GOLANGCO V.

PCIB
Facts: In 1989, William Golangco Construction Corporation (WGCC) and the Philippine
Commercial International Bank (PCIB) entered into a contract for the construction of the extension
of PCIB Tower II. The project included, among others, the application of a granitite wash-out finish
on the exterior walls of the building.
In a letter, PCIB, with the concurrence of its consultant TCGI Engineers (TCGI), accepted the
turnover of the completed work by WGCC. To answer for any defect arising within a period of one
year, WGCC submitted a guarantee bond dated July 1, 1992 in compliance with the construction
contract (Defects liability period).
The controversy between the parties arose when portions of the granitite wash-out finish of the
exterior of the building began peeling off and falling from the walls in 1993. WGCC made minor
repairs after PCIB requested it to rectify the construction defects.
In 1994, PCIB entered into another contract with Brains and Brawn Construction and Development
Corporation to re-do the entire granitite wash-out finish after WGCC manifested that it was "not in a
position to do the new finishing work," though it was willing to share part of the cost. PCIB incurred
expenses amounting to P11, 665,000 for the repair work.
PCIB filed a request for arbitration with the Construction Industry Arbitration Commission (CIAC) for
the reimbursement of its expenses for the repairs made by another contractor. It complained of
WGCCs alleged non-compliance with their contractual terms on materials and workmanship.
The CIAC declared WGCC liable for the construction defects in the project.
On appeal, the CA affirmed the CIAC decision.
Hence, this present petition.
Issue: Whether or not petitioner WGCC is liable for defects in the granitite wash-out finish that
occurred after the lapse of the one-year defects liability period provided in Art. XI of the
construction contract.
Held: No.
The controversy pivots on a provision in the construction contract referred to as the defects liability
period. Article XI of the construction contract provides:
xxx
the CONTRACTOR hereby guarantees the work stipulated in this Contract, and shall make
good any defect in materials and workmanship which becomes evident within one (1) year after the
final acceptance of the work.
Article 1306 of the Civil Code enunciates the autonomous nature of contracts.
Article 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.
Obligations arising from contracts have the force of law between the parties and should be
complied with in good faith. In characterizing the contract as having the force of law between the
parties, the law stresses the obligatory nature of a binding and valid agreement.

In the present case, the provision in the construction contract providing for a defects liability
period was not shown as contrary to law, morals, good customs, pubic order or public policy. By
the nature of the obligation in such contract, the provision limiting liability for defects and fixing
specific guaranty periods was not only fair and equitable; it was also necessary. Without such
limitation, the contractor would be expected to make a perpetual guarantee on all materials and
workmanship.
The contract further did not specify a different period for defects in the granitite wash-out finish;
hence, any defect therein should have been brought to WGCCs attention within the one-year
defects liability period in the contract.
We cannot countenance an interpretation that undermines a contractual stipulation freely and
validly agreed upon. The courts will not relieve a party from the effects of an unwise or
unfavorable contract freely entered into.
Further, it must be noted that this kind of stipulation is of particular importance to the contractor,
for as a general rule, after the lapse of the period agreed upon therein, he may no longer be held
accountable for whatever defects, deficiencies or imperfections that may be discovered in the
work executed by him.
PNB V. CA
Facts:

April 7, 1982- private respondents, as owners of a NACIDA-registered enterprise,

obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from petitioner, PNB,
in the amount of P50,000 as evidenced by a Credit Agreement. The loan was to be amortized
over a period of 3 years to end on March 20, 1985 at 12% interest annually. The said loan was
secured by a Real Estate Mortgage over an agricultural land and Chattel Mortgage over a
thermo plastic-forming machine.

The credit agreement provided that:

o
The BANK reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future; Provided, that the
interest rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in the maximum interest rate.

The promissory note, in turn, authorized PNB to raise the interest, at any time without
notice, beyond the stipulated rate of 12% but only within the limits allowed by law.

February 17, 183- private respondents were granted an additional NACIDA loan of
P50,000. PNB executed another promissory note which is to mature on April 1, 1985. It
contained the same terms specified in the previous note. The parties also executed a new Credit
Agreement, changing the amount from P50,000 to P100,000, with the same stipulations as the
previous one.

August 1, 1984- petitioner sent a letter to respondents informing them that the interest
rate of their CIGLF loan account was raised to 25% per annum plus a penalty of 6% per annum
on past dues. PNB further increased the interest rate to 30% and 42 % a few months later.

Thereafter, private respondents exerted efforts to get PNB to re-adopt the 12%
interest and to condone the present interest and penalties due, but to no avail.

December 15, 1987- private respondents filed a suit for specific performance against
petitioner PNB and NACIDA praying to release the mortgage; pay damages and other relief
which the court may find just and equitable.

The trial court dismissed the case. CA reversed the decision in favor of private
respondents and disallowed the increases in interest rates.

Petitioners Contention: The increase in interest rates is authorized by the escalation clause
specified in the Credit Agreement.
Issue: Whether or not the increase in interest rates made by petitioner is valid.
Held: No. The increase in interest rates made by petitioner is invalid.
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 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.
The Court disagrees with petitioners argument that the escalation clause gives it the 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) the Court held
. . . The unilateral action of the PNB in increasing the interest rate on the private respondent's loan
violated the mutuality of contracts ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them.
In order that obligations arising from contracts may have the force or law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void . . . . Hence, even assuming that the . . . loan agreement between the
PNB and the private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would have been null and
void for being violative of the principle of mutuality essential in contracts. It would have invested the
loan agreement with the character of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take
it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice
must protect against abuse and imposition. (Citation omitted.)
Private respondents are not also estopped from assailing the unilateral increases in interest rate
made by petitioner bank. No one receiving a proposal to change a contract to which he is a party,
is obliged to answer the proposal, and his silence per se cannot be construed as an acceptance. In
the case at bench, the circumstances do not show that private respondents implicitly agreed to the
proposed increases in interest rate which by any standard were too sudden and too stiff.
ALLIED BANKING V. CA
FACTS:
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot located
at No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered by TCT No.
136779 in their name. On 30 June 1978 they leased the property to petitioner Allied Banking
Corporation (ALLIED) for a monthly rental of P1,000.00 for the first three (3) years, adjustable by
25% every three (3) years thereafter. 1 The lease contract specifically states in its Provision No. 1

that "the term of this lease shall be fourteen (14) years commencing from April 1, 1978 and may
be renewed for a like term at the option of the lessee."
Pursuant to their lease agreement, ALLIED introduced an improvement on the property
consisting of a concrete building with a floor area of 340-square meters which it used as a
branch office. As stipulated, the ownership of the building would be transferred to the lessors
upon the expiration of the original term of the lease.
Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the
subject property in favor of their four (4) children, namely, private respondents herein Oscar D.
Tanqueco, Lucia Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who accepted
the donation in the same public instrument.
On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos
notified petitioner ALLIED that they were no longer interested in renewing the lease. 2 ALLIED
replied that it was exercising its option to renew their lease under the same terms with additional
proposals. 3 Respondent Ruben D. Tanqueco, acting in behalf of all the donee-lessors, made a
counter-proposal. 4 ALLIED however rejected the counter-proposal and insisted on Provision No.
1 of their lease contract.
When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the
premises. But the latter asserted its sole option to renew the lease and enclosed in its reply
letter a cashier's check in the amount of P68,400.00 representing the advance rental payments
for six (6) months taking into account the escalation clause. Private respondents however
returned the check to ALLIED, prompting the latter to consign the amount in court.
An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City.
After trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being violative
of Art. 1308 of the Civil Code
On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision
was affirmed. 5
On 20 February 1993, while the case was pending in the Court of Appeals ALLIED vacated the
leased premises by reason of the controversy. 6
ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon
hence valid and binding on both parties, and the exercise by petitioner of its option to renew the
contract was part of their agreement and in pursuance thereof.
ISSUE:
Whether a stipulation in a contract of lease to the effect that the contract "may be renewed for a
like term at the option of the lessee" is void for being potestative or violative of the principle of
mutuality of contracts under Art. 1308 of the Civil Code?
Rule:
No. Decision of the Court of Appeals is REVERSED and SET ASIDE.
Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of
contracts. It provides that "the contract must bind both the contracting parties; its validity or
compliance cannot be left to the will of one of them." This binding effect of a contract on both
parties is based on the principle that the obligations arising from the contracts have the force of
law between the contracting parties, and there must be mutuality between them based
essentially on their equality under which it is repugnant to have one party bound by the contract
while leaving the other free therefrom. The ultimate purpose is to render void a contract
containing a condition which makes its fulfillment dependent solely upon the uncontrolled will of
one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding on the parties. This option, which is provided in
the same lease agreement, is fundamentally part of the consideration in the contract and is no
different from any other provision of the lease carrying an undertaking on the part of the lessor to
act conditioned on the performance by the lessee. It is a purely executory contract and at most
confers a right to obtain a renewal if there is compliance with the conditions on which the rights
is made to depend. The right of renewal constitutes a part of the lessee's interest in the land and
forms a substantial and integral part of the agreement.

The fact that such option is binding only on the lessor and can be exercised only by the lessee
does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the
option to the lessee. And while the lessee has a right to elect whether to continue with the lease or
not, once he exercises his option to continue and the lessor accepts, both parties are thereafter
bound by the new lease agreement. Their rights and obligations become mutually fixed, and the
lessee is entitled to retain possession of the property for the duration of the new lease, and the
lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if
he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and
equality exists between the lessor and the lessee since they remain with the same faculties in
respect to fulfillment.
Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating
its abandonment of whatever rights it had under the renewal clause. Consequently, what remains
to be done is for ALLIED to pay rentals for the continued use of premises until it vacated the same,
computed from the expiration of the original term of the contract on 31 March 1992 to the time it
actually left the premises on 20 February 1993, deducting therefrom the amount of P68,400.00
consigned in court by ALLIED and any other amount which it may have deposited or advanced in
connection with the lease. Since the old lease contract was deemed renewed under the same
terms and conditions upon the exercise by ALLIED of its option, the basis of the computation of
rentals should be the rental rate provided for in the existing contract.
Considering that petitioner ALLIED BANKING CORPORATION already vacated the leased
premises as of 20 February 1993, the renewed lease contract is deemed terminated as of that
date. However, petitioner is required to pay rentals to respondent lessors at the rate provided in
their existing contract, subject to computation in view of the consignment in court of P68,400.00 by
petitioner, and of such other amounts it may have deposited or advanced in connection with the
lease.
What is the meaning of the clause maybe renewed for a like term at the option of the lessee?
With respect to the meaning of the clause "may be renewed for a like term at the option of the
lessee," we sustain petitioner's contention that its exercise of the option resulted in the automatic
extension of the contract of lease under the same terms and conditions. The subject contract
simply provides that "the term of this lease shall be fourteen (14) years and may be renewed for a
like term at the option of the lessee." As we see it, the only term on which there has been a clear
agreement is the period of the new contract, i.e., fourteen (14) years, which is evident from the
clause "may be renewed for a like term at the option of the lessee," the phrase "for a like
term"referring to the period. It is silent as to what the specific terms and conditions of the renewed
lease shall be. Shall it be the same terms and conditions as in the original contract, or shall it be
under the terms and conditions as may be mutually agreed upon by the parties after the expiration
of the existing lease?
BALUYOT V. CA
FACTS:

Petitioners in this case are residents and members of Cruz-na-Ligas Homesite Association,
Inc. at Diliman, Quezon City.

Petitioners were contending that they have been in open, peaceful, adverse and continuous
possession in the concept of an owner, for the rest of the land in Barrio Cruz-na-Ligas, consisting
at least 42 hectares.

Since Oct. 1972, the said land is actually subject of quasi-judicial proceedings and
administrative investigations by different branches of government. In fact the Bureau of land and
the President of the RP issued endorsements confirming the rights of the bona fide residents of
barrio Cruz-na-Ligas to the parcel of land.

In 1979, UP Board of Regents approved the donation of 9.2 hectares of the site that was
endorsed by the President of RP. But after several negotiations with the residents, the area was
increased to 15.8 hectares.

Due to the unreasonable demand of the residents for an area bigger than 15.8 hectares, the
execution of the legal instrument to formalize the donation failed.

Later on, the association proposed to accept the offer of the UP to donate 15.8 hectares.
UP manifested in writing its consent to the intended donation in favor with the association
provided that they will agree and comply with the terms and conditions of the donation.

Defendant UP backed-out from the arrangement to donate directly to the Association the
said land, instead, the former decided to negotiate the donation thru the Quezon City Govt
under the terms and conditions not favorable to the residents of the said barrio.

The Association added to its cause of action in its petition the specific performance aside
from the exclusion from the technical description of Certificate of Title of Defendant UP the 42
hectares covering Barrio Cruz-na-Ligas.

The said association also filed a petition for writ of preliminary injunction to restraint
defendant UP from donating the area to the Quezon City Government.

After the TCs decision, UP assured the residents through motion of reconsideration that
the donation of the 15.8 hectares to the Quezon City Govt will be for the benefit of the residents
of the said barrio.

As the Quezon City Governments willing to comply with the terms and conditions of the
donation made by UP, President Jose Abueva (UP), failed to deliver the certificate of title of the
said land which enabled the QC government to register the deed of donation.

It reached the expiration period of 18 months, for the non-compliance of the QC govt under
par.16 of the terms and conditions of the said donation.

President Abueva issued Administrative order No. 21 declaring the deed of donation
revoked.

