conveying a patrimonial benefit to a third person; (3) the
creditor has no other legal remedy to satisfy his claim; (4) the
act being impugned is fraudulent; (5) the third person who
received the property conveyed, if it is by onerous title, has been
an accomplice in the fraud.
196
Velarde v CA (2001)
199
DOCTRINE: A substantial breach of a reciprocal obligation, like
failure to pay the price in the manner prescribed by the contract,
entitles the injured party to rescind the obligation. Rescission
abrogates the contract from its inception and requires a mutual
restitution of benefits received.
199
Miguel vs Montanez
201
DOCTRINE: If the amicable settlement is repudiated by one
party, either expressly or impliedly, the other party has 2 options,
namely, to enforce the compromise in accordance with the LGC
or Rules of Court as the case may be, or to consider it rescinded
and insist upon his original demand.
201
Ada V Baylon (2012)
203
DOCTRINE: Rescission is a remedy granted by law to the
contracting parties and even to third persons, to secure the
reparation of damages caused to them by a contract, even if it
should be valid, by means of the restoration of things to their
condition at the moment prior to the celebration of said
contract. It is a remedy to make ineffective a contract, validly

entered into and therefore obligatory under normal conditions, by
reason of external causes resulting in a pecuniary prejudice to
one of the contracting parties or their creditors. Contracts which
are rescissible are valid contracts having all the essential
requisites of a contract, but by reason of injury or damage caused
to either of the parties therein or to third persons are considered
defective and, thus, may be rescinded.The kinds of rescissible
contracts, according to the reason for their susceptibility to
rescission, are the following: first, those which are rescissible
because of lesion or prejudice; second, those which are
rescissible on account of fraud or bad faith; and third, those
which, by special provisions of law, are susceptible to rescission.
203
Caldwallader v. Smith (1907)
207

209
DOCTRINE: It must be repeated that the mortgage was executed
while a receiver was in charge of the Vegetable Oil Company. A
mortgage accomplished at such a time by the corporation under
receivership and a creditor would be a nullity.
209
Singsong v. Isabela Sawmill (1979)
211
DOCTRINE: As a rule, a contract cannot be assailed by one who
is not a party thereto. However, when a contract prejudices the
rights of a third person, he may file an action to annul the
contract.
211
This Court has held that a person, who is not a party obliged
principally or subsidiarily under a contract, may exercised an
action for nullity of the contract if he is prejudiced in his rights
with respect to one of the contracting parties, and can show
detriment which would positively result to him from the contract
in which he has no intervention.
211
Metropolitan Fabrics, Incorporated (MFI) v. Prosperity
213
Uy Soo Lim v Tan Unchuan (1918)
216
Viloria v. CAI (2012)

217
DOCTRINE: Implied ratification may take diverse forms, such as
by silence or acquiescence.
217
270

Atty Tizon
219
The Roman Catholic Church vs. Regino Pante (2012)

221
DOCTRINE: Not every mistake renders a contract voidable. For
mistake as to the qualification of one of the parties to vitiate
consent, two requisites must concur:
221
1. the mistake must be either with regard to the identity or with
regard to the qualification of one of the contracting parties; and
221
2. the identity or qualification must have been the principal
consideration for the celebration of the contract.
221
222
Metropolitan v Prosperity (2014)
224

228
DOCTRINE: It must be repeated that the mortgage was executed
while a receiver was in charge of the Vegetable Oil Company. A
mortgage accomplished at such a time by the corporation under
receivership and a creditor would be a nullity.
228
Carbonnel v Poncio, 103 Phil 655 (1958)
231
DOCTRINE: It is well settled in this jurisdiction that the Statute of
Frauds is applicable only to executory contracts, not to contracts
that are totally or partially performed.
231
Limketkai v CA (1996)
233
DOCTRINE: The Statute of Frauds, embodied in Article 1403 of
the Civil Code of the Philippines, does not require that the
contract itself be written. The plain test of Article 1403,
Paragraph (2) is clear that a written note or memorandum,
embodying the essentials of the contract and signed by the party
charged, or his agent suffices to make the verbal agreement
enforceable, taking it out of the operation of the statute.
233
Swedish Match, AB (SMAB) v CA
234
Neri v Heirs of Uy (2012)
237
Iglesia v. Heirs of Bernardino Taeza (2014)
239
DOCTRINE: A contract entered into in the name of another

person by one who has been given no authority or legal
representation, or who has acted beyond his powers are
unenforceable unless ratified.
239
Heirs of Policronio M. Ureta v Heirs of Liberato M. Ureta 241

