ObliCon Case Digest 1

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SLU-COL: OBLIGATIONS AND CONTRACTS
SOURCES OF OBLIGATIONS
A. LAW
1. LEUNG BEN VS. O’BRIEN, 38 PHIL 182

2. PELAYO VS. LAURON, 12 PHIL 453
3. NIKKO HOTEL VS. REYES, 452 SCRA 532
4. ST. MARY’S ACADEMY VS. CARPITANOS, FEB. 6, 2002
5. REGINO VS. PANGASINAN COLLEGE, NOV. 18, 2004
6. COSMO ENTERTAINMENT VS. LA VILLE, AUG. 20,
2004
LEUNG BEN; plaintiff,

VS. P. J. O’BRIEN, JAMES A. OSTRAND and GEO. R. HARVEY,
Judges of First Instance of the City of Manila, defendants
April 6, 1918
FACTS:
On December 12, 1917, an action was instituted in the Court of First
Instance of Manila by P.J. O’Brien to recover of Leung Ben the sum of
P15,000, all alleged to have been lost by the plaintiff to the defendant in a
series of gambling, banking, and percentage games conducted during the two
or three months prior to the institution of the suit. The plaintiff asked for an
attachment against the property of the defendant, on the ground that the
latter was about to depart from the Philippines with intent to defraud his
creditors. This attachment was issued. The provision of law under which this
attachment was issued requires that there should be a cause of action arising
upon contract, express or implied. The contention of the petitioner is that the
statutory action to recover money lost at gaming is not such an action as is
contemplated in this provision, and he insists that the original complaint
shows on its face that the remedy of attachment is not available in aid
thereof; that the Court of First Instance acted in excess of its jurisdiction in
granting the writ of attachment; that the petitioner has no plain, speedy, and
adequate remedy by appeal or otherwise; and that consequently the writ of
certiorari supplies the appropriate remedy for this relief.
ISSUE:
Whether or not the statutory obligation to restore money won at
gaming is an obligation arising from contract, express or implied.
RULING:
Yes. In permitting the recovery money lost at play, Act No. 1757 has
introduced modifications in the application of Articles 1798, 1801, and 1305
of the Civil Code.
The first two of these articles relate to gambling contracts, while article
1305 treats of the nullity of contracts proceeding from a vicious or illicit
consideration. Taking all these provisions together, it must be apparent that
the obligation to return money lost at play has a decided affinity to
contractual obligation; and the Court believes that it could, without violence
to the doctrines of the civil law, be held that such obligations is an innominate
quasi-contract.
It is however, unnecessary to place the decision on this ground. In the

opinion of the Court, the cause of action stated in the complaint in the court
below is based on a contract, express or implied, and is therefore of such
nature that the court had authority to issue the writ of attachment. The
Digested by: (1-A) B. Mendoza, S. Mappang, F. Dangli, A. Gandeza, J. Apolonio, E. Santiago,

J. Achazo, M. Urbano, D. Torres, D. Padilla, L. Ramos, C. Laminato, O. Dela Cruz
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application for the writ of certiorari must therefore be denied and the
proceedings dismissed.
LAW AS A SOURCE OF OBLIGATION
ARTURO PELAYO, plaintiff-appellant

VS. MARCELO LAURON, defendant-appellee
12 Phil 453
January 12, 1909
FACTS:
On November 23, 1906, Arturo Pelayo, a physician, filed a complaint

against Marcelo and Juana Abella. He alleged that on October 13, 1906 at
night, Pelayo was called to the house of the defendants to assist their
daughter-in-law who was about to give birth to a child. Unfortunately, the
daughter-in-law died as a consequence of said childbirth. Thus, the defendant
refuses to pay. The defendants argue that their daughter-in-law lived with her
husband independently and in a separate house without any relation, that her
stay there was accidental and due to fortuitous event.
ISSUE:
Whether or not the defendants should be held liable for the fees
demanded by the plaintiff upon rendering medical assistance to the
defendants’ daughter-in-law.
RULING:
No. The Court held that the rendering of medical assistance is one of
the obligations to which spouses are bound by mutual support, expressly
determined by law and readily demanded. Therefore, there was no obligation
on the part of the in-laws but rather on the part of the husband who is not a
party.
Decision affirmed

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NIKKO HOTEL MANILA GARDEN AND RUBY LIM

VS. ROBERTO REYES a.k.a. “AMAY BISAYA”
2005 Feb 28
G.R. No. 154259
FACTS:
In the evening of October 13, 1994, while drinking coffee at the lobby
of Hotel Nikko, respondent was invited by a friend, Dr. Filart to join her in a
party in celebration of the birthday of the hotel’s manager. During the party
and when respondent was lined-up at the buffet table, he was stopped by
Ruby Lim, the Executive Secretary of the hotel, and asked to leave the party.
Shocked and embarrassed, he tried to explain that he was invited by Dr.
Filart, who was herself a guest. Not long after, a Makati policeman
approached him and escorted him out of her party.
Ms. Lim admitted having asked respondent to leave the party but not
under the ignominious circumstances painted by Mr. Reyes, that she did the
act politely and discreetly. Mindful of the wish of the celebrant to keep the
party intimate and exclusive, she spoke to the respondent herself when she
saw him by the buffet table with no other guests in the immediate vicinity.
She asked him to leave the party after he finished eating. After she had
turned to leave, the latter screamed and made a big scene.
Dr. Filart testified that she did not want the celebrant to think that she
invited Mr. Reyes to the party.
Respondent filed an action for actual, moral and/or exemplary damages

and attorney’s fees. The lower court dismissed the complaint. On appeal, the
Court of Appeals reversed the ruling of the trial court, consequently imposing
upon Hotel Nikko moral and exemplary damages and attorney’s fees. On
motion for reconsideration, the Court of Appeals affirmed its decision. Thus,
this instant petition for review.
ISSUES:
Whether or not Ms. Ruby Lim is liable under Articles 19 and 21 of the
Civil Code in asking Mr. Reyes to leave the party as he was not invited by the
celebrant thereof and whether or not Hotel Nikko, as the employer of Ms.
Lim, be solidarily liable with her.

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RULING:
The Court found more credible the lower court’s findings of facts.
There was no proof of motive on the part of Ms. Lim to humiliate Mr. Reyes
and to expose him to ridicule and shame. Mr. Reyes’ version of the story was
unsupported, failing to present any witness to back his story. Ms. Lim, not
having abused her right to ask Mr. Reyes to leave the party to which he was
not invited, cannot be made liable for damages under Articles 19 and 21 of
the Civil Code. Necessarily, neither can her employer, Hotel Nikko, be held
liable as its liability springs from that of its employees.
When a right is exercised in a manner which does not conform with the
norms enshrined in Article 19 and results in damage to another, a legal wrong
is thereby committed for which the wrongdoer must be responsible. Article
21 states that any person who willfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
Without proof of any ill-motive on her part, Ms. Lim’s act cannot
amount to abusive conduct.
The maxim “Volenti Non Fit Injuria” (self-inflicted injury) was upheld by
the Court, that is, to which a person assents is not esteemed in law as injury,
that consent to injury precludes the recovery of damages by one who has
knowingly and voluntarily exposed himself to danger.
ST. MARY’S ACADEMY, petitioner,

VS. WILLIAM CARPITANOS and LUCIA S. CARPITANOS, GUADA
DANIEL, JAMES DANIEL II, JAMES DANIEL, SR., and VIVENCIO
VILLANUEVA, respondents
February 6, 2002
FACTS:
From February 13 to 20, 1995, defendant-appellant St. Mary’s
Academy of Dipolog City conducted an enrollment drive for the school year
1995-1996. As a student of St. Mary’s Academy, Sherwin Carpitanos was part
of the campaigning group. Accordingly, Sherwin, along with other high
school students were riding in a Mitsubishi jeep owned by defendant Vivencio
Villanueva on their way to Larayan Elementary School, Larayan, Dapitan City.
The jeep was driven by James Daniel II then 15 years old and a student of the
same school. Allegedly, the latter drove the jeep in a reckless manner and as
a result the jeep turned turtle. Sherwin Carpitanos died as a result of the
injuries he sustained from the accident.
The trial court ordered the defendants, St. Mary’s Academy principally
liable and the parents of James Daniel as subsidiarily liable for damages.
The Court of Appeals affirmed the decision of the trial court. The Court
of Appeals held petitioner St. Mary’s Academy liable for the death of Sherwin
Carpitanos under Articles 218 and 219 of the Family Code, pointing out that

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petitioner was negligent in allowing a minor to drive and in not having a
teacher accompany the minor students in the jeep.
ISSUE:
Whether or not the appellant St. Mary’s Academy is principally liable
for damages for the death of Sherwin.
RULING:
No. Under Article 219 of the Family Code, if the person under custody
is a minor, those exercising special parental authority are principally and
solidarily liable for damages caused by the acts or omissions of the
unemancipated minor while under their supervision, instruction, or custody.
However, for petitioner to be liable, there must be a finding that the act
or omission considered as negligent was the proximate cause of the injury
caused because the negligence must have a causal connection to the
accident.
Respondents Daniel spouses and Villanueva admitted that the

immediate cause of the accident was not the negligence of petitioner or the
reckless driving of James Daniel II, but the detachment of the steering wheel
guide of the jeep.
Hence, liability for the accident, whether caused by the negligence of

the minor driver or mechanical detachment of the steering wheel guide of the
jeep, must be pinned on the minor’s parents primarily. The negligence of
petitioner St. Mary’s Academy was only a remote cause of the accident.
Between the remote cause and the injury, there intervened the negligence of
the minor’s parents or the detachment of the steering wheel guide of the jeep.
Considering that the negligence of the minor driver or the detachment of the
steering wheel guide of the jeep owned by respondent Villanueva was an
event over which petitioner St. Mary’s Academy had no control, and which
was the proximate cause of the accident, petitioner may not be held liable for
the death resulting from such accident.
KHRISTINE REA M. REGINO,

Assisted and Represented by ARMANDO REGINO, Petitioner,
VS. PANGASINAN COLLEGES OF SCIENCE AND TECHNOLOGY,
RACHELLE A. GAMUROT and ELISSA BALADAD, Respondents
G.R. No. 156109
November 18, 2004
FACTS:
Petitioner Khristine Rea M. Regino was a first year computer science
student at Respondent Pangasinan Colleges of Science and Technology
(PCST) who went to college mainly through the financial support of her
relatives. During the second semester of school year 2001-2002, she enrolled
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in logic and statistics subjects under Respondents Rachelle A. Gamurot and
Elissa Baladad, respectively, as teachers.
In February 2002, PCST held a fund raising campaign dubbed the

“Rave Party and Dance Revolution,” the proceeds of which were to go to the
construction of the school’s tennis and volleyball courts. Each student was
required to pay for two tickets at the price of P100 each. The project was
allegedly implemented by recompensing students who purchased tickets with
additional points in their test scores; those who refused to pay were denied
the opportunity to take the final examinations.
Financially strapped and prohibited by her religion from attending

dance parties and celebrations, Regino refused to pay for the tickets. On
March 14 and March 15, 2002, the scheduled dates of the final examinations
in logic and statistics, her teachers -- Respondents Rachelle A. Gamurot and
Elissa Baladad -- allegedly disallowed her from taking the tests.
On April 25, 2002, petitioner filed, as a pauper litigant, a Complaint for

damages against PCST, Gamurot and Baladad.
On May 30, 2002, respondents filed a Motion to Dismiss on the ground

of petitioner’s failure to exhaust administrative remedies. According to
respondents, the question raised involved the determination of the wisdom of
an administrative policy of the PCST; hence, the case should have been
initiated before the proper administrative body, the Commission of Higher
Education (CHED).
In her Comment to respondents’ Motion, petitioner argued that prior

exhaustion of administrative remedies was unnecessary, because her action
was not administrative in nature, but one purely for damages arising from
respondents’ breach of the laws on human relations. As such, jurisdiction lay
with the courts.
On July 12, 2002, the RTC dismissed the Complaint for lack of cause of
action. In its dispositive portion, the assailed Order dismissed the Complaint
for “lack of cause of action” without, however, explaining this ground.
Aggrieved, petitioner filed the present Petition on pure questions of law.
ISSUE:
Whether or not respondent school has an obligation to petitioner as its
student.
RULING:
Yes. The obligation on the part of the school has been established in
Magtibay v. Garcia, Licup v. University of San Carlos and Ateneo de Manila
University v. Garcia, in which the Court held that, barring any violation of the
rules on the part of the students, an institution of higher learning has a
contractual obligation to afford its students a fair opportunity to complete the
course they seek to pursue.
Such contract is by no means an ordinary one. In Non, the Court

stressed that the school-student contract “is imbued with public interest,
considering the high priority given by the Constitution to education and the
grant to the State of supervisory and regulatory powers over all educational
institutions.” Sections 5 (1) and (3) of Article XIV of the 1987 Constitution
provide:
“The State shall protect and promote the right of all citizens to quality
education at all levels and shall take appropriate steps to make such
declaration accessible to all.”

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“Every student has a right to select a profession or course of study, subject to

fair, reasonable and equitable admission and academic requirements.”
The same state policy resonates in Section 9(2) of BP 232, otherwise

known as the Education Act of 1982:
“Section 9. Rights of Students in School. – In addition to other rights, and

subject to the limitations prescribed by law and regulations, students and
pupils in all schools shall enjoy the following rights:
xxx xxx xxx
(2) The right to freely choose their field of study subject to existing curricula
and to continue their course therein up to graduation, except in cases of
academic deficiency, or violation of disciplinary regulations.”
In her Complaint, petitioner also charged that private respondents

“inhumanly punish students x x x by reason only of their poverty, religious
practice or lowly station in life, which inculcated upon [petitioner] the
feelings of guilt, disgrace and unworthiness;” as a result of such punishment,
she was allegedly unable to finish any of her subjects for the second semester
of that school year and had to lag behind in her studies by a full year. The acts
of respondents supposedly caused her extreme humiliation, mental agony and
“demoralization of unimaginable proportions” in violation of Articles 19, 21
and 26 of the Civil Code. These provisions of the law state thus:
“Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith.”
“Article 21. Any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.”
“Article 26. Every person shall respect the dignity, personality, privacy and
peace of mind of his neighbors and other persons. The following and similar
acts, though they may not constitute a criminal offense, shall produce a cause
of action for damages, prevention and other relief:
(1) Prying into the privacy of another’s residence;
(2) Meddling with or disturbing the private life or family relations of
another;
(3) Intriguing to cause another to be alienated from his friends;
(4) Vexing or humiliating another on account of his beliefs, lowly station in
life, place of birth, physical defect, or other personal condition.”
Generally, liability for tort arises only between parties not otherwise
bound by a contract. An academic institution, however, may be held liable for
tort even if it has an existing contract with its students, since the act that
violated the contract may also be a tort. We ruled thus in PSBA vs. CA, from
which the Supreme Court quoted:
“x x x A perusal of Article 2176 [of the Civil Code] shows that

obligations arising from quasi-delicts or tort, also known as extra-contractual
obligations, arise only between parties not otherwise bound by contract,
whether express or implied. However, this impression has not prevented this
Court from determining the existence of a tort even when there obtains a
contract.
The case was then remanded to the court of origin and to continue the
proceedings.

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COSMO ENTERTAINMENT MANAGEMENT, INC., Petitioner,

VS. LA VILLE COMMERCIAL CORPORATION, Respondent
G.R. No. 152801
20 August 2004
FACTS:
The respondent, La Ville Commercial Corporation, is the registered
owner of a parcel of land covered by Transfer Certificate of Title (TCT) No.
174250 of the Registry of Deeds of Makati City together with the commercial
building thereon situated at the corner of Kalayaan and Neptune Streets in
Makati City. On March 17, 1993, it entered into a Contract of Lease with
petitioner Cosmo Entertainment Management, Inc. over the subject property
for a period of seven years with a monthly rental of P250 per square meter of
the floor area of the building and a security deposit equivalent to three
monthly rentals in the amount of P447,000 to guarantee the faithful
compliance of the terms and conditions of the lease agreement. Upon
execution of the contract, the petitioner took possession of the subject
property.
The petitioner, however, suffered business reverses and was

constrained to stop operations in September 1996. Thereafter, the petitioner
defaulted in its rental payments. Consequently, on February 1, 1997, the
respondent made a demand on the petitioner to vacate the premises as well
as to pay the accrued rentals plus interests which, as of January 31, 1997,
amounted to P740,478.91. In reply to the demand, the petitioner averred that
its unpaid rentals amounted to P698,500 only and since it made a security
deposit of P419,100 with the respondent, the said amount should be applied
to the unpaid rentals; hence, the outstanding accounts payable would only be
P279,400. The respondent requested that the interest charges be waived and
it be given time to find a solution to its financial problems.
After negotiations between the parties failed, the respondent, on May

27, 1997, reiterated its demand on the petitioner to pay the unpaid rentals as
well as to vacate and surrender the premises to the respondent. When the
petitioner refused to comply with its demand, the respondent filed with the
Metropolitan Trial Court (MeTC) of Makati City.
The petitioner, in its answer to the complaint, raised the defense that,
under the contract, it had the right to sublease the premises upon prior
written consent by the respondent and payment of transfer fees. However,
the respondent, without any justifiable reason, refused to allow the petitioner
to sublease the premises.
After due proceedings, the MeTC rendered judgment in favor of the

respondent.
ISSUE:
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Whether or not the contention of the petitioner is tenable.
RULING:
While petitioner pleads that a liberal, not literal, interpretation of the
rules should be our policy guidance, nevertheless procedural rules are not to
be disdained as mere technicalities. They may not be ignored to suit the
convenience of a party. Adjective law ensures the effective enforcement of
substantive rights through the orderly and speedy administration of justice.
Rules are not intended to hamper litigants or complicate litigation. But they
help provide for a vital system of justice where suitors may be heard in the
correct form and manner, at the prescribed time in a peaceful though
adversarial confrontation before a judge whose authority litigants
acknowledge. Public order and our system of justice are well served by a
conscientious observance of the rules of procedure.
In any case, the Court is convinced that the findings and conclusions of
the court a quo and the RTC are in order. These courts uniformly found that,
under the terms of the contract of lease, the respondent, as the owner-lessor
of the premises, had reserved its right to approve the sublease of the same.
The petitioner, having voluntarily given its consent thereto, was bound by this
stipulation. And, having failed to pay the monthly rentals, the petitioner is
deemed to have violated the terms of the contract, warranting its ejectment
from the leased premises. The Court finds no cogent reason to depart from
this factual disquisition of the courts below in view of the rule that findings of
facts of the trial courts are, as a general rule, binding on this Court.
The petition is DENIED.
B. CONTRACTS
1. PSBA VS. CA, FEB. 4, 1992

2. AYALA CORP. VS. ROSA DIANA REALTY, 346 SCRA 663
3. BRICKTOWN DEVELOPMENT VS. AMOR TIERRA
DEVELOPMENT, 239 SCRA 126
4. PILIPINAS HINO VS. CA, 338 SCRA 355
5. SBTC VS. CA, OCT. 11, 1995
PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, ET AL.

petitioners,
VS. COURT OF APPEALS, HON. REGINA ORDOÑEZ-BENITEZ, in her
capacity as Presiding Judge of Branch 47, Regional Trial Court,
Manila, SEGUNDA R. BAUTISTA, and ARSENIA D. BAUTISTA,
respondents
G.R. No. 84698
February 4, 1992
FACTS:
Carlitos Bautista was a third year student at the Philippine School of
Business Administration. Assailants, who were not members of the schools
academic community, while in the premises of PSBA, stabbed Bautista to
death. This incident prompted his parents to file a suit against PSBA and its
corporate officers for damages due to their alleged negligence, recklessness
and lack of security precautions, means and methods before, during and after
the attack on the victim.
The defendants filed a motion to dismiss, claiming that the compliant

states no cause of action against them based on quasi-delicts, as the said rule
does not cover academic institutions. The trial court denied the motion to
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dismiss. Their motion for reconsideration was likewise dismissed, and was
affirmed by the appellate court. Hence, the case was forwarded to the
Supreme Court.
ISSUE:
Whether or not PSBA is liable for the death of the student.
RULING:
Because the circumstances of the present case evince a contractual
relation between the PSBA and Carlitos Bautista, the rules on quasi-delict do
not really govern. A perusal of Article 2176 shows that obligations arising
from quasi-delicts or tort, also known as extra-contractual obligations, arise
only between parties not otherwise bound by contract, whether express or
implied. However, this impression has not prevented this Court from
determining the existence of a tort even when there obtains a contract.
Article 2180, in conjunction with Article 2176 of the Civil Code,

establishes the rule in in loco parentis. Article 2180 provides that the damage
should have been caused or inflicted by pupils or students of the educational
institution sought to be held liable for the acts of its pupils or students while
in its custody. However, this material situation does not exist in the present
case for, as earlier indicated, the assailants of Carlitos were not students of
the PSBA, for whose acts the school could be made liable. But it does not
necessarily follow that PSBA is absolved form liability.
When an academic institution accepts students for enrollment, there is

established a contract between them, resulting in bilateral obligations which
both parties is bound to comply with. For its part, the school undertakes to
provide the student with an education that would presumably suffice to equip
him with the necessary tools and skills to pursue higher education or a
profession. This includes ensuring the safety of the students while in the
school premises. On the other hand, the student covenants to abide by the
school's academic requirements and observe its rules and regulations.
Failing on its contractual and implied duty to ensure the safety of their
student, PSBA is therefore held liable for his death.
Petition denied.
CONTRACT AS A SOURCE OF OBLIGATION
AYALA CORPORATION
VS. ROSA DIANA REALTY
346 SCRA 633
FACTS:
In April 1976, appellant-petitioner entered into a transaction with
Manuel Sy and Sy Ka Kieng where former sold a lot in Salcedo Village in
Makati. The deed of sale had some encumbrances contained in the Special
Conditions of Sale (SCS) and Deed of Restrictions (DR), which should be
followed by the vendees. The stipulations in the SCS are:
1) a building proposal must be submitted to Ayala which must be in

accordance with the DR,
2) the construction of the building must be completed on or before 1979, and
3) that there will be no resale of the lot.
The DR specified the limits in height and floor area of the building to be
constructed. However, Sy and Kieng, failed to build a building but nonetheless

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with the permission of Ayala, the vendees sold the said lot to the respondent,
Rosa Diana Realty. Respondent Company agreed to abode by the SCS and the
DR stipulations. Prior to the construction, Rosa Diana submitted a building
plan to Ayala complying with the DR but it also passed a different building
plan to the building administrator of Makati, which did not comply with the
stipulations in the DR. While the building, “The Peak,” was being
constructed, Ayala filed a case praying that: 1) Rosa Diana, be compelled to
comply with the DR and build the building in accordance with the building
plan submitted to Ayala; or 2) on the alternative, the rescission of the deed of
sale.
The trial court ruled in favor of the respondent and thus, Rosa Diana
was able to complete the construction of “The Peak.” Undeterred, Ayala filed
before the Register of Deeds (RD) of Makati a cause of annotation lis
pendens. RD refused to grant Ayala such registration for in the lower court;
the case is of personal action for a specific performance and/or rescission.
However, the Land Registration Authority (LRA) reversed RD’s ruling. The
appellate court upheld the RD’s ruling stating that the case before the trial
court is a personal action for the cause of action arises from the alleged
violation of the DR. The trial court sustained the respondent’s point saying
that Ayala was guilty of abandonment and/or estoppels due to its failure to
enforce the terms of the DR and SCS against Sy and Kieng. Ayala
discriminately chose which obligor would be made to follow certain
conditions, which is not fair and legal. On appeal, the CA affirmed the lower
court’s ruling. Hence, this petition.
ISSUE:
Whether or not Rosa Diana committed a breach of contract.
RULING:
Yes, the Supreme Court ruled that Rosa Diana committed a breach of
contract by submitting a building plan to Ayala complying with the DR and
submitting a different building plan to the building administrator of Makati,
which did not comply with the stipulations in the DR.
Contractual Obligations between parties have the force of law between

them and absent any allegation that the same are contrary to law, morals,
good customs, public order or public policy, they must complied with in good
faith.
Thus, the assailed decision of the Court of Appeals is reversed and set
aside.
BRICKTOWN DEVELOPMENT CORP. and MARIANO Z. VERALDE

VS. AMOR TIERRA DEVELOPMENT CORPORATION and
the HON. COURT OF APPEALS
G.R. No. 112182
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December 12, 1994
239 SCRA 127
FACTS:
Bricktown Development Corporation, represented by its President and
co-petitioner Mariano Z. Velarde, executed two Contracts to Sell in favor of
Amor Tierra Development Corporation, represented in these acts by its Vice-
President, Moises G. Petilla, covering a total of 96 residential lots at the
Multinational Village Subdivision, La Huerta, Parañaque, Metro Manila.
The total price of P21,639,875.00 was stipulated to be paid by private

respondent in such amounts and maturity dates, as follows: P2,200,000.00 on
31 March 1981; P3,209,968.75 on 30 June 1981; P4,729,906.25 on 31
December 1981; and the balance of P11,500,000.00 to be paid by means of an
assumption by private respondent of petitioner corporation's mortgage
liability to the Philippine Savings Bank or, alternately, to be made payable in
cash. On date, March 31, 1981, the parties executed a Supplemental
Agreement, providing that private respondent would additionally pay to
petitioner corporation the amounts of P55,364.68, or 21% interest on the
balance of down payment for the period from 31 March to 30 June 1981, and
of P390,369.37 representing interest paid by petitioner corporation to the
Philippine Savings Bank in updating the bank loan for the period from 01
February to 31 March 1981.
Private respondent was only able to pay petitioner corporation the sum
of P1,334,443.21. However, the parties continued to negotiate for a possible
modification of their agreement, but nothing conclusive happened. And on
October 12, 1981, petitioner’s counsel sent private respondent a “Notice of
Cancellation of Contract” because of the latter’s failure to pay the agreed
amount.
Several months later, private respondent’s counsel, demanded the

refund of private respondent's various payments to petitioner corporation,
allegedly "amounting to P2,455,497.71," with interest within fifteen days from
receipt of said letter, or, in lieu of a cash payment, to assign to private
respondent an equivalent number of unencumbered lots at the same price
fixed in the contracts. When the demand was not heeded, Amor Tierra filed
an action with the court a quo which rendered a decion in its favor. The
decision of the lower court was affirmed in toto by the Court of Appeals.
Hence, this petition.
ISSUE:
Whether or not the contract was properly rescinded.
Whether or not Bricktown properly forfeited the payments of Amor
Tierra.
RULING:
The contract between Bricktown and Amor Tierra was validly rescinded
because of the failure of the latter to pay the agreed amounts stipulated in the
contract on the proper date even after the sixty-days grace period.
Furthermore, the records showed that private respondent corporation paid
less than the amount agreed upon. The Supreme Court also added that such
cancellation must be respected. It may also be noteworthy to add that in a
contract to sell, the non-payment of the purchase price can prevent the
obligation to convey title from acquiring any obligatory force.
On the second issue, the Supreme Court ruled that since the private
respondent did not actually possessed the property under the contract, the
petitioner is then ordered to return to private respondent the amount
remitted. However, to adjudge any interest payment by petitioners on the
amount to be thus refunded, private respondent should not be allowed to
totally free itself from its own breach.
13
PILIPINAS HINO, INC. VS. COURT of APPEALS

G. R. No. 126570
August 18, 2000
338 SCRA 355
FACTS:
On or about August 14, 1989, a contract of lease was entered into
between Pilipinas Hino, Inc. and herein respondents, under which the
respondents, as lessors, leased real property located at Bulacan to Pilipinas
Hino, Inc. for a term of two years from August 16, 1989 to August 15, 1991.
Pursuant to the contract of lease, petitioner deposited with the respondents
the amount of P400,000.00 to answer repairs and damages that may be
caused by the lessee on the leased premises during the period of lease.
After the expiration of the contract, the petitioner and respondents

made a joint inspection of the premises to determine the extent of damages
thereon. Both agreed that the cost or repairs would amount to P60,000.00
and that the amount of P340,000.00 shall be returned to petitioner. However,
respondents returned only the amount of P200,000.00 leaving a balance of
P140,000.00. Notwithstanding repeated demands, respondents averred that
the true and actual damage amounted to P298,738.90.
On August 10, 1990, petitioner and respondents entered into a contract

to sell denominated as Memorandum of Agreement to sell whereby the latter
agreed to sell to the former the leased property in the amount of
P45,611,000.00. The said Memorandum of Agreement to sell granted the
owner (respondents) the option to rescind the same upon failure of the buyer
to pay any of the first six installments with the corresponding obligation to
return to the buyer the amount paid by the buyer in excess of the down
payment as stated in paragraphs 7 and 9 of the Memorandum of Agreement.
Pilipinas Hino, Inc. remitted on August 10, 1990 to the respondents the
amount of P1,811,000.00 as down payment. Subsequently, petitioner paid the
first and second installments in the amount of P1,800,000.00 and
P5,250,000.00, respectively, totaling the down payment of P7,050,000.00.
Unfortunately, petitioner failed to pay the third installment and

subsequent installments. Respondents decided to rescind and terminate the
contract and promised to return to petitioner all the amounts paid in excess of
the down payment after deducing the interest due from third to sixth
installments, inclusive. From the amount of P7,050,000.00 due to be
returned to the petitioner, respondents deducted P924,000.00 as interest and
P220,000.00 as rent for the period from February 15 to March 15, 1991,
returning to the petitioner the amount of P5,906,000.00 only.
After trial, the lower court rendered judgment stating that the
petitioner has no cause of action to demand the return of the balance of the
deposits in the amount P140,000.00 and the respondents have the legal right
to demand accrued interest on the unpaid installments in the amount of
P924,00.00. The Court of Appeals affirmed the decision of the trial court.

14
ISSUE:
Whether or not the petitioner is entitled to demand the balance of the
deposits in the amount of P140,000.00 and to the return of the amount of
P924,000.00.
RULING:
The Supreme Court held that the petitioner failed to prove his first
cause of action that the damages to the leased property amounted to more
than P60,000.00. In contrast, respondents were able to prove their
counterclaim that the damage to the leased property amounted to
P338,732.50, as testified by their witness who is an experienced contractor.
The trial court did not hold petitioner liable for the whole amount of
P384,732.50, but only for the amount of P200,000.00.
On the other hand, the Supreme Court held that both lower and
appellate court failed to consider paragraph 9 contained in the same
memorandum of agreement entered into by the parties. Said paragraphs
provides in very clear terms that “when the owner exercise their option to
forfeit the down payment, they shall return to the buyer any amount paid by
the buyer in excess of the down payment with no obligation to pay interest
thereon.” The private respondents’ withholding of the amount corresponding
to the interest violated the specific and clear stipulation in paragraph 9 of the
said memorandum. The parties are bound by their agreement.
Hence, the decision of the Court of Appeals is modified in that private

respondent is ordered to return to the petitioner the amount of P924,000.00
representing the accrued interest for the unpaid installments and the decision
appealed is affirmed in all other respects.
SECURITY BANK AND TRUST COMPANY (SBTC) and ROSITO

MANHIT, petitioners VS. COURT OF APPEALS and YSMAEL FERRER
G.R. No. 117009
October 11, 1995
FACTS:
Allegedly, private respondent Ysmael Ferrer was contracted by herein
petitioners SBTC and Rosito Manhit to construct the building of SBTC in
Davao City. The contract dated 4 February 1980 provided that Ferrer would
finish the construction in two hundred working days which the respondent
did, finishing it on 15 August 1980 nut he was compelled by a drastic increase
in the cost of construction materials to incur expenses of P300,000.00 on top
of the original cost. Advise was timely made to the Vice President of SBTC
with document to proof increase in cost, however, despite repeated demand,
SBTC refused. SBTC thru assistant Vice-President Susan Guanio made a
verification of the claim made by Ferrer, then made recommendation to settle
Ferrer claim but only up to P200,000.00. SBTC instead of paying the
recommended additional amount, denied authorizing payment of any
additional amount beyond the contract price.
Looking into the provision of the contract, it provided that adjustment

may be made for as long as there is no fault on the part of the contractor.
Ferrer then filed a breach of contract with damages.
This was opposed by the petitioner alleging that such adjustment

should have been by mutual agreement.

15
ISSUE:
Whether or not the contract may be deemed invalid, invoking that there
was no mutual agreement and that petitioner cannot be made liable.
RULING:
In the present case, the mutual agreement, the absence of which
petitioner relies on to support non-liability for the increased construction
price, is in effect a condition dependent upon the will of the petitioner bank.
Hence, to allow petitioner bank to acquire the constructed building at a

price for below the actual construction would undoubtedly constitute unjust
enrichment for the bank to the prejudice of the private respondent.
The decision appeal for is hereby affirmed.
C. QUASI – CONTRACTS
1. PADCOM CONDOMINIUM VS. ORTIGAS, MAY 9, 2002

2. MC ENGINEERING VS. CA, 380 SCRA 116
3. BPI VS. PIÑEDA, 156 SCRA 404
4. STATE INVESTMENT VS. CA, 198 SCRA 392
PADCOM CONDOMINIUM CORPORATION, petitioner,

VS. ORTIGAS CENTER ASSOCIATION, INC., respondent
G.R. No. 146807
May 9, 2002
382 SCRA 222
FACTS:
Petitioner PADCOM CONDOMINIUM CORPORATION (PADCOM)

bought a land from Tierra Development Corporation with terms and
conditions among which is that the transferee and its successor-in-interest
must become members of an Association for realty owners and long-term
lessees at Ortigas Center. The Ortigas Center Association (OCA) which was
subsequently formed levies membership dues of P2,700.00 per month to all
members. Petitioner refused to pay the membership dues on the ground that
it did not become automatic member of the Association when it bought the
land. Herein respondent OCA filed a civil case for recovery of the amounts
due, which was dismissed by the Regional Trial Court and reversed on appeal.
Petitioner PADCOM appealed for review on certiorari at the Supreme Court.

16
ISSUE:
Whether or not petitioner PADCOM can be compelled to become a

member of the OCA and thus pay the membership dues based on the
condition of the Deed of Sale.
RULING:
PADCOM became automatically a member of the OCA by virtue of the

conditions of the Deed of Sale attached to its Title of the property. By
voluntarily buying the land with the conditions, it subscribed to such
conditions which gave rise to a quasi-contract between it and the OCA.
Therefore, it could not avoid payment of the membership dues without
violating the underlying principles of quasi-contract – which provides that
certain lawful, unilateral, and voluntary act gives rise to a juridical relation
between the parties to the end that no one shall be unjustly enriched of
benefited at the expense of others.
Petition denied for lack of merit.
QUASI-CONTRACT AS A SOURCE OF OBLIGATION
MC ENGINEERING, INC.
VS. THE COURT OF APPEALS, GERENT BUILDERS, INC. and
STRONGHOLD INSURANCE CO., INC.,
G.R. No. 104047
April 3, 2002
380 SCRA 116
FACTS:
On October 29, 1984, Mc Engineering, Inc. and Surigao Coconut
Development Corporation signed a contract for the restoration of the latter’s
building, land improvement, electrical, and mechanical equipment located at
Lipata, Surigao City, which was damaged by typhoon Nitang. The agreed
consideration was P5,150,000.00 of which P2,500,000.00 was for the
restoration of the damaged buildings and land improvement, while the
P3,000,000.00 was for the restoration of the electrical and mechanical works.
The next day, on October 30, 1984 defendant Mc Engineering and

plaintiff Gerent Builders, Inc. entered into an agreement wherein defendant
subcontracted to plaintiff the restoration of the buildings and land
improvement phase of its contract with Sucodeco but defendant retained for
itself the restoration of the electrical and mechanical works. The
17
subcontracted work covered the restoration of the buildings and improvement
for P1,665,000.00.
Two (2) months later, on December 3, 1984, Sucodeco and defendant

Mc Engineering entered into an agreement amending provision No. VII, par 1
of their contract dated October 29, 1984, by increasing the price of the civil
works from P2,250,000.00 to P3,104,851.51, or an increase of P854,851.51,
with the express proviso that ‘except for the amendment above specified, all
the other provisions of the original contract shall remain the same’.
The civil work aspect consisting of the building restoration and land
improvement from which plaintiff would get P1,665,000.00 was completed
and the corresponding certificate of acceptance was executed, but the
electrical works were cancelled. On January 2, 1985, plaintiff received from
defendant the amount of P1,339,720.00 as full payment of the sub-contract
price, after deducting earlier payments made by defendant to plaintiff, as
evidenced by the affidavit executed by plaintiff’s president, Mr. Narciso C.
Roque wherein the latter acknowledged complete satisfaction for such
payment on the basis of the Statement of Account which plaintiff had earlier
forwarded to defendant.
Nevertheless, plaintiff is still claiming from defendant the sum of

P632,590.13 as its share in the adjusted contract cost in the amount of
P854,851.51, alleging that the sub-contract is subject to the readjustment
provided for in Section VII of the agreement, and also the sum of P166,252.00
in payment for additional electrical and civil works outside the scope of the
sub-contract.
Petitioner refused to pay respondent Gerent.
ISSUE:
Whether or not respondent Gerent Builders, Inc. can claim a share in
the adjusted contract cost between petitioner and Surigao Coconut
Development Corporation basing its claim from its assertion that the
quitclaim executed by plaintiff-appellant is vitiated with fraud.
RULING:
Gerent Builders, Inc. cannot claim for a share in the adjusted contract
cost between petitioner and Sucodeco because petitioner was under no
obligation to disclose to respondent Gerent, a subcontractor, any price
increase in petitioner’s main contract with Sucodeco. Respondent Gerent is
not a party to the main contract. The subcontract between petitioner and
respondent Gerent does not require petitioner to disclose to Gerent any price
increase in the main contract. The non-disclosure by petitioner of the price
increase cannot constitute fraud or breach of any obligation on the part of
petitioner.
Moreover, the record shows that the P139,720.30 representing final

and full payment of the subcontract price was paid by petitioner to
respondent Gerent based on the statement of account Gerent itself prepared
and submitted to petitioner.
BANK OF THE PHILIPPINE ISLANDS

VS. BENJAMIN PINEDA
G.R. No. L-62441
156 SCRA 404
FACTS:
18
Southern Industrial Project (SIP) and/or Bacong purchased the vessels
SS "Southern Comet," SS "Southern Express" and SS "Southern Hope," thru
financing furnished by defendant Peoples Bank and Trust Company, now the
Bank of the Philippine Islands. To secure the payment of whatever amounts
maybe disbursed for the aforesaid purpose, the said vessels were mortgaged
to Peoples Bank and Trust Company. For the operation of the said vessels,
these were placed under the booking agency of defendant Interocean
Shipping Corporation, with the undertaking that the freight revenues from
their charter and operation shall be deposited with the Trust Department of
Peoples Bank and Trust Company and that disbursements made there from
shall be covered by vouchers bearing the approval of SIP. As Peoples Bank
and Trust Company and SIP were not satisfied with the amount of revenues
being deposited with the said Bank, it being suggested that diversions thereof
were being made, Gregorio A. Concon of SIP and/or Bacong and Roman
Azanza of Peoples Bank and Trust Company, organized S.A. Gacet, Inc. to
manage and supervise the operation of the vessels with Ezekiel P. Toeg as the
manager thereof. Accordingly, on August 15, 1966, a Management Contract
was entered into between SIP and GACET, Inc., placing the supervision and
management of the aforementioned vessels in the hands of GACET, Inc.,
which was to run for a period of six (6) months, renewable at the will of the
parties, without however, terminating the booking agency of Interocean
Shipping Corporation. Likewise, under the terms of said Management
Contract, the Peoples Bank and Trust Company was designated as depository
of all revenues coming from the operation of the subject vessels thereby
enabling it to control all expenses of GACET, Inc., since they win all be drawn
against said deposit.
During the period comprising March 16, 1967 and August 25, 1967,
GACET and Interocean in performing their obligations under said
Management Contract, contracted the services of herein plaintiff-appellee,
Benjamin Pineda doing business under the name and style "Pioneer Iron
Works," to carry out repairs, fabrication and installation of necessary parts in
said vessels in order to make them seaworthy and in good working operation.
Accordingly, repairs on the vessels were made. Labor and materials supplied
in connection therewith, amounted to P84,522.70, P18,141.75 of which was
advanced by Interocean, thereby leaving a balance of P62,095.95. For this
balance, Interocean issued three checks and the third one for P 17,377.57.
When these checks were however presented to the drawee, Peoples Bank and
Trust Company, they were dishonored as defendant Interocean stopped
payment thereon.
Meanwhile and by reason of the inability of SIP and/or Bacong to pay

their mortgage indebtedness which was past due since 1964, the mortgagee
Peoples Bank and Trust Company threatened to foreclose the mortgage on
said vessels. In order to avoid the inconvenience and expense of imminent
foreclosure proceedings, SIP and/or Bacong sold said vessels to Peoples Bank
by way of dacion en pago.
On October 1, 1968, plaintiff instituted the present action (Civil Case

No. 74379) before the Court of First Instance of Manila, seeking to recover
from SIP, GACET, Interocean and the Peoples Bank and 'Trust Company the
principal sum of P62,095.92 with interests thereon from the respective dates
of each repair order until the same is fully paid, which amount was allegedly
the total unpaid balance of the cost of repairs, fabrication and installation of
necessary parts carried out by the said plaintiff on the a forenamed vessels.
Answering the complaint, defendants Peoples Bank and Trust Co., now
Bank of P.I. and Southern Industrial Projects, Inc. (SIP) alleged that the
abovementioned claim is the personal responsibility of Interocean Shipping
Corporation and/or Gacet, Inc. and deny liability thereof Defendant Bacong
Shipping Company, S.A.

19
The trial court rendered a decision dismissing the compliant against
defendants Interocean Shipping Corporation and Gacet, Inc.
Defendants Bank of P.I. and Southern Industrial Projects, Inc. appealed

to the Court of Appeals but the latter, finding the aforequoted decision to be
in accordance with law and the evidence, affirmed the same.
ISSUE:
Whether or not People's Bank, now Bank of P.I. being the purchaser of
said vessels, is jointly and severally liable for the outstanding balance of said
repairs, admittedly a lien on the properties in question.
RULING:
There is no question that at the time subject obligation was incurred,
defendant Southern industrial Projects, Inc. owned the vessels although
mortgaged to People's Bank and Trust Company. Hence, the former as owner
is liable for the costs of repairs made on the vessels. On the other hand,
Interocean Shipping Corporation and S.A. Gacet undeniably mere agents of
the owner, a disclosed principal, cannot be held liable for repairs made on the
vessels to keep them in good running condition in order to earn revenue,
there being no showing that said agents exceeded their authority.
In view of the foregoing facts, it was aptly stated by the trial court and
affirmed by the Court of Appeals that when the parties executed the deed of
"Confirmation of Obligation" they really intended to confirm and acknowledge
the existing obligations for the purpose of the buyer assuming liability
therefore and charging them to the seller after proper accounting, verification
and set offs have been made. Indeed, there is merit in the trial court's view
that if there was no intention on the part of People's Bank (now Bank of P.I.)
to assume responsibility y for these obligations at the time of the sale of the
vessels, there is no sense in executing said Deed of Confirmation together
with the deeds of sale and the stipulations there under would be pointless.
Finally, it is indisputable that the repairs made on the vessels ultimately
redounded to the benefit of the new owner for without said repairs, those
vessels would not be seaworthy. Under Art. 2142 of the Civil Code, such acts
"give rise to the juridical relation of quasi-contract to the end that no one
shall be unjustly enriched or benefited at the expense of another."

20
STATE INVESTMENT VS. COURT OF APPEALS

198 SCRA 392
FACTS:
On 5 April 1982, respondent spouses Rafael and Refugio Aquino
pledged certain shares of stock to petitioner State Investment House Inc.
(“State”) in order to secure a loan of P120,000.00. Prior to the execution of
the pledge, respondent spouses Jose and Marcelina Aquino signed an
agreement with petitioner State for the latter’s purchase of receivables
amounting to P375,000.00. When the 1st Account fell due, respondent spouses
paid the same partly with their own funds and partly from the proceeds of
another loan which they obtained also from petitioner State designated as the
2nd Account. This new loan was secured by the same pledge agreement
executed in relation to the 1 st Account. When the new loan matured, State
demanded payment. Respondents expressed willingness to pay, requesting
that upon payment, the shares of stock pledged be released. Petitioner State
denied the request on the ground that the loan which it had extended to the
spouses Jose and Marcelina Aquino has remained unpaid.
On 29, June 1984, Atty. Rolando Salonga sent to respondent spouses a

Notice of Notarial Sale stating that upon request of State and by virtue of the
pledge agreement, he would sell at public auction the shares of stock pledged
to State. This prompted respondents to file a case before the Regional Trial
Court of Quezon City alleging that the intended foreclosure sale was illegal
because from the time the obligation under the 2 nd Account became due, they
had been able and willing to pay the same, but petitioner had insisted that
respondents pay even the loan account of Jose and Marcelino Aquino, which
had not been secured by the pledge. It was further alleged that their failure
to pay their loan was excused because the Petitioner State itself had
prevented the satisfaction of the obligation.
On January 29, 1985, the trial court rendered a decision in favor of the
plaintiff ordering State to immediately release the pledge and to deliver to
respondents the share of stock upon payment of the loan. The CA affirmed in
toto the decision of the trial court.
ISSUES:
Whether or not the phrase “upon payment” in the trial court’s decision
means upon payment of spouses’ loan in the principal amount of P110,000.00
alone without interest, penalties and other charges.
Whether or not the conditions to be complied with by the debtor

desirous of being released from his obligation in cases where the creditor
unjustly refuses to accept payment have been met by the spouses Aquino.
RULING:
Anent the 1st issue, NO. The phrase “upon payment” as held by the
Supreme Court means upon payment of the amount of P110,000.000 plus
21
seventeen percent (17%) per annum regular interest computed from the time
of maturity of the plaintiffs’ loan and until full payment of such principal and
interest to defendants. For respondent spouses to continue in possession of
the principal of the loan amounting to P110,000.00 and to continue to use the
same after maturity of the loan without payment of regular or monetary
interest, would constitute unjust enrichment on the part of the respondent
spouses at the expense of petitioner State even though the spouses had not
been guilty of mora.
With respect to the 2 nd issue, NO. The conditions had not been
complied with. Article 1256 of the civil code states that: “ If the creditor to
whom tender of payment has been made refuses without just cause to accept
it, the debtor shall be released from responsibility by consignation of the
thing or sum due.” Where the creditor unjustly refuses to accept payment,
the debtor desirous of being released from his obligation must comply with
two (2) conditions, viz: (a) tender of payment; and (b) consignation of the sum
due. Tender of payment must be accompanied or followed by consignation in
order that the effects of payment may be produced. Thus, in Llamas v. Abaya,
the Supreme Court stressed that a written tender of payment alone, without
consignation in court of the sum due, does not suspend the accruing of
regular or monetary interest. In the instant case, respondent spouses Aquino,
while they are properly regarded as having made a written tender of payment
to petitioner state, failed to consign in court the amount due at the time of the
maturity of the 2nd Account No. It follows that their obligation to pay
principal-cum-regular or monetary interest under the terms and conditions of
the said Account was not extinguished by such tender of payment alone.
SOURCES OF OBLIGATIONS:
D. DELICTS
1. PEOPLE VS. SIA, NOV. 21, 2001

2. PEOPLE VS. DOCTOLERO, AUG. 20, 2001
3. PEOPLE VS. ABULENCIA, AUG. 22, 2001
4. BERMUDEZ VS. MELECIO- HERRERA, FEB. 26, 1988
5. PEOPLE VS. RELOVA, MAR, 6, 1987
6. MANANTAN VS. CA, JAN. 29, 2001
7. PEOPLE VS. BAYOTAS, 236 SCRA 239
PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

VS. ROSAURO SIA y DICHOSO, JOHNNY BALALIO y DEZA, JIMMY
PONCE y TOL and JOHN DOE @ PEDRO MUÑOZ (at large), accused-
appellants
G.R. No. 137457
2001 Nov 21
FACTS:
The taxi was taken from the garage and driven by its regular driver,
Christian Bermudez, at about 6:00 a.m. on August 23, 1995. The taxi was last
seen at the vicinity of the Pegasus Night Club at about 10:30 p.m. on the said
date with the passenger who is the accused Rosauro Sia. Accused Rosauro
Sia appears to have tipped driver Christian Bermudez to service him the
following day in the morning and to be paid P150.00 per hour which was
apparently accepted because Rosauro gave instructions to accused Johnny
Balalio and Jimmy Ponce to wait for him (Christian) that following morning.
When Christian returned to Sia’s residence he was told to come back in the
afternoon. When Christian returned in the afternoon, he was asked to get
inside. As soon as he alighted from the taxi, his hands were tied by Johnny
Balalio and was handed to a certain “Pedro”, the accused Peter Doe who has
22
not been arrested. Christian was taken to accused Rosauro and shortly
afterwards, the latter was seen lugging with him a big carton box from which
blood was dripping. Accused Jimmy Ponce saw Rosauro hand the carton-
wrapped lifeless body of Christian inside the carnapped FX taxi. Before
leaving with the lifeless body of Christian loaded in the taxi, accused Sia gave
P3,000.00 each to Jimmy Ponce, Johnny Balalio and “Pedro” and admonished
them not to say anything about what happened. The ring taken from
Christian was given to accused Jimmy Ponce by Rosauro Sia.
On August 26, 1995, the lifeless body of Christian Bermudez was found
and retrieved from a fishpond in Meycauayan, Bulacan. This fact was
broadcast over the radio and, after hearing the same, Agripina Bermudez
went to see the lifeless body retrieved from the fishpond and confirmed it to
be that of Christian, whom she claims is her eldest son who was earning
about P650.00 a day as a taxi driver.
ISSUE:
Whether or not the trial court is correct in awarding the damages to
the heirs of the victim.
RULING:
The Court finds no reason to reverse the ruling of the court a quo
insofar as the crimes were committed. Anent the civil indemnity award, this
Court finds the amount of P50,000.00 as death indemnity proper, following
prevailing jurisprudence and in line with controlling policy. Award of civil
indemnity may be granted without any need of proof other than the death of
the victim.
The victim’s heirs are likewise entitled to moral damages, pegged at

P50,000.00 by controlling case law, taking into consideration the pain and
anguish of the victim’s family brought about by his death. However, the award
of P200,000.00 as burial and other expenses incurred in connection with the
death of the victim must be deleted. The records are bereft of any receipt or
voucher to justify the trial court’s award of burial and other expenses
incurred in connection with the victim’s death.
The trial court was correct in awarding damages for loss of earning
capacity despite the non-availability of documentary evidence. Damages
representing net earning capacity have been awarded by the Court based on
testimony in several cases. However, the amount of the trial court’s award
needs to be recomputed and modified accordingly.
In determining the amount of lost income, the following must be taken

into account: (1) the number of years for which the victim would otherwise
have lived; and (2) the rate of the loss sustained by the heirs of the deceased.
The second variable is computed by multiplying the life expectancy by the net
earnings of the deceased, meaning total earnings less expenses necessary in
the creation of such earnings or income less living and other incidental
expenses. Considering that there is no proof of living expenses of the
deceased, net earnings are computed at fifty percent (50%) of the gross
earnings. The formula used by this Court in computing loss of earning
capacity is:
Net Earning Capacity = [2/3 x (80 – age at time of death) x (gross

annual income – reasonable and necessary living expenses)]
In this case, the Court notes that the victim was 27 years old at the
time of his death and his mother testified that as a driver of the Tamaraw FX
taxi, he was earning P650.00 a day. Hence, the damages payable for the loss
of the victim’s earning capacity is computed thus:
Gross Annual Earnings = P650 x 261 working days in a year

23
= P169,650.00
Net Earning Capacity = 2/3 x (80-27) x [P169,650.00 – P84,825.00]
= 35.33 x 84,825.00
= P2,996,867.20
Based on the foregoing computation, the award of the trial court with
regard to lost income is thus modified accordingly.
DELICT AS A SOURCE OF OBLIGATION

VS. CARLOS DOCTOLERO, SR., accused-appellant
G.R. No. 131866
2001 Aug 20
FACTS:
On November 20, 1996 at around 7:00 in the evening, Vicente
Ganongan Jr. and Roderick Litorco went to their friends’ boarding house on
Honeymoon Road, Baguio City. Thereat, Vicente Ganongan, Roderick Litorco,
Regie Daodaoan, Rex Tabanganay, Jeffrey Alimani and Florencio Dagson
agreed to drink gin in Sangatan Store. After two (2) hours, the group decided
to go home. They went down Honeymoon road towards Rimando road to get a
24
taxi for Litorco. Upon noticing that Litorco could not carry himself, they
decided to bring him to their boarding house. Dagson assisted Litorco and
walked ahead of Ganongan, Daodaoan, Tabanganay and Alimani. As the latter
four neared the Garcia store along Honeymoon road, Carlos Garcia, with
three companions, told them to stop, pointing a gun at them. Hearing the
commotion, Dagson who was walking about 5 to 7 meters ahead with Litorco
rushed to the boarding house and sought help. When Dagson came back, he
was with Oliver Alimani, Arman Alimani and Dexter Daggay. When they
arrived, they saw Garcia pointing a gun at the group of Ganongan, Daodaoan,
Tabanganay and Jeffrey Alimani. Oliver Alimani approached Garcia who in
turn pointed his gun at Oliver and identified himself as barangay kagawad. At
this time, Carlos Doctolero Sr. was standing at the edge of Honeymoon road.
He then put his arm over Daodaoan’s shoulder. Daoadaoan shoved
Doctolero’s hand and retreated. Doctolero stepped back and fired twice at
Daodaoan but missed. Tabanganay asked Daodaoan if he was hit and upon
answering that he was not, Tabanganay shouted at his friends to run. When
Ganongan turned around to run, Doctolero fired at him, hitting him twice.
Oliver Alimani came to Ganongan’s aid when the latter yelled that he was hit.
Thereafter, they hailed a taxi and rushed Ganongan to Saint Louis University
Hospital where he expired.
Accused-appellant was convicted of murder after appreciating the

aggravating circumstance of treachery. He was sentenced to suffer the
penalty of reclusion perpetua and was ordered to indemnify the heirs of
Ganongan the amounts of P50,000.00 as civil indemnity, P227,808.00 as
actual damages, and P300,000.00 as moral damages plus costs.
ISSUE:
Whether or not the accused was guilty of murder and the damages
awarded to the heirs were proper.
RULING:
No. Since treachery was not proven to be resent in this case, the court
deemed it proper to convict the accused of the crime of homicide, instead of
murder thus damages were reduced to P112,413.40 representing funeral
expenses, which were duly proven and covered by receipts.
Expenses relating to the 9th day, 40th day and 1st year anniversaries
cannot be considered in the award of actual damages as these were incurred
after a considerable lapse of time from the burial of the victim. With respect
to the award of moral damages, the same is reduced to P50,000.00 in
accordance with existing jurisprudence

25
VS. ROLLY ABULENCIA Y COYOS, defendant-appellant
2001 Aug 22
G.R. No. 138403
FACTS:
It is established from the testimony of prosecution witness Reynaldo
Garcia, Jr. that he met the appellant in the morning of that fateful day of
August 4, 1998 and later, both engaged in a drinking spree; that they slept on
the papag of Garcia’s house in the afternoon of that day; that the victim
Rebelyn, was also in the same house at that time; that after waking up, the
appellant left the house at about 5:30 o’clock in the afternoon to buy dilis in
the nearby store located 40 meters away, the victim tagging along; that the
appellant and Rebelyn never returned; that in the evening of the same day,
the appellant surrendered to Mayor Sevilleja, reporting that he was with the
victim when the latter allegedly fell from the bridge after he “accidentally
tripped (napatid) her” off; that the appellant admitted having raped the victim
in a tape interview by Dennis Mojares, another prosecution witness; that the
victim was found dead the following morning floating at the Colobong creek
near the Aburido bridge; and that the autopsy conducted on her cadaver
shows that she was sexually abused and, thereafter, brutally killed.
After the trial on the merits, the court a quo rendered its decision dated
March 16, 1999, convicting accused Rolly Abulencia of the crime as charged
and to suffer the penalty of death, to be implemented in the manner provided
for by law. Ordering the accused to indemnify the heirs of Rebelyn Garcia,
the sum of P75,000.00 damages, and another sum of P20,000.00 for
exemplary damages plus P6,425.00 as actual damages.
ISSUE:
Whether or not the court a quo’s award of civil liability is reasonable
based on the circumstances of the crime and whether circumstancial
evidence is sufficient to warrant a conviction.
RULING:
With regard to the civil indemnity, the trial court awarded only
P75,000.00. Current jurisprudence has fixed at P100,000.00 the civil
indemnity in cases of rape with homicide, which is fully justified and properly
commensurate with the seriousness of that special complex crime.
The trial court did not award moral damages to the victim’s family.
Based on prevailing jurisprudence, however, moral damages may be awarded
to the heirs of the victim without need for pleading or proof of its basis for
their mental, physical and psychological sufferings are too obvious to still
require their recital at the trial. Hence, moral damages in the amount of
P50,000.00 must be awarded. Attendant circumstances may be considered to
determine civil liability. In view of the evident cruelty inflicted upon Rebelyn,
as shown by the multiple burns and contusions on her body, the Court granted
the award of exemplary damages in the amount of P25,000.00.
As regards to the sufficiency of circumstantial evidence to warrant

conviction, the Court held that the absence of direct evidence, however, does
not preclude the conviction of a person accused of the complex crime of rape
with homicide. Circumstantial evidence can be as potent as direct evidence
to sustain a conviction provided that there is a concurrence of all the
requisites prescribed in Section 5, Rule 133 of the Revised Rules on Evidence,
thus: “Circumstantial Evidence, when sufficient.- Circumstantial evidence is
sufficient for conviction if: (a) There is more than one circumstance; (b) The
facts from which the inferences are derived are proven; and (c) The
combination of all the circumstances is such as to produce a conviction
beyond a reasonable doubt.”

26
Likewise this Court has held that an accused can be convicted based on
circumstantial evidence if the circumstances proven constitute an unbroken
chain which leads to a fair and reasonable conclusion pointing to the accused,
to the exclusion of all others, as the guilty person.
Thus, the appealed decision convicting Rolly Abulencia of the crime of

rape with homicide and sentencing him to suffer the penalty of death, is
affirmed with modification insofar as the civil aspect is concerned. Appellant
is thus ordered to pay the heirs of Rebelyn Garcia P100,000.00 as civil
indemnity; P50,000.00 as moral damages; P25,000.00 as exemplary damages;
and P6,425.00 as actual damages.
REYNALDO BERMUDEZ, SR., and,

ADONITA YABUT BERMUDEZ, petitioners-appellants,
VS. HON. JUDGE A. MELENCIO-HERRERA, DOMINGO PONTINO y
TACORDA and CORDOVA NG SUN KWAN, respondents-appellees
February 26, 1988
FACTS:
A cargo truck, driven by Domingo Pontino and owned by Cordova Ng
Sun Kwan, bumped a jeep on which Rogelio, a six-year old son of plaintiffs-
appellants, was riding. The boy sustained injuries which caused his death. As
a result, Criminal Case No. 92944 for Homicide Through Reckless
Imprudence was filed against Domingo Pontino. Plaintiffs-appellants filed on
July 27, 1969 in the said criminal case "A Reservation to File Separate Civil
Action."
On July 28, 1969, the plaintiffs-appellants filed a civil case for damages
against Domingo Pontino y Tacorda and Cordova Ng Sun Kwan.
Finding that the plaintiffs instituted the action "on the assumption that
defendant Pontino's negligence in the accident of May 10, 1969 constituted a
quasi-delict," the trial court stated that plaintiffs had already elected to treat
the accident as a "crime" by reserving in the criminal case their right to file a
separate civil action. That being so, the trial court decided to order the
dismissal of the complaint against defendant Cordova Ng Sun Kwan and to
suspend the hearing of the case against Domingo Pontino until after the
criminal case for Homicide Through Reckless Imprudence is finally
terminated.
ISSUE:
Whether or not the present action is based on quasi-delict under the
Civil Code and therefore could proceed independently of the criminal case for
homicide thru reckless imprudence.
RULING:
In cases of negligence, the injured party or his heirs has the choice
between an action to enforce the civil liability arising from crime under
Article 100 of the Revised Penal Code and an action for quasi-delict under
Article 2176-2194 of the Civil Code.
If a party chooses the latter, he may hold the employer solidarily liable
for the negligent act of his employee, subject to the employer's defense of
exercise of the diligence of a good father of the family.
In the case at bar, the action filed by appellant was an action for
damages based on quasi-delict. The fact that appellants reserved their right
in the criminal case to file an independent civil action did not preclude them
from choosing to file a civil action for quasi-delict.
27
The appellant precisely made a reservation to file an independent civil

action. In fact, even without such a reservation, the Court allowed the injured
party in the criminal case which resulted in the acquittal of the accused to
recover damages based on quasi-delict.
It does not follow that a person who is not criminally liable is also free
from civil liability. While the guilt of the accused in a criminal prosecution
must be established beyond reasonable doubt, only a preponderance of
evidence is required in a civil action for damages (Article 29, Civil Code). The
judgment of acquittal extinguishes the civil liability of the accused only when
it includes a declaration that the facts from which the civil liability might
arise did not exist.
PEOPLE OF THE PHILIPPINES, petitioner,

VS. THE HONORABLE BENJAMIN RELOVA, in his capacity as
Presiding Judge of the Court of First Instance of Batangas, Second
Branch,
and MANUEL OPULENCIA, respondents
G.R. No. L-45129
March 6, 1987
FACTS:
On 1 February 1975, members of the Batangas City Police together
with personnel of the Batangas Electric Light System, equipped with a search
warrant issued by a city judge of Batangas City, searched and examined the
premises of the Opulencia Carpena Ice Plant and Cold Storage owned and
operated by the private respondent Manuel Opulencia. The police discovered
that electric wiring, devices and contraptions had been installed, without the
necessary authority from the city government, and "architecturally concealed
inside the walls of the building" owned by the private respondent. These
electric devices and contraptions were, in the allegation of the petitioner
"designed purposely to lower or decrease the readings of electric current
consumption in the electric meter of the said electric plant."
During the subsequent investigation, Manuel Opulencia admitted in a

written statement that he had caused the installation of the electrical devices
"in order to lower or decrease the readings of his electric meter."
On 24 November 1975, an Assistant City Fiscal of Batangas City filed

before the City Court of Batangas City an information against Manuel
Opulencia for violation of Ordinance No. 1, Series of 1974, Batangas City. A
violation of this ordinance was, under its terms, punishable by a fine "ranging
from Five Pesos (P5.00) to Fifty Pesos (P50.00) or imprisonment, which shall
not exceed thirty (30) days, or both, at the discretion of the court."
The accused Manuel Opulencia pleaded not guilty. On 2 February

1976, he filed a motion to dismiss the information upon the grounds that the
28
crime there charged had already prescribed and that the civil indemnity there
sought to be recovered was beyond the jurisdiction of the Batangas City Court
to award which was dismissed by the judge.
Fourteen (14) days later, on 20 April 1976, the Acting City Fiscal of
Batangas City filed before the Court of First Instance of Batangas, Branch II,
another information against Manuel Opulencia, this time for theft of electric
power under Article 308 in relation to Article 309, paragraph (1), of the
Revised Penal Code.
Before he could be arraigned thereon, Manuel Opulencia filed a Motion

to Quash, dated 5 May 1976, alleging that he had been previously acquitted
of the offense charged in the second information and that the filing thereof
was violative of his constitutional right against double jeopardy. By Order
dated 16 August 1976, the respondent Judge granted the accused's Motion to
Quash and ordered the case dismissed.
ISSUES:
Whether or not Manuel Opulencia can be tried for violation of the
Revised Penal Code after acquittal from the violation of an ordinance due to
prescription which were based from the same act and whether or not he may
still be held liable civilly.
RULING:
The Supreme Court held that the accused was placed in double
jeopardy, hence, could not be tried in the criminal case.
However, the civil liability aspects of this case are another matter.
Because no reservation of the right to file a separate civil action was made by
the Batangas City electric light system, the civil action for recovery of civil
liability arising from the offense charged was impliedly instituted with the
criminal action both before the City Court of Batangas City and the Court of
First Instance of Batangas.
The extinction of criminal liability whether by prescription or by the bar

of double jeopardy does not carry with it the extinction of civil liability arising
from the offense charged.
In the present case, accused Manuel Opulencia freely admitted during

the police investigation having stolen electric current through the installation
and use of unauthorized electrical connections or devices. While the accused
pleaded not guilty before the City Court of Batangas City, he did not deny
having appropriated electric power. However, there is no evidence in the
record as to the amount or value of the electric power appropriated by
Manuel Opulencia, the criminal informations having been dismissed both by
the City Court and by the Court of First Instance (from which dismissals the
Batangas City electric light system could not have appealed) before trial could
begin. Accordingly, the related civil action which has not been waived
expressly or impliedly, should be remanded to the Court of First Instance of
Batangas City for reception of evidence on the amount or value of the electric
power appropriated and converted by Manuel Opulencia and rendition of
judgment conformably with such evidence.
MANANTAN VS. COURT OF APPEALS

350 SCRA 387
January 29, 2001
FACTS:

29
On June 1, 1983, the Provincial Fiscal of Isabela filed an information
charging petitioner Manantan with reckless imprudence resulting to
homicide, allegedly committed on or about the 25th day of September 1982, in
the municipality of Santiago, Isabela. The said accused being then the driver
and person-in-charge of an automobile bearing Plate No. NGA-816 willfully
and unlawfully drove and operated the same while along the Daang Maharlika
of the said municipality, in a negligent manner causing the automobile to
sideswipe a passenger jeepney, thereby causing the said automobile to turn
turtle twice resulting to the death Ruben Nicolas passenger of the said
automobile.
In its decision dated June 30, 1988, promulgated on August 4, 1988, the
trial court decided the criminal case in favor of Manantan.
Subsequently, the private respondent spouses Nicolas filed their notice

of appeal on the civil aspect of the trial court’s judgment. The Nicolas
spouses prayed that the decision appealed from be modified and that the
appellee be ordered to pay indemnity and damages. On its decision, the
Court of Appeals decided in favor of the private respondents. In finding
petitioner civil liability, the court a quo noted that at the time the accident
occurred, Manantan was in a state of intoxication, due to his having consume
all in all a total amount of at least twelve bottles of beer between 9 a.m. to 11
p.m.
The petitioner moved for reconsideration but the appellate court

denied the motion.
ISSUE:
Whether or not the acquittal of the accused also extinguished his civil
liability.
RULING:
NO. Our law recognizes two kinds of acquittal, with different effects on
the civil liability of the accused. First is an acquittal on the ground that the
accused is not the author of the act or omission complained of as a felony.
This instance closes the door to civil liability, for a person who has been found
not to be the perpetrator of any act or omission cannot and can never be held
liable for such act or omission. There being no delict, civil liability ex delicto
is out of the question, and the civil action, if any, which will be instituted must
be based on ground other than the delict complained of. The second instance
is an acquittal based on reasonable doubt on the guilt of the accused. In this
case, even if the guilt of the accused has not been satisfactorily established,
he is not exempt from civil liability which may be proved by preponderance of
evidence only.
In the case at bar, the accused’s acquittal is based on reasonable doubt.

The decision of the trial court did not state in clear and equivocal terms that
petitioner was not recklessly imprudent or negligent. Hence, impliedly, the
trial court acquitted him on reasonable doubt. Since civil liability is not
extinguished in criminal cases if the accused acquittal is based on reasonable
doubt, the decision of the Court of Appeals finding that the defendant is civilly
liable for his negligent and reckless act of driving his car which was the
proximate cause of the vehicular accident, and sentenced him to indemnify
plaintiff-appellants in the amount of P74,400.00 for the death of Ruben
Nicolas.

VS. ROGELIO BAYOTAS Y CORDOVA, accused-appellant
G.R. No. 102007
Sept. 2, 1994
30
236 SCRA 239
FACTS:
Rogelio Bayotas was charged with rape and eventually convicted on
June 19, 1991. While the appeal was pending, Bayotas died. The Supreme
Court dismissed the criminal aspect of the appeal; however, it required the
Solicitor-General to comment with regard to Bayotas’ civil liability arising
from his commission of the offense charged.
In his comment, the Solicitor-General expressed his view that the death
of accused-appellant did not extinguish his civil liability as a result of his
commission of the offense charged. This comment was opposed by the
counsel of accused-appellant, arguing that the death of the accused while
judgment of the conviction is pending appeal extinguishes both criminal and
civil penalties, he cited in support and invoked the ruling of the Court of
Appeals in People v. Castillo, which was held that the civil obligation in a
criminal case takes root in the criminal responsibility and therefore civil
liability is extinguished if accused should die before final judgment is
rendered.
ISSUE:
Whether or not the death of the accused pending appeal of his
conviction extinguishes his civil liability.
RULING:
Yes, the death of the accused pending appeal of his conviction
extinguishes his civil liability because tire liability is based solely on the
criminal act committed. Corollarily, the claim for civil liability survives
notwithstanding the death of the accused, if the same may also be predicted
as one source of obligation other than delict.
Moreover, when a defendant dies before judgment becomes executory,

'there cannot be any determination by final judgment whether or not the
felony upon which the civil action might arise exists,' for the simple reason
that `there is no party defendant.' The Rules of Court state that a judgment
in a criminal case becomes final 'after the lapse of the period for perfecting
an appeal or when the sentence has been partially or totally satisfied or
served, or the defendant has expressly waived in writing his right to appeal.'
In addition, where the civil liability does not exist independently of the
criminal responsibility, the extinction of the latter by death, ipso facto
extinguishes the former, provided, of course, that death supervenes before
final judgment. As in this case, the right to institute a separate civil action is
not reserved, the decision to be rendered must, of necessity, cover 'both the
criminal and the civil aspects of the case.' The accused died before final
judgment was rendered, thus, he is absolved of both his criminal and civil
liabilities based solely on delict or the crime committed.
Appeal dismissed.

31
A. QUASI-DELICTS
1. BARREDO VS. GARCIA, 73 PHIL 607

2. SCHMITZ TRANSPORT VS. TRANSPORT VENTURE, 456
SCRA
3. SMITH BELL DODWELL SHIPPING VS. BORJA, JUNE 10,
2002
4. CALALAS VS. CA, MAY 31, 2000
5. LUDO AND LUYM CORP. VS. CA, FEB. 1, 2001
6. RAMOS VS. CA, 321 SCRA 584 AND 360 380 SCRA 467
7. REYES VS. SISTERS OF MERCY, OCT. 3, 2000
8. CARTESIANO VS. NUVAL, SEPT. 28, 2000
9. THERMOCHEM VS. NAVAL, OCT. 30, 2000
10. PICART VS. SMITH, 37 PHIL 813
FAUSTO BARREDO VS. SEVERINO GARCIA and TIMOTEO ALMARIO

G.R. No. 48006
July 08, 1942
73 PHIL 607
FACTS:
On May 3, 1936, there was a head-on collision between a taxi of the
Malate Taxi driven by Fontanilla and a carretela guided by Dimapilis. The
carretela was overturned and a passenger, 16-year-old boy Garcia, suffered
injuries from which resulted to his death. A criminal action was filed against
Fontanilla, and he was convicted. The court in the criminal case granted the
petition to reserve the civil action against Barredo, the proprietor of the
Malate Taxi and the employer of Fontanilla, making him primarily and directly
responsible under culpa aquiliana. It was undisputed that Fontanilla’s
negligence was the cause of the accident as he was driving on the wrong side
of the road at high speed, and there was no showing that Barredo exercised
the diligence of a good father of a family.
Barredo’s theory of defense is that Fontanilla’s negligence being

punishable by the Revised Penal Code, that his liability as employer is only
subsidiary liable but Fontanilla was sued for civil liability, hence, Barredo
claims that he can not be held liable.
ISSUE:
Whether or not complainant’s liability as employer of Fontanilla was
only subsidiary and not as primarily and directly responsible under Article
1903 of the Civil Code.
RULING:
No, the Supreme Court ruled that complainant’s liability is not only
subsidiary but also primary liability. The Court affirmed the decision of the
Court of Appeals which ruled that the liability sought to be imposed upon
Barredo in this action is not a civil obligation arising from a felony, but an
obligation imposed in Article 1903 of the Civil Code by reason of his
negligence in the selection or supervision of his servant or employee.
QUASI-DELICT OR CULPA AQUILIANA is a separate legal institution

under the Civil Code and is entirely distinct and independent from a delict or
crime as punished under the Revised Penal Code (RPC). In this jurisdiction,
32
the same negligent act causing damage may produce civil liability (subsidiary)
arising from a crime under Art. 103 of the RPC; or create an action for the
quasi delict or culpa aquiliana (primary) and the parties injured are free to
choice which course to take.
In the instant case, the negligent act of Fontanilla produced two

liabilities of Barredo. First, a subsidiary one because of the civil liability of
Fontanilla arising from the latter’s criminal negligence; and second, Barredo’s
primary and direct responsibility arising from his presumed negligence as an
employer in the selection of his employees or their supervision, under Art.
1903 of the Civil Code.
The parties instituted an action for damages under Art. 1903 of the
Civil Code. Barredo was found guilty of negligence for carelessly employing
Fontanilla, who had been caught several times for violation of the Automobile
Law and speeding violation. Thus, the petition is denied. Barredo must
indemnify plaintiffs under the provisions of Art. 1903 of the Civil Code.
QUASI-DELICT AS A SOURCE OF OBLIGATION
SCHIMTZ TRANSPORT & BROKERAGE CORPORATION

VS. TRANSPORT VENTURE, INC., INDUSTRIAL INSURANCE
COMPANY, LTD. AND BLACK SEA SHIPPING AND DODWELL now
INCHCAPE SHIPPING SERVICES
G.R. No.158255
April 22, 2005
456 SCRA
FACTS:
On September 25,1991, SYTCO Pte Ltd. Singapore shipped from the
port of Ilichevsk, Russia on board M/V “Alexander Saveliev” (a vessel of
Russian registry and owned by Balck Sea) 545 hot rolled steel sheets in coil
weighing 6, 992, 450 metric tons. The said cargoes, to be discharged at the
port of Manila, were for the consignee Little Giant Steel Pipe Corporation was
insured against all risks with Industrial Insurance Company Ltd.
The consignee engaged the services of Schimtz Transport to receive

the cargoes from the shipside and deliver them to its warehouse at Cainta,
Rizal. Schimtz Transport, on the other hand, engaged the services of TVI to
send a barge and a tugboat to the shipside.
TVI’s tugboat “Lailani” then towed the barge “Erika V” to the shipside
and then left and returned to the port terminal. Ocean Terminal Services Inc.
began to unload 37 of the 545 coils from the vessel unto the barge. Since the
weather condition was not good due to the approaching storm, the 37 coils
were then washed away. Despite efforts, the cargoes were not recovered;
thus, Little Giant filed a formal complaint against Industrial Insurance which
it received the amount of P5, 246, 113.11.
Industrial Insurance later filed a complaint against Schimtz Transport,

TVI, and Black Sea for the recovery of the amount it paid to Little Giant. The
RTC then rendered its decision in favor of Industrial Insurance and held all
the defendants liable for their negligence in unloading the cargoes outside
the breakwater notwithstanding the storm signal.
Schimtz Transport and TVI jointly filed a motion for reconsideration but
was subsequently denied by the trial court. Defendants appealed to the Court

33
of Appeals which affirmed in toto the decision of the trial court. Hence, this
petition for review.
ISSUE:
Whether or not Schimtz Transport, TVI and Black Sea should all be
held liable for the loss of the 37 coiled steel sheets.
RULING:
The Supreme Court held that the proximate cause of the loss of the 37
coiled steel sheets was not the fortuitous event- the storm- because there was
no indication that there was a greater risk in loading the cargoes outside the
breakwater because the records of PAGASA showed that the sea condition of
Manila was moderate. The proximate cause of the loss was TVI’s failure to
promptly provide a tugboat which did not only increase the risk that might
have been reasonably anticipated during the shipside operation.
As for Schimtz Transport, it failed to prove that it exercised due

diligence to prevent or minimize the loss, before, during and after the
occurrence of the storm in order that it may be exempted from liability for the
loss of the goods under Article 1739. It failed to summon the same tugboat of
TVI or another to extend help despite the deteriorating sea conditions.
On the other hand, the Supreme Court absolved Black Sea because its
duty as a common carriage extended only to the port of discharge or so near
thereto as she may safely get always afloat. Thus, the delivery of goods was
not from pier to pier but from the shipside of M/V Alexander Saveliev and into
barges wherein it constructively delivered the cargoes to Little Giant
discharging then its duties.
SMITH BELL DODWELL SHIPPING AGENCY CORPORATION

VS. BORJA
G.R. No. 143008
June 10, 2002
383 SCRA 341
FACTS:
On September 23, 1987, petitioner Smith Bell filed a written request
with the Bureau of Customs for the attendance of the latter’s inspection team
on vessel M/T King Family containing 750 metric tons of alkyl benzene and
methyl methacrylate monomer. Supervising Customs Inspector Manuel Ma.
D. Nalgan instructed respondent Catalino Borja to inspect the vessel from its
arrival until its departure.
While M/T King Family was unloading chemicals unto two barges, a
sudden explosion occurred setting the vessels afire. Upon hearing the
explosion, Borja checked what happened. Again, another explosion was
heard. Borja hurriedly jumped over board to save himself. However, the
water was likewise on fire due mainly to the spilled chemicals. Despite the
tremendous heat, Borja swam his way for one hour until he was rescued by
the people living in the squatters’ area and brought him to San Juan de Dios
Hospital.
After weeks of intensive care at the hospital, he was diagnosed

permanently disabled due to the incident. Borja made demands against Smith

34
Bell and ITTC for the damages caused by the explosion. However, both
denied liabilities and attributed to each other negligence.
The trial court ruled in favor of the respondent Borja and held
petitioner liable for damages and loss of income. The Court of Appeals
affirmed the decision of the trial court.
ISSUE:
Whether petitioner or respondent ITTC should be held liable for the
injuries sustained b Catalino Borja.
RULING:
The Supreme Court held that negligence is conduct that creates undue
risk of harm to another. It is the failure to observe that degree of care,
precaution and vigilance that the circumstances justly demand, whereby that
other person suffers injury. Petitioner’s vessel was carrying chemical cargo.
While knowing that their vessel was carrying dangerous inflammable
chemicals, its officers and crew failed to take all the necessary precautions to
prevent the incident. Petitioner is therefore negligent. Thus, the owner or the
person in possession and control of a vessel and the vessel are liable to all
natural and proximate damage caused to persons and property by reason of
negligent management in navigation.
In determining the reasonableness of the damages awarded under

Article 1764 in relation with Article 2206 of the Civil Code, the factors to be
considered are: (a) life expectancy (considering the health of the victim and
the mortality table which is deemed conclusive) and loss of earning capacity;
(b) pecuniary loss, loss of support and service; and (c) moral and mental
sufferings. The loss of earning capacity is based mainly on the number of
years remaining in the person’s expected life span. In turn, this number is
the basis of the damages that shall be computed and the rate at which the
loss sustained by the heirs shall be fixed.
The formula for the computation of loss of earning capacity is as

follows:
Net earning capacity = Life expectancy x [Gross Annual Income – Living

Expenses (50% of Gross Annual Income)], where Life expectancy = 2/3 (80 –
the age of the deceased)
The award for loss of earning capacity should be computed as follows:
Loss of earning capacity = [2 (80-50)] x [(P2, 752 x 12)-16,512]

3
= P330, 240
Hence, petitioner is ordered to pay the heirs of the victim damages in

the amount of P320,240 as loss of earning capacity, moral damages in the
amount of P100,000, plus another P50,000 as attorney’s fees.
VICENTE CALALAS, petitioner

VS. COURT OF APPEALS,
ELIZA JUJEURCHE SUNGA AND FRANCISCO SALVA, respondents
31 May 2000
FACTS:

35
At 10 o’clock in the morning of August 23, 1989, private respondent
Eliza Jujeurche G. Sunga, then a college freshman majoring in Physical
Education at the Siliman University, took a passenger jeepney owned and
operated by petitioner Vicente Calalas. As they jeepney was filled to capacity
of about 24 passenger, Sunga was given by the conductor an extension seat’,
a wooden stool at the back of the door at the rear end of the vehicle. As the
jeepney stopped to let a passenger off, Sunga gave way to the outgoing
passenger, but just as she was doing so, an Isuzu truck driver by
IglecerioVerena and owned by Francisco Silva bumped the left rear portion of
the jeepney, injuring Sunga. Sunga was confined to the hospital, and on
October 9, 1989 she filed a complaint for damages against Calalas, alleging
violation of the contract of carriage by the former in failing to exercise the
diligence required of him as a common carrier. Calalas, also filed a third-
party complaint against Salva.
The lower court rendered judgment against Salva and absolved Calalas
of liability. Eventually, a civil case was filed against Salva and Verena jointly
liable to Calalas for the damage to his jeepney.
On appeal to the Court of Appeals, the ruling of the lower court was
reversed on the ground that Sunga’s cause of action was based on a contract
of carriage, not quasi-delict. The appellate court dismissed the third party
complaint against Salva and adjudged Calalas liable for damages to Sunga.
ISSUE:
Whether or not petitioner is liable on his contract of carriage.
RULING:
Yes. Art. 1756 of the Civil Code provides that common carriers are
presumed to have been at fault or to have acted negligently unless that they
observed extraordinary diligence as defined in Arts. 1733 and 1755 of the
Code.
The doctrine of proximate cause is applicable only in actions for quasi-

delict, not in actions involving breach of contract. In the case at bar,
petitioner is liable on his contract of carriage, because, first, the jeepney was
not properly parked, its rear portion being exposed about two meters from
the broad shoulders of the highway. This is a violation of the R.A. No. 4136.
Second, petitioner’s driver took in more passengers than the allowed seating
capacity of the jeepney, a violation of the same law. Sunga was seated in an
‘extension seat’ that placed her in a peril greater than that to which the other
passengers were exposed.
As to the damages, moral damages are not recoverable in actions for

damages predicated on a breach of contract for only in situations like the
mishap results in the death of a passenger or in cases where the carrier is
guilty of fraud or bad faith.

36
LUDO AND LUYM CORPORATION, petitioner,

VS. COURT OF APPEALS, GABISAN SHIPPING LINES, INC.
and/or ANSELMO OLASIMAN, respondents.
G.R. No. 125483
February 1, 2001
351 SCRA 35
FACTS:
Private respondent Anselmo Olasiman, as captain, was maneuvering
the ship MV Miguela owned by respondent Gabisan Shipping lines, at the pier
owned by petitioner Ludo and Luym Corporation when it rammed the pile
cluster damaging it and deforming the cable wires wound around it.
In an action for recovery of damages filed by Petitioner, the Regional

Trial Court ruled against respondents for incompetence and negligence. In
an appeal the Court of Appeals reversed the lower court’s decision, saying
that the petitioner’s witness Naval was incompetent to testify on the
negligence of the crew and that petitioner’s evidence did not positively
identify that MV Miguela caused the damage.
Thus, petitioner filed this petition for review.
ISSUE:
Whether or not the private respondents are responsible for the damage
done to the pier by the ship based on the doctrine of RES IPSA LOQUITOR.
RULING:
The Supreme Court sustained the Regional Trial Court decision partly
on the ground that the incompetence of eyewitness Naval was not an
assigned error at the appellate court.
The doctrine of RES IPSA LOQUITOR says that when the thing that
causes the damage is in the control and management of the respondent, and
in the ordinary course of things the accident does not happen if those who
have the management use proper care, it affords reasonable evidence, in the
absence of explanation, that the accident arose from want of care. The
principle applies here. The MV Miguela was in the exclusive control of
respondent Olasiman, and aside from petitioner’s witness testimony that the
vessel rammed the pile cluster, respondent did not show persuasively other
possible causes of the damage.
Therefore, respondents were responsible for the damage.
Petition is granted and the decision of the Regional Trial Court

reinstated.