RTC ordered that petitioners are not parties to the said deed of donation.

CA set aside the TCs order and dismissed the case.

ISSUE: WON the petitioners has the cause of action and right to seek the enforcement of the
deed of donation though they were not parties of such deed?
HELD: SC said Yes.

SC said that even if petitioners were not parties to the deed of donation, they have the right
to seek its enforcement upon their allegation that they are intended beneficiaries of the donation
to the Quezon City Government.

Art. 1311 provides, 2nd par. of the CC provides that: If a contract should contain some
stipulation in favor of a third person, he may demand its fulfillment provided he communicated
his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person.

Following requisites must be present in order to have a stipulation POUR AUTRUI:

There must be a stipulation in favor of a 3rd person.

The stipulation must be a part, not the whole of the contract.

The contracting parties must have clearly and deliberately conferred a favor upon a 3 rd
person, not a mere incidental benefit or interest.

The 3rd person must have communicated his acceptance to the obligor before its
revocation.

Neither of the contracting parties bears the legal representation of the 3rd party.

There was stipulation in the said deed of donation that QC govt as the donee, is required to
transfer to qualified residents, said lots by way of donation.

The stipulation is part of the conditions imposed by UP.

Par. 15 and 16 that the intent of the parties to the deed of donation was to favor petitioner
by transferring the latter the lots occupied by them.

Through conferences, petitioners accepted the said donation and private respondents were
aware of such acceptance.

Neither of private respondents acted in representation of the other. Each of the private
respondents had its own obligations, in view of conferring a favor upon petitioners.


The trial courts decision about the donation has been revoked and petitioner had no clear
and legal right to be protected was still tentative.

The SC ordered the decision of the CA be reversed and the case was remanded to the RTC.

INTEGRATED PACKAGING V. CA
Nature of the case: This is a petition to review the decision of the Court of Appeals rendered on
April 20, 1994 reversing the judgment of the Regional Trial Court of Caloocan City in an action for
recovery of sum of money filed by private respondent against petitioner.
FACTS:

Petitioner and private respondent executed on May 5, 1978, an order agreement whereby
private respondent bound itself to deliver to petitioner reams of printing paper, coated, 2 sides
basis, short grain in the following schedules: May and June 1978, August and September 1978,
January 1979, March 1979, July 1979 and March 1979.

In accordance with the standard operating practice of the parties, the materials were to be
paid within a minimum of thirty days and maximum of ninety days from delivery.

Later, on June 7, 1978, petitioner entered into a contract with Philippine Appliance
Corporation (Philacor) to print three volumes of "Philacor Cultural Books"

Petitioner alleged it wrote private respondent to immediately deliver the balance because
further delay would greatly prejudice petitioner.

From June 5, 1980 and until July 23, 1981, private respondent delivered again to petitioner
various quantities of printing paper amounting to P766,101.70.

However, petitioner encountered difficulties paying private respondent said amount.

Accordingly, private respondent made a formal demand upon petitioner to settle the
outstanding account.

Meanwhile, petitioner entered into an additional printing contract with Philacor. Unfortunately,
petitioner failed to fully comply with its contract with Philacor for the printing of books VIII, IX, X and
XI.

Philacor demanded compensation from petitioner for the delay and damage it suffered on
account of petitioners failure.

On July 5, 1990, the trial court rendered judgment declaring that petitioner should pay private
respondent the sum of P763,101.70 representing the value of printing paper delivered by private
respondent from June 5, 1980 to July 23, 1981.

On appeal, the respondent Court of Appeals reversed and set aside the judgment of the trial
court.

Petitioner filed this instant petition contending that the appellate courts judgment is based on
erroneous conclusions of facts and law.
ISSUE: WON private respondent is liable for petitioners breach of contract with Philacor
HELD:

Petitioners contention lacks factual and legal basis, hence, bereft of merit.

The transaction between the parties is a contract of sale whereby private respondent (seller)
obligates itself to deliver printing paper to petitioner (buyer) which, in turn, binds itself to pay
therefore a sum of money or its equivalent (price).

Clearly, petitioner did not fulfill its side of the contract as its last payment in August 1981 could
cover only materials covered by delivery invoices dated September and October 1980.

There is no dispute that the agreement provides for the delivery of printing paper on different
dates and a separate price has been agreed upon for each delivery.

As correctly held by the appellate court, private respondent cannot be held liable under the
contracts entered into by petitioner with Philacor.

Private respondent is not a party to said agreements.

It is also not a contract pour autrui.

Aforesaid contracts could not affect third persons like private respondent because of the
basic civil law principle of relativity of contracts which provides that contracts can only bind the
parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of
such contract and has acted with knowledge thereof.

Indeed, the order agreement entered into by petitioner and private respondent has not
been shown as having a direct bearing on the contracts of petitioner with Philacor.

As pointed out by private respondent and not refuted by petitioner, the paper specified in
the order agreement between petitioner and private respondent are markedly different from the
paper involved in the contracts of petitioner with Philacor.

Instant petition is DENIED.

A&C MINIMART V. VILLAREAL
FACTS: Petitioner leased the six stalls of the one-storey commercial building from spouses
Bonifacio under a lease agreement. However, the ownership of the subject property is under
dispute between respondents Villareal and spouses Bonifacio. Spouses Bonifacio claimed to
have purchased the property from spouses Sevilla, original owners of the disputed property.
On the other hand Respondents Villareal claimed ownership of the same alleging that
in a separate case, the said property is sold to them at a public auction and they were adjudged
as the sole and highest bidder. The said property was sold to satisfy the damages awarded to
respondents Villareal against spouses Sevilla, original owners of the disputed property, arising
from the murder of Jose Villareal.
Upon learning that the spouses Bonifacios claim of ownership over the subject
property had been seriously denied by the Makati RTC, petitioner stopped paying its rentals on
the subject property on March 2, 1999, in violation of the renewed Lease Contract.
The appellate court ordered petitioner A & C Minimart to pay respondents Villareal, a
monthly interest of 3% on the total amount of rental and other charges not paid on time, in
addition to the unpaid rental and other charges which the trial court ordered petitioner to pay.
ISSUE: Whether or not petitioner Minimart is obligated to pay the penalty interest of 3% per
month to respondents Villareal pursuant to the Contract of Lease.
HELD: No. Petitioner Minimart is not obligated to pay the penalty interest because the Lease
Contract, including the stipulation for the 3% penalty interest, was bilateral between petitioner
and Teresita Bonifacio. So respondents cannot succeed to any contractual rights which may
accrue to the spouses Bonifacio. Contracts produce an effect only between the parties who
execute them. A contract cannot be binding upon and cannot be enforced by one who is not
party to it.
Article 1311 of the Civil Code: Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations arising from the contract are
not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable
beyond the value of the property he received from the decedent.
Here, the Lease Contract was executed between the spouses Bonifacio and
petitioner. None of the respondents had taken part in the contract in question nor entered into a
contract with either the lessee or the lessor, as to an assignment of any right under the Lease
Contract in question. Respondents claim ownership over the subject property, but not as a
successor-in-interest of the spouses Bonifacios. They purchased the property in an
execution sale from the spouses Sevilla. Thus, respondents cannot succeed to any
contractual rights which may accrue to the spouses Bonifacio.
Although the respondents were adjudged to be entitled to rentals accruing from March
2, 1999, until the time the petitioner vacated the premises, the obligation to pay rent was not
derived from the Lease Contract, but from a quasi-contract. In the present case, the
spouses Bonifacio, who were named as the lessors in the Lease Contracts, are already
adjudged not to be the real owners of the subject property. In Civil Case, the Makati RTC

declared that the Deed of Sale, between the spouses Bonifacio and the spouses Sevilla was a
forgery and, hence, did not validly transfer ownership to the spouses Bonifacio.
Since the spouses Bonifacio are not the owners of the subject property, they cannot
unjustly benefit from it by collecting rent which should accrue to the rightful owners of the same.
Hence, the Makati RTC had set up a bank account where the rent due on the subject property
should be deposited and kept in trust for the real owners thereto.

renew can be inferred from their persistence to remain in the premises despite respondents
demand from them to vacate.
As a result, there was no obstacle to the sale of the subject lot by Cornelio to respondents
Eduardo and Jorge as the prohibitory clause under the lease contract was no longer in force.

SOLER V. CA
LLENADO V. LLENADO
Facts:

The subject of this controversy is a parcel of land consisting of 1,554 sq. m. located in Barrio
Malinta, Valenzula, Matro Manila and registered under the names of Eduardo and Jorge LLenado.
The subject lot once formed part, owned by, and registered under the name of their father Cornelio
Llenado.

On Dec. 2, 1975, Cornelio leased the subject lot to his nephew Romeo Llenado for a period of
5 yrs, renewable for another 5 yrs at the option of Cornelio.

On march 31, 1978, Cornelio, Romeo, and the latters father Orlando executed an agreement
whereby Romeo assigned all his rights to his father Orlando over the unexpired portion of the
aforesaid leased contract, and further agreed that Orlando shall have the option to renew the
contract for 3 yrs commencing from Dec. 3, 1980- 1983, renewable for another 4 yrs up to 1987.
That during that period the property cannot be sold, transferred, alienated or conveyed in whatever
manner to any 3rd party.

Shortly thereafter, Cornelio and Orlando entered into a supplementary agreement. Orlando
was given an additional option to renew the contract for an aggregate period of 10 yrs at 5 yr
intervals. The provision was inserted in order to comply with the requirements of Mobil Philippines
Inc. for the operation of the gasoline station subsequently built on the subject lot.

Upon the death of Orlando, his wife, Wenifreda, took over the operation of the gasoline
station. Meanwhile, Cornelio sold a lot to his children through a deed of absolute sale denominated
as Kasulatan sa Ganap na Bilihan for 160,000. As earlier stated, the subject lot was owned by
Eduardo and Jorge. Several months thereafter, Cornelio passed away.

Sometime in 1993, Eduardo informed Wenifreda of his desire to take over the subject lot
however the latter refused to vacate the premises prompting Eduardo to file a complaint of unlawful
detainer. MTC rendered decision in favor of Eduardo however the RTC reversed MTCs decision.
On appeal, CA reinstated MTCs decision hence this petition.
Issue: WON the sale of the subject lot by Cornelio is invalid for violation the prohibitory clause.
Held: No.

Petitioner claims that when Cornelio sold the subject lot to respondents Eduardo and Jorge,
the Lease was in full force and effect thus, the sale violated the prohibitory clause rendering it
invalid.

The petition lacks merit.

Under Art. 1311 of CC, the heirs are bound by the contract entered into by their predecessorsin-interest except when the rights and obligations are not transmissible by their nature, by their
stipulation, or by provisions of law.

In the instant case, the lease subsisited at the time of the sale of the subject lot but when
Orlando died on Nov 7, 1983, the lease was set to expire 26 days later or on Dec. 3, 1983, unless
renewed by the heirs of Orlando. While the option to renew is an enforceable right, it must
necessarily be first exercised to be given effect.

There is no dispute that the lessees were granted the option to renew the lease for another
4yrs yet there was never any positive act on the part of the petitioner before or after the termination
of the original period to show their exercise of such option. The silence of the lessees cannot be
taken to mean that they opted to renew the contract. Neither can the exercise of the option to

FACTS:

1986, Soler, a professional interior designer, met with Nida Lopez, manager of
COMBANK Ermita, for plans to renovate branch office

Soler agreed to render services, at a professional fee of P10,000, assured by Lopez to

be paid by the bank.

Soler asked for the blueprint of the building then paid a draftsman, engineer, architects
and suppliers for the layout, quotation and measurements based on the design the bank wanted.

Soler submitted the drawings and designs to Lopez on time.

Subsequently, Soler demanded payment but Lopez ignored.

Contentions by the parties:

a. Lopez replied that she was not entitled to pay because the designs did not conform to the
banks standard.

b.

COMBANK replied that there was no contract between Soler and COMBANK since Lopez
merely invited Soler to join a bid to renovate, subject to the approval of the head office.

c.

Soler contended that there was an offer and acceptance of professional services.

Soler filed for collection of professional fees and damages.

RTC ruled in favor of Soler but the CA ruled in favor of Lopez, saying COMBANK did
not give its consent under Art 1318.
ISSUE:

WON there was a perfected contract between Soler and COMBANK & Lopez?

HELD:

YES. SC REVERSED CA decision and REINSTATED RTC.

There was a PERFECTED contract between Soler and COMBANK.

a. Art 1305 states that a contract is a meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some service.
b. Art 1315 states that contracts are perfected by mere consent, and from that moment the
parties are bound not only to the fulfillment of what has been expressly stipulated but also to all
the consequences, which according to their nature, may be in keeping with good faith, usage
and law.
c.
Art 1318 states that there is no contract unless the requisites of consent, object and
cause are all present.

The STAGES of contract were complete

The contract was commenced, perfected and consummated when Soler and Lopez
met to discuss the details of the work, agreed to the professional fee of P10,000 for the designs
before the December 1986 board meetings and submitted the designs.
There was a perfected oral or consensual contract which is the second stage of a
contract, which happens the moment the parties agree on the terms of the contract.
Soler believed that she would be paid P10,000 upon submission of the designs in due
time.


Lopez had AUTHORITY to engage the services of Soler.
a.
During their meeting in 1986, Lopez even gave Soler specifications and blueprints of
what were to be renovated in the branch.
b.
Lopez also insisted that the designs be rushed to present to the bank.
c.
COMBANK permitted Lopez to act within the scope of her authority and is estopped
from denying such authority when Soler, in good faith, dealt with her as an officer of bank. (Art
1322)
d.
Lopez also refused to return the submitted designs, which means that these were useful
to her for the board meetings.