Doctrine: Partition among heirs is not legally deemed a
conveyance of real property resulting in change of ownership. It
is not a transfer of property from one to the other, but rather, it is
a confirmation or ratification of title or right of property that an
heir is renouncing in favor of another heir who accepts and
receives the inheritance. It is merely a designation and
segregation of that part which belongs to each heir.
241
Formaran v Ong
243
DOCTRINE: The amplitude of foregoing undisputed facts and
circumstances clearly shows that the sale of the land in question
was purely simulated. It is void from the very beginning (Article
1346, New Civil Code). If the sale was legitimate, defendant
Glenda should have immediately taken possession of the land,
declared in her name for taxation purposes, registered the sale,
paid realty taxes, introduced improvements therein and should
not have allowed plaintiff to mortgage the land. These omissions
properly militated against defendant Glendas submission that
the sale was legitimate and the consideration was paid.
243
Constantino v Heirs of Constantino
244
CPG of the SP. Cadavedo v Lacaya (2014)
246
Liguez v. CA (1957)
250
cause. However, the burden of proving the illegality of a cause in
an apparent valid contract lies on the one assailing such validity.
250
Rellosa v Gaw Cheen Hum, (1953)
251
Doctrine: A party to an illegal contract cannot come into a court
of law and ask to have his illegal objects carried out. The law will
not aid either party to an illegal agreement; it leaves the parties
where it finds them.
251
271

Atty Tizon
Frenzal v Catito (2003)

253
DOCTRINE: A contract that violates the Constitution and the law,
is null and void and vests no rights and creates no obligations. It
produces no legal effect at all. The petitioner, being a party to an
illegal contract, cannot come into a court of law and ask to have
his illegal objective carried out. One who loses his money or
property by knowingly engaging in a contract or transaction
which involves his own moral turpitude may not maintain an
action for his losses. To him who moves in deliberation and
premeditation, the law is unyielding. The law will not aid either
party to an illegal contract or agreement; it leaves the parties
where it finds them.
253
Gonzalo v Tarnate, Jr.
255
DOCTRINE: The doctrine of in pari delicto which stipulates that
the guilty parties to an illegal contract are not entitled to any
relief, cannot prevent a recovery if doing so violates the public
policy against unjust enrichment.
255
PILTEL v Tecosn (2004)
256
DOCTRINE: , the contract herein involved is a contract of
adhesion. But such an agreement is not per se inefficacious. The
rule instead is that, should there be ambiguities in a contract of
adhesion, such ambiguities are to be construed against the party
that prepared it. If, however, the stipulations are not obscure, but
are clear and leave no doubt on the intention of the parties, the
literal meaning of its stipulations must be held controlling.
256
Alpha Insurance v. Castor (2013)
258
DOCTRINE: A contract of insurance is a contract of adhesion. So,
when the terms of the insurance contract contain limitations on
liability, courts should construe them in such a way as to
preclude the insurer from non-compliance with his obligation. 258
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CIVIL LAW REVIEW 2: Contracts

civil action and this is more expeditious because by the time of

Gutierrez v Gutierrez (1931)

CIVIL LAW REVIEW 2: Contracts

2. second, the boy was authorized or designated by his

CIVIL LAW REVIEW 2: Contracts

Milla required her to undergo physical therapy to alleviate her

arise. Once negligence, the damages and the proximate

CIVIL LAW REVIEW 2: Contracts

ordinary witness. Despite the fact that Leila is a physician and

CIVIL LAW REVIEW 2: Contracts

appealed decision. For such contravention, as appellant

CIVIL LAW REVIEW 2: Contracts

CA: REVERSED TC decision. Deep well was part of the

CIVIL LAW REVIEW 2: Contracts

entered into a contract with petitioner for the construction of

When the operations of the business began he was paid P 2,000

CIVIL LAW REVIEW 2: Contracts

ISSUE Whether the respondent company committed fraud in

CIVIL LAW REVIEW 2: Contracts

Metropolitan Fabrics, Inc. (MFI) v. Prosperity

Immediately thereafter, Enrique and Vicky proceeded to the

CIVIL LAW REVIEW 2: Contracts

Petitioners insist that respondents committed fraud when the

CIVIL LAW REVIEW 2: Contracts

Petitioners failed to adduce clear and convincing evidence

respondents on the partial redemption of three of the 7 lots.

The evidence adduced by Vicky Ang, the lone witness for

And, lastly, Vickys own letters to respondents had an apologetic