37
RAMOS VS. COURT OF APPEALS

321 SCRA 584 AND 380 SCRA 467
FACTS:
Because of discomforts due to pains allegedly caused by the presence
of a stone in her gall bladder, plaintiff, Erlinda Ramos sought professional
advice. She was advised to undergo an operation for the removal of a stone
in her gall bladder. She and her husband Rogelio sought for the services of
Dr. Orlino Hozaka and they agreed on the date and time on when the
operation will be made. Included in the agreement is that, Dr. Hozaka will be
the one to look for an anesthesiologist since the couple did not know anyone.
At around 7:30 am of June 17, 1985, and while still in her room, she
was prepared for the operation by the hospital staff. Prior to the operation,
she was intubated but the process did not go good as her nailbed turned
bluish and was placed in trendelenburg position—a position where the head
of the patient is placed in a position lower than the feet which was an
indication that there is a decrease of blood supply in the patient’s brain. She
was to be operated by 9:00 o’clock that morning but it was not done since Dr.
Hozaka arrived at 12:15 that day and at that time when Dr. Hozaka arrived,
the patient was already in her fateful condition. Afterwards, the patient
turned comatose, for which she stayed in the hospital for several months.
Petitioners filed a civil case for damages against, Dr. Hozaka, Dr.
Gutierrez who was the anesthesiologist recommended by Dr. Hozaka and the
Hospital, alleging negligence in the management and care of Erlinda Ramos.
After considering the evidences presented by both sides, the Regional

Trial Court rendered judgment in favor of petitioners and finding defendants
guilty of, at the very least, negligence in the performance of their duty to
plaintiff-appellant Erlinda Ramos.
Private respondents reasonably interposed an appeal to the Court of

Appeals. The appellate court rendered a Decision reversing the findings of
the lower court.
ISSUE:
Whether or not the Court of Appeals erred in finding that private
respondents were not negligent in the case.
RULING:
Yes. In the case at bar, respondent Dra. Gutierrez admitted that she
saw Erlinda for the first time on the day of the operation itself. Before this
date, no prior consultations with or pre-operative evaluation of Erlinda was
done by her, an act of exceptional negligence, a professional irresponsibility.
The measures cautioning prudence and vigilance in dealing with human lives
lie at the core of the physician’s centuries-old Hippocratic Oath. Her failure
to follow this medical procedure is, therefore a clear indicia of her
negligence.
Respondent Dr. Hozaka’s negligence can be found in his failure to

exercise the proper authority (as the “captain” of the operative team) in not
determining if his anesthesiologist observed proper anesthesia protocols. In
fact no evidence on record exist to show that respondent Dr. Hozaka verified
38
if Dra. Gutierrez properly intubated the patient. Respondnet Hospital, apart
from general denial of its responsibility over respondent physicians failed to
adduce evidence showing that it exercised the diligence of a good father of a
family in the hiring and the supervision of the latter.
Thus, the Court of Appeals clearly erred in holding that private

respondents were not negligent in the care and in the performance of their
duty as in connection with the case of plaintiff-appellant Ramos.
REYES VS. SISTERS OF MERCY HOSPITAL

OCTOBER 3, 2000
341 SCRA 760
FACTS:
Petitioner Leah Alesna Reyes is the wife of the late Jorge Reyes, 40
years of age. Five days before his death, Jorge had been suffering from a
recurring fever with chills. After he failed to get relief from some home
medication, he decided to see a doctor and went to Mercy Community Clinic
with his wife.
The respondent Dr. Marilyn Rico, who gave Jorge physical examination
and took his medical history, attended him. Suspecting that Jorge is suffering
from typhoid fever, Dr. Rico ordered a Widal test, a standard test for typhoid
fever, to be performed on Jorge. After an hour, the medical technician
submitted the results of the test from which Dr. Rico concluded that Jorge was
positive fro typhoid fever. As her shift was only up to 5:00 p.m., Dr. Rico
indorsed Jorge to respondent Dr. Marvie Blanes.
Dr. Blanes also took Jorge’s history and gave him physical examination.
Like Dr. Rico, her impression was that Jorge had typhoid fever. She ordered
that a compatibility test with the antibiotic Chloromycetin be done on Jorge
since antibiotic is the accepted treatment for typhoid fever. Said nurse
Josephine Pagente administered test that also gave the patient a dose of
triglobe. As she did not observed any adverse reaction by the patient to
Chloromycetin, Dr. Blanes ordered the first hundred milligrams of said
antibiotic to be administered on Jorge at about three hours later just before
midnight. At around 1:00 a.m. of January 9, 1987, Jorge’s temperature rose
at 41 degree Celsius. He also experienced chills and exhibited respiratory
distress, nausea, vomiting, and convulsions. Dr. Blanes applied emergency
measures, however, at around 2:00 a.m. Jorge died. The cause of his death
was “Ventricular Arrythemia Secondary to Hyperpyrexia and typhoid fever.”
On June 3, 1987, petitioners filed before RTC of Cebu City a compliant

for damages against respondents Sisters of Mercy, Sister Rose Palacio, Dr.
Marvie Blanes, Dr. Marlyn Rico, and nurse Josephine Pagente. They
contended that Jorge did not die of typhoid fever. Instead, his death was due
to the wrongful administration of chloromycetin. Likewise, they asserted that
the respondent doctors did not exercise due care and diligence.
On September 12, 1991, the trial court rendered its decision absolving
respondents from the charges of negligence and dismissing petitioner’s action
fro damages due to the incomplete and inconclusive autopsy of Dr. Vacalares
39
on Jorge. Petitioners brought the matter to the Court of Appeals, however it
only affirmed the decision of the trail court.
ISSUES:
1. Whether or not petitioner’s allegation of negligence against the
respondents is meritorious.
2. Whether or not the doctrine of res ipsa loquitor applies in the
present case.
RULING:
Anent the 1st issue, NO. Petitioner’s action is for medical practice. This
is a particular form of negligence which consists in the failure of a physician
or surgeon to apply to his practice of medicine that degree of care and skill
which is ordinarily employed by the profession generally, under similar
conditions, and in like surrounding circumstances. There is no doubt that a
physician-patient relationship exists.
The Supreme Court did not find Dr. Apolinar Vacalares as an expert
witness for he is not a specialist on infectious diseases like typhoid fever.
Second, the two doctors presented by respondents clearly were experts on
the subject. They vouched for the correctness of Dr. Marlyn Rico’s diagnosis.
Third, the petitioners’ contention that respondents Dr. Blanes was negligent
in ordering the intravenous administration of two doses of 500 milligrams of
chloromycetin at an interval of less than three hours was refuted by the fact
that the dosages given were still within medically accepted limits, since the
recommended dose of chloromycetin is 1 gram every 6 hours. And fourth, the
practice of medicine is a profession engaged in only by qualified individuals.
The Hyppocratic Oath, an ancient code of discipline and ethical rules, which
doctors have imposed upon them in recognition, and acceptance of their great
responsibility to society also strictly governs the conduct of doctors.
Thus, they are required to exercise “extraordinary diligence” in the

performance of their profession.
Anent the 2nd issue, NO. The requisites for the application of res ipsa
loquitor are the following: (a) the accident was of a kind which does not
ordinarily occur unless someone is negligent; (b) the instrumentality or
agency which caused the injury was under the exclusive control of the person
in charge and; (3) the injury suffered must have not have been due to any
voluntary action or contribution of the person injured. Respondents alleged
failure to observe due care was not immediately apparent to a layman so as to
justify application of res ipsa loquitor.
CARTICIANO VS. NUVAL

341 SCRA 264
September 28, 2000
FACTS:
On September 3, 1992 at about 9:30 in the evening, plaintiff Zacarias
Carticiano was on his way home. Zacarias was driving his father’s Ford Laser
car, traversing the costal roads of Lengos Cavite. On the same date and time,
defendant Nuval’s owner-type jeep, then driven by defendant Darwin was
traveling on the opposite direction. When the two cars were about to pass
one another, defendant Darwin veered his vehicle to his left and as a result,
plaintiff’s Ford Laser collided head-on with defendant Nuval’s jeep. On this
account, plaintiff filed a criminal suit against defendant Darwin and also filed
this civil suit against Nuval for damages.

40
ISSUE:
Whether or not respondent Nuval is liable for the damages caused by
Darwin who was acting as his employee.
RULING:
Yes. Article 2180 of the Civil Code provides that employers acting
within the scope of their assigned task.
The facts established in the case at bar show that Darwin was acting
within the scope of the authority given to him when the collision occurred.
The claim of respondent that he had exercised the diligence of a good father
of a family is not borne out by the evidence. Once a driver is proven
negligent and imposes upon him the burden to prove otherwise.
In addition, moral damages are awarded to the plaintiff because of the

injuries caused by QUASI-DELICT.
THERMOCHEM INCORPORATED and JEROME O. CASTRO,

petitioners,
VS. LEONORA NAVAL and THE COURT OF APPEALS, respondents
G.R. No. 131541
2000 Oct 20
FACTS:
On May 10, 1992, at around 12:00 o'clock midnight, Eduardo Edem
was driving a "Luring Taxi" along Ortigas Avenue, near Rosario, Pasig, going
towards Cainta. Prior to the collision, the taxicab was parked along the right
side of Ortigas Avenue, not far from the Rosario Bridge, to unload a
passenger. Thereafter, the driver executed a U-turn to traverse the same
road, going to the direction of EDSA. At this point, the Nissan Pathfinder
traveling along the same road going to the direction of Cainta collided with
the taxicab. The point of impact was so great that the taxicab was hit in the
middle portion and was pushed sideward, causing the driver to lose control of
the vehicle. The taxicab was then dragged into the nearby Question Tailoring
Shop, thus, causing damage to the said tailoring shop, and its driver, Eduardo
Eden, sustained injuries as a result of the incident.

41
Private respondent, as owner of the taxi, filed a damage suit against
petitioner, Thermochem Incorporated, as the owner of the Nissan Pathfinder,
and its driver, petitioner Jerome Castro.
After trial, the lower court adjudged petitioner Castro negligent and
ordered petitioners, jointly and severally, to pay private respondent actual,
compensatory and exemplary damages plus attorney's fees and costs of suit.
On appeal, the Court of Appeals affirmed the judgment of the court a

quo. Hence, this petition for review on certiorari.
ISSUE:
Whether or not the petitioners are liable based on quasi-delict.
RULING:
Yes. The Court held that the driver of the oncoming Nissan Pathfinder
vehicle was liable and the driver of the U-turning taxicab was contributorily
liable.
From petitioner Castro's testimonial admissions, it is established that

he was driving at a speed faster than 50 kilometers per hour. But as he
allegedly stepped on the brake, it locked causing his Nissan Pathfinder to skid
to the left and consequently hit the taxicab. The sudden malfunction of the
vehicle's brake system is the usual excuse of drivers involved in collisions
which are the result of speedy driving. Malfunction or loss of brake is not a
fortuitous event. The owner and his driver are presumed to know about the
conditions of the vehicle and is duty bound to take care thereof with the
diligence of a good father of the family. A mechanically defective vehicle
should avoid the streets.
Moreover, the record shows that the Nissan Pathfinder was on the
wrong lane when the collision occurred. This was a disregard of traffic safety
rules. The law considers what would be reckless, blameworthy or negligent
in a man of ordinary diligence and prudence and determines liability by that.
As mentioned earlier, the driver of the taxi is contributorily liable. U-

turns are not generally advisable particularly on major streets. The driver of
the taxi ought to have known that vehicles coming from the Rosario bridge
are on a downhill slope. Obviously, there was lack of foresight on his part,
making him contributorily liable.
Considering the contributory negligence of the driver of private

respondent's taxi, the award of P47,850.00, for the repair of the taxi, should
be reduced in half. All other awards for damages are deleted for lack of
merit.
PICART VS. SMITH

37 PHIL 813
FACTS:
Plaintiff was riding on his pony across the bridge. Before he had gotten
half-way across, the defendant approached from the opposite direction in an
automobile. As the defendant neared the bridge, he saw the plaintiff and
42
blew his horn to give warning. The plaintiff heard the warning signal but
instead of going to the let, he pulled the pony closely up against the railing on
the right side of the bridge. He averred that he thought he did not have
sufficient time to get over the other side. As the automobile approached, the
defendant guided it toward the plaintiff, without diminution to speed,
assuming the horseman would move to the other side. When he had gotten
quite near, there being no possibility o the horse getting across to the other
side, the defendant quickly turned his car sufficiently to the right to escape
hitting the horse. However, the horse was still hit and died while the rider
was thrown off violently.
ISSUE:
Whether the defendant was negligent in maneuvering his car giving
rise to a civil obligation.
RULING:
Yes. The Court held that the control of the situation has shifted to the
defendant when the incident occurred. At first, he has the right to assume
that the horse and rider would pass over to the other side but as he moved to
the center, it was demonstrated that this would not be done. It was then his
duty to bring his car to an immediate stop or, seeing that there were no other
person on the bridge, to take the other side and ass sufficiently far away from
the horse to avoid the danger of collision. Instead of doing this, the defendant
ran straight on until he was almost upon the horse. When the defendant
exposed the horse and rider to this danger he was negligent in the eye of the
law.
Conduct is said to be negligent when a prudent man in the position of

the tortfeasor would have foreseen that an effect harmful to another was
sufficiently probable to warrant his foregoing the conduct or guarding against
its consequences. Applying this test to the conduct of the defendant, it is
clear that negligence is established. A prudent man, laced in the position o
the defendant, would have recognized that the course which he was pursuing
was fraught with risk, and would therefore have foreseen harm to the horse
and rider as a reasonable consequence of that course. Under these
circumstances the law imposed on the defendant the duty to guard against
the threatened harm.
The plaintiff on the other hand was guilty of antecedent negligence in

planting himself on the wrong side o the road. The negligent acts of the two
arties were not contemporaneous, since the negligence of the defendant
succeeded the negligence of the plaintiff by an appreciable interval. Under
these circumstances, the law is that the person who has the last fair chance to
avoid the impending harm and fails to do is chargeable wit the consequences,
without reference to the prior negligence of the other party.
In sum, though the plaintiff was guilty of negligence or being on the

wrong side of the bridge, the defendant was civilly liable as he had fair
chance to avoid the accident.

43
NATURE AND EFFECT OF OBLIGATIONS
PARTIES TO DELIVERY IN REAL OBLIGATIONS
LAGON VS. HOOVEN COMALCO

349 SCRA 363
FACTS:
Jose Lagon is a businessman and owner of a commercial building in
Sultan Kudarat. HOOVEN Comalco Industries is a domestic corporation
known to be the biggest manufacturer and installer of aluminum materials in
the country.
In 1981, Lagon and HOOVEN entered into two contracts, both

denominated Proposal, whereby for a total consideration of P104,870
HOOVEN agreed to sell and install various aluminum materials in Lagon’s
commercial building. Upon execution, Lagon paid P48,000 in advance.
On February 24, 1987, HOOVEN commenced an action for sum of

money with damages and attorney’s fees against petitioner Lagon. HOOVEN
alleged in its complaint than on different occasions, it delivered and installed
several construction materials in the commercial building of Lagon; that the
total cost of the labor and materials amounted to P117,329 out of which
P69,329 remained unpaid even after completion of the project, and despite
repeated demands, Lagon failed and refused to liquidate his indebtedness.
Lagon, on the contrary, denied liability and averred that HOOVEN was
the party guilty of breach of contract by failing to deliver and install some of
the materials specified in the proposals; that as a consequence he was
compelled to purchase the undelivered materials from other sources; that as
regards the materials duly delivered and installed by HOOVEN, they were
fully paid.
On October 9, 1987, the trail court conducted an occular inspection of

Lagon’s commercial building to determine whether the items alleged in the
complaint and appearing in the invoices and delivery receipts had been
delivered and installed in the premises. Thereafter, the trial court rendered a
decision partly on the basis of the result of the ocular inspection finding that
P39,140 remained unpaid by Lagon where he even incurred delay. The court
awarded HOOVEN attorney’s fees but sustained Lagon’s counterclaims and
awarded him actual damages representing the value of the undelivered and
uninstalled materials.
Both parties appealed to the Court of Appeals. The Appellate Court set
aside the judgment of the trial court and resolved the case in favor of
HOOVEN. It held that the trial court erred in relying solely on the results of
the ocular inspection. It also stressed that testimonies of HOOVEN’s
witnesses were straightforward, categorical and supported by documentary
evidence of the disputed transactions and that Lagon only offered a mere
denial, uncorroborated and self-serving statements.
ISSUES:
Whether or not the materials specified in the contracts had been
delivered and installed by respondent in petitioner’s commercial building and

44
whether or not HOOVEN’s institution of an action for collection of money
against Lagon is tenable.
RULING:
Anent the 1st issue, NO. The Court carefully and diligently considered
the exhibits offered by HOOVEN as evidences and it was fully convinced that
the mass of documentary evidences adduced suffered from patent
irregularities and material inconsistencies. The flaws inevitably deplete the
weight of its evidence resulting to respondent’s dismal failure to discharge its
burden necessary to prevail in the case at bar.
Inconsistencies that raised serious questions requiring cogent

explanations include: first, the quantity of materials and the amounts stated
in the delivery receipts do not tally with those in the invoices covering them;
second, the total values of the materials in all the invoices and the delivery
receipts were different; third, under the proposal, HOOVEN bound itself to
invoice the materials “when complete and ready for shipment”, oddly, the
records show that the invoices were prepared several years after the
materials were allegedly delivered and installed completely; fourth, the
demand letter for partial payment was only given by HOOVEN two years after
it allegedly completely delivered and installed all materials in Lagon’s
building; fifth, all the delivery receipts did not appear
to have been signed by petitioner or his authorized representative

acknowledging receipt of the materials listed; sixth, it is obvious that from the
contested delivery receipts, some important details were not supplied or were
left in blank.
Given the pathetic state of respondent’s evidence, the Supreme Court

then ordered HOOVEN to pay petitioner moral and actual damages.
However, petitioner is not entirely free from any liability to respondent. He
must pay the value of the unpaid materials admittedly delivered to him.
Anent the 2nd issue, NO. The Supreme Court maintained that it is quite
strange for HOOVEN COMALCO to institute an action for collection of sum of
money against petitioner only after more than five (5) years after the
supposed completion of the project of installing various aluminum materials
in Lagon’s commercial building. Indeed, it is contrary to common experience
that a creditor would take its own sweet time in collecting its credit, more so
in this case when the amount involved is not miniscule but substantial.

45
POSITIVE PERSONAL OBLIGATIONS / TO DO
1. FRANCISCO VS. CA, 401 SCRA 594

2. TANGUILING VS. CA, 266 SCRA 78
SPOUSES LORENZO G. FRANCISCO and LORENZA D. FRANCISCO,

petitioners,
VS. HONORABLE COURT OF APPEALS, and
BIENVENIDO C. MERCADO, respondents
April 25, 2003
401 SCRA 594
FACTS:
On 3 February 1984, the spouses Lorenzo and Lorenza Francisco and
Engineer Bienvenido C. Mercado entered into a Contract of Development for
the development into a subdivision of several parcels of land in Pampanga.
Respondent committed to complete the construction within 27 months.

Respondent also advanced P200,000.00 for the initial expenses of the
development work. In return, respondent would receive 50% of the total
gross sales of the subdivision lots and other income of the subdivision.
Respondent also enjoyed the exclusive and irrevocable authority to manage,
control and supervise the sales of the lots within the subdivision.
On 5 August 1986, respondent secured from the Human Settlements

Regulatory Commission ("HSRC") an extension of time to finish the
subdivision development until 30 July 1987. On 8 August 1986, petitioners
instructed respondent to stop selling subdivision lots and collecting payments
from lot buyers.
On 20 January 1987, petitioners granted respondent an authority to

resume the sale of subdivision lots and the collection of payments subject to
the following conditions: (1) all collections shall be deposited in a joint
account with China Banking Corporation, San Fernando, Pampanga branch;
(2) withdrawals shall be limited to 50% of the total collections or to
46
respondent's share, which can only be used for development expenses, and
any withdrawal shall be subject to the approval of petitioners; (3) only Franda
Village Subdivision receipts, duly countersigned by petitioners, shall be used;
(4) collections shall be subject to a weekly or monthly audit; and (5) any
violation of these conditions shall result in the automatic cancellation of the
authority.
Respondent filed an action to rescind the contract on the ground that

conditional authority issued by petitioners violated the Contract. Petitioners
countered that respondent breached the Contract by failing to finish the
subdivision within the 27 months agreed upon, and therefore respondent was
in delay. Petitioners also alleged that respondent sold one subdivision lot to
two different buyers.
The trial Court ruled that the petitioners breached the Contract by: (1)
hiring Rosales to do development work on the subdivision within the 27-
month period exclusively granted to respondent; (2) interfering with the
latter’s development work; and (3) stopping respondent from managing the
sale of lots and collection of payments.
Because petitioners were the first to breach the Contract and even
interfered with the development work, the trial court declared that
respondent did not incur delay even if he completed only 28% of the
development work. Further, the HSRC extended the Contract up to July 1987.
Since the Contract had not expired at the time respondent filed the action for
rescission, petitioners’ defense that respondent did not finish the
development work on time was without basis.
The Court of Appeals affirmed the decision.
ISSUE:
Whether or not the respondent incurred delay in not finishing the work
in the stipulated time.
RULING:
The Supreme Court finds no merit in petitioner’s claim that respondent
incurred delay in the performance of his obligation under the Contract. At
that time, the law authorized HSRC to grant extensions of time for completion
of subdivision projects.
The law provides that delay may exist when the obligor fails to fulfill his
obligation within the time expressly stipulated. In this case, the HSRC
extended the period for respondent to finish the development work until 30
July 1987. Respondent did not incur delay since the period granted him to
fulfill his obligation had not expired at the time respondent filed the action for
rescission on 27 February 1987.
Moreover petitioners hampered and interfered with respondent’s

development work. Petitioners also stopped respondent from selling lots and
collecting payments from lot buyers, which was the primary source of
development funds. In effect, petitioners rendered respondent incapable, or
at least made it difficult for him, to develop the subdivision within the allotted
period. In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply with what is incumbent upon him.
It is only when one of the parties fulfills his obligation that delay by the other
begins.
47
Respondent’s failure to submit the monthly report cannot serve as

sufficient basis for the cancellation of the Contract. The cancellation of a
contract will not be permitted for a slight or casual breach. Only a
substantial and fundamental breach, which defeats the very object of the
parties in making the contract, will justify a cancellation. In the instant case,
the development work continued for more than two years despite the lack of a
monthly report.
POSITIVE PERSONAL OBLIGATIONS / TO DO
JACINTO TANGUILIG doing business under the name and style J.M.T.
ENGINEERING AND GENERAL MERCHANDISING, petitioner.
VS. COURT OF APPEALS and VICENTE HERCE JR., respondents
G.R. No. 117190
January 2, 1997
266 SCRA 78
FACTS:
Sometime in April 1987, petitioner entered into a contract with herein
private respondent to construct windmill for the latter. After some
negotiations they agreed on the construction of the windmill for a
consideration of P60,000.00 with a one-year guaranty from the date of
completion and acceptance by respondent Herce Jr. of the project. Pursuant
48
to the agreement respondent paid petitioner a down payment of P30,000.00
and an installment payment of P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay

the balance, petitioner filed a complaint to collect the amount. However,
private respondent claimed that petitioner did not build a deep well so he was
not entitled for payment and also such windmill was defective and was easily
destroyed by a typhoon. Petitioner, on the other hand, denied the inclusion of
the construction of a deep well in their contract and besides the destruction
of the windmill is due to a force majeure. In finding for plaintiff, the trial
court held that the construction of the deep well was not part of the windmill
project as evidenced clearly by the letter proposals submitted by petitioner to
respondent. The defects and the construction were not also clearly proven by
the respondent.
However, Court of Appeals reversed the trial court. It ruled that the
construction of the deep well was included in the agreement of the parties
because the term "deep well" was mentioned in both proposals. His motion
for reconsideration having been denied by the Court of Appeals, petitioner
now seeks relief from the Supreme Court.
ISSUES:
Whether or not petitioner is obliged to construct the deep well and is
obliged to repair the windmills.
RULING:
On the first issue, the Supreme Court held that petitioner is not obliged
to construct the deep well, sustaining the trial court to be correct that said
deep well is not stipulated in their contract. Notably, nowhere in either
proposal is the installation of a deep well mentioned, even remotely. Neither
is there an itemization or description of the materials to be used in
constructing the deep well. There is absolutely no mention in the two (2)
documents that a deep well pump is a component of the proposed windmill
system.
In order for a party to claim exemption from liability by reason of

fortuitous event under Art. 1174 of the Civil Code the event should be the sole
and proximate cause of the loss or destruction of the object of the contract.
In Nakpil vs. Court of Appeals, four (4) requisites must concur: (a) the cause
of the breach of the obligation must be independent of the will of the debtor;
(b) the event must be either unforeseeable or unavoidable; (c) the event must
be such as to render it impossible for the debtor to fulfill his obligation in a
normal manner; and, (d) the debtor must be free from any participation in or
aggravation of the injury to the creditor.
Petitioner failed to show that the collapse of the windmill was due
solely to a fortuitous event. Interestingly, the evidence does not disclose that
there was actually a typhoon on the day the windmill collapsed. Petitioner
merely stated that there was a "strong wind." But a strong wind in this case
cannot be fortuitous, unforeseeable or unavoidable. On the contrary, a strong
wind should be present in places where windmills are constructed, otherwise
the windmills will not turn.
BREACH OF OBLIGATIIONS: CAUSES AND EFFECTS

49
1. PERIQUET VS. CA, 238 SCRA 697
2. LEGASPI OIL VS. CA, 224 SCRA 213
3. ARCHIPELAGO MANAGEMENT VS. CA, 266 SCRA 429
PERIQUET JR. VS. COURT OF APPEALS

238 SCRA 697
FACTS:
Spouses Fernando Periquet and Petra Francisco were left childless so
they took in a son out of wedlock of Maria, Petra’s sister. The boy was given
the name Fernando Periquet Jr., though he was not legally adopted.
On March 20, 1966, Fernando Periquet died. He left a will wherein he

named his wife Petra as his universal heir. Accordingly, Petra instituted a
Special Proceeding for probate of her deceased spouse’s will. Unfortunately,
Petra died after only four months and eighteen days later. Prior to her
untimely death, she asked her lawyer to prepare her last will and testament.
Petra left her estate to petitioner and provided for certain legacies to her
brother, sister and children of her deceased siblings. However, she died
before she could sign it.
On August 3,1966, Felix Francisco executed a document of Assignment

of Hereditary Rights in favor of Periquet Jr. other intestate heirs also executed
a Deed of assignment of Hereditary Rights except Florentino Zaragoza and
Alberta Zaragoza-Morgan.
On December 13, 1969, petitioner entered into a compromise

agreement with the Zaragozas and Periquets. The trial court approved the
compromise agreement. Also, an order for adjudication and transfer of the
residue of the estate to petitioner was issued.
On May 16, 1970, Felix Francisco filed an action to annul the

Assignment of Hereditary Rights he executed in favor of petitioner. The
action for annulment was based on gross misrepresentation and fraud, grave
abuse of confidence, mistake and undue influence and lack of cause and/or
consideration in the execution of the challenged Deed of Assignment.
The trial court declared the Assignment of Hereditary Rights executed

by Francisco in favor of Periquet Jr. valid and binding.
On appeal, the then Intermediate Appellate Court annulled and

rescinded the Assignment of Hereditary Rights. A motion for reconsideration
was denied for lack of merit.
ISSUES:
Whether or not the CA erred in disregarding and ignoring the trial
court’s strong and substantial findings of fact that no fraud, deception, gross
misrepresentation or undue influence attended the execution and signing of
the Deed of Assignment of Hereditary Rights.
Whether or not the Intermediate Appellate Court erred in disregarding

the trial court’s strong and substantial findings of fact that no fraud,
deception, gross misrepresentation or undue influence attended the execution
and signing of the deed of Assignment.
Whether or not the Intermediate Appellate Court erred in disturbing

and setting aside the Compromise Agreement.
RULING:
Anent the 1st issue, YES. No fraud was employed by herein petitioner.
50
Felix Francisco could not be considered to have been deceived into

signing the subject deed of assignment. The kind of fraud that will vitiate a
contract refers to those insidious words or machinations resorted to by one of
the contracting parties to induce the other to enter into a contract which
without them he would not have agreed to. It must have a determining
influence on the consent of the victim. The will of the victim, in effect, is
maliciously vitiated by means of a false appearance of reality.
In the case at bench, manifestations of fraud are non-existent.

Resultantly, the Assignment of Hereditary Rights executed by Felix Francisco
in favor of herein petitioner is valid and effective. Furthermore, the
allegations of fraud, deception, gross misrepresentation, or undue influence
were not established by full, clear and convincing evidence. The finding of
the trial court as to its existence or non-existence is final and cannot be
reviewed save only when the finding id clearly shown to be erroneous.
Anent the 2nd issue, YES. The fraud that vitiates a contract refers to
those insidious words or machinations resorted to by one of the contracting
parties to induce the other to enter into a contract which without them he
would not have agreed to. In the case at bench, no such fraud was employed
by herein petitioner. Clearly, Felix Francisco executed the document
voluntarily and freely basing it on the Trial Court’s findings. The finding of
the Trial Court as to the existence of fraud is final and cannot be reviewed
save only when the finding is clearly shown to be erroneous.
Anent the 3rd issue, YES. It cannot be denied that a compromise

agreement was entered into by the parties in that case in order to end the suit
already filed in court. The same was approved by the court, cannot and
should not be disturbed except for vices of consent or forgery, it being the
obvious purpose of such compromise agreement to settle, once and for all, the
claims of the parties, and bar all future disputes and controversies thereon.

51
BREACH OF OBLIGATIIONS: CAUSES AND EFFECTS (Art. 1167, CC)
LEGASPI OIL CO., INC., petitioner,

VS. THE COURT OF APPEALS and BERNARD OSERAOS, respondents
G.R. No. 96505
July 1, 1993
224 SCRA 213
FACTS:
Respondent Bernard Oseraos acting through his authorized agents, had
several transactions with appellee Legaspi Oil Co. for the sale of copra to the
latter. The price at which appellant sells the copra varies from time to time,
depending on the prevailing market price when the contract is entered into.
One of his authorized agents, Jose Llover, had previous transactions with
appellee for the sale and delivery of copra. The records show that he
concluded a sale for 70 tons of copra at P95.00 per 100 kilos on May 27, 1975
and another sale for 30 tons of P102.00 per 100 kilos on September 23, 1975.
Subsequently, on November 6, 1975, another designated agent signed a
contract in behalf of appellant for the sale of 100 tons of copra at P79.00 per
100 kilos with delivery terms of 25 days effective December 15, 1975. At this
point, it must be noted that the price of copra had been fluctuating (going up
and down), indicating its unsteady position in the market.
On February 16, 1976, appellant's agent Jose Llover signed a contract

for the sale of 100 tons of copra at P82.00 per 100 kilos with delivery terms of
20 days effective March 8, 1976. As compared to appellant's transaction on
November 6, 1975, the current price agreed upon is slightly higher than the
last contract. In all these contracts though, the selling price had always been
stated as "total price" rather than per 100 kilos. However, the parties have
understood the same to be per 100 kilos in their previous transactions.
After the period to deliver had lapsed, appellant sold only 46,334 kilos
of copra thus leaving a balance of 53,666 kilos as per running account card.
Accordingly, demands were made upon appellant to deliver the balance with a
final warning embodied in a letter dated October 6, 1976, that failure to
deliver will mean cancellation of the contract, the balance to be purchased at
open market and the price differential to be charged against appellant. On
October 22, 1976, since there was still no compliance, appellee exercised its
option under the contract and purchased the undelivered balance from the
open market at the prevailing price of P168.00 per 100 kilos, or a price
differential of P86.00 per 100 kilos, a net loss of P46,152.76 chargeable
against appellant.
The petitioner then filed a complaint against private respondent for

breach of a contract and for damages. The trial court held Oseraos liable for
damages amounting to P48,152.76. The Appellate Court ordered the

52
dismissal of the case on appeal. Hence, the instant petition for review on
certiorari.
ISSUE:
Whether or not private respondent Oseraos is liable for damages
arising from fraud or bad faith in deliberately breaching the contract of sale
entered into by the parties.
RULING:
Yes. The private respondent is guilty of fraud in the performance of his
obligation under the sales contract whereunder he bound himself to deliver to
petitioner 100 metric tons of copra within twenty (20) days from March 8,
1976. However within the delivery period, Oseraos delivered only 46,334
kilograms of copra to petitioner, leaving an undelivered thus a balance of
53,666 kilograms. Petitioner made repeated demands upon private
respondent to comply with his contractual undertaking to deliver the balance
of 53,666 kilograms but private respondent elected to ignore the same.
In a letter dated October 6, 1976, petitioner made a final demand with

a warning that, should private respondent fail to complete delivery of the
balance of 53,666 kilograms of copra, petitioner would purchase the balance
at the open market and charge the price differential to private respondent.
Still private respondent failed to fulfill his contractual obligation to deliver the
remaining 53,666 kilograms of copra. On October 22, 1976, since there was
still no compliance by private respondent, petitioner exercised its right under
the contract and purchased 53,666 kilograms of copra, the undelivered
balance, at the open market at the then prevailing price of P168.00 per 100
kilograms, a price differential of P86.00 per 100 kilograms or a total price
differential of P46,152.76.
In general, fraud may be defined as the voluntary execution of a

wrongful act, or a wilfull omission, knowing and intending the effects which
naturally and necessarily arise from such act or omission; the fraud referred
to in Article 1170 of the Civil Code of the Philippines is the deliberate and
intentional evasion of the normal fulfillment of obligation; it is distinguished
from negligence by the presence of deliberate intent, which is lacking in the
latter. The conduct of private respondent clearly manifests his deliberate
fraudulent intent to evade his contractual obligation for the price of copra had
in the meantime more than doubled from P82.00 to P168 per 100 kilograms.
Under Article 1170 of the Civil Code of the Philippines, those who in
the performance of their obligation are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for
damages. Pursuant to said article, private respondent is liable for damages.
In case of fraud, bad faith, malice, or wanton attitude, the guilty party
is liable for all damages, which may be reasonably attributed to the non-
performance of the obligation. On account of private respondent's deliberate
breach of his contractual obligation, petitioner was compelled to buy the
balance of 53,666 kilos of copra in the open market at the then prevailing
price of P168 per 100 kilograms thereby paying P46,152.76 more than he
would have paid had private respondent completed delivery of the copra as
agreed upon.
Thus, private respondent is liable to pay respondent the amount of

P46,152.76 as damages.
Petition granted. The trial court ruling reinstated.

53
BREACH OF OBLIGATIIONS: CAUSES AND EFFECTS (Art. 1167, CC)
ACE-AGRO DEVELOPMENT CORP. VS. COURT OF APPEALS

266 SCRA 429
FACTS:
Cosmos Bottling Corporation contacted the services of herein
petitioner, Ace-Agro Development Corporation, for cleaning soft drink bottles
and repairing wooden shells for the former covering the period of January 1,
1990 to December 31, 1990. A few months later, a fire broke out at Cosmos
plant, destroying among other places including the area where petitioner did
its work. As a result, petitioner’s work was stopped.
Due to the fire, Cosmos terminated their contract. Petitioner wrote a

letter of reconsideration with Cosmos but the latter denied because the fire
destroyed the bottles and wooden shells of the corporation. Thus, petitioner
dismissed its employees because of the termination of its contract with
Cosmos. The employees filed a complaint for illegal dismissal against
petitioner and Cosmos. During the pendency of the labor case, Cosmos
informed petitioner that it could resume its work but the work will be outside
of the plant. The petitioner rejected the offer because of the additional cost in
the transportation of its employees which will affect its derived benefits from
54
the contract. Further negotiation took place, Cosmos agreed that petitioner
could resume its work inside the plant in accordance with their original
contract. However, the latter rejected the offer citing the fact that there was
a pending labor case. Petitioner filed a case for breach of contract and
damages against Cosmos.
ISSUE:
Whether or not private respondent was justified in unilaterally
terminating the contract on account of a force majeure.
Whether or not there was a breach of obligation.
RULING:
Yes, the Supreme Court ruled that the agreement between the appellee
and the appellant is with a resolutory period, beginning from January 1, 1990
to December 31, 1990. When the fire broke out, there resulted a suspension
of the appellee’s work as per agreement. The suspension of work due to force
majeure did not merit an automatic extension of the period of the agreement
between them. The stipulation that in the event of a fortuitous event or force
majeure, the contract shall be deemed suspended during the said period does
not mean that the happening of any of those events stops the running of the
period the contract has been agreed upon to run. It only relieves the parties
from the fulfillment of their respective obligations during that time. If during
the sixth of the thirty years fixed as the duration of a contact, one of the
parties is prevented by force majeure to perform his obligation during those
years, he cannot after the expiration of the thirty-year period, be compelled to
perform those years and he cannot after six more years to make up for what
he failed to perform during the said six years because it would in effect be an
extension of the term of the contract.
Cosmos withdrew its unilateral termination of their agreement when it

agreed with Ace-Agro to resume its work. The Ace-Agro’s rejection of the
offer of the appellant is an act without a basis. Ace-Agro asked for an
extension of the period of the contact with Cosmos but it was denied because,
in effect, Ace-Agro is asking for a new contract with appellant. That’s why,
Ace-Agro refused the second offer of Cosmos.
Yes, the Court found out that Ace-Agro breached the contract and that
Cosmos did not. The act of refusing the offer of Cosmos by petitioner is a
breach of the contract because it insisted that the contract must be extended
and that working outside the premises of the Cosmos plant would constitute
additional expenses for the Ace-Agro, which in turn, does not have any legal
basis. Cosmos is not liable for the dismissal of the employees of petitioner
because it had made efforts towards accommodation while petitioner was
unwilling to make adjustments since it cannot profitably resume operations
due to the upcoming expiration of the contract.
Thus, petition is denied.
NECESSITY OF DEMAND: EXTRAJUDICIAL OR JUDICIAL
PNB MADECOR VS. GERARDO C. UY

G.R. No. 129598
August 15, 2001
363 SCRA 128
FACTS:
55
Guillermo Uy, doing business under the name G.U. Enterprises,
assigned to respondent Gerardo Uy his receivables due from Pantranco North
Express Inc. (PNEI) amounting to P4,660,558.00. The deed of assignment
included sales invoices containing stipulations regarding payment of interest
and attorney’s fees. Thus, Uy filed with the RTC a collection suit with an
application for the issuance of a writ of preliminary attachment against PNEI.
A writ of preliminary attachment was issued on January 26, 1995,

commanding the sheriff “to attach the properties of the defendant, real or
personal, and/or (of) any person representing the defendant” in such amount
as to cover Gerardo Uy’s demand. On January 27, 1995, the sheriff issued a
notice of garnishment addressed to the Philippine National Bank (PNB)
attaching the “goods, effects, credits, monies and all other personal
properties” of PNEI in the possession of the bank, and requesting a reply
within five days. PNB MADECOR received a similar notice.
Petitioner then submitted a position paper stating that PNB MADECOR

is a creditor of PNEI with respect to the P8,784,227.48 and at the same time
its debtor with respect to the P7,884,000.00, PNB MADECOR and PNEI are
therefore creditors and debtors of each other and by force of the law on
compensation, both obligations of PNB MADECOR and PNEI are already
considered extinguished to the concurrent amount or up to P7,884,000.00 so
that PNEI is still obligated to pay PNB MADECOR the amount of P900,227.48
Uy filed an omnibus motion opposing PNB MADECOR’s claim of

compensation in which the latter argued that the letter of PNEI on September
28, 1984 was not a demand letter but merely a request for the
implementation of the arrangement for set-off receivables. Therefore, PNEI
did not earn an interest of 18% annually.
ISSUE:
Whether or not the letter of PNEI on September 28, 1984 to PNB
MADECOR was a demand letter.
RULING:
The Supreme Court observed that petitioner’s obligation to PNEI
appears to be payable on demand. Petitioner is obligated to pay the amount
stated in the promissory note upon receipt of a notice to pay from PNEI.
Henceforth, if petitioner fails to pay after such notice, the obligation will earn
an interest of 18 percentum per annum.
The records showed that the letter was not a demand letter but one
that merely informed petitioner of the conveyance of a certain portion of its
obligation to PNEI per a dacion en pago arrangement between PNEI and
PNB, and the unpaid balance of obligation after deducting the amount
conveyed to PNB. The letter only connotes that PNEI was advising petitioner
to settle the matter of implementing the earlier arrangement with PNB.

56
WHEN DEMAND NOT NECESSARY
1. TANGUILING VS, CA, 266 SCRA 78

2. TAYAG VS. CA, 219 SCRA 480
3. BARZAGA VS. CA, 268 SCRA 105
4. PERIQUET VS. CA, 238 SCRA 697
TANGUILIG v. COURT of APPEALS

G. R. No. 117190
January 2, 1997
266 SCRA 78
FACTS:
In April 1987, petitioner Jacinto Tanguilig, ( J.M.T. Engineering and
General Merchandising), proposed to respondent Vicente Herce, Jr. to
construct a windmill system for him. After some negotiations, they agreed on
the construction of the windmill for a consideration of P60,000.00 with a one-
year guaranty from the date of completion and acceptance by Herce, Jr. of the
project. Pursuant to the agreement, Herce, Jr. paid Tanguilig a down payment
of P30,000.00 and an installment payment of P15,000.00, leaving a balance of
P15,000.00. On March 14, 1988, due to the refusal and failure of respondent
to pay the balance, petitioner filed a complaint to the collect the amount. In
his Answer before the trial court, Herce, Jr. denied the claim saying that he
had already paid the amount to San Pedro General Merchandising, Inc. which
the windmill was to be connected. Since the deep well formed part of the
system, the payment Herce, Jr. tendered to SPGMI should be credited his
account by Tanguilig. Respondent also averred that assuming he owed
petitioner a balance of P15,000.00, this should be offset by the defects in the
windmill which caused the structure to collapse after a strong wind hit hteir
place.
Tanguilig denied that the construction of a deep well was included in

the agreement to build the windmill sytem, for the contract price of
P60,000.00 was solely for the windmill assembly and its installation, exclusive
of other incidental materials needed for the project. Tanguilig also disowned
any obligation to repair or reconstruct the system and insisted that he
delivered it in good and working condition to respondent who accepted the
same without protest. He also contended that the collapse was attributable to
a typhoon, a force majeure, which relieved him of any liability.
ISSUE:
Whether or not the petitioner is under obligation to reconstruct the
windmill after it collapsed
RULING:
The Supreme Court held that when the windmill failed to function
properly, it becomes incumbent upon the petitioner to institute the proper
repairs in accordance with the guaranty stated in the contract. Hence,
respondent cannot be said to have incurred in delay; instead it is the
petitioner who should bear the expenses for the reconstruction of the
windmill. Thus, the Supreme Court ruled that respondent Herce, Jr. should
pay petitioner Tanguilig the balance of P15,000.00 and likewise ordered
petitioner Tanguilig to reconstruct subject defective windmill system, in
accordance with the one-year guaranty.

57
JOSEFINA TAYAG, RICARDO GALICIA, TERESITA GALICIA, EVELYN

GALICIA, JUAN GALICIA, JR. and RODRIGO GALICIA, petitioners,
VS. COURT OF APPEALS and ALBRIGIDO LEYVA, respondents
G.R. No. 96053
March 3, 1993
219 SCRA 418
FACTS:
The deed of conveyance executed on May 28, 1975 by Juan Galicia, Sr.,
prior to his demise in 1979, and Celerina Labuguin, in favor of Albrigido
Leyva involving the undivided one-half portion of a piece of land situated at
Poblacion, Guimba, Nueva Ecija is the subject matter of the present litigation
between the heirs of Juan Galicia, Sr. who assert breach of the conditions as
against private respondent’s claim anchored on full payment and compliance
with the stipulations thereof.
The court of origin which tried the suit for specific performance filed by
private respondent on account of the herein petitioner’s reluctance to abide
by the covenant, ruled in favor of the vendee while respondent court
practically agreed with the trial court except as to the amount to be paid to
petitioners and the refund to private respondent are concerned.
There is no dispute that the sum of P3,000.00 listed as first installment

was received by Juan Galicia, Sr. According to petitioners, of the P10,000.00
to be paid within ten days from execution of the instrument, only P9,707.00
was tendered to, and received by, them on numerous occasions from May 29,
1975, up to November 3, 1979. Concerning private respondent’s assumption
of the vendor’s obligation to the Philippine Veterans Bank, the vendee paid
only the sum of P6,926.41 while the difference of the indebtedness came from
Celerina Labuguin. Moreover, petitioners asserted that not a single centavo
of the P27,000.00 representing the remaining balance was paid to them.
Because of the apprehension that the heirs of Juan Galicia, Sr. are disavowing
the contract inked by their predecessor, private respondent filed the
complaint for specific performance.
ISSUE:
Whether or not private respondent correctly anchored on estopped or
waiver by acceptance of delayed payments.
RULING:
Both the trial and appellate courts were correct in sustaining the claim
of private respondent anchored on estopped or waiver by acceptance of
delayed payments under Article 1235 of the Civil Code in that:
“When the obligee accepts the performance, knowing its incompleteness or

irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with.”

58
considering that the heirs of Juan Galicia, Sr. accommodated private
respondently by accepting the latter’s delayed payments not only beyond the
grace periods but also during the pendency of the case for specific
performance. Indeed, the right to rescind is not absolute and will not be
granted where there has been substantial compliance by partial payments.
By and large, petitioners’ actuation is susceptible of but one construction-that
they are now estopped from reneging from their commitment on account of
acceptance of benefits arising from overdue accounts of private respondent.
Now, as to the issue of whether payments had in fact been made, there
is no doubt that the second installment was actually paid to the heirs of Juan
Galicia, Sr. due to Josefina Tayag’s admission in judicio that the sum of
P10,000.00 was fully liquidated. It is thus erroneous for petitioners to
suppose that “the evidence in the records do not support this conclusion”. A
contrario, when the court of origin, as well as the appellate court, emphasized
the frank representation along this line of Josefina Tayag before the trial
court, petitioners chose to remain completely mute even at this stage despite
the opportunity accorded to them, for clarification. Consequently, the
prejudicial aftermath of Josefina Tayag’s spontaneous reaction may no longer
be obliterated on the basis of estoppel.
Insofar as the third item of the contract is concerned, it may be

recalled that respondent court applied Article 1186 of the Civil Code on
constructive fulfillment which petitioners claim should not have been
appreciated because they are the obliges while the proviso in point speaks of
the obligor.
But, petitioners must concede that in a reciprocal obligation like a contract of

purchase, both parties are mutually obligors and also obliges, and any of the
contracting parties may, upon non-fulfillment by the other privy of his part of
the prestation, rescind the contract or seek fulfillment (Article 1191, Civil
Code).
Petitioners argue that there was no valid tender of payment nor

consignation of the sum of P18,520.00 which they acknowledge to have been
deposited in court on January 22, 1981 five years after the amount of
P27,000.00 had to be paid. This suggestion ignores the fact that consignation
alone produced the effect of payment in the case at bar because it was
established that two or more heirs of Juan Galicia, Sr. claimed the same right
to collect.
Moreover, petitioners did not bother to refute the evidence on hand

that, aside from the P18,520.00. These two figures representing private
respondent’s payment of the fourth condition amount to P32,428.25, less the
P3,778.77 paid by petitioners to the bank, will lead us to the sum of
P28,649.48 or a refund of P1,649.48 to private respondent as overpayment of
the P27,000.00 balance.

59
IGNACIO BARZAGA, petitioner,

VS. COURT OF APPEALS and ANGELITO ALVIAR, respondents
G.R. No. 115129
February 12, 1997
268 SCRA 105
FACTS:
Petitioner Ignacio Barzaga bought from the hardware store of
respondent Angelito Alviar construction materials for the niche of his wife
scheduled for internment on December 24, 1990. He paid for the materials
purchased but the circumstances of delivery with the specific date (December
22), time (8 A.M.), and place (Memorial Cemetery, Dasmarinas) were not
indicated in the invoice receipts but were verbally acknowledged by the store
attendant. Respondent was not able to deliver the materials on the specified
date and time which resulted to the delay in the construction of the niche and
consequently to the delay in the internment of petitioners wife. The delay
caused the inability of the petitioner to accede to the dying wishes of his wife
that she be buried on the 24th of the month. She was buried 2 and ½ days
later, after Christmas.
ISSUE:

60
Whether or not the respondent is liable for damages due to his non-
performance of his obligation to deliver the materials on the specified date
and time.
RULING:
Yes, private respondent is liable for damages. Respondent’s contention
in the appellate court that he did not incur delay in the performance of his
obligation to deliver the thing sold to petitioner since the time of delivery was
not indicated in the invoice receipt covering the sale could not be sustained in
view of the positive verbal commitment of the respondent’s employee. It was
no longer necessary to indicate the time of delivery. Respondent was
negligent and incurred delay in the performance of his contractual
obligations. Respondent had no right to manipulate petitioner’s timetable
and substitute it with his own.
Therefore, he is liable for moral damage for causing further anguish

and pain, and suffering to the family of petitioner especially during Christmas
day, and for exemplary damages for not performing his obligation under the
business contract.
DR. FERNANDO PERIQUET, JR.,

VS. HONORABLE FOURTH CIVIL CASES DIVISION OF THE
INTERMEDIATE APPELLATE COURT and the HEIRS OF THE LATE
FELIX R. FRANCISCO
G.R. No. 69996
December 5, 1994
238 SCRA 697
FOR FACTS, SEE PAGE 41:

61
ISSUE:
Whether or not the findings of the Court of Appeals that the assignment
of hereditary rights executed by Felix Francisco in favor of petitioner is void
due to fraud, deception, gross misrepresentation, or undue influence should
be sustained.
RULING:
The decision of the Court of Appeals was reversed and set aside for the
kind of fraud that will vitiate a contract refers to those insidious words or
machinations resorted to by one of the contracting parties to induce the other
to enter into a contract which without them he would not have agreed to.
In the case at bench, no such fraud was employed by herein petitioner.

Resultantly, the assignment of hereditary rights executed by Felix Francisco
in favor of herein petitioner is valid and effective.
And since, Felix is not a party to the compromise agreement; he cannot

be blinded by the same.
MORA SOLVENDI: EFFECTS
RIZAL COMMERCIAL BANKING CORPORATION

VS. COURT OF APPEALS and FELIPE LUSTRE
G.R. No. 133107
March 25, 1999
305 SCRA 449

62
FACTS:
On March 10, 1993, private respondent Atty. Felipe Lustre purchased a
Toyota Corolla from Toyota Shaw, Inc. for which he made a down payment of
P164,620.00, the balance of the purchase price to be paid in 24 equal monthly
installments. Private respondent thus issued 24 postdated checks for the
amount of P14, 976.00 each. The first was dated April 10, 1991; subsequent
checks were dated every 10th day of each succeeding month.
To secure the balance, private respondent executed a promissory note

and a contract of chattel mortgage over the vehicle in favor of Toyota Shaw,
Inc. The contract of chattel mortgage, in paragraph 11 thereof, provided for
an acceleration clause stating that should the mortgagor default in the
payment of any installment, the whole amount remaining unpaid shall become
due. In addition, the mortgagor shall be liable for 25% of the principal due as
liquidated damages.
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and
interests in the chattel mortgage to petitioner Rizal Commercial Banking
Corporation (RCBC). All the checks dated April 10, 1991 to January 10, 1993
were thereafter encashed and debited by RCBC from private respondent's
account, except for RCBC Check No. 279805 representing the payment for
August 10, 1991, which was unsigned. Previously, the amount represented by
RCBC Check No. 279805 was debited from private respondent's account but
was later recalled and re-credited, to him. Because of the recall, the last two
checks, dated February 10, 1993 and March 10, 1993, were no longer
presented for payment. This was purportedly in conformity with petitioner
bank's procedure that once a client's account was forwarded to its account
representative, all remaining checks outstanding as of the date the account
was forwarded were no longer presented for patent.
On the theory that respondent defaulted in his payments, the check

representing the payment for August 10, 1991 being unsigned, petitioner, in a
letter dated January 21, 1993, demanded from private respondent the
payment of the balance of the debt, including liquidated damages. The latter
refused, prompting petitioner to file an action for replevin and damages
before the Pasay City Regional Trial Court (RTC). Private respondent, in his
Answer, interposed a counterclaim for damages.
The RTC dismissed the petition. Likewise, the petition for appeal was
denied by the Court of Appeals. The Court of Appeals stated that the
"default" was not a case of failure to pay, the check being sufficiently funded,
and which amount was in fact already debited from appellee's account by the
appellant bank which subsequently re-credited the amount to defendant-
appelle's account for lack of signature.
ISSUE:
Whether or not petitioner’s claim is meritorious.
RULING:
No. Petitioner's conduct, in the light of the circumstances of this case,
can only be described as mercenary. Petitioner had already debited the value
of the unsigned check from private respondent's account only to re-credit it
much later to him. Thereafter, petitioner encashed checks subsequently
dated, and then abruptly refused to encash the last two. More than a year
after the date of the unsigned check, petitioner, claiming delay, demanded
from private respondent payment of the value of said check and that of the
last two checks, including liquidated damages. As pointed out by the trial
court, this whole controversy could have been avoided if only petitioner
bothered to call up private respondent and ask him to sign the check. Good
faith, not only in compliance with its contractual obligations, but also in
observance of the standard in human relations, for every person "to act with
justice, give everyone his due, and observe honesty and good faith." behooved
63
the bank to do so. Failing thus, petitioner is liable for damages caused to
private respondent. These include moral damages for the mental anguish,
serious anxiety, besmirched reputation, wounded feelings and social
humiliation suffered by the latter.
EFFECTS OF MORA ACCIPIENDI
SEE STATE INVESTMENT VS. COURT OF APPEALS, PAGE 17
COMPENSATIO MORAE - EFFECTS
1. LEAÑO VS. CA, 369 SCRA 36

2. HEIRS OF BACUS VS. CA, 371 SCRA 295
3. INTEGRATED PACKING VS. CA, 333 SCRA 170
4. LAFORTEZA VS. MACHUCA, 333 SCRA 643
5. BPI INVESTMENT VS. CA, 377 SCRA 117
LEAÑO VS. COURT OF APPEALS

369 SCRA 36
FACTS:
On November 13, 1985, private respondent Hermogenes Fernando, as
vendor and petitioner Carmelita Leaño, as vendee entered into a contract
regarding the sale of a piece of land located at Baliuag, Bulacan.
Petitioner Leaño agreed to pay the total purchase price of P

107,750.00. Further, P10,000.00 was agreed as a down payment and the
balance of P96,975.00 shall be paid within the period of 10 years at a monthly
amortization of P1,747.30 to commence on December 7, 1985 with interest of
18% per annum based on balances. It was also provided in the contract that
there is a grace period of one month within which to make payments,
together with the one corresponding to the month of grace. Should the
month of grace expire without the installments for both months having been
satisfied, an interest of 18% per annum will be charged on the unpaid
installments. Further, should the period of 90 days elapse from the expiration
of the grace period without the overdue and unpaid installments having been
paid with the corresponding interests up to that date, the vendor Fernando
was authorized to declare the cancellation of the contract and dispose of the
parcel of land. The payments and all other improvements made on the
premises shall be considered as rents paid for the use and occupation of the
premises and as liquidated damages.
Eventually, the contract was executed and Leaño made several

payments in lump sum. She constructed thereafter a house on the lot valued
at P800,000.00. The last payment she tendered was on April 1, 1989.
The trial court on September 16, 1991 rendered a decision on an

ejectment case filed by respondent Fernando, ordering Leaño to vacate the
premises and to pay P250.00 per month by way of compensation for the use
and occupation of the property from May 27, 1991 until the petitioner vacated
the premises, attorney’s fees and cost of the suit. A writ of execution was
thereafter issued on August 24, 1993.
On September 27, 1993, the petitioner filed with the RTC of Bulacan a
compliant of specific performance with preliminary injunction. Petitioner
assailed the decision of the municipal trial court that it was violative of her
right to due process and for being in contrary with the intentions of RA 6552
regarding the protection of buyers of lots on installments. She further
deposited the amount of P18,000.00 with the clerk of court to cover the
64
balance of the total cost of the contested lot. She also posted a cash bond of
P50,000.00 and on November 4, 1993, the trial court issued a writ of
preliminary injunction on the assailed decision of the municipal trial court.
On February 6, 1995, the trial court rendered a decision favoring the

petitioner, making the preliminary injunction permanent, ordering the
plaintiff to pay the defendant P103,090.70 corresponding to the outstanding
obligation under the contract executed which consists of the principal
together with interest and surcharges, plus interest thereon at the rate of
18% per annum in accordance with the contract’s provision, ordering the
defendant to pay the plaintiff P10,000.00 by way of attorney’s fees and costs
of suit.
On February 21, 1995, Fernando filed a motion for reconsideration and

the supplement thereto.
According to the trial court, the transaction was an absolute sale,

making the petitioner the owner of the contested lot upon actual and
constructive delivery thereof. Therefore, Fernando was divested of ownership
and cannot recover the same unless the contract is rescinded pursuant to
Article 1592 of the Civil Code which requires a judicial or notarial demand.
Since there had been no rescission, petitioner cannot be evicted.
Regarding the issue of delay, the trial court pointed out that the
plaintiff defaulted in the payment of the amortization due and therefore she
should be liable for the payment of the interest and penalties.
The trial court disregarded the petitioner’s claim that she gave a down
payment of P10,000.00 at the time of the execution of the contract. The trial
court relied on the statement of account and the summary prepared by the
respondent to determine the liability of the petitioner for the payment of the
liabilities and penalties. The trial court held that the petitioner’s consignation
on the amount of P18,000.00 did not produce a legal effect since it was not
undertaken in accordance with Articles 1176, 1177 and 1178 of the Civil
Code. The Court of Appeals affirmed in toto the trial court’s decision; hence,
this petition.
ISSUES:
1. Whether or not the transaction was an absolute and not a conditional
sale.
2. Whether or not there was proper cancellation of the contract to sell.
3. Whether or not there was delay on the petitioner’s part in the payment
of the monthly amortization.
RULING:
1. NO, the transaction was not an absolute sale; rather, it was a
conditional sale. The very intention of the parties was to reserve the
ownership of the land in the seller (Fernando) until the buyer has paid the
total purchase price. First, the contract to sell makes the sale, cession and
conveyance “subject to conditions” set forth on the contract. Second, what
was transferred was possession and not ownership. Finally, the land is
covered by the Torrens title, the act of registration of the deed of sale was the
operative act that could transfer ownership over the lot. No deed could be
registered in the case at bar since as stipulated in the contract, such deed
shall be executed upon completion of payment by Leaño.
In a contract to sell real property on installments, full payment of the

purchase price is a positive suspensive condition and the failure of the
payment is not a breach but rather shall be an event that will prevent the
obligation of the seller to convey the title from acquiring any obligatory force.

65
The transfer of ownership and title would occur after full payment of the
price.
In the case at bar, Leaño did not pay the installments after April 1,
1989, which prevented the obligation of Fernando to convey the property. It
brought into effect the cancellation provision of the contract. Article 1592 of
the Civil Code is inapplicable in the case at bar. But the provisions of RA
6552 (The Realty Installment Buyer Protection Act) governs the case at bar
which recognizes the right of the seller to cancel the contract upon non-
payment of an installment by the buyer.
2. NO, there was no proper cancellation of the contract to sell.
Leaño did not pay the installments after April 1, 1989, which prevented
the obligation of Fernando to convey the property. It brought into effect the
cancellation provision of the contract. Nevertheless, what is controlling is not
Article 1592 of the Civil Code but the provisions of RA 6552 (The Realty
Installment Buyer Protection Act) which recognizes not only the right of the
seller to cancel the contract upon non-payment off an installment by the
buyer but also rights of the buyer in case of cancellation.
Although the ejectment case operated as the notice of cancellation

required under the provisions of RA 6552, petitioner was not given the cash
surrender value of the payments that she made; hence, there was no actual
cancellation of the contract.
Consequently, petitioner Leaño may still reinstate the contract by updating

the account during the grace p[period and before actual cancellation.
3. YES, there was delay on the petitioner’s part to pay the monthly
amortizations. Article 1169 of the Civil Code provides that in reciprocal
obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay by the other begins.
Since respondent Fernando performed his part of the obligation by

allowing Leaño to have possession over the property and the latter not having
paid the monthly amortization in accordance with the terms of the contract,
the petitioner incurred delay and therefore is liable for damages.
The Court affirmed the decision of the appellate court, in toto.
HEIRS OF BACUS VS. COURT OF APPEALS

371 SCRA 295
FACTS:
On June 1, 1984, Luis Bacus leased to private respondent Faustino
Duray a parcel of agricultural land in Talisay, Cebu for 6 years, ending May
31, 1990. The contract contained an option to buy clause where the lessee
had the exclusive and irrevocable right to buy 2,000 square meters of the
property within five (5) years from the year of the effectivity of the contract at
P200 per square meter the rate of which shall be proportionately adjusted
depending on the peso rate against the US dollar, which at the time of the
execution of the contract was P14.00.

66
On March 15, 1990, the Duray spouses signified their intention to
Roque Bacus, one the decedent’s heirs, that they were willing and ready to
purchase the property under the option to buy clause. On March 30, 1990,
due to the heirs’ refusal to sell the property to the respondents, Duray’s
adverse claim was annotated by the Register of Deeds of Cebu.
On April 5, 1990, Duray filed a complaint for specific performance

against the heirs of the decedent with the Lupon Tagapamayapa of their
barangay, asking that he be allowed to purchase the land agreed upon in the
contract with the decedent.
Having failed to come to an agreement, the private respondents filed a

complaint before the trial court, praying that the heirs: a) execute a deed of
sale over the subject property in favor of them; b) receive the payment of the
purchase price; and c) pay the damages.
Petitioners alleged that prior to the death of the decedent, respondents

conveyed to them their lack of interest to but the subject land for want of
sufficient funds. They even requested the respondents to pay in full the
purchase price but the respondents refused.
On October 30, 1990, private respondents manifested in court that they

caused the issuance of a cashier’s check in the amount of P 650,000 payable
too petitioners at anytime upon demand. On August 31, 1991, trail court
rendered its decision, favoring the private respondents. On appeal, the Court
of appeals denied the motion of the petitioners.
Petitioners ratiocinated that they cannot be compelled to sell the

disputed property by virtue of the nonfulfillment of the obligation under the
option contract of the private respondents. Respondents argued that the
petitioners are unclear if Rule 65 or 45 of the Rules of Court govern their
petition.
Further, that questions of fact, which were actually raised by the

petitioners, cannot be entertained by the Supreme Court in a petition for
review.
Nonetheless, if the claim must be under Rule 45, the respondents opted
to exercise their option to buy as contained in the contract.
ISSUES:
1. Whether or not when the respondents opted to buy the property, were
they already required to deliver the money or consign it in court before the
execution of the deed of transfer.
2. Whether or not the private respondents incurred in delay when they

did not deliver the purchase price or consign it in court or before the
expiration of the contract.
RULING:
1. NO, the petitioners were not required to deliver the money or consign
it in court. Obligations under an option to buy are reciprocal obligations. The
performance of one obligation is conditioned on the simultaneous fulfillment
of the other obligation. In an option to buy, the payment of the purchase price
by the creditor is contingent upon the execution and delivery of a deed of sale
by the debtor. In the case at bar, the respondents were not yet obliged to
67
make actual payment. Consequently, since the obligation was not yet due,
consignation in court of the purchase price was not yet required.
2. NO, the private respondents did not incur delay when they did not
deliver the purchase price or consign it in court or before the expiration of
the contract. Consignation is the act of depositing the thing due with the
court or judicial authorities whenever the creditor cannot accept or refuses to
accept payment and it requires a prior tender of payment. Petitioners’
contention that private respondents failed to comply with their obligation
under the option to buy because they failed to actually deliver the purchase
price or consign it in court before the contract expired is not tenable. Ergo,
the private respondents did not incur any delay when they did not yet deliver
payment or make consignation before the expiration of the contract. In
reciprocal obligations, neither party incurs delay if the other does not comply
or is not ready to comply in a proper manner with what is incumbent upon
him. Only from the moment one of the parties fulfills his obligation, does
delay by the other begins.
In the case at bar, as early as March 15, 1990, respondents

communicated with the petitioners that they intended to exercise their
exclusive right to buy the parcel of land stipulated in the contract but which
was not given due course by the petitioners unless there is delivery of the
sum of money. As there was no compliance with what was incumbent upon
the petitioners under the option to but, private respondents had not incurred
in delay when the cashier’s check was issued even after the contract expired.
The instant petition is denied and the Court of Appeal’s decision is

affirmed.
INTEGRATED PACKAGING CORPORATION VS. COURT OF APPEALS

333 SCRA 170
FACTS:

68
Petitioner Integrated Packaging Corporation (Integrated) entered into
an agreement with private respondent Fil-Anchor paper Co., Inc. (Fil-Anchor)
regarding the delivery of 3, 450 reams of printing papers in a staggered basis
from May to October 1979. Then, Integrated entered into a contract with
Philippine Appliance Corporation (Philacor) for the printing of a minimum of
300, 000 copies of books.
Out of the 3, 450 reams that were supposed to be delivered, Fil-Anchor

delivered only 1,097; so petitioner demanded immediate delivery of the rest
of the reams of paper. Fil-Anchor consequently delivered P766,101.00 worth
of printing papers to which Integrated encountered difficulties in its payment.
The former made a formal demand from the latter to settles its outstanding
account. Integrated made a partial payment totaling to P 97,200.00.
Integrated once again entered into an additional printing contract with

Philacor but failed to comply with what is incumbent upon it. Hence, Philacor
demanded compensation from Integrated for the delay and damages it
suffered on account of petitioner’s non-compliance with what was agreed
upon in their contract. Consequently, Fil-Anchor filed a collection suit against
petitioner totaling to P 766,101.70 which represents the unpaid purchase
price of the printing paper bought by Integrated.
Integrated denied the material allegations of the complaint and by way

of a counterclaim, it alleged that respondent breached when it failed to
deliver 2,875 reams despite demand which made petitioner suffer actual
damages and failed to realized expected profits.
Eventually, the lower court rendered its judgment after due hearing
and trial. It ordered Integrated to pay P763,101.70 while it also ordered Fil-
Anchor to pay Integrated moral damages and compensatory damages of
P790,324.30 for the unrealized income of Integrated when Fil-Anchor failed
to deliver the reams of papers it needed for the printing of books. However,
the CA affirmed the decision of the lower court with respect only to
Integrated liabilities and not with Fil-Anchor’s liability to pay moral and
compensatory damages.
ISSUES:
Whether or not private respondent violated the order agreement.
Whether or not private respondent is liable for petitioner’s breach of
contract with Philacor.
RULING:
Anent the 1st issue, NO. The transaction between the parties is a
contract of sale whereby Fil-Anchor obligates itself to deliver printing paper
to Integrated which, in turn, binds itself to pay a sum of money. Both parties
conceded that the order agreement gives rise to reciprocal obligations such
that the obligation of one is dependent upon the obligation of the other.
Reciprocal obligations are to be performed simultaneously, so that the
performance of one is conditioned upon the simultaneous fulfillment of the
other. Fil-Anchor undertakes to deliver printing paper of various quantities
subject to petitioner’s corresponding obligation to pay, on a maximum 90-day
credit, for the materials. Petitioner Integrated did not fulfill its side of the
contract as its last payment in August 1981 could only cover materials
covered by delivery invoices dated September and October of 1980.
Consequently, Fil-Anchor’s suspension of its deliveries to petitioner whenever
the latter failed to pay on time is legally justified. Fil-Anchor has the right to
cease making further delivery; hence, it did not violate the order agreement.
On the contrary, it was Integrated which breached the agreement as it failed
to pay on time the materials delivered by private respondent.
Anent the 2nd issue, NO. Fil-Anchor cannot be held liable under the
contracts entered into by petitioner with Philacor because it is not a party to
69
said agreements. It is also not a contract pour autriu. The 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.
ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, MICHAEL Z.

LAFORTEZA, DENNIS Z. LAFORTEZA, and LEA Z. LAFORTEZA,
petitioners,
VS. ALONZO MACHUCA, respondent
June 16, 2000
G.R. No. 137552
333 SCRA 643
FACTS:
On August 2, 1988, Lea Zulueta-Laforteza executed a Special Power of
Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo Z.
Laforteza, Jr., appointing both as her Attorney-in-fact authorizing them jointly
to sell the subject house and lot property and sign any document for the
settlement of the estate of the late Francisco Q. Laforteza. Likewise on the
same day, Michael Z. Laforteza executed a Special Power of Attorney in favor
of Roberto and Gonzalo Jr., likewise, granting the same authority. Both
agency instruments contained a provision that in any document or paper to
exercise authority granted, the signature of both attorneys-in-fact must be
affixed. Dennis Laforteza also executed Special Power of Attorneys on
different dates.
In the exercise of the above authority, on January 20, 1989, the heirs of
the late Francisco Q. Laforteza represented by Roberto and Gonzalo entered
into a Memorandum of Agreement (Contract to Sell) with Alonzo Machuca
over the subject property for the sum of Six Hundred Thirty Thousand Only
(P630,000.00) to be payable as stipulated: P30,000 upon signing the
agreement and the remaining P600,000 upon issuance of the new certificate
of title in the name of the late Francisco Q. Laforteza and upon execution of
an extra-judicial settlement of the decedent’s estate with sale in favor of the
plaintiff. On June 20, 1989, the defendant was able to pay P30,000 as
stipulated in the agreement. On September 18, 1989, defendants sent letter
informing the defendant his obligation to pay the remaining balance to be due
after thirty (30) days, and the reconstituted title, which the defendant
received on the same date, of which on October 18, 1983, asked for an
extension until November 15, 1989. Roberto, assisted by a lawyer, was the
one who affirmed said request, but not Gonzalo.
On November 20, 1989, defendant informed the heirs that Roberto had
the payment for the balance, but said heirs refused to accept said payment.
Roberto declared the property not for sale for failure to comply with the
contractual obligations, and the agreement rescinded by the plaintiff-heirs.
Defendant insisted tender of payment but when the defendants refused to
accept such, an action for specific performance was filed in court. The trial
court ruled in favor of the defendant. When the petitioner-heirs appealed this
to the Court of Appeals, the decision was rendered against them. So, an
appeal to the Supreme Court was made.
ISSUE:
Whether or not the rescission of the agreement for failure by the
private respondent to fulfill his obligations was validly done.
70
RULING:
The Supreme Court ruled in the negative.
The issuance of the new certificate of title in the name of the late
Francisco Laforteza and the execution of an extrajudicial settlement of his
estate was not a condition which determined the perfection of the contract of
sale. Petitioners’ contention that since the condition was not met, they no
longer had an obligation to proceed with the sale of the house and lot is
unconvincing. The petitioners fail to distinguish between a condition imposed
upon the perfection of the contract and a condition imposed on the
performance of an obligation. Failure to comply with the first condition
results in the failure of a contract, while the failure to comply with the second
condition only gives the other party the option either to refuse to proceed
with the sale or to waive the condition. Thus, Art. 1545 of the Civil Code
states: "Art. 1545. Where the obligation of either party to a contract of sale is
subject to any condition which is not performed, such party may refuse to
proceed with the contract or he may waive performance of the condition. If
the other party has promised that the condition should happen or be
performed, such first mentioned party may also treat the nonperformance of
the condition as a breach of warranty. Where the ownership in the things has
not passed, the buyer may treat the fulfillment by the seller of his obligation
to deliver the same as described and as warranted expressly or by implication
in the contract of sale as a condition of the obligation of the buyer to perform
his promise to accept and pay for the thing."
In the case at bar, there was already a perfected contract. The

condition was imposed only on the performance of the obligations contained
therein. Considering however that the title was eventually "reconstituted"
and that the petitioners admit their ability to execute the extrajudicial
settlement of their father’s estate, the respondent had a right to demand
fulfillment of the petitioners’ obligation to deliver and transfer ownership of
the house and lot.
The Supreme Court did not subscribe to the petitioners’ view that the
Memorandum Agreement was a contract to sell. There is nothing contained
in the MOA from which it can reasonably be deduced that the parties
intended to enter into a contract to sell, i.e. one whereby the prospective
seller would explicitly reserve the transfer of title to the prospective buyer,
meaning, the prospective seller does not as yet agree or consent to transfer
ownership of the property subject of the contract to sell until the full payment
of the price, such payment being a positive suspensive condition, the failure
of which is not considered a breach, casual or serious, but simply an event
which prevented the obligation from acquiring any obligatory force.
There is clearly no express reservation of title made by the petitioners

over the property, or any provision which would impose non-payment of the
price as a condition for the contract’s entering into force. Although the
memorandum agreement was also denominated as a "Contract to Sell", it held
that the parties contemplated a contract of sale. A deed of sale is absolute in
nature although denominated a conditional sale in the absence of a
stipulation reserving title in the petitioners until full payment of the purchase
price. In such cases, ownership of the thing sold passes to the vendee upon
actual or constructive delivery thereof. The mere fact that the obligation of
the respondent to pay the balance of the purchase price was made subject to
the condition that the petitioners first deliver the reconstituted title of the
house and lot does not make the contract a contract to sell for such condition
is not inconsistent with a contract of sale.
The property in dispute, being an immovable property, is governed by

Article 1592 of the NCC, which needs the judicial or notarial act for its
71
rescission. It is not disputed that the petitioners did not make a judicial or
notarial demand for rescission. The November 20, 1989 letter of the
petitioners informing the respondent of the automatic rescission of the
agreement did not amount to a demand for rescission, as it was not notarized.
It was also made five days after the respondent’s attempt to make the
payment of the purchase price. This offer to pay prior to the demand for
rescission is sufficient to defeat the petitioners’ right under article 1592 of
the Civil Code.
Besides, the Memorandum Agreement between the parties did not

contain a clause expressly authorizing the automatic cancellation of the
contract without court intervention in the event that the terms thereof were
violated. A seller cannot unilaterally and extrajudicially rescind a contract of
sale where there is no express stipulation authorizing him to extrajudicially
rescind. Neither was there a judicial demand for the rescission thereof.
Thus, when the respondent filed his complaint for specific performance,
the agreement was still in force inasmuch as the contract was not yet
rescinded.
At any rate, considering that the six-month period was merely an

approximation of the time it would take to reconstitute the lost title and was
not a condition imposed on the perfection of the contract and considering
further that the delay in payment was only thirty days which was caused by
the respondents justified but mistaken belief that an extension to pay was
granted to him, the Court agreed with the CA’s ruling that the delay of one
month in payment was a mere casual breach that would not entitle the
respondents to rescind the contract. RESCISSION of a contract will not be
permitted for a slight or casual breach, but only such substantial and
fundamental breach as would defeat the very object of the parties in making
the agreement.
BANK OF THE PHILIPPINE ISLANDS INVESTMENT CORPORATION

VS. COURT OF APPEALS and ALS MANAGEMENT AND
DEVELOPMENT CORPORATION
377 SCRA 117
2002 Feb 15
FACTS:
A certain Frank Roa obtained a loan from Ayala Investment and
Development Corporation (AIDC), the predecessor of BPI Investment
Corporation (BPIIC). He mortgaged his house and lot as security for the loan.
Eventually, Roa sold the said property to ALS Management and Development
Corp. with the understanding that the latter would assume Roa’s balance of
indebtedness with AIDC.
In March 1981, AIDC issued a new loan to ALS to be applied to Roa’s

debt. The loan was released in August and September 1982. The
72
amortization commenced on May 1, 1981. On August 31, 1982, ALS updated
Roa’s arrearages by paying BPIIC the sum of P190,601.35. This reduced
Roa’s principal balance to P457,204.90 which, in turn, was liquidated when
BPIIC applied thereto the proceeds of private respondents’ loan of P500,000.
On September 13, 1982, BPIIC released to ALS what was left of their
loan after full payment of Roa’s loan. BPIIC instituted a foreclosure
proceeding against ALS for non-payment of their mortgage indebtedness from
May 1, 1981 to June 30, 1984 on the ground that they failed to pay the
mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted
to P475,585.31. A notice of sheriff’s sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093
against BPIIC. They alleged, among others, that they were not in arrears in
their payment, but in fact made an overpayment as of June 30, 1984. They
maintained that they should not be made to pay amortization before the
actual release of the P500,000 loan in August and September 1982. Further,
out of the P500,000 loan, only the total amount of P464,351.77 was released
to private respondents. Hence, applying the effects of legal compensation,
the balance of P35,648.23 should be applied to the initial monthly
amortization for the loan.
Private respondents maintain that even granting, arguendo, that the

loan contract was perfected on March 31, 1981, and their payment did not
start a month thereafter, still no default took place. According to private
respondents, a perfected loan agreement imposes reciprocal obligations,
where the obligation or promise of each party is the consideration of the
other party. In this case, the consideration for BPIIC in entering into the loan
contract is the promise of private respondents to pay the monthly
amortization. For the latter, it is the promise of BPIIC to deliver the money. In
reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. Therefore, private respondents conclude, they did not incur in
delay when they did not commence paying the monthly amortization on May
1, 1981, as it was only on September 13, 1982 when petitioner fully complied
with its obligation under the loan contract.
The trial court had held that private respondents were not in default in
the payment of their monthly amortization, hence, the extrajudicial
foreclosure conducted by BPIIC was premature and made in bad faith. It
awarded private respondents the amount of P300,000 for moral damages,
P50,000 for exemplary damages, and P50,000 for attorney’s fees and
expenses for litigation. It likewise dismissed the foreclosure suit for being
premature. The Court of Appeals affirmed the decision in toto. The motion
for reconsideration was denied hence the petition before the Supreme Court.
ISSUE:
Whether there is default on the part of both the parties regarding their
respective liabilities.
RULING:
NO. A contract of loan involves a reciprocal obligation, wherein the
obligation or promise of each party is the consideration for that of the other.
As averred by private respondents, the promise of BPIIC to extend and

deliver the loan is upon the consideration that ALS and Litonjua shall pay the
monthly amortization commencing on May 1, 1981, one month after the
supposed release of the loan.
It is a basic principle in reciprocal obligations that neither party incurs

in delay, if the other does not comply or is not ready to comply in a proper
73
manner with what is incumbent upon him. Only when a party has performed
his part of the contract can he demand that the other party also fulfills his
own obligation and if the latter fails, default sets in.
Consequently, petitioner could only demand for the payment of the

monthly amortization after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract.
Therefore, in computing the amount due as of the date when BPIIC

extrajudicially caused the foreclosure of the mortgage, the starting date is
October 13, 1982 and not May 1, 1981.
As admitted by private respondents themselves, they were irregular in

their payment of monthly amortization. Conformably with the ruling in SSS,
the Court can not properly declare BPIIC in bad faith. Consequently, the
award of moral and exemplary damages is ruled out.
However, BPIIC was negligent in relying merely on the entries found in

the deed of mortgage, without checking and correspondingly adjusting its
records on the amount actually released to private respondents and the date
when it was released. Such negligence resulted in damage to private
respondents, for which an award of nominal damages should be given in
recognition of their rights which were violated by BPIIC. For this purpose,
the amount of P25,000 is sufficient.

74
DOLO INCIDENTE – EFFECTS:
1. INTERNATIONAL CORPORAL BANK VS. GUECO, 351 SCRA

516
2. REPUBLIC VS. COURT OF TAX APPEALS, 366 SCRA 516
INTERNATIONAL CORPORATE BANK VS. GUECO

351 SCRA 516
FACTS:
Respondents Gueco Spouses obtained a loan form petitioner
International Corporate Bank (now Union Bank of the Philippines) to obtain a
car. In consideration thereof, the Spouses executed promissory notes which
were payable in monthly installments and chattel mortgage over the car to
serve as security for the notes.
The Spouses defaulted in the payment of the installments and

consequently, the petitioner filed on August 7, 1995 a civil action for “Sum of
Money with Prayer for a Writ of Replivin.”
On August 25, 1995, Dr. Gueco was served summons and was fetched
by the sheriff and representative of the bank for a meeting in the bank
premises. The bank demanded payment of the amount of P184,000.00 which
represents the unpaid balance for the car loan which was lowered to
P154,000.00 after negotiations and recomputations. As a result of the non-
payment of the reduced amount on that date, the car was detained within the
bank’s compound.
On August 28, 1995, Dr. Gueco further renegotiated for the reduction
of the outstanding loan to P150,000.00.
On August 29, 1995, Dr. Gueco delivered a manager’s check in the

amount of P150,000.00 but the car was not released because of his refusal to
sign the JOINT Motion to Dismiss.
After several demand letters and meetings with bank representatives,

the respondents initiated a civil action for damages which was dismissed for
lack of merit.
On appeal, the RTC ruled in favor of the Spouses, pointing out that
there was a meeting of the minds between the petitioner and the respondents
as to the reduction of the amount of indebtedness and the release of the car
but said agreement did not include the signing of the Joint Motion to Dismiss
as a condition sine qua non for the effectivity of the compromise.
On appeal, the Court of Appeals affirmed in toto the lower court’s

decision.
Hence, the petitioner comes to the Supreme Court by way of certiorari.
ISSUES:
Whether or not there was no agreement with respect to the execution of
the Joint Motion to Dismiss as a condition for the compromise agreement.