COLLECTION of professional fees and damages

Soler may be paid based on quantum meruit which recovers the reasonable value of
services rendered to prevent unjust enrichment.
Aside from P10,000, Soler is entitled to actual, compensatory and exemplary damages
for her expenses in hiring other professionals.

when the parties come to agree on the terms of the contract. (3) Consummation or
death, which is the fulfillment or performance of the terms agreed upon in the contract.

C.F. SHARP V. PIONEER INSURANCE

Facts:

On august 1990, Wilfredo and Hernando applied with CF sharp for a job as sandblasters
and painters in libya as advertised in a newspaper.
After passing the interviews and submitting the requirements, a Contract of Employment
was executed between them. After which, they were required to attends seminars, open
a bank account and were asked to return to CF sharp to ascertain the date of their
deployment.
After a month, wilfredo and hernando were yet to be deployed, prompting them to
request the release of the documents which CF SHARP allegedly refused to do. This led
the private respondents to file a complaint before the POEA.
The poea issued an order finding the petitioner guilty for violating the labor code when it
withheld or denied travel document to applicant workers before departure for monetary
and financial considerations other than those authorized in the code. The POEA
suspended the license of CF sharp until the return of the documents.
On march 1995 filed a complaint for breach of contract before the RTC. Pioneer
insurance also filed a cross claim againt CF sharp and its vice president, john rocha
based on an indemnity agreement that it would be jointly and severally liable for all the
damages, losses and costs that it would suffer as surety.
RTC rendered a judgment favouring the respondents .The trial court ruled that there was
a violation of the contract when C.F. Sharp failed to deploy and release the papers and
documents of respondents, hence, they are entitled to damages. The trial court likewise
upheld the cause of action of respondents against Pioneer Insurance, the former being
the actual beneficiaries of the surety bond.
The CA held that there is no breach of contract because no contract of employment was
perfected. However, it found petitioners liable for damages pursuant to art 21 of the civil
code. It also limited the liability of pioneer insurance to 150,000.

Under Article 1315 of the Civil Code, a contract is perfected by mere consent and from
that moment the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law.10
An employment contract, like any other contract, is perfected at the moment (1) the
parties come to agree upon its terms; and (2) concur in the essential elements thereof:
(a) consent of the contracting parties, (b) object certain which is the subject matter of
the contract and (c) cause of the obligation.
By the contract, C.F. Sharp, on behalf of its principal, International Shipping
Management, Inc., hired respondents as Sandblaster/Painter for a 3-month contract,
with a basic monthly salary of US$450.00. Thus, the object of the contract is the
service to be rendered by respondents on board the vessel while the cause of the
contract is the monthly compensation they expect to receive. These terms were
embodied in the Contract of Employment which was executed by the parties. The
agreement upon the terms of the contract was manifested by the consent freely given
by both parties through their signatures in the contract. Neither parties disavow the
consent they both voluntarily gave. Thus, there is a perfected contract of employment.

GARCIA V. THIO
FACTS

Issue: whether there was a perfected contract of employment?

Held: YES. SC sustained the RTCs ruling.

The contract of employment entered into by the plaintiffs and the defendant C.F. Sharp is
an actionable document, the same contract having the essential requisites for its validity.
It is worthy to note that there are three stages of a contract: (1) preparation, conception,
or generation which is the period of negotiation and bargaining ending at the moment of
agreement of the parties. (2) Perfection or birth of the contract, which is the moment

Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner
Carolyn M. Garcia a crossed check4 dated February 24, 1995 in the amount of
US$100,000 payable to the order of a certain Marilou Santiago
Thereafter, petitioner received from respondent every month (specifically, on March
24, April 26, June 26 and July 26, all in 1995) the amount of
US$3,0006 and P76,5007 on July 26,8 August 26, September 26 and October 26,
1995.
In June 1995, respondent received from petitioner another crossed check 9 dated June
29, 1995 in the amount ofP500,000, also payable to the order of Marilou Santiago.
Consequently, petitioner received from respondent the amount of P20,000 every
month on August 5, September 5, October 5 and November 5, 1995
According to petitioner, respondent failed to pay the principal amounts of the loans
(US$100,000 and P500,000) when they fell due.
Thus, on February 22, 1996, petitioner filed a complaint for sum of money and
damages in the RTC of Makati City, against respondent, seeking to collect the sums of
US$100,000, with interest thereon at 3% a month from October 26, 1995
and P500,000, with interest thereon at 4% a month from November 5, 1995, plus
attorneys fees and actual damages.
For both loans, no promissory note was executed since petitioner and respondent
were close friends at the time.15
Respondent denied that she contracted the two loans with petitioner and countered
that it was Marilou Santiago to whom petitioner lent the money.
She claimed she was merely asked by petitioner to give the crossed checks to
Santiago
She issued the checks for P76,000 and P20,000 not as payment of interest but to
accommodate petitioners request that respondent use her own checks instead of
Santiagos.

ISSUE:

February 28, 1997, the RTC ruled in favor of petitioner It found that respondent
borrowed from petitioner the amounts of US$100,000 with monthly interest of 3%
and P500,000 at a monthly interest of 4%:20
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract
of loan between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim
that [respondent] indeed borrowed money from her.
There is nothing in the record that shows that [respondent] received money from
[petitioner].
What is evident is the fact that [respondent] received a MetroBank [crossed] check dated
February 24, 1995 in the sum of US$100,000.00, payable to the order of Marilou
Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount
of P500,000.00, again payable to the order of Marilou Santiago, both of which were
issued by [petitioner]
The checks received by [respondent], being crossed, may not be encashed but
only deposited in the bank by the payee thereof, that is, by Marilou Santiago
herself.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and
delivery to the payee in contemplation of law since the latter is not the person who could
take the checks as a holder, i.e., as a payee or indorsee thereof, with intent to transfer
title thereto.
Neither could she be deemed as an agent of Marilou Santiago with respect to the checks
because she was merely facilitating the transactions between the former and [petitioner].
Whether or not there were contracts of loan?

RULING:

A loan is a real contract, not consensual, and as such is perfected only upon the delivery
of the object of the contract

This is evident in Art. 1934 of the Civil Code which 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 the delivery of the object of the contract .
(Emphasis supplied)

Upon delivery of the object of the contract of loan (in this case the money received by the
debtor when the checks were encashed) the debtor acquires ownership of such money
or loan proceeds and is bound to pay the creditor an equal amount.26
It is undisputed that the checks were delivered to respondent. However, these checks
were crossed and payable not to the order of respondent but to the order of a certain
Marilou Santiago
Thus the main question to be answered is: who borrowed money from petitioner
respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were made
payable to Santiago
She maintains that it was also upon respondents instruction that both checks were
delivered to her (respondent) so that she could, in turn, deliver the same to Santiago
Furthermore, she argues that once respondent received the checks, the latter had
possession and control of them such that she had the choice to either forward them to
Santiago (who was already her debtor), to retain them or to return them to petitioner
Delivery is the act by which the res or substance thereof is placed within the actual or
constructive possession or control of another

Although respondent did not physically receive the proceeds of the checks, these
instruments were placed in her control and possession under an arrangement.
Hence according to SC in agreeing with the contentions of the petitioner that there is
perfected contract of loan upon the receipt of the respondent of the 2 crossed checks
issued and delivered by the petitioner.

PANGAN V. PERRERAS (Essential Requisites)

FACTS:

Spouses Pangan were the owners of the lot and two-door apartment (subject properties)

On 1989, Consuelo agreed to sell to the respondents the subject properties for the price
of P540, 000.00. On the same day, Consuelo received P20,000.00 from the respondents as
earnest money, evidenced by a receipt that also included the terms of the parties agreement.

Three days later, or on June 5, 1989, the parties agreed to increase the purchase price
from P540, 000.00 to P580, 000.00.

In compliance with the agreement, the respondents issued two Far East Bank and Trust
Company checks payable to Consuelo in the amounts of P200, 000.00 and P250, 000.00.

On June 15, 1989. Consuelo, however, refused to accept the checks. She justified her
refusal by saying that her children (the petitioners-heirs) co-owners of the subject properties
did not want to sell the subject properties. For the same reason, Consuelo offered to return
the P20,000.00 earnest money she received from the respondents, but the latter rejected it.
Thus, Consuelo filed a complaint for consignation against the respondents.

FOR THE RESPONDENTS: They insisted on enforcing the agreement. They sought to
compel Consuelo and the petitioners-heirs (who were subsequently impleaded as co-defendants)
to execute a Deed of Absolute Sale over the subject properties.

FOR CONSUELO: She was justified in backing out from the agreement on the ground that
the sale was subject to the consent of the petitioners-heirs who became co-owners of the
property upon the death of her husband, Cayetano. Since the petitioners-heirs disapproved of
the sale, Consuelo claimed that the contract became ineffective for lack of the requisite
consent.
ISSUE:
Whether or not there was s perfected contract between the parties.
HELD:

YES. There was a perfected contract between the parties. That a thing is sold without the
consent of all the co-owners does not invalidate the sale or render it void.

Article 1318 of the Civil Code declares that no contract exists unless the following
requisites concur:

consent of the contracting parties; (Which is the requisite involved in this case)

object certain which is the subject matter of the contract; and

cause of the obligation established.

Article 493 of the Civil Code recognizes the absolute right of a co-owner to freely dispose of
his pro indiviso share as well as the fruits and other benefits arising from that share,
independently of the other co-owners. Also, The explicit terms of the June 8, 1989
receipt provide no occasion for any reading that the agreement is subject to the petitionersheirs favorable consent to the sale.

Thus, when Consuelo agreed to sell to the respondents the subject properties, what she in
fact sold was her undivided interest that, as quantified by the RTC, consisted of one-half interest,
representing her conjugal share, and one-sixth interest, representing her hereditary share.

The presence of Consuelos consent and, corollarily, the existence of a perfected contract
between the parties are further evidenced by the payment and receipt of P20,000.00, an earnest
money by the contracting parties common usage. The law on sales, specifically Article 1482 of
the Civil Code, provides that whenever earnest money is given in a contract of sale, it shall

be considered as part of the price and proof of the perfection of the contract. Although the
presumption is not conclusive, as the parties may treat the earnest money differently, there is
nothing alleged in the present case that would give rise to a contrary presumption.

In sum, the case contains no element, factual or legal, that negates the existence of a
perfected contract between the parties.
JARDINE DAVIS V. CA
Facts:
In 1992, when the country was at the height of the power crisis, petitioner Purefoods Corporation
decided to install two (2) 1500 KW generators in its food processing plant in San Roque, Marikina
City to remedy and curtail further losses due to the series of power failures.
A bidding for the supply and installation of the generators was held wherein only three (3) bidders
submitted bid proposals and gave bid bonds equivalent to 5% of their respective bids, as required.
They are respondent FAR EAST MILLS SUPPLY CORPORATION (FEMSCO), MONARK and
ADVANCE POWER. Purefoods, in a letter addressed to FEMSCO, confirmed the award of the
contract to it.
Immediately, FEMSCO submitted the required performance bond and contractors all-risk
insurance policy which PUREFOODS through its Vice President acknowledged in a letter.
FEMSCO also made arrangements with its principal and started the PUREFOODS project by
purchasing the necessary materials. PUREFOODS, on the other hand, returned FEMSCOs
Bidders Bond.
Later, however, PUREFOODS unilaterally canceled the award as "significant factors were
uncovered and brought to their attention which dictate the cancellation and warrant a total review
and re-bid of the project." Consequently, FEMSCO protested the cancellation of the award and
sought a meeting with PUREFOODS. However, before the matter could be resolved,
PUREFOODS already awarded the project and entered into a contract with JARDINE NELL, a
division of Jardine Davies, Inc. (JARDINE), which incidentally was not one of the bidders.
FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to cease
and desist from delivering and installing the two (2) generators at PUREFOODS. Its demand letters
unheeded, FEMSCO sued both PUREFOODS and JARDINE: PUREFOODS for reneging on its
contract, and JARDINE for its unwarranted interference and inducement.
The trial court rendered a decision ordering PUREFOODS to indemnify FEMSCO. The Court of
Appeals affirmed the decision of the trial court. It also ordered JARDINE to pay FEMSCO damages
for inducing PUREFOODS to violate the latters contract with FEMSCO.
PUREFOODS argues that its letter to FEMSCO was not an acceptance of the latter's bid proposal
and award of the project but more of a qualified acceptance constituting a counter-offer which
required
FEMSCO's
express acceptance.
Since
PUREFOODS
never
received
FEMSCOs acceptance, PUREFOODS was very well within reason to revoke its qualified
acceptance or counter-offer. Hence, no contract was perfected between PUREFOODS and
FEMSCO.
JARDINE asserts that the records are bereft of any showing that it had prior knowledge of the
supposed contract between PUREFOODS and FEMSCO, and that it induced PUREFOODS to
violate the latters alleged contract with FEMSCO.
ISSUE:

WON there existed a perfected contract between PUREFOODS and FEMSCO

WON there is any showing that JARDINE induced or connived with PUREFOODS to violate
the latter's contract with FEMSCO.
HELD:
Issue 1 and 2.
There was a perfected contract between the parties and the acceptance of the offer was
communicated which perfected the contract.
There can be no contract unless the following requisites concur: (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. A contract binds both contracting parties and has the force of law
between them.
Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made
by the offeror. From that moment, the parties are bound not only to the fulfillment of what has
been expressly stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage and law. To produce a contract, the acceptance must not
qualify the terms of the offer. However, the acceptance may be express or implied. For a
contract to arise, the acceptance must be made known to the offeror. Accordingly, the
acceptance can be withdrawn or revoked before it is made known to the offeror.
To resolve the dispute, there is a need to determine what constituted the offer and the
acceptance. Since petitioner PUREFOODS started the process of entering into the contract by
conducting a bidding, Art. 1326 of the Civil Code, which provides that "advertisements for
bidders are simply invitations to make proposals," applies. Accordingly, the Terms and
Conditions of the Bidding disseminated by petitioner PUREFOODS constitutes the
"advertisement" to bid on the project. The bid proposals or quotations submitted by the
prospective suppliers including respondent FEMSCO, are the offers. And, the reply of petitioner
PUREFOODS, the acceptance or rejection of the respective offers.
Quite obviously, the letter of petitioner PUREFOODS to FEMSCO constituted acceptance of
respondent FEMSCOs offer as contemplated by law. The tenor of the letter, i.e.,"This will
confirm that Pure Foods has awarded to your firm (FEMSCO) the project," could not be more
categorical. While the same letter enumerated certain "basic terms and conditions," these
conditions were imposed on the performance of the obligation rather than on the perfection of
the contract. In fine, the enumerated "basic terms and conditions" were prescriptions on how the
obligation was to be performed and implemented. They were far from being conditions imposed
on the perfection of the contract.
The decision to award the contract has already been made. The letter only serves as a
confirmation of such decision. Hence, to the Courts mind, there is already an acceptance made
of the offer received by Purefoods.
But even granting arguendo that the letter of petitioner PUREFOODS constituted a "conditional
counter-offer," respondent FEMCO's submission of the performance bond and contractor's allrisk insurance was an implied acceptance, if not a clear indication of its acquiescence to, the
"conditional counter-offer," which expressly stated that the performance bond and the
contractor's all-risk insurance should be given upon the commencement of the contract.
Even the tenor of the subsequent letter of petitioner PUREFOODS, i.e., "Pure Foods
Corporation is hereby canceling the award to your company of the project," presupposes that the
contract has been perfected. For, there can be no cancellation if the contract was not perfected
in the first place.
Issue 3.
While it may seem that petitioners PUREFOODS and JARDINE connived to deceive respondent
FEMSCO, the court finds no specific evidence on record to support such perception. Likewise,
there is no showing whatsoever that petitioner JARDINE induced petitioner PUREFOODS. The
similarity in the design submitted to petitioner PUREFOODS by both petitioner JARDINE and
respondent FEMSCO, and the tender of a lower quotation by petitioner JARDINE are insufficient
to show that petitioner JARDINE indeed induced petitioner PUREFOODS to violate its contract
with respondent FEMSCO.
SAN MIGUEL PROPERTIES V. HUANG
FACTS:
Petitioner offered two of its properties for P52,140,000.00 in cash. The offer was made to Atty.
Helena M. Dauz who was acting for respondent spouses as undisclosed principals. Atty. Dauz
signified her clients interest in purchasing the properties for the amount for which they were
offered by petitioner, under the following terms: the sum of P500,000.00 would be given as
earnest money and the balance would be paid in eight equal monthly installments from May to
December, 1994. However, petitioner refused the counter-offer.

On March 29, 1994, Atty. Dauz wrote another letter [3] proposing the following terms for the
purchase of the properties, viz:
This is to express our interest to buy your-above-mentioned property with an area of 1, 738 sq.
meters. For this purpose, we are enclosing herewith the sum of P1,000,000.00 representing
earnest-deposit money, subject to the following conditions.
1. We will be given the exclusive option to purchase the property within the 30 days from date of
your acceptance of this offer.
2. During said period, we will negotiate on the terms and conditions of the purchase; SMPPI will
secure the necessary Management and Board approvals; and we initiate the documentation if
there is mutual agreement between us.
3. In the event that we do not come to an agreement on this transaction, the said amount of
P1,000,000.00 shall be refundable to us in full upon demand. . . .
Isidro A. Sobrecarey, petitioners vice-president and operations manager for corporate real estate,
indicated his conformity to the offer by affixing his signature to the letter and accepted the "earnestdeposit" of P1 million. Upon request of respondent spouses, Sobrecarey ordered the removal of
the "FOR SALE" sign from the properties.
Atty. Dauz and Sobrecarey then commenced negotiations. During their meeting on April 8, 1994,
Sobrecarey informed Atty. Dauz that petitioner was willing to sell the subject properties on a 90-day
term. Atty. Dauz countered with an offer of six months within which to pay.
On April 14, 1994, the parties again met during which Sobrecarey informed Atty. Dauz that
petitioner had not yet acted on her counter-offer. This prompted Atty. Dauz to propose a four-month
period of amortization.
On April 25, 1994, Atty. Dauz asked for an extension of 45 days from April 29, 1994 to June 13,
1994 within which to exercise her option to purchase the property, adding that within that period,
"[we] hope to finalize [our] agreement on the matter."[4] Her request was granted.
On July 7, 1994, petitioner, through its president and chief executive officer, Federico Gonzales,
wrote Atty. Dauz informing her that because the parties failed to agree on the terms and conditions
of the sale despite the extension granted by petitioner, the latter was returning the amount of P1
million given as "earnest-deposit."[5]
On July 20, 1994, respondent spouses, through counsel, wrote petitioner demanding the execution
within five days of a deed of sale covering the properties. Respondents attempted to return the
"earnest-deposit" but petitioner refused on the ground that respondents option to purchase had
already expired.
On August 16, 1994, respondent spouses filed a complaint for specific performance against .
Trial Court ruled in favor of petitioner. CA reversed the decision contending that there was a
perfected contract.
Issue : WON there was a perfected contract. NO
RULING: In holding that there is a perfected contract of sale, the Court of Appeals relied on the
following findings: (1) earnest money was allegedly given by respondents and accepted by
petitioner through its vice-president and operations manager, Isidro A. Sobrecarey; and (2) the
documentary evidence in the records show that there was a perfected contract of sale.
With regard to the alleged payment and acceptance of earnest money, the Court holds that
respondents did not give the P1 million as "earnest money" as provided by Art. 1482 of the Civil
Code. They presented the amount merely as a deposit of what would eventually become the
earnest money or downpayment should a contract of sale be made by them. The amount was thus
given not as a part of the purchase price and as proof of the perfection of the contract of sale but
only as a guarantee that respondents would not back out of the sale.
The first condition for an option period of 30 days sufficiently shows that a sale was never
perfected. As petitioner correctly points out, acceptance of this condition did not give rise to a
perfected sale but merely to an option or an accepted unilateral promise on the part of respondents
to buy the subject properties within 30 days from the date of acceptance of the offer. Such option
giving respondents the exclusive right to buy the properties within the period agreed upon is
separate and distinct from the contract of sale which the parties may enter. All that respondents
had was just the option to buy the properties which privilege was not, however, exercised by them

because there was a failure to agree on the terms of payment. No contract of sale may thus be
enforced by respondents.
Furthermore, even the option secured by respondents from petitioner was fatally defective.
Under the second paragraph of Art. 1479, an accepted unilateral promise to buy or sell a
determinate thing for a price certain is binding upon the promisor only if the promise is supported
by a distinct consideration. Consideration in an option contract may be anything of value, unlike
in sale where it must be the price certain in money or its equivalent. There is no showing here of
any consideration for the option. Lacking any proof of such consideration, the option is
unenforceable.
The parties never got past the negotiation stage. The alleged "indubitable evidence" of a
perfected sale was nothing more than offers and counter-offers which did not amount to any
final arrangement containing the essential elements of a contract of sale. While the parties
already agreed on the real properties which were the objects of the sale and on the purchase
price, the fact remains that they failed to arrive at mutually acceptable terms of payment, despite
the 45-day extension given by petitioner.
The manner of payment of the purchase price is an essential element before a valid and binding
contract of sale can exist. Although the Civil Code does not expressly state that the minds of the
parties must also meet on the terms or manner of payment of the price, the same is needed,
otherwise there is no sale.
Thus, it is not the giving of earnest money, but the proof of the concurrence of all the essential
elements of the contract of sale which establishes the existence of a perfected sale. Case is
Dismissed.

LIMSON V. CA
FACTS:

Petitioner Lourdes Limson filed a complaint before the RTC alleging that in July 1978,
respondent spouses De Vera, through their agent Marcosa Sanchez, offered to sell to petitioner
a parcel of land in Barrio San Dionisio, Paraaque.

Respondent spouses informed her that they were the owners of the property.

On July 31, 1978, petitioner agreed to buy the property and gave P20,000 as earnest
money.

Respondent spouses signed a receipt and gave her a 10-day option period to
purchase the property.

Respondent informed her that the subject property was mortgaged to Emilio and Isidro
Ramos and asked her to pay the purchase price.

On Aug. 5, 1978, petitioner agreed to meet the Ramoses to consummate the

transaction, but due to failure of respondent and Ramoses to appear, no transaction was
formalized.

On Aug. 11, 1978, she claimed that she was willing and ready to pay the balance of
the purchase price, but the transaction did not materialize as the spouses failed to pay the back
taxes of the property.

On Sept. 5, 1978, she was surprised to learn from the agent of the spouses that the
property was the subject of a negotiation for the sale to Sunvar Realty Development
Corporation.

In their answer, respondent spouses maintained that the option to buy the property
had long expired and that there was no perfected contract to sell between them. They insisted
that they negotiated with Sunvar only after the expiration of the period given to petitioner and her
failure with her commitments thereunder.

RTC ruled in favor of petitioner.

On appeal, CA reversed the decision of the RTC; hence, the present appeal.

ISSUE: WON there was a perfected contract to sell between petitioner Limson and respondent De
Vera Spouses.
HELD:

No.

A scrutiny of facts as well as the evidence of the parties overwhelmingly leads to

the conclusion that the agreement between the parties was a CONTRACT of OPTION and
not contract to sell.

An option is a continuing offer or contract by which the owner stipulates with another that
the latter shall have the right to buy the property within a time certain or under, or in compliance
with certain terms and conditions or which gives to the owner of the property the right to sell or
demand a sale. It is sometimes called unaccepted offer. An option is not itself a purchase, but
merely secures the privilege to buy.

A contract, like contract to sell, involves the meeting of minds between 2 persons
whereby one binds himself, with respect to the other to give something or to render some service.

The Receipt provides:

Received from Lourdes Limson the sum of P20,000 xxx as earnest money to purchase a parcel of
land owned by Lorenzo de Vera xxx at the price of 34.00 cash subject to condition and stipulation
that have been agreed upon by the buyer and me which will form part of the receipt. Should
transaction of the property not materialize not on fault of the buyer, I obligate myself to return the
full amount of P20,000 earnest money with option to buy or forfeit on the fault of the buyer. Xxx.
This option to buy is good within 10 days xxx.

The receipt readily shows that the respondent and petitioner only entered into a
contract of option; a contract by which respondent agreed with petitioner that the latter shall have
the right to buy the formers property at a fixed price of P34.00/m2 within 10 days from July 31,
1978.

The consideration of P20,000 paid b petition was referred as earnest money.

However, a careful examination of words used indicated that the money is not earnest
money but OPTION MONEY.

EARNEST MONEY is part of the purchase price, while OPTION MONEY is the money
given as a distinct consideration for an option contract.

EARNEST MONEY given only when there is already sale, while OPTION MONEY
applies to a sale not yet perfected.

When the EARNEST MONEY is given, the buyer is bound to pay the balance, while
when the would-be buyer gives OPTION MONEY, he is not required to buy, but may even forfeit it
depending on the terms of the option.

There is nothing in the receipt which indicates that the P20,000 was part of the
purchase price. Moreover, it was not shown that there was a perfected sale between the
parties where earnest money was given.

Finally, when the petitioner gave the earnest money, the receipt did not reveal
that she was bound to pay the balance of the purchase price.

The rule is that except where a formal acceptance is required, although the acceptance
must be affirmatively and clearly made and evidenced by some acts or conduct communicated to
the offeror, it may be made either in a formal or informal manner.

On or before Aug. 10, 1978, the last day of the option period, no affirmative or clear
manifestation was made by petitioner to accept the offer. Certainly, there was no
concurrence of respondent spouses offer and petitioners acceptance within the option
period. Consequently, there was no perfected contract to sell.

On Aug. 11, 1978, the option period expired and the exclusive right to buy the property of
the respondent spouses ceased.

According to petitioner: Respondent extended the option period until Aug. 31, 1978
UNTENABLE because the extension must not be implied, but categorical and must show the clear
intention of the parties.

According to petitioner: When the respondent spouses sent her telegram demanding
full payment of the purchase price, it was an acknowledgement of their contract to sell
UNTENABLE because there was no contract to sell between the petitioner and respondent
spouses to speak of.

The option period having expired and acceptance was not effectively made by
petitioner, the purchase of subject property by SUNVAR was perfectly valid and entered into in
good faith.

TAYAG V. LACSON
Nature: Petition for review on certiorari of the Decision and the Resolution of respondent Court
of Appeals in CA-G.R. SP No. 44883.
Facts:

Respondents Angelica Tiotuyco Vda. de Lacson and her children were the registered
owners of three parcels of land located in Mabalacat, Pampanga registered in the Register of
Deeds of San Fernando, Pampanga. The properties, which were tenanted agricultural lands,
were administered by Renato Espinosa for the owner.