75
Whether or not the respondents should be granted moral, exemplary
damages and attorney’s fees.
Whether or not the Court of Appeals erred in holding that the petitioner
return the subject car to the respondents, without making any provision for
the issuance of the new manager’s/ cashier’s check by the respondents in
favor of the petitioner in lieu of the original cashier’s check that already
became stale.
RULING:
1. NO, there was no agreement with respect to the execution of the Joint
Motion to Dismiss as a condition for the compromise agreement.
Petitioner has the burden of proof that the oral compromise entered
into by the parties included the stipulation that the parties would joint file a
motion to dismiss. Factual findings of the lower court and the appellate court
found no evidence to acknowledge the contestation of the petitioner bank that
there was indeed such an agreement. Further, the only findings was that the
agreement between the parties was merely regarding the lowering of the
price and not anent the Joint Motion to Dismiss.
2. NO, the respondents are not entitled to the damages awarded by the Court
of Appeals. In awarding the damages, both the trial and appellate courts
found out that there was fraud, when in the findings of the Supreme Court,
there was none. Fraud is the deliberate intention to cause damage or
prejudice. It is the voluntary execution of a wrongful act, or the willful
omission. Knowing and intending the effects which naturally and necessarily
arise from such act or omission. There was no fraud on the part of the
petitioner bank in requiring the respondent to sign the joint motion to
dismiss.
3. YES, the Court of Appeals committed the error anent the 3 rd issue.
Respondents contend that the petitioner should return the car or its value and
that the latter, due to its own negligence, should suffer the loss occasioned of
the fact that the check had become stale. Respondents aver that the delivery
of the manager’s check produced the effect of payment; thus, petitioner was
negligent in opting not to deposit or use said check. The Court is not
persuaded.
A stale check is one which has not been presented for payment within a
reasonable time after its issue. It is valueless, and should not be paid.
In the case at bar, the check involved is not an ordinary bill of exchange
but a manager’s check which is drawn by the bank manager upon the bank
itself. In this case, the Gueco spouses have not alleged or shown that they or
the bank which issued the manager’s check has suffered damage or loss by
the delay or non-presentment. There is no doubt that the petitioner bank held
on the check and refused to encash the same because of the controversy
surrounding the signing of the joint motion to dismiss. Hence, the Court is of
the opinion that there is no bad faith or negligence.
Premises considered, the decision of the Court of appeals affirming the

Trial court’s decision is set aside. Respondents are further ordered to pay the
original obligation amounting to P150,000 to the petitioner upon surrender or
cancellation of the manager’s check in the latter’s possession, afterwhich,
petitioner is to return the subject motor vehicle in good working condition.

76
DOLO INCIDENTE – EFFECTS:
REPUBLIC OF THE PHILIPPINES,

represented by the COMMISSIONER OF CUSTOMS, petitioner,
VS. THE COURT OF TAX APPEALS and AGFHA, INCORPORATED,
respondents
Oct 23, 2000
G.R. No. 139050
FACTS:
FIL-JAPAN, a shipping agent, requested for an amendment of the
Inward Foreign Manifest so as to correct the name of the consignee from that
of GQ GARMENTS, Inc., to that of AGFHA, Inc. when its shipment’s Inward
Foreign Manifest stated that the bales of cloth were consigned to GQ
GARMENTS, Inc., while the Clean Report of Findings issued by the Societe
Generale de Surveilance mention AGFHA, Incorporated, to be the consignee.
FIL-JAPAN forwarded to AGFHA, Inc., the amended Inward Foreign

Manifest which the latter, in turn, submitted to the MICP Law Division. The
MICP indorsed the document to the Customs Intelligence Investigation
Services (CIIS). The CIIS placed the subject shipment under hold on the
ground that GQ GARMENTS, Inc., could not be located in its given address
and was thus suspected to be a fictitious firm. Forfeiture proceedings under
the Tariff and Customs Code were initiated.
AGFHA, Inc.’s motion for intervention contending that it is the lawful

owner and actual consignee of the subject shipment was granted. After
hearing, the Collector of Customs came up with a draft decision ordering the
lifting of the warrant of seizure and detention on the basis of its findings that
GQ GARMENTS, Inc., was not a fictitious corporation and that there was a
valid waiver of rights over the bales of cloth by GQ GARMENTS, Inc., in favor
of AGFHA, Inc. The draft decision was submitted to the Deputy
Commissioner for clearance and approval, who, in turn, transmitted it to the
77
CIIS for comment. The CIIS opposed the draft decision, insisting that GQ
GARMENTS, Inc., was a fictitious corporation and that even if it did exist, its
president, John Barlin, had no authority to waive the right over the subject
shipment in favor of AGFHA, Inc. The Deputy Commissioner then rejected
the draft decision of the Collector of Customs.
GQ GARMENTS, Inc., and AGFHA, Inc., filed a joint motion for

reconsideration. Convinced that the evidence presented established the legal
existence of GQ GARMENTS, Inc., and finding that a resolution passed by the
Board of Directors of GQ GARMENTS, Inc., ratified the waiver of its
president, the Collector of Customs in another draft decision granted the joint
motion. The Office of the Commissioner of Customs, however, disapproved the
new draft decision and denied the release of the goods. In deference to the
directive of the Commissioner, the District Collector of Customs ordered the
forfeiture of the shipment. AGFHA, Inc., interposed an appeal to the Office of
the Commissioner of Customs but was dismissed.
AGFHA, Inc., therefore, filed a petition for review with the Court of Tax
Appeals questioning the forfeiture of the bales of textile cloth. Finding merit
in the plea of appellants, the Court of Tax Appeals granted the petition and
ordered the release of the goods to AGFHA, Inc., however, the Commissioner
of Customs then challenged before the Court of Appeals the decision of the
tax court but was dismissed for lack of merit. The appellate court ruled that
the Bureau of Customs has failed to satisfy its burden of proving fraud on the
part of the importer or consignee. The Court of Appeals attributed the error
in indicating GQ GARMENTS, Inc., instead of AGFHA, Inc., in the Inward
Foreign Manifest as being the consignee of the subject shipment to the
shipping agent. It also noted the finding of the tax court that GQ GARMENTS,
Inc., was, in fact, a registered importer. The BOC instituted the instant
petition for review under Rule 45 of the Revised Rules of Court assailing the
affirmance by the Court of Appeals of the tax court's decision.
ISSUE:
Whether or not AGFHA, Inc. committed fraud in the importation of
bales of cloth.
RULING:
The requisites for the forfeiture of goods under the Tariff and Customs
Code are: (a) the wrongful making by the owner, importer, exporter or
consignee of any declaration or affidavit, or the wrongful making or delivery
by the same person of any invoice, letter or paper - all touching on the
importation or exportation of merchandise; (b) the falsity of such declaration,
affidavit, invoice, letter
or paper; and (c) an intention on the part of the importer/consignee to evade
the payment of the duties due.
Petitioner asserts that all of these requisites are present in this case. It
contends that it did not presume fraud, rather the events positively point to
the existence of fraud. On the other hand, AGFHA, Inc. maintains that there
has only been an inadvertent error and not an intentional wrongful
declaration by the shipper to evade payment of any tax due.
Fraud must be proved to justify forfeiture. It must be actual,

amounting to intentional wrong-doing with the clear purpose of avoiding the
tax. Mere negligence is not equivalent to the fraud contemplated by law.
What is here involved is an honest mistake, not even directly attributable to
private respondent, which will not deprive the government of its right to
collect the proper tax. The Collector of Customs, Court of Tax Appeals and the
Court of Appeals are unanimous in concluding that no fraud has been
committed by AGFHA, Inc. in the importation of the bales of cloth. Therefore,
the forfeiture cannot be justified.

78
Petition denied. Decision affirmed.
NEGLIGENCE AS A QUESTION OF FACT
1. YAMBAO VS. ZUÑIGA, 18 SCRA 266

2. SMITH BELL DODWELL SHIPPING VS. BORJA, 383 SCRA
341
3. ILUSORIO VS. CA, 393 SCRA 89
4. NPC VS. CA, 161 SCRA 334
YAMBAO VS. ZUÑIGA

418 SCRA 266

79
FACTS:
On May 6, 1992 at around 3:30 P.M, the bus owned by petitioner
Cecilia Yambao was being driven by her driver, one Ceferino G. Venturina
along EDSA. Suddenly, the bus bumped Herminigildo Zuñiga, a pedestrian.
Such was the force of the impact that the left side of the front windshield of
the bus was cracked. Zuñiga was rushed to the Quezon City General Hospital
where he was given medical attention, but due to the massive injuries
sustained, he succumbed shortly thereafter.
A complaint against petitioner and her driver for damages was filed at
the Regional Trial Court of Malolos City. In her answer, the petitioner
vehemently denied the material allegations of the complaint. She tried to
shift the blame upon the victim, theorizing that Herminigildo bumped into her
bus, while avoiding an unidentified woman who was chasing him.
Furthermore, she alleged that she was not liable for any damages because
she exercised the proper diligence of a good father of a family both in the
selection and supervision of her bus driver.
The trial court rendered its decision holding petitioner and her driver
liable for the untimely death of Zuñiga and to indemnify his legal heirs, the
herein respondents. The Court of Appeals affirmed the said decision of the
RTC. Petitioner duly moved for reconsideration, but her motion was denied
for lack of merit.
ISSUE:
Whether or not the petitioner exercised the diligence of a good father
of a family in the selection and supervision of her employees thus absolving
her from any liability.
RULING:
YES. Whether a person is negligent or not is a question of fact. It was
Venturina’s reckless and imprudent driving of petitioner’s bus, which is the
proximate cause of the victim’s death. It is thus evident that petitioner did
not exercise the diligence of a good father of a family in the selection and
supervision of her employees. The law governing petitioner’s liability, as the
employer of bus driver Venturina is Article 2180 of the Civil Code. The
“diligence of a good father” means diligence in the selection and supervision
of employees. Thus, when an employee, while performing his duties, causes
damage to persons or property due to his own negligence, there arises the
juris tantum presumption that the employer is negligent, either in the
selection of the employee or in the supervision over him after the selection.
The presumption juris tantum that there was negligence in the selection of
her bus driver remains unrebutted.
Having failed to rebut the legal presumption of negligence in the

selection and supervision of her driver is responsible for damages, the basis
of the liability being the relationship of pater familias or on the employer’s
own negligence.

80
SMITH BELL DODWELL SHIPPING AGENCY CORPORATION

VS. CATALINO BORJA and INTERNATIONAL TO WAGE AND
TRANSPORT CORPORATION
G.R. No. 143008
June 10, 2002
383 SCRA 341
FACTS:
On September 23, 1987, Smith Bell filed a written request with the
Bureau of Customs for the attendance of the latter’s inspection team on
vessel M/T King Family which was due to arrive at the port of Manila on
September 24, 1987. The vessel contained 750 metric tons of alkyl benzene
and methyl methacrylate monomer.
On the same day, Supervising Customs Inspector Manuel Ma. D.

Nalgan instructed respondent Catalino Borja to board said vessel and perform
his duties as inspector upon the vessel’s arrival until its departure. At that
time, Borja was a customs inspector of the Bureau of Customs.
At about 11 o’clock in the morning on September 24, 1987, while M/T

King Family was unloading chemicals unto two (2) barges owned by ITTC, a
sudden explosion occurred setting the vessels afire. Upon hearing the
explosion, Borja, who was at that time inside the cabin preparing reports, ran
outside to check what happened. Again, another explosion was heard.
Seeing the fire and fearing for his life, he hurriedly jumped over board to save
himself. However, the water was likewise on fire due mainly to the spilled
chemicals. Despite the tremendous heat, Borja swam his way for one hour
until he was rescued by the people living in the squatters’ area and sent to
San Juan De Dios Hospital.
After weeks of intensive care at the hospital, his attending physician

diagnosed Borja was diagnosed to be permanently disabled due to the
incident. Thus, he made demands against Smith Bell and ITTC for the
damages caused by the explosion. However, both denied liabilities and
attributed to each other negligence.
After hearing, the trial court ruled in favor of respondent Borja and
held petitioner liable for damages and loss of income. On appeal, the same
ruling was also upheld. Hence this petition.
ISSUE:
Whether or not the RTC and the Court of Appeals labored under a
misapprehension of facts regarding the negligence committed.
RULING:
Petitioner avers that both lower courts labored under a
misapprehension of the facts. It claims that the documents adduced in the
RTC conclusively revealed that the explosion that caused the fire on M/T King
Family had originated from the barge ITTC-101. However, the Supreme Court
find no cogent reason to overturn factual findings of the RTC and the Court of
Appeals since such findings were supported by substantial evidences.
Negligence is a conduct that creates undue risk of harm to another. It

is the failure to observe that degree of care, precaution and vigilance that the
circumstances justly demand, whereby that other person suffers injury.
Petitioner’s vessel was carrying chemical cargo -- alkyl benzene and methyl
methacrylate monomer. While knowing that their vessel was carrying
dangerous inflammable chemicals, its officers and crew failed to take all the
necessary precautions to prevent an accident. Petitioner was, therefore,
negligent.
81
The three elements of QUASI-DELICT are:

1. damages suffered by the plaintiff,
2. fault or negligence of the defendant, and
3. the connection of cause and effect between the fault or
negligence of the defendant and the damages inflicted on the
plaintiff.
All these elements were established in this case.
As a result of the fire and the explosion during the unloading of the
chemicals from petitioner’s vessel, Respondent Borja suffered the following
damage: and injuries: (1) chemical burns of the face and arms; (2) inhalation
of fumes from burning chemicals; (3) exposure to the elements while floating
in sea water for about three (3) hours; (4) homonymous hemianopsia or
blurring of the right eye [which was of] possible toxic origin; and (5) cerebral
infract with neo-vascularization, left occipital region with right sided
headache and the blurring of vision of right eye.
Wherefore, the Petition is partly granted. The assailed Decision is

AFFIRMED with the following MODIFICATIONS: petitioner is ordered to pay
the heirs of the victim damages in the amount of P320,240 as loss of earning
capacity, moral damages in the amount of P100,000, plus another P50,000 as
attorney’s fees.
ILUSORIO VS. COURT OF APPEALS

G. R. No. 139130
November 27, 2002
393 SCRA 89
FACTS:
Ramon Ilusorio is a prominent businessman, was the Managing
Director of Multinational Investment Bancorporation and the Chairman
and/or President of several other corporations he was a depositor in good
standing of respondent bank, the Manila Banking Corporation. As he was
then running about 20 corporations, and was going out of the country a
number of times, petitioner entrusted to his secretary, Katherine Eugenio, his
credit cards and checkbook with blank checks. Eugenio was able to encash
and deposit to her personal account about seventeen checks drawn against
the respondent bank. Petitioner did not bother to check his statement of
account until a business partner apprised him that he saw Eugenio use his
credit cards. Petitioner immediately fired his secretary and filed a criminal
case against her for estafa thru falsification. Respondent bank also lodged a
complaint for estafa thru falsification against Eugenio on the basis of
petitioner’s statement that his signatures in the checks were forged.
Petitioner then requested the respondent bank to credit back and restore to
its account the value of the checks which were wrongfully encashed but the
respondent bank refused. Thus, petitioner filed the instant case. In addition,
Manila Bank also sought the expertise of the National Bureau Investigation in
determining the genuineness of the signatures appearing on the checks.
However, in a letter, the NBI informed the trial court that they could not
conduct the desired examination since the standard specimens were not
sufficient for purposes of rendering a definitive opinion. The NBI then
suggested that petitioner be asked to submit seven or more additional
standard signatures; however, the petitioner failed to comply with this
request. After evaluating the evidence on both sides, the trial court dismissed
82
the case for lack of sufficient basis. On appeal, the Court of Appeals affirmed
the decision of the trial court.
ISSUE:
Whether or not the respondent bank was negligent in not determining
the genuineness of the signatures of the petitioner on the checks.
RULING:
The Supreme Court held that it was the petitioner, not the bank, who
was negligent. Negligence is the omission to do something which a
reasonable man, guided by those considerations which ordinarily regulate the
conduct of human affairs, would do, or the doing of something which a
prudent and reasonable man would do. In the present case, it appears that
petitioner accorded his secretary unusual degree of trust and unrestricted
access to his credit cards, passbooks, check books, bank statements,
including custody and possession of cancelled checks and reconciliation of
accounts.
Petitioner’s failure to examine his bank statements appears as the

proximate cause of his own damage. Petitioner failed to examine his bank
statements not because he was prevented by some cause in not doing so, but
because he did not pay sufficient attention to the matter. In view of Article
2179 of the New Civil Code, when the plaintiff’s own negligence was the
immediate and proximate cause of his injury, no recovery could be had for
damages. Hence, the petition is dismissed.
NATIONAL POWER CORPORATION VS. COURT OF APPEALS

161 SCRA 334
G.R. No. L-47379
May 16, 1988
FACTS:
On August 4, 1964, plaintiff Engineering Construction, Inc., being a
successful bidder, executed a contract in Manila with National Waterworks
and Sewerage Authority (NAWASA), whereby the former undertook to furnish
all tools, labor, equipment, and materials (not furnished by Owner), and to
construct the proposed 2nd Ipo-Bicti Tunnel, Intake and Outlet Structures, and
Appurtenant Structures, and Appurtenant Features, at Norzagaray, Bulacan,
and to complete said works within eight hundred (800) calendar days from
the date the Constructor receives the formal notice to proceed.
The record shows that on November 4, 1967, typhoon “Welming” hit

Central Luzon, passing trough the defendant’s Angat Hydro-electric Project
and Dam at Ipo, Norzagaray, Bulacan. Strong winds struck the project area,
and heavy rains intermittently fell. Due to the heavy downpour, the water in
the reservoir of the Angat Dam was rising perilously at the rate of sixty (60)
centimeters per hour. To prevent an overflow of water from the dam, since
the water level had reached the danger height of 212 meters above sea level,
the defendant corporation caused the opening of the spillway gates”.
The appellate court sustained the findings of the trial court that the
evidence preponderantly established the fact that due to the negligent
manner with which the spillway gates of the Angat Dam were opened, an
extraordinary large volume of water rushed out of the gates, and hit the
installations and construction works of ECI at the Ipo Site with terrific impact
as a result of which the latter’s stockpile of materials and supplies, camp

83
facilities and permanent structures and accessories were either washed away,
lost or destroyed.
ISSUE:
Whether or not NAPOCOR is exempt from liability because the lost or
deterioration of ECI’s facilities was due to fortuitous event.
RULING:
It is clear from the CA”S ruling that the petitioner NPC was
undoubtedly negligent because it opened the spillway gates of the Angat Dam
only at the height of typhoon “Welming” when it knew very well that it was
safer to have opened the same gradually and earlier, as it was also undeniable
that NPC knew of the coming typhoon at least four days before it actually
struck. And even though the typhoon was an act of God or what we may call
force majeure, NPC cannot escape liability because its negligence was the
proximate cause of the loss and damage.
Petitions dismissed. Decision affirmed.
CULPA CONTRACTUAL
1. RODZSSEN VS. FAR EAST BANK, 357 SCRA 618

2. UNIVERSITY OF THE EAST VS. JADER, FEB. 17, 2000
3. BAYNE ADJUSTERS VS. CA, 323 SCRA 231
4. GERMAN MARINE VS. NLRC, 350 SCRA 629
RODZSSEN SUPPLY CO. INC. VS. FAR EAST BANK & TRUST CO.
GR No. 109087
May 9, 2001
357 SCRA 618
FACTS:
Petitioner Rodzssen Supply opened a letter of credit with respondent
Far East Bank for the payment of 5 loaders bought by petitioner from Ekman
and Co. The letter of credit had a validity of 30 days to expire February 15,
1979 but was subsequently extended to October 16, 1979. Three of the
loaders were delivered to the petitioner and was paid by respondent. The two
remaining loaders were delivered to the petitioner belatedly but were still
accepted by petitioner on the ground that it was bound to do so under the
trust receipt arrangement with respondent bank.

84
The bank paid the two remaining loaders five months after the
expiration of the credit on March 1980. Petitioner refused to pay the P76,000
for the two loaders since the bank paid for them beyond the expiration of the
letter of credit. Both the RTC and the CA ruled for the respondent. Thus, this
petition for review.
ISSUE:
Is the petitioner liable to pay respondent bank when the bank paid
Ekman only after 5 months beyond the expiration of the letter of credit?
RULING:
Yes. While respondent bank was negligent in paying the P76,000 to
Ekman within the validity of the letter of credit, petitioner voluntarily
accepted the late delivery of the equipment and used it for 3 years before
respondent demanded payment, without verifying the status of ownership or
possession of the loaders. By acknowledging receipt of the loaders, petitioner
impliedly accepted its obligation to pay the respondent bank even when the
bank paid for the delivery by Ekman after the expiration of the letter of
credit.
When both parties are equally negligent in the performance of their

obligations under a contract, the fault of one cancels the negligent of the
other. Their rights and obligations may then be determined equally under the
law proscribing the unjust enrichment.
CULPA CONTRACTUAL
UNIVERSITY OF THE EAST, VS. ROMEO A. JADER,

2000 Feb 17
G.R. No. 132344
FACTS:
Plaintiff was enrolled in the defendants' College of Law from 1984 up to
1988. In the first semester of his last year (School year 1987-1988), he failed
to take the regular final examination in Practice Court I for which he was
given an incomplete grade. He enrolled for the second semester as fourth
year law student and on February 1, 1988 he filed an application for the
removal of the incomplete grade given him by Professor Carlos Ortega which
was approved by Dean Celedonio Tiongson after payment of the required fee.
He took the examination on March 28, 1988. On May 30, 1988, Professor
Carlos Ortega submitted his grade. It was a grade of five (5).
85
The plaintiff's name appeared in the Tentative List of Candidates for

graduation for the Degree of Bachelor of Laws (LL.B) as of Second Semester
(1987-1988) with the following annotation:
"JADER ROMEO A.
Def. Conflict of Laws - x-1-87-88, Practice Court I - Inc., 1-87-88. C-1 to submit
transcript with S.O.
In the invitation for graduation the name of the plaintiff appeared as

one of the candidates. At the foot of the list of the names of the candidates
there appeared however the following annotation:
This is a tentative list. Degrees will be conferred upon these

candidates who satisfactorily complete requirements as stated in the
University Bulletin and as approved of the Department of Education, Culture
and Sports.
The plaintiff attended the investiture ceremonies during the program of

which he went up the stage when his name was called. He tendered a blow-
out that evening. And there were pictures taken too during the blow-out.
He thereafter prepared himself for the bar examination. He took a

leave of absence without pay from his job from April 20, 1988 to September
30, 1988 and enrolled at the pre-bar review class in Far Eastern University.
Having learned of the deficiency, he dropped his review class and was not
able to take the bar examination.
Consequently, respondent sued petitioner for damages alleging that he

suffered moral shock, mental anguish, serious anxiety, besmirched reputation,
wounded feelings and sleepless nights when he was not able to take the 1988
bar examinations arising from the latter's negligence. He prayed for an
award of moral and exemplary damages, unrealized income, attorney's fees,
and costs of suit.
ISSUE:
Whether or not respondent can claim damages from petitioner school.
RULING:
It is the contractual obligation of the school to timely inform and
furnish sufficient notice and information to each and every student as to
whether he or she had already complied with all the requirements for the
conferment of a degree or whether they would be included among those who
will graduate. Although commencement exercises are but a formal ceremony,
it nonetheless is not an ordinary occasion, since such ceremony is the
educational institution's way of announcing to the whole world that the
students included in the list of those who will be conferred a degree during
the baccalaureate ceremony have satisfied all the requirements for such
degree. Prior or subsequent to the ceremony, the school has the obligation to
promptly inform the student of any problem involving the latter's grades and
performance and also most importantly, of the procedures for remedying the
same.
The college dean is the senior officer responsible for the operation of
an academic program, enforcement of rules and regulations, and the
supervision of faculty and student services. He must see to it that his own
professors and teachers, regardless of their status or position outside of the
university, must comply with the rules set by the latter. The negligent act of a
professor who fails to observe the rules of the school, for instance by not
promptly submitting a student's grade, is not only imputable to the professor
but is an act of the school, being his employer.

86
The University should have practiced what it inculcates in its students,

more specifically the principle of good dealings enshrined in Articles 19 and
20 of the Civil Code. Educational institutions are duty-bound to inform the
students of their academic status and not wait for the latter to inquire from
the former. The conscious indifference of a person to the rights or welfare of
the person/persons who may be affected by his act or omission can support a
claim for damages.
CULPA CONTRACTUAL
BAYNE ADJUSTERS AND SURVEYORS, INC. VS. COURT OF APPEALS

AND INSURANCE COMPANY OF NORTH AMERICA
323 SCRA 231
FACTS:
On May 1987, Colgate Palmolive Philippines imported alkyl benzene
from Japan valued at US $255,802.88. It is insured with private respondent
Insurance Company of North America. Petitioner was contracted by the
consignee to supervise the proper handling and discharge of the cargo from
the chemical tanker to the receiving barge until the cargo is pumped into the
consignee’s shore tank. When the cargo arrived, the pumping operation
commenced at 2020 hours of June 27, 1987. Nevertheless, the pumping was
interrupted for several times due to mechanical problems with the pump.
When the pump broke down once again at about 1300 hours, the petitioner’s
surveyors left the premises without leaving any instruction with the barge
foremen what to do in event that the pump becomes operational again. No
other surveyor was left in the premises and the assigned surveyor did not seal
the valves to the tank to avoid unsupervised pumping of the cargo. Consignee
asked petitioner to send surveyor to conduct tank sounding. Thus, the
petitioner sent Armando Fontilla, a cargo surveyor, not a liquid bulk surveyor.
Then after, it was agreed that operation would resume the following day at
1030 hours. Fontanilla tried to inform bargemen and surveyor about the
agreement but he could not find them so he left the premises. When the
bargemen arrived, they found that the valves of the tank are open and
resumed pumping operation in the absence of any instruction from the
surveyor. The following morning, undetermined amount of alkyl benzene was
lost due to overflow.
Consignee filed a claim with the insurance company. A conference

transpired which the petitioner, consignee and Claimsmen Adjustment
Company attended. The compromise quantity of the alkyl benzene, which
was lost, was 67.649 MT. The insurance company agreed to pay consignee
the net amount of P84, 609.53. Consequently, the insurance company
instituted action for collection of money as subrogee of the consignee after
failure to extra judicially settles the manner with Bayne Adjusters. Both the
trial and appellate court rendered a decision adverse to the petitioner for its
failure to comply Standard Operating Procedure for Handling Liquid Bulk
Cargo.
ISSUE:
Whether or not the petitioner is liable for the loss of a certain amount
of alkyl benzene.
RULING:
Yes. The negligence of the obligor in the performance of the obligation
renders him liable for damages for the resulting loss suffered by the obligee.
The Supreme Court did not find that the trial court erred in holding the
petitioner liable because of its failure to exercise due diligence which is
87
governed by the Standard Operation Procedure in Handling Liquid Bulk
Survey. Although the cessation of the pumping operation in this case was not
voluntarily requested by the pumping operation in this case was not
voluntarily requested by the pumping operation in this case was not
voluntarily requested by the consignee, but was due to mechanical problems
with the pump, there is greater reason to comply with the SOP. The
petitioner assigned surveyor disregarded SOP and left the pump site without
leaving any instruction or directive with the barge pump operators.
The petition was dismissed.
CULPA CONTRACTUAL
GERMAN MARINE AGENCIES, INC. VS. NLRC

350 SCRA 629
FACTS:
Private respondent Froilan S. De Lara was hired by petitioners on
October 17, 1994 to work as a radio officer on board its vessel. Sometime in
June 1995, while the vessel was docked at the port of New Zealand, private
respondent was taken ill. His worsening health condition was brought by his
crewmates to the master of the vessel. However, instead of disembarking
private respondent so that he may receive immediate medical attention at a
hospital, the master of the vessel proceeded to Manila, a voyage of ten days,
during which time the health of private respondent rapidly deteriorated. Upon
arrival in Manila, private respondent was not immediately disembarked but
was made to wait for several hours until a vacant slot in the Manila pier was
available for the vessel to dock. Private respondent was confined in the
Manila Doctors Hospital, wherein, he was treated by a team of medical
specialist from June 24-26, 1995.
Private respondent demanded from petitioners the payment of his

disability benefits and the unpaid balance of his sickness wages, pursuant to
the Standard Employment Contract of the parties. Private respondent waited
for almost a year for the payment of his benefits but to no avail. Eventually,
petitioner told private respondent that aside from the sickness wages that he
had already received, no other compensation or benefit was forthcoming.
Private respondent filed a complaint with the National Labor Relations
Commission (NLRC) for payment of disability benefits and the balance of his
sickness wages.
The labor arbiter rendered decision in favor of private respondent on

July 31, 1997. On July 29, 1998, the NLRC affirmed the labor arbiter’s
decision in toto. Petitioners moved for reconsideration, which was denied by
the NLRC. The petitioners resorted to the Court of Appeals. The Court of
Appeals, however, upheld the decision of the NLRC, with the modification that
petitioners are to pay private respondent exemplary damages amounting to
P50,000.00. Petitioners’ motion for reconsideration was denied by the Court
of Appeals.
ISSUE:
Whether or not petitioner is liable to pay private respondent’s claim as
awarded by the respondent court.
RULING:
88
YES. It is a cardinal rule in the interpretation of contracts that if the
terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulation shall control. There
is no ambiguity in the wording of the Standard Employment Contract - the
only qualification prescribed for the physician entrusted with the task of
assessing the seaman’s disability is that he be “company-designated.” The
language of the contract is explicit leaving no doubt as to the intention of the
drafters thereof. Petitioners’ act of committing private respondent for
treatment at the Manila Doctors Hospital and paying the hospital bills therein
is tantamount to “company-designation.”
CULPA ACQUILIANA
1. DELSAN TRANSPORT VS. C & A CONSORTIUM, OCT. 1,

2003
2. PCIB VS. CA, 350 SCRA 446
3. SMC VS. HEIRS OF OUANA VS. CA, JULY 4, 2002
DELSAN TRANSPORT LINES, INC., petitioner,

VS. C & A CONSTRUCTION, INC., respondent
G.R. No. 156034
October 1, 2003
FACTS:
Respondent C & A Construction, Inc. was engaged by the National
Housing Authority (NHA) to construct a deflector wall at the Vitas
Reclamation Area in Vitas, Tondo, Manila. The project was completed in 1994
but it was not formally turned over to NHA.
On October 9, 1994, M/V Delsan Express, a ship owned and operated
by petitioner Delsan Transport Lines, Inc., anchored at the Navotas Fish Port
for the purpose of installing a cargo pump and clearing the cargo oil tank. At
around 12:00 midnight of October 20, 1994, Captain Demetrio T. Jusep of M/V
Delsan Express received a report from his radio head operator in Japan that a
typhoon was going to hit Manila in about eight (8) hours. At approximately
8:35 in the morning of October 21, 1994, Capt. Jusep tried to seek shelter at
the North Harbor but could not enter the area because it was already
congested. At 10:00 a.m., Capt. Jusep decided to drop anchor at the vicinity
of Vitas mouth, 4 miles away from a Napocor power barge. At that time, the
waves were already reaching 8 to 10 feet high. Capt. Jusep ordered his crew
to go full ahead to counter the wind which was dragging the ship towards the
Napocor power barge. To avoid collision, Capt. Jusep ordered a full stop of

89
the vessel. He succeeded in avoiding the power barge, but when the engine
was re-started and the ship was maneuvered full astern, it hit the deflector
wall constructed by respondent.
The trial court ruled that petitioner was not guilty of negligence
because it had taken all the necessary precautions to avoid the accident.
Applying the “emergency rule”, it absolved petitioner of liability because the
latter had no opportunity to adequately weigh the best solution to a
threatening situation. It further held that even if the maneuver chosen by
petitioner was a wrong move, it cannot be held liable as the cause of the
damage sustained by respondent was typhoon “Katring”, which is an act of
God.
On appeal to the Court of Appeals, the decision of the trial court was
reversed and set aside. It found Capt. Jusep guilty of negligence in deciding
to transfer the vessel to the North Harbor only at 8:35 a.m. of October 21,
1994 and thus held petitioner liable for damages.
ISSUE:
Whether or not petitioner is solidarily liable under Article 2180 of the
Civil Code for the quasi-delict committed by Capt. Jusep.
RULING:
The Court of Appeals was correct in holding that Capt. Jusep was
negligent in deciding to transfer the vessel only at 8:35 in the morning of
October 21, 1994.
As early as 12:00 midnight of October 20, 1994, he received a report from
his radio head operator in Japan that a typhoon was going to hit Manila after
8 hours. This, notwithstanding, he did nothing, until 8:35 in the morning of
October 21, 1994, when he decided to seek shelter at the North Harbor,
which unfortunately was already congested. The finding of negligence cannot
be rebutted upon proof that the ship could not have sought refuge at the
North Harbor even if the transfer was done earlier. It is not the speculative
success or failure of a decision that determines the existence of negligence in
the present case, but the failure to take immediate and appropriate action
under the circumstances. Capt. Jusep, despite knowledge that the typhoon
was to hit Manila in 8 hours, complacently waited for the lapse of more than 8
hours thinking that the typhoon might change direction. He cannot claim that
he waited for the sun to rise instead of moving the vessel at midnight
immediately after receiving the report because of the difficulty of traveling at
night. The hour of 8:35 a.m. is way past sunrise. Furthermore, he did not
transfer as soon as the sun rose because, according to him, it was not very
cloudy and there was no weather disturbance yet.
When he ignored the weather report notwithstanding reasonable

foresight of harm, Capt. Jusep showed an inexcusable lack of care and caution
which an ordinary prudent person would have observed in the same situation.
Had he moved the vessel earlier, he could have had greater chances of finding
a space at the North Harbor considering that the Navotas Port where they
docked was very near North Harbor. Even if the latter was already
congested, he would still have time to seek refuge in other ports.
The instant petition is denied.
CULPA ACQUILIANA

90
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly
INSULAR BANK OF ASIA AND AMERICA), petitioner,
VS. COURT OF APPEALS and FORD PHILIPPINES, INC.
and CITIBANK, N.A., respondents
2001 Jan 29
350 SCRA 446
FACTS:
The consolidated petitions herein involve several fraudulently
negotiated checks. The original actions a quo were instituted by Ford
Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank (PCIBank), the
value of several checks payable to the Commissioner of Internal Revenue,
which were embezzled allegedly by an organized syndicate.
G.R. Nos. 121413 and 121479 are twin petitions for review of the
March 27, 1995 Decision of the Court of Appeals in CA-G.R. CV No. 25017,
entitled Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and
America (now Philippine Commercial International Bank), and the August 8,
1995 Resolution ordering the collecting bank, Philippine Commercial
International Bank, to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15,
1996 Decision of the Court of Appeals and its March 5, 1997 Resolution in
CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and
Philippine Commercial International Bank," affirming in toto the judgment of
the trial court holding the defendant drawee bank, Citibank, N.A., solely liable
to pay the amount of P12,163,298.10 as damages for the misapplied proceeds
of the plaintiff’s Citibank Check Numbers SN-10597 and 16508.
ISSUE:
Whether or not the petitioner Ford has the right to recover from the
collecting bank (PCIBank) and the drawee bank (Citibank) the value of the
checks intended as payment to the Commissioner of Internal Revenue.
RULING:
In G.R. Nos. 121413 and 121479, the Court held that banking business
requires that the one who first cashes and negotiates the check must take
some precautions to learn whether or not it is genuine. And if the one
cashing the check through indifference or other circumstance assists the
forger in committing the fraud, he should not be permitted to retain the
proceeds of the check from the drawee whose sole fault was that it did not
discover the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which cashes a
check drawn upon another bank, without requiring proof as to the identity of
persons presenting it, or making inquiries with regard to them, cannot hold
the proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party.
In such cases the drawee bank has a right to believe that the cashing
bank (or the collecting bank) had, by the usual proper investigation, satisfied
itself of the authenticity of the negotiation of the checks. Thus, one who
encashed a check which had been forged or diverted and in turn received
payment thereon from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the drawee bank. The
latter may recover from the holder the money paid on the check. Having
established that the collecting bank’s negligence is the proximate cause of the
loss,
the Court concludes that PCIBank is liable in the amount corresponding to

the proceeds of Citibank Check No. SN-04867.

91
In G.R. No. 128604, the pro-manager of San Andres Branch of PCIBank,
Remberto Castro, received Citibank Check Numbers SN 10597 and 16508.
He passed the checks to a co-conspirator, an Assistant Manager of PCIBank’s
Meralco Branch, who helped Castro open a Checking account of a fictitious
person named "Reynaldo Reyes." Castro deposited a worthless Bank of
America Check in exactly the same amount of Ford checks.
The syndicate tampered with the checks and succeeded in replacing

the worthless checks and the eventual encashment of Citibank Check Nos. SN
10597 and 16508. The PCIBank Pro-manager, Castro, and his co-conspirator
Assistant Manager apparently performed their activities using facilities in
their official capacity or authority but for their personal and private gain or
benefit. A bank holding out its officers and agents as worthy of confidence
will not be permitted to profit by the frauds these officers or agents were
enabled to perpetrate in the apparent course of their employment; nor will it
be permitted to shirk its responsibility for such frauds, even though no benefit
may accrue to the bank therefrom.
For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and apparent
scope of his employment or authority. And if an officer or employee of a bank,
in his official capacity, receives money to satisfy an evidence of indebtedness
lodged with his bank for collection, the bank is liable for his misappropriation
of such sum. But in this case, responsibility for negligence does not lie on
PCIBank’s shoulders alone. The evidence on record shows that Citibank as
drawee bank was likewise negligent in the performance of its duties.
Citibank failed to establish that its payment of Ford’s checks were made in
due course and legally in order. Citibank should have scrutinized Citibank
Check Numbers SN 10597 and 16508 before paying the amount of the
proceeds thereof to the collecting bank of the BIR. One thing is clear from
the record: the clearing stamps at the back of Citibank Check Nos. SN 10597
and 16508 do not bear any initials. Citibank failed to notice and verify the
absence of the clearing stamps. Had this been duly examined, the switching
of the worthless checks to Citibank Check Nos. 10597 and 16508 would have
been discovered in time. For this reason, Citibank had indeed failed to
perform what was incumbent upon it, which is to ensure that the amount of
the checks should be paid only to its designated payee. The fact that the
drawee bank did not discover the irregularity seasonably, in our view,
constitutes negligence in carrying out the bank’s duty to its depositors. The
point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of
their relationship.
Thus, invoking the doctrine of comparative negligence, the Court is of

the view that both PCIBank and Citibank failed in their respective obligations
and both were negligent in the selection and supervision of their employees
resulting in the encashment of Citibank Check Nos. SN 10597 and 16508.
Thus, the Court is constrained to hold them equally liable for the loss of the
proceeds of said checks issued by Ford in favor of the CIR.Time and again,
the Court has stressed that banking business is so impressed with public
interest where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of diligence must
be very high, if not the highest, degree of diligence.
A bank’s liability as obligor is not merely vicarious but primary, wherein

the defense of exercise of due diligence in the selection and supervision of its
employees is of no moment. Banks handle daily transactions involving
millions of pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and
officials is far greater than those of ordinary clerks and employees. Banks are

92
expected to exercise the highest degree of diligence in the selection and
supervision of their employees.
Thus the Decision and Resolution of the Court of Appeals in CA-G.R. CV

No. 25017, are affirmed. PCIBank, is declared solely responsible for the loss
of the proceeds of Citibank Check No. SN 04867 in the amount
P4,746,114.41, which shall be paid together with six percent (6%) interest
thereon to Ford Philippines Inc. from the date when the original complaint
was filed until said amount is fully paid. However, the Decision and
Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as
follows: PCIBank and Citibank are adjudged liable for and must share the
loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and
16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is
ORDERED to pay Ford Philippines Inc. P6,081,649.05, with six percent (6%)
interest thereon, from the date the complaint was filed until full payment of
said amount.
CULPA ACQUILIANA
SAN MIGUEL CORPORATION, petitioner,

VS. HEIRS OF SABINIANO INGUITO, and JULIUS OUANO, respondents
2002 Jul 4
G.R. No. 141716
FACTS:
SMC entered into a Time Charter Party Agreement (TCPA) with Julius
Ouano, of J. Ouano Marine Services. Under the terms of the agreement, SMC
chartered the M/V Doña Roberta for a period of two years for the purpose of
transporting SMC’s beverage products from its Mandaue City plant to various
points in Visayas and Mindanao. The TCPA provided, among others, that the
Ouano, the owner, warrants that the vessel is seaworthy and that there shall
be no employer-employee relations between the owner and/or its vessel’s
crew on one hand and the charterer on the other. The crew of the vessel shall
continue to be under the employ, control and supervision of the owner.
Consequently, damage or loss that may be attributable to the crew,

including loss of the vessel used shall continue to be the responsibility of, and
shall be borne, by the owner; the owner further covenants to hold the
charterer free from all claims and liabilities arising out of the acts of the crew
and the condition of the vessel; the owner shall be responsible to the
charterer for damages and losses arising from the incompetence and/or
negligence of, and/or the failure to observe the required extra-ordinary
diligence by the crew.
On November 11, 1990, SMC issued sailing orders to the Master of the
MN Doña Roberta, Captain Inguito. Inguito obtained the necessary sailing
clearance from the Philippine Coast Guard. The vessel left Mandaue City at
6:00 a.rn. of November 12. At 4:00 a.m., typhoon Ruping was spotted. At
7:00 a.m., SMC Radio Operator Moreno contacted Inguito through the radio
and advised him to take shelter. Inguito replied that they will proceed since
the typhoon was far away from them, and that the winds were in their favor.
At 2:00 p.m., Moreno again communicated with Inguito and advised him to
take shelter. The captain responded that they can manage. Moreno again
contacted Inguito at 4:00 p.m. and reiterated the advice that it will be difficult
to take shelter after passing Balicasag Island because they were approaching
an open sea. Still, the captain refused to heed his advice.
At 11:40 p.m, Moreno made a series of calls to the M/V Doña Roberta
but he failed to get in touch with anyone in the vessel. At 1:15 a.m. of
November 13, Inguito called Moreno over the radio and requested him to
contact the son of Julius Ouano because they needed a helicopter to rescue
93
them. At 2:30 a.m. of November 13, 1990, the M/V Doña Roberta sank. Out of
the 25 officers and crew on board the vessel, only five survived.
On November 24, 1990, Julius Ouano, in lieu of the captain who

perished in the sea tragedy, filed a Marine Protest. The heirs of the deceased
captain and crew, as well as the survivors, of the ill-fated M/V Doña Roberta
filed a complaint for tort against SMC and Julius Ouano before the RTC.
Julius Ouano alleged that the proximate cause of the loss of the vessel and its
officers and crew was the fault and negligence of SMC, which had complete
control and disposal of the vessel as charterer and which issued the sailing
order for its departure despite being forewarned of the impending typhoon.
Thus, he prayed that SMC indemnify him for the cost of the vessel and the
unrealized rentals and earnings thereof. SMC argued that the proximate
cause of the sinking was Ouano’s breach of his obligation to provide SMC
with a seaworthy vessel duly manned by competent crew. SMC interposed
counterclaims against Ouano for the value of the cargo lost in the sea tragedy.
The trial court ruled that the proximate cause of the loss of the M/V
Doña Roberta was attributable to SMC and was ordered and sentenced to pay
to the heirs of the deceased crew. The CA modified the decision appealed
from, declaring defendant-appellants SMC and Julian C. Ouano jointly and
severally liable to plaintiffs-appellees, except to the heirs of Capt. Inguito.
ISSUE:
Whether or not the finding of the appellate court was in order.
RULING:
Under the terms of the TCPA between the parties, the charterer, SMC,
should be free from liability for any loss or damage sustained during the
voyage, unless it be shown that the same was due
to its fault or negligence. The evidence does not show that SMC or its
employees were amiss in their duties. SMC’s Radio Operator Moreno, who
was tasked to monitor every shipment of its cargo, zealously contacted and
advised Capt. Inguito to take shelter from typhoon Ruping.
In contrast to the care exercised by Moreno, Rico Ouano tried to

communicate with the captain only after receiving the S.O.S. message.
Neither Ouano nor his son was available during the entire time that the vessel
set out and encountered foul weather. Considering that the charter was a
contract of affreightment, the shipowner had the clear duty to ensure the safe
carriage and arrival of goods transported on board its vessels. More
specifically, Ouano expressly warranted in the TCPA that his vessel was
seaworthy. For a vessel to be seaworthy, it must be adequately equipped for
the voyage and manned with a sufficient number of competent officers and
crew.
The proximate cause of the sinking of the vessel was the gross failure
of the captain of the vessel to observe due care and to heed SMC’s advice to
take shelter. Gilbert Gonsaga, Chief Engineer of Doña Roberta, testified that
the ship sank at 2:30 in the early morning of November 13th. On the other
hand, from the time the vessel left the port of Mandaue at six o’clock in the
morning, Captain Sabiniano Inguito was able to contact the radio operator of
SMC. He was fully apprised of typhoon "Ruping" and its strength. Due
diligence dictated that at any time before the vessel was in distress, he should
have taken shelter in order to safeguard the vessel and its crew.
Ouano is vicariously liable for the negligent acts of his employee, Capt.
Inguito. Under Articles 2176 and 2180 of the Civil Code, owners and
managers are responsible for damages caused by the negligence of a servant
or an employee, the master or employer is presumed to be negligent either in
the selection or in the supervision of that employee. This presumption may be
94
overcome only by satisfactorily showing that the employer exercised the care
and the diligence of a good father of a family in the selection and the
supervision of its employee. Ouano miserably failed to overcome the
presumption of his negligence. He failed to present proof that he exercised
the due diligence of a bonus paterfamilias in the selection and supervision of
the captain of the M/V Doña Roberta. Hence, he is vicariously liable for the
loss of lives and property occasioned by the lack of care and negligence of his
employee.
SMC is not liable for the losses. The contention that it was the
issuance of the sailing order by SMC which was the proximate cause of the
sinking is untenable. The fact that there was an approaching typhoon is of no
moment. It appears that on one previous occasion, SMC issued a sailing
order to the captain of the M/V Doña Roberta, but the vessel cancelled its
voyage due to typhoon. Likewise, it appears from the records that SMC
issued the sailing order on November 11, 1990, before typhoon "Ruping" was
first spotted at 4:00 a.m. of November 12, 1990.
Consequently, Ouano should answer for the loss of lives and damages
suffered by the heirs of the officers and crew who perished on board the M/V
Doña Roberta, except Captain Sabiniano Inguito. The award of damages
granted by the CA is affirmed only against Ouano, who should also indemnify
SMC for the cost of the lost cargo, in the total amount of P10,278,542.40.
CULPA CRIMINAL
PEOPLE VS. DE LOS SANTOS

G.R. No. 131588
March 27, 2001
355 SCRA 415
FACTS:
As part of the Special Counter Insurgency Operation Unit Training held
at Camp Damilag, Manolo Fortich, Bukidnon, several members of the
Philippine National Police were undergoing an “endurance run” on October 5,
1995 which started at 2:20 am. The PNP trainees were divided into three
columns and were wearing black t-shirts, bl;ack short pants, and green and
black combat shoes. There were two rear guards assigned to each rear
column. Their duty was to jog backwards facing the oncoming vehicles and
give hand signals for other vehicles. From Alae to Maitum Highway, Puerto,
95
Cagayan de Oro City, about 20 vehicles passed them, all of which slowed
down and took the left portion of the road when signaled to do so.
While they were negotiating Maitum Highway, they saw an Isuzu Elf
truck coming at high speed towards them. The vehicle lights were in the high
beam. At a distance of 100 meters, the rear security guards started waving
their hands for the vehicle to take the other side of the road, but the vehicle
just kept its speed, apparently ignoring their signals and coming closer and
closer to them. The rear guards told their co-trainees to “retract”. The
guards jumped in different directions. They saw their co-trainees being hit by
the said vehicle, falling like dominoes one after the other. Some were thrown,
and others were overrun by the vehicle. The driver, Glenn de los Santos did
not reduce his speed even after hitting the first and second columns.
After arraignment and trial, the court convicted accused-appellant

guilty of complex crime of multiple murder, multiple frustrated murder and
multiple attempted murder, with the use of motor vehicle as the qualifying
circumstance. The court likewise sentenced him to suffer the penalty of
death and indemnify each group of the heirs of the deceased in the amount of
P75,000; each of the victims of frustrated murder in the amount of P30,000;
and each of the victims of attempted murder in the amount of P10,000.
ISSUE:
Whether or not the incident was a product of a malicious intent on the
part of accused-appellant
RULING:
The Supreme Court held that the incident, tragic though it was in the
light of the number of persons killed and seriously injured, was an accident
than of a malicious intent on Glenn’s part. Glenn showed an inexcusable lack
of precaution. Since the place of the incident was foggy and dark, he should
have observed due care in accordance with the conduct of a reasonably
prudent man, such as by slackening his speed, applying his brakes, or turning
to the left side even if it would mean entering the opposite lane.
Wherefore, the Supreme Court convicted Glenn de Los Santos of one

complex crime of reckless imprudence resulting in multiple homicide with
serious physical injuries and less serious physical injuries and sentenced him
to suffer an indeterminate penalty of four years of prision correccional, as
minimum, to 10 years of prision mayor, as maximum; and 10 counts of
reckless imprudence resulting in slight physical injuries and sentenced for
each count, to the penalty of 2 months of arresto mayor. The awards of death
indemnity for each group of heirs of trainees are reduced to P50,000, and the
awards in favor of other victims are deleted.
CONTRAVENTION OF THE TERMS
VICTORINO D. MAGAT, petitioner,

VS. HON. LEO D. MEDIALDEA and SANTIAGO A. GUERRERO,
respondents
G.R. No. L-37120
April 20, 1983
96
FACTS:
Sometime in September 1972, the defendant entered into a contract
with the U.S. Navy Exchange, Subic Bay, Philippines, for the operation of a
fleet of taxicabs, each taxicab to be provided with the necessary taximeter
and a radio transceiver for receiving and sending of messages from mobile
taxicab to fixed base stations within the Naval Base at Subic Bay, Philippines.
Since herein petitioner is known of his good reputation as a businessman, the
defendant, through his agent, entered into a contract with the former. In said
contract, the defendant must open a letter of credit in favor of the petitioner,
since the latter would also engage a foreign company for such taximeter.
Defendant and his agent have repeatedly assured plaintiff herein of the
defendant's financial capabilities to pay for the goods ordered by him and in
fact he accomplished the necessary application for a letter of credit with his
banker, but he subsequently instructed his banker not to give due course to
his application for a letter of credit and that for reasons only known to the
defendant, he fails and refuses to open the necessary letter of credit to cover
payment of the goods ordered by him. After some time, herein defendant
failed to comply with his obligation, and several demands were made by
petitioner so as to reinforce such contract, and even communicated if
defendant would like to rescind contract, but said defendant did not reply to
such demands. The defendant even used as a defense that the petitioner was
delayed in delivering the taximeters when the former was apprehended by
U.S. Navy Exchange for not complying with their agreement. As a
consequence, petitioner filed a case against the defendant but respondent
judge dismissed such petition in a minute order for lack of cause of action.
ISSUE:
Whether or not petitioner has a cause of action against the defendant
for the latter’s contravention of the terms of contract.
RULING:
Article 1170 of the Civil Code provides:
“Those who in the performance of their obligation are guilty of fraud,

negligence, or delay, and those who in any manner contravene the tenor
thereof are liable for damages.”
The phrase "in any manner contravene the tenor" of the obligation
includes any ilicit act or omission which impairs the strict and faithful
fulfillment of the obligation and every kind of defective performance. The
damages which the obligor is liable for includes not only the value of the loss
suffered by the obligee [daño emergente] but also the profits which the latter
failed to obtain [lucro cesante]. If the obligor acted in good faith, he shall be
liable for those damages that are the natural and probable consequences of
the breach of the obligation and which the parties have foreseen or could
have reasonably foreseen at the time the obligation was constituted; and in
case of fraud, bad faith, malice or wanton attitude, he shall be liable for all
damages which may be reasonably attributed to the non-performance of the
obligation.
The same is true with respect to moral and exemplary damages. The
applicable legal provisions on the matter, Articles 2220 and 2232 of the Civil
Code, allow the award of such damages in breaches of contract where the
defendant acted in bad faith. To our mind, the complaint sufficiently alleges
bad faith on the part of the defendant. In fine, the Supreme Court held that
on the basis of the facts alleged in the complaint, the court could render a
valid judgment in accordance with the prayer thereof.

97
SPECIFIC PERFORMANCE: NECESSITY (Art. 1165, CC)
1. VDA. DE MISTICA VS. NAGUIAT, 418 SCRA 73

2. CO VS. CA, AUG. 17, 1999
VDA DE MISTICA VS. NAGUAIT

418 SCRA 73
FACTS:
Eulalio Mistica, predecessor-in-interest of herein petitioner, is the
owner of the parcel of land which was leased to respondent Bernardinio
Naguiat.
Mistica entered into a contract to sell with respondent over a portion of

the aforementioned lot containing an area of 200 square meters. This
agreement was reduced to writing in a document. Pursuant to said
agreement, respondent gave a down payment of P2,000. He made another
partial payment of P1,000 on February 8, 1980. He failed to make any
payments thereafter. Mistica died sometime in October 1986.
On December 4,1991, petitioner filed a complaint for rescission

alleging, among others that the failure and refusal of respondent to pay the
balance of the purchase price constitute a violation of the contract which
established her to rescind the same. That respondent have been in
possession of the subject matter, should be ordered to vacate and surrender
possession of the same.
ISSUE:
Whether or not the Court of Appeals erred in the application of Article
1191 of the Civil Code, as it ruled that there is no breach of obligation in spite
of the lapse of their stipulated period and the failure of the respondent to pay.
RULING:
NO. The failure of respondent to pay the value of the purchase price
within ten (10) years from execution of the deed did not amount to a
substantial breach.
In the agreement, it was stipulated that payment could be made even

after ten (10) years from execution provided that the vendee paid 12%
interest. The stipulation of the parties constitute the law between them, thus
court have no alternative but to enforce them as agreed upon and written.
Thus, the Supreme Court ruled that the Court of Appeals did not commit an
error in deciding this issue.

98
SPECIFIC PERFORMANCE: NECESSITY (Art. 1165, CC)
SPS. HENRY CO AND ELIZABETH CO AND MELODY CO, petitioners,

VS. COURT OF APPEALS AND MRS. ADORACION CUSTODIO,
represented by her Attorney-in-fact, TRINIDAD KALAGAYAN,
respondents
Aug 17, 1999
G.R. No. 112330
FACTS:
On October 9, 1984, the spouses Co entered into a verbal contract with
Custodio for her purchase of the their house and lot worth $100,000.00. One
week thereafter, and shortly before she left for the United States she paid
amounts of $1,000.00 and P40,000.00 as earnest money, in order that the
same may be reserved for her purchase, said earnest money to be deducted
from the total purchase price. The purchase price of $100,000.00 is payable
in two payments $40,000.00 on December 4, 1984 and the balance of
$60,000.00 on January 5, 1985. On January 25, 1985, although the period of
payment had already expired, she paid to the defendant Melody Co in the
United States, the sum of $30,000.00, as partial payment of the purchase
price. Spouses Co’s counsel, Atty. Leopoldo Cotaco, wrote a letter to the
plaintiff dated March 15, 1985, demanding that she pay the balance of
$70,000.00 and not receiving any response thereto, said lawyer wrote another
letter to plaintiff dated August 8, 1986, informing her that she has lost her
‘option to purchase’ the property subject of this case and offered to sell her
another property.
Atty. Estrella O. Laysa, counsel of Custodio, wrote a letter to Atty.

Leopoldo Cotaco informing him that Custodio ‘is now ready to pay the
remaining balance to complete the sum of $100,000.00, the agreed amount as
selling price’ and on October 24, 1986, plaintiff filed the instant complaint.”
The trial court ruled in favor of Custodio and ordered the spouses Co
to refund the amount of $30,000.00. Not satisfied with the decision, the
spouses Co appealed to the Court of Appeals, which affirmed the decision of
the RTC. Hence, this appeal.
ISSUE:
Whether or not the Court of Appeals erred in ordering the Cos to
return the $30,000.00 paid by Custodio pursuant to the “option” granted to
her.
RULING:
An option is a contract granting a privilege to buy or sell within an
agreed time and at a determined price. It is a separate and distinct contract
from that which the parties may enter into upon the consummation of the
option. It must be supported by consideration. However, the March 15, 1985

99
letter sent by the COS through their lawyer to Custodio reveals that the
parties entered into a perfected contract of sale and not an option contract.
A contract of sale is a consensual contract and is perfected at the

moment there is a meeting of the minds upon the thing which is the object of
the contract and upon the price. From that moment the parties may
reciprocally demand performance subject to the provisions of the law
governing the form of contracts.
The elements of a valid contract of sale under Article 1458 of the Civil
Code are (1) consent or meeting of the minds; (2) determinate subject matter;
and (3) price certain in money or its equivalent. As evidenced by the March
15, 1985 letter, all three elements of a contract of sale are present in the
transaction between the petitioners and respondent. Custodio’s offer to
purchase the Beata property, subject of the sale at a price of $100,000.00 was
accepted by the Cos. Even the manner of payment of the price was set forth
in the letter. Earnest money in the amounts of US$1,000.00 and P40,000.00
was already received by the Cos. Under Article 1482 of the Civil Code,
earnest money given in a sale transaction is considered part of the purchase
price and proof of the perfection of the sale.
Despite the fact that Custodio’s failure to pay the amounts of

US$40,000.00 and US$60,000.00 on or before December 4, 1984 and January
5, 1985 respectively was a breach of her obligation under Article 1191 of the
Civil Code, the Cos did not sue for either specific performance or rescission of
the contract. The Cos were of the mistaken belief that Custodio had lost her
“option” over the Beata property when she failed to pay the remaining
balance of $70,000.00 pursuant to their August 8, 1986 letter. In the absence
of an express stipulation authorizing the sellers to extrajudicially rescind the
contract of sale, the Cos cannot unilaterally and extrajudicially rescind the
contract of sale.
Accordingly, Custodio acted well within her rights when she attempted
to pay the remaining balance of $70,000.00 to complete the sum owed of
$100,000.00 as the contract was still subsisting at that time. When the Cos
refused to accept said payment and to deliver the Beata property, Custodio
immediately sued for the rescission of the contract of sale and prayed for the
return of the $30,000.00 she had initially paid.
Under Article 1385 of the Civil Code, rescission creates the obligation
to return the things, which were the object of the contract, but such
rescission can only be carried out when the one who demands rescission can
return whatever he may be obliged to restore. This principle has been
applied to rescission of reciprocal obligations under Article 1191 of the Civil
Code. The Court of Appeals therefore did not err in ordering the Cos to
return the amount of $30,000.00 to Custodio after ordering the rescission of
the contract of sale over the property.
Since it has been shown that the appellee who was not in default, was
willing to perform part of the contract while the appellants were not,
rescission of the contract is in order. The power to rescind obligations is
implied in reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him, (Article 1191, same Code). Rescission creates
the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest x x x x (Article 1385,
same Code).
In the case at bar, the property involved has not been delivered to the
appellee. She has therefore nothing to return to the appellants. The price
received by the appellants has to be returned to the appellee as aptly ruled by

100
the lower court, for such is a consequence of rescission, which is to restore
the parties in their former situations.
EFFECTS OF RESOLUTION/RESCISSION
1. SERRANO VS. CA, 417 SCRA 415

2. GIL VS. CA, 411 SCRA 18
3. REYES VS. LIM, 408 SCRA 560
4. ONG VS. TIU, FEB. 1, 2002
5. EQUATORIAL REALTY VS. MAYFAIR THEATER, 370 SCRA
56
6. VELARDE VS. CA, 361 SCRA 56
7. ASUNCION VS. EVANGELISTA, OCT. 13, 1999
8. UY VS. CA, SEPT. 9, 1999
PERLA PALMA GIL, VICENTE HIZON, JR., and ANGEL PALMA GIL
VS. HON. COURT OF APPEALS, HEIRS OF EMILIO MATULAC,
CONSTANCIO MAGLANA, AGAPITO PACETES & The REGISTER OF
DEEDS OF DAVAO CITY

101
G.R. No. 127206
September 12, 2003
411 SCRA 19
FACTS:
Concepcion Palma Gil, and her sister, Nieves Palma Gil, married to
Angel Villarica, were the co-owners of a parcel of commercial land with an
area of 829 square meters in Davao City. The spouses Angel and Nieves
Villarica had constructed a two-storey commercial building on the property.
On October 13, 1953, Concepcion filed a complaint against her sister

Nieves with the then Court of First Instance of Davao City for specific
performance, to compel the defendant to cede and deliver to her an undivided
portion of the said property with an area of 256.2 square meters. After due
proceedings, the court rendered judgment on April 7, 1954 in favor of
Concepcion, ordering the defendant to deliver to the plaintiff an undivided
portion of the said property with an area of 256.2 square meters.
Nieves appealed to the Court of Appeals which affirmed the assailed

decision. The court issued a writ of execution. Nieves, however, refused to
execute the requisite deed in favor of her sister.
On April 27, 1956, the court issued an order authorizing ex-officio

Sheriff Eriberto Unson to execute the requisite deed of transfer to the plaintiff
over an undivided portion of the property with a total area of 256.2 square
meters. Instead of doing so, the sheriff had the property subdivided into four
lots namely, Lot 59-C-1, with an area of 218 square meters; Lot 59-C-2, with
an area of 38 square meters; Lot 59-C-3, with an area of 14 square meters;
and Lot 59-C-4, with an area of 560 square meters, all covered by a
subdivision plan. The sheriff thereafter executed a Deed of Transfer to
Concepcion over Lot 59-C-1 and Lot 59-C-2 with a total area of 256.2 square
meters.
On October 24, 1956, Concepcion executed a deed of absolute sale over

Lot 59-C-1 in favor of Iluminada Pacetes for a purchase price of P21,600.00
upon which P7,500.00 is to be paid upon signing of the contract and the
balance of P14,100.00 to be paid upon delivery of the Title. On March 16,
1966, spouses Iluminada Pacetes and Agapito Pacetes executed a deed of
absolute sale over the disputed lots in favor Constancio Maglana. And on
April 22, 1980, Maglana ewecuted a deed of sale in favor of Emilio Matulac
for the purchase price of P150,000.00. And on August 4, 1959, Concepcion
died, leaving all her obligations to her heirs including the petitioners.
On June 11, 1993, the trial court rendered judgment in favor of the
defendants. The trial court ruled that this Court had affirmed, in G.R. No.
85538 and G.R. No. L-60690, the sales of the property from Concepcion Palma
Gil to Iluminada Pacetes, then to Constancio Maglana and to Emilio Matulac;
hence, the trial court was barred by the rulings of the Court. The plaintiffs
appealed to the Court of Appeals which affirmed the latter’s decision.
ISSUE:
Whether or not the trial court erred in not declaring the sale of the
properties in question from Iluminada Pacetes to Constancio Maglana,
thence, from Constancio Maglana to Emilio Matulac NULL and VOID for there
was delay incurred by Concepcion in not delivering the Title of the subject
lands to Pacetes.

102
RULING:
Article 1191 in tandem with Article 1592 of the New Civil Code are
central to the issues at bar. Under the last paragraph of Article 1169 of the
New Civil Code, in reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper manner with what
is incumbent upon him.
From the moment one of the parties fulfills his obligation, delay in the
other begins. Thus, reciprocal obligations are to be performed
simultaneously so that the performance of one is conditioned upon the
simultaneous fulfillment of the other. The right of rescission of a party to an
obligation under Article 1191 of the New Civil Code is predicated on a breach
of faith by the other party that violates the reciprocity between them.
The petitioners therefore, as successors-in-interest of the vendor, are

not the injured parties entitled to a rescission of the deed of absolute sale. It
was Concepcion’s heirs, including the petitioners, who were obliged to deliver
to the vendee a certificate of title over the property under the latter’s name,
free from all liens and encumbrances within 120 days from the execution of
the deed of absolute sale on October 24, 1956, but had failed to comply with
the obligation. Furthermore, the consignation by the vendee of the purchase
price of the property is sufficient to defeat the right of the petitioners to
demand for a rescission of the said deed of absolute sale.
The petition for review was denied for lack of merit.

103
SERRANO VS. COURT OF APPEALS

417 SCRA 415
FACTS
Petitioners spouses Arturo and Niceta Serrano are the owners of the
parcel of land and the house constructed thereon located in Quezon City and
a parcel of land located in Quezon City. The couple mortgaged said
properties in favor of Government Service Insurance System (GSIS) for a
security loan of P50,000. They were able to pay P18,000 on 1969. On the
same year, the spouses Serrano as vendors and respondents spouses Emilio
and Evelyn Geli as vendees executed a deed of absolute sale with partial
assumption of the mortgage for the price of P70,000. Spouses Geli paid the
amount of P38,000 and the balance of P32,000 to be paid to GSIS. Emilio Geli
and his children, respondents herein, failed to settle the amount to the GSIS.
Petitioners filed a complaint for the rescission of the deed of absolute

sale with partial assumption of mortgage on September 6, 1984. The trial
court rendered a decision ordering rescission of the deed. Emilio and
petitioners appealed the decision to the Court of Appeals (CA). The GSIS
foreclosed the mortgage during the pendency of the appeal. A certificate of
sale over the property was issued in favor of the GSIS it being the highest
bidder.
In 1987, Emilio paid the redemption price of P67,701.84 to GSIS.

Accordingly, the GSIS executed a deed of transfer and turned over to Emilio
the transfer certificate title (TCT) without informing Serrano and the CA. In
1991, the CA dismissed Emilio and petitioners’ appeal for failure to pay the
requisite docket fees which became final and executory.
On February 15, 1994, the court granted the motion for execution of
the trial court’s September 6, 1984 decision upon the motion of the
petitioners which was not implemented. Defendant filed a motion to quash on
September 6, 1996 claming for the first time that he had redeemed the said
properties from GSIS in 1988 which was denied by the court.
The trial court issued an alias writ of execution upon issuance of order
granting petitioners’ motion. The petitioners filed with the CA a petition for
certiorari and/or prohibition praying for the nullification of the trial court
orders. CA issued an order restraining the implementation of the alias writ of
execution and the notice to vacate issued by the trial court. CA on May 12,
1998 granted the respondents’ motion.
ISSUE:
Whether or not the trial court’s September 6, 1984 judgment ordering
the rescission of the deed of absolute sale with partial assumption of
mortgage executed by petitioners and respondents is proper.
RULING:
YES. The payment by Emilio of the redemption price to the GSIS was
made pending appeal by the respondents from the trial court’s order and
concealed said payment to petitioners. The respondents’ appealed the
decision before the CA which was subsequently dismissed for failure to pay
the requisite docket fees. Neither did respondents file any motion for
reconsideration for the dismissal of the appeal. Consequently, the trial
court’s decision became final and executory.
With the rescission of the deed of sale, the rights of Emilio Geli under
said deed to redeem the property had been extinguished. The petitioners
cannot even be compelled to subrogate the respondents to their right under
the real estate mortgage over the property which the petitioners executed in
104
favor of GSIS since the payment of the redemption price was made without
the knowledge of the petitioners. The respondents, however, are entitled to
be reimbursed by the petitioners to the extent that the latter were benefited.
In sum, respondents are obliged to vacate the subject property. The

decision of the CA is reversed and set aside. The petitioners are obliged to
return the amount of P67,701.04 to be deducted from the amount due the
petitioners under said trial court’s decision.
REYES VS. LIM

G. R. No. 134241
August 11, 2003
408 SCRA 560
FACTS:
Petitioner David Reyes, as seller, and Jose Lim, as buyer, entered into a
contract to sell a parcel of land located along F.B. Harrison Street, Pasay City
on November 7, 1994. Harrison Lumber occupied the property as lessee with
a monthly rental of P35,000.00. The contract provided that the total
consideration for the purchase of the property is P28,000,000.00 and upon
signing of the contract, P10,000,000.00 should be paid as down payment.
The balance of P18,000,000.00 shall be paid at a bank designated by the
buyer but upon the complete vacation of all the tenants or occupants of the
property. The contract also provided that in the event, the tenants or
occupants of the premises shall not vacate the premises on March 8, 1995,
the vendee shall withhold the payment of the balance of P18,000,000.00 and
the vendor agrees to pay a penalty of 4% per month to the vendee based on
the down payment of P10,000,000.00 until the complete vacation of the
premises by the tenants.
Petitioner claimed that he had informed Harrison Lumber to vacate the

property before the end of January 1995. Reyes also informed Chuy Cheng
Keng and Harrison Lumber that if they failed to vacate by March 8, 1995, he
would hold them liable for the penalty of P400,000.00 a month as provided in
the contract to sell. His complaint also alleged that Lim connived with
Harrison Lumber not to vacate the property until the P400,000.00 monthly
penalty would have accumulated and equaled the unpaid purchase price of
P18,000,000.00.
Keng and Harrison Lumber denied that Lim had connived with them.
Harrison Lumber alleged that Reyes approved their request for an extension
of time to vacate the property and that as of March 1995, it had already
started transferring some of its merchandise to its new business location in
Malabon.
On the other hand, Lim filed his Answer stating that he was ready and
willing to pay the balance of the purchase price on or before March 8, 1995.
Lim requested a meeting with Reyes through the latter’s daughter but Reyes
kept postponing them. On March 9, 1995, Reyes offered to return the P10
million down payment to Lim because Reyes was having problems in
removing the lessee from the property. Lim rejected Reyes’ offer and
proceeded to verify the status of Reyes’ title to the property. He learned that
Reyes had already sold the property to Line One Foods Corporation on March
1, 1995 for P16,782,480. Lim also denied conniving with Keng and Harrison
Lumber.

105
On November 2, 1995, Reyes filed a Motion for Leave to File Amended
Complaint due to the filing by Lim of a complaint for estafa against Reyes as
well as an action for specific performance and nullification of sale and title
plus damages before another trial court.
Meanwhile, Lim prayed for the cancellation of the Contract to Sell and
for the issuance of writ of preliminary attachment against Reyes but the court
denied the writ. Lim requested on March 6, 1997 in open court that Reyes be
ordered to deposit the P10 million down payment with the cashier of the trial
court and the court granted this motion.
The trial court denied Reyes’ motion to set aside the order dated March
6, 1997. On October 3, 1997, the court denied Reyes’ motion for
reconsideration and ordered Reyes to deposit the P10 million down payment
on or before October 30, 1997. Reyes file a petition for certiorari with the
Court of Appeals but the appellate court dismissed the petition for lack of
merit.
ISSUE:
Whether or not the petitioner should deposit the P10 million down
payment to the custody of the trial court as an effect of rescission of the
Contract to Sell
RULING:
The Supreme Court held that an action for rescission could prosper
only if the party demanding rescission can return whatever he may be obliged
to restore should the court grant the rescission. The trial court in the
exercise of its equity jurisdiction may validly order the deposit of P10 million
down payment in court. The purpose of the exercise of equity jurisdiction in
this case is to prevent unjust enrichment and to ensure restitution. Reyes is
seeking rescission of the Contract to Sell.
To subscribe top Reyes’ contention will unjustly enrich Reyes at the

expense of Lim. Reyes sold to Line One Foods Corporation the property.
Reyes cannot claim ownership of the P10 million down payment because
Reyes had already sold to another buyer the property for which Lim made the
down payment. The Supreme Court find the equities weigh heavily in favor of
Lim, who paid the P10 million down payment in good faith only to discover
later that Reyes had subsequently sold the property to another buyer.
Hence, the appealed decision of the appellate court is affirmed and the
petition is dismissed.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,

WILLIAM T. ONG, WILLIE T. ONG, And JULIE ONG ALONZO,
petitioners, VS. DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE
YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, INTRALAND
RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART, INC.,
REGISTER OF DEEDS OF PASAY CITY, And the SECURITIES AND
EXCHANGE COMMISSION, respondents
G.R. No. 144476
February 1, 2002
FACTS:
The Masagana Citimall, a commercial complex owned and managed by
the First Landlink Asia Development Corporation (FLADC) was threatened
with incompletion when its owner found in its financial distress in the amount
106
of P190M for being indebted to the Philippine National Bank (PNB). FLADC
was then fully owned by the Tiu Group composed of David S. Tiu, Cely Y. Tiu,
Moly Yu Gaw, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu. In
order to recover from its floundering finances, the Ong Group composed of
Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and
Julie Ong Alonzo, were invited by the Tius to invest in FLADC. Hence, the
execution of a Pre-Subscription Agreement by and between the Tiu and Ong
Groups on August 15, 1994.
By the Pre-Subscription Agreement, both parties agreed to maintain

equal shareholdings in FLADC with the Ongs investing cash while the Tius
contributing property. Specifically, the Ongs were to subscribe to 1 million
shares of FLADC at a par value of P100.00 per share while the Tius were to
subscribe to 549,800 shares more of FLADC at a par value of P100.00 per
share over and above their previous subscription of 450,200 shares in order
to complete a subscription of 1 million shares.
Commensurate to their proposed subscriptions, the Ongs were to pay
P100,000,000.00 in cash, while the Tius were to contribute the properties by
way of separate Deeds of Assignments.
The controversy between the two parties arose when the Ongs refused
to credit the number of FLADC shares in the name of Masagana Telamart,
Inc. commensurate to its 1,902.30 square meter property contribution; also
when they refused to credit the number of FLADC shares in favor of the Tius
commensurate to their 151 square meter property contribution; and when
David S. Tiu and Cely Y. Tiu were proscribed from assuming and performing
their duties as Vice-President and Treasurer, respectively of FLADC. These
became the basis of the Tius' unilateral rescission of the Pre-Subscription
Agreement on February.
ISSUE:
Whether Court of Appeals erred in ruling that the ‘Pre-Subscription
Agreement’ of the parties may be rescinded under Article 1191 of the New
Civil Code.
RULING:
No. The Court of Appeals did not err in ruling that the "Pre-
Subscription Agreement" of the parties dated August 15, 1994 may be
rescinded under Article 1191 of the New Civil Code.The Ongs illustrate
reciprocity in the following manner: In a contract of sale, the correlative duty
of the obligation of the seller to deliver the property is the obligation of the
buyer to pay the agreed price. In
the case at bar, the correlative obligation of the Tius to let the Ongs have and
exercise the functions of the positions of President and Secretary is the
obligation of the Ongs to let the Tius have and exercise the functions of Vice-
President and Treasurer. Moreover, the Ongs are now estopped from denying
the applicability of Art. 1191 to the present controversy. the Ongs allege that
rescission is applicable only to reciprocal obligations and the "Pre-
Subscription Agreement" does not provide for reciprocity, hence, the remedy
of rescission is not available.
The Ongs cited the case of Songcuan vs. IAC, to illustrate their point
that "As in the Songcuan case, there are here two (2) separate and distinct
obligations each independent of the other the obligation to subscribe to, and
to pay, 50% of the increased capital stock of FLADC; and the obligation to
install the Ongs and the Tius as members of the Board of Directors and to
certain corporate positions, but only after the Ongs and the Tius have

107
subscribed each to 50% of the increased capital stock of FLADC." In this
petition, in lieu of Art. 1191, the Ongs invoke Articles 1156 and 1159 of the
New Civil Code which state –
"Art. 1156. An obligation is a juridical necessity to give, to do or not to do.
"Art. 1159. Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith."
and that should there be any violation, those who failed to fulfill their
obligations should be required to perform their obligations under the
agreement.Contrary to the Ongs' assertion, the Songcuan case does not apply
squarely to this case.
In the Songcuan case, the Court ruled that Art. 1191 to rescind the
right of the Alviars to repurchase does not apply because their corresponding
obligations can hardly be called reciprocal because the obligation of the
Alviars to lease to Songcuan the subject premise arises only after the latter
had reconveyed the realties to them. On the other hand, in the instant case,
the obligations of the two (2) groups to pay 50% of the increased capital stock
of FLADC and to install them as members of the Board of Directors and to
certain corporate positions are simultaneous and arise upon the execution of
the pre-subscription agreement.
The Ongs illustrate reciprocity in the following manner: In a contract
of sale, the correlative duty of the obligation of the seller to deliver the
property is the obligation of the buyer to pay the agreed price. In the case at
bar, the correlative obligation of the Tius to let the Ongs have and exercise
the functions of the positions of President and Secretary is the obligation of
the Ongs to let the Tius have and exercise the functions of Vice-President and
Treasurer.
EQUATORIAL REALTY DEVELOPMENT, INC. VS. MAYFAIR THEATER,

INC.

108
GR No. 133879
November 21, 2001
FACTS:
In June 1967, Carmelo & Bauerman, Inc. entered into a Contract of
Lease with Mayfair Theater for a parcel of land with 2-storey building for 20
years. Two years later in March, 1969, Carmelo entered into a second
Contract with Mayfair for another portion of the property also for 20 years.
In both contracts, Mayfair was given the right-of-first refusal to purchase the
properties. However, on July 30, 1978, within the 20-year period, Carmelo
sold the same properties to Equatorial for P11,300,000. Mayfair sued
Equatorial for specific performance and annulment of the Deed of Absolute
Sate with Carmelo. The trial court ruled in favor of Mayfair but was reversed
by the CA. The Supreme Court, however, upheld the trial court, for which
Mayfair filed a motion for execution. The Deed of Absolute Sale was
rescinded and the lot was registered in the name of Mayfair.
However, in September 1997, Equatorial filed a collection suit for a

sum of money against Mayfair claiming payment of rentals or reasonable
compensation for the use of the properties AFTER its lease contracts had
expired. The trial court ruled in favor Mayfair holding that the Deed of
Absolute Sale in the mother case DID NOT confer on Equatorial any vested or
residual property rights. Hence, the present case.
ISSUES:
1. Did Equatorial obtain rights to the property when it entered into
Deed of Absolute Sale with Carmelo and hence, entitled to the fruits
thereof?
2. Is the right of first refusal granted to Mayfair through the lease

contracts with Carmelo superior to that of Equatorial, and therefore a
bar to the consummation of the Deed of Absolute Sale between
Carmelo and Equatorial?
RULING:
1. No. Equatorial did not obtain right of ownership over the property
when it entered into the Deed of Absolute Sale. Ownership of the property
which the buyer acquires only upon the delivery of the thing to him. There is
delivery if the thing sold is placed in the control and possession of the vendee.
While the execution of a public instrument of sale is recognized by law as the
equivalent of delivery of the thing sold, such constructive or symbolic
delivery, being only presumptive, is deemed negated by the failure of the
vendee to take actual possession of the property sold. Since Mayfair was in
actual possession of the property by virtue of the lease contract with Carmelo,
there was no consummation of the sale, and therefore, Equatorial did not get
ownership right (real right).
2. The Deed of Absolute Sale entered into by Carmelo and Equatorial

was a violation of the right of first refusal granted by Carmelo to Mayfair. The
execution of the deed of absolute sale as a form of constructive delivery is a
legal fiction. It holds true only if there is no legal impediment that may
prevent the passing of the property from the vendor to the vendee. The right
of first refusal held by Mayfair was such legal impediment. Therefore, there
was no transfer of ownership from Camelot to Equatorial.
Dissenting opinion:
The Deed of Absolute Sale was deemed a rescissible contract and

should remain valid until rescinded. Since the Deed was not actually
rescinded in the decision of the mother case, then it was valid until it is
rescinded in a proper court decision. Since there was no actual rescission of
the contract, then Equatorial was deemed the own of the property from the
109
signing of the Deed to the time the property was legally transferred to
Mayfair.
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE

VS. COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE
RAYMUNDO
2001 Jul 11
G.R. No. 108346
FACTS:
David Raymundo is the absolute and registered owner of a parcel of
land, together with the house and other improvements thereon, located at
1918 Kamias St., Dasmariñas Village, Makati and covered by TCT No.
142177. Defendant George Raymundo is David’s father who negotiated with
plaintiffs Avelina and Mariano Velarde for the sale of said property, which
was, however, under lease.
On August 8, 1986, a Deed of Sale with Assumption of Mortgage was

executed by defendant David Raymundo, as vendor, in favor of plaintiff
Avelina Velarde, as vendee, with terms and conditions one of which is:
‘That as part of the consideration of this sale, the VENDEE hereby assumes
to pay the mortgage obligations on the property herein sold in the amount of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, in favor of Bank of the Philippine Islands, in the name of
the VENDOR, and further agrees to strictly and faithfully comply with all the
terms and conditions appearing in the Real Estate Mortgage signed and
executed by the VENDOR in favor of BPI, including interests and other
charges for late payment levied by the Bank, as if the same were originally
signed and executed by the VENDEE.
The Vendee herby agreed that until such time as her assumption of the
mortgage obligations on the property purchased is approved by the
mortgagee bank, the Bank of the Philippine Islands, she shall continue to pay
the said loan in accordance with the terms and conditions of the Deed of Real
Estate Mortgage in the name of Mr. David A. Raymundo, the original
Mortgagor. And further agrees That, in the event there is violation in any of
the terms and conditions of the said Deed of Real Estate Mortgage, that the
downpayment of P800,000.00, plus all payments made with the Bank of the
Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr.
David A. Raymundo, as and by way of liquidated damages, without necessity
of notice or any judicial declaration to that effect, and Mr. David A Raymundo
shall resume total and complete ownership and possession of the property
sold by way of Deed of Sale with Assumption of Mortgage, and the same shall
be deemed automatically cancelled and be of no further force or effect, in the
same manner as if (the) same had never been executed or entered into.
Plaintiffs were advised that the Application for Assumption of Mortgage

with BPI was not approved. This prompted plaintiffs not to make any further
payment. Defendants, thru counsel, wrote plaintiffs informing the latter that
their non-payment to the mortgage bank constituted non-performance of their
obligation
110
Plaintiffs, thru counsel, responded, that they are willing to pay the
balance in cash not later than January 21, 1987 provided: (a) there is deliver
actual possession of the property to her not later than January 15, 1987 for
her immediate occupancy; (b) defendant cause the release of title and
mortgage from the Bank of P.I. and make the title available and free from any
liens and encumbrances; and (c) defendant must execute an absolute deed of
sale in plaintiff’s favor free from any liens or encumbrances not later than
January 21, 1987.
On January 8, 1987, defendants sent plaintiffs a notarial notice of

cancellation/rescission of the intended sale of the subject property allegedly
due to the latter’s failure to comply with the terms and conditions of the Deed
of Sale with Assumption of Mortgage
ISSUE:
Whether or not rescission should be granted in the case at bar.
RULING:
The right of rescission of a party to an obligation under Article 1191 of
the Civil Code is predicated on a breach of faith by the other party who
violates the reciprocity between them. The breach contemplated in the said
provision is the obligor’s failure to comply with an existing obligation. When
the obligor cannot comply with what is incumbent upon it, the obligee may
seek rescission and, in the absence of any just cause for the court to
determine the period of compliance, the court shall decree the rescission.
In the present case, private respondents validly exercised their right to

rescind the contract, because of the failure of petitioners to comply with their
obligation to pay the balance of the purchase price. Indubitably, the latter
violated the very essence of reciprocity in the contract of sale, a violation that
consequently gave rise to private respondents’ right to rescind the same in
accordance with law.
True, petitioners expressed their willingness to pay the balance of the

purchase price one month after it became due; however, this was not
equivalent to actual payment as would constitute a faithful compliance of
their reciprocal obligation. Moreover, the offer to pay was conditioned on the
performance by private respondents of additional burdens that had not been
agreed upon in the original contract. Thus, it cannot be said that the breach
committed by petitioners was merely slight or casual as would preclude the
exercise of the right to rescind.
In the instant case, the breach committed did not merely consist of a
slight delay in payment or an irregularity; such breach would not normally
defeat the intention of the parties to the contract. Here, petitioners not only
failed to pay the P1.8 million balance, but they also imposed upon private
respondents new obligations as preconditions to the performance of their own
obligation. In effect, the qualified offer to pay was a repudiation of an
existing obligation, which was legally due and demandable under the contract
of sale. Hence, private respondents were left with the legal option of seeking
rescission to protect their own interest.