Mar. 17, 1996: A group of original farmers/tillers individually executed in favor of the
petitioner separate Deeds of Assignment in which the assignees assigned to the petitioner their
respective rights as tenants/tillers of the landholdings possessed and tilled by them for and in
consideration of P50.00 per square meter. The said amount was made payable "when the legal
impediments to the sale of the property to the petitioner no longer existed." The petitioner was
also granted the exclusive right to buy the property if and when the respondents, with the
concurrence of the defendants-tenants, agreed to sell the property. In the interim, the petitioner
gave varied sums of money to the tenants as partial payments, and the latter issued receipts for
the said amounts.

July 24, 1996: Petitioner called a meeting of the defendants-tenants to work out the
implementation of the terms of their separate agreements. However the defendants-tenants,
through Joven Mariano, wrote the petitioner stating that they were not attending the meeting and
instead gave notice of their collective decision to sell all their rights and interests, as
tenants/lessees, over the landholding to the respondents.

Aug. 19, 1996: Petitioner filed a complaint with the RTC of San Fernando, Pampanga,
against the defendants-tenants, as well as the respondents, for the court to fix a period within
which to pay the agreed purchase price of P50.00 per square meter to the defendants, as
provided for in the Deeds of Assignment. The petitioner also prayed for a writ of preliminary
injunction against the defendants and the respondents therein.
Issue: WON there is a perfected Option Contract.
Held: No

SC does not agree with the contention of the petitioner that the deeds of assignment
executed by the defendants-tenants are perfected option contracts.

An option is a contract by which the owner of the property agrees with another person that
he shall have the right to buy his property at a fixed price within a certain time. It is a condition
offered or contract by which the owner stipulates with another that the latter shall have the right
to buy the property at a fixed price within a certain time, or under, or in compliance with certain
terms and conditions, or which gives to the owner of the property the right to sell or demand a
sale. It imposes no binding obligation on the person holding the option, aside from the
consideration for the offer. Until accepted, it is not, properly speaking, treated as a contract. The
second party gets in praesenti, not lands, not an agreement that he shall have the lands, but the
right to call for and receive lands if he elects. An option contract is a separate and distinct
contract from which the parties may enter into upon the conjunction of the option.

In this case, the defendants-tenants-subtenants, under the deeds of assignment, granted to

the petitioner not only an option but the exclusive right to buy the landholding. But the grantors
were merely the defendants-tenants, and not the respondents, the registered owners of the

10

property. Not being the registered owners of the property, the defendants-tenants could not legally
grant to the petitioner the option, much less the "exclusive right" to buy the property. As the Latin
saying goes, "NEMO DAT QUOD NON HABET."

Petition is PARTIALLY GRANTED. Decision of the CA nullifying the Orders of the RTC is
AFFIRMED. The writ of injunction issued by the CA permanently enjoining the RTC from further
proceeding with Civil Case No. 10910 is hereby LIFTED and SET ASIDE.
Note:

In praesenti at the present time

NEMO DAT QUOD NON HABET - "no one can give what he does not have
FONTANA RESORT V. TAN
Facts:
In March 1997, respondent spouses Tan bought from petitioner RN Development Corp.
(RNDC) two class D shares of stock in petitioner Fontana Resort and Country petitioner
Fontana Resort and Country Club, Inc. worth P387,300.
-

These bought stocks entail a promise that Fontana Resort would construct a park with firstclass leisure facilities in Clark Field, Pampanga, to be called Fontana Leisure Park (FLP).

It was also promised that FLP would be fully developed and operational by the first quarter of
1998 and that Fontana Resort Class D shareholders would be admitted to one membership in
the country club, which entitled them to use park facilities and stay at a two-bedroom villa for
five (5) ordinary weekdays and two (2) weekends every year for free.

Two years later, respondents filed before the Securities and Exchange Commission a
complaint for the refund of purchase price of the bought stocks from the petitioners.

Respondents alleged that they had been deceived into buying Fontana Resorts shares
because of petitioners fraudulent misrepresentations. That construction of FLP turned out to
be still unfinished and the policies, rules, and regulations of the country club were obscure.
But FLP said, at that time, most of the amenities are operational.

The spouses narrated that they were able to book and avail themselves of free
accommodations at an FLP villa on a Saturday in the month of September. They requested
that an FLP Villa again be reserved for their free use on another Saturday in October for their
daughters 18th Birthday, but were refused by the petitioners saying that the petitioners could
only avail of 5 ORDINARY DAYS, 1 SATURDAY and 1 SUNDAY, annually, and that
respondents had consumed their free Saturday pass for the said year.
Spouses Tan, on the other hand, said that they were not informed of said rule regarding their
free accommodation at FLP, and had they known about it, they would not have availed
themselves of the free accommodations during Saturday last September. But this was
countered by Fontana Resort saying that the respondents were duly informed of the
privileges givent to them as seen in the propmotional materials for the country club, the
Articles of Incorporation, and the By-Laws of FRCCI.

In January 1999, respondents attempted once more to book and reserve an FLP villa for their
free use on April 1, 1999, a Thursday. Their reservation was confirmed by a certain Murphy
Magtoto, and that later, another employee called them that the said reservation was cancelled
because the FLP was already fully booked.

FLP countered the said allegation by saying that there was no confirmation to speak of
because as early as the start of the year, FLP is already fully booked, and that there was no
reservation number issued in favor of the Spouses Tan.

Hearing officer Bacalla of SEC ruled in favor of Spouses Tan by stating that the
respondents were induced to buy shares which actually are empty promises. CA ruled by
ordering Fontana Resort to provide for a refund to the spouses, hence, this petition before
the SC.

Issue: WON there Fontana Resort committed fraud during the selling of stocks which would
warrant the annulment or recission of the contract which the parties entered into?
RULING:
Article 1390 of the Civil Code states that contracts are voidable and annullable when the
consent is vitiated by mistake, violence, intimidation, undue influence or fraud. However,
they are susceptible of ratification.
-

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.

In this case respondents, in their complaint, cannot just simply pray for refund of the
purchase price they had paid for their shares without specifically mentioning the annulment
or recisision of the sale of said shares.

There is fraud when one party is induced by the other to enter into a contract, through and
solely because of the latters insidious words or machinations. But not all forms of fraud can
vitiate consent. Under Article 1330, fraud refers to dolo causante or causal fraud, in which,
prior to or simultaneous with the execution of a contract, one party secures the consent of
the other by using deception, without which such consent would not have been given. In
simple words, the fraud must be the determining cause of the contract, or must have cause
the consent to be given.

The general rule is that he who alleges fraud or mistake in a transaction must substantiate
his allegation with full, creal, and convincing evidence because the presumption is the
contract is has been entered into fairly and regularly.

In the case at bar, Spouses Tan have miserably failed to prove how petitioners employed
fraud to induce them to buy the subject shares. It can only be expected that petitioners will
advertise FLP in the most positive light in order to attract investor-members. There is no
showing that in their sales talk to respondents, petitioner actually used insidious words or
machination which led the respondents to buy the said shares. They appeared to be literate
could no be easily deceived into parting with a substantial amount of money.

What is apparent to us is that respondents knowingly and willingly consented to buying the
shares and were later on disappointed with the actual facilities and club membership
benefits.

Similarly, we find no evidence on record that petitioners defaulted on any of their

obligations that would have called for the rescission of the sale of the FRCCI shares to
respondents.

As to the issue of cancellation of the alleged confirmed reservation, the SC concluded that
there is mix-up in the reservation process of petitioners. This demonstrates mere
negligence on the part of the petitioners but not willful intention to deprive the spouses of
their benefits. More so, it does not constitute default on the part of FLP to warrant recission
of the contract. At most, Spouses Tan can only be awarded Nominal Damages as to the
mix-up in the reservation process.

11

Respondents complaint sufficiently alleged a cause of action for the annulment of the
contract. However, it was dismissed for lack of merit since they were not able to establish by
preponderance of evidence that they are entitled to such annulment.

THE ROMAN CATHOLIC CHURCH V. PANTE (Sema)

FELICIANO V. ZALDIVAR (Duran)
SWIFT FOODS V. MATEO, JR.
Nature: Petition for Review of the CA Nov. 15 Decision
Facts:

Petitioner Swift Foods, Inc., a corporation engaged in the manufacture, sale, and distribution
of animal feeds entered a Trucking Agreement in 1984 with spouse respondents Jose and Irene
Mateo, businessmen engaged in dealership in poultry and supply and trucking business in San
Jose Del Monte, Bulacan.

The trucking agreement stipulates that respondents trucks hauled Swift feeds from its central
office in Mandaluyong City to its various warehouses in Luzon wherein respondents are to deposit
cash bonds of P100,000.00 per truck.

Several years after, only one truck remained in contract but still petitioner maintained
respondents case bond which the latter requested the return of the excess but petitioner denied.

In 1995, same parties entered into a warehousing agreement wherein petitioners feeds are to
be stored in respondents warehouses for a period of 2years. The agreement required respondents
to post bond to secure compliance with the obligation, however, both parties proceeded with the
enforcement of the contract on July of same year without compliance of such requirement.

For documenting and monitoring movements of the stocks, two documents were issued: the
Daily Warehouse Stock Report (DSWD) for inventory of incoming stocks and Warehouse Issue Slip
(WIS) which serves as the receipt of released stocks. WIS contains signature of the sales
personnel as proof of receiving said stocks according to the stipulation of such agreement.
Petitioners National Sales Manager would sometimes inspect the warehouses and such
documents.

By February 1996, respondents delivered three land titles to petitioner as compliance of the
warehousing agreement.

An inventory conducted by Swift personnels on May 9, 1996 revealed one missing bag which
respondents paid on the same day. On May 20, 1996 petitioner informed respondents that it was
terminating the contract effective May 13, 1996 due to the apparent violations of the respondents of
the warehousing agreement.

Under paragraph V of the Warehousing Agreement, petitioner should only release stocks to
Swifts sales personnel after they present a clearance to withdraw said stocks to ensure that stocks
would only be released to authorized individuals and for payments to be collected accordingly.

Contrary to said provisions, Petitioner released stocks without necessary clearance as

evidenced by the WIS which did not contain signatures of said personnels. Absence of said
clearance, petitioner alleged that respondents have violated the contract. Said unauthorized
release cost Swift a shortage of 2Million which respondents should be held accountable. Swift
retained respondents 3 land titles pending full compliance citing paragraph XII of the agreement
which states that the bond shall answer for whatever obligation the warehouse operator may
have.

Respondents denied having violated the terms of the agreement as proof they presented a
hand written letter from the sales rep of swift which instructed that the stocks be released directly to
customers. Respondents maintained that the sales rep should answer for the cash shortages

thereby demanding swift to return their three land titles which swift denied causing the former to
file a complaint against the latter for the surrender of the certificates of title with damages and
alleged that the cash shortage is attributable to petitioners own negligence in the supervision of
its sales personnel.

Petitioner answered that it falls upon the respondents to be aware that the sales personnels
acted violative of the procedure set in the agreement.

RTC ruled in favour of petitioner and ordered respondents to return the tittles and held that
there was no breach as they merely followed instructions of the sales rep and that as
respondents were first time warehouse operators, hence they could not have presumed
knowledge of the warehouse operating procedures and that it is incumbent upon swift to conduct
trainings and seminars for respondents. Further, RTC ruled the payment of 100k as attys fees
and 200k as moral damages as well as costs of suit.

CA ruled no basis for the termination of the agreement and found basis for the 200k but
deleted the Attys fess for lack of basis.
ISSUE: WON there was a breach of the contract committed by the respondents.
HELD:

The contract stated that the petitioner to pay a monthly 18k rental fee and in turn
respondents are accountable for all the stocks duly received and released by them. Further, it
provided procedures that respondents to observe. The contract is clear and having respondents
acted to the contrary is a clear violation of the contract.

Respondents admitted that there were times when they released stocks directly to
customers and not to the sales rep, when asked why, it further admitted that it did not read much
less understand the warehouse agreement and simply followed all the verbal instructions given
to him by the sales rep. such admittance clearly is a violation.

The court further ruled that ones newness to the business is not an excuse to violate clear
terms of ones contract. A seasoned businessman such as the respondents should have been
alert to the dangers of contravening the clear terms of a contract. Respondents should not have
deviated from the from the procedure provided in the contract in the absence of any amendment
therein as ordinary diligence required him to inquire with the head office whether changes being
introduced were proper or authorized.

Respondents total reliance on the work of the petitioners sales personnel, contrary to the
contrary to the contract is a clear act of negligence. The ruled reiterated that a contract is the law
between the parties and those who are guilty of negligence in the performance of their
obligations are liable for damages.

the reasoning of the respondents that it did not read nor understand the contract is a total
ignorance of the obligations under the warehousing agreement and an abdication of his duties.

The court further stated that unless a contracting party cannot read or dos not understand
the language in which the agreement was written, he is presumed to know the import of his
contract and is bound thereby. Not having alleged any of the foregoing, respondent has no
excuse for his actions. It was his nonchalance to his contractual duties and obligations, which
facilitated the malfeasance of petitioners personnel and exposed petitioner to undue risks.