111
ASUNCION VS. EVANGELISTA

G.R. No. 133491
October 13, 1999
316 SCRA 848
FACTS:
Private respondent has been operating a piggery since 1970, which was
under the trade name of Embassy Farms. In 1981, private respondent’s wife,
together with three others, organized Embassy Farms, Inc. and registered it
with the Securirties and Exchange Commission. Private respondent was the
majority stockholder of the corporation, president and chief executive officer.
On September 9, 1980, he borrowed P500,000.00 from Paluwagan ng Bayan
Savings and Loan Association to use as working capital for the farm. He
executed a real estate mortgage on three of his properties as security for the
loan. On November 4, 1981, he mortgaged ten titles more in favor of PAIC
Savings and Mortgage Bank as security for another loan in the amount of
P1,712,000.00. On February 16, 1982, he obtained another loan in the
amount of P844,625.78 from Mercator Finance Corporation. It was secured
by a real estate mortgage on five other landholdings of private respondent, all
situated in Bulacan.
However, he defaulted in his loan payments. By June 1984, private

respondent debt had ballooned to almost six million pesos in overdue
principal payments, interests, penalties and other financial charges. On
August 2, 1984, petitioner and private respondent executed a Memorandum
of Agreement that states that petitioner will pay all of the loans of respondent
112
provided that the latter will transfer the title of the farm and properties,
which were mortgaged in favor of the petitioner.
The petitioner was able to pay partially the loans of respondent from
the three creditors as compliance to the MOA. For his part, private
respondent was obligated under the MOA to execute, sign, and deliver any
and all documents necessary for the transfer and conveyance of the
mortgaged properties as well as of the farm. However, more than a year after
signing the MOA, the landholdings of the respondent still remained titled in
his name. Neither did he inform said mortgages of the transfer of his lands.
On April 10, 1986, petitioner filed in the RTC a compliant for rescission
of the MOA with a prayer for damages. The trial court ruled in favor of the
private respondent. On July 12, 1994, a copy of the decision of the trial court
was sent by registered mail to petitioner’s counsel however, unknown to
petitioner, his counsel died while the case was pending. On February 2, 1998,
CA affirmed the decision of the trial court and ordered its immediate
execution. Petitioner’s motion for reconsideration was likewise denied.
ISSUE:
Whether or not rescission of the MOA is a valid remedy for the
petitioner.
RULING:
Yes. Article 1191 of the Civil Code governs the situation where there is
non-compliance by one party in case of reciprocal obligations.
The Supreme Court found that private respondent failed to perform his
substantial obligations under the MOA. Hence, petitioner sought the
rescission of the agreement and ceased infusing capital into the piggery
business of private respondent. He later justified his refusal to execute any
deed of sale and deliver the certificates of stock by accusing petitioner of
having failed to assume his debts.
The Court holds that the respondent’s insistence that petitioner

execute a formal assumption of mortgage independent and separate from his
own execution of a deed of cases is legally untenable, considering that a
recorded real estate mortgage is a lien inseparable from the property
mortgaged and until discharged, it follows the property.
The Court holds, in fine, that the MOA entered into by petitioner and
private respondent should indeed be rescinded. The respondent appellate
court erred in assessing damages against petitioner for his refusal to fully pay
private respondent’s overdue loans. Such refusal was justified, considering
that private respondent was the first to refuse to deliver to petitioner the
lands and certificates of stock that were the consideration for the almost 6M
in debt that petitioner was to assume and pay.
The effect of rescission is also provided in Article 1385 of the Civil

Code.
The instant petition was granted. Decisions of the lower and appellate
courts were reversed and set aside. The MOA entered into by the parties is
declared rescinded.
UY VS. COURT OF APPEALS

314 SCRA 69
September 9, 1999
113
FACTS:
Petitioners William Uy and Rodel Roxas are agents authorized to sell
eight (8) parcels of land by the owners thereof. By virtue of such authority,
petitioners offered to sell the lands, located in Tuba, Tadiangan, Benguet to
respondent National Housing Authority (NHA) to be utilized and developed as
a housing project.
On February 14, 1989, NHA approved the acquisition of the said

parcels of land with an area of 31.8231 hectares at the cost of P23.867
million, pursuant to which the parties executed a series of Deeds of Absolute
Sale covering the subject lands. Of the eight parcels of lands, however, only
five were paid for by the NHA because of the report it received from the Land
Geosciences Bureau of the Department of Environment and Natural
Resources that the remaining area is located at an active landslide area and
therefore, not suitable for development into a housing project. NHA
eventually cancelled the sale over the remaining three (3) parcels of land.
On March 9, 1992, petitioners filed a complaint for damages. After

trial, the RTC of Quezon City rendered the cancellation of contract to be
justified and awarded P1.255 million as damages in favor of petitioners.
Upon appeal by petitioners, the Court of Appeals reversed the decision

and entered a new one dismissing the complaint including the award of
damages.
The motion for reconsideration having been denied, petitioners seek

relief from this court contending, inter alia, that the CA erred in declaring
that NHA had any legal basis to rescind the subject sale.
ISSUE:
Whether or not the contention of petitioner is correct.
RULING:
NO. Petitioners confuse the cancellation of the contract by the NHA as
a rescission of the contract under Article 1191 of the Civil Code. The right to
rescission is predicated on a breach of faith by the other party that violates
the reciprocity between them. The power to rescind is given to the injured
party. In this case, the NHA did not rescind the contract. Indeed, it did not
have the right to do so for the other parties to the contract, the vendors did
not commit any breach of their obligation. The NHA did not suffer any injury.
The cancellation was not therefore a rescission under Article 1191. Rather, it
was based on the negation of the cause arising from the realization that the
lands, which were the objects of the sale, were not suitable for housing.
KINDS OF DAMAGES:
1. GSIS VS. LABUNG-DEANG, 365 SCRA 341

2. BPI INVESTMENT VS. D.G. CARREON, 371 SCRA 58
114
3. VICTORY LINER VS. HEIRS, 394 SCRA 520
GOVERNMENT SERVICE INSURANCE SYSTEM

VS. SPOUSES GONZALO and MATILDE LABUNG-DEANG
G.R. No. 135644
September 17, 2001
365 SCRA 341
FACTS:
Sometime in December 1969, the spouses Deang obtained a housing
loan from the GSIS in the amount of eight thousand five hundred pesos
(P8,500.00). Under the agreement, the loan was to mature on December 23,
1979. The loan was secured by a real estate mortgage constituted over the
spouses’ property. As required by the mortgage deed, the spouses Daeng
deposited the owner’s duplicate copy of the title with the GSIS.
On January 19, 1979, eleven (11) months before the maturity of the
loan, the spouses Deang settled their debt with the GSIS and requested for
the release of the owner’s duplicate copy of the title since they intended to
secure a loan from a private lender and use the land covered by it as
collateral security for the loan of fifty thousand pesos (P50,000.00) which they
applied for with one Milagros Runes. They would use the proceeds of the
loan applied for the renovation of the spouses’ residential house and for
business. However, personnel of the GSIS were not able to release the
owner’s duplicate of the title as it could not be found despite diligent search.
Satisfied that the owner’s duplicate copy of the title was really lost, in
1979, GSIS commenced the reconstitution proceedings with the Court of First
Instance of Pampanga for the issuance of a new owner’s copy of the same.
On June 22, 1979, GSIS issued a certificate of release of mortgage. On

June 26, 1979, after the completion of judicial proceedings, GSIS finally
secured and released the reconstituted copy of the owner’s duplicate of
Transfer Certificate of Title No. 14926-R to the spouses Deang.
On July 6, 1979, the spouses Deang filed with the Court of First
Instance, Angeles City a complaint against GSIS for damages, claiming that
as result of the delay in releasing the duplicate copy of the owner’s title, they
were unable to secure a loan from Milagros Runes, the proceeds of which
could have been used in defraying the estimated cost of the renovation of
their residential house and which could have been invested in some profitable
business undertaking.
The trial court rendered decision in favor of the spouses Labung-

Deang. The Court of Appeals also affirmed the decision of the lower court.
ISSUE:
Whether or not GSIS is liable for damages.
RULING:
Under the facts, there was a pre-existing contract between the parties.
GSIS and the spouses Deang had a loan agreement secured by a real estate
mortgage. The duty to return the owner’s duplicate copy of title arose as
soon as the mortgage was released. Negligence is obvious as the owners’
duplicate copy could not be returned to the owners. Thus, GSIS is liable for
damages.
First, in a breach of contract, moral damages are not awarded if the

defendant is not shown to have acted fraudulently or with malice or bad faith.

115
The fact that the complainant suffered economic hardship or worries and
mental anxiety is not enough.
Second, actual damages cannot be awarded as there is no factual basis

for such award. Actual damages to be compensable must be proven by clear
evidence. A court cannot rely on “speculation, conjecture or guess work” as
to the fact and amount of damages, but must depend on actual proof.
On the other hand, it is also apparent that the spouses Deang suffered
financial damage because of the loss of the owners’ duplicate copy of the title.
Temperate damages may be granted on the amount of P20, 000.00 as a
reasonable amount considering that GSIS spent for the reconstitution of the
owners’ duplicate copy of the title.
Wherefore the petition is denied.
BPI INVESTMENT CORPORATION, petitioner,

VS. D. G. CARREON COMMERCIAL CORPORATION, DANIEL G.
CARREON, AURORA J. CARREON, AND JOSEFA M. JECIEL,
respondents
2001 Nov 29
371 SCRA 58
FACTS:
Petitioner BPI Investment Corporation (BPI Investments), formerly
known as “Ayala Investment and Development Corporation,” was engaged in
money market operations. Respondent D. G. Commercial Corporation was a
client of petitioner and started its money market placements in September,
1978. The individual respondents, spouses Daniel and Aurora Carreon and
Josefa M. Jeceil also placed with BPI Investments their personal money in
money market placements.
On April 21, 1982, BPI Investments wrote respondents Daniel Carreon

and Aurora Carreon, demanding the return of the overpayment of
P410,937.09. The respondents asserted that there was no overpayment and
asked for time to look for the papers. Upon the request of BPI Investments,
the spouses Daniel and Aurora Carreon sent to BPI Investments a proposed
memorandum of agreement, dated May 7, 1982.
The agreement provided that respondent company, in the spirit of

goodwill, agreed to temporarily reimburse BPI the amount of P410,937.09
while the said controversy (transactions of the placement) would be checked
within five years.
On May 10, 1982, BPI Investments, without responding to the

memorandum and proposal of D. G. Carreon filed with the Court of First
Instance of Rizal, Branch 36, Makati, a complaint for recovery of a sum of
money against D. G. Carreon with preliminary attachment. On May 14, 1982,
the trial court issued an order for preliminary attachment after submission of
affidavit of merit to support the petition, and the posting of a bond in the
amount of P200,000.00. However, on October 8, 1982, the trial court lifted
the writ of attachment. On October 28, 1982, BPI Investments moved for
reconsideration, but the trial court denied the motion after finding the
absence of double payment to the defendants.
On July 30, 1982, respondents D. G. Carreon filed with the trial court
an answer to the complaint, with counterclaim. D.G. Carreon asked for
116
compensatory damages in an amount to be proven during the trial; spouses
Daniel and Aurora Carreon asked for moral damages of P1,000,000.00
because of the humiliation, great mental anguish, sleepless nights and
deterioration of health due to the filing of the complaint and indiscriminate
and wrongful attachment of their property, especially their residential house
and payment of their money market placement of P109,283.75. Josefa Jeceil
asked for moral damages of P500,000.00, because of sleepless nights and
mental anguish, and payment of her money market placement of P73,857.57;
all defendants claimed for exemplary damages and attorney’s fees of
P100,000.00.
On May 25, 1993, the trial court rendered a decision dismissing both
the complaint and the counterclaim. Both parties appealed. On July 19,1996,
the Court of Appeals affirmed the dismissal of the complaint but reversed and
set aside the dismissal of the counterclaim thereby awarding respondents
damages amounting to more than P5M in sum.
ISSUE:
Whether or not respondents are entitled to damages as awarded by
Court of Appeals.
RULING:
No. The Court found petitioner not guilty of gross negligence in the
handling of the money market placement of respondents.
“Gross negligence implies a want or absence of or failure to exercise slight

care or diligence, or the entire absence of care. It evinces a thoughtless
disregard of consequences without exerting any effort to avoid them.”
However, while petitioner BPI Investments may not be guilty of gross

negligence, it failed to prove by clear and convincing evidence that D. G.
Carreon indeed received money in excess of what was due them. “The
alleged payments in the complaint were admitted by plaintiff itself to be
withdrawals from validly issued commercial papers, duly verified and signed
by at least two authorized high-ranking officers of BPI Investments.”
The law on exemplary damages is found in Section 5, Chapter 3, Title

XVIII, Book IV of the Civil Code. These are imposed by way of example or
correction for the public good, in addition to moral, temperate, liquidated, or
compensatory damages. They are recoverable in criminal cases as part of the
civil liability when the crime was committed with one or more aggravating
circumstances; in quasi-delicts, if the defendant acted with gross negligence;
and in contracts and quasi-contracts, if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner.
BPI Investments did not act in a wanton, fraudulent, reckless,

oppressive, or malevolent manner, when it asked for preliminary attachment.
It was just exercising a legal option. The sheriff of the issuing court did the
execution and the attachment. Hence, BPI Investments is not to be blamed
for the excessive and wrongful attachment.
The award of moral damages and attorney’s fees is also not in keeping
with existing jurisprudence. Moral damages may be awarded in a breach of
contract when the defendant acted in bad faith, or was guilty of gross
negligence amounting to bad faith, or in wanton disregard of his contractual
obligation. Finally, with the elimination of award of moral damages, so must
the award of attorney’s fees be deleted. ”There is no doubt, however, that the

117
damages sustained by respondents were due to petitioner’s fault or
negligence, short of gross negligence.
Temperate or moderate damages may be recovered when the court

finds that some pecuniary loss has been suffered but its amount cannot, from
the nature of the case, be proved with certainty. The Court deems it prudent
to award reasonable temperate damages to respondents under the
circumstances. As to the claim for payment of the money market placement
of Josefa Jeceil, the trial court may release the deposited amount of
P73,857.57 to petitioner as the consignation was not proper or warranted.
Thus, the decision of the Court of Appeals is affirmed with modification.

The award of moral, compensatory and exemplary damages and attorney’s
fees are deleted. BPI Investments is ordered to pay to the estate of Daniel G.
Carreon and Aurora J. Carreon the money market placement of P109,238.75,
with legal interest of twelve (12%) percent per annum from June 3, 1982,
until fully paid; to pay the estate of Josefa M. Jeceil, the money market
placement in the amount of P73,857.57, with legal interest at twelve (12%)
percent per annum from maturity on July 12, 1982, until fully paid. The
petitioner may withdraw its deposit from the lower court at its peril. BPI
Investments is likewise ordered to pay temperate damages to the estate of the
late Daniel G. Carreon in the amount of P300,000.00, and to the estate of
Aurora J. Carreon in the amount of P300,000.00, and to the estate of Josefa M.
Jeceil in the amount of P150,000.00.
VICTORY LINER, INC. petitioner,

VS. HEIRS OF ANDRES MALECDAN, respondents
2002 Dec 27
G.R. No. 154278
394 SCRA 520
FACTS:
Andres Malecdan was a 75 year-old farmer. On July 15, 1994, at
around 7:00 p.m., while Andres was crossing the National Highway on his
way home from the farm, a Dalin Liner bus on the southbound lane stopped to
allow him and his carabao to pass. However, as Andres was crossing the
highway, a bus of petitioner Victory Liner, driven by Ricardo C. Joson, Jr.,
bypassed the Dalin Bus. In so doing, respondent hit the old man and the
carabao on which he was riding. As a result, Andres Malecdan was thrown off
the carabao, while the beast toppled over. The Victory Liner bus sped past
the old man, while the Dalin bus proceeded to its destination without helping
him.
The incident was witnessed by Andres Malecdan’s neighbor, Virgilio

Lorena, who was resting in a nearby waiting shed after working on his farm.
Malecdan sustained a wound on his left shoulder, from which bone fragments
protruded. He was taken by Lorena and another person to the district
hospital where he died a few hours after arrival. The carabao also died soon
118
afterwards. Lorena executed a sworn statement before the police authorities.
Subsequently, a criminal complaint for reckless imprudence resulting in
homicide and damage to property was filed against the Victory Liner bus
driver Ricardo Joson, Jr.
Private respondents brought the suit for damages in the RTC which
found the driver guilty of gross negligence in the operation of his vehicle and
Victory Liner, Inc. also guilty of gross negligence in the selection and
supervision of Joson, Jr. Petitioner and its driver were held liable jointly and
severally for damages as follows: a. P50,000.00 as death indemnity; b.
P88,339.00 for actual damages; c. P200,000.00 for moral damages; d.
P50,000.00 as exemplary damages; e. thirty percent (30%) as attorney’s fees
of whatever amount that can be collected by the plaintiff; and f. the costs of
the suit.
On appeal, the decision was affirmed by the Court of Appeals, with the
modification that the award of attorney’s fees was fixed at P50,000.00.
ISSUES:
1. Whether or not the CA erred in affirming the appealed decision of
the RTC granting P200,000.00 as moral damages which is double the
P100,000.00 as prayed for by the private respondents in their complaint and
in granting actual damages not supported by official receipts and spent way
beyond the burial of the deceased victim.
2. Whether or not the affirmation by the CA of the appealed decision of

the RTC granting the award of moral and exemplary damages and attorney’s
fees which were not proved and considering that there is no finding of bad
faith and gross negligence on the part of the petitioner was not established, is
in accord with law and jurisprudence.
RULING:
The Court found the appealed decision to be in order.
Article 2176 provides: “Whoever by act or omission causes damage to

another, there being fault or negligence, is obliged to pay for the damage
done. Such fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the provisions
of this Chapter.” Article 2180 provides for the solidary liability of an
employer for the quasi-delict committed by an employee. The responsibility
of employers for the negligence of their employees in the performance of
their duties is primary and, therefore, the injured party may recover from the
employers directly, regardless of the solvency of their employees.
Employers may be relieved of responsibility for the negligent acts of

their employees acting within the scope of their assigned task only if they can
show that "they observed all the diligence of a good father of a family to
prevent damage." For this purpose, they have the burden of proving that they
have indeed exercised such diligence, both in the selection of the employee
and in the supervision of the performance of his duties.
In the selection of prospective employees, employers are required to

examine them as to their qualifications, experience and service records. With
respect to the supervision of employees, employers must formulate standard
operating procedures, monitor their implementation and impose disciplinary
measures for breaches thereof. These facts must be shown by concrete proof,
including documentary evidence.
In the instant case, petitioner presented the results of Joson, Jr.’s

written examination, actual driving tests, x-ray examination, psychological
examination, NBI clearance, physical examination, hematology examination,
119
urinalysis, student driver training, shop training, birth certificate, high school
diploma and reports from the General Maintenance Manager and the
Personnel Manager showing that he had passed all the tests and training
sessions and was ready to work as a professional driver. However, the trial
court noted that petitioner did not present proof that Joson, Jr. had nine years
of driving experience. Petitioner also presented testimonial evidence that
drivers of the company were given seminars on driving safety at least twice a
year. However, the trial court noted that there is no record of Joson, Jr. ever
attending such a seminar. Petitioner likewise failed to establish the speed of
its buses during its daily trips or to submit in evidence the trip tickets, speed
meters and reports of field inspectors. The finding of the trial court that
petitioner’s bus was running at a very fast speed when it overtook the Dalin
bus and hit the deceased was not disputed by petitioner. Thus it was held
that the trial court did not err in finding petitioner to be negligent in the
supervision of its driver Joson, Jr.
To justify an award of actual damages, there should be proof of the

actual amount of loss incurred in connection with the death, wake or burial of
the victim. Receipts showing expenses incurred some time after the burial of
the victim, such as expenses relating to the 9th day, 40th day and 1st year
death anniversaries are not to be taken accounted for. In this case, the trial
court awarded P88,339.00 as actual damages. While these were duly
supported by receipts, these included the amount of P5,900.00, the cost of
one pig which had been butchered for the 9th day death anniversary of the
deceased. The item cannot be allowed.
The award of P200,000.00 for moral damages was reduced. The trial
court found that the wife and children of the deceased underwent "intense
moral suffering" as a result of the latter’s death. Under Art. 2206 of the Civil
Code, the spouse, legitimate children and illegitimate descendants and
ascendants of the deceased may demand moral damages for mental anguish
by reason of the death of the deceased. Under the circumstances of this case
an award of P100,000.00 would be in keeping with the purpose of the law in
allowing moral damages.
The award of P50,000.00 for indemnity is in accordance with current

rulings of the Court. Art. 2231 provides that exemplary damages may be
recovered in cases involving quasi-delicts if the defendant acted with gross
negligence. Exemplary damages are imposed not to enrich one party or
impoverish another but to serve as a deterrent against or as a negative
incentive to curb socially deleterious actions. In this case, petitioner’s driver
Joson, Jr. was grossly negligent in driving at such a high speed along the
national highway and overtaking another vehicle which had stopped to allow
a pedestrian to cross. Worse, after the accident, Joson, Jr. did not stop the
bus to help the victim. Under the circumstances, the trial court’s award of
P50,000.00 as exemplary damages was proper.

120
REMEDIES IN CASE OF BREACH: ACCION PAULIANA
KHE HONG CHENG VS. COURT OF APPEALS

355 SCRA 701
G.R. No. 144169
March 28, 2001
FACTS:
Petitioner Khe Hong Cheng, is the owner of Butuan Shipping Lines. Its
vessel M/V Prince Eric was used by Philippine Agricultural Trading
Corporation to ship 3,400 bags of Copra at Masbate for delivery to Dipolog.
The shipment was covered by a marine insurance policy issued by American
Home Insurance Company (eventually Philam). However, M/V Prince Eric
sank, which resulted to the total loss of the shipment. Insurer Philam paid the
amount of P 354,000.00, which is the value of the copra, to Philippine
Agricultural Trading Corporation. American Home was thereby subrogated
unto the rights of the consignee and filed a case to recover money paid to the
latter, based on breach of common carriage.
While the case was pending, Khe Hong Cheng executed deeds of
donations of parcels of land in favor of his children. As a consequence of a
favorable judgment for American Home, a writ of execution to garnish Khe
Hong Cheng’s property was issued. But the writ of execution could not be
implemented because Cheng’s property were already transferred to his
children. Consequently, American filed a case for the rescission of the deeds
of donation executed by petitioner in favor of children on the ground that they
were made in fraud of his creditors. Petitioner answered that the action
should be dismissed for it already prescribed. Petitioner posited that the
registration of the donation was on December 27, 1989 and such constituted
constructive notice. And since the complaint was filed only in 1997, more
than four (4) years after registration, the action is thereby barred by
prescription.
ISSUES:
Whether or not the action for the rescission of the deed of donation has
prescribed, and whether or not accion pauliana/ rescission of the deed of
donation is proper.
RULING:
NO for the first issue. Although the Civil Code provides that “The
action to claim rescission must be commenced within four (4) years” is silent
as to where the prescriptive period would commence, the general rule is such
shall be reckoned from the moment the cause of action accrues; i.e., the legal
possibility of bringing the action.
Since accion pauliana is an action of last resort after all other legal
remedies have been exhausted and have been proven futile, in the case at bar,
it was only in February 25, 1997, barely a month from discovering that
petitioner Khe Hong Cheng had no other property to satisfy the judgment
award against him that the action for rescission accrued. So the contention
of Khe Hong Cheng that the action accrued from the time of the constructive
notice; i.e., December 27, 1989, the date that the deed of donation was
registered, is untenable.
YES for the second issue. For an accion pauliana to accrue, the
following requisites must concur: first, the plaintiff asking for rescission has a
credit prior to the alienation, although demandable late. Second, that the
121
debtor has made a subsequent contract conveying a patrimonial benefit to a
third person. Third, that the creditor has no other legal remedy to satisfy his
claim; but would benefit by rescission of the conveyance to the third person.
Fourth, that the act being impugned is fraudulent, and fifth, that the third
person who received the property conveyed, if by onerous title, has been an
accomplice in the fraud. All the above enumerated elements are presents in
the case at bar.
FORTUITOUS EVENTS/ CASO FORTUITO – REQUISITES
1. HUIBONHOA VS. CA, DEC. 14, 1999

2. ACE AGRO VS. CA, 266 SCRA 429
FLORENCIA T. HUIBONHOA, petitioner,

VS. COURT OF APPEALS, Spouses Rufina G. Lim and ANTHONY LIM,
LORETA GOJOCCO CHUA and Spouses SEVERINO and PRISCILLA
GOJOCCO, respondents
December 14, 1999
G.R. No. 95897
FACTS:
On June 8, 1983, Florencia T. Huibonhoa entered into a memorandum
of agreement with siblings Rufina Gojocco Lim, Severino Gojocco and Loreta
Gojocco Chua stipulating that Florencia T. Huibonhoa would lease from them
(Gojoccos) three (3) adjacent commercial lots at Ilaya Street, Binondo,
Manila, described as lot nos. 26-A, 26-B and 26-C, covered by Transfer
Certificates of Title Nos. 76098, 80728 and 155450, all in their (Gojoccos')
names.
On June 30, 1983, pursuant to the said memorandum of agreement, the

parties inked a contract of lease of the same three lots for a period of fifteen
(15) years commencing on July 1, 1983 and renewable upon agreement of the
parties. Subject contract was to enable the lessee, Florencia T. Huibonhoa, to
construct a "four-storey reinforced concrete building with concrete roof deck,
according to plans and specifications approved by the City Engineer's Office."
The parties agreed that the lessee could let/sublease the building
and/or its spaces to interested parties under such terms and conditions as the
lessee would determine and that all amounts collected as rents or income
from the property would belong exclusively to the lessee. The lessee
undertook to complete construction of the building "within eight (8) months
from the date of the execution of the contract of lease." The parties also
agreed that upon the termination of the lease, the ownership and title to the
building thus constructed on the said lots would automatically transfer to the
lessor, even without any implementing document therefor. Real estate taxes
on the land would be borne by the lessor while that on the building, by the
lessee, but the latter was authorized to advance the money needed to meet
the lessors' obligations such as the payment of real estate taxes on their lots.

122
The lessors would deduct from the monthly rental due all such advances
made by the lessee.
The construction of the building was not met on the date agreed upon
due to the assassination of the then Senator Benigno Aquino Jr. It was
claimed that increase in the value of the materials was a fortuitous event,
which the lower courts did not consider as such.
ISSUE:
Whether or not the assassination of Senator Benigno Aquino Jr., which
caused inflation, was a fortuitous event.
RULING:
The Supreme Court found no merit in petitioner’s submission that the
assassination of the late Senator Benigno Aquino, Jr. was a fortuitous event
that justified a modification of the terms of the lease contract.
A fortuitous event is that which could not be foreseen, or which even if

foreseen, was inevitable. To exempt the obligor from liability for a breach of
an obligation due to an "act of God", the following requisites must concur: (a)
the cause of the breach of the obligation must be independent of the will of
the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the
event must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner; and (d) the debtor must be free from any
participation in, or aggravation of the injury to the creditor.
In the case under scrutiny, the assassination of Senator Aquino may

indeed be considered a fortuitous event. However, the said incident per se
could not have caused the delay in the construction of the building. What
might have caused the delay was the resulting escalation of prices of
commodities including construction materials. Be that as it may, there is no
merit in Huibonhoa's argument that the inflation borne by the Filipinos in
1983 justified the delayed accrual of monthly rental, the reduction of its
amount and the extension of the lease by three (3) years.
Inflation is the sharp increase of money or credit or both without a

corresponding increase in business transaction. There is inflation when there
is an increase in the volume of money and credit relative to available goods
resulting in a substantial and continuing rise in the general price level. While
it is of judicial notice that there has been a decline in the purchasing power of
the Philippine peso, this downward fall of the currency cannot be considered
unforeseeable considering that since the 1970's we have been experiencing
inflation. It is simply a universal trend that has not spared our country.
Conformably, this Court upheld the petitioner's view in Occena v. Jabson that
even a worldwide increase in prices does not constitute a sufficient cause of
action for modification of an instrument. It is only when an extraordinary
inflation supervenes that the law affords the parties a relief in contractual
obligations. In Filipino Pipe and Foundry Corporation v. NAWASA, the Court
explained extraordinary inflation thus:
"Extraordinary inflation exists when 'there is a decrease or increase in the

purchasing power of the Philippine currency which is unusual or beyond the
common fluctuation in the value of said currency’, and such decrease or
increase could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of the
obligation.”
No decrease in the peso value of such magnitude having occurred,

Huibonhoa has no valid ground to ask this Court to intervene and modify the
lease agreement to suit her purpose. As it is, Huibonhoa even failed to prove
by evidence, documentary or testimonial, that there was an extraordinary
inflation from July 1983 to February 1984. Although she repeatedly alleged
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that the cost of constructing the building doubled from P6 million to P12
million, she failed to show by how much, for instance, the price index of goods
and services had risen during that intervening period. An extraordinary
inflation cannot be assumed.
Hence, for Huibonhoa to claim exemption from liability by reason of

fortuitous event under Art. 1174 of the Civil Code, she must prove that
inflation was the sole and proximate cause of the loss or destruction of the or,
in this case, of the delay in the construction of the building. Having failed to
do so, Huibonhoa's contention is untenable.
Pathetically, if indeed a fortuitous event deterred the timely fulfillment

of Huibonhoa's obligation under the lease contract, she chose the wrong
remedy in filing the case for reformation of the contract. Instead, she should
have availed of the remedy of recission of contract in order that the court
could release her from performing her obligation under Arts. 1266 and 1267
of the Civil Code, so that the parties could be restored to their status prior to
the execution of the lease contract.
FORTUITOUS EVENTS/ CASO FORTUITO – REQUISITES
ACE-AGRO DEVELOPMENT CORP. VS. CA

266 SCRA 429
FACTS:
Petitioner Ace-Agro Development Corporation and private respondent
Cosmos Bottling Corporation entered into a service contract covering the
period from January 1, 1990 to December 31, 1990. According to the
agreement, the former shall clean soft drink bottles and repair wooden shells
for private respondent. The service contract was suspended on account of a
fire on April 25, 1990 which destroyed the area where petitioner did its work.
Respondent terminated the service contract due to the fire. Petitioner

sent several letters for reconsideration, which the respondent willingly
124
considered through its letters dated August 29, 1990 and November 7, 1990
directing petitioner to resume its work. Petitioner, however, refused to
continue its work on two reasons. First, the August 29 letter did not allow
them to resume their work on respondent’s premises which will be quite
costly for them. Second, petitioner requested for an extension of two (2)
months for their contract on account of the fire which the respondent did not
heed into.
ISSUES:
1. Whether or not force majeure or fortuitous event is present in the case.
2. Whether or not the respondet was justified in unilaterally terminating
the contract due to a fortuitous event.
3. Whether or not the fortuitous event allows the extension of a contract.
RULING:
1. YES. Pursuant to Article 1174 of the Civil Code, “Except in cases
expressly specified by law, or when it is otherwise declared by stipulation, or
when the nature of the obligation requires the assumption of risk, no person
shall be responsible for those events which could not be foreseen, or which
though foreseen, were inevitable.” The requisites for an event to be
considered a fortuitous event are as follows: First, the cause of breach must
be independent of the will of the obligor. Second, the event must be
unforeseeable or inevitable. Third, the event must be such as to render it
impossible for the debtor to fulfill his obligation in a normal manner. And
fourth, the debtor must be free from any participation in, or aggravation of,
the injury to the creditor. In this case, all the mentioned requisites are
present.
2. NO. The fortuitous event that happened in this case could not warrant a
termination of the service contract; but rather, it only temporarily suspends
the performance of the obligation. The unilateral termination therefore
shifted on petitioner’s part when it unreasonably refused to continue its
services.
3. NO. Fortuitous events do not automatically warrant an extension for the

period of a contract, especially that this case is one which has a resolutory
condition. The fact is that the contract was subject to a resolutory period
which relieved the parties of their respective obligations but did not stop the
running of the period of their contract.
EFFECTS OF FORTUITOUS EVENT UPON OBLIGATIONS
1. DIOQUINO VS. LAUREANO, 33 SCRA 65

2. NAPOCOR VS. PHILLIP BROS, 369 SCRA 626
3. FGU INSURANCE VS. CA, 454 SCRA 337
125
4. YOBIDO VS. CA, OCT. 17, 1997
5. JUNTILLA VS. FONTANAR, 136 SCRA 625
6. PHILAMGEN INSURANCE VS. MGG MARINE, MAR 8 ,
2002
7. MINDEZ VS. MORILLO, MAR. 12, 2002
8. VASQUEZ VS. CA, 138 SCRA 558
PEDRO DIOQUINO, plaintiff-appellee,

VS. FEDERICO LAUREANO, AIDA DE LAUREANO, and
JUANITO LAUREANO, defendants-appellants
33 SCRA 65
FACTS:
Petitioner Dioquino met respondent Laureano at the MVO office when
the former went to register his car at the said office. Respondent was a patrol
officer of the MVO office and at the time was waiting for a jeepney to take him
to the office of the Provincial Copmmander. Petitioner requested respondent
to introduce him to one of the clerks in the MVO office, who could facilitate
the registration of his car and the request was graciously attended to.
Afterwards, respondent rode on the car of petitioner with petitioner’s driver
to the office of the provincial commander. Along the way, some mischievous
boys stoned the car and its windshield was broken. Respondent chased and
was able to catch one of the boys and took him to petitioner. The petitioner,
however, did not file charges against the boy and his parents because the
stone throwing was merely accidental and due to force majeure. Respondent
refused to pay the windshield himself, even after petitioner tried to settle and
even asked respondent’s wife to convince her husband, since the same due to
force majeure.
Petitioner prevailed in the trial court. Hence, this appeal to the Court
was filed.
ISSUE:
Whether or not the respondent is liable for the broken windshield of
petitioner’s car.
RULING:
The damage to the windshield caused by the mischievous boys was a
fortuitous event resulting in a loss, which must be borne by the owner of the
car.
Article 1174 of the Civil Code provides that if the nature of the
obligation requires the assumption risk, compels the conclusion that in the
absence of a legal provision or an express covenant, “no one should be held to
account for fortuitous cases.”
Where the risk is quite evident such that the possibility of danger is not
only foreseeable, but also actually foreseen, then it could be said that the
nature of the obligation is such that a party could rightfully be deemed to
have assumed it. It is not enough therefore that the event should not have
been foreseen or anticipated, but it must be one impossible to foresee or to
avoid in order that a party may be said to have assumed the risk resulting
from the nature of the obligation itself.
In the case, there is no assumption of risk by the borrower of a car to

respond to damages for the broken windshield caused by an accidental stone-
throwing incident by boys playing along the road. Decision reversed as to the
liability of respondent.

126
FGU INSURANCE CORPORATION VS. COURT of APPEALS, ET AL

G.R. No. 137775
March 31, 2005
454 SCRA 337
FACTS:
Anco Enterprises Company (ANCO), a partnership between Ang Gui
and Co To, was engaged in the shipping business. It owned the M/T ANCO
tugboat and the D/B Lucio barge which were operated as common carriers.
Since the D/B Lucio had no engine of its own, it could not maneuver by itself
and had to be towed by a tugboat for it to move from one place to another.
On 23 September 1979, San Miguel Corporation (SMC) shipped from

Mandaue City, Cebu, on board the D/B Lucio, for towage by M/T ANCO. The
consignee for the cargoes covered by Bill of Lading No. 1 was SMC’s Beer
Marketing Division (BMD)-Estancia Beer Sales Office, Estancia, Iloilo, while
the consignee for the cargoes covered by Bill of Lading No. 2 was SMC’s
BMD-San Jose Beer Sales Office, San Jose, Antique. The D/B Lucio was towed
by the M/T ANCO all the way from Mandaue City to San Jose, Antique. The
vessels arrived at San Jose, Antique, at about one o’clock in the afternoon of
30 September 1979. The tugboat M/T ANCO left the barge immediately after
reaching San Jose, Antique.
When the barge and tugboat arrived at San Jose, Antique, in the
afternoon of 30 September 1979, the clouds over the area were dark and the
waves were already big. The arrastre workers unloading the cargoes of SMC
on board the D/B Lucio began to complain about their difficulty in unloading
the cargoes. SMC’s District Sales Supervisor, Fernando Macabuag, requested
ANCO’s representative to transfer the barge to a safer place because the
vessel might not be able to withstand the big waves. ANCO’s representative
did not heed the request because he was confident that the barge could
withstand the waves. This, notwithstanding the fact that at that time, only
the M/T ANCO was left at the wharf of San Jose, Antique, as all other vessels
already left the wharf to seek shelter. With the waves growing bigger and
bigger, only ten thousand seven hundred ninety (10,790) cases of beer were
discharged into the custody of the arrastre operator.
At about ten to eleven o’clock in the evening of 01 October 1979, the

crew of D/B Lucio abandoned the vessel because the barge’s rope attached to
the wharf was cut off by the big waves. At around midnight, the barge run
aground and was broken and the cargoes of beer in the barge were swept
away. As a result, ANCO failed to deliver to SMC’s consignee Twenty-Nine
Thousand Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred
Fifty (550) cases of Cerveza Negra. The value per case of Pale Pilsen was
Forty-Five Pesos and Twenty Centavos (P45.20). The value of a case of
Cerveza Negra was Forty-Seven Pesos and Ten Centavos (P47.10), hence,
SMC’s claim against ANCO amounted to One Million Three Hundred Forty-Six
Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00).
As a consequence of the incident, SMC filed a complaint for Breach of

Contract of Carriage and Damages against ANCO for the amount of One
127
Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos
(P1,346,197.00) plus interest, litigation expenses and Twenty-Five Percent
(25%) of the total claim as attorney’s fees. Upon Ang Gui’s death, ANCO, as a
partnership, was dissolved hence, on 26 January 1993, SMC filed a second
amended complaint which was admitted by the Court impleading the
surviving partner, Co To and the Estate of Ang Gui represented by Lucio,
Julian and Jaime, all surnamed Ang.
The substituted defendants adopted the original answer with

counterclaim of ANCO “since the substantial allegations of the original
complaint and the amended complaint are practically the same.” ANCO
claimed however that it had an agreement with SMC that it would not be
liable for any losses or damages resulting to the cargoes by reason of
fortuitous event. Since the cases of beer Pale Pilsen and Cerveza Negra were
lost by reason of a storm, a fortuitous event which battered and sunk the
vessel in which they were loaded, they should not be held liable.
Subsequently, ANCO, with leave of court, filed a Third-Party Complaint
against FGU, alleging that before the vessel of ANCO left for San Jose,
Antique with the cargoes owned by SMC, the cargoes, to the extent of Twenty
Thousand (20,000) cases, were insured with FGU for a total amount of Eight
Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) under
Marine Insurance Policy No. 29591.
In its answer to the Third-Party complaint, third-party defendant FGU

admitted the existence of the Insurance Policy under Marine Cover Note No.
29591 but maintained that the alleged loss of
the cargoes covered by the said insurance policy cannot be attributed directly
or indirectly to any of the risks insured against in the said insurance policy.
After trial, the trial court found that while the cargoes were indeed lost
due to fortuitous event, there was failure on ANCO’s part, through their
representatives, to observe the degree of diligence required that would
exonerate them from liability. The trial court thus held the Estate of Ang Gui
and Co To liable to SMC for the amount of the lost shipment. With respect to
the Third-Party complaint, the court a quo found FGU liable to bear Fifty-
Three Percent (53%) of the amount of the lost cargoes. The appellate court
affirmed in toto the decision of the lower court and denied the motion for
reconsideration and the supplemental motion for reconsideration. Hence,
this petition.
ISSUE:
Whether or not the respondent Court of Appeals committed grave
abuse of discretion in holding FGU liable under the insurance contract
considering the circumstances surrounding the loss of the cargoes
RULING:
The Supreme Court held that a careful study of the records shows no
cogent reason to fault the findings of the lower court, as sustained by the
appellate court, that ANCO’s representatives failed to exercise the
extraordinary degree of diligence required by the law to exculpate them from
liability for the loss of the cargoes. First, ANCO admitted that they failed to
deliver to the designated consignee the Twenty Nine Thousand Two Hundred
Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of
Cerveza Negra. Second, it is borne out in the testimony of the witnesses on
record that the barge D/B Lucio had no engine of its own and could not
maneuver by itself. Yet, the patron of ANCO’s tugboat M/T ANCO left it to
fend for itself notwithstanding the fact that as the two vessels arrived at the
128
port of San Jose, Antique, signs of the impending storm were already
manifest. As stated by the lower court, witness Mr. Anastacio Manilag
testified that the captain or patron of the tugboat M/T ANCO left the barge
D/B Lucio immediately after it reached San Jose, Antique, despite the fact that
there were already big waves and the area was already dark. This is
corroborated by defendants’ own witness, Mr. Fernando Macabueg.
ANCO’s arguments boil down to the claim that the loss of the cargoes
was caused by the typhoon Sisang, a fortuitous event (caso fortuito), and
there was no fault or negligence on their part. In fact, ANCO claims that
their crewmembers exercised due diligence to prevent or minimize the loss of
the cargoes but their efforts proved no match to the forces unleashed by the
typhoon which, in petitioners’ own words was, by any yardstick, a natural
calamity, a fortuitous event, an act of God, the consequences of which
petitioners could not be held liable for. There was blatant negligence on the
part of M/T ANCO’s crewmembers, first in leaving the engine-less barge D/B
Lucio at the mercy of the storm without the assistance of the tugboat, and
again in failing to heed the request of SMC’s representatives to have the
barge transferred to a safer place, as was done by the other vessels in the
port; thus, making said blatant negligence the proximate cause of the loss of
the cargoes. Taking into account the circumstances present in the instant
case concludes that the blatant negligence of ANCO’s employees is of such
gross character that it amounts to a wrongful act which must exonerate FGU
from liability under the insurance contract.
Hence, the assailed decision is affirmed.
NATIONAL POWER CORPORATION

VS. PHILIPP BROTHERS OCEANIC, INC.
G.R. No. 126204
November 20, 2001
369 SCRA 629
FACTS:
On May 14, 1987, the National Power Corporation (NAPOCOR) issued
invitations to bid for the supply and delivery of 120,000 metric tons of
imported coal for its Batangas Coal-Fired Thermal Power Plant in Calaca,
Batangas. The Philipp Brothers Oceanic, Inc. (PHIBRO) prequalified and was
allowed to participate as one of the bidders. After the public bidding was
conducted, PHIBRO’s bid was accepted. NAPOCOR’s acceptance was
conveyed in a letter dated July 8, 1987, which was received by PHIBRO on
July 15, 1987.

129
On July 10, 1987, PHIBRO sent word to NAPOCOR that industrial
disputes might soon plague Australia, the shipment’s point of origin, which
could seriously hamper PHIBRO’s ability to supply the needed coal unless a
“strike-free” clause is incorporated in the charter party or the contract of
carriage. In order to hasten the transfer of coal, PHIBRO proposed to
NAPOCOR that they equally share the burden of a “strike-free” clause.
NAPOCOR refused. On August 6, 1987, PHIBRO received from NAPOCOR a
confirmed and workable letter of credit. Instead of delivering the coal on or
before the thirtieth day after receipt of the Letter of Credit, as agreed upon
by the parties in the July contract, PHIBRO effected its first shipment only on
November 17, 1987.
Consequently, in October 1987, NAPOCOR once more advertised for

the delivery of coal to its Calaca thermal plant. PHIBRO participated anew in
this subsequent bidding but its application was denied for not meeting the
minimum requirements. However, PHIBRO found that the real reason for the
disapproval was its purported failure to satisfy NAPOCOR’s demand for
damages due to the delay in the delivery of the first coal shipment. Thus,
PHIBRO filed an action for damages with application for injunction against
NAPOCOR with the Regional Trial Court, Branch 57, Makati City. In its
complaint, PHIBRO alleged that NAPOCOR’s act of disqualifying it in the
October 1987 bidding and in all subsequent biddings was tainted with malice
and bad faith. PHIBRO prayed for actual, moral and exemplary damages and
attorney’s fees.
On the other hand NAPOCOR averred that the strikes in Australia could
not be invoked as reason for the delay in the delivery of coal because PHIBRO
itself admitted that as of July 28, 1987 those strikes had already ceased.
Furthermore, NAPOCOR claimed that due to PHIBRO’s failure to deliver the
coal on time, it was compelled to purchase coal from ASEA at a higher price.
NAPOCOR claimed for actual damages in the amount of P12,436,185.73,
representing the increase in the price of coal, and a claim of P500,000.00 as
litigation expenses.
On January 16, 1992, the trial court rendered a decision in favor of

PHIBRO. Unsatisfied, NAPOCOR elevated the case to the Court of Appeals
which affirmed in toto the latter’s decision. Hence, this present petition.
ISSUE:
Whether or not the lower court erred in holding that PHIBRO’s delay in
the delivery of imported coal was due to force majeure.
RULING:
It was disclosed from the records of the case that what prevented
PHIBRO from complying with its obligation under the July 1987 contract was
the industrial disputes which besieged Australia during that time. The Civil
Code provides that no person shall be responsible for those events which
could not be foreseeen, or which, though foreseen, were inevitable. This
means that when an obligor is unable to fulfill his obligation because of a
fortuitous event or force majeure, he cannot be held liable for damages for
non-performance.
In addition to the above legal precept, it is worthy to note that PHIBRO

and NAPOCOR explicitly agreed in Section XVII of the “Bidding Terms and
Specifications that “neither seller (PHIBRO) nor buyer (NAPOCOR) shall be
liable for any delay in or failure of the performance of its obligations, other
than the payment of money due, if any such delay or failure is due to Force
Majeure.” “Strikes” then are undoubtedly included in the force majeure

clause of the Bidding Terms and Specifications.

130
YOBIDO VS. COURT OF APPEALS

281 SCRA 01
G.R. No. 113003
Oct. 17, 1997
FACTS:
On April 26, 1988, spouses Tito and Leny Tumboy and their minor
children named Ardee and Jasmin, boarded at Mangagoy , Surigao Del Sur, a
Yobido Liner bus bound for Davao City. Along Picop Road in Km. 17,
Sta.Maria, Agusan del Sur, the left front tire of the bus exploded. The bus fell
into a ravine around three (3) feet from the road and struck a tree. The
incident resulted in the death of 28-year-old Tito Tumboy and physical injuries
to other passengers. On Nov. 21, 1988, a complaint for breach of contract of
carriage, damages and attorney’s fees was filed by Leny and her children
against Alberta Yobido, the owner of the bus, and Cresencio Yobido, its driver,
before the Regional Trial Court of Davao City. When the defendants therein
filed their answer to the complaint, they raised the affirmative defense of caso
fortuito. They also filed a third-party complaint against Philippine Surety and
Insurance, Inc. This third-party defendant filed an answer with compulsory
counterclaim. At the pre-trial conference, the parties agreed to a stipulation
of facts.
On August 29, 1991, the lower court rendered a decision dismissing the
action for lack of merit. On the issue of whether or not the tire blowout was a
caso fortuito, it found that “the falling of the bus to the cliff was a result of no
other outside factor than the tire bolw-out.” It held that the ruling in the La
Mallorca and Pampanga Bus Co. v. De Jesus that a tire blowout is a
“mechanical defect of the conveyance or a fault in its equipment which was
easily discoverable if the bus had been subjected to a more thorough or rigid
check-up before it took to the road that morning” is inapplicable to this case.
It reasoned out that in said case. It reasoned out that in said case, it was
found that the blowout was caused by the established fact that the inner tube
of the left front tire “was pressed between the inner circle of the left wheel
and the rim which had slipped out of the left wheel “. In this case, however,”
the cause of the explosion remains a mystery until at present.” As such, the
court added, the tire blowout was “a caso fortuito which is completely an
extraordinary circumstance independent of the will” of the defendants who
should be relieved of “whatever liability the plaintiffs may have suffered by
reason of the explosion pursuant to Article 1174 of the Civil Code.”
ISSUE:
Whether or not the Trial Court erred in their findings that the tire
blowout was a caso fortuito.
RULING:
On August 23, 1193, the Court of Appeals rendered the decision
reversing the decision of the trial court. Article 1755 provides that “(a)
common carrier is bound to carry the passenger safely as far as human care
and foresight can provide, using the utmost diligence very cautious persons,
with a due regard for all the circumstances”. Accordingly, in culpa
contractual, once a passenger dies or is injured, the carrier is presumed to
have been at fault or to have acted negligently. The disputable presumption
may only be overcome by evidence that the carrier had observed
extraordinary diligences as prescribed by Articles 1733, 1755 and 1756 of the
Civil Code or that the injury of the passenger was due to fortuitous event.
Consequently, the court need make an express finding of fault or negligence
on the part of the carrier to hold it responsible for damages sought by the
passenger.
131
The decision of the Court of Appeals was affirmed subject to the

modification that petitioners shall, in addition to the monetary awards
therein, be liable for the award of exemplary damages in the amount of
P20,000.00.
ROBERTO JUNTILLA VS. CLEMENTE FONTANAR

136 SCRA 625
G.R. No. L-45637
FACTS:
The plaintiff was a passenger of the public utility jeepney on the course
of the trip from Danao City to Cebu City. The jeepney was driven by
defendant Berfol Camoro. It was registered under the franchise of defendant
Clemente Fontanar but was actually owned by defendant Fernando Banzon.
When the jeepney reached Mandaue City, the right rear tire exploded causing
the vehicle to turn turtle. The plaintiff who was sitting at the front seat was
thrown out of the vehicle and momentarily lost consciousness. When he came
to his senses, he found that he had a lacerated wound on his right palm and
injuries on his left arm, right thigh and on his back. Because of his shock and
injuries, he went back to Danao City but on the way, he discovered that his
"Omega" wrist watch was lost. Upon his arrival in Danao City, he immediately
entered the Danao City Hospital to attend to his injuries, and also requested
his father-in-law to proceed immediately to the place of the accident and look
for the watch. In spite of the efforts of his father-in-law, the wrist watch could
no longer be found.
ISSUE:
Whether or not the accident that happened was due to a fortuitous

event, thereby, absolving the respondents from any obligation.
RULING:
NO. The accident was not due to a fortuitous event. There are specific
acts of negligence on the part of the respondents. The passenger jeepney
turned turtle and jumped into a ditch immediately after its right rear tire
exploded. It was running at a very high speed before the accident and was
overloaded. The petitioner stated that there were three (3) passengers in the
front seat and fourteen (14) passengers in the rear.
While the tire that blew-up was still good because the grooves were
still visible, this does not make the explosion of the tire a fortuitous event. No
evidence was presented to show that the accident was due to adverse road
conditions or that precautions were taken by the jeepney driver to avert
possible accidents. The blowing-up of the tire, therefore, could have been
caused by too much air pressure and aggravated by the fact that the jeepney
was overloaded and speeding at the time of the accident.
The accident was caused either through the negligence of the driver or
because of mechanical defects in the tire. Common carriers are obliged to
supervise their drivers and ensure that they follow rules and regulations such
132
as not to overload their vehicles, not to exceed safe and legal speed limits,
and to know the correct measures to take when a tire blows up.
The source of a common carrier's legal liability is the contract of

carriage, and by entering into the said contract, it binds itself to carry the
passengers safely as far as human care and foresight can provide, using the
utmost diligence of a very cautious person, with a due regard for all the
circumstances.
The driver and the owner of the vehicle are liable for damages.
THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC,

VS. MGG MARINE SERVICES, INC. and DOROTEO GAERLAN
2002 Mar 8
G.R. No. 135645
FACTS:
On March 1, 1987, San Miguel Corporation insured several beer bottle
cases with an aggregate value of P5,836,222.80 with petitioner Philippine
American General Insurance Company. The cargo were loaded on board the
M/V Peatheray Patrick-G to be transported from Mandaue City to Bislig,
Surigao del Sur.
After having been cleared by the Coast Guard Station in Cebu the
previous day, the vessel left the port of Mandaue City for Bislig, Surigao del
Sur on March 2, 1987. The weather was calm when the vessel started its
voyage.
The following day, March 3, 1987, M/V Peatheray Patrick-G listed and
subsequently sunk off Cawit Point, Cortes, Surigao del Sur. As a consequence
thereof, the cargo belonging to San Miguel Corporation was lost.
Subsequently, San Miguel Corporation claimed the amount of its loss from
petitioner.
The Court of Appeals observed respondents from any liability because

the cargo was lost due to a fortuitous event; strong winds and huge waves
caused the vessel to sink.
ISSUE:
Whether the loss of the cargo was due to the occurrence of a natural
disaster, and if so, whether such natural disaster was the sole and proximate
cause of the loss or whether private respondents were partly to blame for
failing to exercise due diligence to prevent the loss of the cargo.
RULING:
Common carriers, from the nature of their business and for reasons of
public policy, are mandated to observe extraordinary diligence in the
vigilance over the goods and for the safety of the passengers transported by
them. Owing to this high degree of diligence required of them, common
133
carriers, as a general rule, are presumed to have been at fault or negligent if
the goods transported by them are lost, destroyed or if the same deteriorated.
The parties do not dispute that on the day the M/V Peatheray Patrick-G
sunk, said vessel encountered strong winds and huge waves ranging from six
to ten feet in height. The vessel listed at the port side and eventually sunk at
Cawit Point, Cortes, Surigao del Sur.
In the case at bar, it was adequately shown that before the M/V
Peatheray Patrick-G left the port of Mandaue City, the Captain confirmed with
the Coast Guard that the weather condition would permit the safe travel of
the vessel to Bislig, Surigao del Sur. Thus, he could not be expected to have
foreseen the unfavorable weather condition that awaited the vessel in Cortes,
Surigao del Sur. It was the presence of the strong winds and enormous waves
which caused the vessel to list, keel over, and consequently lose the cargo
contained therein. The appellate court likewise found that there was no
negligence on the part of the crew of the M/V Peatheray Patrick-G. Since the
presence of strong winds and enormous waves at Cortes, Surigao del Sur on
March 3, 1987 was shown to be the proximate and only cause of the sinking
of the M/V Peatheray Patrick-G and the loss of the cargo belonging to San
Miguel Corporation, private respondents cannot be held liable for the said
loss.
MINDEX RESOURCES DEVELOPMENT VS. MORILLO

379 SCRA 144
March 12, 2002
FACTS:
On February 1991 a verbal agreement was entered into between
Ephraim Morillo and Mindex Resources Corporation fro the lease of the
former’s 6x6 10-wheeler cargo truck for use in Mindex’s mining operations in
Oriental Mindoro at a stipulated rental of P300.00 per hour for a minimum of
8 hours a day or a total of P2,400.00 daily. Mindex was paying its rentals
until April 10, 1991. On April 11, unidentified persons burned the truck while
it was parked unattended at San Teodoro, Oriental Mindoro due to
mechanical trouble. Upon learning the burning incident, Morillo offered to
sell the truck to Mindex but the latter refused. Instead, it replaced the
vehicle’s burned tires and had it towed to a shop for repair and overhauling.
On April 15, 1991, Morillo sent a letter to Mindex proposing that he will
entrust the said vehicle in the amount of P275,000.00 that is its cost price
without charging for the encumbrance of P76,800.00.
Mindex responded by a hand written letter expressing their

reservations on the above demands due to their tight financial situation.
However, he made counter offers which state that they will pay the rental of
the 6x6 truck in the amount of P76,000.00, repair and overhaul the truck on
their own expenses and return it to Morillo on good running condition after
repair. April 18, Morillo replied that he will relinquish to Mindex the
134
damaged truck; that he is amenable to receive the rental in the amount of
P76, 000.00; and that Mindex will pay P50,000.00 monthly until the balance
of P275,000.00 is fully paid. Except for his acceptance of the proffered
P76,000.00 unpaid rentals. Morillo’s stand has not been changed as he merely
lowered the first payment on the P275,000.00 valuation of the truck from
P150,000.00 to P50,000.00.
The parties had since remain intransigent and so on August, Morillo

pulled out the truck from the repair shop of Mindex and had it repaired
elsewhere for which he spent the amount of P132,750.00. The RTC found
petitioner responsible fro the destruction of loss of the leased 6x6 truck and
ordered it to pay respondent P76,000.00 as balance of the unpaid rental for
the 6x6 truck with interest of 12%, P132,750.00 representing the cost of
repair and overhaul of the truck with interest of 12% until fully paid; and
P20,000.00 as attorney’s fees.
The appellate court sustained RTC’s finding. The CA found petitioner

was not without fault for the loss and destruction of the truck and thus liable
therefore. However, it modified the 12% interest on the P76,000.00 rentals
and P132,750.00 repair cost to 6% per annum form June 22, 1994 to the date
of finality of the said decision. It affirmed the award of attorney’s fees.
ISSUE:
Whether or not the CA is correct in finding the petitioner liable due to
negligence and cannot be exonerated due to the defense of fortuitous event.
RULING:
YES. As stated by the Court of Appeals, “the burning of the subject
truck was impossible to foresee, but not impossible to avoid. Mindex could
have prevented the incident by immediately towing the truck to a motor shop
for repair.
In this case, petitioner was found negligent and thus liable for the loss
or destruction of the leased truck. Article 1174 of the Civil Code states that,
“No person shall be responsible for a fortuitous event that could not be
foreseen or, though foreseen, was inevitable. In other words, there must be
an exclusion of human intervention form the cause of injury on loss.” In this
case, the petitioner is contributory negligent to the incident.
Decision was denied. Deleting attorney’s fees, modified the RTC and
CA’s decision.
VASQUEZ VS. COURT OF APPEALS

138 SCRA 558
FACTS:
A vessel sailed from Manila to Cebu despite the knowledge by the
captain and officers that a typhoon was building up somewhere in Mindanao.
When it passed Tanguigui Island, the weather suddenly changed and the
vessel struck a reef, sustained leaks and eventually sunk. The ship sunk with
the children of the petitioners who sued for damages before the CFI of
Manila, which was granted. Respondents defense of force majeure to

135
extinguish its liability were not entertained. On appeal, the judgment was
reversed.
ISSUE:
Whether or not the defense of force majeure is tenable.
RULING:
NO. A fortuitous event is constituted by the following: 1) The event
must be independent of the human will; 2) the occurrence must render it
impossible for the debtor to fulfill the obligation in a normal manner; and 3)
the obligor must be free of participation in the aggravation of the injury
suffered by the obligee or if it could be foreseen, it must have been impossible
to avoid. There must be an entire exclusion of human agency from the cause
of the injury or loss. Such is not the case at bar. The vessel still proceeded
even though the captain already knew that they were within the typhoon zone
and despite the fact that they were kept posted about the weather conditions.
They failed to exercise that extraordinary diligence required from them,
explicitly mandated by the law, for the safety of the passengers.
TRANSMISSIBILITY OF RIGHTS AND OBLIGATIONS
1. SAN AGUSTIN VS. CA, 371 SCRA 348

2. PROJECT BUILDERS, INC. VS. CA, 358 SCRA 626

136
SAN AGUSTIN VS. COURT OF APPEALS

371 S 348
FACTS:
On February 11, 1974, the Government Service Insurance System
(GSIS) sold to Macaria Vda de Caiquep, a parcel or residential land located in
Pasig City, part of the GSIS Low Cost Housing Project evidenced by a Deed of
Absolute Sale.
On February 19, 1974, the Register of Deeds of Rizal issued in the

name of Caiquep, Transfer Certificate of Title. The next day, Caiquep sold the
subject lot to private respondent Maximo Menez. Sometime in 1979, for
being suspected as a subversive, military men ransacked Menez's’ house in
Rizal. He surrendered to the authorities and was detained for two years.
When released, another order for his arrest was issued so he hid in Mindanao
for another four years or until March 1984. In December 1990, he discovered
that the subject TCT was missing. He consulted a lawyer but the latter did
not act immediately on the matter. Upon consulting a new counsel, an
Affidavit of Loss was filed with the Register of Deeds and a certified copy of
TCT was issued. Private respondent also declared the property for tax
purposes and obtained a certification thereof from the Assessor’s office. His
search for the registered owner to different parts of the country failed
prompting the former to file a petition for the issuance of owner’s duplicate
copy to replace the lost one.
During the hearing, only Menez and counsel were present because the
Register of Deeds and the Provincial Prosecutor were not notified. The trial
court granted his petition after Menez presented his evidence ex parte. San
Agustin claimed this was the first time he became aware of the case of his
aunt Ma. Vda de Caiquep and the present occupant of the property. He filed
A Motion to Reopen Reconstitution Proceedings but RTC denied said motion.
Petitioner moved for motion for reconsideration but was again denied.
ISSUE:
Whether or not petitioner is bound by the contract entered into by his
predecessor-in-interest.
RULING:
Yes, petitioner is bound by contracts entered into by his predecessor’s-
in-interest. Heirs are bound by contracts entered into by their predecessors-
in-interest. In this case, the GSIS has not filed any action for the annulment of
Deed of Absolute Sale of the lot the latter sold to Caiquep, nor the forfeiture
of the lot in question.
In the Court’s view, the contract of sale remains valid between the
parties, unless and until annulled in the proper suit filed by the rightful party,
the GSIS. For now, the said contract of sale is binding upon the heirs of
Macaria Vda de Caiquep., including petitioner who alleges to be one of her
heirs, in line with the rule that heirs are bound by contracts entered into by
their predecessors-in-interest.

137
TRANSMISSIBILITY OF RIGHTS AND OBLIGATIONS
PROJECT BUILDERS, INC., GALICANO A. CALAPATIA, JR., and

LEANDRO ENRIQUEZ, petitioners, vs. THE COURT OF APPEALS and
INDUSTRIAL FINANCE CORPORATION, respondents
2001 Jun 19
358 SCRA 626
FACTS:
On August 21, 1975, plaintiff and defendant PBI entered into an
agreement whereby it was agreed that plaintiff would provide a maximum
amount of P2,000,000.00 against which said defendant would discount and
assign to plaintiff on a ‘with recourse non-collection basis’ its (PBI’s) accounts
receivable under the contracts to sell specified in said agreement. Eventually,
the same parties entered into an agreement whereby it was agreed that PBI’s
credit line with plaintiff be increased to P5,000,000.00. It was stipulated that
the credit line of P5,000,000.00 granted includes the amount already
assigned/discounted.Against the above-mentioned ‘credit line,’ defendant PBI
discounted with plaintiff on different dates accounts receivables with different
maturity dates from different condominium-unit buyers. The total amount of
receivables discounted by defendant PBI is P7,986,815.38 and consists of
twenty accounts. Of such receivables amounting to P7,986,815.38 plaintiff
released to defendant PBI the amount of P4,549,132.72 and the difference of
P3,437,682.66 represents the discounting fee or finance fee.
To secure compliance with the terms and conditions of the agreement

defendants executed a Deed of Real Estate Mortgage in favor of plaintiff.
When defendants allegedly defaulted in the payment of the subject account,
plaintiff foreclosed the mortgage and plaintiff was the highest bidder in the
amount of P3,500,000.00. The foreclosed property was redeemed a year later
but after application of the redemption payment, plaintiff claims that there is
still a deficiency in the amount of P1,323,053.08.
A collection suit was then filed by IFC against PBI. However, PBI
denied liability alleging that IFC has no case or right of action because the
obligation is fully paid out of the proceeds of foreclosure sale of its property.
Further, it alleged that a proper accounting of the transaction between the
parties will show that it is the IFC who is liable to PBI.
The trial court dismissed the complaint but the Court of Appeals
reversed it. It ordered PBI to pay IFC the deficiency in the amount of
P1,237,802.48 and the monetary interests.
ISSUE:
Whether or not said Republic Act No. 5980 should govern the
transaction between petitioners and private respondent which in reality was
bilateral, not trilateral, and respondent financing company was not really
subrogated in the place of the supposed seller or assignor.
RULING:
The assignment of the contracts to sell falls within the purview of the
Act. The term credit has been defined to - "(c) x x x mean any loan, mortgage,
deed of trust, advance, or discount; any conditional sales contract, any
contract to sell, or sale or contract of sale of property or service, either for
present or future delivery, under which, part or all of the price is payable
subsequent to the making of such sale or contract; any rental-purchase
contract; any option, demand, lien, pledge, or other claim against, or for the
138
delivery of, property or money, any purchase, or other acquisition of or any
credit upon the security of, any obligation or claim arising out of the
foregoing; and any transaction or series of transactions having a similar
purpose or effect.”
An assignment of credit is an act of transferring, either onerously or

gratuitously, the right of an assignor to an assignee who would then be
capable of proceeding against the debtor for enforcement or satisfaction of
the credit. The transfer of rights takes place upon perfection of the contract,
and ownership of the right, including all appurtenant accessory rights, is
thereupon acquired by the assignee. The assignment binds the debtor only
upon acquiring knowledge of the assignment but he is entitled, even then, to
raise against the assignee the same defenses he could set up against the
assignor. Where the assignment is on account of pure liberality on the part of
the assignor, the rules on donation would likewise be pertinent; where
valuable consideration is involved, the assignment partakes of the nature of a
contract of sale or purchase.
Upon an assignment of a contract to sell, the assignee is effectively

subrogated in place of the assignor and in a position to enforce the contract
to sell to the same extent as the assignor could.
An insistence of petitioners that the subject transaction should be

considered a simple loan since private respondent did not communicate with
the debtors, condominium unit buyers, to collect payment from them, is
untenable. In an assignment of credit, the consent of the debtor is not
essential for its perfection, his knowledge thereof or lack of it affecting only
the efficaciousness or inefficaciousness of any payment he might make.
The assignment, it might be pointed out, was "with recourse," and

default in the payment of installments had been duly established when
petitioner corporation foreclosed on the mortgaged parcels of land. The
resort to foreclosure of the mortgaged properties did not preclude private
respondent from collecting interest from the assigned Contracts To Sell from
the time of foreclosure to the redemption of the foreclosed property. The
imposition of interest was a mere enforcement or exercise of the right to the
ownership of the credit or receivables which the parties stipulated in the
1976 financing agreement. Thus -"f. That the Assignor shall comply with all
the terms and conditions specified on the said Contracts to Sell, executed by
the assignor and its individual purchaser or customers, and
assigned/discounted to Assignee.”
One of the provisions in the contracts to sell, subject matter of the

assignment agreement, related to the imposition of interest in the event of
default by the debtor in the payment of installments, to wit: "All payments
shall be made on or before their respective due dates without necessity of
demand therefor, and failure to make such payments on time shall entitle the
Developer to charge interest at the rate of one percent (1%) per month
without prejudice to the other remedies available to the Developer.” As
owner of the account receivables, private respondent was impressed with the
entitlement over such interest payment.

139
REQUISITES OF CONDITIONAL OBLIGATIONS (Art. 1179, CC)
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

VS. COURT OF APPEALS, Sps. NORMY D. CARPIO and CARMEN
ORQUISA; Sps. ROLANDO D. CARPIO and RAFAELA VILLANUEVA; Sps.
ELISEO D. CARPIO and ANUNCIACION del ROSARIO; LUZ C. REYES,
MARIO C. REYES,
JULIET REYES-RUBIN, respondents
1996 September 20
G.R. No. 118180
262 SCRA 245
FACTS:
Private respondents were the original owner of a parcel of agricultural
land covered by a TCT, with an area of 113,695 square meters, more or less.
On 30 May 1977, Private respondents mortgaged said land to petitioner.
When private respondents defaulted on their obligation, petitioner foreclosed
the mortgage on the land and emerged as sole bidder in the ensuing auction
sale. Consequently, a TCT was eventually issued in petitioner's name. On 6
April 1984 petitioner and private respondents entered into a Deed of
Conditional Sale wherein petitioner agreed to reconvey the foreclosed
property to private respondents.
The Deed provided, among others, that: “the VENDEES offered to

repurchase and the VENDOR agreed to sell the above-described property,
subject to the terms and stipulations as hereinafter stipulated, for the sum of
SEVENTY THREE THOUSAND SEVEN HUNDRED ONLY (P73,700.00), with a
down payment of P8,900.00 and the balance of P64,800 shall be payable in six
(6) years on equal quarterly amortization plan at 18% interest per annum.
The first quarterly amortization of P4,470.36 shall be payable three months
from the date of the execution of the documents and all subsequent
amortization shall be due and payable every quarter thereafter. . .that, upon
completion of the payment herein stipulated and agreed, the Vendor agrees to
140
deliver to the Vendee/s(,) his heirs, administrators and assigns(,) a good and
sufficient deed of conveyance covering the property, subject matter of this
deed of conditional sale, in accordance with the provision of law.”
On 6 April 1990, upon completing the payment of the full repurchase

price, private respondents demanded from petitioner the execution of a Deed
of Conveyance in their favor. Petitioner then informed private respondents
that the prestation to execute and deliver a deed of conveyance in their favor
had become legally impossible in view of Sec. 6 of Rep. Act 6657 (the
Comprehensive Agrarian Reform Law or CARL) approved 10 June 1988, and
Sec. 1 of E.O. 407 issued 10 June 1990.
Aggrieved, private respondents filed a complaint for specific

performance with damages against petitioner before the RTC. The trial court
rendered judgment ordering defendant to execute and deliver unto plaintiffs a
deed of final sale of there land subject of their deed of conditional sale.
Dissatisfied, petitioner appealed to the CA, still insisting that its

obligation to execute a Deed of Sale in favor of private respondents had
become a legal impossibility and that the non-impairment clause of the
Constitution must yield to the demands of police power. The CA rendered
judgment dismissing petitioner's appeal.
ISSUE:
Whether or not the petitioner’s prestation to execute and deliver a deed
of conveyance in favor of private respondents had become legally impossible
in view of Sec. 6 of Rep. Act 6657 (the Comprehensive Agrarian Reform Law
or CARL) approved 10 June 1988, and Sec. 1 of E.O. 407 issued 10 June 1990.
RULING:
If the obligation depends upon a suspensive condition, the
demandability as well as the acquisition or effectivity of the rights arising
from the obligation is suspended pending the happening or fulfillment of the
fact or event which constitutes the condition. Once the event which
constitutes the condition is fulfilled resulting in the effectivity of the
obligation, its effects retroact to the moment when the essential elements
which gave birth to the obligation have taken place. Applying this precept to
the case, the full payment by the appellee on April 6, 1990 retracts to the
time the contract of conditional sale was executed on April 6, 1984. From
that time, all elements of the contract of sale were present. Consequently, the
contract of sale was perfected. As such, the said sale does not come under
the coverage of R.A. 6657.
Despite the mandate of Sec. 1, R.A. 6657, appellant continued to accept

the payments made by the appellant until it was fully paid on April 6, 1990.
All that the appellant has to do then is to execute the final deed of sale in
favor of the appellee. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith.
E.O. 407 can neither affect appellant's obligation under the deed of
conditional sale. Under the said law, appellant is required to transfer to the
Republic of the Philippines "all lands foreclosed" effective June 10, 1990.
Under the facts obtaining, the subject property has ceased to belong to the
mass of foreclosed property failing within the reach of said law. The property
has already been sold to herein appellees even before the said E.O. has been
enacted. On this same reason, the Court held that they need not delve on the
applicability of DBP Circular No. 11.
The Court ruled in favor of private respondents. In conditional

obligations, the acquisition of rights, as well as the extinguishment or loss of
those already acquired, shall depend upon the happening of the event which
constitutes the condition. The deed of conditional sale between petitioner
141
and private respondents was executed on 6 April 1984. Private respondents
had religiously paid the agreed installments on the property until they
completed payment on 6 April 1990. Petitioner, in fact, allowed private
respondents to fulfill the condition of effecting full payment, and invoked
Section 6 of Rep. Act 6657 only after private respondents, having fully paid
the repurchase price, demanded the execution of a Deed of Sale in their favor.
The Court ruled that the trial court and CA have correctly ruled that
neither Sec. 6 of Rep. Act 6657 nor Sec. 1 of E.O. 407 was intended to impair
the obligation of contract petitioner had much earlier concluded with private
respondents. Petitioner cannot invoke the last paragraph of Sec. 6 of Rep.
Act 6657 to set aside its obligations already existing prior to its enactment.
In the first place, said last paragraph clearly deals with "any sale, lease,
management contract or transfer or possession of private lands executed by
the original landowner." The original owner in this case is not the petitioner
but the private respondents. Petitioner acquired the land through foreclosure
proceedings but agreed thereafter to reconvey it to private respondents,
albeit conditionally. Sec. 6 of Rep. Act 6657 in its entirety deals with
retention limits allowed by law to small landowners. Since the property here
involved is more or less ten (10) hectares, it is then within the jurisdiction of
the Department of Agrarian Reform (DAR) to determine whether or not the
property can be subjected to agrarian reform. But this necessitates an
entirely differently proceeding.
While DBP committed egregious error in interpreting Sec. 6 of RA

6657, the same is not equivalent to gross and evident bad faith when it
refused to execute the deed of sale in favor of private respondents.
The petition was DENIED, and the decision of the CA was AFFIRMED
with the MODIFICATION that attorney's fees and nominal damages awarded
to private respondent were DELETED.
SUSPENSIVE CONDITIONS – MEANING
1. INSULAR LIFE VS. YOUNG, 373 SCRA 626

2. DIRECT FOUNDERS VS. LAVINA, 373 SCRA 645
3. GONZALES VS. HEIRS, 314 SCRA 585

142
INSULAR LIFE ASSURANCE COMPANY, LTD., INSULAR SAVINGS
BANK and JACINTO D. JIMENEZ
VS. ROBERT YOUNG, GABRIEL LA'O II, ARTHUR TAN, LOPE JUBAN,
JR., MARIA LOURDES ONGPIN, ANTONIO ONGPIN, ELSIE DIZON,
YOLANDA BAYER, CECILIA VIRAY, MANUEL VIRAY and JOSE VITO
BORROMEO
2002 Jan 16
G.R. No. 140964
FACTS:
In December, 1987, respondent Robert Young, together with his
associates and co-respondents, acquired by purchase Home Bankers Savings
and Trust Co., now petitioner Insular Savings Bank ("the Bank," for brevity),
from the Licaros family for P65,000,000.00. Young and his group obtained
55% equity in the Bank, while Jorge Go and his group owned the remaining
45%.
Subsequently, the Bank granted respondents and others individual

loans in the total amount of P153,000,000.00, secured by promissory notes.
On December, 1990, Benito Araneta, a stockholder of the Bank,

signified his intention to purchase 99.82% of its outstanding capital stock for
P340,000,000.00, subject to the condition that the ownership of all the shares
will be consolidated in Young's name. On February 5, 1991, Araneta paid
Young P14,000,000.00 as part of the downpayment.
In order to carry out the intended sale to Araneta, Young bought from
Jorge Go and his group their 45% equity in the Bank for P153,000,000.00. In
order to pay this amount, Young obtained a short-term loan of
P170,000,000.00 from International Corporate Bank ("Interbank") to finance
the purchase.
However, Araneta backed out from the intended sale and demanded the
return of his downpayment.
Meanwhile, Young's loan from Interbank became due, causing his

serious financial problem. Consequently, he engaged the services of Asian
Oceanic Investment House, Inc. ("Asian Oceanic"), a domestic company
owned and controlled by another petitioner, Insular Life Assurance Co., Ltd.
("Insular Life"), to look for possible sources of capital.
On August 27, 1991, through the intervention of Asian Oceanic, Young

and Insular Life entered into a Credit Agreement. Under its provisions,
Insular Life extended a loan to Young in the amount of P200,000,000.00. To
secure the loan, Young, acting in his behalf and as attorney-in-fact of the
other stockholders, executed on the same day a Deed of Pledge over
1,324,864 shares which represented 99.82% of the outstanding capital stock
of the Bank. The next day, he also executed a promissory note in favor of
Insular Life in the same amount with an interest rate of 26% per annum to
mature 120 days from execution. The Credit Agreement further provides that
Insular Life shall have the prior right to purchase the Schedule I Shares
(owned by Young) and the Schedule II Shares (owned by the other
stockholders of the Bank), as well as the 250,000 shares which will be issued
after the additional capital of P25,000,000.00 (payable from the proceeds of
the loan) shall have been infused.
On October 1, 1991, Insular Life and Insular Life Pension Fund formally
informed Young of their intention to acquire 30% and 12%, respectively, of the
Bank's outstanding shares, subject to due diligence audit and proper
documentation. On October 9, 1991, Insular Life and Young, authorized to
represent the other stockholders, entered into a Memorandum of Agreement
(MOA), wherein Insular Life and its Pension Fund agreed to purchase 830,860
143
common shares and 311,572 common shares, respectively, for a total
consideration of P198,000,000.00. Under its terms, the MOA is subject to
Young's representations and warranties that, as of September 30, 1991, the
Bank has (a) a total outstanding paid-in capital of P157,714,900.00, (b) a
total net worth of P114,801,539.00, and (c) total
loans with doubtful recovery of P60,000,000.00. The MOA is also subject to

these "condition precedents": (1) Young shall infuse additional capital of
P50,000,000.00 into the Bank, and (2) Insular Life and its Pension Fund shall
undertake a due diligence audit on the Bank to determine whether the
provision for P60,000,000.00 doubtful account made by Young is sufficient.
On October 11, 1991, Insular Life, through a team of auditors led by

Mr. Wilfrido Patawaran, conducted a due diligence audit on the Bank
pursuant to the MOA. The audit revealed several check-kiting operations
which amounted to P340,000,000.00. As a result, the Bank's Board of
Directors was convened to discuss this matter.
On October 17, 1991, a special meeting of the Bank's directors was

held. Chief Executive Officer Antonino L. Alindogan, Jr. reported to the
Board the initial findings of the audit team about the irregularities in the
Bank’s "kiting operations." When asked to explain these anomalies, Young,
who was then the Bank's President, assumed responsibility since it happened
during his incumbency. Thereupon, he offered, among others, to the Bank
the 45% of his holdings as security. He admitted that he has compromised
the interest of the Bank and thus tendered his resignation. The Board
deferred its acceptance.
On October 21, 1991, Young signed a letter prepared by Atty. Jacinto

Jimenez, counsel of Insular Life, addressed to Mr. Vicente R. Ayllon, Chairman
of the Bank's Board of Directors, stating that due to business reverses, he
shall not be able to pay his obligations under the Credit Agreement between
him and Insular Life. Consequently, Young "unconditionally and irrevocably
waive(s) the benefit of the period" of the loan (up to December 26, 1991) and
Insular "may consider (his) obligations thereunder as defaulted." He likewise
interposes no objection to Insular Life's exercise of its rights under the said
agreement.
Forthwith, Insular Life instructed its counsel to foreclose the pledge

constituted upon the shares. The latter then sent Young a notice informing
him of the sale of the shares in a public auction scheduled on October 28,
1991, and in the event that the shares are not sold, a second auction sale
shall be held the next day, October 29.
On October 28, 1991, only Insular Life submitted a bid, hence, the
shares were not sold on that day. The next day, a second auction was held.
Again, Insular Life was the sole bidder. Since the shares were not sold at the
two public auctions, Insular Life appropriated to itself, not only the original
1,324,864 shares, but also the 250,000 shares subsequently issued by the
Bank and delivered to Insular Life by way of pledge. Thus, Insular Life gave
Young an acquittance of his entire claim.
Thereafter, title to the said shares was consolidated in the name of

Insular Life. On November 12, 1991, the Bangko Sentral ng Pilipinas'
Supervision and Examination Sector approved Insular Life's request to
maintain its present ownership of 99.82% of the Bank.
From October 31, 1991 to December 27, 1991, Insular Life invested a
total of P325,000,000.00 in the Bank. Meanwhile, on November 27, 1991, its
Board of Directors, during its meeting, accepted the resignation of Young as
President.