Ruled that respondents are liable for 150k as nominal damages payable to petitioner, 1ook
be returned with interest, and moral damages awarded to respondents in the amount of 50k.
VILLEGAS V. RURAL BANK OF TANJAY
Facts:

Sometime in June, 1982, [petitioners], spouses Joaquin and Emma Villegas, obtained an
agricultural loan of P350T from [respondent] Rural Bank of Tanjay, Inc. The loan was secured by
a real estate mortgage

For failure of [petitioners] to pay the loan upon maturity, the mortgage was extrajudicially
foreclosed. At the foreclosure sale, [respondent], being the highest bidder, purchased the
foreclosed properties for P367,596.16. Thereafter, the Sheriff executed in favor of [respondent] a

12

certificate of sale, which was subsequently registered with the Registry of Deeds of Dumaguete
City.

[Petitioners] failed to redeem the properties within the one-year redemption period.

In May, 1987, [respondent] and [petitioner] Joaquin Villegas, through his attorney-in-fact
Marilen Victoriano, entered into an agreement denominated as Promise to Sell, whereby
[respondent] promised to sell to [petitioners] the foreclosed properties for a total price
of P713,312.72, payable within a period of five (5) years.

Upon the signing of the agreement, [petitioners] gave [respondent] the sum of P250,000.00 as
down payment. [Petitioners], however, failed to pay the first yearly installment, prompting
[respondent] to consolidate its ownership over the properties. Accordingly, old TCT was cancelled
and a new one was issued in [respondents name. Thereafter, [respondent] took possession of the
properties. Hence, the action by [petitioners for declaration of nullity of loan and mortgage
contracts, recovery of possession of real property, accounting and damages and, in the alternative,
repurchase of real estate] commenced on January 15, 1990.

RTC dismissed the petition and CA affirmed with modifications that the down payment of
250,000 be returned to the petitioners.

Petitioners insist on the nullity of the loan and mortgage contracts. Unabashedly, petitioners
admit that the loan (and mortgage) contracts were made to appear as several sugar crop loans not
exceeding P50,000.00 each even if they were not just so the respondent rural bank could grant
and approve the same pursuant to Republic Act (R.A.) No. 720, the Rural Banks Act. In short,
petitioners aver that the sugar crop loans were merely simulated contracts and, therefore, without
any force and effect.
Issue: WON petitioners may recover possession of the mortgaged properties. NO
Held:

Articles 1345 and 1346 of the Civil Code are the applicable laws, and they unmistakably
provide:
Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when
the parties do not intend to be bound at all; the latter, when the parties conceal their true
agreement.
Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it
does not prejudice a third person and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy binds the parties to their real agreement.

Given the factual antecedents of this case, it is obvious that the sugar crop loans were
relatively simulated contracts and that both parties intended to be bound thereby. There are two
juridical acts involved in relative simulation the ostensible act and the hidden act. The ostensible
act is the contract that the parties pretend to have executed while the hidden act is the true
agreement between the parties. To determine the enforceability of the actual agreement between
the parties, we must discern whether the concealed or hidden act is lawful and the essential
requisites of a valid contract are present.

In this case, the juridical act which binds the parties is the loan and mortgage
contracts, i.e., petitioners procurement of a loan from respondent. Although these loan and
mortgage contracts were concealed and made to appear as sugar crop loans to make them fall
within the purview of the Rural Banks Act, all the essential requisites of a contract were present.
However, the purpose thereof is illicit, intended to circumvent the Rural Banks Act requirement in
the procurement of loans. Consequently, while the parties intended to be bound thereby, the
agreement is void and inexistent under Article 1409 of the Civil Code.

In arguing that the loan and mortgage contracts are null and void, petitioners would impute all
fault therefor to respondent. Yet, petitioners averments evince an obvious knowledge and
voluntariness on their part to enter into the simulated contracts. We find that fault for the nullity of

the contract does not lie at respondents feet alone, but at petitioners as well. Accordingly,
neither party can maintain an action against the other, as provided in Article 1412 of the Civil
Code:

Petitioners did not come to court with clean hands. They admit that they never planted
sugarcane on any property, much less on the mortgaged property. Yet, they eagerly accepted
the proceeds of the simulated sugar crop loans. Petitioners readily participated in the ploy to
circumvent the Rural Banks Act and offered no objection when their original loan of P350,000.00
was divided into small separate loans not exceeding P50,000.00 each. Clearly, both petitioners
and respondent are in pari delicto, and neither should be accorded affirmative relief as against
the other.

In all, petitioners explicitly recognized respondents ownership over the subject property
and merely resorted to the void contract argument after they had failed to reacquire the property
and a new title thereto in respondents name was issued.

We are not unmindful of the fact that the Promise to Sell ultimately allows petitioners to
recover the subject property which they were estopped from recovering under the void loan and
mortgage contracts. However, the Promise to Sell, although it involves the same parties and
subject matter, is a separate and independent contract from that of the void loan and mortgage
contracts.

To reiterate, under the void loan and mortgage contracts, the parties, being in pari delicto,
cannot recover what they each has given by virtue of the contract. Neither can the parties
demand performance of the contract. No remedy or affirmative relief can be afforded the parties
because of their presumptive knowledge that the transaction was tainted with illegality. The
courts will not aid either party to an illegal agreement and will instead leave the parties where
they find them.

Consequently, the parties having no cause of action against the other based on a void
contract, and possession and ownership of the subject property being ultimately vested in
respondent, the latter can enter into a separate and distinct contract for its alienation. Petitioners
recognized respondents ownership of the subject property by entering into a Promise to Sell,
which expressly designates respondent as the vendor and petitioners as the vendees. At this
point, petitioners, originally co-owners and mortgagors of the subject property, unequivocally
acquiesced to their new status as buyers thereof. In fact, the Promise to Sell makes no
reference whatsoever to petitioners previous ownership of the subject property and to the void
loan and mortgage contracts. On the whole, the Promise to Sell, an independent contract, did
not purport to ratify the void loan and mortgage contracts.

By its very terms, the Promise to Sell simply intended to alienate to petitioners the subject
property according to the terms and conditions contained therein. Article 1370 of the Civil Code
reads:
Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall
prevail over the
former.

Thus, the terms and conditions of the Promise to Sell are controlling.
Paragraph 5 of the Promise to Sell provides:
5) Provided further, that in case of a delay in any yearly installment for a period of
ninety (90) days, this sale
will become null and void [without] further effect or validity; and
provided further, that payments made shall
be reimbursed (returned to the VENDEE less
interest on the account plus additional 15% liquidated
damages and charges.
As stipulated in the Promise to Sell, petitioners are entitled to reimbursement of
the P250,000.00 down
payment. We agree with the CAs holding on this score:

WHEREFORE, premises considered, the petition is hereby DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 40613 is hereby AFFIRMED. Costs against petitioners.

VILLACERAN V. DE GUZMAN (Yaphockun)

13

MARTINEZ V. CA
Facts:
1. Feb 1981: private respondents Godofredo and his sister Manuela De la Paz, entered into an oral
contract with petitioner Rev. Fr. Dante Martinez for the sale of a lot at the Villa Fe Subdivision in
Cabanatuan City for the sum of P15T.
2. After giving the P3T downpayment, Fr. Martinez started the construction of a house and began
paying the real estate taxes on said property.
3. Jan 1983: Fr. Martinez completed payment of the lot for which private respondents De la Paz
executed two documents but the latter never delivered the Deed of Sale they promised to
petitioner.
4. Oct 1981: a Deed of Absolute Sale with Right to Repurchase was executed by private
respondents De la Paz who sold 3 lots with right to repurchase the same within 1 year to spouses
Reynaldo and Susan Veneracion for the sum of P150T. One of the lots sold was the lot previously
sold to Fr. Martinez. Spouses Veneracion never took actual possession of any of these lots during
the period of redemption, but all titles to the lots were given to him.
5. June1983: a Deed of Absolute Sale in favour of spouses Veneracion was executed over the two
lots.
6. Jan 1984: private respondent Reynaldo V. asked a certain Reyes (Fr. Martinez neighbour), who
the owner of the building erected on the subject lot was. Reyes told him that it was Feliza,
petitioners mother, who was in possession of the property. Reynaldo told respondent Godofredo
about the matter and was assured that Godofredo would talk to Feliza. Based on that assurance,
spouses Veneracion registered the lots with the Register of Deeds of Cabanatuan on Mar 1984.
7. Mar 1986: Fr. Martinez discovered that the lot he was occupying with his family had been sold to
the spouses Veneracion after receiving a letter from private respondent Reynaldo claiming
ownership of the land and demanding that they vacate the property and remove their
improvements thereon.
8. MTC rendered a decision: Fr. Dante Martinez and his mother are the rightful possessors and in
good faith and in concept of owner, thus cannot be ejected from the land in question.
9. RTC rendered its decision finding spouses Veneracion as the true owners of the lot in dispute by
virtue of their prior registration with the Register of Deeds.
10. On appeal, CA affirmed the RTC decision and declared spouses Veneracion to be owners of
the lot in dispute as they were the first registrants in good faith, in accordance with Art. 1544, CC.
CA held that Fr. Martinez failed to overcome the presumption of good faith for the following
reasons: (1) when private respondent Veneracion discovered the construction on the lot, he
immediately informed private respondent Godofredo about it and relied on the latters assurance
that he will take care of the matter and (2) the sale between Fr. Martinez and De la Paz was not
notarized, as required by Arts. 1357 and 1358, CC, thus it cannot be said that the private
respondents Veneracion had knowledge of the first sale.
Issue: Whether or not notarization is an indispensable requirement in the execution of a deed of
sale.
Ruling:
On Double Sale
1. This case involved a double sale and Art. 1544,CC provides that where immovable property is
the subject of a double sale, ownership shall be transferred (1) to the person acquiring it who in
good faith first recorded it to the Registry of Property; (2) in default thereof, to the person who in
good faith was first in possession; and (3) in default thereof, to the person who presents the oldest
title.
2. The requirement of the law, where title to the property is recorded in the Register of Deeds, is
two-fold: acquisition in good faith and recording in good faith. To be entitled to priority, the second
purchaser must not only prove prior recording of his title but that he acted in good faith, i.e., without
knowledge or notice of a prior sale to another. The presence of good faith should be ascertained
from the circumstances surrounding the purchase of the land.

3. With regard to the first sale to them, Reynaldo Veneracion testified that 18 days before the
execution of the first Deed of Sale with Right to Repurchase, he inspected the premises and
found it vacant. However, this was belied by the testimony of Engr. Minor, then DPWH building
inspector, that he conducted on Oct 6, 81 an ocular inspection of the lot in dispute in the
performance of his duties as a building inspector to monitor the progress of the construction of
the building subject of the building permit issued in favor of petitioner, and that he found it 100 %
completed. In the absence of contrary evidence, he is to be presumed to have regularly
performed his official duty. Thus, as early as Oct 1981, spouses Veneracion already knew that
there was construction being made on the property they purchased.
Equitable Mortgage
4. CA overlooked the fact that the first contract of sale between the private respondents showed
that it was in fact an equitable mortgage.The requisites for considering a contract of sale with a
right of repurchase as an equitable mortgage are (1) that the parties entered into a contract
denominated as a contract of sale and (2) that their intention was to secure an existing debt by
way of mortgage. In case of doubt, a contract purporting to be a sale with right to repurchase
shall be construed as an equitable mortgage.
5. In this case, the following circumstances indicate that the private respondents intended the
transaction to be an equitable mortgage and not a contract of sale:
(1) Private respondents Veneracion never took actual possession of the 3 lots;
(2) Private respondents De la Paz remained in possession of the Melencio lot which was coowned by them and where they resided; (3) During the period between the first sale and the
second sale to private respondents Veneracion, they never made any effort to take possession
of the properties; and
(4) when the period of redemption had expired and private respondents Veneracion were
informed by the De la Pazes that they are offering the lots for sale to another person for P200T,
they never objected. To the contrary, they offered to purchase the two lots for P180T when they
found that a certain Mr. Tecson was prepared to purchase it for the same amount.
Second sale:
6. With regard to the second sale, which was the true contract of sale between the parties, it
should be noted that the SC in several cases, has ruled that a purchaser who is aware of facts
which should put a reasonable man upon his guard cannot turn a blind eye and later claim that
he acted in good faith. Veneracion merely relied on the assurance of private respondent
Godofredo, who was not even the owner of the lot in question, that he would take care of the
matter. This did not meet the standard of good faith.
Articles 1357 and 1358
7. CAs reliance on Articles 1357 and 1358, CC to determine spouses Veneracions lack of
knowledge of petitioners ownership of the disputed lot is erroneous.
+Articles 1357 and 1358, in relation to Art. 1403(2), CC require that the sale of real
property must be in writing for it to be enforceable.
+It need not be notarized.
+If the sale has not been put in writing, either of the contracting parties can compel the
other to observe such requirement. This is what petitioner Fr. Martinez did when he
repeatedly demanded that a Deed of Absolute Sale be executed in his favor by private
respondents De la Paz.
+There is nothing in the above provisions which require that a contract of sale of realty
must be executed in a public document.
Decision
8. The decision of the CA was reversed and a new one was rendered:
(1) declaring as null and void the deed of sale executed by private respondents De la Paz in
favor of spouses Veneracion;

14

(2) ordering private respondents De la Paz to execute a deed of absolute sale in favor of
petitioner Rev. Fr. Dante Martinez;
(3) ordering private respondents De la Paz to reimburse spouses Veneracion the amount the latter
may have paid to the former;
(4) ordering the Register of Deeds of Cabanatuan City to cancel TCT No. T-44612 and issue a
new one in the name of petitioner Rev. Fr. Dante Martinez; and
(5) ordering private respondents to pay petitioner jointly and severally the sum of P20T as
attorneys fees and to pay the costs of the suit.