144
On January 7, 1992, Young and his associates filed with the Regional
Trial Court (RTC), Branch 142, Makati City, a complaint against the Bank,
Insular Life and its counsel, Atty. Jacinto Jimenez, petitioners, for annulment
of notarial sale, specific performance and damages, docketed as Civil Case
No. 92-049. The complaint alleges, inter alia, that the notarial sale
conducted by petitioner Atty. Jacinto Jimenez is void as it does not comply
with the requirement of notice of the second auction sale; that Young was
forced by the officers of Insular Life to sign letters to enable them to have
control of the Bank; that under the MOA, Insular Life should apply the
purchase price of P198,000,000.00 (corresponding to the 55% of the
outstanding capital stock of the Bank) to Young's loan of P200,000,000.00 and
pay the latter P162,000,000.00, representing the remaining 45% of its
outstanding capital stock, which must be set-off against the loans of the other
respondents.
ISSUE:
Whether or not the respondent court erred in declaring the MOA dated
October 9, 1991 valid and enforceable between the parties despite
respondent Young's failure to comply with the terms and conditions thereof.
RULING:
Contrary to the findings of the Court of Appeals, the foregoing
provisions of the MOA negate the existence of a perfected contract of sale.
The MOA is merely a contract to sell since the parties therein specifically
undertook to enter into a contract of sale if the stipulated conditions are met
and the representation and warranties given by Young prove to be true. The
obligation of petitioner Insular Life to purchase, as well as the concomitant
obligation of Young to convey to it the shares, are subject to the fulfillment
of the conditions contained in the MOA. Once the conditions, representation
and warranties are satisfied, then it is incumbent upon the parties to perform
their respective obligations under the contract. Conversely, in the event that
these conditions are not met or complied with, no obligation on the part of
either party arises. This is in accord with Article 1181 of the Civil Code which
provides that "(i)n conditional obligations, the acquisition of rights, as well as
the extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition." And when the
obligation assumed by a party to a contract is expressly subjected to a
condition, the obligation cannot be enforced against him unless the condition
is complied with.
Here, the MOA provides that Young shall infuse additional capital of
P50,000,000.00 into the Bank. It likewise specifies the warranty given by
Young that the doubtful accounts of petitioner Bank amounted to
P60,000,000.00 only. However, records show that Young failed to infuse the
required additional capital. Moreover, the due diligence audit shows that
Young was involved in fraudulent schemes like check-kiting which amounted
to a staggering P344,000,000.00. This belies his representation that the
doubtful accounts of petitioner Bank amounted only to P60,000,000.00. As a
result of these anomalous transactions, the reserves of the Bank were
depleted and it had to undergo a ten-year rehabilitation plan under the
supervision of the Central Bank.
Significantly, respondents do not dispute petitioners’ assertion that

Young committed fraud, misrepresented the warranties and failed to comply
with his obligations under the MOA. Accordingly, no right in favor of Young's
arose and no obligation on the part of Insular Life was created.
Since no sale transpired between the parties, the Court of Appeals

erred in concluding that Insular Life purchased 55% of the total shares of the
145
Bank under the MOA. Consequently, its findings that the debt of Young has
been fully paid and that Insular Life is liable to pay for the remaining 45%
equity have no basis. It must be emphasized that the MOA did not convey
title of the shares to Insular Life. If ever there was delivery of the said shares
to Insular Life, it was because they were pledged by Young to Insular Life
under the Credit Agreement.
It would be unfair on the part of Young to demand compliance by

Insular Life of its obligations when he himself was remiss in his own. Neither
can he feign ignorance of the stipulation in the MOA since it is presumed that
he read the same and was satisfied with its provisions before he affixed his
signature therein. The fact that no deed of sale was subsequently executed
by the parties confirms the conclusion that no sale transpired between them.
SUSPENSIVE CONDITIONS: MEANING
DIRECT FUNDERS HOLDINGS CORPORATION, petitioner,

VS. JUDGE CELSO D. LAVIÑA, PRESIDING JUDGE OF RTC- Pasig City,
Branch 71 and KAMBIAK Y. CHAN, JR., respondents
January 16, 2002
G. R. No. 141851
FACTS:
Herein petitioner was granted with a writ of possession. During the
hearing for the issuance of temporary restraining order filed by herein private
respondent, it was made clear to the respondent Judge that the property in
question was occupied by the petitioner by virtue of a writ of possession
issued by the Regional Trial Court of Pasig, Branch 157 in LRC Case No. R-
5475 in a petition for the issuance of writ of possession thereof way back on
October 23, 1997.
Despite the lawful order of a coordinate and co-equal court, the

respondent Judge, presiding Regional Trial Court of Pasig, Branch 71, issued
the questioned orders to restore possession to private respondent Chan,
alleging an obviously grave abuse of discretion, tantamount to lack of
jurisdiction. On the same date on December 8, 1997, the temporary
restraining order (TRO) was issued, the Court Sheriff IV Cresencio Rabello, Jr.
implemented the TRO and submitted the Return on December 9, 1997. Then,
on January 21, 1998, the respondent Judge issued the questioned order
granting the issuance of a writ of preliminary injunction who subsequently
146
denied the petitioner’s motion to dismiss and supplemental motion to dismiss
and the very urgent motion for reconsideration on February 16, 1998.
On May 29, 1998, the motion for inhibition and the motion to dissolve
the writ of preliminary injunction were also denied. On August 5, 1998,
petitioner filed with the Court of Appeals a petition for certiorari and
prohibition assailing the trial court’s issuance of a writ of preliminary
injunction. On September 28, 1999, the Court of Appeals promulgated a
decision dismissing the petition ruling that the trial court had jurisdiction to
issue the injunction that did not interfere with the writ of possession of a
coordinate court. On October 19, 1999, petitioner filed with the Court of
Appeals a motion for reconsideration of the decision. On February 2, 2000,
the Court of Appeals denied petitioner’s motion stating that the arguments
advanced were “mere reiteration and restatements of those contained in their
pleadings. Hence, this appeal to the Supreme Court.
ISSUE:
Who between petitioner and respondent Kambiak Y. Chan, Jr. has a
better right to the possession of the subject property?
RULING:
The Supreme Court ruled in favor of petitioner. It found that the
conditional sale agreement is officious and ineffectual. First, it was not
consummated. Second, it was not registered and duly annotated on the
Transfer Certificate of Title (No. 12357) covering the subject property. Third,
it was executed about eight (8) years after the execution of the real estate
mortgage over the subject property.
To emphasize, the mortgagee (United Savings Bank) did not give its
consent to the change of debtor. It is a fundamental axiom in the law on
contracts that a person not a party to an agreement cannot be affected
thereby. Worse, not only was the conditional sale agreement executed
without the consent of the mortgagee-creditor, United Savings Bank, the
same was also a material breach of the stipulations of the real estate
mortgage over the subject property. The conditions of the conditional sale
agreement were not fulfilled, hence, respondent’s claim to the subject
property was as heretofore stated ineffectual. Article 1181 of the Civil Code
reads:
“Art. 1181. In conditional obligations, the acquisition of rights, as well as the

extinguishments or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition.”
SUSPENSIVE CONDITIONS: MEANING
FELIX L. GONZALES, petitioner,

VS. THE HEIRS OF THOMAS and PAULA CRUZ, herein represented by
ELENA C. TALENS, respondents
G.R. No. 131784
19 September 1999
314 SCRA 585
FACTS:
On December 1, 1983, Paula Cruz together with the plaintiffs heirs of
Thomas and Paula Cruz, entered into a Contract of Lease/Purchase with the
147
defendant, Felix L. Gonzales, the sole proprietor and manager of Felgon
Farms, of a half-portion of a 'parcel of land containing an area of 12 hectares,
more or less, and an accretion of 2 hectares, more or less, situated in
Rodriguez Town, Province of Rizal. The contract of Lease/Purchase contains
the following provisions:
'1.......The terms of this Contract is for a period of one year upon the
signing thereof. After the period of this Contract, the LESSEE shall purchase
the property on the agreeable price of One Million Pesos (P1,000,000.00)
payable within Two (2) Years period with an interest of 12% per annum
subject to the devalued amount of the Philippine Peso, according to the
following schedule of payment: Upon the execution of the Deed of Sale 50% -
and thereafter 25% every six (6) months thereafter, payable within the first
ten (10) days of the beginning of each period of six (6) months.
'2.......The LESSEE shall pay by way of annual rental an amount

equivalent to Two Thousand Five Hundred (P2,500.00) Pesos per hectare,
upon the signing of this contract on Dec. 1, 1983.
'9.......The LESSORS hereby commit themselves and shall undertake to

obtain a separate and distinct T.C.T. over the herein leased portion to the
LESSEE within a reasonable period of time which shall not in any case exceed
four (4) years, after which a new Contract shall be executed by the herein
parties which shall be the same in all respects with this Contract of
Lease/Purchase insofar as the terms and conditions are concerned.
The defendant Gonzales paid the P2,500.00 per hectare or P15,000.00

annual rental on the half-portion of the property in accordance with the
second provision of the Contract of Lease/Purchase and thereafter took
possession of the property, installing thereon the defendant Jesus Sambrano
as his caretaker. The defendant Gonzales did not, however, exercise his option
to purchase the property immediately after the expiration of the one-year
lease on November 30, 1984. He remained in possession of the property
without paying the purchase price provided for in the Contract of
Lease/Purchase and without paying any further rentals thereon.
A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the

defendant Gonzales informing him of the lessors' decision to rescind the
Contract of Lease/Purchase due to a breach thereof committed by the
defendant. The letter also served as a demand on the defendant to vacate the
premises within 10 days from receipt of said letter.
The defendant Gonzales refused to vacate the property and continued

possession thereof.
The property subject of the Contract of Lease/Purchase is currently the

subject of an Extra-Judicial Partition. Title to the property remains in the
name of the plaintiffs' predecessors-in-interest, Bernardina Calixto and
Severo Cruz.
Alleging breach of the provisions of the Contract of Lease/Purchase,

the plaintiffs filed a complaint for recovery of possession of the property -
subject of the contract with damages, both moral and compensatory and
attorney's fees and litigation expenses.
ISSUE:
Whether or not the trial court gravely erred in holding that plaintiffs-
appellants could not validly rescind and terminate the lease/purchase
contract and thereafter to take possession of the land in question and eject
therefrom defendants-appellees.

148
RULING:
Alleging that petitioner has not purchased the property after the lapse
of one year, respondents seek to rescind the Contract and to recover the
property. Petitioner, on the other hand, argues that he could not be
compelled to purchase the property, because respondents have not complied
with paragraph nine, which obligates them to obtain a separate and distinct
title in their names. He contends that paragraph nine was a condition
precedent to the purchase of the property.
Both the trial court and the Court of Appeals (CA) interpreted this
provision to mean that the respondents had obliged themselves to obtain a
TCT in the name of petitioner-lessee. The trial court held that this obligation
was a condition precedent to petitioner's purchase of the property. Since
respondents had not performed their obligation, they could not compel
petitioner to buy the parcel of land. The CA took the opposite view, holding
that the property should be purchased first before respondents may be
obliged to obtain a TCT in the name of petitioner-lessee-buyer.
As earlier noted, petitioner disagrees with the interpretation of the two

courts and maintains that respondents were obligated to procure a TCT in
their names before he could be obliged to purchase the property in question.
Basic is the rule in the interpretation of contracts that if some

stipulation therein should admit of several meanings, it shall be understood as
bearing that import most adequate to render it effectual. Considering the
antecedents of the ownership of the disputed lot, it appears that petitioner's
interpretation renders clause nine most effectual.
The record shows that at the time the contract was executed, the land
in question was still registered in the name of Bernardina Calixto and Severo
Cruz, respondents' predecessors-in-interest. There is no showing whether
respondents were the only heirs of Severo Cruz or whether the other half of
the land in the name of Bernardina Calixto was adjudicated to them by any
means. In fact, they admit that extrajudicial proceedings were still ongoing.
Hence, when the Contract of Lease/Purchase was executed, there was no
assurance that the respondents were indeed the owners of the specific
portion of the lot that petitioner wanted to buy, and if so, in what concept and
to what extent.
Thus, the clear intent of the ninth paragraph was for respondents to
obtain a separate and distinct TCT in their names. This was necessary to
enable them to show their ownership of the stipulated portion of the land and
their concomitant right to dispose of it. Absent any title in their names, they
could not have sold the disputed parcel of land.

149
POTESTATIVE SUSPENSIVE CONDITIONS
1. VDA. DE MISTICA VS. NAGUIAT, 418 SCRA 73

2. HERMOSA VS. LONGARA, 93 PHIL 971
3. TRILLANA VS. QUEZON COLLEGES, 93 PHIL 383
FIDELA DEL CASTILLO Vda. DE MISTICA, petitioner,

VS. Spouses BERNARDINO NAGUIAT and
MARIA PAULINA GERONA-NAGUIAT, respondents
December 11, 2003
G.R. No. 137909
418 SCRA 73
FACTS:
Eulalio Mistica, predecessor-in-interest of herein petitioner, is the
owner of a parcel of land, and a portion thereof was leased to Bernardino
sometime in 1970. On April 5, 1979, Eulalio Mistica entered into a contract
to sell with Bernardino over a portion of the aforementioned lot containing an
area of 200 square meters. This agreement was reduced to writing in a
Kasulatan. Pursuant to said agreement, Bernardino gave a downpayment of
P2,000.00 and another partial payment of P1,000.00 on February 7, 1980.
However, he failed to make any payments thereafter. Eulalio Mistica died
sometime in October 1986.
On December 4, 1991, petitioner filed a complaint for rescission

alleging that the failure and refusal of respondents to pay the balance of the
purchase price constitutes a violation of the contract which entitles her to
rescind the same; that respondents have been in possession of the subject
portion and they should be ordered to vacate and surrender possession of the
same to petitioner; that the reasonable amount of rental for the subject land
is P200.00 a month; that on account of the unjustified actuations of
respondents, petitioner has been constrained to litigate where she incurred
expenses for attorney’s fees and litigation expenses.
On the other hand, respondents contended that the contract couldn’t

be rescinded on the ground that it clearly stipulates that in case of failure to
pay the balance as stipulated, a yearly interest of 12% is to be paid.
Bernardino likewise alleged that sometime in October 1986, during the wake
of the late Eulalio Mistica, he offered to pay the remaining balance to
petitioner but the latter refused and hence, there is no breach or violation
committed by them and no damages could yet be incurred by the late Eulalio
Mistica, his heirs or assigns pursuant to the said document; that he is
presently the owner in fee simple of the subject lot having acquired the same
by virtue of a Free Patent Title duly awarded to him by the Bureau of Lands;
and that his title and ownership had already become indefeasible and
incontrovertible. As counterclaim, respondents pray for moral damages in
150
the amount of P50,000.00; exemplary damages in the amount of P30,000.00;
attorney’s fees in the amount of P10,000.00 and other litigation expenses.
The trial court dismissed the complaint and ordered the petitioner to
pay the respondents attorney’s fee and the cost of suit while ordering the
respondents to pay the heirs of the petitioner the balance of the purchase
price and reconveyance of the extra area of 58 square meters from the land in
question.
Disallowing rescission, the Court of Appeals held that respondents did

not breach the Contract of Sale. It explained that the conclusion of the ten-
year period was not a resolutory term, because the Contract had stipulated
that payment, with interest of 12 percent, could still be made if respondents
failed to pay within the period. Petitioner did not disprove the allegation of
respondents that they had tendered payment of the balance of the purchase
price during her husband’s funeral, which was well within the ten-year
period. Moreover, rescission would be unjust to respondents, because they
had already transferred the land title to their names. The proper recourse,
the CA held, was to order them to pay the balance of the purchase price, with
12 percent interest. As to the matter of the extra 58 square meters, the CA
held that its reconveyance was no longer feasible, because it had been
included in the title issued to them. The appellate court ruled that the only
remedy available was to order them to pay petitioner the fair market value of
the usurped portion.
ISSUE:
Whether or not there is a potestative suspensive condition in the
Kasulatan.
RULING:
The failure of respondents to pay the balance of the purchase price
within ten years from the execution of the Deed did not amount to a
substantial breach. It was stipulated that payment could be made even after
ten years from the execution of the Contract, provided the vendee paid 12
percent interest.
Moreover, it is undisputed that during the ten-year period, petitioner

and her deceased husband never made any demand for the balance of the
purchase price. Petitioner even refused the payment tendered by
respondents during her husband’s funeral, thus showing that she was not
exactly blameless for the lapse of the ten-year period. Had she accepted the
tender, payment would have been made well within the agreed period.
If petitioner would like to impress upon the Court that the parties
intended otherwise, she has to show competent proof to support her
contention. Instead, she argues that the period cannot be extended beyond
ten years, because to do so would convert the buyer’s obligation to a purely
potestative obligation that would annul the contract under Article 1182 of the
Civil Code.
The Code prohibits purely potestative, suspensive, conditional

obligations that depend on the whims of the debtor, because such obligations
are usually not meant to be fulfilled. Indeed, to allow the fulfillment of
conditions to depend exclusively on the debtor’s will would be to sanction
illusory obligations. The Kasulatan does not allow such thing. First, nowhere
is it stated in the Deed that payment of the purchase price is dependent upon
whether respondents want to pay it or not. Second, the fact that they already
made partial payment thereof only shows that the parties intended to be
bound by the Kasulatan.
Affirmed with the modification that the payment for the extra 58-square
meter lot included in respondents’ title is deleted.
151
POTESTATIVE SUSPENSIVE CONDITIONS (Art. 1182, CC)
HERMOSA VS. LONGARA

93 PHIL 971
FACTS:
Intestate Fernando Hermosa, Sr. asked for three (3) credit advances
from respondent Epifanio M. Longara. Two (2) of said credit advances were
made during his lifetime and in his favor and in his son while the last credit
was made after his death and in favor of his grandson. Evidences show that
said credits were asked by the intestate “on condition that their payment
should be made by him, as soon as he receives funds derived from the sale of
his property in Spain.”
After the intestate’s death and upon authorization of the probate court,
the administration of the intestate’s property, his wife, sold the property and
the same was paid for subsequently. As a consequence, respondent filed an
action for the payment of the aforesaid credits which was upheld by the lower
court and by the Court of Appeals.
However, the same was contested by herein petitioners, heirs of the

intestate, on the ground that the obligation contracted by the intestate was
subject to a condition exclusively dependent upon the will of the debtor
condicion potestiva and therefore null and void, in accordance with article
1115 of the Old Civil Code.
152
ISSUE:
Whether or not the condition made in the obligation is a purely
suspensive condition dependent or potestative upon the exclusive will of the
debtor.
RULING:
NO, the condition of the obligation was that the payment was to be
made “as soon as he (obligor) receives funds from the sale of his property in
Spain.” The will to sell on the part of the debtor (intestate) was present in
fact or presumed legally to exist although the price and other condition
thereof were still within his discretion and final approval. But in addition to
this acceptability of the sale to him (obligor), there were still other conditions
that had to concur to effect the sale, mainly that of the presence of a buyer,
ready, able and willing to purchase the property under the condition
demanded by the vendor.
POTESTATIVE SUSPENSIVE CONDITIONS (Art. 1182, CC)
NAZARIO TRILLANA VS. QUEZON COLLEGE, INC

No. L-5003,
June 27, 1953
93 PHIL 383
FACTS:
Damasa Crisostomo sent a letter to the Board of Trustees of the Quezon
College for the subscription of P200 shares of the latter’s capital stock. In the
said letter Damasa stated that “Babayaran kong lahat pagkatapos na ako ay
makapagpahuli na isda (that she will pay the stocks when she had harvested
fish)”.
Damasa then died on October 26, 1948 and since there was no payment
that was made in her subscription to Quezon College, the latter claimed
153
before the Court of First Insatnce of Bulacan the recovery of P20,000 as
subscription to its capital stocks. The subscription was opposed by the
administrator of the estate on the ground that subscription was not registered
in the Securities and Exchange Commission and was never accepted by
Quezon College.
Wherefore, the CFI of Bulacan dismissed the claim, hence this appeal.
ISSUE:
Whether or not the subscription letter of Damasa is a Potestative
Suspensive Condition.
RULING:
The need for express acceptance on the part of the Quezon College,
Inc. becomes the more imperative, in view of the proposal of Damasa
Crisostomo to pay the value of the subscription after she had harvested fish, a
condition obviously dependent upon her sole will and, therefore, facultative in
nature, rendering the obligation void, under article 1115 of the old Civil Code
which provides as follows:
"If the fulfillment of the condition should depend upon the exclusive will of
the debtor, the conditional obligation shall be void. If it should depend upon
chance, or upon the will of a third person, the obligation shall produce all its
effects in accordance with the provisions of this code."
POSITIVE SUSPENSIVE CONDITIONS
1. VISAYAN SAWMILL VS. CA, 219 SCRA 378

2. LEANO VS. CA, 369 SCRA 36

154
VISAYAN SAWMILL COMPANY, INC. VS. COURT of APPEALS
G.R. No. 83851.
March 3, 1993
219 SCRA 378
FACTS:
On May 1, 1983, RJH Trading and Visayan Sawmill Company, Inc.
entered into a sale involving scrap iron located at the stockyard of petitioner
company at Cawitan, Sta. Catalina, Negros Oriental, subject to the condition
that RJH Trading will open a leter of credit in the amount of P250,000 in favor
of petitioner company on or before May 15, 1983. This is evidenced by a
contract entitled “Purchase and Sale of Scrap Iron” duly signed by both
parties.
RJH Trading started to dig and gather scrap iron at the defendant-
appellant’s premises until May 30 when Visayan Sawmill Company Inc.
allegedly directed private respondent to desist from pursuing the work in
view of an alleged case filed against private respondent by a certain Alberto
Pursuelo. However, on May 23, 1983, petitioner company alleged that they
sent a telegram to private respondent canceling the contract of sale because
of failure of the latter to comply with the conditions. On May 24, 1983, RJH
Trading informed petitioner company by telegram that the letter of credit was
opened May 12, 1983 at BPI main office in Ayala, but that the transmittal was
delayed. On May 26, 1983, petitioner company received a letter of advice
from the Dumaguete City Branch of the BPI. On July 19, 1983, RJH Trading
sent a series of telegrams stating that the case filed against him by Pursuelo
had been dismissed and demanding that petitioner company comply with the
Deed of Sale, otherwise a case will be filed against them.
Petitioner company’s counsel on July 20, 1983 informed private

respondent’s counsel that petitioner company is unwilling to continue with
the sale due to private respondent’s failure to comply with essential
preconditions of the contract. Private respondent filed an action for specific
performance and damages with the trial court.
The trial court rendered its decision in favor of the private respondent.
The petitioner appealed from said decision to the Court of Appeals; however,
the appellate court affirmed with modification the decision of the lower court.
ISSUE:
Whether or not the private respondent’s non-compliance with essential
precondition justified the cancellation of the contract.
RULING:
The Supreme Court held that the nature of the transaction between the
petitioner company and the private respondent is a mere contract to sell, and
not a contract of sale. The petitioner company’s obligation is subject to a
positive suspensive condition, which is the private respondent’s opening,
making or indorsing of an irrevocable and unconditional letter of credit. The
failure of the private respondent to comply with the positive suspensive
condition cannot even be considered a breach but simply an event that
prevented the obligation of petitioner company to convey title from acquiring
binding force. Hence, the petition is granted and the assailed decision is
reversed.

155
POSITIVE SUSPENSIVE CONDITIONS (Art. 1184, CC)
LEANO VS. COURT OF APPEALS

369 SCRA 36
G.R. No.129018
Nov. 15, 2001
FACTS:
On November 13, 1985, Hermogenes Fernando, as vendor and
Carmelita Leano, as vendee executed a contract to sell involving a piece of
land, Lot No. 876-B, with an area of 431 square meters, located at Sto.Cristo,
Baliuag, Bulacan.
In the contract, Carmelita Leano bound herself to pay Hermogenes

Fernandez the sum of one hundred and fifty pesos (P107,750.00) as the total
purchase price of the lot.
The contract also provided for a grace period of one month within
which to make payments, together with the one corresponding the month of
grace. Should the month of grace be expired without the installments for
both months having been satisfied, an interest of 18% per annum will be
charged on the unpaid installments.
Should a period of (90) ninety days elapse from the expiration of the
grace period without the overdue and unpaid installments having been paid
with the corresponding interests up to that date, respondent Fernando, as
vendor, was authorized to declare the contract cancelled and to dispose of the
parcel of land, as if the contract had not been entered into. The payments
made, together with all the improvements made on the premises, shall be
considered as rents paid for the use and occupation of the premises and as
liquidated damages.
After the execution of the contract, Carmelita Leano made several

payments in lump sum. Thereafter, she constructed a house on the lot valued
at P800,000.00. The last payment that she made was on April 1, 1989.
On September 16, 1991, the Trial Court rendered a decision in an

ejectment case earlier filed by respondent Fernando ordering petitioner to
vacate the premises and to pay P250.00 per month by way of compensation
for the use and occupation of the property from May 27,1991 until she
vacated the premises, attorney’s fees and costs of the suit. On August 24,
1993, the trial court issued a writ of execution which was duly served on
petitioner Leano.
On November 4, 1993, 1993, after petitioner Leano posted acash bond

of P50000.00, the trial court issued a writ of preliminary injunction to stay the
enforcement of the decision of the municipal trial court.
ISSUE:
Whether or not the petitioner was in delay the payment of the monthly
amortizations.
RULING:
While the contract provided that the total purchase price shall be paid
in monthly installments by claiming that the ten-year period, the same
contract specified that the purchase price shall be paid in monthly
installments for which the corresponding penalty shall be imposed in case of
default. Petitioner Leano cannot ignore the provision on payment of monthly
156
installments by claiming that the ten-year period within which to pay has not
elapsed.
Article 1169 of the Civil Code provides that in reciprocal obligations,

neither party incurs in delay if the other does not comply or is not ready to
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay by
the other begins.
In the case at bar, respondent Fernando performed his part of the

obligation by allowing petitioner Leano to continue in possession and use of
the property. Clearly, when petitioner Leano did not pay the monthly
amortization in accordance with the terms and conditions of the contract, she
was in delay and liable for damages. However, the default committed by the
petitioner Leano in respect of the obligation could be compensated by the
interest and surcharges imposed upon her under the contract in question.
Petition denied, judgment affirmed in toto.
EFFECTS OF NON-FULFILLMENT OF SUSPENSIVE CONDITION
HEIRS OF SANDEJAS, petitioners VS. LINA, respondent

351 SCRA 183
GR NO. 141634
FACTS:
Eliodoro Sandejas, Sr. filed a petition in the lower court praying that
letters of administration be issued in his favor for the settlement of the estate
of his wife, Remedios R. Sandejas. On July 1, 1981, Letters of Administration
were issued by the lower court appointing him as administrator of the estate
of the decedent. The records of the letter of administration given to
Sandejas, however, were burned when the Manila City Hall was destroyed by
fire. Thus, Sandejas Sr. filed a Motion for Reconstitution of the records,
which motion was granted.
An Omnibus Pleading for motion to intervene and petition-in-

intervention was filed by respondent Lina alleging among others that he and
Administrator Sandejas Sr., in his capacity as seller, bound and obligated
himself, his heirs, administrators, and assigns, to sell forever and absolutely
and in their entirety parcels of land which formed part of the estate.
Consequently, the lower court issued an Order granting the

intervention of respondent Lina. Sandejas Sr. filed a Manifestation alleging
among others that the administrator, Eliodoro P. Sandejas, Sr., died in
Canada. He also alleged, among others that the matter of the claim of
Intervenor Lina becomes a money claim to be filed in the estate of the late
Sandejas, Sr.
The lower court issued an Order directing the counsel for the four heirs
and other heirs of Teresita R. Sandejas to move for the appointment of a new
administrator within fifteen (15) days from receipt of this Order.
Heirs Sixto, Roberto, Antonio and Benjamin, all surnamed Sandejas,

filed a Motion for Reconsideration and the appointment of another
administrator, Mr. Sixto Sandejas in lieu of respondent Lina stating that it was
only lately that Mr. Sixto Sandejas, a son and heir, expressed his willingness
to act as a new administrator. Thereafter, respondent Lina filed his
Manifestation and Counter Motion alleging that he had no objection to the
appointment of Sixto Sandejas as administrator provided that Sixto Sandejas
be also appointed as administrator of the intestate estate of his father,

157
Eliodoro P. Sandejas, Sr. The lower court granted the said Motion and
substituted Alex Lina with Sixto Sandejas as petitioner in the said Petitions.
After the payment of the administrator's bond and approval thereof by the
court, Administrator Sixto Sandejas took his oath as administrator of the
estate of the deceased Remedios R. Sandejas and Eliodoro P. Sandejas and
was likewise issued Letters of Administration on the same.
On November 29, 1993, Intervenor filed an Omnibus Motion to approve

the deed of conditional sale executed between Plaintiff-in-lntervention Lina
and Elidioro Sandejas, Sr. on June 7, 1982; to compel the heirs of Remedios
Sandejas and Eliodoro Sandejas, Sr. thru their administrator, to execute a
deed of absolute sale in favor of Intervenor Lina pursuant to said conditional
deed of sale to which the administrator filed a Motion to Dismiss and/or
Opposition to said omnibus motion.
The lower court granted intervenor's Motion but was overturned by the
Court of Appeals.
ISSUE:
Whether or not Eliodoro P. Sandejas Sr. is legally obligated to convey

title to the property referred to in the subject document which was found to
be in the nature of a contract to sell - where the suspensive condition set forth
therein, was not complied with.
RULING:
Petitioners argue that the CA erred in ordering the conveyance of the

disputed 3/5 of the parcels of land, despite the nonfulfillment of the
suspensive condition -- court approval of the sale. They assert that because
this condition had not been satisfied, their obligation to deliver the disputed
parcels of land was converted into a money claim.
Petitioners admit that the agreement between the deceased Eliodoro

Sandejas Sr. and respondent was a contract to sell, in which case the payment
of the purchase price is a positive suspensive condition. The vendor's
obligation to convey the title does not become effective in case of failure to
pay. On the other hand, the agreement between Eliodoro Sr. and respondent
is subject to a suspensive condition -- the procurement of a court approval,
not full payment. There was no reservation of ownership in the agreement.
Petitioners were supposed to deed the disputed lots over to respondent.
They could do this upon the court's approval, even before full payment.
Hence, their contract was a conditional sale, rather than a contract to sell.
When a contract is subject to a suspensive condition, its birth or effectivity
can take place only if and when the condition happens or is fulfilled. Thus,
the intestate court's grant of the Motion for Approval of the sale filed by
respondent resulted in petitioners' obligation to execute the Deed of Sale of
the disputed lots in his favor. The condition having been satisfied, the
contract was perfected. Henceforth, the parties were bound to fulfill what
they had expressly agreed upon.

158
PERIOD OR TERM, MEANING AND DEFINITION
1. LIRAG VS. CA, 63 SCRA 375

2. DAGUHOY VS. PONCE, 96 PHIL 15
3. VICTORIA PLANTERS VS. VICTORIA MILLING, 97 PHIL
110
LIRAG TEXTILE MILLS, INC. and FELIX K. LIRAG vs.COURT OF

APPEALS and CRISTAN ALCANTARA
G.R. No. L-30736
April 14, 1975
FACTS:
On May 11, 1960 and for sometime prior and subsequent thereto,
defendant Felix Lirag was a member of the Board of Directors of the
Philippine Chamber of Industries; and for about two months, more or less,
prior to May 11, 1960, plaintiff Cristina Alcantara worked in a temporary
capacity with defendant Lirag Textile Mills, Inc. During this same period of
time, defendant Felix Lirag was a director and Chairman of the Board of
159
Directors of defendant Lirag Textile Mills, Inc. On May 9, 1960, defendant
Lirag Textile Mills, Inc. wrote a letter to plaintiff (Alcantara) advising him
that, effective May 11, 1960, his temporary designation as Technical Assistant
to the Administrative Officer was made permanent and as Assistant to the
Administrative Officer of the Lirag Textile Mills, Inc. As of May 11, 1960,
plaintiff received a salary of P400.00 and allowance of P100.00 per month.
Plaintiff's tenure of employment, per defendant Lirag Textile Mills,

Inc.'s above letter of May 9, 1960 was to be 'for an indefinite period, unless
sooner terminated by reason of voluntary resignation or by virtue of a valid
cause or causes'.
On March 4, 1960, per letter of defendant Lirag Textile Mills, Inc. of

that date, signed by its Executive Vice President and General Manager,
plaintiff was advised that effective November 15, 1960 he (Alcantara) was
promoted to the position of Assistant Administrative Officer. Subsequently, on
July 22, 1961, defendant Lirag Textile Mills, Inc. wrote plaintiff (Alcantara) a
letter advising him that because the company 'has suffered some serious
reverses, both in terms of pecuniary loss and in market opportunities,' the
company was terminating his services and effecting his separation from
defendant corporation effective at the close of working hours of August 22,
1961.
Because of this, plaintiff Alcantara filed a complaint before the

Regional Trial Court against defendant Lirag Textile Mills Inc. for illegal
dismissal as in accordance with the employment contract between herein
then plaintiff and then defendant.
Respondent Court of Appeals affirmed the decision of the lower court in

Civil Case No. 6884 principally its conclusion that the trial court did not
commit any error in its evaluation of the evidence when it found that it was
not true that petitioner Lirag Textile Mills (then defendant) suffered
pecuniary loss and in market opportunities which it used as a justification to
terminate the services of plaintiff Alcantara; that it was not also true that the
latter suffered from lack of skill; that, therefore, there was a violation of the
written contract of employment executed by and between petitioners and
private respondent Alcantara; that petitioner (then defendant) Felix Lirag was
responsible for inducing private respondent Alcantara to leave his
employment with the Philippine Chamber of Industries where he was holding
a permanent position and to accept employment with petitioner (then
defendant) Lirag Textile Mills; and that appellee Alcantara was correctly
awarded moral damages and attorney's fees.
ISSUE:
Whether or not there has been a violation of the written contract for a
period of employment between petitioner and private respondent.
RULING:
The contract of employment was for an indefinite period as it shall
continue without ending, subject to a resolutory period, unless sooner
terminated by reason of voluntary resignation or by virtue of a valid cause or
causes (the resolutory period).
There is an indefinite period of time for employment agreed upon by

and between petitioners and the private respondent, subject only to the
resolutory period agreed upon which may end the indeterminate period of
employment, namely voluntary resignation on the part of private respondent
Alcantara or termination of employment at the option of petitioner Lirag
Textile Mills, but for a "valid cause or causes". It necessarily follows that if
160
the petitioner-employer Lirag Textile Mills terminates the employment
without a "valid cause or causes", as it admittedly did, it committed a breach
of the contract of employment executed by and between the parties. The
measure of an employer's liability provided for in Republic Act 1052, as
amended by R. A. 1787, is solely intended for contracts of employment
without a stipulated period. It cannot possibly apply as a limitation to an
employer's liability in cases where the employer commits a breach of contract
by violating an indefinite period of employment expressly agreed upon
through his wrongful act of terminating said employment without any valid
cause or causes, which act may even amount to bad faith on the employer's
part.
The "indefinite period" of employment expressly agreed upon by and

between the parties in this case is really a resolutory period because the
employment is bound to terminate on a future "day certain" such as the
employee's resignation or employer's termination of employment upon a valid
cause or causes, like death of the employee or termination of employer's
corporate existence, although it may not be known when.
It is clear that petitioner Lirag Textile Mills, Inc. violated the contract
of employment with private respondent Alcantara when the former
terminated his services without a valid cause. The act was attended with bad
faith and deceit because said petitioner made false allegations of a supposed
valid cause knowing them to be false, thus making itself liable for payment of
actual, moral and exemplary damages, plus attorneys fees to private
respondent Alcantara. Petitioner Lirag Textile Mills, Inc. cannot with
impunity be allowed the absolute and unilateral power to terminate without
valid cause a contract of employment with a definite period it voluntarily
entered into merely on the basis of its whim or caprice and under the false
pretense of financial distress.

161
PERIOD OR TERM, MEANING AND DEFINITION (Art. 1193-1198, CC)
DAGUHOY ENTERPRISES, INC. VS. PONCE

96 Phil 15
FACTS:
In the year 1950, defendant-appellant Domingo Ponce was chairman
and manager and his son Buhay M. Ponce was secretary-treasurer of the
plaintiff corporation Daguhoy Enterprises, Inc. On June 24, Rita L. Ponce, wife
of Domingo, executed in favor of plaintiff corporation a deed of mortgage over
a parcel of land including the improvements thereon to secure the payment of
a loan of P5, 000 granted to her by said corporation, payable within six years
with interests at 12% annum. On March 10, 1951, Rita L. Ponce with the
consent of her husband Domingo executed another mortgage deed amending
the first one, whereby the loan was increased from P5,000 to P6,190, the
terms and conditions of the mortgage remaining the same. Rita and Domingo
presented the two mortgage deeds for registration in the office of the register
of deeds for registrations in the office of the register of deeds, but the said
register advised the two to cure the defects and furnish the necessary data.
Instead of complying with the suggestion and requirements, the two withdrew
the two mortgage deeds and then mortgaged the same parcel of land in favor
of the Rehabilitation Finance Corporation (RFC) to secure a loan.
Potenciano Gapol, the majority stockholder in the corporation, upon

learning that the deeds of mortgage were not registered and that they were
withdrawn from the office of the register of deeds and the land covered by the
two deeds was again mortgaged to RFC, he filed a civil case against the
respondents, not only for the amount of the loan of P6,190 but for other sums,
possibly on the theory that the loan in question was granted by Domingo and
Buhay as officers of the corporation.
To account for the amount of the loan, Domingo and his son filed in
court a check of RFC in the amount of P6,190 and an interesr of P266.10 in
favor of the company. Thereafter, Gapol petitioned the court for permission to
withdraw the amounts as payment of the loan. But because the defendants
opposed said petition, the court denied it. Gapol, agreeing to the cancellation
of the mortgage as soon as the amounts are withdrawn and deposited with
the Bank of America, in the name of the company, filed a second petition for
withdrawal. However, the defendants failed to agree, thus it was again
denied.
ISSUE:
Whether or not the sum in the form of an RFC check and some interest
deposited in the civil case may be withdrawn to satisfy the judgment and to
pay the loan of P6,190 and part of the interest due.
RULING:
Yes. Although the original loan of P5,000 including the increase of
P1,190 was payable within six years from June 1950 and so did not become
due and payable until 1956, the trial court held that under article 1198 of the
Civil Code, the debtor lost the benefit of the period by reason of her failure to
give the security in the form of the two deeds of mortgage and register them,
including defendant’s act in withdrawing said two deeds from the office of the
register of deeds and then mortgaging the same property in favor of the RFC;
and so the obligation became pure and without any condition and
consequently, the loan became due and immediately demandable. Likewise,

162
even if the defendants had already deposited a certain amount in favor of the
corporation, they are not yet relieved from the payment of interests from the
time of the deposit because the loan is not yet paid.
PERIOD OR TERM, MEANING AND DEFINITION (Art. 1193-1198, CC)
VICTORIAS PLANTERS VS. VICTORIAS MILLING
97 PHIL. 318
FACTS
From 1917 to 1934, the sugar cane planters Manapla and Cadiz,
Negros Occidental, executed identical milling contracts, under which the
sugar central "North Negros Sugar Co. Inc." would mill the sugar produced
by the sugar cane planters of the Manapla and Cadiz districts.
The sugar cane planters of Manapla and Cadiz, Negros Occidental had
executed with Miguel J. Ossorio, a contract whereby Ossorio was given a
period up to December 31, 1916 within which to make a study of and decide
whether he would construct a sugar central or mill with a capacity of milling
300 tons of sugar cane every 24 hours and setting forth the mutual
obligations and undertakings of such central and the planters and the terms
and conditions under which the sugar cane produced by said planters would
be milled in the event of the construction of such sugar central by Ossorio.
Such central was in fact constructed by said Ossorio in Manapla, Negros
Occidental, through the North Negros Sugar Co., Inc., where after the
standard form of milling contracts were executed.
The parties cannot stipulate as to the milling contracts executed by the

planters by Victorias, Negros Occidental, other than as follows: 1) a number
of them executed such milling contracts with the North Negros Sugar Co.,
Inc.; 2) while a number of them executed milling contracts with the Victorias
Milling Co., Inc., which was likewise organized by Miguel J. Ossorio and which
had constructed another Central at Victorias, Negros Occidental. The North
Negros Sugar Co., Inc. had its first milling during the 1918-1919 crop years,
and the Victorias Milling Co., had its first milling during the 1921-1922 crop
year. Subsequent millings took place every successive crop year thereafter,
except the 6-year period, comprising 4 years of the last World War II and 2
years of post-war reconstruction of respondent's central at Victorias, Negros
Occidental.
After the liberation, the North Negros Sugar Co., Inc. did not
reconstruct its destroyed central at Manapla, Negros Occidental, and in 1946,
it advised the North Negros Planters Association, Inc. that it had made
arrangements with the respondent Victorias Milling Co., Inc. for said
respondent corporation to mill the sugar cane produced by the planters of
163
Manapla and Cadiz holding milling contracts with it. Thus, after the war, all
the sugar cane produced by the planters of petitioner associations, in
Manapla, Cadiz, as well as in Victorias, who held milling contracts, were
milled in only one central, that of the respondent corporation at Victorias.
Beginning with the year 1948, and in the following years, when the planters-
members of the North Negros Planters Association, Inc. considered that the
stipulated 30-year period of their milling contracts executed in the year 1918
had already expired and terminated in the crop year 1947-1948, and the
planters-members of the Victorias Planters Association, Inc. likewise
considered the stipulated 30-year period of their milling contracts, as having
likewise expired and terminated in the crop year 1948-1949, under the
pertinent provisions of the standard milling contract. Notwithstanding the
repeated representations made by the herein petitioners with the respondent
corporation, the herein respondent has refused and still refuses to accede to
the same, contending that under the provisions of the milling contract.
ISSUE:
Whether or not the trial court erred in rendering its disputed decision,
favoring the petitioner.
RULING:
NO. Fortuitous event relieves the obligor from fulfilling a contractual

obligation.
The fact that the contracts make reference to "first milling" does not
make the period of thirty (30) years one of thirty (30) milling years. The term
"first milling" used in the contracts under consideration was for the purpose
of reckoning the thirty-year period stipulated therein. Even if the thirty-year
period provided for in the contracts be construed as milling years, the
deduction or extension of six (6) years would not be justified. At most on the
last year of the thirty-year period stipulated in the contracts the delivery of
sugar cane could be extended up to a time when all the amount of sugar cane
raised and harvested should have been delivered to the appellant's mill as
agreed upon.
Further, the parties stipulated that in the event of flood, typhoon,

earthquake, or other force majeure, war, insurrection, civil commotion,
organized strike, etc., the contract shall be deemed suspended during said
period, does not mean that the happening of any of those events stops the
running of the period agreed upon. It only relieves the parties from the
fulfillment of their respective obligations during that time — the planters from
delivering sugar cane and the central from milling it.
In order that the central, the herein appellant, may be entitled to

demand from the other parties the fulfillment of their part in the contracts,
the latter must have been able to perform it but failed or refused to do so and
not when they were prevented by force majeure such as war. To require the
planters to deliver the sugar cane which they failed to deliver during the four
(4) years of the Japanese occupation and the two (2) years after liberation
when the mill was being rebuilt is to demand from the obligors the fulfillment
of an obligation which was impossible of performance at the time it became
due. Nemo tenetur ad impossibilia.
The obligee not being entitled to demand from the obligors the
performance of the latter’s part of the contracts under those circumstances
cannot later on demand its fulfillment. The performance of what the law has
written off cannot be demanded and required. The prayer that the plaintiffs
164
be compelled to deliver sugar cane to the appellant for six (6) years more to
make up for what they failed to deliver during those trying years, the
fulfillment of which was impossible, if granted, would in effect be an
extension of the term of the contracts entered into by and between the
parties.
DISTINCTIONS: CONDITION VS. PERIOD / TERM
BERG VS. MAGDALENA ESTATES

92 PHIL 110
FACTS:
This is an action for partition of the property known as Crystal Arcade
situated in the City of Manila.
The complaint avers that plaintiff and defendant are co-owners of said
property, the former being the owner of one-third interest and the latter of
the remaining two-thirds.

165
The division is asked because plaintiff and defendant are unable to
agree upon the management of the property and upon the partition thereof.
Defendant answered setting up a special defense and counterclaim. As

a special defense, defendant claims that on September 22, 1943, it sold to
plaintiff one-third of the property in litigation subject to the express condition
that should either vendor or vendee decide to sell his undivided share, the
party selling would grant to the other party first an irrevocable option to
purchase the same at the seller’s price. It avers that in January 1946, plaintiff
fixed the sum of P200,000 as the price of said share and offered to sell it to
defendant, which offer was accepted and for the payment of said price
plaintiff gave defendant a period of time which, including the extensions
granted would expire on May 31, 1947. Defendant claims that in spite of its
acceptance of the offer, plaintiff refused to accept the payment of the price,
and for this refusal defendant suffered damages in the amount of P100,000.
For these reasons, defendant asks for specific performance.
ISSUE:
Whether or not the obligation is one subject to a term.
RULING:
NO, rather, the obligation is rather subject to a condition. Under
Article 1125 of the old Civil Code, obligations with a term, for the fulfillment
of which a day certain has been fixed, shall be demandable only when the day
arrives. A day certain is understood to be that which must necessarily arrive,
even though it is not known when. In order that an obligation may be with a
term, it is, therefore, necessary that it should arrive, sooner or later;
otherwise, if its arrival is uncertain, the obligation is conditional.
Viewing in this light the clause on which defendant relies for the
enforcement of its right to buy the property, it would seem that it is not a
term, but a condition. Considering the first alternative, that is, until
defendant shall have obtained a loan from the National City Bank of New
York, it is clear that the granting of such loan is not definite and cannot be
held to come within the terms “day certain.” And if it is considered that the
period given was until such time as defendant could raise money from other
sources, then it is also to be indefinite and contingent, and so it is also a
condition and not a term within the meaning of the law. In any event, it is
apparent that the fulfillment of the condition contained in this second
alternative is made to depend upon defendant’s exclusive will, and viewed in
this light, the plaintiff’s obligation to sell did not arise, for, under article 1115
of the old Civil Code, “when the fulfillment of the condition depends upon the
exclusive will of the debtor the conditional obligation shall be void.”
POTESTATIVE PERIOD
1. JESPAJO REALTY VS. CA, 390 SCRA 27

166
2. BORROMEO VS. CA, 47 SCRA 65
3. GONZALES VS. JOSE, 66 PHIL 369
JESPAJO REALTY CORPORATION, petitioner,

VS. HON. COURT OF APPEALS, TAN TE GUTIERREZ and CO TONG,
respondents
390 SCRA 27
FACTS:
The subject of this controversy is an apartment building owned by
Jespajo Realty Corporation. Said corporation, represented by its President,
Jesus L. Uy, entered into separate contracts of lease with Tan Te Gutierrez
and Co Tong. The lease period shall be effective as of February 1, 1985 and
shall continue for an indefinite period provided the lessee is up-to-date in the
payment of his monthly rentals. The lessee may, at his option, terminate this
contract any time by giving sixty (60) days prior written notice of termination
to the lessor. However, violation of any of the terms and conditions of this
contract shall be a sufficient ground for termination thereof by the lessor. For
the duration of the contract, the lessee agrees to an automatic 20% yearly
increase in the monthly rentals.
On January 2, 1990, the lessor corporation sent a written notice to the

lessees informing them of the formers’ intention to increase the monthly
rentals on the occupied premises to P3,500.00 monthly effective February 1,
1990. The lessees through its counsel in a letter dated March 10, 1990
manifested their opposition alleging that the same is in contravention of the
terms of the contract of lease as agreed upon. Due to the opposition and the
failure of the lessees to pay the increased monthly rentals in the amount of
P3,500.00, the lessor through its counsel in a letter dated April 10, 1990
demanded that the lessees vacate the premises and pay the amount of
P7,000.00 corresponding to the months of February and March, 1990.
The lessees exerted effort to pay the rentals due for the months of
February and March 1990 at the monthly rate stipulated in the contract but
was refused by the lessor so that on May 2, 1990, they instituted before the
Metropolitan Trial Court of Manila, Branch 16 a case for consignation.
The trial judge in the consignation case issued an order allowing the
plaintiffs therein to deposit with the City Treasurer of Manila the amount of
P33,480.28 for Co Tong and the amount of P32,710.32 for Tan Te Gutierrez
representing their respective rentals for thirteen (13) months from February,
1990 to January, 1991.
More than six (6) months from the filing of the case for consignation,
the lessor instituted an ejectment suit against the lessees before the
Metropolitan Trial Court of Manila Branch 20. The court in its decision
dismissed the ejectment suit for lack of merit. Regional Trial Court is
constrained to reverse the appealed decision and ordered another judgment
to be entered in favor of appellant. This was, however, reversed by the Court
of Appeals
ISSUE:
Whether or not the subject contract of lease did not provide for a
definite period hence it falls under the ambit of Art. 1687 of the NCC, making
the agreement effective on a month-to-month basis since rental payments are
made monthly
RULING:
No. The Court held that Art. 1687 finds no application in the case at
bar.
167
The lease contract between petitioner and respondents is with a period

subject to a resolutory condition. Art. 1687 provides that if the period for the
lease has not been fixed, it is understood to be from year to year, if the rent
agreed upon is annual; from month to month, if it is monthly; from week to
week, if the rent is weekly; and from day to day, if the rent is to be paid daily.
However, even though a monthly rent is paid, and no period for the lease has
been set, the courts may fix a longer term for the lease after the lessee has
occupied the premises for over one year.
If the rent is weekly, the courts may likewise determine a longer period
after the lessee has been in possession for over six months. In case of daily
rent, the courts may also fix a longer period after the lessee has stayed in the
place for over one month. The wording of the agreement is unequivocal: “The
lease period shall continue for an indefinite period provided the lessee is up-
to-date in the payment of his monthly rentals.” The condition imposed in
order that the contract shall remain effective is that the lessee is up-to-date in
his monthly payments. It is undisputed that the lessees Gutierrez and Co
Tong religiously paid their rent at the increasing rate of 20% annually. The
agreement between the lessor and the lessees are therefore still subsisting,
with the original terms and conditions agreed upon, when the petitioner
unilaterally increased the rental payment to more than 20% or P3,500.00 a
month.
POTESTATIVE PERIOD
BORROMEO VS. CA
47 SCRA 65
FACTS:
Before the year 1933, Jose A. Villamor was a distributor of lumber
belonging to Mr. Miller who was the agent of the Insular Lumber Company in
Cebu City. Defendant being a friend and former classmate of plaintiff,
Borromeo, used to borrow from the latter certain amounts from time to time.
On one occasion with some pressing obligation to settle with Mr. Miller,
defendant borrowed from plaintiff a large sum of money for which he
mortgaged his land and house in Cebu City. Mr. Miller filed civil action
against the defendant and attached his properties including those mortgaged
to plaintiff, inasmuch as the deed of mortgage in favor of plaintiff could not be
registered because it was not properly drawn up. Plaintiff then pressed the
defendant for the settlement of his obligation, but defendant instead offered
to execute a document promising to pay his indebtedness even after the lapse
of ten (10) years.
Liquidation was made and defendant was found to be indebted to

plaintiff in the sum of P7,220, for which defendant signed a promissory note
on November 29, 1933 with interest at the rate of 12% per annum, agreeing
to pay-“as soon as I have money.” The note further stipulates that defendant
“hereby relinquish, renounce, or otherwise waive my rights to the
prescriptions established by our Code of Civil Procedure for the collection or
recovery of the above sum of P7,220.”
ISSUE:
Whether or not prescription extinguished the obligation.
RULING:

168
NO. The obligation in this case is one which is subject to a potestative
condition, one which is dependent solely on the will of the debtor. The
statement “as soon as I have money” is the condition which is dependent on
the debtor’s will. Although this condition is void, it has been relied upon by
the creditor resulting to the delayed filing of the action.
Prescription in this case cannot be applied strictly for it will result to

grave injustice on the part of the creditor. For as was also made clear
therein, there had been since then verbal requests on the part of the creditor
made to the debtor for the settlement of the loan. Furthermore, plaintiff did
not file any complaint against the defendant within ten (10) years from the
execution of the document as there was no property registered in defendant’s
name who furthermore assured him that he could collect even after the lapse
of ten years. The debtor is therefore liable for the amount of the obligation
plus interests.
POTESTATIVE PERIOD (Art. 1180 in rel to Art. 1197, CC)
GONZALES VS. JOSE

66 PHIL 369
FACTS:
Defendant Florentino de Jose executed two (2) promissory notes on
June 22, 1922 and September 13, 1922 in favor of plaintiff Benito Gonzales.
The two (2) promissory notes were both worded as follows: “I promise to pay
Mr. Benito Gonzalez the sum of P (amount) as soon as possible.” Defendant
appealed from the decision of the Court of First Instance of Manila ordering
him to pay the plaintiff the sum of P547.95 within thirty (30) days from the
date of notification of said decision, plus the costs. The defendant interposed
the defense of prescription because the action was not filed by the plaintiff
within the prescriptive period prescribed by law.
ISSUE:
Whether or not the action has already prescribed.
RULING:
NO. The words “as soon as possible” in the promissory notes denote
that such is an obligation subject to a potestative condition. Article 1128 of
the Civil Code provides:
“If the obligation does not specify a term, but it is to be inferred from its
nature and circumstances that it was intended to grant the debtor time for its
performance, the period of the term shall be fixed by the court”.
The action to ask the court to fix the period has already prescribed in
accordance with section 43 (1) of the Code of Civil Procedure. This period of
prescription is ten (10) years, which has already elapsed from the execution
of the promissory notes until the filing of the action on June 1, 1934. The
action which should be brought in accordance with Article 1128 is different
169
from the action for the recovery of the amount of the notes, although the
effects of both are the same, being, like other civil actions, subject to the
rules of prescription.
OBLIGATIONS WITH A TERM OR PERIOD: EFFECTS
1. SANTOS-VENTURA VS. SANTOS, 441 SCRA 472

2. MELOTINDOS VS. TOBIAS, 391 SCRA 299
3. LL AND COMPANY VS. HUANG, 378 SCRA 612
4. BRENT SCHOOL VS. ZAMORA, FEB. 5, 1990
5. LIM VS. PEOPLE, NOV. 21, 1984
6. PACIFIC BANKING VS. CA, MAY 5 1989
SANTOS VENTURA HOCORMA FOUNDATION, INC., Petitioner,

VS. ERNESTO V. SANTOS and RIVERLAND, INC., Respondents
November 4, 2000
G.R. No. 153004
FACTS:
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc.
(SVHFI) were the plaintiff and defendant, respectively, in several civil cases
filed in different courts in the Philippines. On October 26, 1990, the parties
executed a Compromise Agreement which amicably ended all their pending
litigations. The pertinent portions of the Agreement read as follows:
1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the

following manner:
a) P1.5 Million immediately upon the execution of this agreement; and, b) the
balance of P13 Million shall be paid, whether in one lump sum or in
installments, at the discretion of the Foundation, within a period of not more
170
than two (2) years from the execution of this agreement; provided, however,
that in the event that the Foundation does not pay the whole or any part of
such balance, the same shall be paid with the corresponding portion of the
land or real properties subject of the aforesaid cases and previously covered
by the notices of lis pendens, under such terms and conditions as to area,
valuation, and location mutually acceptable to both parties; but in no case
shall the payment of such balance be later than two (2) years from the date of
this agreement; otherwise, payment of any unpaid portion shall only be in the
form of land aforesaid;
2. Immediately upon the execution of this agreement (and [the] receipt of

the P1.5 Million), plaintiff Santos shall cause the dismissal with prejudice of
Civil Cases Nos. 88-743, 1413OR, TC-1024, 45366 and 18166 and voluntarily
withdraw the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 88-
45366 (C.A.-G.R. No. 24304) respectively and for the immediate lifting of the
aforesaid various notices of lis pendens on the real properties aforementioned
(by signing herein attached corresponding documents, for such lifting);
provided, however, that in the event that defendant Foundation shall sell or
dispose of any of the lands previously subject of lis pendens, the proceeds of
any such sale, or any part thereof as may be required, shall be partially
devoted to the payment of the Foundation’s obligations under this agreement
as may still be subsisting and payable at the time of any such sale or sales;
X.X X
5. Failure of compliance of any of the foregoing terms and conditions by

either or both parties to this agreement shall ipso facto and ipso jure
automatically entitle the aggrieved party to a writ of execution for the
enforcement of this agreement.
In compliance with the Compromise Agreement, respondent Santos

moved for the dismissal of the aforesaid civil cases. He also caused the lifting
of the notices of lis pendens on the real properties involved. For its part,
petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance of
P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange

Livelihood Corporation two real properties, which were previously subjects of
lis pendens. Discovering the disposition made by the petitioner, respondent
Santos sent a letter to the petitioner demanding the payment of the remaining
P13 million, which was ignored by the latter. Meanwhile, on September 30,
1991, the Regional Trial Court of Makati City, Branch 62, issued a Decision
approving the compromise agreement.
On October 28, 1992, respondent Santos sent another letter to

petitioner inquiring when it would pay the balance of P13 million. There was
no response from petitioner. Consequently, respondent Santos applied with
the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ
of execution of its compromise judgment dated September 30, 1991. The RTC
granted the writ. Thus, on March 10, 1993, the Sheriff levied on the real
properties of petitioner, which were formerly subjects of the lis pendens.
Petitioner, however, filed numerous motions to block the enforcement of the
said writ. The challenge of the execution of the aforesaid compromise
judgment even reached the Supreme Court. All these efforts, however, were
futile.
On November 22, 1994, petitioner’s real properties located in

Mabalacat, Pampanga were auctioned. In the said auction, Riverland, Inc.
was the highest bidder for P12 million and it was issued a Certificate of Sale
covering the real properties subject of the auction sale. Subsequently,
171
another auction sale was held on February 8, 1995, for the sale of real
properties of petitioner in Bacolod City. Again, Riverland, Inc. was the
highest bidder. The Certificates of Sale issued for both properties provided
for the right of redemption within one year from the date of registration of
the said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for

Declaratory Relief and Damages alleging that there was delay on the part of
petitioner in paying the balance of P13 million. They further alleged that
under the Compromise Agreement, the obligation became due on October 26,
1992, but payment of the remaining P12 million was effected only on
November 22, 1994. Thus, respondents prayed that petitioner be ordered to
pay legal interest on the obligation, penalty, attorney’s fees and costs of
litigation. Furthermore, they prayed that the aforesaid sales be declared final
and not subject to legal redemption.
In its Answer, petitioner countered that respondents have no cause of

action against it since it had fully paid its obligation to the latter. It further
claimed that the alleged delay in the payment of the balance was due to its
valid exercise of its rights to protect its interests as provided under the Rules.
Petitioner counterclaimed for attorney’s fees and exemplary damages.
On October 4, 1996, the trial court rendered a Decision dismissing

herein respondents’ complaint and ordering them to pay attorney’s fees and
exemplary damages to petitioner. Respondents then appealed to the Court of
Appeals. The appellate court reversed the ruling of the trial court.
ISSUE:
Whether or not the Court of Appeals was correct in its decision,
reversing the trial court’s decision, regarding the legal interest of herein
respondents on aforementioned properties.
RULING:
The Supreme Court held the decision of the Court of Appeals correct.
A compromise is a contract whereby the parties, by making reciprocal
concessions, avoid litigation or put an end to one already commenced. It is an
agreement between two or more persons, who, for preventing or putting an
end to a lawsuit, adjust their difficulties by mutual consent in the manner
which they agree on, and which everyone of them prefers in the hope of
gaining, balanced by the danger of losing. The general rule is that a
compromise has upon the parties the effect and authority of res judicata, with
respect to the matter definitely stated therein, or which by implication from
its terms should be deemed to have been included therein. This holds true
even if the agreement has not been judicially approved.
In the case at bar, the Compromise Agreement was entered into by the
parties on October 26, 1990. It was judicially approved on September 30,
1991. Applying existing jurisprudence, the compromise agreement as a
consensual contract became binding between the parties upon its execution
and not upon its court approval. From the time a compromise is validly
entered into, it becomes the source of the rights and obligations of the parties
thereto. The purpose of the compromise is precisely to replace and terminate
controverted claims. In accordance with the compromise agreement, the
respondents asked for the dismissal of the pending civil cases. The petitioner,
on the other hand, paid the initial P1.5 million upon the execution of the
agreement. This act of the petitioner showed that it acknowledges that the
agreement was immediately executory and enforceable upon its execution. As
to the remaining P13 million, the terms and conditions of the compromise
agreement are clear and unambiguous.

172
The two-year period must be counted from October 26, 1990, the date
of execution of the compromise agreement, and not on the judicial approval of
the compromise agreement on September 30, 1991. When respondents wrote
a demand letter to petitioner on October 28, 1992, the obligation was already
due and demandable. When the petitioner failed to pay its due obligation
after the demand was made, it incurred delay. Article 1169 of the New Civil
Code provides:
Those obliged to deliver or to do something incur in delay from the

time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.
Delay as used in this article is synonymous to default or mora which

means delay in the fulfillment of obligations. It is the non-fulfillment of the
obligation with respect to time. In order for the debtor to be in default, it is
necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance;
and (3) that the creditor requires the performance judicially or extrajudicially.
In the case at bar, the obligation was already due and demandable after
the lapse of the two-year period from the execution of the contract. The two-
year period ended on October 26, 1992. When the respondents gave a
demand letter on October 28, 1992, to the petitioner, the obligation was
already due and demandable. Furthermore, the obligation is liquidated
because the debtor knows precisely how much he owes and when he should
pay the amount due.
The second requisite is also present. Petitioner delayed in the

performance. It was able to fully settle its outstanding balance only on
February 8, 1995, which is more than two years after the extra-judicial
demand. Moreover, it filed several motions and elevated adverse resolutions
to the appellate court to hinder the execution of a final and executory
judgment, and further delay the fulfillment of its obligation.
Third, the demand letter sent to the petitioner on October 28, 1992,
was in accordance with an extra-judicial demand contemplated by law.
Verily, the petitioner is liable for damages for the delay in the
performance of its obligation. This is provided for in Article 1170 of the New
Civil Code. When the debtor knows the amount and period when he is to pay,
interest as damages is generally allowed as a matter of right. The
complaining party has been deprived of funds to which he is entitled by virtue
of their compromise agreement. The goal of compensation requires that the
complainant be compensated for the loss of use of those funds. This
compensation is in the form of interest. In the absence of agreement, the
legal rate of interest shall prevail. The legal interest for loan as forbearance
of money is 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of
the Civil Code.

173
MANUEL D. MELOTINDOS
VS. MELECIO TOBIAS, represented by JOSEFINA PINEDA
G.R. No. 146658
28 October 2002
391 SCRA 299
FACTS:
Eighty-seven-year old petitioner, Atty. Manuel D. Melontindos, was the
lessee of the ground floor of a house in Malate, Manila. He had been renting
the place since 1983 on a month-to-month basis from its owner, respondent
Melecio Tobias, who was then residing in Canada.
Sometime in the last quarter of 1995, owing to his sickly mother who
needed constant medical attention and filial care, respondent demanded from
petitioner either to pay an increased rate of monthly rentals or else to vacate
the place so he and his mother could use the house during her regular
medical check-up in Manila. For two (2) years nothing came out of the
demand to vacate, hence, in 1997 respondent insisted upon raising the rental
fee once again.
On 1 June 1998 respondent asked petitioner to restore the premises to

him for some essential repairs of its dilapidated structure. This time he did
not offer petitioner anymore the option to pay higher rentals. The renovation
of the house was commenced but had to stop midway because petitioner
refused to vacate the portion he was occupying and worse he neglected to pay
for the lease for four (4) months from May to August 1998. Hence for the
second time, or on 19 October 1998, respondent demanded the payment of
the rental arrears as well as the restoration of the house to him. On 3
February 1999, since petitioner was insisting on keeping possession of the
house but did not pay the rental for January 1999, although he had settled the
arrears of four (4) months, respondent was compelled to file a complaint for
ejectment.
The MeTC of Manila decided the ejectment complaint in favor of

respondent and ordered petitioner to vacate the leased premises and to pay
rental arrears in the amount of P60,000.00 as of December 1998 and
P6,000.00 for every month thereafter until he finally restored possession
thereof to respondent plus attorney’s fees of P15,000.00 and the costs of suit.
The RTC of Manila upheld in toto the MeTC Decision and denied the
subsequent motion for reconsideration for failure to set the date of hearing
thereof not later than ten (10) days from its filing. Petitioner’s recourse to the
Court of Appeals by petition for review was also unsuccessful since the
assailed Decision was affirmed in its entirety as the ensuing motion for
reconsideration thereof was denied for late filling, i.e., the motion was filed
only on 30 October 2000 beyond the fifteen (15) – day period from his receipt
of the CA Decision on 9 October 2000 as shown by the registry return receipt.

174
ISSUE:
Whether or not the lower courts erred in their rulings.
RULING:
It is not only the evidence on record but petitioner’s pleadings
themselves that confirm his default in paying the rental fees for more than
three (3) months in 1999 and 1998 prior to the filing of the ejectment
complaint. There is also sufficient basis for the courts a quo to conclude that
respondent desperately needed the property in good faith for his own family
and for the repair and renovation of the house standing thereon. These facts
represent legal grounds to eject a tenant.
The Petition for Review is DENIED for lack of merit.
LL AND COMPANY DEVELOPMENT AND AGRO-INDUSTRIAL

CORPORATION, petitioner,
VS. HUANG CHAO CHUN AND YANG TUNG FA, respondents
Mar 7, 2000
G.R. No. 142378
378 SCRA 612
FACTS:
The case originated from an unlawful detainer case filed by petitioner
before the trial court alleging that respondents Huang Chao Chun and Yang
Tung Fa violated their amended lease contract over a 1,112 square meter lot
it owns, when they did not pay the monthly rentals thereon in the total
amount of P4,322,900.00. It also alleged that the amended lease contract
already expired on September 16, 1996 but respondents refused to surrender
possession thereof plus the improvements made thereon, and pay the rental
arrearages despite repeated demands. The parties entered into the amended
lease contract sometime in August 1991. The same amended the lease
contract previously entered into by the parties on August 8, 1991.
Respondent were joined by the Tsai Chun International Resources Inc.

in their answer to the Complaint, wherein they alleged that the actual lessee
is the corporation. Respondents and the corporation denied petitioner’s
allegations.
The MTC dismissed the case. The MTC ruled that the lessees could
extend the contract entered into by the parties unilaterally for another five
years for reasons of justice and equity. It also ruled that the corporation’s
failure to pay the monthly rentals as they fell due was justified by the fact that
petitioner refused to honor the basis of the rental increase as stated in their
Lease Agreement. This was affirmed by the RTC. It also held that the parties
had a reciprocal obligation: unless and until petitioner presented “the
increased realty tax,” private respondents were not under any obligation to
pay the increased monthly rental. The decision was likewise affirmed by the
Court of Appeals.
175
ISSUE:
Whether or not the court could still extend the term of the lease, after
its expiration.
RULING:
In general, the power of the courts to fix a longer term for a lease is
discretionary. Such power is to be exercised only in accordance with the
particular circumstances of a case: a longer term to be granted where
equities demanding extension come into play; to be denied where none
appear -- always with due deference to the parties’ freedom to contract.
Thus, courts are not bound to extend the lease.
Article 1675 of the Civil Code excludes cases falling under Article 1673
from those under Article 1687. Article 1673 provides among others, that the
lessor may judicially eject the lessee upon the expiration of “the period
agreed upon or that, which is fixed for the duration of the leases.” Where no
period has been fixed by the parties, the courts, pursuant to Article 1687,
have the potestative authority to set a longer period of lease.
In the case, the Contract of Lease provided for a fixed period of five (5)
years -- “specifically” from September 16, 1991 to September 15, 1996.
Because the lease period was for a determinate time, it ceased, by express
provision of Article 1669 of the Civil Code, “on the day fixed, without need of
a demand.” Here, the five-year period expired on September 15, 1996,
whereas the Complaint for ejectment was filed on October 6, 1996. Because
there was no longer any lease that could be extended, the MeTC, in effect,
made a new contract for the parties, a power it did not have.
As stated in Bacolod-Murcia Milling v. Banco Nacional Filipino, “It is

not the province of the court to alter a contract by construction or to make a
new contract for the parties; its duty is confined to the interpretation of the
one which they have made for themselves, without regard to its wisdom or
folly, as the court cannot supply material stipulations or read into contract
words which it does not contain.”
Furthermore, the extension of a lease contract must be made before

the term of the agreement expires, not after. Upon the lapse of the stipulated
period, courts cannot belatedly extend or make a new lease for the parties,
even on the basis of equity. Because the Lease Contract ended on September
15, 1996, without the parties reaching any agreement for renewal,
respondents can be ejected from the premises.
On the other hand, respondents and the lower courts argue that the
Contract of Lease provided for an automatic renewal of the lease period.
Citing Koh v. Ongsiaco and Cruz v. Alberto, the MeTC -- upheld by the RTC
and the CA -- ruled that the stipulation in the Contract of Lease providing an
option to renew should be construed in favor of and for the benefit of the
lessee. This ruling has however, been expressly reversed in Fernandez v. CA
and was recently reiterated in Heirs of Amando Dalisay v. Court of Appeals.
Thus, pursuant to Fernandez, Dalisay and Article 1196 of the Civil Code, the
period of the lease contract is deemed to have been set for the benefit of both
parties. Its renewal may be authorized only upon their mutual agreement or
at their joint will. Its continuance, effectivity or fulfillment cannot be made to
depend exclusively upon the free and uncontrolled choice of just one party.
While the lessee has the option to continue or to stop paying the rentals, the
lessor cannot be completely deprived of any say on the matter. Absent any
contrary stipulation in a reciprocal contract, the period of lease is deemed to
be for the benefit of both parties.

176
In the instant case, there was nothing in the aforesaid stipulation or in
the actuation of the parties that showed that they intended an automatic
renewal or extension of the term of the contract. First, demonstrating
petitioner’s disinterest in renewing the contract was its letter dated August
23, 1996, demanding that respondents vacate the premises for failure to pay
rentals since 1993. As a rule, the owner-lessor has the prerogative to
terminate the lease upon its expiration. Second, in the present case, the
disagreement of the parties over the increased rental rate and private
respondents’ failure to pay it precluded the possibility of a mutual renewal.
Third, the fact that the lessor allowed the lessee to introduce improvements
on the property was indicative, not of the former’s intention to extend the
contract automatically, but merely of its obedience to its express terms
allowing the improvements. After all, at the expiration of the lease, those
improvements were to “become its property.”
As to the contention that it is not fair to eject respondents from the

premises after only five years, considering the value of the improvements they
introduced therein, suffice it to say that they did so with the knowledge of the
risk -- the contract had plainly provided for a five-year lease period.
Parties are free to enter into any contractual stipulation, provided it is

not illegal or contrary to public morals. When such agreement, freely and
voluntarily entered into, turns out to be disadvantageous to a party, the courts
cannot rescue it without crossing the constitutional right to contract. They
are not authorized to extricate parties from the necessary consequences of
their acts, and the fact that the contractual stipulations may turn out to be
financially disadvantageous will not relieve the latter of their obligations.
Petition granted. Decision set aside. Respondents ordered to vacate

the premises, to restore peaceful possession thereof to petitioner, and to pay
accrued rentals.
BRENT SCHOOL VS. ZAMORA

181 SCRA 702
FACTS:
177
The root of the controversy at bar is an employment contract in virtue
of which Doroteo R. Alegre as engaged as athletic director by Brent School,
Inc. at a yearly compensation of P20,000. The contract fixed a specific term
for its existence, five (5) years, i.e., from July 18, 1971, the date of execution
of the agreement, to July 17, 1976. Subsequent subsidiary agreements dated
March 15, 1973, August 28, 1973, and September 14, 1974 reiterated the
same terms and conditions, including the expiry date, as those contained in
the original contract.
Some three (3) months before the expiration of the stipulated period, or
more precisely on April 20, 1976, Alegre was given a copy of the report filed
by Brent School with the Department of Labor advising of the termination of
his services effective on July 16, 1976.
Alegre objected to this termination of his employment contending that

since his services were necessary and desirable in the usual business of his
employer, and his employment had lasted for five (5) years, he had acquired
the status of a regular employee and could not be removed except for valid
cause.
ISSUE:
Whether or not Alegre’s contention is tenable.
RULING:
NO. The provisions of the Labor Code recognize the existence and
legality of term employments. The case at bar is one which involves term
employment. Therefore, Alegre’s employment was terminated upon the
expiration of his last contract with Brent School on July 16, 1976 without the
necessity of any notice. The advance written advice given the Department of
Labor with copy to said petitioner was a mere reminder of the impending
expiration of his contract, not a letter of termination, nor an application for
clearance to terminate which needed the approval of the Department of Labor
to make the termination of his services effective. In any case, such clearance
should properly have been given, not denied.

178
LOURDES VALERIO LIM VS. PEOPLE OF THE PHILIPPINES

G.R. No. L-34338
November 21, 1984
133 SCRA 333
FACTS:
On January 10, 1966, Lim (Appellant) went to the house of Maria
Ayroso and proposed to sell Ayroso's tobacco. Ayroso agreed to the
proposition of the appellant to sell her tobacco consisting of 615 kilos at
P1.30 a kilo. The appellant was to receive the overprice for which she could
sell the tobacco.
Of the total value of P799.50, the appellant had paid to Ayroso only
P240.00, and this was paid on three different times. Demands for the
payment of the balance of the value of the tobacco were made upon the
appellant by Ayroso, and particularly by her sister, Salud Bantug. Salud
Bantug further testified that she had gone to the house of the appellant
several times, but the appellant often eluded her; and that the 'camarin' of the
appellant was empty. Although the appellant denied that demands for
payment were made upon her, it is a fact that on October 19, 1966, she wrote
a letter to Salud Bantug stating that she could not pay in full the amount of
P799.50 because it is also hard to demand payment from her “suki” in the
market of Cabanatuan. Pursuant to this letter, the appellant sent a money
order for P100.00 on October 24, 1967, and another for P50.00 on March 8,
1967; and she paid P90.00 on April 18, 1967 or a total of P240.00. As no
further amount was paid, the complainant filed a complaint against the
appellant for estafa.
ISSUE:
Whether or not the Article 1197 of the Civil Code can be applied in this
case
RULING:
NO. It is clear in the agreement that the proceeds of the sale of the
tobacco should be turned over to the complainant as soon as the same was
sold, or, that the obligation was immediately demandable as soon as the
tobacco was disposed of. Hence, Article 1197 of the New Civil Code, which
provides that the courts may fix the duration of the obligation if it does not fix
a period, does not apply.
Anent the argument that petitioner was not an agent because the
agreement does not say that she would be paid the commission if the goods
were sold, the fact that appellant received the tobacco to be sold at P1.30 per
kilo and the proceeds to be given to complainant as soon as it was sold,
strongly negates transfer of ownership of the goods to the petitioner. The
agreement constituted her as an agent with the obligation to return the
tobacco if the same was not sold.

179
PACIFIC BANKING CORPORATION VS. COURT of APPEALS

G. R. No. 45656
May 5, 1989
173 SCRA 102
FACTS:
On April 15, 1955, private respondents Joseph and Eleanor Hart
discovered an area consisting of 480 hectares of tidewater land in Tambac,
Gulf of Lingayen which had great potential for the cultivation of fish and
saltmaking. They organized Insular Farms, Inc., applied for and after eleven
months, obtained a lease from the Department of Agriculture for a period of
25 years, renewable for another 25 years. Joseph Hart approached
businessman John Clarkin, then President of Pepsi-Cola Bottling Co. in
Manila, for financial assiatance.
On July 15, 1956, Joseph Hart and Clarkin signed a Memorandum of

Agreement. Due to financial difficulties, Insular Farms, Inc. borrowed from
Pacific Banking Corporation sometime in July 1956. On July 31, 1956, Insular
Farms, Inc. executed a Promissory Note of P250,000 to the bank payable on
or before July 1957. Such note provided that upon default in the payment of
any installment when due, all other installments shall become due and
payable. This loan was effected and the money released without any security
except for the Continuing Guaranty, executed on July 18, 1956, of John
Clarkin, who owned seven and half percent of the capital stock of the bank
and his wife Helen. Unfortunately, the business floundered; nevertheless,
petitioner Pacific Banking Corporation and its then Executive Vice President,
petitioner Chester Babst, did not demand payment for the initial July 1957
installment nor of the entire obligation, but instead opted for more collateral
in addition to the guaranty of Clarkin. As the business further deteriorated,
Hart agreed to Clarkin’s proposal that all Insular Farms shares of stocks be
pledged to petitioner bank in lieu of additional collateral and to insure and
extension of the period to pay the July 1957 installment. On March 3, 1958,
Pacific Farms, Inc. was organized to engage in the same business as Insular
Farms, Inc. The next day, Pacific Banking Corporation, through petitioner
Chester Babst wrote Insular Farms, Inc. giving the latter 48 hours to pay its
entire obligation.
On March 7, 1958, Hart received a notice that the pledged shared of

stocks of Insular Farms, Inc. would be sold at public auction on March 10,
1958 to satisfy Insular Farms’ obligation. Hart filed a complaint for
reconveyance and damages with prayer for a writ of preliminary injunction
and the Court of First Instance granted the writ. However, upon petitions for
dissolution of preliminary injunction filed by the petitioners PBC and Babst,
the court lifted the writ of preliminary injunction. On March 20, 1958,
respondent Hart received a notice from PBC signed by Babst that the shares
of stocks on Insular Farms Inc. will be sold at public auction on March 21,
1958. On March 21, 1958, PBC sold the 1, 000 shares of stocks of Insular
Farms to Pacific Farms. The latter then sold its shares of stocks to its own
180
stockholders, who constituted themselves as stockholders of Insular Farms
and then resold back to Pacific Farms Inc. all of Insular Farms assets except
for a certificate of public convenience to operate an ice plant. On September
28, 1959, Hart filed another case for recovery of sum of money comprising his
investments and earnings.
The trial court rendered a decision ordering Pacific Farms Inc. to pay
Joseph Hart for unpaid salaries and for loans made by private respondents to
Insular Farms, Inc. the private respondents, dissatisfied with the decision,
appealed to the Court of Appeals. The appellate court modified the lower
court’s decision, directing Pacific Banking Corporation to pay Joseph Hart
P100,000.00, subject to reimbursement from Babst.
ISSUES:
Whether or not the sale by the petitioner bank of the shares of stocks of
private respondent on March 21, 1958 is valid since the shares of stocks had
been pledged to insure an extension of the period to pay the July installment.
Whether or not the Court may fix a period in the parties’ agreement to
extend the payment of the loan, including the installment which was due on
or before July 1957 it being imprecise.
RULING:
The Supreme Court held that since there was an agreement to extend
indefinitely the payment of the installment of P50,000.00 in July 1957 as
provided in the promissory note, consequently, petitioner Pacific Banking
Corporation was precluded form enforcing the payment of the said
installment of July 1957, before the expiration of the indefinite period of
extension, which period had to be fixed by the court as provided in Article
1197 of the Civil Code. Hence, the disputed foreclosure and subsequent sale
was premature. Wherefore, the petition is dismissed.
YES. In case the period of extension is not precise, the provisions of

Article 1197 of the Civil Code should apply. The pledge executed as collateral
security no longer contained a provision on installment due on or before July
1957. The pledge constituted on February 19, 1958 on the shares of stocks of
Insular was sufficient consideration for the extension, considering that pledge
was additional collateral required by the Pacific in addition to the continuing
guaranty of Carkin. Even the ledge did not provide for dates of payment of
installments; or any fixed date for maturity of the whole indebtedness.
Accordingly, the date of maturity of the indebtedness should be as may be
determined by the court under Article 1197 of the Civil Code.

181
ALTERNATIVE OBLIGATION: MEANING AND DEFINITION
1. AGONCILLO VS. JAVIER, 38 PHIL 124

2. ONG GUAN VS. CENTURY, 46 PHIL 592
AGONCILLO VS. JAVIER

38 PHIL 124
FACTS:
On February 27 1904, Anastasio Alano, Jlose Alano and Florencio Alano
executed in favor of the plaintiff, Dra. Marcela Marino a document stipulating
that the Alanos as testamentary heirs of deceased Rev. Anastacio Cruz, would
pay the sum of P2,730.50 within one (1) year with interest of 12 percent per
annum representing the amount of debt incurred by Cruz. Moreover, the
agreement provided that the Alanos are to convey the house and lot
bequeathed to them by Cruz in the event of failure to pay the debt in money
at its maturity.
No part of interest or principal due has been paid except the sum of
P200 paid in 1908 by Anastacio Alano. In 1912, Anastasio died intestate. On
August 8, 1914, CFI of Batangas appointed Crisanto Javier as administrator of
Anastasio’s estate.
On March 17, 1916, the plaintiffs filed the complaint against Florencio,
Jose and Crisanto praying that unless defendants pay the debt for the
recovery of which the action was brought, they be required to convey to
plaintiffs the house and lot described in the agreement, that the property be
182
appraised and if its value is found to be less than the amount of the debt, with
accrued interest at the stipulation rate, judgment be rendered in favor of the
plaintiffs for the balance.
ISSUE:
Whether or not the agreement that the defendant-appellant, at the
maturity of the debt, will pay the sum of the money lent by the appellees or
will transfer the rights to the ownership and possession of the house and lot
bequeathed to the former by the testator in favor of the appellees, is valid.
RULING:
YES, this stipulation is valid because it is simply an alternative
obligation, which is expressly allowed by law. The agreement to convey the
house and lot on an appraised value in the event of failure to pay the debt in
money at its maturity is valid. It is simply an undertaking that if debt is not
paid in money, it will be paid in another way. The agreement is not open to
the objection that the agreement is pacto comisorio. It is not an attempt to
permit the creditor to declare the forfeiture of the security upon the failure of
the debtor to pay at its maturity. It is simply provided that if the debt is not
paid in money, it shall be paid by the transfer of the property at a valuation.
Such an agreement unrecorded, creates no right in rem, but as between the
parties, it is perfectly valid and specific performance by its terms may be
enforced unless prevented by the creation of superior rights in favor of third
persons.
The contract is not susceptible of the interpretation that the title to the
house and lot in question was to be transferred to the creditor ipso facto upon
the mere failure of the debtors to pay the debt at its maturity. The obligations
assumed by the debtors were in the alternative, and they had the right to
elect which they would perform. The conduct of parties shows that it was not
their understanding that the right to discharge the obligation by the payment
of the money was lost to the debtors by their failure to pay the debt at its
maturity. The plaintiff accepted the payment from Anastacio in 1908, several
years after the debt matured.
It is quite clear therefore that under the terms of the contract, and the
parties themselves have interpreted it, the liability of the defendant as to the
conveyance of the house and lot is subsidiary and conditional, being
dependent upon their failure to pay the debt in money. It must follow
therefore that if the action to recover the debt was prescribed, the action to
compel a conveyance of the house and lot is likewise barred, as the
agreement to make such conveyance was not an independent principal
undertaking, but merely a subsidiary alternative pact relating to the method
by which the debt must be paid.
ALTERNATIVE OBLIGATION: MEANING AND DEFINITION
ONG GUAN CUAN AND

THE BANK OF THE PHILIPPINE ISLANDS, Plaintiff-appellees
VS. CENTURY INSURANCE COMPANY, defendant-appelant
46 SCRA 592
GR No. 22738
46 P 592
FACTS:
A building of plaintiff Ong Guan Cuan was insured with defendant
Century Insurance Company (Century) against fire for P30,000 as well as the
merchandise therein for P15,000. On February 28 1923, the building and the
merchandise were burned while the policies issued were in force. Under the
conditions of the policies, the defendant may at its option reinstate or replace
183
the destroyed property instead of paying for the amount of the loss and that it
is not bound to reinstate exactly or completely the damaged property.
Century proposed reconstruction of the house destroyed but plaintiff

denied that the new house which will be constructed would be smaller and of
materials of lower kind than those employed in the construction of the house
which was destroyed. Plaintiff filed a complaint compelling defendant to pay
the sum of P45,000, the value of the insurance of the building and the
merchandise. On April 19, 1924, the CFI of Iloilo City rendered judgment in
favor of the plaintiff.
Hence the defendant appealed from the judgment and prayed that it be
permitted to rebuild the house as provided in the conditions of the insurance
policies.
ISSUE:
Whether or not defendant Century may be allowed to rebuild the house
as its option instead of payment of the insured value as stipulated in the
insurance policies.
RULING:
NO. The conditions in the insurance policies that the parties entered
into allowed Century to either pay the insured value of the house, or rebuild it
making the obligation of the company an alternative one. In alternative
obligations, the debtor, Century, must notify the creditor of his election
stating which of the two prestations it is disposed to fulfill. The objective is to
give the creditor opportunity to give consent or deny the election of the
debtor. Only after said notice shall election take legal effect when consented
by the creditor (Article 120 Civil Code) or if impugned by the latter when
declared proper by a competent court. In the instant case, appellant
company did not give formal notice of its election to rebuild the house and the
proposed reconstruction of the house was rejected by the creditor.
In alternative obligations, the value of the prestations must be

equivalent or similar in value to each other. The proposed rebuilding of the
house by the insurance company would be of lesser value than the other
prestation. The petitioner would build a smaller house and of materials of
lower kind than those employed in the construction of the burned house. The
other prestation is payment of the amount of P45,000 corresponding to the
value of the burned building (P30, 000) and the value of the merchandise
burned (P15,000). Therefore, the only recourse of the insurer is to pay the
stipulated value of the insurance policy.
ALTERNATIVE OBLIGATIONS: EFFECTS: AS TO DEBTOR: RIGHT OF

CHOICE/ELECTION: NATURE AND LIMITATIONS (Art. 1200, 1202-1203,
CC)

184
CLARA TAMBUNTING DE LEGARDA, ET AL
VS. VICTORIA DESBARATS MIAILHE, substituting WILLIAM J. B.
BURKE
1951 April 28
G.R. No. L-3435
FACTS:
On June 3, 1944, plaintiffs filed a complaint against the original
defendant William J. B. Burke, alleging defendant's unjustified refusal to
accept payment in discharge of a mortgage indebtedness in his favor, and
praying that the latter be ordered (1) to receive the sum of P75,920.83
deposited by plaintiff Clara Tambunting de Legarda, the mortgagor, on the
same date with the clerk of this court in payment of the mortgage
indebtedness of said plaintiff to defendant herein, (2) to execute the
corresponding deed of release of mortgage, and (3) to pay damages in the
sum of P1,000.
The gist of defendant's answer dated the 19th of July, 1944, is that
plaintiffs have no cause of action for the reason that at the instance of
plaintiff Clara Tambunting de Legarda an agreement was had on May 26,
1944, whereunder defendant condoned the interests due and to become due
on the mortgage indebtedness till the termination of the war, in consideration
of the undertaking of said plaintiff (with the consent of her husband Vicente
L. Legarda, the other plaintiff) to pay her obligation to defendant upon such
termination of the war; and that the war then had not yet terminated.
This is an appeal from a judgment of the Court of First Instance of

Manila rendered on August 5, 1949, dismissing the complaint and ordering
plaintiff Clara Tambunting de Legarda to pay to the defendant the sum of
P70,000, with interest thereon at the rate of 3 1/2 per cent per annum, from
January 1, 1942, up to the date of full payment thereof, plus the sum of
P2,500 as costs of suit and attorney's fees, within 120 days from the date of
notice, and ordering the sale of the property mortgaged in accordance with
law in the event of failure of said plaintiff to pay the amount of the judgment
within the period above mentioned.
ISSUE:
Whether or not the obligation is still an alternative obligation between
and among the parties.
RULING:
The option to demand payment of the indebtedness has to be exercised
upon maturity of the obligation, which is February 17, 1943. On this date, the
only currency available is the Philippine currency, or the Japanese Military
notes, because all other currencies, including the English, were outlawed by a
proclamation issued by the Japanese Imperial Commander on January 3,
1942. This means that the right of election ceased to exist on that date
because it had become legally impossible. And this is so because in
alternative obligations there is no right to choose undertakings that are
impossible or illegal. In other words, the obligation on the part of the debtor
to pay the mortgage indebtedness has since then ceased to be alternative.
It appears, therefore, that the tender of payment made by the plaintiff

in Japanese Military notes was a valid tender because it was the only currency
permissible at the time, and the same was made in accordance with the
agreement because payment in Japanese Military notes during the occupation
is tantamount to payment in Philippine currency. But the consignation of the
sum of P75,920.83 in Japanese currency made by the plaintiffs with the clerk
of court does not have any legal effect because it was made in certified check,
and a check "does not meet the requirements of a legal tender.