VILLEGAS V. ARJONA (Tomawis)

SBC filed a complaint for a sum of money against LIC based on the "Money, Securities and
Payroll Robbery Policy," and against PISA as an alternative defendant based on the CSS. SBC
prayed that it be indemnified by either one of the defendants for PHP9,900,000.00.
PISA filed a motion to dismiss, invoking paragraph 5(e) of the PRA and claimed that SBC's right
of action against PISA was subject to at least two suspensive conditions. First, SBC could not
recover the PHP9.9-million from the insurer, defendant LIC; and second, the two security guards
facing criminal prosecution for robbery in band must first be convicted and found to have been
involved in the robbery or otherwise found by a competent court to have been negligent.
According to PISA, SBC's complaint made no averment that (a) there had been a final judgment
rejecting SBC's claim against the insurer; or (b) that the two PISA guards had been convicted of
the charge of robbery in band, or had been found by a competent court to have been involved in
the alleged conspiracy or to have been negligent in connection with the robbery. Hence, PISA
concluded that SBC's complaint against it was premature and should be dismissed. SBC
opposed PISA's motion to dismiss, arguing that the latter's interpretation of the PRA was
erroneous.
The RTC granted PISA's motion, and dismissed the case. On appeal, the Court of Appeals
affirmed the dismissal.

SECURITY BANK V. CA

Issue:
WON the condition could not be recovered from the insurer of the PRA requires final judgment
against SBCs claim against LIC.

TEOCO V. METROBANK (Delicana)

MENESES V. VENTUROZO (Degamo)

Facts:
petitioner Security Bank Corporation (SBC) and Philippine Industrial Security Agency Corporation
(PISA) entered into a "Contract of Security Services" (CSS) wherein PISA undertook to secure,
guard, and protect the personnel and property of SBC. A part of paragraph 9 of the CSS provides
that PISA shall be liable for any loss, damage or injury suffered by [SBC] where such loss, damage
or injury is due to the negligence or willful act of the guards or representatives of [PISA].
On March 12, 1992, the Taytay Branch Office of SBC was robbed PHP12,927,628.01. Among the
suspects in the robbery were two regular security guards of PISA.
At the time, SBC Taytay Branch was covered by a "Money, Securities and Payroll Robbery Policy"
with Liberty Insurance Corporation (LIC), wherein the latter endeavored to indemnify the former
against "loss of money, payroll and securities that may result from robbery or any attempt thereof
within the premises of SBC's Taytay Branch Office, up to the maximum amount of
PHP9,900,000.00." The insurance policy provided, however, that LIC would not be liable if the loss
was caused by any dishonest, fraudulent or criminal act of SBC officers, employees or by its
authorized representative
Subsequently, SBC and PISA entered into a Post-Robbery Agreement (PRA) whereby PISA paid
PHP3,027,728.01, which was the difference between the total amount lost and the maximum
amount insured. Paragraph 5 of the PRA specifically states that PISA's payment was subject to
express terms and conditions, one of which was (e) The parties hereto further agree that this
agreement and/or payment of the whole amount of P3,027,728.01, shall not affect or prejudice,
directly or indirectly, whatever cause of action SBC may have against PISA and whatever claim or
defense the latter may have against SBC, if the maximum recoverable proceeds of the insurance
covering the loss suffered by SBC could not be recovered from the insurer. Further, it is agreed that
should Security Guards Wilson Taca and Ernesto Mariano be absolved from the charge of robbery
in band and/or are found by the proper court not to have been involved at all in the alleged
conspiracy, and that it is duly established through legal action before the competent court that their
failure to prevent the robbery was not due to their, or their PISA co-guards' negligence and/or willful
act, whatever installments may have been paid by PISA under this Agreement shall be reimbursed
with legal interest.
SBC filed a claim with LIC. LIC denied the claim for indemnification, on the ground that the loss
suffered by SBC fell under the general exceptions to the policy, in view of the alleged involvement
of PISA's two security guards.
SBC informed PISA of the denial of the former's insurance claim with LIC and thereafter sought
indemnification of the unrecovered amount of PHP9,900,000.00. PISA denied the claim contending
that such claim is premature

Ruling:
No.
Contrary to the interpretation of PISA to the condition could not be recovered from the insurer
requires final judgment. The Supreme Court held that reading the clause as requiring a final
judgment is a strained interpretation and contrary to settled rules of interpretation of contracts.
Paragraph 5(e) only requires that the proceeds "could not be recovered from the insurer," and
does not state that it should be so declared by a court, or even with finality. In determining the
signification of terms, words are presumed to have been used in their primary and general
acceptance, and there was no evidence presented to show that the words used signified a
judicial adjudication. Indeed, if the parties had intended the non-recovery to be through a judicial
and final adjudication, they should have stated so. In its primary and general meaning,
paragraph 5(e) would cover LIC's extrajudicial denial of SBC's claim.
The supreme Court explained that In sustaining PISA, the Court of Appeals relied on the
argument that paragraph 5(e) of the PRA was intended to benefit PISA. The appellate court held
that the phrase "could not be recovered from the insurer" gives rise to doubt as to the intention
of the parties, as it is capable of two interpretations: either (1) the insurer rejects the written
demand for indemnification by the insured; or (2) a court adjudges that the insurer is not liable
under the policy. The Court of Appeals then interpreted the antecedent circumstances prior to
the institution of Civil Case manifesting SBC's agreement to suspend the filing of the suit against
PISA until after the case against LIC has been decisively terminated.
In contrary to the, CA interpretation, Events would show that SBC's suit against LIC was not a
mere afterthought after LIC had rejected its claim. Rather, SBC exercised its right of action
against PISA pursuant to paragraph 5(e) of the PRA. This interpretation is consistent with settled
canons of contract interpretation, has the import that would make SBC's right of action effectual,
and would yield the greatest reciprocity of interests. If some stipulations of any contract should
admit of several meanings, it shall be understood as bearing that import which is most adequate
to render it effectual. 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. When it
is impossible to settle doubts by the rules established in the preceding articles, and the doubts
refer to incidental circumstances of an onerous contract, the doubt shall be settled in favor of the
greatest reciprocity of interests.
The Supreme Court hold that SBC's suit against PISA was not premature, and the dismissal of
the action as against PISA was improper. the petition is GRANTED. The assailed Decision of the

15

Court of Appeals as well as its Resolution is REVERSED. The civil case is REMANDED to the
RTC, NCJR, Makati City for further proceedings.

REDONDO V. JIMENEZ
FACTS:

Petitioner Adoracion Redondo, with her siblings, Vicente, Celerina, and Efren Redondo,
were the registered co-owners of a 282 square-meter residential lot situated in Bacoor, Cavite.

Adoracions interest in the lot consisting of a one-fourth pro indiviso share, or about 70
square meters, appears in the title.

This had been sold and conveyed to herein respondent Angelina Jimenez, the widow of
Efren Redondo.

The sale was evidenced by a notarized Deed of Absolute Sale of a Portion of Land
showing a consideration of P3,000.

On November 27, 1992, Adoracion filed with the RTC a Complaint for annulment of sale
and recovery of ownership with damages. She claimed that she was deceived into signing the
deed of sale when all she wanted was to borrow money from Angelina.

The trial court dismissed the complaint. On appeal, the Court of Appeals affirmed the
court a quo with modification that the attorneys fees and litigation expenses awarded to the
defendant are deleted.

Hence, the present petition.

ISSUE:
The Court of Appeals committed glaring errors contrary to the clear mandate of law and
jurisprudence justifying reexamination of its decision and resolution by this Honorable Tribunal.
(Is the transaction between Adoracion and Angelina an equitable mortgage; Is the said sale
nevertheless voidable on account of alleged fraud)
HELD:

Petitioner Adoracion contends that the alleged sale was in fact an equitable mortgage
since
(1) the consideration was grossly inadequate;
(2) she paid the realty taxes on the property;
(3) she remained in possession of the property; and
(4) she was in financial distress at the time of the transaction.
She insists that the deed of sale was tainted with fraud and thus voidable. She cites her low
educational attainment, inability to speak English, advanced age, and sickness, as reasons for her
weakness of mind. She also argues that the presumption of regularity of a public document does
not apply when the circumstances surrounding its notarization are suspect.

Respondent Angelina, however, counters that Adoracion failed to adduce convincing

evidence to rebut the presumption of regularity of the notarization of the deed of sale. Angelina
further avers that Adoracion failed to prove by competent evidence her alleged weakness of mind,
which supposedly vitiated her consent. Angelina also maintains she was the one who had been
paying the realty taxes on the property.

Is the transaction between Adoracion and Angelina an equitable mortgage?

ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following
cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument extending the
period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the performance of any other obligation.

xxxx

In this case, none of the instances enumerated above attended the assailed
transaction between Adoracion and Angelina.

We are unable to sustain Adoracions claim that the consideration of P3,000 for the
absolute sale of a 70-square meter residential lot in suburban Bacoor, Cavite was grossly
inadequate. Records show that the market value in 1981 of the entire property, consisting of 282
square meters, was only P22,560. Thus, her one-fourth share would have roughly amounted to
a market value of about P5,640, not exactly grossly disproportionate to the selling price
of P3,000. The sale should be viewed in light of Adoracions own admission that she was in dire
financial straits at the time of the transaction. This explains why the selling price was below the
actual market value of the property.

Adoracion also claims that she paid the real estate taxes on the property. However,
the Tax Receipts on record clearly indicate that it was Angelina who had been paying the realty
taxes on the property from the time of the sale until the filing by Adoracion of the Complaint for
its annulment. Adoracion, on the other hand, failed to present any evidence to support her
claim .

As to Adoracions bare allegation of continuous possession of the disputed property it

must be noted that Adoracion is a sister-in-law of Angelina. Adoracion was already advanced in
age and ailing, with no husband or children to look after her. Angelina, on the other hand,
already had a comfortable place to live in and was faring better than Adoracion so this explains
why Angelina opted not to assert her superior right to possession of the said property. Such
mere tolerated possession is not enough to prove that the transaction between the parties was
an equitable mortgage.

In sum, we are convinced the transaction entered into by Adoracion and Angelina in
1981 was indeed a sale, not an equitable mortgage.

Is the said sale nevertheless voidable on account of alleged fraud?

Article 1390 of the Civil Code provides:
ART. 1390. The following contracts are voidable or annullable, even though there may have
been no damage to the contracting parties:
xxxx
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.
These contracts are binding, unless they are annulled by a proper action in court.

Based on the foregoing, when the consent of one of the contracting parties is vitiated
by fraud, the contract is voidable.

However, even granting that Adoracions consent to the sale was indeed obtained
through fraud, the action to annul the contract is subject to a prescriptive period of four years
from the time of the discovery of the fraud. The time of discovery is the date when the deed of
sale was registered with the Register of Deeds because registration constitutes constructive
notice to the world.

In the instant case, records show that the deed of sale was registered on July 5, 1988.
Hence, Adoracions action to annul the sale on the ground of fraud prescribed on July 5, 1992.
Therefore, when Adoracion filed on November 27, 1992 her Complaint for annulment of the sale,
the action had long prescribed.

With the effective prescription of the action to annul the sale on the ground of fraud, it
would now be futile to discuss the issue of presumption of regularity of the execution of the
notarized deed of sale.

The petition is DENIED. Court of Appeals decision which affirmed with modification the
RTC decision AFFIRMED.

16

Facts:
1. On February 14, 2002, Duran (respondent) offered to sell a laptop computer for the
sum of P15, 000.00 to Duarte (petitioner) thru the help of a common friend, Josephine
Dy.
2. Since petitioner was undecided, respondent left the laptop with petitioner for two
days.
3. On February 16, 2002, petitioner told respondent that she was willing to buy the
laptop on installment.
Respondent agreed; thus, petitioner gave P5, 000.00 as initial payment and promised
to pay P3,000.00 on February 18, 2002 and P7,000.00 on March 15, 2002.
4. On February 18, 2002, petitioner gave her second installment of P3, 000.00 to Dy,
who signed the handwritten receipt allegedly made by petitioner as proof of payment.
But when Dy returned to get the remaining balance on March 15, 2002, petitioner
offered to pay only P2, 000.00 claiming that the laptop was only worth P10, 000.00.
5. Due to the refusal of petitioner to pay the remaining balance, respondent thru
counsel sent petitioner a demand letter dated July 29, 2002.
6. Petitioner, however, denied writing the receipt dated February 18, 2002, and
receiving the demand letter dated July 29, 2002.
Petitioner claimed that there was no contract of sale; insisting that the laptop was not
sold to her but was given as a security for respondent's debt.
Petitioner gave the money (5,000 and additional 3,000) under agreement that the
amounts she lent to respondent would be considered as partial payments for the
laptop in case she decides to buy it, but she decided not to buy the laptop.
7. Respondent filed a suit for collection of money against petitioner before MTCC
Cebu.
8. MTCC rendered a Decision in favor of respondent. It found the receipt dated
February 18, 2002 and the testimonies of respondent and his witness, Dy, sufficient to
prove that there was a contract of sale between the parties
9. On appeal, RTC of Cebu reversed the MTCC Decision. RTC found the alleged
receipt issued by the witness Josephine Dy [in] her own handwriting a mere product
of machination, trickery and self-serving. It shows no proof of conformity or
acknowledgment on the part of the defendant that indeed she agreed on the
stipulations. Thus, it cannot be given any credence and ultimately, did not bind her.
Elena Jane Duarte v. Miguel Samuel A.E. Duran (2011)

10. Upon Petition for Review with the CA, the CA reversed the RTC Decision and
reinstated the Decision of the MTCC. Hence, the petition

17

11. Petitioner argued that there was no contract of sale due to respondent's failure to
present a written contract of sale. She claims that under the Statute of Frauds, a
contract of sale to be enforceable must be in writing.