185
ALTERNATIVE OBLIGATION: EFFECTIVITY OF CHOICE (Art. 12012, CC)
REYES VS. MARTINEZ

55 Phil 493
FACTS:
Estanislao Reyes filed an action before the Court of First Instance of
Laguna against the Martinez heirs upon four several causes of action in which
the plaintiff seeks to recover five parcels of land, containing proximately one
thousand coconut trees, and to obtain a declaration of ownership in his favor
as against the defendants with respect to said parcels; to recover from the
defendants the sum of P9,377.50, being the alleged proceeds of some coconut
trees; to recover from the defendants the sum of P43,000, as alleged value of
the proceeds of the lands involved in the receivership in the case of Martinez
vs. Grano, to which the plaintiff supposes himself to be entitled, but which
have gone, so he claims, to the benefit of the defendants in said receivership
and lastly, to recover the sum of the P10,000 from the defendants as damages
resulting from their improper meddling in the administration of the
receivership property.
The plaintiff has been laboring along for several years in an

unsuccessful legal battle with the defendants, springing from his claim to be
the owner of the property involved in the receivership. This cause of action is
founded upon the contract and the claim put forth by the plaintiff is to have
the five parcels adjudge to him in lieu of another parcel formerly supposed to
contain one thousand trees between him and certain of the Martinez heirs.
By this contract, Reyes was to be given the parcel described in clause 8, but
in a proviso to said clause, the parties contracting with Reyes agreed to
assure to him certain other land containing an equivalent number of trees in
case he should so elect. The litigation shows that the plaintiff elected to take
and hold the parcel described in clause 8, and his right thereto has all along
been recognized in the dispositions made by the court with respect to said
land. Thus, Reyes must be taken to have elected to take that particular parcel
and he is now estopped from asserting a contrary election to take the five
parcels of land described in his complaint.
However, the title of the parcel is in the heirs of Inocente Martinez and
it does not appear that they have transferred said title to Reyes.
ISSUE:
Whether or not Reyes is entitled to the damages against the party’s
signatory to the contract of March 5, 1921 for the value of the said property.
RULING:
Yes. The claim of the defendants to the interest of P8,000 from July 31,
1926 cannot be conceded as the judgment itself bears interest at the lawful
rate from the date the same was rendered. The Martinez heirs are ordered to
procure the sufficient deed conveying to appellant Estanislao Reyes the
parcels of land mentioned in paragraph 8 of the contract. The judgment
against Reyes in favor of the Martinez heirs is enjoined.

186
ALTERNATIVE VS. FACULTATIVE OBLIGATION
QUIZANA VS. REDUGERIO

94 PHIL. 922
FACTS:
This is an appeal to the Court from a decision rendered by the Court of
the First Instance of Marinduque, wherein the defendant Gaudencio
Redugerio was to pay the plaintiff Martina Quizana the sum of P550 with the
interest from the time of the filing of the complaint and from an order of the
same court denying a motion of the defendant for the reconsideration of the
judgment on the ground that they were deprived of their day in court.
There were actionable documents attached to the complaint signed by

the defendant-appellant spouses Redugerio and Pastrado on October 4, 1948
and containing the provision that Quizana is to be paid on January 1949 and
in case of failure, they will mortgage the coconut plantation in Sta. Cruz,
Marinduque. The defendants admitted that they offered the transfer of
possession but was eventually refused by the petitioner.
So eventually, the defendants appealed in the CFI which set the hearing
on August 16, 1951.
However, the counsel for defendants presented an “urgent motion for

continuance” for the date of hearing coincides with his appearance in two (2)
criminal cases previously set for trial before hearing on the aforesaid date.
The motion was not acted upon until the day of the trial.
The CFI denied the motion for continuance, and in the absence of
defendants, rendered its questioned decision.
ISSUE:
Whether or not the trial court was correct in ignoring the 2 nd part of the
written obligation and solely basing its decision on the last part of the 1 st part;
i.e., that payment should have been made on January 21, 1949.
RULING:
YES, the acceptance of plaintiff of the written obligation without
objection and protest and the fact that he kept and based his action therein,

187
are concrete and positive proof that he agreed and consented to all the terms,
including the paragraph on the constitution of the mortgage.
Article 1206 provides: When only one prestation has been agreed upon
but the obligation may render substitution, the obligation is facultative
obligation.
The defendant-appellant shall present a duly executed deed of

mortgage over the property in the written obligation, with a period of
payment to be agreed upon by the parties with the approval of the court.
JOINT OBLIGATIONS: HOW CREATED
ALIPIO VS. COURT OF APPEALS

341 SCRA 441
FACTS:
Respondent Romeo Jaring was the lessee of a 14.5 hectares fishpond in
Barilto, Bataan. The lease was for a period of five (5) years ending September
12, 1990. On June 19, he subleased the fishpond for the remaining period of
his lease to the spouses Placido and Purita Alipio and the spouses Bienvenido
and Remedons Manuel. The stipulated amount of the rent was P 485,600.00
payable in two (2) installments of P300,00.00 and P185,600 with second
installment falling due on June 30, 1989. Each of the four sublease parties
signed the contract.
The first installment was duly paid, but the second installment the sub
lessees only satisfied a portion thereof, leaving an unpaid of P50,600.00.
Despite due demand, the lessees failed to comply with their obligation so that
on October 13,1989 private respondent sued Alipio and Manuel spouses for
the collection of the said amount before the RTC, and in the alternative, he
prayed for the rescission of the sublease contract should the defendant failed
to pay the balance.
Petitioner Purita moved to dismiss the case on the ground that her
husband had passed away on December 1988. She based her action on Rule
3 Section 31 of 1964 Rules of Court.
ISSUE:
Whether or not a creditor can sue the surviving spouses for the
collection of debt which is owned by the conjugal partnership of gains, and
not in a proceeding for the settlement of the estate of the decedent.
RULING:
188
NO, creditor cannot sue the surviving spouse of a decedent in an
ordinary proceeding for the collection of the sum of money chargeable
against the conjugal partnership and that the proper remedy is for him to file
a claim in the settlement of the estate of the decedent.
Article 161(1) states that: All debts and obligation contracted by the
husband for the benefits of the conjugal partnership, and those contracted by
the wife, also for the same purpose, in the cases where she may legally bind
the partnership.
When petitioner’s husband died, their conjugal partnership was

automatically dissolved and debts chargeable against it are to be paid in the
settlement of estate proceeding in accordance with Rule 73 Section 2: When
marriage dissolved by death of the husband or wife, the community property
shall be inventoried, administered and liquidated, and the debts thereof paid
in the testate or intestate proceeding of the deceased spouse. If both spouses
have died, the conjugal partnership shall be liquidated in the testate or
intestate proceeding of either.
EFFECTS OF JOINT OBLIGATIONS
PH CREDIT CORPORATION, petitioner,

VS. COURT OF APPEALS and CARLOS M. FARRALES, respondents
2001 Nov 22
370 SCRA 441
FACTS:
I. CA-G.R. SP NO. 23324
PH Credit Corp., filed a case against Pacific Lloyd Corp., Carlos
Farrales, Thomas H. Van Sebille and Federico C. Lim, for sum of money.
After service of summons upon the defendants, they failed to file their answer
within the reglementary period, hence they were declared in default.
Judgment is rendered in favor of plaintiff PH Credit Corporation.
After the aforesaid decision has become final and executory, a Writ of
Execution was issued and consequently implemented by the assigned Deputy
Sheriff. Personal and real properties of defendant Carlos M. Farrales were
levied and sold at public auction wherein PH Credit Corp. was the highest
bidder. Motion for the issuance of a writ of possession was filed and the same
was granted. Petitioner claims that she, as a third-party claimant with the
court below, filed an ‘Urgent Motion for Reconsideration and/or to Suspend
189
the Order dated October 12, 1990’, but without acting there[on], respondent
Judge issued the writ of possession on October 26, 1990. She claims that the
actuations of respondent Judge was tainted with grave abuse of discretion.
Respondent Judge issued an order considering the assailed Order as well as
the writ of possession as ‘of no force and effect’ thus the issue here has
become moot and academic.
II. CA-G.R. SP NO. 25714

Petitioner claims that the respondent Judge’s Order dated January 31,
1991 was tainted with grave abuse of discretion based on the following
grounds:
“1. Respondent Judge refused to consider as “waived” private respondent’s

objection that his obligation in the January 31, 1984 decision was merely joint
and not solidary with the defendants therein. According to petitioner, private
respondent assailed the levy on execution twice in 1984 and once in 1985 but
not once did the latter even mention therein that his obligation was joint for
failure of the dispositive portion of the decision to indicate that it was
solidary. Thus, private respondent must be deemed to have waived that
objection, petitioner concludes.
“2. The redemption period after the auction sale of the properties had long
lapsed so much [so] that the purchaser therein became the absolute owner
thereof. Thus, respondent Judge allegedly abused his discretion in setting
aside the auction sale after the redemption period had expired.
“3. Respondent Judge erred in applying the presumption of a joint obligation

in the face of the conclusion of fact and law contained in the decision showing
that the obligation is solidary.”
The Court of Appeals affirmed the trial court’s ruling declaring null and
void (a) the auction sale of Respondent Ferrales’ real property and (b) the
Writ of Possession issued in consequence thereof. It held that, pursuant to
the January 31, 1984 Decision of the trial court, the liability of Farrales was
merely joint and not solidary. Consequently, there was no legal basis for
levying and selling Farrales’ real and personal properties in order to satisfy
the whole obligation.
ISSUE:
Whether or not the Court of Appeals erred when it disregarded the
body of the decision and concluded that the obligation was merely a joint
obligation due to the failure of the dispositive portion of the decision dated 31
January 1984 to state that the obligation was joint and solidary.
RULING:
No. A solidary obligation is one in which each of the debtors is liable
for the entire obligation, and each of the creditors is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors. On the
other hand, a joint obligation is one in which each debtors is liable only for a
proportionate part of the debt, and the creditor is entitled to demand only a
proportionate part of the credit from each debtor. The well-entrenched rule is
that solidary obligations cannot be inferred lightly. They must be positively
and clearly expressed. A liability is solidary “only when the obligation
expressly so states, when the law so provides or when the nature of the
obligation so requires.”
In the dispositive portion of the January 31, 1984 Decision of the trial
court, the word solidary neither appears nor can it be inferred therefrom.
The fallo merely stated that the following respondents were liable: Pacific
Lloyd Corporation, Thomas H. Van Sebille, Carlos M. Farrales and Federico C.
Lim. Under the circumstances, the liability is joint, as provided by the Civil
Code, which we quote:“ Art. 1208. If from the law, or the nature or the
190
wording of the obligations to which the preceding article refers[,] the
contrary does not appear, the credit or debt shall be presumed to be divided
into as many equal shares as there are creditors or debtors x x x.” Hence the
execution must conform with that which is ordained or decreed in the
dispositive portion of the decision.
Petitioner maintains that the Court of Appeals improperly and

incorrectly disregarded the body of the trial court’s Decision, which clearly
stated as follows: “To support the Promissory Note, a Continuing Suretyship
Agreement was executed by the defendants, Federico C. Lim, Carlos M.
Farrales and Thomas H. Van Sebille, in favor of the plaintiff corporation, to
the effect that if Pacific Lloyd Corporation cannot pay the amount loaned by
plaintiff to said corporation, then Federico C. Lim, Carlos M. Farrales and
Thomas H. Van Sebille will hold themselves jointly and severally together with
defendant Pacific Lloyd Corporation to answer for the payment of said
obligation.”
The only exception when the body of a decision prevails over the fallo is
when the inevitable conclusion from the former is that there was a glaring
error in the latter, in which case the body of the decision will prevail. In this
instance, there was no clear declaration in the body of the January 31, 1984
Decision to warrant a conclusion that there was an error in the fallo.
Nowhere in the former can we find a definite declaration of the trial court
that, indeed, respondent’s liability was solidary. If petitioner had doubted this
point, it should have filed a motion for reconsideration before the finality of
the Decision of the trial court.

191
SOLIDARY OBLIGATIONS: HOW CREATED
1. INDUSTRIAL MANAGEMENT VS. NLRC, 331 SCRA 640

2. METRO MANILA TRANSIT VS. CA, JUNE 21, 1993
INDUSTRIAL MANAGEMENT VS. NLRC

331 SCRA 640
FACTS:
In September 1984, private respondents Enrique Sulit, Socorro
Mahinay, Esmeralco Pegarido, Tita Bacusimo, Nierre, Virginia Bagus,
Nemenzo, Dariogo and Roberto filed a complaint with the DOLE, Regional
Arbitration Branch No.111 in Cebu City against Filipinas Carbon Mining
Corp, Genardo Sicaty, Gonzales, Dhin Gin, Lo Kuan Chin petitioner Industrial
Management Development Corporation for payment of separation pay and
unpaid wages.
Labor Arbiter judgment-ordering Filipinas, Gonzales, Lo Kuan Chin to

pay complainant Enrique Sulit total amount of P82,800.00.
On September 3, 1987 petitioner filed a motion to quash alias writ of

execution and set aside decision alleging among that the alias writ of
execution altered and charged the tenor of the decision by charging the
liability of therein respondent from joint to solidary by the insertion of the
words ‘and/or’ between Gonzales and Filipinas.
ISSUE:
Whether or not the petitioner’s liability pursuant to the decision of the
labor arbiter dated March 10, 1987 is solidary.
RULING:
NO, the liability pursuant to the decision of the labor arbiter dated
March 10, 1987 should be as it is hereby, considered joint and petitioner’s
payment which has been accepted considered as full satisfaction of its
liability, without the prejudice to the enforcement of the awards against the
other five respondents in the said case.
A solidary or joint and several obligations is one in which each debtor is

liable for the entire obligation and each creditor is entitled to demand the
obligation. In a joint obligation each obligor answers only a part of the whole
liability and to each obligation belong only a part of the correlative rights.
There is solidary liability only when the obligation expressly so states,

when the law so provides or when the nature of the obligation so required.
When it is not provided in a judgment that the defendant are liable to pay
jointly and severally a certain sum of money, none of them may be compelled
to satisfy in full said judgment.

192
SOLIDARY OBLIGATIONS: HOW CREATED
METRO MANILA TRANSIT CORPORATION, petitioner,

VS. THE COURT OF APPEALS and NENITA CUSTODIO, respondents.
Jun 21, 1993
G.R. No. 104408
FACTS:
Plaintiff-appellant Nenita Custodio boarded as a passenger of a public
utility jeepney, then driven by defendant Agudo Calebag and owned by his co-
defendant Victorino Lamayo, bound for her work at Dynetics Incorporated
located in Bicutan, Taguig, Metro Manila, where she then worked as a
machine operator. While the passenger jeepney was travelling at along DBP
Avenue, Bicutan, Taguig, Metro Manila another fast moving vehicle, a Metro
Manila Transit Corp. (MMTC) bus driven by defendant Godofredo C. Leonardo
bound for its terminal at Bicutan. As both vehicles approached the
intersection of DBP Avenue and Honeydew Road they failed to slow down and
slacken their speed; neither did they blow their horns to warn approaching
vehicles. As a consequence, a collision between them occurred. The collision
impact caused plaintiff-appellant Nenita Custodio to hit the front windshield
of the passenger jeepney and was thrown out therefrom, falling onto the
pavement unconscious with serious physical injuries. She was brought to the
Medical City Hospital where she regained consciousness only after 1 week.
Thereat, she was confined for 24 days, and as a consequence, she was unable
to work for three and one half months 3 1/2. Defendants denied all the
material allegations in the complaint and pointed an accusing finger at each
other as being the party at fault for the negligence in the failure to exercise
due diligence in the selection and supervision of their respective employees.
By order of the trial court, defendant Calebag was declared in default

for failure to file an answer. Trial ensued after no amicable settlements were
made. The trial court found both drivers of the colliding vehicles
concurrently negligent for non-observance of appropriate traffic rules and
regulations and for failure to take the usual precautions when approaching an
intersection. As joint tortfeasors, both drivers, as well as defendant Lamayo,
were held solidarily liable for damages sustained by plaintiff Custodio.
Defendant MMTC, on the bases of the evidence presented was, however,
absolved from liability for the accident on the ground that it was not only
careful and diligent in choosing and screening applicants for job openings but
was also strict and diligent in supervising its employees by seeing to it that its
employees were in proper uniforms, briefed in traffic rules and regulations
before the start of duty, and that it checked its employees to determine
whether or not they were positive for alcohol and followed other rules and
regulations and guidelines of the Bureau of Land Transportation and of the
company.
Plaintiff's motion to have that portion of the trial court's decision

absolving MMTC from liability reconsidered having been denied for lack of
merit, an appeal was filed by her with respondent appellate court. After
consideration of the appropriate pleadings on appeal and finding the appeal
meritorious, the Court of Appeals modified the trial court's decision by
193
holding MMTC solidarily liable with the other defendants for the damages
awarded by the trial court because of their concurrent negligence, hence, this
appeal.
ISSUE:
Whether or not the appellate court erred in holding that MMTC should
be solidary liable with the other defendants.
RULING:
No, the appellate court did not err in its decision. Whether or not the
diligence of a good father of a family has been observed by petitioner is a
matter of proof which under the circumstances in the case at bar has not
been clearly established. It is not felt by the Court that there is enough
evidence on record as would overturn the presumption of negligence, and for
failure to submit all evidence within its control, assuming the putative
existence thereof; petitioner MMTC must suffer the consequences of its own
inaction and indifference.
The mere formulation of various company policies on safety without

showing that they were being complied with is not sufficient to exempt
petitioner from liability arising from negligence of its employees. It is
incumbent upon petitioner to show that in recruiting and employing the
erring driver the recruitment procedures and company policies on efficiency
and safety were followed. As joint tortfeasors, all defendants, including
MMTC will be solidarily liable for damages awarded by the trial court.
Decision affirmed.
ACTIVE SOLIDARITY OR MUTUAL AGENCY: EFFECTS
1. INCIONG VS. CA, 257 SCRA 578

2. PHILIPPINE BLOOMING MILLS VS. CA, OCT. 15, 2003
BALDOMERO INCIONG, JR., petitioner,

VS. COURT OF APPEALS and
PHILIPPINE BANK OF COMMUNICATIONS, respondents
G.R. No. 96405
June 26, 1996
FACTS:
Petitioner, together with Gregorio Pantanosas Jr., and Rene Naybe, had
their obligations arouse from the signing of a promissory note amounting to
P50, 000 holding themselves jointly and severally liable to private respondent
Philippine Bank of Communications, Cagayan de Oro City branch. The
promissory note was due on May 5, 1983.
The promissors failed to fulfill their obligations despite demand by the

bank. As a consequence, an action to collect was filed with the court but was
dismissed due to failure to prosecute. Said dismissal was reconsidered by the
trial court and later ordered the sheriff to serve the summons. On January
27, 1987, the lower court dismissed the case against defendant Pantanosas as
prayed for by the private respondent herein. Meanwhile, only the summons
addressed to petitioner was served as the sheriff learned that defendant
Naybe had gone to Saudi Arabia.
Petitioner argued that said promissory note has vitiated his consent
through fraud and deceit which was later corroborated by Pantanosas for he
only signed for the amount of P5,000 on one of the copies of the promissory
note, and not the alleged amount, to buy chainsaw. He also claimed that
since the liabilities of Pantanosas and Naybe, his co-promissors, had
extinguished, his should also be extinguished, as provided for by Article 2080
194
of the Civil Code on guarantors. The Regional Trial Court and the Court of
Appeals rejected his petitions and so a petition for review on certiorari was
filed with the Supreme Court.
ISSUE:
Whether or not the petitioner is solidary co-maker of the promissory
note in issue and not merely a guarantor.
RULING:
The Supreme Court held that the petitioner signed the promissory note
as a solidary co-maker and not as a guarantor. A solidary or joint and several
obligation is one in which each debtor is liable for the entire obligation, and
each creditor is entitled to demand the whole obligation. On the other hand,
Article 2047 of the Civil Code states:
“By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do
so.”
If a person binds himself solidarily with the principal debtor, the

provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In
such a case the contract is called a suretyship. While a guarantor may bind
himself solidarily with the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus, Tolentino explains:
“A guarantor who binds himself in solidum with the principal debtor under
the provisions of the second paragraph does not become a solidary co-debtor
to all intents and purposes. There is a difference between a solidary co-
debtor and a fiador in solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal debtor has been
exhausted, retains all the other rights, actions and benefits which pertain to
him by reason of the fiansa; while a solidary co-debtor has no other rights
than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the
Civil Code.”
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint
and several obligations. Under Art. 1207 thereof, when there are two or more
debtors in one and the same obligation, the presumption is that the obligation
is joint so that each of the debtors is liable only for a proportionate
part of the debt. There is a solidary liability only when the obligation
expressly so states, when the law so provides or when the nature of the
obligation so requires.
Because the promissory note involved in this case expressly states that
the three signatories therein are jointly and severally liable, any one, some or
all of them may be proceeded against for the entire obligation. The choice is
left to the solidary creditor to determine against whom he will enforce
collection. Consequently, the dismissal of the case against Judge Pontanosas
may not be deemed as having discharged petitioner from liability as well. As
regards Naybe, suffice it to say that the court never acquired jurisdiction over
him. Petitioner, therefore, may only have recourse against his co-makers, as
provided by law.

195
ACTIVE SOLIDARITY OR MUTUAL AGENCY: EFFECTS
PHILIPPINE BLOOMING MILLS VS. COURT OF APPEALS

413 SCRA 445
OCTOBER 15, 2003
FACTS:
Alfredo Ching (Ching) was the Senior Vice President of Philippine
Blooming Mills, Inc. (PBM). In his personal capacity and not as a corporate
officer, Ching signed a Deed of Suretyship dated 21 July 1977 binding himself
solidarily liable together with the debtor PBM.
On March 24 and August 6 1980, Traders Royal Bank (TRB) granted

PBM letters of Credit on application of Ching in his capacity as Senior Vice
President of PBM. Ching later accomplished and delivered to TRB trust
receipts, which acknowledged receipt in trust for TRB of the merchandise
subject of the letters of credit. Under the trust receipts, PBM had the right to
196
sell the merchandise for cash with the obligation to turn over the entire
proceeds of the sale to TRB as payment of PBM’s indebtedness.
Ching further executed an Undertaking for each trust receipt, which

uniformly granted the TRB the right to take possession of the goods at any
time to protect the TRB’s interests.
On 27 April 1981, PBM obtained a P3, 500,000 trust loan from TRB.
Ching signed as co-maker in the notarized Promissory Note evidencing said
loan.
PBM defaulted in its payment of the two (2) trust receipts as well as the
trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of

payments with the Securities and Exchange Commission (SEC). The petition
sought to suspend payment of PBM’s obligations and prayed that the SEC
allow PBM to continue its normal business operations free from the
interference of its creditors. One of the listed creditors of PBM was TRB.
On 9 July 1982, the SEC placed all of PBM’s assets, liabilities, and
obligations under the rehabilitation receivership of Kalaw, Escaler and
Associates.
On 13 May 1983, ten months after the SEC placed PBM under
rehabilitation receivership, TRB filed with the trial court a complaint for
collection against PBM and Ching. TRB asked the trial court to order
defendants to pay solidarily the indebtedness of PBM.
On 25 May 1983, TRB moved to withdraw the complaint against PBM

on the ground that the SEC had already placed PBM under receivership. The
trial court thus dismissed the complaint against PBM.
On 23 July 1983, PBM and Ching also moved to dismiss the complaint
on the ground that the trial court had no jurisdiction over the subject matter
of the case. PBM and Ching invoked the assumption of jurisdiction by the
SEC over all of PBM’s assets and liabilities.
The trial court denied the motion to dismiss with respect to Ching and
affirmed its dismissal of the case with respect to PBM. The trial court
stressed that TRB was holding Ching liable under the Deed of Suretyship. As
Ching’s obligation was solidary, the trial court ruled that TRB could proceed
against Ching as surety upon default of the principal debtor PBM.
Upon the trial court’s denial of his Motion for Reconsideration, Ching
filed a Petition for Certiorari and Prohibition before the Court of Appeals. The
appellate court granted Ching’s petition and ordered the dismissal of the
case. The appellate court ruled that SEC assumed jurisdiction over Ching and
PBM to the exclusion of courts or tribunals of coordinate rank.
TRB assailed the Court of Appeal’s decision before the Supreme Court.
In Traders Royal Bank v. Court of Appeals, the highest tribunal upheld the
TRB and ruled that Ching was merely a nominal party in the SEC case.
Creditors may sue individual sureties of debtor corporations, like Ching, in a
separate proceeding before regular courts despite the pendency of a case
before the SEC involving the debtor corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety

and accommodation co-maker of PBM. He claimed that the SEC had already
issued a decision approving a revised rehabilitation plan for PBM’s creditors.
197
He further claimed that even as a surety, he has the right to the defenses
personal to PBM. Thus, his liability as surety would attach only if, after the
rehabilitation of payments scheduled under the rehabilitation plan, there
would remain a balance of PBM’s debt to TRB.
The trial court ruled that Ching is liable to TB under the Deed of
Suretyship. On appeal, the Court of Appeals affirmed the decision of the lower
court. The Court of Appeals denied Ching’s Motion for Reconsideration for
lack of merit.
ISSUES:
Whether or not Ching is liable for obligations PBM contracted after the
execution of the Deed of Suretyship.
Whether or not Ching’s liability is limited to the amount stated in

PBM’s rehabilitation plan.
RULING:
Ching is liable for credit obligations contracted by PBM against TRB
before and after the execution of the 21 July 1977 Deed of Suretyship. This is
evident from the tenor of the deed itself, referring to amounts PBM “may now
be indebted or may hereafter become indebted” to TRB. The law expressly
allows a suretyship for “future debts” as provided for in Article 2053 of the
Civil Code. Under the Civil Code, a guaranty may be given to secure even
future debts; the amount of which may not be known at the time the guaranty
is executed. A continuing guaranty is one which is not limited to a single
transaction, but which contemplates a future course of dealing, covering a
series of transactions, generally for an indefinite time or until revoked.
Anent the second issue, in granting the loan to PBM, TRB required
Ching’s surety precisely to insure full recovery of the loan in case PBM
becomes insolvent or fails to pay in full. Ching cannot invoke Article 1222 of
the Civil Code. Thus, Ching cannot use PBM’s failure to pay in full as
justification for his own reduced liability to TRB. TRB, as creditor, has the
right under the surety to proceed against Ching for the entire amount of
PBM’s loan. This is clear from Article 1216 of the Civil Code, which states
that: “the creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them
shall not be an obstacle to those which may subsequently be directed against
the others, so long as the debt has not been fully collected.”

198
EFFECTS OF PASSIVE SOLIDARITY/MUTUAL GUARANTY
1. DIMAYUGA VS. PCIB, AUG. 5, 1991

3. CERNA VS. CA, MAR. 30, 1993
CARLOS DIMAYUGA, petitioner, VS. PHILIPPINE COMMERCIAL &

INDUSTRIAL BANK and COURT OF APPEALS, respondents
Aug 5, 1999
G.R. No. 42542
FACTS:
Petitioner is the defendant-appellant in a case for collection of sum of
money against whom the decision was rendered by the trial court on May 28,
1974. Plaintiff, who is now the respondent in the instant petition, is a banking
institution and is the creditor of petitioner.
On February 6, 1962, petitioner borrowed from the plaintiff the sum of

P10,000.00 as evidenced by a promissory note executed and signed by Pedro
Tanjuatco and Carlos Dimayuga. The indebtedness was to be paid on May 7,
1962 with interest at the rate of 10% per annum in case of non-payment at
maturity as evidenced by and in accordance with the terms and conditions of
the promissory note executed jointly and severally by defendants. Carlos
Dimayuga bound himself to pay jointly and severally with Pedro Tanjuatco
interest at the rate of 10% per annum on the said amount of P10,000.00 until
fully paid. Moreover, both undertook to "jointly and severally authorize the
respondent Philippine Commercial and Industrial Bank, at its option to apply
to the payment of this note any and all funds, securities or other real or
personal property of value which hands (sic) on deposit or otherwise
belonging to anyone or all of us."
Upon the default of the promissors to pay, bank filed a complaint for
the collection of a sum of money. Defendant Carlos Dimayuga, now petitioner,
however, had remitted to the respondent the P4,000.00 by way of partial
payments made from August 1, 1969 to May 7, 1970 as evidenced by
corresponding receipts thereto. These payments were nevertheless applied
to past interests, charges and partly on the principal.
The trial court held the defendants jointly and severally liable to pay
the plaintiff the sum of P9,139.60 with interest at 10% per annum until fully
paid plus P913.96 as attorneys' fees and costs against defendants. Petitioner
then filed a motion alleging that since Pedro Tanjuatco died on December 23,
1973, the money claim of the respondents should be dismissed and
prosecuted against the estate of the late Pedro Tanjuatco as provided in Sec.
5, Rule 86, New Rules of Court. The trial court denied the motion for lack of
merit. On appeal, the Court of Appeals dismissed the appeal for failure of the
Record on Appeal to show on its face that the appeal was timely perfected.
ISSUE:
Whether or not the money claim of PCIB should be dismissed and
prosecuted against the estate of the late Tanjuatco.
RULING:
From the evidence presented, there can be no dispute that Carlos
Dimayuga bound himself jointly and severally with Pedro C. Tanjuatco, now
deceased, to pay the obligation with PCIB in the amount of P10,000.00 plus
199
10% interest per annum. In addition, as above stated, in case of non-
payment, they undertook among others to jointly and severally authorize
respondent bank, at its option to apply to the payment of this note, any and all
funds, securities, real or personal properties, etc. belonging to anyone or all
of them. Otherwise stated, the promissory note in question provides in
unmistakable language that the obligation of petitioner Dimayuga is joint and
several with Pedro C. Tanjuatco.
It is well settled under the law and jurisprudence that when the
obligation is solidary, the creditor may bring his action in toto against the
debtors obligated in solidum. As expressly allowed by Article 1216 of the
Civil Code, the creditor may proceed against any one of the solidary debtors
or some or all of them simultaneously. "Hence, there is nothing improper in
the creditor's filing of an action against the surviving solidary debtors alone,
instead of instituting a proceeding for the settlement of the estate of the
deceased debtor wherein his claim could be filed." The notice is undoubtedly
left to the solidary creditor to determine against whom he will enforce
collection.
Court of Appeals decision reversed and set aside. Trial court decision
affirmed.
EFFECTS OF PASSIVE SOLIDARITY/MUTUAL GUARANTY
CERNA VS. COURT OF APPEALS

220 SCRA 517
MARCH 30, 1993
FACTS:
Celerino Delgado and Conrad Leviste entered into a loan agreement on
or about October 16, 1972, which was evidenced by a promissory note. On the
same date, Delgado executed a chattel mortgage over a jeep owned by him.
And acting as the attorney-in-fact of herein petitioner, Manolo P. Cerna
(petitioner), he also mortgaged a “Taunus” car owned by the latter.
The period lapsed without Delgado paying the loan. This prompted
Leviste to file a collection suit against Delgado and petitioner as solidary
debtors. Petitioner filed a motion to dismiss. The grounds cited in the Motion
were lack of cause of action and the death of Delgado. Anent the latter,
petitioner claimed that the claim should be filed in the proceedings for the
settlement of the estate of Delgado as the action did not survive Delgado’s
death. Moreover, he also stated that since Leviste already opted to collect on
the note, he could no longer foreclose the mortgage. The trial court denied
the motion to dismiss.
The petitioner then filed a special civil action for certiorari, mandamus,
and prohibition with preliminary injunction on the ground that the respondent
judge committed grave abuse of discretion. However, the Court of Appeals
denied the petition because herein petitioner failed to prove the death of
Delgado and the consequent settlement of the latter’s estate.
On February 18, 1977, petitioner filed his second motion to dismiss.

The trial court again denied the said motion. Petitioner filed a motion to
reconsider the said order but this was denied. Then, petitioner filed another
petition for certiorari and prohibition with the Court of Appeals. The
respondent court dismissed the petition. The respondent court hold
petitioner and Delgado were solidary debtors.
ISSUE:
Whether or not petitioner is a co-debtor of Delgado; hence, liable to pay
the loan contracted by Delgado.

200
RULING:
NO, petitioner is not a co-debtor of Delgado. Nowhere did it appear in
the promissory note that petitioner was a co-debtor. Article 1311 of the Civil
Code is clear that “contracts take effect only between the parties…”
Moreover, Article 1207 of the Civil Code states that “there is solidary liability
only when the obligation expressly so states, or when the law or nature of the
obligation so requires.” It was clear that petitioner had no part in the
contract. It was Delgado alone who signed the said agreement. Thus,
nowhere could it be seen from the agreement that petitioner was solidarily
bound with Delgado for the payment of the loan.
There is also no legal provision nor jurisprudence in our jurisdiction

which makes a third person who secures the fulfillment of another’s
obligation by mortgaging his own property solidarily bound with the principal
obligor. A chattel mortgage may be an “accessory contract” to a contract of
loan, but that fact alone does not make a third-party mortgagor solidarily
bound with the principal debtor in the fulfilling of the principal obligation that
is, to pay the loan. The signatory of the principal contract remains to be
primarily bound. It is only upon the default of the latter that the creditor may
have recourse on the mortgagors by foreclosing the mortgaged properties in
lieu of an action for recovery of the amount of the loan. And the liability of
the third-party mortgagors extends only to the property mortgaged. Should
there be any deficiency, the creditor has recourse on the principal debtor.
INDIVISIBLE OBLIGATIONS: KINDS OF INDIVISIBILITY: NATURAL, LEGAL

OR CONVENTIONAL
NATIVIDAD P. NAZARENO, MAXIMINO P. NAZARENO, JR.

VS. COURT OF APPEALS, ESTATE OF MAXIMINO A. NAZARENO, SR.,
ROMEO P. NAZARENO and ELIZA NAZARENO
G.R. No. 138842
October 18, 2000
343 SCRA 637
FACTS:
Maximino Nazareno, Sr. and Aurea Poblete were husband and wife.
Aurea died on April 15, 1970, while Maximino, Sr. died on December 18,
1980. They had five children, namely, Natividad, Romeo, Jose, Pacifico, and
Maximino, Jr. Natividad and Maximino, Jr. are the petitioners in this case,
while the estate of Maximino, Sr., Romeo, and his wife Eliza Nazareno are the
respondents. During their marriage, Maximino Nazareno, Sr. and Aurea
Poblete acquired properties in Quezon City and in the Province of Cavite. It is
the ownership of some of these properties that is in question in this case.
After the death of Maximino, Sr., Romeo filed an intestate case in the CFI of
Cavite, Branch XV. Upon the reorganization of the courts in 1983, the case
was transferred to the RTC of Naic, Cavite. Romeo was appointed
administrator of his father’s estate. In the course of the intestate
proceedings, Romeo discovered that his parents had executed several deeds
of sale conveying a number of real properties in favor of his sister, Natividad.
One of the deeds involved six lots in Quezon City which were allegedly sold by
Maximino, Sr., with the consent of Aurea, to Natividad on January 29, 1970
for the total amount of P47,800.00.

201
Among the lots covered by the above Deed of Sale is Lot 3-B which is
registered under TCT No. 140946. This lot had been occupied by Romeo, his
wife Eliza, and by Maximino, Jr. since 1969. Unknown to Romeo, Natividad
sold Lot 3-B on July 31, 1982 to Maximino, Jr., for which reason the latter was
issued TCT No. 293701 by the Register of Deeds of Quezon City. When
Romeo found out about the sale to Maximino, Jr., he and his wife Eliza locked
Maximino, Jr. out of the house. On August 4, 1983, Maximino, Jr. brought an
action for recovery of possession and damages with prayer for writs of
preliminary injunction and mandatory injunction with the RTC of Quezon City.
On December 12, 1986, the trial court ruled in favor of Maximino, Jr. In CA-
G.R. CV No. 12932, the CA affirmed the decision of the trial court. On June
15, 1988, Romeo in turn filed, on behalf of the estate of Maximino, Sr., the
present case for annulment of sale with damages against Natividad and
Maximino, Jr. The case was filed in the RTC of Quezon City. Romeo sought
the declaration of nullity of the sale made on January 29, 1970 to Natividad
and that made on July 31, 1982 to Maximino, Jr. on the ground that both sales
were void for lack of consideration. On March 1, 1990, Natividad and
Maximino, Jr. filed a third-party complaint against the spouses Romeo and
Eliza. They alleged that Lot 3, which was included in the Deed of Absolute
Sale of January 29, 1970 to Natividad, had been surreptitiously appropriated
by Romeo by securing for himself a new title in his name. They alleged that
Lot 3 is being leased by the spouses Romeo and Eliza to third persons. They
therefore sought the annulment of the transfer to Romeo and the cancellation
of his title, the eviction of Romeo and his wife Eliza and all persons claiming
rights from Lot 3, and the payment of damages.
In the trial court, it rendered a decision declaring the nullity of the

Deed of Sale dated January 29, 1970 except as to lots 3, 3-b, 13 and 14 which
had passed on to third persons. On motion for reconsideration, the trial court
modified its decision. On appeal to the Court of Appelas, the decision of the
trial court was modified in the sense that the titles to Lot 3 (in the name of
Romeo Nazareno) and Lot 3-B ( in the name of Maximino Nazareno, Jr.), as
well as to Lots 10 and 11 were cancelled and ordered restored to the estate of
Maximino, Sr.
ISSUE:
Whether or not the the Deed of Absolute Sale on January 29, 1970 is an
indivisible contract founded on an indivisible obligation
RULING:
An obligation is indivisible when it cannot be validly performed in
parts, whatever may be the nature of the thing which is the object thereof.
The indivisibility refers to the prestation and not to the object thereof. In the
present case, the Deed of Sale of January 29, 1970 supposedly conveyed the
six lots to Natividad. The obligation is clearly indivisible because the
performance of the contract cannot be done in parts; otherwise the value of
what is transferred is diminished. Petitioners are therefore mistaken in
basing the indivisibility of a contract on the number of obligors. The decision
of the Court of Appeals is AFFIRMED.
KINDS OF PENALTIES:
1. ALONZO VS. SAN JUAN, 451 SCRA 45

2. DAVID VS. CA, 316 SCRA 710
AURELIO P. ALONZO and TERESITA A. SISON

VS. JAIME and PERLITA SAN JUAN
G. R. No. 137549
February 11, 2005
451 SCRA 45

202
FACTS:
Petitioners Alonzo and Sison alleged that they are the registered
owners of a parcel of land located at Lot 3, Block 11, M. Agoncillo St.,
Novaliches, Quezon City, evidenced by TCT No. 152153. At around June
1996, petitioners discovered that a portion on the left side of the parcel of
land was occupied by the respondents San Juan, without their knowledge or
consent. A demand letter was sent to the respondents requiring them to
vacate the said premises, but they refused to comply. Petitioners then filed a
complaint against the respondents. During the pendency of the case, the
parties agreed to enter into a Compromise Agreement which the trial court
approved in a judgment by compromise dated May 7, 1997. In the
Compromise Agreement, it was expressly stipulated that should any two of
the installments of the purchase price be not paid by the respondents, the
said agreement shall be considered null and void. Alleging that the
respondents failed to abide by the provisions of the Compromise Agreement
by their failure to pay the amounts due thereon, petitioners then filed an
Amended Motion for Execution. Petitioners alleged that the respondents
failed to pay the installments for July 31, 1997 and August 31, 1997 on their
due dates, thus the Compromise Agreement submitted by the parties became
null and void. With this, the trial court found no reason to direct the issuance
of the writ of execution and denied the petitioners’ Amended Motion for
Execution. Petitioners filed their motion for reconsideration to which the
respondents opposed. The trial court likewise denied the petitioners’ motion
for reconsideration.
ISSUE:
Whether or not the petitioners have a right to enforce the provision on
Compromise Agreement by asking for the issuance of a writ of execution
because of the failure of the respondents to pay.
RULING:
The Supreme Court held that the items 11 and 12 of the Compromise
Agreement provided, in clear terms, that in case of failure to pay on the part
of the respondents, they shall vacate and surrender possession of the land
that they are occupying and the petitioners shall be entitled to obtain
immediately from the trial court the corresponding writ of execution for the
ejectment of the respondents. This provision must be upheld, because the
Agreement supplanted the complaint itself. When the parties entered into a
Compromise Agreement, the original action for recovery of possession was
set aside and the action was changed to a monetary obligation. Once
approved judicially, the Compromise Agreement cannot and must not be
disturbed except for vices of consent or forgery. For failure of the respondents
to abide by the judicial compromise, petitioners are vested with the absolute
right under the law and the agreement to enforce it by asking for the issuance
of the writ of execution. Doctrinally, a Compromise Agreement is immediately
final and executory. Petitioners’ course of action, asking for the issuance of a
writ of execution was in accordance with the very stipulation in the
agreement that the lower court could not change. Hence, the petition is
granted.

203
KINDS OF PENALTIES:
JESUS T. DAVID, petitioner.

VS. THE COURT OF APPEALS HON. EDGARDO P. CRUZ, MELCHOR P.
PENA AND VALENTIN AFABLE, JR. respondents
G.R. NO. 115821
OCTOBER 13, 1999
FACTS:
The RTC of Manila, Branch 27, with Judge Ricardo Diaz, then presiding,
issued a writ of attachment over real properties covered by TCT Nos. 80718
and 10281 of private respondents. In his decision Judge Diaz ordered private
respondent Afable to pay petitioner until fully paid. Respondent Afable
appealed to the Court of Appeals and then to the Supreme Court. In both
instances, the decision of the lower court was affirmed. Entries of judgment
were made and the record of the case was remanded to Branch 27 presided at
that time by respondent Judge Cruz. Petitioners elevated said orders to the
Court of Appeals in a petition for certiorari, prohibition and mandamus.
However, respondent appellate court dismissed the petiton.
ISSUE:
Whether or not respondent appellate court erred in affirming the
respondent Judge’s order for the payment of simple interest only rather than
the compounded interest.
RULING:
Petitioner insists that in computing the interest due should be
computed at 6% on the principal sum pursuant to Article 2209 and then
interest on the legal interest should also be computed in accordance with the
language of article 2212 of the Civil Code. In view of this means Compound
interest.
In cases where no interest had been stipulated by the parties, no

accrued conventional interest could further earn interest upon judicial
demand.
The instant petition is denied. The decision of the Court of Appeals is

affirmed.

204
OBLIGATIONS WITH A PENAL CLAUSE: PENALTIES VS. INTEREST
TAN VS. COURT OF APPEALS

367 SCRA 571
GR NO. 116285
FACTS:
On May 14, 1978, petitioner Antonio Tan obtained two loans in the total
amount of four million pesos from respondent Cultural Center of the
Philippines (CCP), evidenced by 2 promissory notes with maturity dates on
May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but later he
had the loans restructured by respondent CCP. Petitioner accordingly
executed a promissory note on August 31, 1979 in the amount of
P3,411,421.32 payable in five (5) installments. Petitioner however, failed to
pay any of the supposed installments and again offered another mode of
paying restructured loan which respondent CCP refused to consent.
On May 30, 1984, respondent wrote petitioner demanding the full

payment, within ten (10) days, from receipt of the letter, of the latter’s
restructured loan which as of April 30, 1984 amounted to P6, 088,735. On
August 29, 1984, respondent CCP filed with the RTC of Manila a complaint for
a collection of a sum of money. Eventually, petitioner was ordered to pay said
amount, with 25% thereof as attorney’s fees and P500, 000.00 as exemplary
damages. On appeal, the Court of Appeals, reduced the attorney’s fees to 5%
of the principal amount to be collected from petitioner and deleted the
exemplary damages.
Still unsatisfied with the decision, petitioner seeks for the deletion of
the attorney’s fees and the reduction of the penalties.
ISSUE:
Whether or not interests and penalties may be both awarded.
RULING:
YES. Article 1226 of the New Civil Code provides that in obligations
with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of non-compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation. The penalty may be enforced only when it is demandable in
accordance with the provisions.
In the case at bar, the promissory note expressly provides for the
imposition of both interest and penalties in case of default on the part of the
petitioner in the payment of the subject restructured loan. Since the said
stipulation has the force of law between the parties and does not appear to be
inequitable or unjust, it must be respected.

205
ESCALATION CLAUSE VS. ACCELERATION CLAUSE
NEW SAMPAGUITA BUILDERS CONSTRUCTION, INC. (NSBCI) and

Spouses EDUARDO R. DEE and ARCELITA M. DEE
VS. PHILIPPINE NATIONAL BANK
2004 Jul 30
G.R. No. 148753
435 SCRA 565
FACTS:
On February 11, 1989, Board Resolution No. 05, Series of 1989 was
approved by Petitioner NSBCI authorizing the company to x x x apply for or
secure a commercial loan with the PNB in an aggregate amount of P8.0M,
under such terms agreed by the Bank and the NSBCI, using or mortgaging
the real estate properties registered in the name of its President and
Chairman of the Board Petitioner Eduardo R. Dee as collateral; and
authorizing petitioner-spouses to secure the loan and to sign any and all
documents which may be required by Respondent PNB, and that petitioner-
spouses shall act as sureties or co-obligors who shall be jointly and severally
liable with Petitioner NSBCI for the payment of any [and all] obligations.
On August 15, 1989, Resolution No. 77 was approved by granting the

request of Respondent PNB thru its Board NSBCI for an P8 Million loan
broken down into a revolving credit line of P7.7M and an unadvised line of
P0.3M for additional operating and working capital to mobilize its various
construction projects.
The loan of Petitioner NSBCI was secured by a first mortgage on the

following: a) three (3) parcels of residential land located at Mangaldan,
Pangasinan; b) six (6) parcels of residential land situated at San Fabian,
Pangasinan; and c) a residential lot and improvements thereon located at
Mangaldan. The loan was further secured by the joint and several signatures
of Petitioners Eduardo Dee and Arcelita Marquez Dee, who signed as
accommodation-mortgagors since all the collaterals were owned by them and
registered in their names. Moreover Petitioner NSBCI executed three
promissory notes. In addition, petitioner corporation also signed the Credit
Agreement dated August 31, 1989 relating to the ‘revolving credit line’ of
P7.7 Million x x x and the Credit Agreement dated September 5, 1989 to
support the ‘unadvised line’ of P300,000.00.
On August 31, 1989, petitioner-spouses executed a ‘Joint and Solidary

Agreement’ (JSA) in favor of Respondent PNB ‘unconditionally and
irrevocably binding themselves to be jointly and severally liable with the
borrower for the payment of all sums due and payable to the Bank under the
206
Credit Document. Later on, Petitioner NSBCI failed to comply with its
obligations under the promissory notes.
On June 18, 1991, Petitioner Eduardo R. Dee on behalf of Petitioner

NSBCI sent a letter to the Branch Manager of the PNB Dagupan Branch
requesting for a 90-day extension for the payment of interests and
restructuring of its loan for another term. Subsequently, NSBCI tendered
payment to Respondent PNB of three (3) checks aggregating P1,000,000.00.
In a meeting held on August 12, 1991, Respondent PNB’s

representative, Mr. Rolly Cruzabra, was informed by [Petitioner] Eduardo Dee
of his intention to remit to Respondent PNB post-dated checks covering
interests, penalties and part of the loan principals of his due account.
On August 22, 1991, Respondent bank’s Crispin Carcamo wrote

Petitioner Eduardo Dee, informing him that Petitioner NSBCI’s proposal was
acceptable, provided the total payment should be P4,128,968.29 that would
cover the amount of P1,019,231.33 as principal, P3,056,058.03 as interests
and penalties, and P53,678.93 for insurance[,] with the issuance of post-dated
checks to be dated not later than November 29, 1991.
On September 6, 1991, Petitioner Eduardo Dee wrote the PNB Branch

Manager reiterating his proposals for the settlement of Petitioner NSBCI’s
past due loan account amounting to P7,019,231.33. Petitioner Eduardo Dee
later tendered four (4) post-dated Interbank checks aggregating
P1,111,306.67 in favor of Respondent PNB
Upon presentment, however, x x x check nos. 03500087 and 03500088

dated September 29 and October 29, 1991 were dishonored by the drawee
bank and returned due to a ‘stop payment’ order from petitioners.
On November 12, 1991, PNB’s Mr. Carcamo wrote Petitioner Eduardo

Dee informing him that unless the dishonored checks were made good, said
PNB branch ‘shall recall its recommendation to the Head Office for the
restructuring of the loan account and refer the matter to its legal counsel for
legal action. Petitioners did not heed respondent’s warning and as a result,
the PNB Dagupan Branch sent demand letters to Petitioner NSBCI at its
office address at 1611 ERDC Building, E. Rodriguez Sr. Avenue, Quezon City,
asking it to settle its past due loan account.
Petitioners nevertheless failed to pay their loan obligations within the

time frame given them and as a result, Respondent PNB filed with the
Provincial Sheriff of Pangasinan at Lingayen a Petition for Sale
The sheriff foreclosed the real estate mortgage and sold at public
auction the mortgaged properties of petitioner-spouses, with Respondent PNB
being declared the highest bidder for the amount of P10,334,000.00.
Copies of the Sheriff’s Certificate of Sale were sent by registered mail

to petitioner corporation’s address petitioner-spouses’ address.
On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to

petitioners at their address informing them that the properties securing their
loan account had been sold at public auction, that the Sheriff’s Certificate of
Sale had been registered with the Registry of Deeds of Pangasinan and that a
period of one (1) year therefrom was granted to them within which to redeem
their properties.
Petitioners failed to redeem their properties within the one-year

redemption period and so Respondent PNB executed a Deed of Absolute Sale
consolidating title to the properties in its name.

207
Respondent PNB informed Petitioner NSBCI that the proceeds of the
sale conducted on February 26, 1992 were not sufficient to cover its total
claim amounting to P12,506,476.43 and thus demanded from the latter the
deficiency of P2,172,476.43 plus interest and other charges until the amount
was fully paid.
Petitioners refused to pay the above deficiency claim which compelled

Respondent PNB to institute the instant Complaint for the collection of its
deficiency claim.
ISSUE:
Whether or not the escalation clause is valid and whether or not it is
violative of the principle of mutuality of contracts.
RULING:
In each drawdown, the Promissory Notes specified the interest rate to
be charged: 19.5 percent in the first, and 21.5 percent in the second and
again in the third. However, a uniform clause therein permitted respondent
to increase the rate “within the limits allowed by law at any time depending
on whatever policy it may adopt in the future x x x,” without even giving prior
notice to petitioners. The Court holds that petitioners’ accessory duty to pay
interest did not give respondent unrestrained freedom to charge any rate
other than that which was agreed upon. No interest shall be due, unless
expressly stipulated in writing. It would be the zenith of farcicality to specify
and agree upon rates that could be subsequently upgraded at whim by only
one party to the agreement.
The “unilateral determination and imposition” of increased rates is

“violative of the principle of mutuality of contracts ordained in Article 1308 of
the Civil Code.” One-sided impositions do not have the force of law between
the parties, because such impositions are not based on the parties’ essential
equality.
Although escalation clauses are valid in maintaining fiscal stability and

retaining the value of money on long-term contracts, giving respondent an
unbridled right to adjust the interest independently and upwardly would
completely take away from petitioners the “right to assent to an important
modification in their agreement” and would also negate the element of
mutuality in their contracts. The clause cited earlier made the fulfillment of
the contracts “dependent exclusively upon the uncontrolled will” of
respondent and was therefore void. Besides, the pro forma promissory notes
have the character of a contract d’adhésion, “where the parties do not
bargain on equal footing, the weaker party’s the debtor’s participation being
reduced to the alternative ‘to take it or leave it.’”
REDUCTION OF CONVENTIONAL PENALTIES
1. REFORMINA VS. TOMOL, 139 SCRA 260, OCT. 11, 1985

2. IMPERIAL VS. JAUCIAN, 427 SCRA 517
3. PABUGAIS VS. SAHIJWANI, 423 SCRA 596
4. LO VS. CA, 411 SCRA 523, SEPT. 23, 2003
5. LIGUTAN VS. CA, FEB. 12, 2002
6. FIRST METRO INVESTMENT VS. ESTE DEL SOL, 369 SCRA 99
7. DOMEL TRADING VS. CA, 315 SCRA 13
REFORMINA VS. TOMOL

139 SCRA 260
208
OCTOBER 11, 1985
FACTS:
This is a Petition for Review on certiorari of the Resolution of the Hon.
respondent Judge Valeriano P. Tomol, Jr. of the then Court of First Instance of
Cebu-Branch XI, an action for Recovery of Damages for injury to Person and
Loss of Property. The petitioners prayed for the setting aside of the said
Resolution and for a declaration that the judgment in their favor should bear
legal interest at the rate of twelve (12%) percent per annum pursuant to
Central Bank Circular No. 416 dated July 29, 1974. The appellate court
affirmed the decision but made certain modifications. The said decision
having become final on October 24, 1980, the case was remanded to the
lower court for execution and this is where the controversy started. In the
computation of the "legal interest" decreed in the judgment sought to be
executed, petitioners claim that the "legal interest" should be at the rate of
twelve (12%) percent per annum, invoking in support of their aforesaid
submission, Central Bank of the Philippines Circular No. 416. Upon the other
hand, private respondents Shell and Michael, Incorporated insist that said
legal interest should be at the rate of six (6%) percent per annum only,
pursuant to and by authority of Article 2209 of the New Civil Code in relation
to Articles 2210 and 2211 thereof.
ISSUE:
Whether or not the petition is with merit.
RULING:
No. The petition is devoid of merit. Consequently, its dismissal is in
order. Central Bank Circular No. 416 which took effect on July 29, 1974 was
issued and promulgated by the Monetary Board pursuant to the authority
granted to the Central Bank by P.D. No. 116, which amended Act No. 2655,
otherwise known as the Usury Law.
Acting pursuant to this grant of authority, the Monetary Board

increased the rate of legal interest from that of six (6%) percent per annum
originally allowed under Section I of Act No. 2655 to twelve (12%) percent
per annum.
It will be noted that Act No. 2655 deals with interest on (1) loans; (2)
forbearances of any money, goods, or credits; and (3) rate allowed in
judgments.Hence, not all money judgments are included in the said act. The
judgments spoken of and referred to are Judgments in litigations involving
loans or forbearance of any 'money, goods or credits. Any other kind of
monetary judgment which has nothing to do with, nor involving loans or
forbearance of any money, goods or credits does not fall within the coverage
of the said law for it is not within the ambit of the authority granted to the
Central Bank. The Monetary Board may not tread on forbidden grounds. It
cannot rewrite other laws. That function is vested solely with the legislative
authority. It is axiomatic in legal hermeneutics that statutes should be
construed as a whole and not as a series of disconnected articles and phrases.
In the absence of a clear contrary intention, words and phrases in statutes
should not be interpreted in isolation from one another. A word or phrase in a
statute is always used in association with other words or phrases and its
meaning may thus be modified or restricted by the latter.
The instant petition is without merit, the same is DISMISSED with

costs against petitioners.
IMPERIAL VS. JAUCIAN

209
427 SCRA 517
2004 Apr 14
FACTS:
The present controversy arose from a case for collection of money, filed
by Alex A. Jaucian against Restituta Imperial, on October 26, 1989. The
complaint alleges, inter alia, that defendant obtained from plaintiff six (6)
separate loans for which the former executed in favor of the latter six (6)
separate promissory notes and issued several checks as guarantee for
payment. When the said loans became overdue and unpaid, especially when
the defendant’s checks were dishonored, plaintiff made repeated oral and
written demands for payment.
The loans were covered by six (6) separate promissory notes executed
by defendant. The face value of each promissory notes is bigger [than] the
amount released to defendant because said face value already included the
interest from date of note to date of maturity. Said promissory notes indicate
the interest of 16% per month, date of issue, due date, the corresponding
guarantee checks issued by defendant, penalties and attorney’s fees. The trial
court’s clear and detailed computation of petitioner’s outstanding obligation
to respondent was affirmed by the CA for being convincing and satisfactory.
However, the CA held that without judicial inquiry, it was improper for the
RTC to rule on the constitutionality of Section 1, Central Bank Circular No.
905, Series of 1982.
ISSUES:
Whether or not the penalties charged per month is in the guise of
hidden interest.
Whether or not the reduction of attorney’s fees by the RTC is

reasonable.
RULING:
Iniquitous and unconscionable stipulations on interest rates, penalties
and attorney’s fees are contrary to morals. Consequently, courts are granted
authority to reduce them equitably. If reasonably exercised, such authority
shall not be disturbed by appellate courts.
Article 1229 of the Civil Code states thus:

“The judge shall equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.”
In exercising this power to determine what is iniquitous and

unconscionable, courts must consider the circumstances of each case. What
may be iniquitous and unconscionable in one may be totally just and equitable
in another. In the present case, iniquitous and unconscionable was the
parties’ stipulated penalty charge of 5 percent per month or 60 percent per
annum, in addition to regular interests and attorney’s fees. Also, there was
partial performance by petitioner when she remitted P116,540 as partial
payment of her principal obligation of P320,000. Under the circumstances,
the trial court was justified in reducing the stipulated penalty charge to the
more equitable rate of 14 percent per annum.
The Promissory Note carried a stipulation for attorney’s fees of 25

percent of the principal amount and accrued interests. Strictly speaking, this
covenant on attorney’s fees is different from that mentioned in and regulated
by the Rules of Court. “Rather, the attorney’s fees here are in the nature of
liquidated damages and the stipulation therefor is aptly called a penal
clause.” So long as the stipulation does not contravene the law, morals, public
order or public policy, it is binding upon the obligor. It is the litigant, not the
210
counsel, who is the judgment creditor entitled to enforce the judgment by
execution.
Nevertheless, it appears that petitioner’s failure to comply fully with

her obligation was not motivated by ill will or malice. The twenty-nine partial
payments she made were a manifestation of her good faith. Again, Article
1229 of the Civil Code specifically empowers the judge to reduce the civil
penalty equitably, when the principal obligation has been partly or irregularly
complied with. Upon this premise, we hold that the RTC’s reduction of
attorney’s fees -- from 25 percent to 10 percent of the total amount due and
payable -- is reasonable.
ANTONIO LO, petitioner,

VS. THE HON. COURT OF APPEALS AND NATIONAL ONIONS
GROWERS COOPERATIVE MARKETING ASSOCIATION, INC.,
respondents
FACTS:
At the core of the present controversy are two parcels of land
measuring a total of 2,147 square meters, with an office building constructed
thereon. Petitioner acquired the subject parcels of land in an auction sale on
November 9, 1995 for P20,170,000 from the Land Bank of the Philippines
(Land Bank). Private respondent National Onion Growers Cooperative
Marketing Association, Inc., an agricultural cooperative, was the occupant of
the disputed parcels of land under a subsisting contract of lease with Land
Bank. The lease was valid until December 31, 1995. Upon the expiration of
the lease contract, petitioner demanded that private respondent vacate the
leased premises and surrender its possession to him. Private respondent
refused on the ground that it was, at the time, contesting petitioner’s
acquisition of the parcels of land in question in an action for annulment of
sale, redemption and damages.
Petitioner filed an action for ejectment before the MTC. He asked,

inter alia, for the imposition of the contractually stipulated penalty of P5,000
per day of delay in surrendering the possession of the property to him. On
September 3, 1996, the trial court decided the case in favor of petitioner. On
appeal to the RTC, the MTC decision was affirmed in toto. The CA rendered
its assailed decision affirming the decision of the trial court, with the
modification that the penalty imposed upon private respondent for the delay
in turning over the leased property to petitioner was reduced from P 5,000 to
P 1000 per day.
ISSUE:
Whether or not the Court of Appeals erred in reducing the penalty
awarded by the trial court, the same having been stipulated by the parties.
RULING:
No. Generally, courts are not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit as long as they
are not contrary to law, morals, good customs, public order or public policy.
Nevertheless, courts may equitably reduce a stipulated penalty in the
contract if it is iniquitous or unconscionable, or if the principal obligation has
been partly or irregularly complied with. This power of the courts is explicitly
sanctioned by Article 1229 of the Civil Code which provides:
Article 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if

211
there has been no performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.
The question of whether a penalty is reasonable or iniquitous is

addressed to the sound discretion of the court and depends on several
factors, including, but not limited to, the following: the type, extent and
purpose of the penalty, the nature of the obligation, the mode of breach and
its consequences, the supervening realities, the standing and relationship of
the parties.
In this case, the stipulated penalty was reduced by the appellate court
for being unconscionable and iniquitous. Petition denied; CA decision
affirmed.
LIGUTAN VS. COURT OF APPEALS

376 SCRA 561
FEBRUARY 12, 2002
FACTS:
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on May
11, 1981 a loan in the amount of P120,000.00 from respondent Security Bank
and Trust Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed with an interest of
15.189% per annum upon maturity and to pay a penalty of 5% every month on
the outstanding principal and interest in case of default. In addition,
petitioners agreed to pay 10% of the total amount due by way of attorney’s
fees if the matter were indorsed to a lawyer for collection or if a suit were
instituted to enforce payment. The obligation matured on September 8, 1981;
the bank, however, granted an extension but only until December 29, 1981.
When petitioners defaulted on their obligation, the bank filed on November 3,
1982 with the RTC a complaint for recovery of the due amount. On
September 5, 1988, the trial court ruled in favor of the bank. It ordered the
petitioners to pay, jointly and severally, the sum of P114,416.00 with interest
thereon at the rate of 15.189% per annum, 2% service charge and 5% per
month penalty charge, commencing on May 20, 1982 until fully paid.
The CA affirmed it but deleted the 2% service charge pursuant to

Central Bank Circular No. 783. Not fully satisfied with the decision, both
parties moved for reconsideration. Petitioners prayed for the reduction of the
5% penalty for being unconscionable. The bank asked that the payment of
interest and penalty be commenced not from the date of filing of complaint
but from the time of default as so stipulated in the contract of the parties. On
October 28, 1998, the CA resolved the two (2) motions granting the prayer of
the bank that the payment of interest and penalty be commenced on the date
when the obligation became due and on the other hand held that a penalty of
3% per month or 36% per annum would suffice.

212
The petitioner, before the Court, contended, among others that the
15.189% interest and the penalty of 3% per month or 36% per annum
imposed by private respondent bank on petitioner’s loan obligation are still
manifestly exorbitant, iniquitous and unconscionable. Respondent bank,
which did not take an appeal, would, however, have it that the penalty sought
to be deleted by petitioners was even insufficient to fully cover and
compensate for the cost of money brought about by the radical devaluation
and decrease in the purchasing power of the peso.
ISSUE:
Whether or not the penalty is reasonable and not iniquitous.
RULING:
NO, the penalty is not unreasonable. The Court held that the question
of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factors as, but not
necessarily confide to, the type, extent and purpose of the penalty, the nature
of the obligation, the mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, and the like, the
application of which, by and large, is addressed to the sound discretion of the
court. In Rizal Commercial Banking Corp. v. Court of Appeals, for example,
the Court has tempered the penalty charges after taking into account the
debtor’s pitiful situation and its offer to settle the entire obligation with the
creditor bank. The stipulated penalty might likewise be reduced when a
partial or irregular payment is made by the payment. The stipulated penalty
might even be deleted such as when there has been substantial performance
in good faith by the obligor, when the penalty clause itself suffers from fatal
infirmity, and when exceptional circumstances so exist as to warrant it. In the
case at bar, given the circumstances, not to mention the repeated acts of
breach by petitioners of their contractual obligation, this Court sees no
cogent ground to change the ruling of the appellate court.
FIRST METRO INVESTMENT petitioner,

VS. ESTE DEL SOL MOUNTAIN RESERVE, INC, respondent
369 SCRA 99
FACTS:
Petitioner FMIC granted respondent Este del Sol a loan of Seven
Million Three Hundred Eighty-Five Thousand Five Hundred Pesos
(P7,385,500.00) to finance the construction and development of the Este del
Sol Mountain Reserve, a sports/resort complex project. Under the terms of
the Loan Agreement, the proceeds of the loan were to be released on
staggered basis. Interest on the loan was pegged at sixteen (16%) percent
per annum based on the diminishing balance. The loan was payable in thirty-
six (36) equal and consecutive monthly amortizations to commence at the
beginning of the thirteenth month from the date of the first release in
accordance with the Schedule of Amortization. In case of default, an
acceleration clause was, among others, provided and the amount due was
made subject to a twenty (20%) percent one-time penalty on the amount due
and such amount shall bear interest at the highest rate permitted by law from
the date of default until full payment thereof plus liquidated damages at the
rate of two (2%) percent per month compounded quarterly on the unpaid
213
balance and accrued interests together with all the penalties, fees, expenses
or charges thereon until the unpaid balance is fully paid, plus attorney’s fees
equivalent to twenty-five (25%) percent of the sum sought to be recovered,
which in no case shall be less than Twenty Thousand Pesos (P20,000.00) if the
services of a lawyer were hired. In accordance with the terms of the Loan
Agreement, respondent Este del Sol executed several documents as security
for payment, among them, (a) a Real Estate Mortgage and (b) individual
Continuing Suretyship agreements by co-respondents Valentin S. Daez, Jr., et
al. Respondent Este del Sol also executed, as provided for by the Loan
Agreement, an Underwriting Agreement whereby petitioner FMIC shall
underwrite on a best-efforts basis the public offering of 120,000 common
shares of respondent Este del Sol’s capital stock for a one-time underwriting
fee of P200,000.00.
The Underwriting Agreement also provided that for supervising the

public offering of the shares, respondent Este del Sol shall pay petitioner
FMIC an annual supervision fee of 200,000.00 per annum for a period of four
consecutive years. The Underwriting Agreement also stipulated for the
payment by respondent Este del Sol to petitioner FMIC a consultancy fee of
P332,500.00 per annum for a period of four consecutive years. Simultaneous
with the execution of and in accordance with the terms of the Underwriting
Agreement, a Consultancy Agreement was also executed on January 31, 1978
whereby respondent Este del Sol engaged the services of petitioner FMIC for
a fee as consultant to render general consultancy services. Since respondent
Este del Sol failed to meet the schedule of repayment in accordance with a
revised Schedule of Amortization, it appeared to have incurred a total
obligation of P12,679,630.98 per the petitioner’s Statement of Account dated
June 23, 1980. Accordingly, petitioner FMIC caused the extrajudicial
foreclosure of the real estate mortgage on June 23, 1980. At the public
auction, petitioner FMIC was the highest bidder of the mortgaged properties
for P9,000,000.00. Failing to secure from the individual respondents, the
payment of the alleged deficiency balance, petitioner instituted the instant
collection suit to collect the alleged deficiency balance of P6,863,297.73 plus
interest thereon at 21% percent per annum from June 24, 1980 until fully
paid, and 25% percent thereof as and for attorney’s fees and costs.
The trial court rendered its decision in favor of petitioner FMIC. CA

reversed the challenged decision of the trial court.
ISSUE:
Whether or not the appellate court erred in reversing the decision of
the trial court as regards to the payment of penalties.
RULING:
No. First, Central Bank Circular No. 905 did not repeal nor in any way
amend the Usury Law but simply suspended the latter’s effectivity. Thus,
retroactive application of a Central Bank Circular cannot, and should not, be
presumed. Second, several facts and circumstances taken altogether show
that the Underwriting and Consultancy Agreements were simply cloaks or
devices to cover an illegal scheme employed by petitioner FMIC to conceal
and collect excessively usurious interest. The Underwriting and Consultancy
Agreements which were executed and delivered contemporaneously with the
Loan Agreement on January 31, 1978 were exacted by petitioner FMIC as
essential conditions for the grant of the loan. An apparently lawful loan is
usurious when it is intended that additional compensation for the loan be
disguised by an ostensibly unrelated contract providing for payment by
the borrower for the lender’s services which are of little value or which are
not in fact to be rendered, such as in the instant case. In this connection,
Article 1957 of the New Civil Code clearly provides that: “Art. 1957.
Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws against usury shall be void. The borrower may recover
214
in accordance with the laws on usury.” In usurious loans, the entire
obligation does not become void because of an agreement for usurious
interest; the unpaid principal debt still stands and remains valid but the
stipulation as to the usurious interest is void, consequently, the debt is to be
considered without stipulation as to the interest.
Thus, the Court agrees with the factual findings and conclusion of the
appellate court, wherein it held that the stipulated penalties, liquidated
damages and attorney’s fees, excessive, iniquitous and unconscionable.
Accordingly, the 20% penalty on the amount due and 10% of the proceeds of
the foreclosure sale as attorney’s fees would suffice to compensate the
appellee, especially so because there is no clear showing that the appellee
hired the services of counsel to effect the foreclosure; it engaged counsel only
when it was seeking the recovery of the alleged deficiency.
Attorney’s fees as provided in penal clauses are in the nature of

liquidated damages. So long as such stipulation does not contravene any law,
morals, or public order, it is binding upon the parties. Nonetheless, courts
are empowered to reduce the amount of attorney’s fees if the same is
“iniquitous or unconscionable.”[46] Articles 1229 and 2227 of the New Civil
Code provide that: Art. 1229. The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly complied with by
the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable. Art. 2227.
Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
In the case at bar, the amount of Three Million One Hundred Eighty-
Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos
(P3,188,630.75) for the stipulated attorney’s fees equivalent to twenty-five
(25%) percent of the alleged amount due, as of the date of the auction sale
on June 23, 1980, is manifestly exorbitant and unconscionable. Accordingly,
we agree with the appellate court that a reduction of the attorney’s fees to
ten (10%) percent is appropriate and reasonable under the facts and
circumstances of this case.

215
DOMEL TRADING CORPORATION, petitioner,

VS. HONORABLE COURT OF APPEALS and NDC-NACIDA RAW
MATERIALS, CORPORATION, respondents
September 22, 1999
G.R. No. 84813
FACTS:
On June 3, 1981, private respondent NDC-NACIDA Raw Materials
Corporation (NNRMC) ordered from petitioner Domel Trading Corporation
(DOMEL) 22,000 bundles of buri midribs at P16.00 per bundle to be delivered
within 30 working days from the date of the opening of a letter of credit. On
June 4, 1981, private respondent again ordered 300,000 pieces of rattan poles
at P9.65 per piece for a total price of P2,895,000.00, also to be delivered
within 60 days from the date of the opening of a letter of credit. The
specifications and provisions of both transactions, which served as their
agreement, were printed in two separate purchase orders.
In accordance with their agreement, NNRMC, on July 9, 1981, opened

a letter of credit with Philippine National Bank (PNB) in favor of DOMEL in
the amount of P1,997,000.00 to cover its order for 206,943 pieces of rattan
poles. On July 13, 1981, NNRMC opened another letter of credit in favor of
DOMEL in the amount of P1,236,000.00 to cover the price of 93,057 pieces of
rattan poles and 22,000 bundles of buri midribs.
In violation of their agreement, DOMEL failed to deliver the buri

midribs and rattan poles within the stipulated period. Thus, on September
23, 1981, DOMEL and NNRMC agreed to restructure the latter’s purchase
orders in a Memorandum of Agreement. Under the agreement, NNRMC
extended the expiry date of its two letters of credit to November 5, 1981. It
also reduced the quantity of the rattan poles from 300,000 to only 100,000
pieces while the quantity of buri midribs remained at 22,000 bundles.
Further, DOMEL undertook to deliver the goods on or before October 31,
1981. However, no deliveries were again made on the said date.
Consequently, demands were made by NNRMC on January 19, 1982 for the
payment of damages, which demands were ignored by DOMEL. Hence,
NNRMC filed a complaint for damages before the Regional Trial Court of
Pasig. After trial, judgment was rendered in favor of plaintiff and against
defendant.
Both DOMEL and NNRMC assail the above-quoted decision in separate

petitions which have been consolidated before this Court. Based on the
pleadings submitted by the parties, this Court has resolved to give due course
to the petition and decides the same. DOMEL submits it has not breached its
contractual obligation to NNRMC inasmuch as it was the fault of the latter for
not inspecting and examining the rattan poles as well as the buri midribs
already shipped by the suppliers and stored in the former’s warehouse. In
short, DOMEL claims that NNRMC must first inspect the ordered items
before delivery could be made.
ISSUE:
Whether or not the decision of the Court of Appeals in CA-G.R. CV No.
08952 which modified the decision of the lower court granting private
respondent’s prayer for damages, was correct.

216
RULING:
While the Supreme Court did not agree with the Court of Appeals that
the failure of NNRMC to conduct the inspection mitigated DOMEL’s liability
for liquidated damages, nevertheless, it agreed in the reduction of the amount
of liquidated damages to only P150,000.00. The amount of P2,000.00 as
penalty for every day of delay is excessive and unconscionable.
Article 1229 of the Civil Code states, thus:“The judge shall equitably
reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous
or unconscionable.”
Article 2227 of the Civil Code likewise states, thus: “Liquidated

damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.”
In determining whether a penalty clause is “iniquitous and

unconscionable,” a court may very well take into account the actual damages
sustained by a creditor who was compelled to sue the defaulting debtor,
which actual damages would include the interest and penalties the creditor
may have had to pay on its own from its funding source. In this case, NNRMC
was only able to prove that it incurred the amounts of P5,995.83 as opening
charges on the two Letters of Credit and an additional P1,911.85 as
amendment charges on the same Letters of Credit. Other than that, NNRMC
failed to prove it had suffered actual damages resulting from the nondelivery
of the specified buri midribs and rattan poles. In fact, what it allegedly
suffered are what it calls “Foregone Interest Income” and “Foregone Profit”
from the two Letters of Credit. Such could not be considered as actual
damages.
The Court agreed with the following observation of the Court of

Appeals:
“Necessarily, We discern some merit in the second assignment of error.

The trial court erred in holding the appellant liable for P908,966.72 in
damages. The said unitemized amounts and various types of damages is too
much and has to be reduced within reasonable limits. As already elaborated
upon in connection with the first assignment of error, the amount of
liquidated damages has to be lessened to P150,000.00. But the charges of
P5,995.83 and P1,911.85 on the two letters of credit involved should be
reimbursed by appellant. As regards the alleged forgone profits of
P206,943.00 testified on by Jose Victorioso as the profit appellee could have
realized had appellant been able to supply the goods in question, we consider
such amount of expected profit highly conjectural and speculative. The
aforesaid testimony regarding the matter of profits is utterly lacking of the
requisite details on how such huge amount of profits could be made possible.
Plaintiff-appellee’s witness did not detail out how such huge amount of gain
could have been derived from the would-be exportation of buri midribs and
rattan poles. Well-entrenched is the doctrine that actual, compensatory and
consequential damages must be proved, and cannot be presumed. If, as in
this case, the proof adduced thereon is flimsy and insufficient, no damages
will be allowed. Verily, the testimonial evidence on alleged unrealized profits
earlier referred to is not enough to warrant the award of damages appealed
from. It is too scanty, vague and unspecified to induce faith and reliance.
Absent the needed quantum of proof, We are of the sense that, apart from the
aforestated amount of liquidated damages and reimbursement of the charges

217
paid by appellee for the unutilized letters of credit, no other damages can be
granted.”
MEANING OF PAYMENT / PERFORMANCE (ART. 1232-1261, CC)
SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC.,

respondent
2003 Oct 8
G.R. No. 149420
413 SCRA 182
FACTS:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation
engaged in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing
business under the name and style San’s Enterprises, is a building contractor.
On February 22, 1990, petitioner ordered scaffolding equipments from
respondent worth P540,425.80. He paid a downpayment in the amount of
P150,000.00. The balance was made payable in ten monthly installments.
Respondent delivered the scaffoldings to petitioner. Petitioner was

able to pay the first two monthly installments. His business, however,
encountered financial difficulties and he was unable to settle his obligation to
respondent despite oral and written demands made against him.
On October 11, 1990, petitioner and respondent executed a Deed of

Assignment, whereby petitioner assigned to respondent his receivables in the
amount of P335,462.14 from Jomero Realty Corporation.
218
However, when respondent tried to collect the said credit from Jomero
Realty Corporation, the latter refused to honor the Deed of Assignment
because it claimed that petitioner was also indebted to it. On November 26,
1990, respondent sent a letter to petitioner demanding payment of his
obligation, but petitioner refused to pay claiming that his obligation had been
extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for

recovery of a sum of money against the petitioner before the Regional Trial
Court of Makati, Branch 147, which was docketed as Civil Case No. 91-074.
During the trial, petitioner argued that his obligation was extinguished
with the execution of the Deed of Assignment of credit. Respondent, for its
part, presented the testimony of its employee, Almeda Bañaga, who testified
that Jomero Realty refused to honor the assignment of credit because it
claimed that petitioner had an outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision dismissing the
complaint on the ground that the assignment of credit extinguished the
obligation.
Respondent appealed the decision to the Court of Appeals. On April

19, 2001, the appellate court rendered a decision reversing the appealed
Decision and enters judgment ordering defendant-appellee Sonny Lo to pay
the plaintiff-appellant KJS ECO-FORMWORK SYSTEM PHILIPPINES, INC.
Three Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100
(P335,462.14) with legal interest of 6% per annum from January 10, 1991
(filing of the Complaint) until fully paid and attorney’s fees equivalent to 10%
of the amount due and costs of the suit.
In finding that the Deed of Assignment did not extinguish the

obligation of the petitioner to the respondent, the Court of Appeals held that
(1) petitioner failed to comply with his warranty under the Deed; (2) the
object of the Deed did not exist at the time of the transaction, rendering it
void pursuant to Article 1409 of the Civil Code; and (3) petitioner violated the
terms of the Deed of Assignment when he failed to execute and do all acts and
deeds as shall be necessary to effectually enable the respondent to recover
the collectibles.
Petitioner filed a motion for reconsideration of the said decision, which

was denied by the Court of Appeals. Hence, this petition for review.
ISSUE:
Whether or not the Court Of Appeals erred in holding that the deed of
assignment did not extinguish petitioner’s obligation on the wrong notion that
petitioner failed to comply with his warranty thereunder.
RULING:
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner

of a credit, known as the assignor, by a legal cause, such as sale, dacion en
pago, exchange or donation, and without the consent of the debtor, transfers
his credit and accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the assignor could
enforce it against the debtor.
Corollary thereto, in dacion en pago, as a special mode of payment, the

debtor offers another thing to the creditor who accepts it as equivalent of
219
payment of an outstanding debt. In order that there be a valid dation in
payment, the following are the requisites: (1) There must be the performance
of the prestation in lieu of payment (animo solvendi) which may consist in the
delivery of a corporeal thing or a real right or a credit against the third
person; (2) There must be some difference between the prestation due and
that which is given in substitution (aliud pro alio); (3) There must be an
agreement between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that
due. The undertaking really partakes in one sense of the nature of sale, that
is, the creditor is really buying the thing or property of the debtor, payment
for which is to be charged against the debtor’s debt. As such, the vendor in
good faith shall be responsible, for the existence and legality of the credit at
the time of the sale but not for the solvency of the debtor, in specified
circumstances.
Hence, it may well be that the assignment of credit, which is in the

nature of a sale of personal property, produced the effects of a dation in
payment which may extinguish the obligation. However, as in any other
contract of sale, the vendor or assignor is bound by certain warranties. More
specifically, the first paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of
the credit at the time of the sale, unless it should have been sold as doubtful;
but not for the solvency of the debtor, unless it has been so expressly
stipulated or unless the insolvency was prior to the sale and of common
knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to

warrant the existence and legality of the credit at the time of the sale or
assignment. When Jomero claimed that it was no longer indebted to
petitioner since the latter also had an unpaid obligation to it, it essentially
meant that its obligation to petitioner has been extinguished by
compensation. In other words, respondent alleged the non-existence of the
credit and asserted its claim to petitioner’s warranty under the assignment.
Therefore, it behooved on petitioner to make good its warranty and paid the
obligation.
Furthermore, the Court found that petitioner breached his obligation

under the Deed of Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at
times hereafter, at the request of said ASSIGNEE, its successors or assigns, at
his cost and expense, execute and do all such further acts and deeds as shall
be reasonably necessary to effectually enable said ASSIGNEE to recover
whatever collectibles said ASSIGNOR has in accordance with the true intent
and meaning of these presents.
The decision of the Court of Appeals was affirmed with modification

that upon finality of the Decision, the rate of legal interest shall be 12% per
annum, inasmuch as the obligation shall thereafter become equivalent to a
forbearance of credit. The award of attorney’s fees is DELETED for lack of
evidentiary basis.

220
REQUISITES OF PAYMENT/PERFORMANCE
PHILIPPINE NATIONAL BANK, petitioner,

VS. COURT OF APPEALS and LORETO TAN, respondents
April 02, 1996
G.R. No. 108630
256 SCRA 44
FACTS:
Private respondent Loreto Tan is the owner of a parcel of land in
Bacolod City. Expropriation proceedings were instituted by the government
against private respondent Tan and other property owners before a trial court
in Negros Occidental. Tan filed a motion requesting issuance of an order for
the release to him of the expropriation price of P32,480.00.
The trial court required petitioner PNB-Bacolod Branch to release to

Tan the amount of P32,480.00 deposited with it by the government. Through
its Assistant Branch Manager Juan Tagamolila, PNB issued a manager's check
for P32,480.00 and delivered the same to one Sonia Gonzaga without Tan's
knowledge, consent or authority. Sonia Gonzaga deposited it in her account
with Far East Bank and Trust Co. (FEBTC) and later on withdrew the said
amount.
Private respondent Tan subsequently demanded payment in the amount

of P32,480.00 from petitioner, but the same was refused on the ground that
petitioner had already paid and delivered the amount to Sonia Gonzaga on the
strength of a Special Power of Attorney (SPA) allegedly executed in her favor
by Tan.
When he failed to recover the amount from PNB, private respondent

filed a motion with the court to require PNB to pay the same to him.
Petitioner filed an opposition contending that Sonia Gonzaga presented to it a
copy of the May 22, 1978 order and a special power of attorney by virtue of
which petitioner delivered the check to her. The petitioner was directed by
the court to produce the said special power of attorney thereat. However,
petitioner failed to do so.
The court decided that there was need for the matter to be ventilated
in a separate civil action and thus private respondent filed a complaint with
the Regional Trial Court in Bacolod City against petitioner and Juan
Tagamolila, PNB's Assistant Branch Manager, to recover the said amount. In
its defense, petitioner contended that private respondent had duly authorized
Sonia Gonzaga to act as his agent. Tagamolila, in his answer, stated that
Sonia Gonzaga presented a Special Power of Attorney to him but borrowed it
later with the promise to return it, claiming that she needed it to encash the
check.
The petitioner likewise filed a third-party complaint against the spouses

Nilo and Sonia Gonzaga praying that they be ordered to pay private
respondent the amount of P32,480.00. However, for failure of petitioner to
have the summons served on the Gonzagas despite opportunities given to it,
the third-party complaint was dismissed.
The trial court rendered judgment ordering petitioner and Tagamolila

to pay private respondent jointly and severally the amount of P32,480.00 with
legal interest, damages and attorney's fees. Both petitioner and Tagamolila
appealed the case to the Court of Appeals. However, the appellate court
dismissed Tagamolila's appeal for failure to pay the docket fee within the
221
reglementary period. The appellate court subsequently affirmed the trial
court’s decision.
ISSUE:
Whether or not payment was made to Loreto Tan.
RULING:
There is no question that no payment had ever been made to private
respondent as the check was never delivered to him. When the court ordered
petitioner to pay private respondent the amount of P32,480.00, it had the
obligation to deliver the same to him. Under Art. 1233 of the Civil Code, a
debt shall not be understood to have been paid unless the thing or service in
which the obligation consists has been completely delivered or rendered, as
the case may be.
The burden of proof of such payment lies with the debtor. In the
instant case, neither the SPA nor the check issued by petitioner was ever
presented in court. The testimonies of petitioner's own witnesses regarding
the check were conflicting. Tagamolila testified that the check was issued to
the order of "Sonia Gonzaga as attorney-in-fact of Loreto Tan," while Elvira

Tibon, assistant cashier of PNB, stated that the check was issued to the order
of "Loreto Tan."
Furthermore, contrary to petitioner's contention that all that is needed

to be proved is the existence of the SPA, it is also necessary for evidence to be
presented regarding the nature and extent of the alleged powers and
authority granted to Sonia Gonzaga; more specifically, to determine whether
the document indeed authorized her to receive payment intended for private
respondent.
Considering that the contents of the SPA are also in issue here, the best
evidence rule applies. Hence, only the original document, which has not been
presented at all, is the best evidence of the fact as to whether or not private
respondent indeed authorized Sonia Gonzaga to receive the check from
petitioner. In the absence of such document, petitioner's arguments regarding
due payment must fail.
Decision affirmed with the modification that the award by the trial
court of P5,000.00 as attorney's fees is reinstated.

222
OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION
1. PADILLA VS. PAREDES, 328 SCRA 434

2. CF SHARP VS. NORTHWEST AIRLINES, 381 SCRA 314
ALBERT R. PADILLA
VS. SPOUSES FLORESCO PAREDES and ADELINA PAREDES, and THE
HONORABLE COURT OF APPEALS
G.R. No. 124874
March 17, 2000
328 SCRA 434
FACTS:
On October 20, 1988, petitioner Albert R. Padilla and private
respondents Floresco and Adelina Paredes entered into a contract to sell
involving a parcel of land in San Juan, La Union. At that time, the land was
untitled although private respondents were paying taxes thereon. Under the
contract, petitioner undertook to secure title to the property in private
respondents' names. Of the P312,840.00 purchase price, petitioner was to
pay a downpayment of P50,000.00 upon signing of the contract, and the
balance was to be paid within ten days from the issuance of a court order
directing issuance of a decree of registration for the property.
On December 27, 1989, the court ordered the issuance of a decree of

land registration for the subject property. The property was titled in the
name of private respondent Adelina Paredes. Private respondents then
demanded payment of the balance of the purchase price.
Petitioner then made several payments to private respondents, some

even before the court issued an order for the issuance of a decree of
registration and they also offered to pay the land through a check. Still,
petitioner failed to pay the full purchase price even after the expiration of the
period set. In a letter dated February 14, 1990, private respondents, through
223
counsel, demanded payment of the remaining balance, with interest and
attorney's fees, within five days from receipt of the letter. Otherwise, private
respondents stated they would consider the contract rescinded.
On February 28, 1990, petitioner made a payment of P100,000.00 to

private respondents, still insufficient to cover the full purchase price. Shortly
thereafter, in a letter dated April 17, 1990 private respondents offered to sell
to petitioner one-half of the property for all the payments the latter had made,
instead of rescinding the contract. If petitioner did not agree with the
proposal, private respondents said they would take steps to enforce the
automatic rescission of the contract. Petitioner did not accept private
respondents' proposal. Instead, in a letter dated May 2, 1990, he offered to
pay the balance in full for the entire property, plus interest and attorney's
fees. Private respondents refused the offer.
On May 14, 1990, petitioner instituted an action for specific

performance against private respondents, alleging that he had already
substantially complied with his obligation under the contract to sell. He also
averred that he had already spent P190,000.00 in obtaining title to the
property, subdividing it, and improving its right-of-way.
The lower court decided in favor of the petitioners stating that the
breach committed was only casual and slight but the Court of Appeals
reversed the ruling and favored respondents’ rescission of the contract to sell.
ISSUE:
Whether or not the payment made by petitioner is one which is
contemplated on the contract.
RULING:
Petitioner’s offer to pay is clearly not the payment contemplated in the
contract. While he might have tendered payment through a check, this is not
considered payment until the check is encashed. Besides, a mere tender of
payment is not sufficient. Consignation is essential to extinguish petitioner's
obligation to pay the purchase price.
The Supreme Court also affirmed the decision of the Court of Appeals
where the respondents have the right to rescind the contract on the ground
that there is failure on the part of the petitioners to pay the balance within
ten days upon the conveyance of the Court of the Title of Land to
respondents. Thus, private respondents are under no obligation, and may not
be compelled, to convey title to petitioner and receive the full purchase price.
OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION
CF SHARP VS. NORTHWEST AIRLINES

381 SCRA 314
FACTS:
On May 9, 1974, respondent, through its Japan Branch, entered an
International Passenger Sales Agency Agreement with petitioner, authorizing
the latter to sell its air transport tickets. Petitioner, however, failed to remit
the proceeds of the ticket sales, for which reason the respondent filed a
collection suit against petitioner before the Tokyo District Court.

224
The said court ordered petitioner to pay respondent including damages
for the delay. Unable to execute the decision in Japan, respondent filed a case
to enforce said judgment with the regional trial court of Manila which
dismissed the case. This was affirmed by the Court of Appeals, and was
subsequently partly affirmed by the Supreme Court. CF Sharp was then
ordered to pay Northwest so that the RTC issued a writ of execution of
decision ruling that Sharp is to pay Northwest the sum of 83,158,195 yen at
the exchange rate prevailing on the date of the foreign judgment plus 6% per
annum until fully paid, 6% damages and 6% interest.
An appeal, the Court of Appeals reduced the interest and it ruled that
the basis of the conversion of petitioner’s liability in its peso equivalent
should be the prevailing rate at the time of payment and not the rate on the
date of the foreign judgment.
ISSUE:
Whether or not the basis for the payment of the amount due is the
value of the currency at the time of the establishment of the obligation.
RULING:
NO, the rule that the value of currency at the time of the establishment
of the obligation shall be the basis of payment finds application only when
there is an official pronouncement or declaration of the existence of an
extraordinary inflation or deflation. Hence, petitioners contention that Article
1250 of the Civil Code which provides that “in case of an extra ordinary
inflation or deflation of the currency stipulated should supervene, the value of
the currency at the time of establishment of the obligation shall be the basis
of payment, unless there is an agreement to the contrary” shall apply in this
case is untenable.
INTEGRITY OF PRESTATION / SUBSTANTIAL PAYMENT
SIMPLICIO PALANCA
VS. ULYSSIS GUIDES joined by her husband LORENZO GUIDES
G. R. No. 146365.
February 28, 2005
452 SCRA 461
FACTS:
On August 23, 1983, Simplicio Palanca executed a Contract to Sell a
parcel of land on installment with a certain Josefa Jopson for P11, 250.00.
Jopson paid the petitioner in the amount of P1, 650 as her down payment,
225
leaving a balance of P9, 600.00. Sometime in December 1983, Jopson
assigned and transferred all her rights and interests over the property in
question in favor of the respondent Ulyssis Guides.
In the deed of transfer, respondent undertook to assume the balance of

Jopson’s account and to pay the same in accordance with the terms and
conditions of the Contract to Sell. After reimbursing Jopson P1,650.00,
respondent acquired possession of the lot and paid petitioner the stipulated
amortizations which were in turn acknowledged by petitioner through
receipts issued in the name of respondent. Believing that she had fully paid
the purchase price of the lot, respondent verified the status of the lot with the
Register of Deeds, only to find out that title thereto was not in the name of
the petitioner as it was covered by Transfer Certificate of Title No. 105742
issued on 26 September 1978 in the name of a certain Carissa T. de Leon.
Respondent went to petitioner’s office to secure the title to the lot, but
petitioner informed her that she could not as she still had unpaid accounts.
Thereafter, respondent, through a lawyer, sent a letter to petitioner
demanding compliance with his obligation and the release of the title in her
name.
As petitioner did not heed her demands, respondent, joined by her

husband, filed a Complaint for specific performance with damages. Petitioner
sought the dismissal of the complaint on the ground of respondent’s alleged
failure to comply with the mandatory requirement of Presidential Decree
(P.D.) No. 1508 on barangay conciliation since the submitted certification
referred to a different defendant, Oscar Rivera who was the manager of
petitioner’s subdivision, and not petitioner himself.
Respondent alleged that she paid petitioner P14,880.00, which not only
fully settled her obligation to him, but in fact overpaid it by P3,620.00. In
addition, she claimed that petitioner charged her devaluation charges and
illegal interest. At the pre-trial in 1989, both parties admitted that Jopson
assigned her rights over the property in favor of respondent and respondent
paid petitioner the subsequent monthly amortizations on installments.
Petitioner likewise acknowledged the payments made by respondent as stated
in the statement of accounts initiated by its manager, Oscar Rivera. On
November 1996, the trial court rendered its decision ordering the petitioner
to execute in favor of the respondent a Deed of Sale. The petitioner appealed
to the Court of Appeals; however, it affirmed the decision of the lower court.
ISSUE:
Whether or not the petitioner has a right to claim for unpaid charges as
stipulated in the contract from the private respondent.
RULING:
The Supreme Court held that primarily preventing petitioner from

recovering the amounts claimed from respondent is the effective waiver of
these charges. Assuming that said charges are due, petitioner waived the
same when he accepted respondent’s payments without qualification, without
any specific demand for the individual charges he now seeks to recover. The
same goes true for the alleged forfeiture of the down payment made by
Jopson. From its own Statements of Accounts and Payments Made, petitioner
credited to respondent’s account the P1,650.00 down payment paid by Jopson
at the commencement of the contract. There is no indication that he
informed respondent of the alleged forfeiture, much more demanded the
payment again of the amount previously paid by Jopson. Art. 1235 of the Civil
Code which provides that “When the obligee accepts the performance,
knowing its incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with,” is in point.
Thus, when petitioner accepted respondent’s installment payments despite
the alleged charges incurred by the latter, and without any showing that he
226
protested the irregularity of such payment, nor demanded the payment of the
alleged charges, respondent’s liability, if any for said charges, is deemed fully
satisfied. The petition is denied.
WHO MAY DEMAND PAYMENT
1. BPI VS. CA, 232 SCRA 302

2. LAGON VS. HOOVEN COMALCO, 349 SCRA 363
BANK OF THE PHILIPPINE ISLANDS VS. COURT OF APPEALS

232 SCRA302
G.R. NO. 104612
MAY 10, 1994
FACTS:
Private respondents Eastern Plywood Corporation and Benigno Lim as
officer of the corporation, had an “AND/OR” joint account with Commercial
Bank and Trust Co (CBTC), the predecessor-in-interest of petitioner Bank of
the Philippine Islands. Lim withdraw funds from such account and used it to
open a joint checking account (an “AND” account) with Mariano Velasco.
When Velasco died in 1977, said joint checking account had P662,522.87. By
virtue of an Indemnity Undertaking executed by Lim and as President and
General Manager of Eastern withdrew one half of this amount and deposited
it to one of the accounts of Eastern with CBTC.
Eastern obtained a loan of P73,000.00 from CBTC which was not

secured. However, Eastern and CBTC executed a Holdout Agreement
providing that the loan was secured by the “Holdout of the C/A No. 2310-001-
42” referring to the joint checking account of Velasco and Lim.
Meanwhile, a judicial settlement of the estate of Velasco ordered the

withdrawal of the balance of the account of Velasco and Lim.
Asserting that the Holdout Agreement provides for the security of the
loan obtained by Eastern and that it is the duty of CBTC to debit the account
of respondents to set off the amount of P73,000 covered by the promissory
note, BPI filed the instant petition for recovery. Private respondents Eastern
and Lim, however, assert that the amount deposited in the joint account of
Velasco and Lim came from Eastern and therefore rightfully belong to Eastern
and/or Lim. Since the Holdout Agreement covers the loan of P73,000, then
petitioner can only hold that amount against the joint checking account and
must return the rest.
ISSUE:
Whether BPI can demand the payment of the loan despite the existence
of the Holdout Agreement and whether BPI is still liable to the private
respondents on the account subject of the withdrawal by the heirs of Velasco.
RULING:
Yes, for both issues. Regarding the first, the Holdout Agreement
conferred on CBTC the power, not the duty, to set off the loan from the
account subject of the Agreement. When BPI demanded payment of the loan
from Eastern, it exercised its right to collect payment based on the
promissory note, and disregarded its option under the Holdout Agreement.
Therefore, its demand was in the correct order.
Regarding the second issue, BPI was the debtor and Eastern was the
creditor with respect to the joint checking account. Therefore, BPI was
obliged to return the amount of the said account only to the creditor. When it
227
allowed the withdrawal of the balance of the account by the heirs of Velasco,
it made the payment to the wrong party. The law provides that payment
made by the debtor to the wrong party does not extinguish its obligation to
the creditor who is without fault or negligence. Therefore, BPI was still liable
to the true creditor, Eastern.
WHO MAY DEMAND PAYMENT, CREDITOR’S RIGHT OF PAYMENT (Art.

1240, CC)
JOSE V. LAGON, petitioner,

vs. HOOVEN COMALCO INDUSTRIES, INC., respondent
G.R. No. 135657
January 17, 2001
349 SCRA 363
FACTS:
Petitioner Jose V. Lagon is a businessman and owner of a commercial
building in Tacurong, Sultan Kudarat. Respondent HOOVEN on the other is a
domestic corporation known to be the biggest manufacturer and installer of
aluminum materials in the country with branch office at E. Quirino Avenue,
Davao City.
Sometime in April 1981 Lagon and HOOVEN entered into two (2)
contracts, both denominated Proposal, whereby for a total consideration of
P104, 870.00 HOOVEN agreed to sell and install various aluminum materials
in Lagon’s commercial building in Tacurong, Sultan Kudarat. Upon execution
of the contracts, Lagon paid HOOVEN P48,000.00 in advance.
Lagon, in his answer, denied liability and averred that HOOVEN was
the party guilty of breach of contract by failing to deliver and install some of
the materials specified in the proposals; that as a consequence he was
compelled to procure the undelivered materials from other sources; that as
regards the materials duly delivered and installed by HOOVEN, they were
fully paid. He counterclaimed for actual, moral, exemplary, temperate and
nominal damages, as well as for attorney’s fees and expenses of litigation.
ISSUE:
Whether or not all the materials specified in the contracts had been
delivered and installed by respondent in petitioner’s commercial building in
Tacurong, Sultan Kudarat.
RULING:
Firstly, the quantity of materials and the amounts sated in the delivery
receipts do not tally with those in the invoices covering them,
notwithstanding that, according to HOOVEN OIC Alberto Villanueva, the
invoices were based merely on the delivery receipts.
Secondly, the total value of the materials as reflected in all the invoices
is P117, 329.00 while under the delivery receipts it is only P112, 870.50, or a
difference of P4,458.00
Even more strange is the fact that HOOVEN instituted the present
action for collection of sum of money against Lagon only on 24 February
228
1987, or more than five (5) years after the supposed completion of the
project. Indeed, it is contrary to common experience that a creditor would
take its own sweet time in collecting its credit, more so in this case when the
amount involved is not miniscule but substantial.
All the delivery receipts did not appear to have been signed by
petitioner or his duly authorized representative acknowledging receipt of the
materials listed therein. A closer examination of the receipts clearly showed
that the deliveries were made to a certain Jose Rubin, claimed to be
petitioner’s driver, Armando Lagon, and a certain bookkeeper. Unfortunately
for HOOVEN, the identities of these persons were never been established, and
there is no way of determining now whether they were indeed authorized
representatives of petitioner.
WHEREFORE, the assailed Decision of the Court of Appeals dated 28

April 1997 is MODIFIED. Petitioner Jose V. Lagon is ordered to pay
respondent Hooven Comalco Industries, Inc., P6, 377.66 representing the
value of the unpaid materials admittedly delivered to him. On the other hand,
respondent is ordered to pay petitioner P50,000.00 as moral damages,
P30,000.00 as attorney’s fees and P46,554.50 as actual damages and
litigation expenses.
PAYMENT – WHO MUST PAY: DEBTOR
AUDION ELECTRIC CO., INC.,

VS. NATIONAL LABOR RELATIONS COMMISSION and NICOLAS
MADOLID
1999 Jun 17
G.R. No. 106648
FACTS:
From the position paper and affidavit corroborated by oral testimony, it
appears that complainant was employed by respondent Audion Electric
Company on June 30, 1976 as fabricator and continuously rendered service
assigned in different offices or projects as helper electrician, stockman and
timekeeper. He has rendered thirteen (13) years of continuous, loyal and
dedicated service with a clean record. On August 3, complainant was
surprised to receive a letter informing him that he will be considered
terminated after the turnover of materials, including respondents’ tools and
equipments not later than August 15, 1989.
Complainant claims that he was dismissed without justifiable cause and

due process and that his dismissal was done in bad faith which renders the
dismissal illegal. For this reason, he claims that he is entitled to
reinstatement with full backwages. He also claims that he is entitled to moral
and exemplary damages. He includes payment of his overtime pay, project
allowance, minimum wage increase adjustment, proportionate 13th month
pay and attorney’s fees.
ISSUES:
Whether or not the respondent NLRC committed grave abuse of
discretion amounting to lack or excess of jurisdiction when it ruled that
private respondent was a regular employee and not a project employee;

229
Whether or not petitioner was denied due process when all the money
claims of private respondent, i.e. overtime pay, project allowances, salary
differential, proportionate 13th month pay, moral and exemplary damages as
well as attorney’s fees, were granted.
RULING:
Respondent’s assigning complainant to its various projects did not
make complainant a project worker. As found by the Labor Arbiter, ‘it
appears that complainant was employed by respondent as fabricator and or
projects as helper electrician, stockman and timekeeper.’ Simply put,
complainant was a regular non-project worker.
Private respondent’s employment status was established by the

Certification of Employment dated April 10, 1989 issued by petitioner which
certified that private respondent is a bonafide employee of the petitioner from
June 30, 1976 up to the time the certification was issued on April 10, 1989.
The same certificate of employment showed that private respondent’s
exposure to their field of operation was as fabricator, helper/electrician,
stockman/timekeeper. This proves that private respondent was regularly and
continuously employed by petitioner in various job assignments from 1976 to
1989, for a total of 13 years. The alleged gap in employment service cited by
petitioner does not defeat private respondent’s regular status as he was
rehired for many more projects without interruption and performed functions
which are vital, necessary and indispensable to the usual business of
petitioner.
Petitioner failed to present such employment contract for a specific

project signed by private respondent that would show that his employment
with the petitioner was for the duration of a particular project.
Moreover, notwithstanding petitioner’s claim in its reply that in taking

interest in the welfare of its workers, petitioner would strive to provide them
with more continuous work by successively employing its workers, in this
case, private respondent, petitioner failed to present any report of
termination. Petitioner should have submitted or filed as many reports of
termination as there were construction projects actually finished, considering
that private respondent had been hired since 1976. The failure of petitioner
to submit reports of termination supports the claim of private respondent that
he was indeed a regular employee.
The Court finds no grave abuse of discretion committed by NLRC in

finding that private respondent was not a project employee.
Private respondent clearly specified in his affidavit the specific dates in

which he was not paid overtime pay, that is, from the period March 16, 1989
to April 3, 1989 amounting to P765.63, project allowance from April 16, 1989
to July 31, 1989 in the total amount of P255.00, wage adjustment for the
period from August 1, 1989 to August 14, 1989 in the amount of P256.50 and
the proportionate 13th month pay for the period covering January to May
1988, November-December 1988, and from January to August 1989. This
same affidavit was confirmed by private respondent in one of the scheduled
hearings where he moved that he be allowed to present his evidence ex-parte
for failure of petitioner or any of his representative to appear thereat. On the
other hand, petitioner submitted its unverified Comment to private
respondent’s complaint stating that he had already satisfied the unpaid wages
and 13th month pay claimed by private respondent, but this was not
considered by the Labor Arbiter for being unverified.

230
Petitioner failed to rebut the claims of private respondent. It failed to
show proof by means of payroll or other evidence to disprove the claim of
private respondent. Petitioner was given the opportunity to cross-examine
private respondent yet petitioner forfeited such chance when it did not attend
the hearing, and failed to rebut the claims of private respondent.
However, the award of moral and exemplary damages must be deleted

for being devoid of legal basis. Moral and exemplary damages are
recoverable only where the dismissal of an employee was attended by bad
faith or fraud, or constituted an act oppressive to labor, or was done in a
manner contrary to morals, good customs or public policy. The person
claiming moral damages must prove the existence of bad faith by clear and
convincing evidence for the law always presumes good faith. It is not enough
that one merely suffered sleepless nights, mental anguish, serious anxiety as
the result of the actuations of the other party. Invariably, such action must be
shown to have been willfully done in bad faith or with ill-motive, and bad faith
or ill motive under the law cannot be presumed but must be established with
clear and convincing evidence. Private respondent predicated his claim for
such damages on his own allegations of sleepless nights and mental anguish,
without establishing bad faith, fraud or ill motive as legal basis therefor.
Private respondent not being entitled to award of moral damages, an

award of exemplary damages is likewise baseless. Where the award of moral
and exemplary damages is eliminated, so must the award for attorney’s fees
be deleted. Private respondent has not shown that he is entitled thereto
pursuant to Art. 2208 of the Civil Code.
WHEREFORE, the challenged resolutions of the respondent NLRC are

hereby AFFIRMED with the MODIFICATION that the awards of moral and
exemplary damages and attorney’s fees are DELETED.
DACION EN PAGO / DATION IN PAYMENT
1. VDA. DE JAYME VS. CA, 390 SCRA 380

2. CALTEX VS. IAC, NOV. 13, 1992
VDA. DE JAYME VS. CA

390 SCRA 380

231
2002 Oct 4
FACTS:
On January 8, 1973, the spouses Graciano and Mamerta Jayme entered
into a Contract of Lease with George Neri, president of Airland Motors
Corporation (now Cebu Asiancars Inc.), covering one-half of Lot 2700 owned
and registered to the former. The lease was for twenty (20) years. The terms
and conditions of the lease contract stipulated that Cebu Asiancars Inc. may
use the leased premises as a collateral to secure payment of a loan which
Asiancars may obtain from any bank, provided that the proceeds of the loan
shall be used solely for the construction of a building which, upon the
termination of the lease or the voluntary surrender of the leased premises
before the expiration of the contract, shall automatically become the property
of the Jayme spouses (the lessors).
In October 1977, Asiancars obtained a loan of P6,000,000 from the

Metropolitan Bank and Trust Company. The entire Lot 2700 was offered as
one of several properties given as collateral for the loan. As mortgagors, the
spouses signed a Deed of Real Estate Mortgage dated November 21, 1977 in
favor of MBTC. It stated that the deed was to secure the payment of a loan
obtained by Asiancars from the bank. Meeting financial difficulties and
incurring an outstanding balance on the loan, Asiancars conveyed ownership
of the building on the leased premises to MBTC, by way of "dacion en pago."
The building was valued at P980,000 and the amount was applied as partial
payment for the loan. There still remained a balance of P2,942,449.66, which
Asiancars failed to pay. Eventually, MBTC extrajudicially foreclosed the
mortgage.
A public auction was held on February 4, 1981. MBTC was the highest
bidder for P1,067,344.35. A certificate of sale was issued and was registered
with the Register of Deeds on February 23, 1981. Meanwhile, Graciano
Jayme died, survived by his widow Mamerta and their children. As a result of
the foreclosure, Graciano’s heirs filed a civil complaint, in January of 1982, for
Annulment of Contract with Damages with Prayer for Issuance of Preliminary
Injunction, against respondent Asiancars, its officers and incorporators and
MBTC. Later, in 1999, Mamerta Jayme also passed away.
The trial court ruled that the REM is valid and binding upon the
Jaymes. The CA affirmed with modifications. Both the trial and appellate
courts found that no fraud attended the execution of the deed of mortgage.
The Motion for Reconsideration was denied.
ISSUE:
Whether or not the dacion en pago by Asiancars in favor of MBTC is
valid and binding despite the stipulation in the lease contract that ownership
of the building will vest on the Jaymes at the termination of the lease.
RULING:
YES. The alienation of the building by Asiancars in favor of MBTC for
the partial satisfaction of its indebtedness is valid.
The ownership of the building had been effectively in the name of the
lessee-mortgagor (Asiancars), though with the provision that said ownership
be transferred to the Jaymes upon termination of the lease or the voluntary
surrender of the premises. The lease was constituted on January 8, 1973 and
was to expire 20 years thereafter, or on January 8, 1993. The alienation via
dacion en pago was made by Asiancars to MBTC on December 18, 1980,
during the subsistence of the lease. At this point, the mortgagor, Asiancars,
could validly exercise rights of ownership, including the right to alienate it, as
it did to MBTC.

232
Dacion en pago is the delivery and transmission of ownership of a thing
by the debtor to the creditor as an accepted equivalent of the performance of
the obligation. It is a special mode of payment where the debtor offers
another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature
of sale, that is the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against
the debtor’s debt. As such, the essential elements of a contract of sale,

namely, consent, object certain, and cause or consideration must be present.
In its modern concept, what actually takes place in dacion en pago is an
objective novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the object of
the contract of sale, while the debt is considered as the purchase price. In
any case, common consent is an essential prerequisite, be it sale or novation,
to have the effect of totally extinguishing the debt or obligation. Private
respondent MBTC is ordered to pay petitioners rentals in the total amount of
P602,083.33, with six (6) percent interest per annum until fully paid.
SPECIAL FORMS OF PAYMENT: DATION EN PAGO/ DATION IN PAYMENT
CALTEX (PHILIPPINES), INC., petitioner, VS. The INTERMEDIATE

APPELLATE COURT and ASIA PACIFIC AIRWAYS, INC., respondents
November 13, 1992
G.R. No. 72703
FACTS:
On January 12, 1978, private respondent Asia Pacific Airways Inc.
entered into an agreement with petitioner Caltex (Philippines) Inc., whereby
petitioner agreed to supply private respondent's aviation fuel requirements
for two (2) years, covering the period from January 1, 1978 until December
31, 1979. Pursuant thereto, petitioner supplied private respondent's fuel
supply requirements.
As of June 30, 1980, private respondent had an outstanding obligation

to petitioner in the total amount of P4,072,682.13, representing the unpaid
price of the fuel supplied. To settle this outstanding obligation, private
respondent executed a Deed of Assignment dated July 31, 1980, wherein it
assigned to petitioner its receivables or refunds of Special Fund Import
Payments from the National Treasury of the Philippines to be applied as
payment of the amount of P4,072,683.13 which private respondent owed to
petitioner. On February 12, 1981, pursuant to the Deed of Assignment,
Treasury Warrant No. B04708613 in the amount of P5,475,294.00
representing the refund to respondent of Special Fund Import Payment on its
fuel purchases was issued by the National Treasury in favor of petitioner.
Four days later, on February 16, 1981, private respondent, having learned
that the amount remitted to petitioner exceeded the amount covered by the
Deed of Assignment, wrote a letter to petitioner, requesting a refund of said
excess.
Petitioner, acting on said request, made a refund in the amount of

P900,000.00 plus in favor of private respondent. The latter, believing that it
was entitled to a larger amount by way of refund, wrote petitioner anew,
demanding the refund of the remaining amount. In response thereto,
petitioner informed private respondent that the amount not returned
(P510,550.63) represented interest and service charges at the rate of 18% per
annum on the unpaid and overdue account of respondent from June 1, 1980 to
July 31, 1981.

233
Thus, on September 13, 1982, private respondent filed a complaint
against petitioner in the Regional Trial Court of Manila, to collect the sum of
P510,550.63.00.
Petitioner (defendant in the trial court) filed its answer, reiterating that
the amount not returned represented interest and service charges on the
unpaid and overdue account at the rate of 18% per annum. It was further
alleged that the collection of said interest and service charges is sanctioned
by law, and is in accordance with the terms and conditions of the sale of
petroleum products to respondent, which was made with the conformity of
said private respondent who had accepted the validity of said interest and
service charges.
On November 7, 1983, the trial court rendered its decision dismissing

the complaint, as well as the counterclaim filed by defendant therein. Private
respondent (plaintiff) appealed to the Intermediate Appellate Court (IAC). On
August 27, 1985, a decision was rendered by the said appellate court
reversing the decision of the trial court, and ordering petitioner to return the
amount of P510,550.63 to private respondent.
ISSUE:
Whether or not there is a valid dation in payment in this case.
RULING:
The Supreme Court ruled that the Deed of Assignment executed by the
parties on July 31, 1980 is not a dation in payment and did not totally
extinguish respondent's obligations as stated therein.
The then Intermediate Appellate Court ruled that the three (3)
requisites of dacion en pago are all present in the instant case, and concluded
that the Deed of Assignment of July 31, 1980) constitutes a dacion in payment
provided for in Article 1245 of the Civil Code which has the effect of
extinguishing the obligation, thus supporting the claim of private respondent
for the return of the amount retained by petitioner.
The Supreme Court, speaking of the concept of dation in payment, in

the case of Lopez vs. Court of Appeals, among others, stated: "'The dation in
payment extinguishes the obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as may be proved, unless
the parties by agreement, express or implied, or by their silence, consider the
thing as equivalent to the obligation, in which case the obligation is totally
extinguished."
From the above, it is clear that a dation in payment does not

necessarily mean total extinguishment of the obligation. The obligation is
totally extinguished only when the parties, by agreement, express or implied,
or by their silence, consider the thing as equivalent to the obligation. In the
instant case, the then Intermediate Appellate Court failed to take into account
the express recitals of the Deed of Assignment.
"That Whereas, ASSIGNOR has an outstanding obligation with

ASSIGNEE in the amount of P4,072,682.13 as of June 30, 1980, plus any
applicable interest on overdue account. Now therefore in consideration of the
foregoing premises, ASSIGNOR by virtue of these presents, does hereby
irrevocably assign and transfer unto ASSIGNEE any and all funds and/or
Refund of Special Fund Payments, including all its rights and benefits
accruing out of the same, that ASSIGNOR might be entitled to, by virtue of
and pursuant to the decision in BOE Case No. 80-123, in payment of
ASSIGNOR's outstanding obligation plus any applicable interest charges on
overdue account and other avturbo fuel lifting and deliveries that ASSIGNOR

234
may from time to time receive from the ASSIGNEE, and ASSIGNEE does
hereby accepts such assignment in its favor."
Hence, it could easily be seen that the Deed of Assignment speaks of

three (3) obligations (1) the outstanding obligation of P4,072,682.13 as of
June 30, 1980; (2) the applicable interest charges on overdue accounts; and
(3) the other avturbo fuel lifting and deliveries that assignor (private
respondent) may from time to time receive from assignee (Petitioner). As
aptly argued by petitioner, if it were the intention of the parties to limit or fix
respondent's obligation to P4,072.682.13, they should have so stated and
there would have been no need for them to qualify the statement of said
amount with the clause "as of June 30, 1980 plus any applicable interest
charges on overdue account" and the clause "and other avturbo fuel lifting
and deliveries that ASSIGNOR may from time to time receive from the
ASSIGNEE".
The terms of the Deed of Assignment being clear, the literal meaning of
its stipulations should control. In the construction of an instrument where
there are several provisions or particulars, such a construction is, if possible,
to be adopted as will give effect to all.
Likewise, the then Intermediate Appellate Court failed to take into

consideration the subsequent acts of the parties which clearly show that they
did not intend the Deed of Assignment to totally extinguish the obligation: (1)
After the execution of the Deed of Assignment on July 31, 1980, petitioner
continued to charge respondent with interest on its overdue account up to
January 31, 1981. This was pursuant to the Deed of Assignment which
provides for respondent's obligation for "applicable interest charges on
overdue account". The charges for interest were made every month and not
once did respondent question or take exception to the interest; and (2) In its
letter of February 16, 1981, respondent addressed the following request to
petitioner:
"Moreover, we would also like to request for a consideration in the following:

1. Interest charges be limited up to December 31, 1980 only; and
2. Reduction of 2% on 18% interest rate p.a.
"We are hoping for your usual kind consideration on this matter."
In order to judge the intention of the contracting parties, their

contemporaneous and subsequent acts shall be principally considered (Art.
1253, Civil Code). The foregoing subsequent acts of the parties clearly show
that they did not intend the Deed of Assignment to have the effect of totally
extinguishing the obligations of private respondent without payment of the
applicable interest charges on the overdue account.
Finally, the payment of applicable interest charges on overdue account,

separate from the principal obligation of P4,072,682.13 was expressly
stipulated in the Deed of Assignment. The law provides that "if the debt
produces interest, payment of the principal shall not be deemed to have been
made until the interests have been covered." (Art. 1253, Civil Code).

235
PAYMENT BY CESSION OR ASSIGNMENT
1. LO VS. KJH, 413 SCRA 182 (SEE PAGE 179-180)

2. DBP VS. CA, JAN. 5, 1998
LYDIA P. CUBA, petitioner,

VS. COURT OF APPEALS, DEVELOPMENT BANK OF THE
PHILIPPINES and AGRIPINA P. CAPERAL, respondents
1998 Jan 5
G.R. Nos. 118342 & 118367
FACTS:
Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement from
the Government. She obtained loans from the DBP in the amounts of
P109,000.00; P109,000.00; and P98,700.00 under the terms stated in the
236
Promissory Notes dated September 6, 1974; August 11, 1975; and April 4,
1977. As security for said loans, She executed two Deeds of Assignment of
her Leasehold Rights. Plaintiff failed to pay her loan on the scheduled dates
thereof in accordance with the terms of the Promissory Notes. Without
foreclosure proceedings, whether judicial or extra-judicial, defendant DBP
appropriated the leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question. DBP executed a Deed of Conditional Sale of the Leasehold Rights in
favor of Cuba over the same fishpond in question. In the negotiation for
repurchase, Cuba addressed two letters to the Manager DBP, Dagupan City.
DBP thereafter accepted the offer to repurchase in a letter addressed to
plaintiff dated February 1, 1982. After the Deed of Conditional Sale was
executed in favor of Cuba, a new Fishpond Lease Agreement was issued by
the Ministry of Agriculture and Food in favor of Lydia Cuba.
Lydia Cuba failed to pay the amortizations stipulated in the Deed of

Conditional Sale. She entered with the DBP a temporary arrangement
whereby in consideration for the deferment of the Notarial Rescission of Deed
of Conditional Sale, she promised to make certain payments as stated in
temporary Arrangement. DBP thereafter sent a Notice of Rescission thru
Notarial Act and which was received by plaintiff. After the Notice of
Rescission, DBP took possession of the Leasehold Rights of the fishpond in
question. DBP advertised in the SUNDAY PUNCH the public bidding dated
June 24, 1984, to dispose of the property. DBP thereafter executed a Deed of
Conditional Sale in favor of defendant Agripina Caperal on August 6, 1984.
Caperal was awarded a Fishpond Lease Agreement by the Ministry of
Agriculture and Food.
The principal issue presented in trial was whether the act of DBP in
appropriating to itself CUBA's leasehold rights over the fishpond in question
without foreclosure proceedings was contrary to Article 2088 of the Civil
Code and, therefore, invalid. DBP stressed that it merely exercised its
contractual right under the Assignments of Leasehold Rights, which was not a
contract of mortgage. Defendant Caperal sided with DBP.
The trial court decided in favor of CUBA by declaring that DBP's taking
possession and ownership of the property without foreclosure was plainly
violative of Article 2088 of the Civil Code which provides as follows: “ART.
2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and
void.”
CUBA and DBP interposed separate appeals from the decision to the
Court of Appeals. The former sought an increase in the amount of damages,
while the latter questioned the findings of fact and law of the lower court.
The Court of Appeals declared as valid the following: the act of DBP in
appropriating Cuba's leasehold rights and interest under Fishpond Lease
Agreement. . . and the assignment of leasehold rights executed by Caperal in
favor of DBP. It then ordered DBP to turn over possession of the property to
Caperal as lawful holder of the leasehold rights and to pay CUBA damages.
ISSUES:
Whether or not the CA erred (1) in not holding that the questioned
deed of assignment was a pactum commissorium contrary to Article 2088 of
the Civil Code; (b) in holding that the deed of assignment effected a novation
of the promissory notes; (c) in holding that CUBA was estopped from
questioning the validity of the deed of assignment when she agreed to
repurchase her leasehold rights under a deed of conditional sale.
RULING:
The Court held that the assignment of leasehold rights was mortgage
contract. In their stipulation of facts the parties admitted that the assignment
237
was by way of security for the payment of the loans. In People's Bank & Trust
Co. vs. Odom, the Court had the occasion to rule that an assignment to
guarantee an obligation is in effect a mortgage.
The said assignment merely complemented or supplemented the notes;

both could stand together. The former was only an accessory to the latter.
Contrary to DBP's submission, the obligation to pay a sum of money
remained, and the assignment merely served as security for the loans covered
by the promissory notes. Significantly, both the deeds of assignment and the
promissory notes were executed on the same dates the loans were granted.
Neither did the assignment amount to payment by cession under Article 1255
of the Civil Code for the plain and simple reason that there was only one
creditor, the DBP. Article 1255 contemplates the existence of two or more
creditors and involves the assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article

1245 of the Civil Code, which reads: "Dation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in money, shall be governed
by the law on sales." The assignment, being in its essence a mortgage, was
but a security and not a satisfaction of indebtedness.
Condition no. 12 of the deed of assignment did not constitute pactum

commissorium. The elements of pactum commissorium are: (1) there should
be a property mortgaged by way of security for the payment of the principal
obligation, and (2) there should be a stipulation for automatic appropriation
by the creditor of the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period. Condition no. 12 did not provide that
the ownership over the leasehold rights would automatically pass to DBP
upon CUBA's failure to pay the loan on time. It merely provided for the
appointment of DBP as attorney-in-fact with authority, among other things, to
sell or otherwise dispose of the said real rights, in case of default by CUBA,
and to apply the proceeds to the payment of the loan. This provision is a
standard condition in mortgage contracts and is in conformity with Article
2087 of the Civil Code, which authorizes the mortgagee to foreclose the
mortgage and alienate the mortgaged property for the payment of the
principal obligation. DBP, however, exceeded the authority vested by
condition no. 12 of the deed of assignment. It had "without foreclosure
proceedings, whether judicial or extrajudicial, . . . appropriated the leasehold
rights of plaintiff over the fishpond in question", violative of Article 2088 of
the Civil Code, which forbids a creditor from appropriating, or disposing of,
the thing given as security for the payment of a debt.

238
APPLICATION OF PAYMENTS
1. PACULDO VS. REGALADO, 345 SCRA 134

2. CBC VS. CA, 265 SCRA 327
3. MOBIL VS. CA, 272 SCRA 523
PACULDO VS. REGALADO

345 SCRA 134
FACTS:
On December 27, 1990, petitioner Nereo Paculdo and respondent
Bonifacio Regalado entered into a contract of lease over a parcel of land with
a wet market building, located at Fairview Park, Quezon City. The contract
was for twenty five (25) years, commencing on January 1, 1991 and ending on
December 27, 2015. For the first five (5) years of the contract beginning
December 27, 1990, Nereo would pay a monthly rental of P450,000, payable
within the first five (5) days of each month with a 2% penalty for every month
of late payment.
Aside from the above lease, petitioner leased eleven (11) other property
from the respondent, ten (10) of which were located within the Fairview
compound, while the eleventh was located along Quirino Highway Quezon
City. Petitioner also purchased from respondent eight (8) units of heavy
equipment and vehicles in the aggregate amount of Php 1, 020,000.
On account of petitioner’s failure to pay P361, 895.55 in rental for the

month of May, 1992, and the monthly rental of P450, 000.00 for the months of
June and July 1992, the respondent sent two demand letters to petitioner
demanding payment of the back rentals, and if no payment was made within
fifteen (15) days from the receipt of the letter, it would cause the cancellation
of the lease contract.
Without the knowledge of petitioner, on August 3, 1992, respondent

mortgaged the land subject of the lease contract, including the improvements
which petitioner introduced into the land amounting to P35, 000,000.00, to
Monte de Piedad Savings Bank, as a security for a loan.
On August 12, 1992, and the subsequent dates thereafter, respondent

refused to accept petitioner’s daily rental payments.
Subsequently, petitioner filed an action for injunction and damages

seeking to enjoin respondents from disturbing his possession of the property
subject of the lease contract. On the same day, respondent also filed a
complaint for ejectment against petitioner.
The lower court rendered a decision in favor of the respondent, which

was affirmed in toto by the Court of Appeals.
ISSUE:
Whether or not the petitioner was truly in arrears in the payment of
rentals on the subject property at the time of the filing of the complaint for
ejectment.

239
RULING:
NO, the petitioner was not in arrears in the payment of rentals on the
subject property at the time of the filing of the complaint for ejectment.
As found by the lower court there was a letter sent by respondent to

herein petitioner, dated November 19, 1991, which states that petitioner’s
security deposit for the Quirino lot, be applied as partial payment for his
account under the subject lot as well as to the real estate taxes on the Quirino
lot. Petitioner interposed no objection, as evidenced by his signature
signifying his conformity thereto.
Meanwhile, in an earlier letter, dated July 15, 1991, respondent

informed petitioner that the payment was to be applied not only to
petitioner’s accounts under the subject land and the Quirino lot but also to
heavy equipment bought by the latter from respondent. Unlike in the
November letter, the July letter did not contain the signature of petitioner.
Petitioner submits that his silence is not consent but is in fact a

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

and RENATO C. TAGUIAM, petitioners,
VS. COURT OF APPEALS, HON. PEDRO T. SANTIAGO, SPS. SO CHING
and CRISTINA SO, and NATIVE WEST INTERNATIONAL TRADING
CORP., respondents
1996 December 05
G.R. No. 121158
FACTS:
China Banking Corporation (China Bank) extended several loans to
Native West International Trading Corporation (Native West) and to So Ching,
Native West's president. Native West in turn executed promissory notes in
favor of China Bank. So Ching, with the marital consent of his wife, Cristina
240
So, additionally executed two mortgages over their properties, viz., a real
estate mortgage executed on July 27, 1989 covering a parcel of land situated
in Cubao, Quezon City, under TCT No. 277797, and another executed on
August 10, 1989 covering a parcel of land located in Mandaluyong, under TCT
No. 5363. The promissory notes matured and despite due demands by China
Bank neither private respondents Native West nor So Ching paid. Pursuant to
a provision embodied in the two mortgage contracts, China Bank filed
petitions for the extra-judicial foreclosure of the mortgaged properties before
Notary Public Atty. Renato E. Taguiam for TCT No. 277797, and Notary Public
Atty. Reynaldo M. Cabusora for TCT No. 5363, copies of which were given to
the spouses So Ching and Cristina So. After due notice and publication, the
notaries public scheduled the foreclosure sale of the spouses' real estate
properties on April 13, 1993. Eight days before the foreclosure sale, however,
private respondents filed a complaint with the Regional Trial Court for
accounting with damages and with temporary restraining order against
petitioners alleging several grounds, including Violation of Article 1308 of the
Civil Code. On April 7, 1993, the trial court issued a temporary restraining
order to enjoin the foreclosure sale.
Petitioners moved for reconsideration, but it was denied in an Order

dated September 23, 1993. To annul the trial court's Orders of April 28, 1993
and September 23, 1993, petitioners elevated the case through certiorari and
prohibition before public respondent Court of Appeals. In a decision dated
January 17, 1995, respondent Court of Appeals held that Administrative
Circular No. 3 is the governing rule in extra-judicial foreclosure of mortgage,
which circular petitioners however failed to follow, and with respect to the
publication of the notice of the auction sale, the provisions of P.D. No. 1079 is
the applicable statute, which decree petitioners similarly failed to obey.
Respondent Court of Appeals did not pass upon the other issues and confined
its additional lengthy discussion on the validity of the trial court's issuance of
the preliminary injunction, finding the same neither capricious nor whimsical
exercise of judgment that could amount to grave abuse of discretion. The
Court of Appeals accordingly dismissed the petition, as well as petitioners'
subsequent motion for reconsideration. Hence, the instant petition under
Rule 45 of the Rules of Court reiterating the grounds raised before
respondent court.
ISSUE:
Whether or not there was a correct application of payment in this case.
RULING:
An important task in contract interpretation is the ascertainment of the
intention of the contracting parties which is accomplished by looking at the
words they used to project that intention in their contract, i.e., all the words,
not just a particular word or two, and words in context, not words standing
alone. Indeed, Article 1374 of the Civil Code, states “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." Applying the rule,
we find that the parties intent is to constitute the real estate properties as
continuing securities liable for future obligations beyond the amounts of P6.5
million and P3.5 million respectively stipulated in the July 27, 1989 and
August 10, 1989 mortgage contracts. Thus, while the "whereas" clause
initially provides that "the mortgagee has granted, and may from time to time
hereafter grant to the mortgagors . . . credit facilities not exceeding six
million five hundred thousand pesos only (P6,500,000.00)" yet in the same
clause it provides that "the mortgagee had required the mortgagor(s) to give
collateral security for the payment of any and all obligations heretofore
contracted/incurred and which may thereafter be contracted/incurred by the
mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee"
which qualifies the initial part and shows that the collaterals or real estate
properties serve as securities for future obligations. The first paragraph
which ends with the clause, "the idea being to make this deed a
241
comprehensive and all embracing security that it is" supports this
qualification.
Similarly, the second paragraph provides that "the mortgagee may take
further advances and all sums whatsoever advanced by the mortgagee shall
be secured by this mortgagee . . ." And although it was stated that "[t]he said
credit shall extend to any account which shall, within the said limit of
P6,500,000.00 exclusive of interest", this part of the second sentence is again
qualified by its succeeding portion which provides that "this mortgage shall
stand as security for all indebtedness of the mortgagor(s) and/or debtor(s), or
any one of them, at any and all times outstanding . . ." Again, under the third
paragraph, it is provided that "the mortgagee may from time to time grant the
mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this
mortgage . . ." The fourth paragraph, in addition, states that ". . . all such
withdrawals, and payments, whether evidenced by promissory notes or
otherwise, shall be secured by this mortgage" which manifestly shows that
the parties principally intended to constitute the real estate properties as
continuing securities for additional advancements which the mortgagee may,
upon application, extend. It is well settled that mortgages given to secure
future advancements or loans are valid and legal contracts, and that the
amounts named as consideration in said contracts do not limit the amount for
which the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness can be
gathered.
The allegations stated are a clear admission that they were unable to
settle to the fullest their obligation. Foreclosure is valid where the debtors,
as in this case, are in default in the payment of their obligation. The essence
of a contract of mortgage indebtedness is that a property has been identified
or set apart from the mass of the property of the debtor-mortgagor as security
for the payment of money or the fulfillment of an obligation to answer the
amount of indebtedness, in case of default of payment. It is a settled rule that
in a real estate mortgage when the obligation is not paid when due, the
mortgagee has the right to foreclose the mortgage and to have the property
seized and sold in view of applying the proceeds to the payment of the
obligation. In fact, aside from the mortgage contracts, the promissory notes
executed to evidence the loans also authorize the mortgagee to foreclose on
the mortgages. Thus: . . . CHINA BANKING CORPORATION is hereby
authorized to sell at public or private sales such securities or things of value
for the purpose of applying their proceeds to such payments.
And while private respondents aver that they have already paid ten
million pesos, an allegation which has still to be settled before the trial court,
the same cannot be utilized as a shield to enjoin the foreclosure sale. A
mortgage given to secure advancements, is a continuing security and is not
discharged by repayment of the amount named in the mortgage, until the full
amount of the advancements are paid.
MOBIL OIL PHILIPPINES, INC., and CALTEX (PHILS.), INC.,

petitioners
VS. HON. COURT OF APPEALS and
CONTINENTAL CEMENT CORPORATION, respondents
G.R. No. 103052
23 May 2003
242
FACTS:
The petition for review on certiorari in the case at bar seeks the
reversal of the decision of the Court of Appeals, affirming that 2 of the
Regional Trial Court (RTC), Branch 101, of Quezon City, which found herein
petitioners Mobil Oil Philippines, Inc., and Caltex Philippines, Inc., jointly and
severally liable to private respondent Continental Cement Corporation in the
amount of eight million pesos (P8,000,000.00) for actual damages, plus ten
percent (10%) thereof by way of attorney’s fees, for having delivered water-
contaminated bunker fuel oil to the serious prejudice and damage of the
cement firm.
Sometime in May 1982, petitioner Mobil Oil Philippines, Inc. (MOPI), a

firm engaged in the marketing of petroleum products to industrial users,
entered into a supply agreement with private respondent Continental Cement
Corporation (CCC), a cement producer, under which the former would supply
the latter’s industrial fuel oil (IFO) or bunker fuel oil (BFO) requirements.
MOPI extended to CCC an unsecured credit line of P2,000,000.00 against
which CCC’s purchases of oil could initially be charged.
MOPI had a “hauling contract” with Century Freight Services (CFS)

whereby CFS undertook the delivery of Mobil products to designated
consignees of MOPI. During the period starting from 12 July to 07 October
1982, MOPI made a total of sixty-seven deliveries of BFO, each delivery
consisting of 20,000 liters, to CCC’s cement factory in Norzagaray, Bulacan.
On 08 October 1982, CCC discovered that what should have been MOPI’s
20,000 BFO delivery to CCC’s Norzagaray plant, through CFS’s lorry truck,
was, in fact, pure water. CCC at once informed MOPI of this anomaly and of
its intention to meanwhile hold in abeyance all payments due to MOPI on its
previous deliveries until such time as the parties would have ascertained that
those deliveries were not themselves adulterated. CCC suggested that MOPI’s
storage tank in the Norzagaray plant be likewise investigated for possible
contamination.
Alleging in the complaint it ultimately filed with the RTC that its factory
equipment broke down from 19 to 22 September 1982 due to the utilization of
the water-contaminated BFO supplied by MOPI; that on 23 September 1982,
its plant operations had to be stopped completely; and that it was able to
resume operations only after essential repairs had been undertaken on 02
October 1982; CCC sought to recover consequential damages from MOPI. In
answer, MOPI averred that CCC had accepted each delivery of BFO in
accordance with the procedure for testing and acceptance of BFO deliveries;
that it was only on 08 October 1982 that CCC brought to its attention the
alleged anomalous delivery of 20,000 liters of BFO under invoice No. 47587
through Mariano Rivera’s lorry truck; that when the delivery was being
inspected by CCC’s representatives, the truck driver and helper fled; that
Rivera acknowledged full liability for such delivery; that Rivera promised to
pay the amount of P42,730.00 for the 20,000 liters of BFO delivered; and that
MOPI agreed to the water draining activity solely for the purpose of
maintaining good business relations with CCC but not to admit any liability
therefore. In its compulsory counterclaim, MOPI claimed that CCC had an
outstanding obligation to it, as of 30 November 1982, in the amount of
P1,096,238.51, and that as a consequence of the “frivolous and malicious suit:
which besmirched MOPI’s reputation, it suffered moral damages of not less
than P10,000,000.00, exemplary damages of the same amount, and the
incurrence of attorney’s fees.
ISSUES:
Whether or not Petitioner Mobil is stopped from claiming that no Mobil
BFO remained unused by Continental on 22 October 1982; and that the
deliveries of BFO made by Mobil to Continental before 8 October 1982 were
not contaminated with water.
243
Whether or not Petitioners can be held liable for the contaminated BFO
delivered on 8 October 1982 on the ground that Country Freight Service, as
carrier-hauler, was an agent of Mobil.
RULING:
The claim that the Court of Appeals “conveniently made an inference
that the subject Continental storage tank contained Mobil BFO deliveries only
because Mobil and Continental agreed to jointly examine the same, “and that
the appellate court had so misapprehended the facts, is unacceptable. The
factual finding that deliveries previous to 08 October 1982 were adulterated
BFO was supported by the 22 October 1982 “joint undertaking.” This
document, witnessed and signed by representatives of both MOPUI and CCC,
clearly showed that a “detailed verification of water contained on all BFO
delivered by MOBIL OIL PHILS., INC., except those that have already been
used in cement operation by CCC,: was undertaken. Implicit from this
statement was that there still was at the time an availability of BFO in the
storage tank designated by CCC for past Mobil deliveries. The same could be
said of the second water draining process, evidence by the second “joint
undertaking.” Although done without the participation of MOPI, the latter,
nonetheless, was notified of the “counting” thrice, the last of which had
indicated that failure on MOPI’s part to send a representative would be
tantamount to a waiver of its right to participate therein.
The appellate court may not thus be faulted for holding that petitioners
and barred from questioning the results of water draining processes
conducted on the MOPI tank in the CCC plant site, in the same manner that
MOPI may not belatedly question the testing procedure theretofore adopted.
MOPI cannot be allowed to turn its back to its own acts (or inactions) to the
prejudice of CCC, which, in good faith, relied upon MOPI’s conduct.
CFS was the contractor of MOPI, not CCC, and the contracted price of
the BFO that CCC paid to MOPI included hauling charges. The presumption
laid down under Article 1523 of the Civil Code that delivery to the carrier
should be deemed to be delivery to the buyer would have no application
where, such as in this case, the sale itself specifically called for delivery by
the seller to the buyer at the latter’s place of business.
WHEREFORE, the herein questioned decision of the Court of Appeals

in AFFIRMED in toto. Costs against petitioners.

244
TENDER OF PAYMENT OR CONSIGNATION
1. PEOPLE’S INDUSTRIAL VS. CA, OCT. 24, 1997

2. ETERNAL GARDENS VS. CS, DEC. 9, 1997
3. RAYOS VS. REYES, 398 SCRA 24
4. CEBU INTERNATIONAL VS. CA, 316 SCRA 488
5. DE MESA VS. CA, OCT. 19, 1999
PEOPLE'S INDUSTRIAL AND COMMERCIAL CORPORATION,

petitioner
VS. COURT OF APPEALS and MAR-ICK INVESTMENT CORPORATION,
respondents.
Oct 24, 1997
G.R. No. 112733
FACTS:
Private respondent Mar-ick Investment Corporation is the exclusive
and registered owner of Mar-ick Subdivision in Barrio Buli, Cainta, Rizal. On
May 29, 1961, private respondent entered into six agreements with petitioner
People's Industrial and Commercial Corporation sell to petitioner six
subdivision lots. Five of the agreements, involving similarly stipulate that the
petitioner agreed to pay private respondent for each lot, the amount of
P7,333.20 with a down payment of P480.00. The balance of P6,853.20 shall
be payable in 120 equal monthly installments of P57.11 every 30th of the
month, for a period of ten years. With respect to Lot No. 8, the parties agreed
to the purchase price of P7,730.00 with a down payment of P506.00 and equal
monthly installments of P60.20.
After ten years, however, petitioner still had not fully paid for the six
lots; it had paid only the down payment and eight installments, even after
private respondent had given petitioner a grace period of four months to pay
the arrears. As of May 1, 1980, the total amount due to private respondent
under the contract was P214,418.00.
In his letter of March 30, 1980 to Mr. Tomas Siatianum, who signed the
agreements for petitioner, private respondent's counsel protested petitioner's
encroachment upon a portion of its subdivision. It added that petitioner had
failed to abide by its promise to remove the encroachment, or to purchase the
lots involved "at the current price or pay the rentals on the basis of the total
area occupied, all within a short period of time." It also demanded the
removal of the illegal constructions on the property that had prejudiced the
subdivision and its neighbors.

245
After a series of negotiations between the parties, they agreed to enter
into a new contract to sell 8 involving seven lots. The contract stipulates that
the previous contracts involving the same lots "have been cancelled due to
the failure of the purchaser to pay the stipulated installments." It states
further that the new contract was entered into "to avoid litigation,
considering that the purchaser has already made use of the premises since
1981 to the present without paying the stipulated installments." The parties
agreed that the contract price would be P423,250.00 with a down payment of
P42,325.00 payable upon the signing of the contract and the balance of
P380,925.00 payable in forty-eight equal monthly amortization payments of
P7,935.94. The new contract bears the date of October 11, 1983 but neither
of the parties signed it. Thereafter, Tomas Siatianum issued the checks in the
total amount of P37,642.72 to private respondent.
Private respondent received but did not encash those checks. Instead
filed in the trial court a complaint for accion publiciana de posesion against
petitioner and Tomas Siatianum, as president and majority stockholder of
petitioner.
The lower court rendered a decision finding that the original

agreements of the parties were validly cancelled in accordance with provision
No. 9 of each agreement. The parties did not enter into a new they did not
sign the draft contract. Receipt by private respondent of the five checks
could not amount to perfection of the contract because private respondent
never encashed and benefited from those checks, they represented the
deposit under the new contract because petitioner failed to prove that those
were monthly installments that private respondent refused to accept. Thus,
the fact that the parties tried to negotiate a new Contract indicated that they
considered the first contract as "already cancelled." This decision was
affirmed by the Court of Appeals.
ISSUE:
Whether there was a tender of payment and consignation in the case.
RULING:
The parties' failure to agree on a fundamental provision of the contract
was aggravated by petitioner's failure to deposit the installments agreed
upon. Neither did it attempt to make a consignation of the installments. As
held in the Adelfa Properties case:
"The mere sending of a letter by the vendee expressing the intention to pay,
without the accompanying payment, is not considered a valid tender of
payment. Besides, a mere tender of payment is not sufficient to compel
private respondents to deliver the property and execute the deed of absolute
sale. It is consignation which is essential in order to extinguish petitioner's
obligation to pay the balance of the purchase price. The rule is different in
case of an option contract or in legal redemption or in a sale with right to
repurchase, wherein consignation is not necessary because these cases
involve an exercise of a right or privilege (to buy, redeem or repurchase)
rather than the discharge of an obligation, hence tender of payment would be
sufficient to preserve the right or privilege. This is because the provisions on
consignation are not applicable when there is no obligation to pay. A contract
to sell, as in the case before us, involves the performance of an obligation, not
merely the exercise of a privilege or a right. Consequently, performance or
payment may be effected not by tender of payment alone but by both tender
and consignation."
In the case, petitioner did not lift a finger towards the performance of
the contract other than the tender of down payment. There is no record that
246
it even bothered to tender payment of the installments or to amend the
contract to reflect the true intention of the parties as regards the number of
lots to be sold. Indeed, by petitioner's inaction, private respondent may not
be judicially enjoined to validate a contract that the former appeared to have
taken for granted. As in the earlier agreements, petitioner ignored
opportunities to resuscitate a contract to sell that were rendered moribund
and inoperative by its inaction.
ETERNAL GARDENS MEMORIAL PARK CORPORATION

VS. COURT OF APPEALS and NORTH PHILIPPINE UNION MISSION
OF THE SEVENTH DAY ADVENTIST
1997 Dec 9
G.R. No. 124554
FACTS:
Petitioner EGMPC and private respondent NPUM entered into a Land
Development Agreement dated October 6, 1976. Under the agreement,
EGMPC was to develop a parcel of land owned by NPUM into a memorial
park subdivided into lots. The parties further agreed that EGMPC had the
obligation to remit monthly to NPUM forty percent (40%) of its net gross
collection from the development of a memorial park on property owned by
NPUM. It also provides for the designation of a depository/trustee bank to
act as the depository/trustee for all funds collected by EGMPC.

247
Later, two claimants of the parcel of land surfaced Maysilo Estate and
the heirs of a certain Vicente Singson Encarnacion. EGMPC thus filed an
action for interpleader against Maysilo Estate and NPUM. The Singson heirs
in turn filed an action for quieting of title against EGMPC and NPUM.
From these two cases, several proceedings ensued. One such case,
from the interpleader action, EGMPC assailed the appellate court's resolution
requiring "petitioner Eternal Gardens [to] deposit whatever amounts are due
from it under the Land Development Agreement with a reputable bank to be
designated by the respondent court."
The trial court dismissed the cases and the appellate court affirmed
insofar as it dismissed the claims of the intervenors, including the Maysilo
Estate, and the titles of NPUM to the subject parcel of land were declared
valid; and the trial court's decision favor of the Singson heirs was reversed
and set aside.
Through the resolution issued by the Supreme Court resolution, the

Court of Appeals proceeded with the disposition of the case and required the
parties to appear at a scheduled hearing on June 16, 1994, "with counsel and
accountants, as well as books of accounts and related records,' to determine
the remaining accrued rights and liabilities of said parties."
The accounting of the parties' respective obligations was referred to

the Court's Accountant, Mrs. Carmencita Angelo, with the concurrence of the
parties, to whom the documents were to be submitted. NPUM prepared and
submitted a Summary of Sales and Total Amounts Due based on the following
documents it likewise submitted to the court. However, EGMPC did not
submit any document whatsoever to aid the appellate court in its mandated
task. Thus, the appellate court declared that EGMPC has waived its right to
present the records and documents necessarily for accounting, and that it will
now proceed "to the mutual accounting required to determine the remaining
accrued rights and liabilities of the said parties…and that the Court will
proceed to do what it is required to do on the basis of the documents
submitted by the NPUMC. Ms. Angelo submitted her Report dated January
31, 1995, to which the appellate court required the parties to comment on.
EGMPC took exception to the appellate court's having considered it to have
waived its right to present documents. Considering EGMPC's arguments, the
court set a hearing date where NPUM would present its documents
"according to the Rules [of Court], and giving the private respondent
[EGMPC] the opportunity to object thereto." Subsequently, NPUM asked for
and the appellate court issued a subpoena duces tecum and subpoena ad
testificandum to EGMPC's President, Mr. Gabriel O. Vida requiring him to
produce documents in relation to the case. However, EGMPC failed to
present the documents required by the subpoena. It further filed a Denial
and/or Objection to the Requests for Admission on the ground that it could
not make comparison of the documents with the originals thereof. On
November 10, 1995, Ms. Angelo submitted her Report. On January 15, 1996,
the Court of Appeals approved the report of Ms. Angelo, finding that EGMPC
owes to the petitioner NPUMSDA the amounts of P167,065,195.00 as
principal and P167,235,451.00 in interest.
ISSUE:
Whether or not EGMPC is liable for interest because there was still the
unresolved issue of ownership over the property subject of the Land
Development Agreement of October 6, 1976.
RULING:
The Supreme Court held that the argument is without merit. EGMPC
under the agreement had the obligation to remit monthly to NPUM forty
248
percent (40%) of its net gross collection from the development of a memorial
park on property owned by NPUM. It also provides for the designation of a
depository/trustee bank to act as the depository/trustee for all funds collected
by EGMPC. There was no obstacle, legal or otherwise, to the compliance by
EGMPC of this provision in the contract, even on the affectation that it did not
know to whom payment was to be made.
Even disregarding the agreement, EGMPC cannot "suspend" payment

on the pretext that it did not know who among the subject property's
claimants was the rightful owner. It had a remedy under the New Civil Code
of the Philippines to give in consignation the amounts due, as these fell due.
Consignation produces the effect of payment. The rationale for

consignation is to avoid the performance of an obligation becoming more
onerous to the debtor by reason of causes not imputable to him. For its
failure to consign the amounts due, EGMPC’s obligation to NPUM necessarily
became more onerous as it became liable for interest on the amounts it failed
to remit.
Thus, the Court of Appeals correctly held Eternal Gardens liable for
interest at the rate of twelve percent (12%). The withholding of the amounts
due under the agreement was tantamount to a forbearance of money.

249
SPOUSES TEOFILO and SIMEONA RAYOS, and GEORGE RAYOS

VS. DONATO REYES, SATURNINO REYES, TOMASA R. BUSTAMANTE
and TORIBIA R. CAMELO
G.R. No. 150913
February 20, 2003
398 SCRA 25
FACTS:
At stake in this petition for review is the ownership of 3 parcels of
unregistered land with an area of approximately 130,947 square meters
situated in Brgy. Sapa, Burgos, Pangasinan, the identities of which are not
disputed.
The 3 parcels were formerly owned by the spouses Francisco and

Asuncion Tazal who on 1 September 1957 sold them for P724.00 to
respondents’ predecessor-in-interest, one Mamerto Reyes, with right to
repurchase within 2 years from date thereof by paying to the vendee the
purchase price and all expenses incident to their reconveyance. After the sale
the vendee a retro took physical possession of the properties and paid the
taxes thereon.
The otherwise inconsequential sale became controversial when 2 of the

3 parcels were again sold on 24 December 1958 by Francisco Tazal for
P420.00 in favor of petitioners’ predecessor-in-interest Blas Rayos without
first availing of his right to repurchase the properties.
In the meantime, on 1 September 1959 the conventional right of

redemption in favor of spouses Francisco and Asuncion Tazal expired without
the right being exercised by either the Tazal spouses or the vendee Blas
Rayos.
After the expiration of the redemption period, Francisco Tazal

attempted to repurchase the properties from Mamerto Reyes by asserting
that the 1 September 1957 deed of sale with right of repurchase was actually
an equitable mortgage and offering the amount of P724.00 to pay for the
alleged debt. But Mamerto Reyes refused the tender of payment and
vigorously claimed that their agreement was not an equitable mortgage.
On 9 May 1960 Francisco Tazal filed a complaint with the Court of First
Instance of Pangasinan against Mamerto Reyes for the declaration of the 1
September 1957 transaction as a contract of equitable mortgage. He also
prayed for an order requiring defendant Mamerto Reyes to accept the amount
of P724.00 which he had deposited on 31 May 1960 with the trial court as full
payment for his debt, and canceling the supposed mortgage on the 3 parcels
of land with the execution of the corresponding documents of reconveyance in
his favor. Defendant denied plaintiff’s allegations and maintained that their
contract was a sale with right of repurchase that had long expired.
On 22 June 1961 Francisco Tazal again sold the third parcel of land
previously purchased by Mamerto Reyes to petitioner-spouses Teofilo and
Simeona Rayos for P400.00. On 1 July 1961 petitioner-spouses bought from
Blas Rayos for P400.00 the 2 lots that Tazal had sold at the first instance to
Mamerto Reyes and thereafter to Blas Rayos. Curiously, these contracts of
sale in favor of petitioner-spouses were perfected while the aforementioned
case was pending before the trial court.

250
On 5 January 1963 the trial court rejected the contention of Francisco
Tazal that the deed of sale executed on 1 September 1957 was an equitable
mortgage but held that Tazal could nonetheless redeem the 3 parcels of land
within 30 days from finality of judgment by paying to Mamerto Reyes the
purchase price of P724.00 and all expenses to execute the reconveyance.
Respondents as heirs of Mamerto Reyes executed an affidavit
adjudicating themselves the ownership of the parcels of land and declared the
properties in their names which were granted by the trial court on November
15, 1996.
On the other hand, petitioners argued that the consignation of P724.00

had the full effect of redeeming the properties from respondents. Hence, this
petition.
ISSUE:
Whether or not the consignation made by the petitioners is valid.
RULING:
In order that consignation may be effective the debtor must show that
(a) there was a debt due; (b) the consignation of the obligation had been
made because the creditor to whom a valid tender of payment was made
refused to accept it; (c) previous notice of the consignation had been given to
the person interested in the performance of the obligation; (d) the amount
due was placed at the disposal of the court; and, (e) after the consignation
had been made the person interested was notified thereof.
In the instant case, petitioners failed, first, to offer a valid and

unconditional tender of payment; second, to notify respondents of the
intention to deposit the amount with the court; and third, to show the
acceptance by the creditor of the amount deposited as full settlement of the
obligation, or in the alternative, a declaration by the court of the validity of
the consignation. The failure of petitioners to comply with any of these
requirements rendered the consignation ineffective.
Mamerto Reyes was therefore within his right to refuse the tender of
payment offered by petitioners because it was conditional upon his waiver of
the two (2)-year redemption period stipulated in the deed of sale with right to
repurchase.
Wherefore, the petition for review is denied.

251
CEBU INTERNATIONAL FINANCE CORPORATION VS. COURT of

APPEALS
G. R. No. 123031. October 12, 1999
316 SCRA 488
FACTS:
Cebu International Finance Corporation (CIFC) is a quasi-banking
institution engaged in money market operations. On April 25, 1991, private
respondent Vicente Alegre invested with CIFC P500, 000.00 in cash.
Petitioner issued a promissory note to mature on May 27, 1991. The note for
P516, 238. 67 covered private respondent’s placement plus interest at 20.5%
for 32 days. On May 27, 1991, CIFC issued BPI Check No. 513397 for P514,
390.94 in favor of the private respondent as proceeds of his mature
investment plus interest. The check was drawn from petitioner’s current
account maintained with Bank of the Philippine Islands (BPI) main branch at
Makati City. On June 17, 1991, private respondent’s wife deposited the check
with Rizal Commercial Banking Corp. (RCBC) in Puerto Princesa, Palawan.
BPI dishonored the check, that the check is subject of an investigation. BPI
took custody of the check pending an investigation of several counterfeit
checks drawn against CIFC’s checking account. BPI used the check to trace
the perpetrators of the forgery. Immediately, private respondent notified CIFC
of the dishonored check and demanded that he be paid in cash. CIFC denied
the request and instead instructed private respondent to wait for its ongoing
bank reconciliation with BPI. Private respondent made a formal demand of his
money market placement. In turn, CIFC promised to replace the check but
required an impossible condition that the original check must first be
surrendered.
On February 25, 1992, Alegre filed a complaint for recovery of sum of
money against petitioner. On July 13, 1992, CIFC sought to recover its lost
funds and formally filed against BPI a separate civil action for collection of a
sum of money with RTC- Makati Branch. It alleged that BPI unlawfully
deducted from CIFC’s checking account, counterfeit checks amounting to P1,
724, 364. 58. The action included the prayer to collect the amount of the

252
check paid to Alegre but dishonored by BPI. CIFC in its response to Alegre’s
complaint filed for leaver of court and impleaded BPI to enforce a right, for
contribution and indemnity. The court granted CIFC’s motion but upon the
motion to dismiss the third-party complaint filed by BPI, the court dismissed
the third-party complaint. During the hearing, BPI through its Manager,
testified that on July 16, 1993, BPI encashed and deducted the said amount
from the account of CIFC, but the proceeds, as well as the check remained in
BPI’s custody. This was alleged in accordance with the Compromise
Agreement it entered with CIFC to end the litigation in RTC-Makati Branch.
On July 27, 1993, BPI filed a separate collection suit against Alegre, alleging
that he had connived with other persons to forge several checks of BPI’s
client, amounting to P1, 724, 364.58. On September 27, 1993, RTC-Makati
Branch rendered its judgment in favor of private respondent. CIFC appealed
from the said decision, but the appellate court affirmed in toto the decision of
the lower court.
ISSUE:
Whether or not the petitioner is still liable for the payment of check
even though BPI accepted the instrument
RULING:
The Supreme Court held that the money market transaction between
the petitioner and private respondent is in the nature of loan. In a loan
transaction, the obligation to pay a sum certain in money may be paid in
money, which is the legal tender or, by the use of a check. A check is not a
legal tender, and therefore cannot constitute valid tender of payment. In
effect, CIFC has not yet tendered a valid payment of its obligation to the
private respondent. Tender of payment involves a positive and unconditional
act by the obligor of offering legal tender currency as payment to the obligee
for the former’s obligation and demanding that the latter accept the same.
Tender of payment cannot be presumed by a mere inference from
surrounding circumstances. Hence, CIFC is still liable for the payment of the
check.
Wherefore, the assailed decision is affirmed and the petition is denied.
DOLORES LIGAYA DE MESA, petitioner, vs. THE COURT OF APPEALS,

OSSA HOUSE, INC. AND DEVELOPMENT BANK OF THE
PHILIPPINES,respondents
G.R. No. 106467-68
October 19, 1999
FACTS:
Petitioner Dolores Ligaya de Mesa owns several parcels of land in
Makati, Pasay City, Cavite, and General Santos City which were mortgaged to
the Development Bank of the Philippines (DBP) as security for a loan she
obtained from the bank. Failing to pay her mortgage debt, all her mortgaged
properties were foreclosed and sold at public auction held on different days.
On April 30, 1977, the Makar property was sold and the corresponding
certificate of sale inscribed on March 10, 1978. On August 25, 1977, the
Naic, Cavite property was sold and the certificate of sale registered on the
same day. On August 30, 1977, the two (2) parcels of land in Makati were
sold at public auction and the certificate of sale was inscribed on November

253
25, 1977. And on January 12, 1978, the three (3) parcels of land in Pasay City
were also sold and the certificate of sale was recorded on the same date. In
all the said auction sales, DBP was the winning bidder.
On October 23, 1978, Mrs. de Mesa, under a “Deed of Sale with
Assumption of Mortgage,” sold the foreclosed properties to private
respondent OSSA under the condition that the latter was to assume the
payment of the mortgage debt by the repurchase of all the properties
mortgaged on installment basis, with an initial payment of P90,000.00
representing 20% of the total obligation.
On March 11, 1981, petitioner de Mesa notified private respondent OSSA
that she was rescinding the Deed of Sale with Assumption of Mortgage she
executed in favor of the latter on the ground that OSSA failed to comply with
the terms and conditions of their agreement, particularly the payment of
installments to the Development Bank of the Philippines, the discharge and
cancellation of the mortgage on the property listed in item IV of the first
whereas clause, and the payment of the balance of more or less P45,000.00 to
petitioner, representing the difference between the purchase price of subject
properties and the actual obligation to the DBP.
On August 5, 1981, DBP refused to accept the 9th quarterly installment
paid by OSSA, prompting the latter to file against DBP and the petitioner, on
August 11, 1981, Civil Case No. 42381 for specific performance and
consignation, with the then Court of First Instance of Pasig, Rizal, depositing
in said case the amount of P15,824.92.
After trial, the lower court came out with a Decision for the private
respondent OSSA. The petitioner appealed to the Court of Appeals which
handed down on March 31, 1992, its decision modifying the challenged
decision.
ISSUE:
Whether or not the Court erred in ruling that the mandatory
requirements of the Civil Code on consignation can be waived by the trial
court or whether or not the requirements of Articles 1256 to 1261 can be
'relaxed' or 'substantially complied with'.
RULING:
Petitioner argues that there was no notice to her regarding OSSA's
consignation of the amounts corresponding to the 12th up to the 20th
quarterly installments. The records, however, show that several tenders of
payment were consistently turned down by the petitioner, so much so that the
respondent OSSA found it pointless to keep on making formal tenders of
payment and serving notices of consignation to petitioner. Moreover, in a
motion dated May 7, 1987, OSSA prayed before the lower court that it be
allowed to deposit by way of consignation all the quarterly installments,
without
making formal tenders of payment and serving notice of consignation, which
prayer was granted by the trial court in the Order dated July 3, 1982. The
motion and the subsequent court order served on the petitioner in the
consignation proceedings sufficiently served as notice to petitioner of OSSA's
willingness to pay the quarterly installments and the consignation of such
payments with the court. For reasons of equity, the procedural requirements
of consignation are deemed substantially complied with in the present case.
Petitioner also insists that there was no valid tender of payment

because the amount tendered was P34,363.08, not P51,243.26, and assuming
ex gratia argumenti that it was the correct amount, the tender thereof was
still not valid, the same having been made by check. This claim, however,

254
does not accord with the records on hand. Thus, the Court of Appeals
ratiocinated:
"The 'Deed of Sale with Assumption of Mortgage', was for a

consideration of P500,000.00, from which shall be deducted de Mesas's
outstanding obligation, with the DBP pegged as of May 10, 1978, by the
parties themselves, at P455,636.92. This amount of P455,636.92 owing DBP,
is what OSSA agreed to assume. What remained to be paid de Mesa was
P44,636.08, but OSSA made an advance payment of P10,000.00, hence the
remaining amount payable to de Mesa is P34,363.08, which OSSA tendered in
cash. It is thus beyond cavil that the respondent OSSA tendered the correct
amount, the tender of which was in cash and not by check, as theorized by
petitioner.
The Court of Appeals erred not in affirming the decision of the trial
court of origin.
The petition is DENIED and the assailed Decision of the Court of

Appeals in CA-G.R. Nos. 19145 and 19156 dated March 31, 1992 AFFIRMED.

255
LOSS OF THE PRESTATION: KINDS OF LOSS
1. OCCENA VS. CA, OCT. 29, 1976

2. ORTIGAS VS. FEATI BANK, 94 SCRA 533
OCCENA VS. JABSON, COURT OF APPEALS AND TROPICAL HOMES,

INC
73 SCRA 637
NO. L-44349, OCTOBER 29, 1976
FACTS:
Private respondent Tropical Homes, Inc had a subdivision contract with
petitioners who are the owners of the land subject of subdivision development
by private respondent. The contract stipulated that the petitioners’ fixed and
sole share and participation is the land which is equivalent to forty percent of
all cash receipts from the sale of the subdivision lots. When the development
costs increased to such level not anticipated during the signing of the
contract and which threatened the financial viability of the project as
assessed by the private respondent, respondent filed at the lower court a
complaint for the modification of the terms and conditions of the contract by
fixing the proper shares that should pertain to the parties therein out of the
gross proceeds from the sales of the subdivision lots. Petitioners moved for
the dismissal of the complaint for lack of cause of action. The lower court
denied the motion for dismissal which was upheld by the CA based on the civil
code provision that “when the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor may also be
released therefrom, in whole or in part”. Insisting that the worldwide
increase in prices cited by private respondent does not constitute a sufficient
cause of action for the modification of the terms and conditions of the
contract, petitioners filed the instant petition.
ISSUE:
Whether or not private respondent may demand modification of the
terms of the contract on the ground that the prestation has manifestly come
beyond the contemplation of the parties.
RULING:
If the prayer of the private respondent is to be released from its
contractual obligations on account of the fact that the prestation has become
beyond the contemplation of the parties, then private respondent can rely on
said provision of the civil code. But the prayer of the private respondent was
for the modification of their valid contract. The above-cited civil code
provision does not grant the court the power to remake, modify, or revise the
contract or to fix the division of the shares between the parties as
contractually stipulated with the force of law between the parties. Therefore,
private respondent’s complaint for modification of its contract with petitioner
must be dismissed. The decision of respondent court is reversed.

256
LOSS OF THE PRESTATION: KINDS OF LOSS
ORTIGAS & CO., LIMITED PARTNERSHIP VS. FEATI BANK AND

TRUST CO.
G.R. No. L-24670
December 14, 1979
FACTS:
Plaintiff is a limited partnership and defendant Feati Bank and Trust
Co., is a corporation duly organized and existing in accordance with the laws
of the Philippines. Plaintiff is engaged in real estate business, developing and
selling lots to the public, particularly the Highway Hills Subdivision along
EDSA, Mandaluyong, Rizal. On March 4, 1952, plaintiff, as vendor, and
Augusto Padilla and Natividad Angeles, as vendees, entered into separate
agreements of sale on installments over two parcels of land. On July 19,
1962, the said vendees transferred their rights and interests over the
aforesaid lots in favor of one Emma Chavez. Upon completion of payment of
the purchase price, the plaintiff executed the corresponding deeds of sale in
favor of Emma Chavez. Both the agreements (of sale on installment) and the
deeds of sale contained some stipulations or restrictions which were later
annotated in TCT Nos. 101509 and 101511 of the Register of Deeds of Rizal,
covering the said lots and issued in the name of Emma Chavez. Eventually,
defendant-appellee acquired Lots Nos. 5 and 6, with TCT Nos. 101613 and
106092 issued in its name, respectively and the building restrictions were
also annotated therein. Defendant-appellee bought Lot No. 5 directly from
Emma Chavez, "free from all liens and encumbrances as stated in Annex 'D', 5
while Lot No. 6 was acquired from Republic Flour Mills through a "Deed of
Exchange," Annex "E". TCT No. 101719 in the name of Republic Flour Mills
likewise contained the same restrictions, although defendant-appellee claims
that Republic Flour Mills purchased the said Lot No. 6 "in good faith. free
from all liens and encumbrances," as stated in the Deed of Sale, Annex "F"
between it and Emma Chavez.
Plaintiff-appellant claims that the restrictions annotated on TCT Nos.