SPS. MALLARI vs. PRUDENTIAL BANK

[G.R. No. 197861. June 5, 2013. 697 SCRA 555]

Issue: Whether there was a contract of sale between the parties. YES

DOCTRINE:
Unconscionable interest rates The SC has ruled in the following cases that the
interest is unconscionable: 3% and 3.81% per month on a P10 Million loan (Toring
vs. Sps. Ganzon-Olan, 2008); 66% per annum or 5.5% per month on a P500
thousand loan (Medel vs. Court of Appeals, 1998) and; 7% and 5% or 84% and 60%
per annum (Chua vs. Timan, 2008). The Court has also ruled affirmed in a plethora
of cases that stipulated interest rates of 3% per month and higher are excessive,
unconscionable and exorbitant.

Ruling: The court ruled that there was a contract of sale, and the absence of a written
contract of sale does not mean otherwise.
A contract of sale is perfected the moment the parties agree upon the object of the sale,
the price, and the terms of payment.
Once perfected, the parties are bound by it whether the contract is verbal or in writing
because no form is required.
Contrary to the view of petitioner, the Statute of Frauds does not apply in the present
case as this provision applies only to executory, and not to completed, executed or
partially executed contracts.
In this case, the contract of sale had been partially executed because the
possession of the laptop was already transferred to petitioner and the partial
payments had been made by her. Thus, the absence of a written contract is not fatal
to respondent's case. Respondent only needed to show by a preponderance of
evidence that there was an oral contract of sale, which he did by submitting in evidence
his own affidavit, the affidavit of his witness Dy, the receipt dated February 18, 2002 and
the demand letter dated July 29, 2002.
As regards the receipt dated February 18, 2002, the court agrees with petitioner that it
is not an actionable document. Hence, there was no need for her to deny its
genuineness and due execution under oath. Nonetheless, we find no error on the part of
the CA in giving full weight and credence to it since it corroborates the testimonies of
respondent and his witness Dy that there was an oral contract of sale between the
parties.
With regard to petitioner's denial of the receipt of the demand letter dated July 29,
2002, we believe that this did not overturn the presumption of regularity that the letter
was delivered and received by the addressee in the regular course of the mail
considering that respondent was able to present the postmaster's certification stating
that the letter was indeed sent to the address of petitioner. Bare denial of receipt of a
mail cannot prevail over the certification of the postmaster, whose official duty is to send
notices of registered mail.
As we see it then, the evidence submitted by respondent weigh more than petitioner's
bare denials. Other than her denials, no other evidence was submitted by petitioner to
prove that the laptop was not sold but was only given as security for respondent's loan.
What adds doubt to her story is the fact that from the first week of March 2002,
the time she allegedly decided not to buy the laptop, up to the time the instant
case was filed against her, she did not exert any effort to recover from
respondent the payment of the alleged loan. Her inaction leads us to conclude
that the alleged loan was a mere afterthought.

Conscionable interest rates In this case 23% per annum or 2% per month as
agreed upon by petitioner and respondent bank is NOT unconscionable. It is much
lower than the above mentioned unconscionable interest rates and there is no
similarity of factual milieu.
FACTS:
[Decided 2013] In 1984, Petitioner Florentino Mallari obtained a loan from respondent
Prudential Bank in the amount of P300,000.00. It was subject to an interest rate of
21% per annum and, in case of default, a penalty of 12% per annum of the total
amount due and attorneys fees equivalent of 15% of the total amount due. This was
secured by a Deed of Assignment (DOA) over petitioner's time deposit account. In
1989, Spouses Florentino and Aurea Mallari obtained another loan from respondent
for P1.7 million, stipulating interest of 23% per annum with the same penalties in case
of default. This was secured by Real Estate Mortgage (REM).
Petitioners defaulted. When computed in 1992, the total debt was P571,218.54 and
P2,991,294.82 for the first and second loans respectively.
Respondent tried to extrajudicially foreclose the mortgage. Petitioners on the other
hand tried to nullify the mortgage claiming that the Bank imposed onerous terms and
conditions and that the bank was unilaterally increasing its charges and interest over
and above those stipulated. The Bank claimed that the basis for its computation was
all written in the Promissory Notes.
The RTC ruled in favor of respondent bank. CA affirmed.
ISSUE: Whether or not an interest rate of 23% per annum and 12% per annum
penalty is unconscionable.
HELD:
No. The Court has also ruled affirmed in a plethora of cases that stipulated interest
rates of 3% per month and higher are excessive, unconscionable and exorbitant.
thus, the 23% per annum interest rate imposed on petitioners loan in this case can by
no means be considered excessive or unconscionable. And neither is the 12% per
annum penalty charge unconscionable as the counrt found in DBP vs. Family Foods
(2009) and Ruiz vs. Court of Appeals (2003).

18

Heirs of Manuel Uy Ek Liong v. Mauricia Meer Castillo, Heirs of Buenaflor C.

Umali, represented by Nancy Umali, et al., G.R. No. 176425, June 5, 2013.
contract; contract of sale; disqualification of a lawyer to buy under Article 1491;
elements of a contract; autonomous nature; obligatory nature of contract; interpretation;
courts have no authority to alter a contract by construction or to make a new contract for
the parties; penal clause; generally substitutes the indemnity for damages and the
payment of interests in case of non-compliance. 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.
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.
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.
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 does not contain. Indeed,
courts will not relieve a party from the adverse effects of an unwise or unfavorable
contract freely entered into.
An accessory undertaking to assume greater liability on the part of the obligor in case of
breach of an obligation, the foregoing stipulation is a penal clause which serves to
strengthen the coercive force of the obligation and provides for liquidated damages for
such breach. The obligor would then be bound to pay the stipulated indemnity without
the necessity of proof of the existence and the measure of damages caused by the
breach.
In obligations with a penal clause, the penalty generally substitutes the indemnity for
damages and the payment of interests in case of non-compliance. Usually incorporated
to create an effective deterrent against breach of the obligation by making the
consequences of such breach as onerous as it may be possible, the rule is settled that
a penal clause is not limited to actual and compensatory damages.

Spouses Ignacio F. Juico and Alice P. Juico, Petitioners, -versus- China

Banking Corporation, Respondent, G.R. No. 187678, April 10, 2013
Ruling: The escalation clause is void because it granted China Banking the power to
impose an increased rate of interest without a written notice to the Juico couple and
their written consent.
Definition: Escalation clauses refer to stipulations allowing an increase in the interest
rate agreed upon by the contracting parties.
Doctrine: There is nothing inherently wrong with escalation clauses which are valid
stipulations in commercial contracts to maintain fiscal stability and to retain the value
of money in long term contracts.
But an escalation clause is void where the creditor unilaterally determines and
imposes an increase in the stipulated rate of interest without the express conformity
of the debtor.
Facts:
Spouses Ignacio and Alice Juico got a loan from China Banking Corporation as
evidenced by 2 promissory notes. The loan was secured by a Real Estate Mortgage
over the Juico couples property located at White Plains, Quezon City. The notes
contained the following escalation clause stating that the interest rate would change
every month based on the prevailing market rate:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or
decrease as the case may be, the interest rate/service charge presently stipulated in
this note without any advance notice to me/us in the event a law or Central Bank
regulation is passed or promulgated by the Central Bank of the Philippines or
appropriate government entities, increasing or decreasing such interest rate or
service charge.
The Juicos failed to pay the monthly amortizations due. As of February 23, 2001, the
amount due on the two promissory notes totaled P19,201,776.63 representing the
principal, interests, penalties and attorneys fees. The mortgaged property was sold at
public auction, with China Bank as the highest bidder for the amount of Php
10,300,000.
After the auction, China Bank filed a collection case with the Regional Trial Court
(RTC) of Makati City for Php 8,901,776.63, the amount of deficiency after applying
the proceeds of the foreclosure sale to the mortgage debt.
In their Answer, the Juicos admitted their debt but claimed that the principal of the
loan was already paid when the mortgaged property was extrajudicially foreclosed
and sold for Php 10,300,000. They contended that should they be held liable for any
deficiency, it should be only for Php 55,000 representing the difference between the
total outstanding obligation of Php 10,355,000 and the bid price of Php 10,300,000.

19

At the trial, China Bank presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant,
as witness. She testified that she handled the account of the Juicos and assisted them
in processing their loan application. She called them monthly to inform them of the
prevailing rates to be used in computing interest due on their loan.
On cross-examination, Ms. Yu reiterated that the interest rate changes every month
based on the prevailing market rate and she notified the Juicos of the prevailing rate by
calling them monthly before their account becomes past due. When asked if there was
any written authority from the Juicos to increase the interest rate unilaterally, Ms. Yu
answered that they signed a promissory note indicating that they agreed to pay interest
at the prevailing rate.
In defense, Ignacio Juico testified that before the loans release, he was required to sign
a blank promissory note and was informed that the interest rate on the loan will be
based on prevailing market rates. On cross-examination, Ignacio testified that he is a
Doctor of Medicine and also engaged in the business of distributing medical supplies.
Ignacio admitted having read the promissory notes and that he is aware of his obligation
under them before he signed them.
The RTC rules against the Juicos
The trial court held that:
(1) Ignacios claim that he signed the promissory notes in blank cannot negate or
mitigate his liability since he admitted reading the Promissory Notes before signing
them.
(2) Considering the substantial amount involved, it is unbelievable that the Juicos threw
all caution to the wind and simply signed the documents without reading and
understanding the contents.
The Court of Appeals affirms RTC ruling

Philippine National Bank v. Sps. Enrique Manalo & Rosalinda Jacinto, et al.,
G.R. No. 174433, February 24, 2014
Article 1308 of the Civil Code; principle of mutuality of contracts. 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 of the Civil Code.Philippine National
Bank v. Sps. Enrique Manalo & Rosalinda Jacinto, et al., G.R. No. 174433, February
24, 2014.
Contracts; a contract where there is no mutuality between the parties partakes of the
nature of a contract of adhesion. The Court has declared that 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. We spoke clearly on this in
Philippine Savings Bank v. Castillo, to wit: The unilateral determination and imposition
of the increased rates is violative of the principle of mutuality of contracts under Article
1308 of the Civil Code, which provides that [t]he contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them. A perusal of
the Promissory Note will readily show that the increase or decrease of interest rates
hinges solely on the discretion of petitioner. It does not require the conformity of the
maker before a new interest rate could be enforced. 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 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. Philippine National Bank v. Sps. Enrique Manalo &
Rosalinda Jacinto, et al., G.R. No. 174433, February 24, 2014.
Interest; interest should be computed from the time of the judicial or extrajudicial
demand; rule when there is no demand. Indeed, the Court said in Eastern Shipping
Lines, Inc. v. Court of Appeals that interest should be computed from the time of the
judicial or extrajudicial demand. However, this case presents a peculiar situation, the
peculiarity being that the Spouses Manalo did not demand interest either judicially or
extrajudicially. In the RTC, they specifically sought as the main reliefs the nullification
of the foreclosure proceedings brought by PNB, accounting of the payments they had
made to PNB, and the conversion of their loan into a long term one. In its judgment,
the RTC even upheld the validity of the interest rates imposed by PNB. In their
appellants brief, the Spouses Manalo again sought the nullification of the foreclosure
proceedings as the main relief. It is evident, therefore, that the Spouses Manalo made
no judicial or extrajudicial demand from which to reckon the interest on any amount to
be refunded to them. Such demand could only be reckoned from the promulgation of

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the CAs decision because it was there that the right to the refund was first judicially
recognized. Nevertheless, pursuant to Eastern Shipping Lines, Inc. v. Court of Appeals,
the amount to be refunded and the interest thereon should earn interest to be computed
from the finality of the judgment until the full refund has been made. Philippine National
Bank v. Sps. Enrique Manalo & Rosalinda Jacinto, et al., G.R. No. 174433, February 24,
2014.
Interest; Monetary Board Circular No. 799 reduced the interest rates from 12% per
annum to 6% per annum. Anent the correct rates of interest to be applied on the amount
to be refunded by PNB, the Court, in Nacar v. Gallery Frames and S.C. Megaworld
Construction v. Parada, already applied Monetary Board Circular No. 799 by reducing
the interest rates allowed in judgments from 12% per annum to 6% per annum.
Philippine National Bank v. Sps. Enrique Manalo & Rosalinda Jacinto, et al., G.R. No.
174433, February 24, 2014.
Interest; prospective application of Monetary Board Circular No. 799. According to
Nacar v. Gallery Frames, MB Circular No. 799 is applied prospectively, and judgments
that became final and executory prior to its effectivity on July 1, 2013 are not to be
disturbed but continue to be implemented applying the old legal rate of 12% per annum.
Hence, the old legal rate of 12% per annum applied to judgments becoming final and
executory prior to July 1, 2013, but the new rate of 6% per annum applies to judgments
becoming final and executory after said date. Philippine National Bank v. Sps. Enrique
Manalo & Rosalinda Jacinto, et al., G.R. No. 174433, February 24, 2014.

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