101509, 101511, 101719, 101613, and 106092 were imposed as part of its
general building scheme designed for the beautification and development of
the Highway Hills Subdivision which forms part of the big landed estate of
plaintiff-appellant where commercial and industrial sites are also designated
or established.
Defendant-appellee, upon the other hand, maintains that the area along
the western part of EDSA from Shaw Boulevard to Pasig River, has been
declared a commercial and industrial zone, per Resolution No. 27, dated
February 4, 1960 of the Municipal Council of Mandaluyong, Rizal. It alleges
that plaintiff-appellant 'completely sold and transferred to third persons all
lots in said subdivision facing EDSA" and the subject lots thereunder were
257
acquired by it "only on July 23, 1962 or more than two (2) years after the area
... had been declared a commercial and industrial zone. On or about May 5,
1963, defendant-appellee began laying the foundation and commenced the
construction of a building on Lots Nos. 5 and 6, to be devoted to banking
purposes, but which defendant-appellee claims could also be devoted to, and
used exclusively for, residential purposes. The following day, plaintiff-
appellant demanded in writing that defendant-appellee stop the construction
of the commerical building on the said lots. The latter refused to comply with
the demand, contending that the building was being constructed in
accordance with the zoning regulations, defendant-appellee having filed
building and planning permit applications with the Municipality of
Mandaluyong, and it had accordingly obtained building and planning permits
to proceed with the construction.
ISSUE:
Whether or not Resolution No. 27 s-1960 is a valid exercise of police
power; and whether or not the said Resolution can nullify or supersede the
contractual obligations assumed by defendant-appellee.
RULING:
The validity of the resolution was admitted at least impliedly, in the
stipulation of facts below when plaintiff-appellant did not dispute the same.
Granting that Resolution No. 27 is not an ordinance, it certainly is a
regulatory measure within the intendment or ambit of the word "regulation"
under the provision. As a matter of fact the same section declares that the
power exists "(A)ny provision of law to the contrary notwithstanding ... "
With regard to the contention that said resolution cannot nullify the
contractual obligations assumed by the defendant-appellee referring to the
restrictions incorporated in the deeds of sale and later in the corresponding
Transfer Certificates of Title issued to defendant-appellee, it should be
stressed, that while non-impairment of contracts is constitutionally
guaranteed, the rule is not absolute, since it has to be reconciled with the
legitimate exercise of police power.
Resolution No. 27, s-1960 declaring the western part of highway , now
EDSA, from Shaw Boulevard to the Pasig River as an industrial and
commercial zone, was obviously passed by the Municipal Council of
Mandaluyong, Rizal in the exercise of police power to safeguard or promote
the health, safety, peace, good order and general welfare of the people in the
locality. Judicial notice may be taken of the conditions prevailing in the area,
especially where lots Nos. 5 and 6 are located. The lots themselves not only
front the highway; industrial and commercial complexes have flourished
about the place. EDSA, a main traffic artery which runs through several cities
and municipalities in the Metro Manila area, supports an endless stream of
traffic and the resulting activity, noise and pollution are hardly conducive to
the health, safety or welfare of the residents in its route. Having been
expressly granted the power to adopt zoning and subdivision ordinances or
regulations, the municipality of Mandaluyong, through its Municipal 'council,
was reasonably, if not perfectly, justified under the circumstances, in passing
the subject resolution.
The motives behind the passage of the questioned resolution being

reasonable, and it being a " legitimate response to a felt public need," not
whimsical or oppressive, the non-impairment of contracts clause of the
Constitution will not bar the municipality's proper exercise of the power.

258
It is, therefore, clear that even if the subject building restrictions were
assumed by the defendant-appellee as vendee of Lots Nos. 5 and 6, in the
corresponding deeds of sale, and later, in Transfer Certificates of Title Nos.
101613 and 106092, the contractual obligations so assumed cannot prevail
over Resolution No. 27, of the Municipality of Mandaluyong, which has validly
exercised its police power through the said resolution. Accordingly, the
building restrictions, which declare Lots Nos. 5 and 6 as residential, cannot
be enforced.
REBUS SIC STANTIBUS
1. MAGAT VS. CA, 337 SCRA 298

2. PNCC VS. CA, 272 SCRA 183
3. NATELCO VS. CA, 230 SCRA 351
MAGAT VS. COURT OF APPEALS

337 SCRA 298
FACTS:
Private respondent Santiago A. Guerrero was President and Chairman
of "Guerrero Transport Services", a single proprietorship. Sometime in 1972,
Guerrero Transport Services won a bid for the operation of a fleet of taxicabs
within the Subic Naval Base, in Olongapo. As highest bidder, Guerrero was to
"provide radio-controlled taxi service within the U.S. Naval Base, Subic Bay,
utilizing as demand requires . . . 160 operational taxis consisting of four
wheel, four-door, four passenger, radio controlled, meter controlled, sedans,
not more than one year . . . "
259
On September 22, 1972, with the advent of martial law, President

Ferdinand E. Marcos issued Letter of Instruction No. 1.
On September 25, 1972, pursuant to the aforequoted Letter of

Instruction, the Radio Control Office issued Administrative Circular No. 4:
Subject: Suspending the acceptance and processing of applications for radio
station construction permits and for permits to own and/or possess radio
transmitters or transceivers.
On September 25, 1972, Guerrero and Victorino D. Magat, as General

Manager of Spectrum Electronic Laboratories, a single proprietorship,
executed a letter-contract for the purchase of transceivers at a quoted price
of US$77,620.59, FOB Yokohoma. Victorino was to deliver the transceivers
within 60 to 90 days after receiving notice from Guerrero of the assigned
radio frequency, "taking note of Government Regulations.” The contract was
signed and Victorino contacted his Japanese supplier, Koide & Co., Ltd. and
placed an order for the transceivers.
On September 29, 1972, Navy Exchange Officer, A. G. Mason confirmed

that Guerrero won the bid for the commercial transportation contract. On
October 4, 1972, middle man and broker Isidro Q. Aligada of Reliance Group
Engineers, Inc. , wrote Victorino, informing him that a radio frequency was
not yet assigned to Guerrero and that government regulations might
complicate the importation of the transceivers. However, in the same letter,
Victorino was advised to advise his supplier "to proceed (with) production
pending frequency information." Victorino was also assured of Guerrero's
financial capability to comply with the contract. On October 6, 1972,
Guerrero informed Aligada of the frequency number assigned by Subic Naval
Base authorities. Aligada was instructed to "proceed with the order thru
Spectrum Electronics Laboratories." On October 7, 1972, Aligada informed
Magat of the assigned frequency number. Aligada also advised Victorino to
"proceed with the order upon receipt of letter of credit." On January 10, 1973,
Guerrero applied for a letter of credit with the Metropolitan Bank and Trust
Company. This application was not pursued.
On March 27, 1973, Victorino, represented by his lawyer, Atty. Sinesio

S. Vergara, informed Guererro that the order with the Japanese supplier has
not been canceled. Should the contract be canceled, the Japanese firm would
forfeit 30% of the deposit and charge a cancellation fee in an amount not yet
known, Guerrero to bear the loss. Further, should the contract be canceled,
Victorino would demand an additional amount equivalent to 10% of the
contract price.
Unable to get a letter of credit from the Central Bank due to the refusal
of the Philippine government to issue a permit to import the transceivers,
Guerrero commenced operation of the taxicabs within Subic Naval Base,
using radio units borrowed from the U.S. government. Victorino thus canceled
his order with his Japanese supplier.
On May 22, 1973, Victorino filed with the Regional Trial Court, Makati
a complaint for damages arising from breach of contract against Guerrero.
On June 7, 1973, Guerrero moved to dismiss the complaint on the ground that
it did not state a cause of action. On June 16, 1973, the trial court granted the
motion and dismissed the complaint. On July 11, 1973, Victorino filed a
petition for review on certiorari with this Court assailing the dismissal of the
complaint.
On April 20, 1983, the Supreme Court ruled that the complaint
sufficiently averred a cause of action. The Court set aside the order of
dismissal and remanded the case to the trial court for further proceedings.
260
On November 27, 1984, the trial court ordered that the case be archived for
failure of Victorino to prosecute. On March 11, 1985, petitioners, Olivia,
Dulce, Ma. Magnolia, Ronald and Dennis Magat, moved to reinstate the case
and to substitute Victorino in its prosecution. Apparently, Victorino died on
February 18, 1985. On April 29, 1985, the trial court granted the motion.
On July 12, 1991, the trial court decided in favor of the heirs of
Victorino and ordered Guerrero to pay temperate, moral and exemplary
damages, and attorney's fees. On August 21, 1991, Guerrero appealed to the
Court of Appeals. However it was dismissed. On October 26, 1995, the heirs
of Victorino filed with the Court of Appeals a motion for reconsideration. On
March 12, 1996, the Court of Appeals denied the motion for reconsideration.
ISSUES:
Whether or not the transceivers were contraband items prohibited by
the LOI and Administrative Circular to import; hence, the contract is void.
Whether or not the contract was breached.
RULING:
Anent the 1st issue, NO. The contract was not void ab initio. Nowhere
in the LOI and Administrative Circular is there an express ban on the
importation of transceivers. The LOI and Administrative Circular did not
render “radios and transceivers” illegally per se. The Administrative Circular
merely ordered the Radio Control Office to suspend the acceptance and
processing… of application… for permits to possess, own, transfer, purchase
and sell radio transmitters and transceivers… therefore; possession and
importation of the radio transmitters and transceivers was legal provided one
had the necessary license for it. The LOI and Administrative Circular did not
render the transceivers outside the commerce of man. They were valid
objects of the contract.
Anent the 2nd issue, NO. The contract was not breached. Affirming the
validity of the contract, the law provides that when the service (required by
the contract) has become so manifestly beyond the contemplation of the
parties, the obligor may also be released there from in whole or in parts.
Here, Guerrero’s inability to secure a letter of credit and to comply with his
obligation was a direct consequence of the denial of the permit to import. For
this, he cannot be faulted. Even if the Court assumes that there was a breach
of contract, damages cannot be awarded. Damnum absque injuria comes into
the fore.

261
REBUS SIC STANTIBUS
PNCC VS. CA
272 SCRA 183
FACTS:
On 18 November 1985, private respondents and petitioner entered into
a contract of lease of a parcel of land owned by the former. The terms and
conditions of said contract of lease are as follows: a) the lease shall be for a
period of five (5) years which begins upon the issuance of permit by the
Ministry of Human Settlement and renewable at the option of the lessee
under the terms and conditions, b) the monthly rent is P20, 000.00 which
shall be increased yearly by 5% based on the monthly rate, c) the rent shall
be paid yearly in advance, and d) the property shall be used as premises of a
rock crushing plan.
On January 7, 1986, petitioner obtained permit from the Ministry which

was to be valid for two (2) years unless revoked by the Ministry. Later,
respondent requested the payment of the first annual rental. But petitioner
alleged that the payment of rental should commence on the date of the
issuance of the industrial clearance not on the date of signing of the contract.
It then expressed its intention to terminate the contract and decided to cancel
the project due to financial and technical difficulties. However, petitioner
refused to accede to respondent’s request and reiterated their demand for the
payment of the first annual rental. But the petitioner argued that it was only
obligated to pay P20, 000.00 as rental for one month prompting private
respondent to file an action against the petitioner for specific performance
with damages before the RTC of Pasig. The trial court rendered decision in
favor of private respondent. Petitioner then appealed the decision of the trial
court to the Court of Appeals but the later affirmed the decision of the trial
court and denied the motion for reconsideration.
ISSUE:
Whether or not petitioner can avail of the benefit of Article 1267 of the
New Civil Code.
RULING:
NO. The petitioner cannot take refuge of the said article. Article 1267
of the New Civil Code provides that when the service has become so difficult
as to manifestly beyond the contemplation of the parties, the obligor may also
be released therefrom, in whole or in part. This article, which enunciates the
doctrine of unforeseen events, is not, however an absolute application of the
principle of rebus sic stantibus, which would endanger the security of
contractual relations. The parties to the contract must be presumed to have
assumed the risks of unfavorable developments. It is therefore only in
absolutely exceptional chances of circumstances that equity demands
assistance for the debtor. The principle of rebus sic stantibus neither fits in
with the facts of the case. Under this theory, the parties stipulate in the light
of certain prevailing conditions, and once these conditions cease to exist, the
contract also ceases to exist.
In this case, petitioner averred that three (3) abrupt change in the
political climate of the country after the EDSA Revolution and its poor
financial condition rendered the performance of the lease contract
impractical and inimical to the corporate survival of the petitioner. However,
262
as held in Central Bank v. CA, mere pecuniary inability to fulfill an
engagement does not discharge a contractual obligation, nor does it
constitute a defense of an action for specific performance.
REBUS SIC STANTIBUS
NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY,

petitioners, VS. THE COURT OF APPEALS AND CAMARINES SUR II
ELECTRIC COOPERATIVE, INC. (CASURECO II), respondents
1994 Feb 24
230 SCRA 351
FACTS:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone
company rendering local as well as long distance service in Naga City while
private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO
II) is a private corporation established for the purpose of operating an electric
power service in the same city.
On November 1, 1977, the parties entered into a contract for the use
by petitioners in the operation of its telephone service the electric light posts
of private respondent in Naga City. In consideration therefor, petitioners
agreed to install, free of charge, ten (10) telephone connections for the use by
private respondent. After the contract had been enforced for over ten (10)
years, private respondent filed with the Regional Trial Court against
petitioners for reformation of the contract with damages, on the ground that
it is too one-sided in favor of petitioners; that it is not in conformity with the
guidelines of the National Electrification Administration (NEA); that after
eleven (11) years of petitioners' use of the posts, the telephone cables strung
by them thereon have become much heavier with the increase in the volume
of their subscribers; that a post now costs as much as P2,630.00; so that
justice and equity demand that the contract be reformed to abolish the
inequities thereon.
As second cause of action, private respondent alleged that starting

with the year 1981, petitioners have used 319 posts outside Naga City,
without any contract with it; that at the rate of P10.00 per post, petitioners
should pay private respondent for the use thereof the total amount of
P267,960.00 from 1981 up to the filing of its complaint; and that petitioners
had refused to pay private respondent said amount despite demands. And as
third cause of action, private respondent complained about the poor servicing
by petitioners.
The trial court ruled, as regards private respondent’s first cause of

action, that the contract should be reformed by ordering petitioners to pay
private respondent compensation for the use of their posts in Naga City, while
263
private respondent should also be ordered to pay the monthly bills for the use
of the telephones also in Naga City. And taking into consideration the
guidelines of the NEA on the rental of posts by telephone companies and the
increase in the costs of such posts, the trial court opined that a monthly
rental of P10.00 for each post of private respondent used by petitioners is
reasonable, which rental it should pay from the filing of the complaint in this
case on January 2, 1989. And in like manner, private respondent should pay
petitioners from the same date its monthly bills for the use and transfers of its
telephones in Naga City at the same rate that the public are paying.
On private respondent's second cause of action, the trial court found

that the contract does not mention anything about the use by petitioners of
private respondent's posts outside Naga City. Therefore, the trial court held
that for reason of equity, the contract should be reformed by including therein
the provision that for the use of private respondent's posts outside Naga City,
petitioners should pay a monthly rental of P10.00 per post, the payment to
start on the date this case was filed, or on January 2, 1989, and private
respondent should also pay petitioners the monthly dues on its telephone
connections located outside Naga City beginning January, 1989. And with
respect to private respondent's third cause of action, the trial court found the
claim not sufficiently proved.
The Court of Appeals affirmed the decision of the trial court, but based
on different grounds to wit: (1) that Article 1267 of the New Civil Code is
applicable and (2) that the contract was subject to a potestative condition
which rendered said condition void.
ISSUE:
Whether or not the principle of Rebus Sic Stantibus is applicable in the
case at bar.
RULING:
No. Article 1267 speaks of "service" which has become so difficult.
Taking into consideration the rationale behind this provision, the term
"service" should be understood as referring to the "performance" of the
obligation.
In the present case, the obligation of private respondent consists in

allowing petitioners to use its posts in Naga City, which is the service
contemplated in said article. Furthermore, a bare reading of this article
reveals that it is not a requirement thereunder that the contract be for future
service with future unusual change. According to Senator Arturo M.
Tolentino, Article 1267 states in our law the doctrine of unforseen events.
This is said to be based on the discredited theory of rebus sic stantibus in
public international law; under this theory, the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist the
contract also ceases to exist. Considering practical needs and the demands of
equity and good faith, the disappearance of the basis of a contract gives rise
to a right to relief in favor of the party prejudiced.
The allegations in private respondent's complaint and the evidence it

has presented sufficiently made out a cause of action under Article 1267. The
Court, therefore, release the parties from their correlative obligations under
the contract. However, the disposition of the present controversy does not
end here. The Court has to take into account the possible consequences of
merely releasing the parties therefrom: petitioners will remove the telephone
264
wires/cables in the posts of private respondent, resulting in disruption of their
essential service to the public; while private respondent, in consonance with
the contract will return all the telephone units to petitioners, causing
prejudice to its business.
The Court shall not allow such eventuality. Rather, the Court requires,
as ordered by the trial court: 1) petitioners to pay private respondent for the
use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao
and Pili, Camarines Sur and in other places where petitioners use private
respondent's posts, the sum of ten (P10.00) pesos per post, per month,
beginning January, 1989; and 2)private respondent to pay petitioner the
monthly dues of all its telephones at the same rate being paid by the public
beginning January, 1989. The peculiar circumstances of the present case, as
distinguished further from the Occeña case, necessitates exercise of a equity
jurisdiction. By way of emphasis, the Court reiterates the rationalization of
respondent court that:
". . . In affirming said ruling, we are not making a new contract for the parties
herein, but we find it necessary to do so in order not to disrupt the basic and
essential services being rendered by both parties herein to the public and to
avoid unjust enrichment by appellant at the expense of plaintiff . . . "
Decision affirmed.
REQUISITES OF CONDONATION – NOT INOFFICIOUS
TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC., petitioner,

VS. THE COURT OF APPEALS and ASSOCIATED BANK, respondents
1994 Aug 19
235 SCRA 494
FACTS:
Sometime in 1979, petitioner applied for and was granted several
financial accommodations amounting to P1,300,000.00 by respondent
Associated Bank. The loans were evidence and secured by four (4)
promissory notes, a real estate mortgage covering three parcels of land and a
chattel mortgage over petitioner's stock and inventories. Unable to settle its
265
obligation in full, petitioner requested for, and was granted by respondent
bank, a restructuring of the remaining indebtedness which then amounted to
P1,057,500.00, as all the previous payments made were applied to penalties
and interests.
To secure the re-structured loan of P1,213,400.00, three new

promissory notes were executed by Trans-Pacific. The mortgaged parcels of
land were substituted by another mortgage covering two other parcels of land
and a chattel mortgage on petitioner's stock inventory. The released parcels
of land were then sold and the proceeds amounting to P1,386,614.20,
according to petitioner, were turned over to the bank and applied to Trans-
Pacific's restructured loan. Subsequently, respondent bank returned the
duplicate original copies of the three promissory notes to Trans-Pacific with
the word "PAID" stamped thereon. Despite the return of the notes, or on
December 12, 1985, Associated Bank demanded from Trans-Pacific payment
of the amount of P492,100.00 representing accrued interest on PN No. TL-
9077-82. According to the bank, the promissory notes were erroneously
released. Initially, Trans-Pacific expressed its willingness to pay the amount
demanded by respondent bank. Later, it had a change of heart and instead
initiated an action before the Regional Trial Court for specific performance
and damages. There it prayed that the mortgage over the two parcels of land
be released and its stock inventory be lifted and that its obligation to the bank
be declared as having been fully paid. After trial, the court a quo rendered
judgment in favor of Trans-Pacific. The appellate court which, as aforesaid,
reversed the decision of the trial court.
ISSUE:
Whether or not petitioner has indeed paid in full its obligation to
respondent bank.
RULING:
No. The Court found no reversible error committed by the appellate
court in disposing of the appealed decision. As gleaned from the decision of
the court a quo, judgment was rendered in favor of petitioner on the basis of
presumptions. The above disquisition finds no factual support, however, per
review of the records. The presumption created by the Art. 1271 of the Civil
Code is not conclusive but merely prima facie. If there be no evidence to the
contrary, the presumption stands. Conversely, the presumption loses its legal
efficacy in the face of proof or evidence to the contrary.
In the case at bar, the Court finds sufficient justification to overthrow

the presumption of payment generated by the delivery of the documents
evidencing petitioners’ indebtedness.
It may not be amiss to add that Article 1271 of the Civil Code raises a
presumption, not of payment, but of the renunciation of the credit where
more convincing evidence would be required than what normally would be
called for to prove payment. The rationale for allowing the presumption of
renunciation in the delivery of a private instrument is that, unlike that of a
public instrument, there could be just one copy of the evidence of credit.
Where several originals are made out of a private document, the intendment
of the law would thus be to refer to the delivery only of the original rather
than to the original duplicate of which the debtor would normally retain a
copy.
Petition denied

266
IMPLIED CONDONATION – PRESUMPTION OF DELIVERY
1. DALUPAN VS. HARDEN, NOV. 27, 1951

2. LOPEZ LISO VS. TAMBUNTING, 33 PHIL. 226
DALUPAN VS. HARDEN

1951 Nov 27
FACTS:
The case is an appeal taken from an order of the First Instance of
Manila dated May 19, 1950, setting aside the writs of execution and
garnishment issued to the sheriff of Manila commanding him to levy on two
(2) checks, one for P9,028.50, and another for P24,546.00, payable to Fred M.
Harden which were then in possession of the receiver appointed in case
involving the liquidation of the conjugal partnership of the spouses Fred M.
Harden and Esperanza P. de Harden.
On August 26, 1948, plaintiff filed an action against the defendant for
the collection of P113,837.17, with interest thereon from the filing of the
complaint, which represents fifty (50) per cent of the reduction plaintiff was
able to secure from the Collector of Internal Revenue in the amount of unpaid
taxes claimed to be due from the defendant. Defendant acknowledged this
claim and prayed that judgment be rendered accordingly. The receiver in the
liquidation of case No. R-59634 and the wife of the defendant, Esperanza P. de
Harden, filed an answer in intervention claiming that the amount sought by
the plaintiff was exorbitant and prayed that it be reduced to 10 per cent of the
rebate. By reason of the acquiescence of the defendant to the claim on one
hand, and the opposition of the receiver and of the wife on the other, an
amicable settlement was concluded by the plaintiff and the intervenor
whereby it was agreed that the sum of P22,767.43 be paid to the plaintiff
from the funds under the control of the receiver "and the balance of
P91,069.74 shall be charged exclusively against the defendant Fred M.
Harden from whatever share he may still have in the conjugal partnership
between him and Esperanza P. de Harden after the final liquidation and
partition thereof, without pronouncement as to costs and interests." The
court rendered judgment in accordance with this stipulation.
Almost one year thereafter, plaintiff filed a motion for the issuance of a
writ of execution to satisfy the balance of P91, 069.74, which was favorably
acted upon. At that time the receiver had in his possession two (2) checks
payable to Fred M. Harden amounting to P33,574.50, representing part of the
proceeds of the sale of two (2) lots belonging to the conjugal partnership
which was ordered by the court upon the joint petition of the spouses in order
that they may have funds with which to defray their living and other similar
expenses. One-half of the proceeds was given to Mrs. Harden. The sheriff
attempted to garnish these two (2) checks acting upon the writ of execution
secured by the plaintiff, but the receivership court quashed the writ, stating
however in the order that it will be “without prejudice to the right of
Francisco Dalupan to attach the money of the defendant Fred M. Harden,
after the same has been delivered to the latter. When said checks were
delivered to the latter.” When said checks were delivered to Jose Salumbides
in his capacity as attorney-in-fact of Fred M. Harden, plaintiff immediately
secured another writ of garnishment in line with the suggestion of the court,
whereupon defendant again filed a motion to quash said writ, and after due
hearing, the court granted the motion setting aside the writ of garnishment,

267
as well as the writ of execution previously issued in the case. This is the
order now subject of appeal.
ISSUE:
Whether or not the proffer made by the plaintiff to the defendant is
binding.
RULING:
YES, the proffer made by the plaintiff to the defendant to the effect that
“in the event you lose your case with your wife, Mrs. Esperanza P. de Harden,
and that after adjudication of the conjugal property what is left with you will
not be sufficient for your livelihood. I shall be pleased to write off as bad debt
the balance of your account in the sum of P42, 069.74.” This proffer was
contained in a letter sent by the plaintiff to the defendant on March 23, 1949,
which was accepted expressly by Fred M. Harden. Harden regarded this
proffer as a binding obligation and acted accordingly, and for plaintiff to say
now that proffer is but a mere gesture of generosity or an act of Christian
charity without any binding legal effect is unfair to say at least. This is an
added circumstance, which confirms the Court’s view that the understanding
between the plaintiff and the defendant is really to defer payment of the
balance of the claim until after the final liquidation of the conjugal
partnership.
IMPLIED CONDONATION – PRESUMPTION OF DELIVERY
LEONIDES LOPEZ LISO, plaintiff-appellee,

VS. MANUEL TAMBUNTING, defendant-appellant
1916 January 19
G.R. No. 9806
33 PHIL 226
FACTS:
These proceedings were brought to recover from the defendant the
sum of P2,000, amount of the fees, which, according to the complaint, are
owing for professional medical services rendered by the plaintiff to a
daughter of the defendant from March 10 to July 15, 1913, which fees the
defendant refused to pay, notwithstanding the demands therefor made upon
him by the plaintiff. The defendant denied the allegations of the complaint,
and furthermore alleged that the obligation which the plaintiff endeavored to
compel him to fulfill was already extinguished.
The Court of First Instance of Manila, after hearing the evidence

introduced by both parties, rendered judgment on December 17, 1913,
ordering the defendant to pay to the plaintiff the sum of P700, without
express finding as to costs. The defendant, after entering a motion for a new
trial, which was denied, appealed from said judgment and forwarded to this
court the proper bill of exceptions.
ISSUE:
Whether or not the obligation alleged in the complaint has already
been extinguished.
RULING:
No, the Supreme Court ruled that the obligation has not been
extinguished. The receipt signed by the plaintiff, for P700, the amount of his
fees he endeavored to collect from the defendant after he had finished
rendering the services in question was in the latter's possession, and this fact
was alleged by him as proof that he had already paid said fees to the plaintiff.
The court, after hearing the testimony, reached the conclusion that,
notwithstanding that the defendant was in possession of the receipt, the said
P700 had not been paid to the plaintiff.

268
Number 8 of section 334 of the Code of Civil Procedure provides as a
legal presumption "that an obligation delivered up to the debtor has been
paid." Article 1188 of the Civil Code also provides that the voluntary
surrender by a creditor to his debtor, of a private instrument proving a credit,
implies the renunciation of the right of action against the debtor; and article
1189 prescribes that whenever the private instrument which evidences the
debt is in the possession of the debtor, it will be presumed that the creditor
delivered it of his own free will, unless the contrary is proven.
But the legal presumption established by the foregoing provisions of

law cannot stand if sufficient proof is adduced against it. In the case at bar
the trial court correctly held that there was sufficient evidence to the
contrary, in view of the preponderance thereof in favor of the plaintiff and of
the circumstances connected with the defendant's possession of said receipt.
Furthermore, in order that such a presumption may be taken into account, it
is necessary, as stated in the laws cited, that the evidence of the obligation be
delivered up to the debtor and that the delivery of the instrument proving the
credit be made voluntarily by the creditor to the debtor. In the present case,
it cannot be said that these circumstances concurred, inasmuch as when the
plaintiff sent the receipt to the defendant for the purpose of collecting his fee,
it was not his intention that that document should remain in the possession of
the defendant if the latter did not forthwith pay the amount specified therein.
By reason of the foregoing, the Court affirmed the judgment appealed

from, with the costs of this instance against the appellant.
CONFUSION OR MERGER OR RIGHTS
1. ESTATE OF MOTA VS. SERRA, 47 PHIL 464

2. YEK TN LIN VS. YUSINGCO, 64 PHIL 1062
ESTATE OF MOTA VS. SERRA

47 PHIL. 464
FACTS:
On February 1, 1919, plaintiffs and defendant entered into a contract of
partnership, for the construction and exploitation of a railroad line from the
"San Isidro" and "Palma" centrals to the place known as "Nandong." The
original capital stipulated was P150, 000. It was covenanted that the parties
should pay this amount in equal parts and the plaintiffs were entrusted with
the administration of the partnership. The agreed capital of P150,000,
however, did not prove sufficient, as the expenses up to May 15, 1920, had
reached the amount of P226,092.92, presented by the administrator and
O.K.'d by the defendant.
January 29, 1920, the defendant entered into a contract of sale with
Venancio Concepcion, Phil. C. Whitaker, and Eusebio R. de Luzuriaga,
whereby he sold to the latter the estate and central known as "Palma" with its
running business, as well as all the improvements, machineries and buildings,
real and personal properties, rights, choices in action and interests, including
the sugar plantation of the harvest year of 1920 to 1921, covering all the
269
property of the vendor. This contract was executed before a notary public of
Iloilo.
Before the delivery to the purchasers of the hacienda thus sold,

Eusebio R. de Luzuriaga renounced all his rights under the contract of
January 29, 1920, in favor of Messrs. Venancio Concepcion and Phil. C.
Whitaker. This gave rise to the fact that on July 17, 1920, Venancio
Concepcion and Phil. C. Whitaker and the herein defendant executed before
Mr. Antonio Sanz, a notary public in and for the City of Manila, another deed
of absolute sale of the said "Palma" Estate for the amount of P1,695,961.90, of
which the vendor received at the time of executing the deed the amount of
P945,861.90, and the balance was payable by installments in the form and
manner stipulated in the contract. The purchasers guaranteed the unpaid
balance of the purchase price by a first and special mortgage in favor of the
vendor upon the hacienda and the central with all the improvements,
buildings, machineries, and appurtenances then existing on the said
hacienda.
Afterwards, on January 8, 1921, Venancio Concepcion and Phil. C.

Whitaker bought from the plaintiffs the one-half of the railroad line pertaining
to the latter, executing therefore the document. The price of this sale was
P237,722.15, excluding any amount which the defendant might be owing to
the plaintiffs. Of the purchase price, Venancio Concepcion and Phil. C.
Whitaker paid the sum of P47,544.43 only. In the Deed, the plaintiffs and
Concepcion and Whitaker agreed, among other things, that the partnership
"Palma" and "San Isidro," formed by the agreement of February 1, 1919,
between Serra, Lazaro Mota, now deceased, and Juan J. Vidaurrazaga for
himself and in behalf of his brother, Felix and Dionisio Vidaurrazaga, should
be dissolved upon the execution of this contract, and that the said partnership
agreement should be totally cancelled and of no force and effect whatever.
So it results that the "Hacienda Palma," with the entire railroad, the
subject-matter of the contract of partnership between plaintiffs and
defendant, became the property of Whitaker and Concepcion. Phil. C.
Whitaker and Venancio Concepcion having failed to pay to the defendant a
part of the purchase price, that is, P750,000, the vendor, the herein
defendant, foreclosed the mortgage upon the said hacienda, which was
adjudicated to him at the public sale held by the sheriff for the amount of
P500,000, and the defendant put in possession thereof, including what was
planted at the time, together with all the improvements made by Messrs. Phil.
C. Whitaker and Venancio Concepcion.
Since the defendant Salvador Serra failed to pay one-half of the amount
expended by the plaintiffs upon the construction of the railroad line, that is,
P113,046.46, as well as Phil. C. Whitaker and Venancio Concepcion, the
plaintiffs instituted the present action praying: 1) that the deed of February 1,
1919, be declared valid and binding; 2) that after the execution of the said
document the defendant improved economically so as to be able to pay the
plaintiffs the amount owed, but that he refused to pay either in part or in
whole the said amount notwithstanding the several demands made on him for
the purpose; and 3) that the defendant be sentenced to pay plaintiffs the
aforesaid sum of
P113, 046.46, with the stipulated interest at 10 per cent per annum beginning
June 4, 1920, until full payment thereof, with the costs of the present action.
Defendant set up three special defenses: 1) the novation of the contract

by the substitution of the debtor with the conformity of the creditors; 2) the
confusion of the rights of the creditor and debtor; and 3) the extinguishment
of the contract.

270
The court a quo in its decision held that there was a novation of the
contract by the substitution of the debtor, and therefore absolved the
defendant from the complaint with costs against the plaintiffs. With regard to
the prayer that the said contract be declared valid and binding, the court held
that there was no way of reviving the contract which the parties themselves
in interest had spontaneously and voluntarily extinguished.
ISSUES:
Whether or not there was a novation of the contract by the substitution
of the debtor with the consent of the creditor, as required by Article 1205 of
the Civil Code; and
Whether or not there was a merger of rights of debtor and creditor
under Article 1192 of the Civil Code.
RULING:
1. NO, there was no novation of the contract. It should be noted that in
order to give novation its legal effect, the law requires that the creditor
should consent to the substitution of a new debtor. This consent must be
given expressly for the reason that, since novation extinguishes the
personality of the first debtor who is to be substituted by new one, it implies
on the part of the creditor a waiver of the right that he had before the
novation which waiver must be express under the principle that renuntiatio
non praesumitur, recognized by the law in declaring that a waiver of right
may not be performed unless the will to waive is indisputably shown by him
who holds the right. The fact that Phil. C. Whitaker and Venancio Concepcion
were willing to assume the defendant's obligation to the plaintiffs is of no
avail, if the latter have not expressly consented to the substitution of the first
debtor. As has been said, in all contracts of novation consisting in the change
of the debtor, the consent of the creditor is indispensable, pursuant to Article
1205 of the Civil Code which reads as follows: Novation which consists in the
substitution of a new debtor in the place of the original one may be made
without the knowledge of the latter, but not without the consent of the
creditor.
2. NO, there was no merger of Rights. Another defense urged by the

defendant is the merger of the rights of debtor and creditor, whereby under
Article 1192 of the Civil Code, the obligation, the fulfillment of which is
demanded in the complaint, became extinguished. It is maintained in
appellee's brief that the debt of the defendant was transferred to Phil. C.
Whitaker and Venancio Concepcion by the document. These in turn acquired
the credit of the plaintiffs by virtue of the debt; thus, the rights of the debtor
and creditor were merged in one person. The argument would at first seem
to be incontrovertible, but if we bear in mind that the rights and titles which
the plaintiffs sold to Phil. C. Whitaker and Venancio Concepcion refer only to
one-half of the railroad line in question, it will be seen that the credit which
they had against the defendant for the amount of one-half of the cost of
construction of the said line was not included in the sale. That the plaintiffs
sold their rights and titles over one-half of the line. The purchasers, Phil. C.
Whitaker and Venancio Concepcion, to secure the payment of the price,
executed a mortgage in favor of the plaintiffs on the same rights and titles
that they had bought and also upon what they had purchased from Mr.
Salvador Serra. In other words, Phil. C. Whitaker and Venancio Concepcion
mortgaged unto the plaintiffs what they had bought from the plaintiffs and
also what they had bought from Salvador Serra. If Messrs. Phil. C. Whitaker
and Venancio Concepcion had purchased something from Mr. Salvador Serra,
the herein defendant, regarding the railroad line, it was undoubtedly the one-
half thereof pertaining to Mr. Salvador Serra. This clearly shows that the
rights and titles transferred by the plaintiffs to Phil. C. Whitaker and Venancio
Concepcion were only those they had over the other half of the railroad line.
Therefore, as already stated, since there was no novation of the contract
between the plaintiffs and the defendant, as regards the obligation of the
latter to pay the former one-half of the cost of the construction of the said
271
railroad line, and since the plaintiffs did not include in the sale, the credit that
they had against the defendant, the allegation that the obligation of the
defendant became extinguished by the merger of the rights of creditor and
debtor by the purchase of Messrs. Phil. C. Whitaker and Venancio Concepcion
is wholly untenable.
CONFUSION OR MERGER OR RIGHTS
YEK TONG LIN VS. YUSINGCO

64 PHIL 473
FACTS:
The defendant Pelagio Yusingco was the owner of the steamship
Yusingco and, as such, he executed, on November 19, 1927, a power of
attorney in favor of Yu Seguios to administer, lease, mortgage and sell his
properties, including his vessels or steamships. Yu Seguios, acting as such
attorneys in fact of Pelagio Yusingco, mortgaged to the plaintiff Yek Tong Lin
Fire & Marine Insurance Co., Ltd., with the approval of the Bureau of
Customs, the steamship Yusingco belonging to the defendant, to answer for
any amount that said plaintiff might pay in the name of the defendant on
account of a promissory note for P45, 000 executed by it.
One year and some months later, or in February, 1930, and in April,
1931, the steamship Yusingco needed some repairs which were made by the
Earnshaw Docks & Honolulu Iron Works upon petition of A. Yusingco
Hermanos which, according to documentary evidence of record, was co-
owner of Pelagio Yusingco. The repairs were made upon the guaranty of the
defendant and appellant Vicente Madrigal at a cost of P8,244.66.
When neither A. Yusingco Hermanos nor Pelagio Yusingco could pay

said sum to the Earnshaw Docks & Honolulu Iron Works, the defendant and
appellant Vicente Madrigal had to make payment thereof with the stipulated
interest thereon, which was at the rate of 9 per cent per annum, on March 9,
1932, because he was bound thereto by reason of the bond filed by him, the
payment then made by him having amounted to P8,777.60. Some days later,
when said defendant discovered that he was not to be reimbursed for the
repairs made on the steamship Yusingco, he brought an action against his co-
defendant Pelagio Yusingco and A. Yusingco Hermanos to compel them to
reimburse him, which resulted in a judgment favorable to him and adverse to
the Yusingcos, as the latter were ordered to pay him the sum of P3,269.66
plus interest thereon at said rate of 9 per cent per annum from May 6, 1931,
with the costs of the suit. It was provided in the judgment that upon failure of
the Yusingcos to pay the above-stated amounts to Vicente Madrigal, a writ of
execution would be issued in order to have the steamship Yusingco sold at
public auction for the purpose of satisfying said amounts with the proceeds
thereof.
Inasmuch as neither the defendant Pelagio Yusingco nor A. Yusingco

Hermanos paid the amount of the judgment rendered in civil case No. 41654,
in favor of the defendant and appellant Vicente Madrigal, the latter sought
and obtained from the Court of First Instance, which tried the case, the
issuance of the corresponding writ of execution. However, before the sale of
the steamship Yusingco, by virtue of the writ of execution so issued, was
carried out, the plaintiff and appellant filed with the defendant sheriff a third
party claim demanding said ship for himself, alleging that it had been
mortgaged to him long before the issuance of said writ and, therefore, he was
entitled to the possession thereof. The defendant sheriff then informed the
defendant and appellant Vicente Madrigal that if he wished to have the
272
execution sought by him carried out, he should file the indemnity bond
required by section 451 of Act No. 190. This was done by Vicente Madrigal,
but in order to prevent him and the sheriff from proceeding with the
execution, the plaintiff and appellant instituted this case in the court of origin
and asked for the issuance of a writ of preliminary injunction addressed to
said two defendants to restrain them from selling the steamship Yusingco at
public auction. The writ of preliminary injunction, which was issued on
August 19, 1932, was later dissolved, the defendant and appellant Vicente
Madrigal having filed a bond of P5,000. This left the preliminary injunction
unimpaired and valid for the sale of the steamship Yusingco at public auction.
For this reason, said ship was sold at public auction on September 19, 1932,
and was purchased, under the circumstances, by the plaintiff and appellant
itself, which was the highest bidder, having made the highest bid of P12,000.
Of said amount, the defendant sheriff turned over P10,195 to Vicente
Madrigal in payment of his judgment credit. It is said sum of P10,195 which
the lower court ordered Vicente Madrigal to turn over to the plaintiff.
ISSUE:
Whether or not the credit of the plaintiff, as mortgaged creditor of
Pedagio Yusingco, is superior to that of Vicente Madrigal, as judgment
creditor of said Pelagio Yusingco and A. Yusingco Hermones.
RULING:
NO, the defendant and appellant Vicente Madrigal enjoy preference in
the payment of his judgment credit.
After the steamship Yusingco had been sold by virtue of the judicial
writ issued in civil case No. 41654 for the execution of the judgment rendered
in favor of Vicente Madrigal, the only right left to the plaintiff was to collect
its mortgage credit from the purchaser thereof at public auction, inasmuch as
the rule is that a mortgage directly and immediately subjects the property on
which it is imposed, whoever its possessor may be, to the fulfillment of the
obligation for the security of which it was created (Article 1876, Civil Code);
but it so happens that it can not take such steps now because it was the
purchaser of the steamship Yusingco at public auction, and it was so with full
knowledge that it had a mortgage credit on said vessel. Obligations are
extinguished by the merger of the rights of the creditor and debtor (Articles
1156 and 1192, Civil Code).

273
COMPENSATION – REQUISITES
1. PNB MANAGEMENT VS. R & R METAL, 373 SCRA 1

2. SILAHIS MARKETING VS. IAC, DEC. 7, 1989
3. FRANCIA VS. CA, JUNE 28, 1988
PNB MANAGEMENT and DEVELOPMENT CORP. (PNB MADECOR),

petitioner,
VS. R&R METAL CASTING and FABRICATING, INC., respondent
January 2, 2002
G. R. No. 132245
FACTS:
On November 19, 1993, respondent R&R Metal Casting and
Fabricating, Inc. (R&R) obtained a judgment in its favor against Pantranco
North Express, Inc. (PNEI). PNEI was ordered to pay respondent P213,050
plus interest as actual damages, P50,000 as exemplary damages, 25 percent
of the total amount payable as attorney’s fees, and the costs of suit. However,
the writ of execution was returned unsatisfied since the sheriff did not find
any property of PNEI recorded at the Registries of Deeds of the different
cities of Metro Manila. Neither did the sheriff receive a reply to the notice of
garnishment he sent to PNB-Escolta.
On March 27, 1995, respondent filed with the trial court a motion for
the issuance of subpoenae duces tecum and ad testificandum requiring
petitioner PNB Management and Development Corp. (PNB MADECOR) to
produce and testify on certain documents pertaining to transactions between
petitioner and PNEI from 1981 to 1995. From the testimony of the
representative of PNB MADECOR, it was discovered that NAREDECO,
petitioner’s forerunner, executed a promissory note in favor of PNEI for P7.8
million, and that PNB MADECOR also had receivables from PNEI in the form
274
of unpaid rentals amounting to more than P7.5 million. On the basis of said
testimony, respondent filed with the trial court a motion for the application of
funds or properties of PNEI, its judgment debtor, in the hands of PNB
MADECOR for the satisfaction of the judgment in favor of respondent.
The trial court issued an order garnishing the amount owed by

petitioner to PNEI under the promissory note, to satisfy the judgment against
PNEI and in favor of respondent. On appeal, the Court of Appeals affirmed
the decision. The appellate court also denied petitioner’s motion for
reconsideration.
ISSUE:
Whether or not the Court of Appeals erred when it ruled that the
requisites for legal compensation as set forth under articles 1277 and 1278 of
the civil code do not concur in the case at bar.
RULING:
NO. Legal compensation could not have occurred because of the
absence of one requisite in this case - that both debts must be due and
demandable.
As observed by the Court of Appeals, under the terms of the promissory

note, failure on the part of NAREDECO (PNB MADECOR) to pay the value of
the instrument ‘after due notice has been made by PNEI would entitle PNEI
to collect an 18% interest per annum from date of notice of demand.
Petitioner makes a similar assertion in its petition. Petitioner’s obligation to
PNEI appears to be payable on demand. Petitioner is obligated to pay the
amount stated in the promissory note upon receipt of a notice to pay from
PNEI. If petitioner fails to pay after such notice, the obligation will earn an
interest of 18 percent per annum. Respondent alleges that PNEI had already
demanded payment.
The Court agrees with petitioner that this letter was not one
demanding payment, but one that merely informed petitioner of (1) the
conveyance of a certain portion of its obligation to PNEI per a dacion en pago
arrangement between PNEI and PNB, and (2) the unpaid balance of its
obligation after deducting the amount conveyed to PNB. The import of this
letter is not that PNEI was demanding payment, but that PNEI was advising
petitioner to settle the matter of implementing the earlier arrangement with
PNB.
Since petitioner’s obligation to PNEI is payable on demand, and there

being no demand made, it follows that the obligation is not yet due.
Therefore, this obligation may not be subject to compensation for lack of a
requisite under the law. Without compensation having taken place, petitioner
remains obligated to PNEI to the extent stated in the promissory note. This
obligation may undoubtedly be garnished in favor of respondent to satisfy
PNEI’s judgment debt.
There is another alleged demand letter on record, dated January 24,

1990. It was addressed to Atty. Domingo A. Santiago, Jr., Senior Vice
President and Chief Legal Counsel of PNB, and signed by Manuel Vijungco,
chairman of the Board of Directors of PNEI. In said letter, PNEI requested
offsetting of accounts between petitioner and PNEI. However, PNEI’s own
Assistant General Manager for Finance at that time, Atty. Loreto N. Tang,
testified that the letter was not a demand letter.
Petition denied. Decision affirmed

275
SILAHIS MARKETING CORPORATION, petitioner,

VS. INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON,
doing business under the name and style of "MARK INDUSTRIAL
SALES", respondents.
1989 December 07
G.R. No. 74027
FACTS:
On various dates in October, November and December, 1975, Gregorio
de Leon doing business under the name and style of Mark Industrial Sales
sold and delivered to Silahis Marketing Corporation various items of

276
merchandise covered by several invoices in the aggregate amount of
P22,213.75 payable within thirty (30) days from date of the covering invoices.
Allegedly due to Silahis' failure to pay its account upon maturity

despite repeated demands, de Leon filed a complaint for the collection of the
said accounts including accrued interest thereon in the amount of P661.03
and attorney's fees of P5,000.00 plus costs of litigation.
The answer admitted the allegations of the complaint insofar as the

invoices were concerned but presented as affirmative defenses; [a] a debit
memo for P22,200.00 as unrealized profit for a supposed commission that
Silahis should have received from de Leon for the sale of sprockets in the
amount of P111,000.00 made directly to Dole Philippines, Incorporated by the
latter sometime in August 1975; and [b] Silahis' claim that it is entitled to
return the stainless steel screen which was found defective by its client,
Borden International, Davao City, and to have the corresponding amount
cancelled from its account with de Leon.
In a decision, the lower court confirmed the liability of Silahis for the
claim of de Leon but at the same time ordered that it be partially offset by
Silahis' counterclaim as contained in the debit memo for unrealized profit and
commission.
De Leon appealed from the said decision insofar as it directed partial

compensation. And the appellate court set aside the decision of the lower
court and dismissed herein petitioner's counterclaim for lack of factual or
legal basis.
ISSUE:
Whether or not private respondent is liable to the petitioner for the
commission or margin for the direct sale which the former concluded and
consummated with Dole Philippines, Incorporated without coursing the same
through herein petitioner.
RULING:
It must be remembered that compensation takes place when two
persons, in their own right, are creditors and debtors to each other. Article
1279 of the Civil Code provides that: "In order that compensation may be
proper, it is necessary: [1] that each one of the obligors be bound principally,
and that he be at the same time a principal creditor of the other; [2] that both
debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated; [3]
that the two debts be due; [4] that they be liquidated and demandable; [5]
that over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor."
Undoubtedly, petitioner admits the validity of its outstanding accounts

with private respondent in the amount of P22,213.75 as contained in its
answer. But whether private respondent is liable to pay the petitioner a 20%
margin or commission on the subject sale to Dole Philippines, Inc. is
vigorously disputed. This circumstance prevents legal compensation from
taking place.
The Court agrees with respondent appellate court that there is no

evidence on record from which it can be inferred that there was any
agreement between the petitioner and private respondent prohibiting the
latter from selling directly to Dole Philippines, Incorporated. Definitely, it
cannot be asserted that the debit memo was a contract binding between the
parties considering that the same, as correctly found by the appellate court,
was not signed by private respondent nor was there any mention therein of
any commitment by the latter to pay any commission to the former involving
the sale of sprockets to Dole Philippines, Inc. in the amount of P111,000.00.
277
Indeed, such document can be taken as self-serving with no probative

value absent a showing or at the very least an inference, that the party sought
to be bound assented to its contents or showed conformity thereto. Thus the
questioned decision of respondent appellate court is hereby affirmed.
ENGRACIO FRANCIA
VS. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ
G.R. No. L-67649
June 28, 1988
162 SCRA 753
FACTS:
Engracio Francia is the registered owner of a residential lot, 328
square meters, and a two-story house built upon it situated at Barrio San
Isidro, now District of Sta. Clara, Pasay City, Metro Manila. On October 15,
1977, a 125 square meter portion of Francia's property was expropriated by
the Republic of the Philippines for the sum of P4,116.00 representing the
estimated amount equivalent to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes.
Thus, on December 5, 1977, his property was sold at public auction pursuant
to Section 73 of Presidential Decree No. 464 known as the Real Property Tax
Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was
the highest bidder for the property. On March 20, 1979, Francia filed a
complaint to annul the auction sale. He later amended his complaint on
January 24, 1980. The petitioner seeks to set aside the auction sale of his
property which took place on December 5, 1977, and to allow him to recover
a 203 square meter lot which was sold at public auction to Ho Fernandez and
ordered titled in the latter's name. He further averred that his tax
delinquency of P2,400.00 has been extinguished by legal compensation since
the government owed him P4, 116.00 when a portion of his land was
expropriated.
The lower court rendered a decision in favor Fernandez which was

affirmed by the Intermediate Appellate Court . Hence, this petition for
review.
ISSUE:
Whether or not the tax delinquency of Francia has been extinguished
by legal compensation.
RULING:
There is no legal basis for the contention. By legal compensation,
obligations of persons, who in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the requirements provided by Article
1279, to wit: (1) that each one of the obligors be bound principally and that
he be at the same time a principal creditor of the other; (2) that the two
debts be due.
The Court had consistently ruled that there can be no off-setting of

taxes against the claims that the taxpayer may have against the government.
A person cannot refuse to pay a tax on the ground that the government owes
him an amount equal to or greater than the tax being collected. The collection
of a tax cannot await the results of a lawsuit against the government. In
addition, a taxpayer cannot refuse to pay his tax when called upon by the

278
collector because he has a claim against the governmental body not included
in the tax levy.
There are also other factors which compelled the Court to rule against
the petitioner. The tax was due to the city government while the
expropriation was effected by the national government. Moreover, the amount
of P4,116.00 paid by the national government for the 125 square meter
portion of his lot was deposited with the Philippine National Bank long before
the sale at public auction of his remaining property. Notice of the deposit
dated September 28, 1977 was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that he knew about the
P4,116.00 deposited with the bank but he did not withdraw it. It would have
been an easy matter to withdraw P2,400.00 from the deposit so that he could
pay the tax obligation thus aborting the sale at public auction.
The petition for review was dismissed.
AUTONOMY OF CONTRACTS
1. TOLENTINO VS. SECRETARY, 235 SCRA 630

2. ARWOOD VS. DM CONSUNJI, 394 SCRA 11
3. PASCUAL VS. RAMOS, 384 SCRA 105
ARTURO M. TOLENTINO
VS. THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE
1994 Aug 25
G.R. No. 115455
235 SCRA 630
FACTS:
The valued-added tax (VAT) is levied on the sale, barter or exchange of
goods and properties as well as on the sale or exchange of services. It is
equivalent to 10% of the gross selling price or gross value in money of goods
or properties sold, bartered or exchanged or of the gross receipts from the
sale or exchange of services. Republic Act No. 7716 seeks to widen the tax
base of the existing VAT system and enhance its administration by amending
the National Internal Revenue Code.
The Chamber of Real Estate and Builders Association (CREBA)

contends that the imposition of VAT on sales and leases by virtue of contracts
entered into prior to the effectivity of the law would violate the constitutional
provision of “non-impairment of contracts.”
ISSUE:
Whether R.A. No. 7716 is unconstitutional on ground that it violates the
contract clause under Art. III, sec 10 of the Bill of Rights.
RULING:
No. The Supreme Court the contention of CREBA, that the imposition
of the VAT on the sales and leases of real estate by virtue of contracts entered
into prior to the effectivity of the law would violate the constitutional
provision of non-impairment of contracts, is only slightly less abstract but
nonetheless hypothetical. It is enough to say that the parties to a contract
cannot, through the exercise of prophetic discernment, fetter the exercise of
the taxing power of the State. For not only are existing laws read into
contracts in order to fix obligations as between parties, but the reservation of
279
essential attributes of sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting contracts against
impairment presupposes the maintenance of a government which retains
adequate authority to secure the peace and good order of society. In truth,
the Contract Clause has never been thought as a limitation on the exercise of
the State's power of taxation save only where a tax exemption has been
granted for a valid consideration.
Such is not the case of PAL in G.R. No. 115852, and the Court does not
understand it to make this claim. Rather, its position, as discussed above, is
that the removal of its tax exemption cannot be made by a general, but only
by a specific, law.
Further, the Supreme Court held the validity of Republic Act No. 7716
in its formal and substantive aspects as this has been raised in the various
cases before it. To sum up, the Court holds:
(1) That the procedural requirements of the Constitution have been

complied with by Congress in the enactment of the statute;
(2) That judicial inquiry whether the formal requirements for the
enactment of statutes - beyond those prescribed by the Constitution -
have been observed is precluded by the principle of separation of
powers;
(3) That the law does not abridge freedom of speech, expression or the
press, nor interfere with the free exercise of religion, nor deny to any of
the parties the right to an education; and
(4) That, in view of the absence of a factual foundation of record, claims
that the law is regressive, oppressive and confiscatory and that it
violates vested rights protected under the Contract Clause are
prematurely raised and do not justify the grant of prospective relief by
writ of prohibition.
WHEREFORE, the petitions are DISMISSED.
ARWOOD INDUSTRIES, INC. VS. D.M. CONSUNJI, INC.

G.R No. 142277
December 11, 2002
394 SCRA 11
FACTS:
Petitioner Arwood Industries and resppndent DM Consunji, as owner
and contractor, respectively, entered into a Civil, Structural and Architectural
Works Agreement on February 6, 1989 for the construction of petitioner’s
Westwood Condominium at No. 23 Eisenhower St. Greenhills, San Juan,
Metro Manila. The contract price for the project aggregated to
P20,800,000.00
Despite completion of the project, the amount of P962,434.78 remained

unpaid by petitioner. Demands were made by respondent for petitioner to
pay went unheeded.
Thus, on August 13, 1993, respondent filed a complaint for the

recovery of the balance of the contract price and for damages against
petitioner. It prayed for the payment of the a) amount of P962, 434.78 with
interest of 2% per month or a fraction thereof, from November 1990 up to the
time of payment; b) the payment of P250, 000 as attorney’s fees and litigation
expenses; c) amount of P150, 000 as exemplary damages and d) costs of suit.

280
The trial court and the Court of Appelas ruled in favor of DM Consunji.
ISSUE:
Whether or not the trial court and the CA correctly granted the
imposition of the monetary interest of 2% per month on the amount of
P962,434
RULING:
The Agreement or the contract between the parties is the formal
expression of the parties rights, duties, and obligations. It is the best evidence
of the intention of the parties. Thus, “when the terms of an agreement have
been reduced to writing, it is considered as containing all the terms agreed
upon and there can be, between the parties and their successors in interest,
no evidence of such terms other than the contents of the written agreement.”
It must be noted that the Agreement provided the respondent-

contractor two options in case of delay in monthly payments, to wit: a)
suspend work on the project until payment is remitted by the owner or b)
continue the work but the owner shall be required to pay the interest at a rate
of 2% per month or fraction thereof. Evidently, respondent the second option,
as the condominium project was in fact already completed. The payment of
2% then cannot be rejected.
Therefore, since the Agreement stands as the law between the parties,
the Court cannot ignore the existence of such provision providing for a
penalty for every month’s delay. Neither can petitioner impugn the Agreement
to which it willingly gave its consent.
Wherefore the petition is denied.
SPOUSES SILVESTRE and CELIA PASCUAL VS. RODRIGO RAMOS

G. R. No. 144712
July 4, 2002
384 SCRA 105
FACTS:
On June 3, 1987, spouses Silvestre and Celia Pascual executed in favor
of Rodrigo Ramos a Deed of Absolute Sale with Right to Repurchase over two
parcels of land located in Bambang, Bulacan, Bulacan for and in consideration
of P150,000.00. The Pascuals did not exercixe their right to repurchase the
property within the stipulated one-year period; thus, Ramos filed with the
trial court a petition that the title or ownership over the subject parcels and
281
improvements thereon be consolidated in his favor. In their answer, the
Pascuals averred that what the parties had actually agreed upon and entered
into was a real estate mortgage and that they had even overpaid Ramos. The
Pascuals prayed that Ramos be ordered to execute a Deed of Cancellation,
Release or Discharge of the Absolute Sale with Right to Repurchase or a Deed
of Real Estate Mortgage and for the award of damages. Among the
documents offered in evidence by Ramos during the trial was a document
denominated as Sinumpaang Salaysay signed by Ramos and Silvestre Pascual,
but not notarized. On the other hand, the Pascuals presented documentary
evidence consisting of acknowledgement receipts to prove the payments they
had made. The trial court found that the transaction was actually a loan in
the amount of P150, 000, the payment of which was secured by a mortgage of
the property. It also found that the Pascuals had made payments in the total
sum of P344,000, and that with interest at 7% per annum, the Pascuals had
overpaid the loan by P141,500.
The trial court rendered its decision dismissing Ramos’ petition and
awarding the Pascuals the sum of P141,500 as overpayments on the loan and
interests.
Ramos moved for the reconsideration of the decision, alleging that the
trial court erred in using an interest rate of 7% pert annum in the
computation of the total amount of obligation since what was expressly
stipulated in the Sinumpaang Salaysay was 7% per month. Thus the total
interest due was P643,000 was still due as interest. Adding the latter to the
principal sum of P150,000, the total amount due from the Pascuals as of April
3, 1995, was P793,000.
Finding merit in Ramos’ motion for reconsideration, which was not

opposed by the Pascuals, the trial court issued an order modifying its
decision. It deleted the award of P141,500 to the Pascuals and ordered them
to pay Ramos P511,000. The trial court noted that during the trial, the
Pascuals never disputed the stipulated interest which is 7% per month.
However, the court declared it is too burdensome and onerous, thus reducing
the interest rate at 5% per month.
The Pascuals filed a motion to reconsider the Order of June 5, 1995 and
Ramos opposed the motion of the Pascuals. The Pascuals appealed to the
Court of Appeals but the appellate court affirmed in toto the trial court’s
orders. Hence, this petition.
ISSUE:
Whether or not the Pascuals are liable for 5% interest per month from
June 3, 1987 to April 3, 1995.
RULING:
The Supreme Court held that parties are bound by the stipulation in the
contracts voluntarily entered into by them. Parties are free to stipulate terms
and conditions which they deem convenient provided they are not contrary to
law, morals, good customs, public order or public policy. The interest rate of
7% per month was voluntarily agreed upon by Ramos and the Pascuals.
There is nothing from the records and no allegation showing that petitioners
were victims of fraud when they entered into the agreement with Ramos.
With the suspension of the Usury Law and the removal of interest ceiling, the
parties are free to stipulate the interest to be imposed on loans. Absent any
evidence of fraud, undue influence, or any vice of consent exercised by Ramos
on the Pascuals, the interest agreed upon them is binding upon them. The
Court is not in a position to impose upon parties contractual stipulations
different from what they have agreed upon. The Court cannot supplant the
interest rate, which was reduced to 5% per month without opposition on the
part of Ramos.

282
Hence, the Pascuals are liable for 5% interest per month from June 3,
1987 to April 3, 1995. The assailed decision is therefore affirmed and the
petition is denied.
OBLIGATORY FORCE OF CONTRACTS
MAXIMA HEMEDES, petitioner,

VS. THE HONORABLE COURT OF APPEALS, DOMINIUM REALTY AND
CONSTRUCTION CORPORATION, ENRIQUE D. HEMEDES, and R & B
INSURANCE CORPORATION, respondents
G.R. No. 108472
October 8, 1999
FACTS:
The instant controversy involves a question of ownership over an
unregistered parcel of land, identified as Lot No. 6, plan Psu-111331, with an
area of 21,773 square meters, situated in Sala, Cabuyao, Laguna. It was
originally owned by the late Jose Hemedes, father of Maxima Hemedes and
Enrique D. Hemedes. On March 22, 1947 Jose Hemedes executed a
document entitled “Donation Inter Vivos With Resolutory Conditions”
whereby he conveyed ownership over the subject land, together with all its
improvements, in favor of his third wife, Justa Kausapin. Maxima Hemedes,
through her counsel, filed an application for registration and confirmation of
title over the subject unregistered land. Subsequently, Original Certificate of
Title (OCT) No. (0-941) 0-198 was issued in the name of Maxima Hemedes
married to Raul Rodriguez by the Registry of Deeds of Laguna on June 8,
1962, with the annotation that “Justa Kausapin shall have the usufructuary
rights over the parcel of land herein described during her lifetime or
widowhood.”
On February 28, 1979, Enrique D. Hemedes sold the property to

Dominium Realty and Construction Corporation (Dominium). On April 10,
1981, Justa Kausapin executed an affidavit affirming the conveyance of the
subject property in favor of Enrique D. Hemedes as embodied in the
“Kasunduan” dated May 27, 1971, and at the same time denying the
conveyance made to Maxima Hemedes.
On August 27, 1981, Dominium and Enrique D. Hemedes filed a

complaint with the Court of First Instance of Binan, Laguna for the annulment
of TCT No. 41985 issued in favor of R & b Insurance and/or the reconveyance
to Dominium of the subject property. Specifically, the complaint alleged that
Dominium was the absolute owner of the subject property by virtue of the
February 28, 1979 deed of sale executed by Enrique D. Hemedes, who in turn
obtained ownership of the land from Justa Kausapin, as evidenced by the
“Kasunduan” dated May 27, 1971. The Plaintiffs asserted that Justa Kausapin
never transferred the land to Maxima Hemedes and that Enrique D. Hemedes
had no knowledge of the registration proceedings initiated by Maxima
Hemedes.
After considering the merits of the case, the trial court rendered
judgment on February 22, 1989 in favor of plaintiffs Dominium and Enrique D.
Hemedes. Both R & B Insurance and Maxima Hemedes appealed from the
trial court’s decision. On September 11, 1992 the Court of Appeals affirmed
the assailed decision in toto and on December 29, 1992, it denied R &
Insurance’s motion for reconsideration. Thus, Maxima Hemedes and R & B
Insurance filed their respective petitions for review with this Court on
November 3, 1992 and February 22, 1993, respectively.
ISSUE:
Which of the two conveyances by Justa Kausapin, the first in favor of
Maxima Hemedes and the second in favor of Enrique D. Hemedes, effectively
transferred ownership over the subject land?
283
RULING:
Public respondent’s finding that the “Deed of Conveyance of
Unregistered Real Property By Reversion” executed by Justa Kausapin in
favor of Maxima Hemedes is spurious is not supported by the factual findings
in this case. It is grounded upon the mere denial of the same by Justa
Kausapin.
A party to a contract cannot just evade compliance with his contractual

obligations by the simple expedient of denying the execution of such contract.
If, after a perfect and binding contract has been executed between the
parties, it occurs to one of them to allege some defect therein as a reason for
annulling it, the alleged defect must be conclusively proven, since the validity
and fulfillment of contracts cannot be left to the will of one of the contracting
parties.
In upholding the deed of conveyance in favor of Maxima Hemedes, the

Court must concomitantly rule that Enrique D. Hemedes and his transferee,
Dominium, did not acquire any rights over the subject property.
Justa Kausapin sought to transfer to her stepson exactly what she had
earlier transferred to Maxima Hemedes – he ownership of the subject
property pursuant to the first condition stipulated in the deed of donation
executed by her husband. Thus, the donation in favor of Enrique D. Hemedes
is null and void for the purported object thereof did not exist at the time of
the transfer, having already been transferred to his sister.
Similarly, the sale of the subject property by Enrique D. Hemedes to

Dominium is also a nullity for the latter cannot acquire more rights than its
predecessor-in-interest and is definitely not an innocent purchaser for value
since Enrique D. Hemedes did not present any certificate of title upon which
it relied.
The Court upheld petitioner R & B Insurance’s assertion of ownership

over the property in dispute, as evidenced by TCT No. 41985, subject to the
usufructuary rights of Justa Kausapin, which encumbrance has been properly
annotated upon the said certificate of title.

284
MUTUALITY OF CONTRACT
1. JOSEFA VS. ZHANDONG, 417 SCRA 269

2. BANCO FILIPINO SAVINGS AND MORTGAGE BANK VS.
CA, MAY 30, 2000
JOSEFA VS. ZHANDONG TRADING CORPORATION

417 SCRA 269
G.R. NO. 150903
DECEMBER 8, 2003
FACTS:
Respondent Zhandong delivered to petitioner Josefa, who was
introduced to it as a client by Mr. Tan, the total volume of 313 crates of
boards valued at P4,558,100.00 payable within 60 days from delivery. Instead
of paying respondent, however, petitioner remitted his payments to Tan who
in turn delivered various checks to respondent, who accepted them upon
Tan’s assurance that said checks came from petitioner. When a number of the
checks bounced, Tan issued his own checks and those of his mother, but Tan
later stopped payments. Respondent demanded payment from Tan and
petitioner but was ignored; hence he filed the instant complaint.
In his answer petitioner averred that he had already paid all his
obligations to respondent through Tan. Furthermore, he claimed he is not
privy to the agreements between Tan and respondent, and hence, in case his
payments were not remitted to respondent, then it was not his (petitioner)
fault and that respondent should bear the consequences.
ISSUE:
Whether or not petitioner is liable for payment of the boards to
respondent when he did not negotiate the transaction with it, rather through
Tan as intermediary.
RULING:
285
No. The transaction was negotiated between Tan and petitioner who
only received the goods delivered by respondent. Petitioner was not privy to
the arrangement between Tan and respondent. Petitioner has fully paid for
the goods to Tan with whom he had arranged the transaction.
Contracts take effect only between the parties, their successors in

interest, heirs, and assigns. When there is no privity of contract, there is
likewise no obligation or liability and thus, no cause of action arises.
Petitioner, being not privy to the transaction between Tan and respondent,
should not be made liable for the failure of Tan to deliver the payment to
respondent.
Therefore, respondent should recover the payment from Tan.
MUTUALITY OF CONTRACT
BANCO FILIPINO SAVINGS AND MORTGAGE BANK

VS. THE HON. COURT OF APPEALS, and CALVIN & ELSA ARCILLA
2000 May 30
G.R. No. 129227
FACTS::
Elsa Arcilla and her husband, Calvin Arcilla, the Appellees in the
present recourse, secured, on three (3) occasions, loans from the Banco
Filipino Savings and Mortgage Bank, the Appellant in the present recourse, in
the total amount of P107,946.00 as evidenced by "Promissory Note" executed
by the Appellees in favor of the Appellant. To secure the payment of said
loans, the Appellees executed "Real Estate Mortgages" in favor of the
Appellants over their parcels of land located in BF-Parañaque, covered by
Transfer Certificate of Title Nos. 444645, 450406, 450407 and 455410 of the
Registry of Deeds of Parañaque. Under said deeds, the Appellant may
increase the rate of interest, on said loans, within the limits allowed by law, as
Appellant’s Board of Directors may prescribe for its borrowers. At that time,
under the Usury Law, Act 2655, as amended, the maximum rate of interest for
loans secured by real estate mortgages was 12% per annum.
On January 10, 1975, the Appellees and the Appellant executed a "Deed
of Consolidation and Amendment of Real Estate Mortgage" whereby the
aforementioned loans of the Appellees and the "Real Estate Mortgage"
executed by them as security for the payment of said loans were consolidated.
Likewise, under said deed, the loan of the Appellees from the Appellant was
286
increased to P188,000.00. The Appellees executed a "Promissory Note",
dated January 15, 1975, whereby they bound and obliged themselves, jointly
and severally, to pay the Appellant the aforesaid amount of P188,000.00 with
interest at the rate of 12% per annum, in nineteen (19) years from date
thereof, in stated installments of P2,096.93 a month.
On January 2, 1976, the Central Bank of the Philippines issued Central

Bank Circular No. 494.
In the meantime, the Skyline Builders, Inc., through its President,

Appellee Calvin Arcilla, secured loans from the Bank of the Philippine Islands
in the total amount of P450,000.00. To insure payment of the aforesaid loan,
the FGU Insurance Corporation, issued PG Bond No. 1003 for the amount of
P225,000.00 in favor of the Bank of the Philippine Islands. Skyline Buildings,
Inc., and the Appellees executed an "Agreement of Counter-Guaranty with
Mortgage" in favor of the FGU Insurance Corporation covering the aforesaid
parcels of land to assure payment of any amount that the insurance company
may pay on account of said loans. The mortgage was annotated as Entry No.
58009 at the dorsal portion of Appellees’ titles.
After October 30, 1978, the Appellant prepared and issued a

"Statement of Account" to the Appellees on their loan account to the effect
that, as of October 30, 1978, the balance of their loan account, inclusive of
interests, computed at 17% per annum, amounted to 284,490.75. It turned
out that the Appellant unilaterally increased the rate of interest on the loan
account of the Appellees from 12% per annum, as covenanted in the "Real
Estate Mortgage" and "Deed of Consolidated and Amended Real Estate
Mortgage" to 17% per annum on the authority of the aforequoted Central
Bank Circular.
The Appellees failed to pay their monthly amortizations to Appellant.

The latter forthwith filed, on April 3, 1979, a petition, with the Provincial
Sheriff, for the extrajudicial foreclosure of Appellees’ "Real Esate Mortgage"
in favor of the Appellant for the amount of P342,798.00 inclusive of the 17%
per annum which purportedly was the totality of Appellees’ account with the
Appellant on their loans. The Appellant was the purchaser of the property at
public auction for the aforesaid amount of P324,798.00. On May 25, 1979,
the Sheriff executed a "Certificate of Sale" over the aforesaid properties in
favor of the Appellant for the aforesaid amount.
The Appellant filed a "Petition for a Writ of Possession" with the

Regional Trial Court entitled "Banco Filipino Savings and Mortgage Bank vs.
Elsa Arcilla, et al., LRC Case No. P-7757-P". On February 28, 1980, the Court
rendered a Decision granting the Petition of the Appellant. The Appellees
appealed to the Court of Appeals but the latter Court, on June 29, 1985,
promulgated a Decision affirming the Decision of the Regional Trial Court.
In the meantime, the FGU Insurance Corporation, Inc., redeemed the

aforesaid properties from the Appellant by paying to the latter the amount of
P389,289.41 inclusive of interest computed at 17% per annum. The Appellant
and FGU Insurance Corp., Inc., executed, on May 27, 1980, a "Deed of
Redemption".
On September 2, 1985, the Appellees filed a complaint in the Court a

quo for the "Annulment of the Loan Contracts, Foreclose Sale with Prohibition
and Injunction, Etc." entitled "Calvin Arcilla, et al. vs. Banco Filipino Savings
and Mortgage Bank, et al.".

287
The Appellees averred, in their complaint, inter alia, that the loan
contracts and mortgages between the Appellees and the Appellant were null
and void because: (a) the interests, charges, etc., were deducted in advance
from the face value of the "Promissory Notes" executed by the Appellees; and
(b) the rate of interests charged by the Appellant were usurious. The
Appellees prayed that judgment be rendered in their favor.
ISSUE:
Has the action of the private respondents prescribed; and second, are
the respondents entitled to the refund of the alleged interest overpayments?
RULING:
Petitioner’s claim that the action of the private respondents has
prescribed is bereft of merit.
Under Article 1150 of the Civil Code, the time for prescription of all
kinds of actions, when there is no special provision which ordains otherwise,
shall be counted from the day they may be brought. Thus, the period of
prescription of any cause of action is reckoned only from the date the cause of
action accrued. And a cause of action arises when that which should have
been done is not done, or that which should not have been done is done. The
period should not be made to retroact to the date of the execution of the
contract on January 15, 1975 as claimed by the petitioner for at that time,
there would be no way for the respondents to know of the violation of their
rights.
The Court of Appeals therefore correctly found that respondents’ cause

of action accrued on October 30, 1978, the date they received the statement
of account showing the increased rate of interest, for it was only from that
moment that they discovered the petitioner’s unilateral increase thereof.
More, the aggrieved must have either actual or presumptive knowledge

of the violation, by the guilty party of his rights either by an act or omission.
The question that now comes to the fore is when the Appellees became
precisely aware of the unilateral increase, by the Appellant, of the rate of
interest on their loan account to 17% per annum. As can be ascertained from
the records, the Appellees discovered or should have discovered, for the first
time, the unilateral increase by the Appellant of the rate of interest to 17%
per annum when they received the "Statement of Account" of the Appellant as
of October 30, 1978. Hence, it was only then that the prescriptive period for
the Appellees to institute their action in the Court a quo commenced. Since
the Appellees filed their complaint in the Court a quo on September 2, 1985,
the same was seasonably filed within the ten-year prescriptive period.
Anent the second issue as to whether the respondents are entitled to

recover the alleged overpayments of interest, the Court finds that they are
entitled, despite the absence of any prayer therefor. This Court has ruled that
it is the material allegations of fact in the complaint, not the legal conclusion
made therein or the prayer that determines the relief to which the plaintiff is
entitled.
The loan contracts with real estate mortgage entered into by and
between the petitioner and respondent stated that the petitioner may
increase the interest on said loans, within the limits allowed by law, as
petitioner’s Board of Directors may prescribe for its borrowers. At the time
the contracts were entered into, said escalation clause was valid. It was only
pursuant to P.D. No. 1684 which became effective March 17, 1980 wherein to
be valid, escalation clauses should provide: 1.) that there can be an increase
in interest if increased by law or by the Monetary Board; and 2.) in order for
such stipulation to be valid, it must include a provision for the reduction of
the stipulated interest in the event that the maximum rate of interest is
reduced by law or by the Monetary Board.
288
The decision of the Court of Appeals is AFFIRMED and the instant

petition is DENIED.
PRINCIPLE OF EQUALITY / CONTRACTS OF ADHESION
1. PAL VS. CA, 255 SCRA 48

2. ERMITANO VS. CA, 306 SCRA 218
PHILIPPINE AIRLINES VS. COURT OF APPEALS

G.R. No. 119706
March 14, 1996
255 SCRA 48
FACTS:
On January 27, 1990, plaintiff Gilda C. Mejia shipped thru defendant,
Philippine Airlines, one (1) unit microwave oven under PAL Air Waybill No. 0-
79-1013008-3, with a gross weight of 33 kilograms from San Francisco, U.S.A.
to Manila, Philippines. Upon arrival, however, of said article in Manila,
Philippines, plaintiff discovered that its front glass door was broken and the
damage rendered it unserviceable. Demands both oral and written were
made by plaintiff against the defendant for the reimbursement of the value of
the damaged microwave oven, and transportation charges paid by plaintiff to
defendant company. But these demands fell on deaf ears. This is because,
according to petitioner, was filed out of time under paragraph 12, a (1) of the
Air Waybill which provides: "(a) the person entitled to delivery must make a
complaint to the carrier in writing in case: (1) of visible damage to the goods,
immediately after discovery of the damage and at the latest within 14 days
from the receipt of the goods.
On September 25, 1990, Gilda C. Mejia filed an action for damages

against the petitioner in the lower court. The latter rendered a decision
rendering PAL liable to pay, actual, moral and exemplary damages as well as
attorney’s fees. On appeal, the Court of Appeals similarly ruled in favor of
private respondent by affirming in full the trial court's judgment, with costs
against petitioner.
ISSUE:
Whether or not the respondent court erred in affirming the conclusions
of the trial court that since the air waybill is a contract of adhesion, its
provisions should be strictly construed against herein petitioner.
RULING:
The Supreme Court affirmed the appealed decision.
The trial court relied on the ruling in the case of Fieldmen's Insurance
Co., Inc. vs. Vda. De Songco, et al. in finding that the provisions of the air
waybill should be strictly construed against petitioner. More particularly, the
court below stated its findings thus:
“In this case, it is seriously doubted whether plaintiff had read the printed
conditions at the back of the Air Waybill, or even if she had, if she was given a
chance to negotiate on the conditions for loading her microwave oven.
Instead she was advised by defendant's employee at San Francisco, U.S.A.,
that there is no need to declare the value of her oven since it is not brand
new. Further, plaintiff testified that she immediately submitted a formal claim
for P30,000.00 with defendant. But their claim was referred from one
employee to another then told to come back the next day, and the next day,
289
until she was referred to a certain Atty. Paco. When they got tired and
frustrated of coming without a settlement of their claim in sight, they
consulted a lawyer who demanded from defendant on August 13, 1990”.
Respondent appellate court approved said findings of the trial court in

this manner: “We cannot agree with defendant-appellant's above contention.
Under our jurisprudence, the Air Waybill is a contract of adhesion considering
that all the provisions thereof are prepared and drafted only by the carrier.
The only participation left of the other party is to affix his signature thereto.
In the earlier case of Angeles v. Calasanz, the Supreme Court ruled that the
terms of a contract of adhesion must be interpreted against the party who
drafted the same.”
PRINCIPLE OF EQUALITY / CONTRACTS OF ADHESION
ERMITAÑO VS. COURT OF APPEALS

306 SCRA 218
FACTS:
Petitioner Luis Ermitaño applied for a credit card from private
respondent BPI Express Card Corp. (BECC) on October 8, 1986 with his wife,
Manuelita, as extension card holder. The spouses were given credit limit of
P10, 000.00. They often exceeded this credit limit without protest from BCC.
On August 9, 1989, Manuelita’s bag was snatched from her as she was
shopping at the greenbelt mall in Makati, Metro Manila. Among the items
inside the bag was her BECC credit card. That same night she informed, by
telephone, BECC of the loss. The call was received by BECC offices through a
certain Gina Banzon. This was followed by a letter dated August 30, 1989.
She also surrendered Luis’ credit card and requested for replacement cards.
In her letter, Manuelita stated that she “shall not be responsible for any and
all charges incurred [through the use of the lost card] After August 29, 1989.
However, when Luis received his monthly billing statement from BECC
dated September 20,1989, the charges included amounts for purchases were
made, one amounting to P2,350.05 and the other, P607.50. Manuelita
received a billing statement dated October 20,1989 which required her to
immediately pay the total amount of P3,197.70 covering the same
(unauthorized) purchases. Manuelita wrote again BECC disclaiming
responsibility for those charges, which were made after she had served BECC
with notice of loss of her card.
However, BECC, in a letter dated July 13, 1990, pointed to Luis the
following stipulation in their contract:
In his reply dated July 18, 1990, Luis stressed that the contract BECC
was referring to was a contract of adhesion and warned that if BECC insisted
on charging him and his wife for the unauthorized purchases, they will sue
BECC continued to bill the spouses for said purchases.
The trial court only opined that the only purpose for the suspension of
the spouses’ credit privileges was to compel them to pay for the unauthorized
purchases. The trial court ruled that the latter portion of the condition in the
parties’ contract, which states the liability for purchases made after a card is
lost or stolen shall be for the account of the cardholder until after notice of
the lost or theft has been given to BECC and after the latter has informed its
290
member establishments, is void for being contrary to public policy and for
being dependent upon the sole will of the debtor.
ISSUE:
Whether or not the Court of Appeals gravely erred in relying on the
case of Serra v. Court of appeals, 229 SCRA 60, because unlike that case,
petitioners have no chance at all to contest the stipulations appearing in the
credit card application that was drafted entirely by private respondent, thus,
a clear contract of adhesion.
RULING:
At the outset, we note that the contract between the parties in this case
is indeed a contract of adhesion, so-called because its terms are prepared by
only one party while the other party merely affixes his signature signifying his
adhesion thereto. Such contracts are not void in themselves. They are as
binding as ordinary contracts. Parties who enter in to such contracts are free
to reject the stipulations entirely.
In this case, the cardholder, Manuelita, has complied with what was
required of her under the contract with BECC, She immediately notified
BECC of loss of her card on the same day it was lost and, the following day,
she sent a written notice of the loss to BECC.
Clearly, what happened in this case was that BECC failed to notify
promptly the establishment in which the unauthorized purchases were made
with the use of Manuelita’s lost card. Thus, Manuelita was being liable for
those purchases, even if there is no showing that Manuelita herself had
signed for said purchases, and after notice by her concerning her card’s loss
was already given to BECC.
RELATIVITY: PRIVITY: EXCEPTIONS (Art. 1311, CC)
JOSEPH CHAN, WILSON CHAN and LILY CHAN VS. BONIFACIO S.

MACEDA,·JR
2003 Apr 30
G.R. No. 142591
402 SCRA 352
FACTS:
On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained
a P7.3 million loan from the Development Bank of the Philippines for the
construction of his New Gran Hotel Project in Tacloban City. Thereafter, on
September 29, 1976, respondent entered into a building construction contract
with Moreman Builders Co., Inc. They agreed that the construction would be
finished not later than December 22, 1977. Respondent purchased various
construction materials and equipment in Manila. Moreman, in turn,
deposited them in the warehouse of Wilson and Lily Chan, herein petitioners.
The deposit was free of charge. Unfortunately, Moreman failed to finish the
construction of the hotel at the stipulated time. Hence, on February 1, 1978,
respondent filed with the then CFI an action for rescission and damages
against Moreman. On November 28, 1978, the CFI rendered its Decision
rescinding the contract between Moreman and respondent and awarding to
the latter P445,000.00 as actual, moral and liquidated damages; P20,000.00
representing the increase in the construction materials; and P35,000.00 as
attorney’s fees. Moreman interposed an appeal to the Court of Appeals but
the same was dismissed on March 7, 1989 for being dilatory. He elevated the
case to this Court via a petition for review on certiorari. In a Decision dated
February 21, 1990, the Court denied the petition. On April 23, 1990 an Entry
of Judgment was issued.
291
Meanwhile, during the pendency of the case, respondent ordered

petitioners to return to him the construction materials and equipment which
Moreman deposited in their warehouse. Petitioners, however, told them that
Moreman withdrew those construction materials in 1977. Hence, on
December 11, 1985, respondent filed with the RTC an action for damages
with an application for a writ of preliminary attachment against petitioners.
ISSUE:
Whether or not respondent have the right to demand the release of the
said materials and equipment or claim for damages.
RULING:
At the outset, the case should have been dismissed outright by the trial
court because of patent procedural infirmities. Even without such serious
procedural flaw, the case should also be dismissed for utter lack of merit.
Under Article 1311 of the Civil Code, contracts are binding upon the parties
(and their assigns and heirs) who execute them. When there is no privity of
contract, there is likewise no obligation or liability to speak about and thus no
cause of action arises. Specifically, in an action against the depositary, the
burden is on the plaintiff to prove the bailment or deposit and the
performance of conditions precedent to the right of action. A depositary is
obliged to return the thing to the depositor, or to his heirs or successors, or to
the person who may have been designated in the contract.
In the present case, the record is bereft of any contract of deposit, oral
or written, between petitioners and respondent. If at all, it was only between
petitioners and Moreman. And granting arguendo that there was indeed a
contract of deposit between petitioners and Moreman, it is still incumbent
upon respondent to prove its existence and that it was executed in his favor.
However, respondent miserably failed to do so. The only pieces of evidence
respondent presented to prove the contract of deposit were the delivery
receipts. Significantly, they are unsigned and not duly received or
authenticated by either Moreman, petitioners or respondent or any of their
authorized representatives. Hence, those delivery receipts have no probative
value at all. While our laws grant a person the remedial right to prosecute or
institute a civil action against another for the enforcement or protection of a
right, or the prevention or redress of a wrong, every cause of action ex-
contractu must be founded upon a contract, oral or written, express or
implied. Moreover, respondent also failed to prove that there were
construction materials and equipment in petitioners’ warehouse at the time
he made a demand for their return. Considering that respondent failed to
prove (1) the existence of any contract of deposit between him and
petitioners, nor between the latter and Moreman in his favor, and (2) that
there were construction materials in petitioners’ warehouse at the time of
respondent’s demand to return the same, we hold that petitioners have no
corresponding obligation or liability to respondent with respect to those
construction materials.
TIMOTEO BALUYOT, JAIME BENITO, BENIGNO EUGENIO, ROLANDO

GONZALES, FORTUNATO FULGENCIO and CRUZ-NA-LIGAS
HOMESITE ASSOCIATION, INC., petitioners,
VS. THE HONORABLE COURT OF APPEALS, THE QUEZON CITY
GOVERNMENT and UNIVERSITY OF THE PHILIPPINES, respondents
1999 Jul 22
FACTS:
Petitioners are residents of Barangay Cruz-na-Ligas. Diliman, Quezon
City. The Cruz-na-Ligas Homesite Association, Inc. is a non-stock corporation
of which petitioners and other residents of Barangay Cruz-na-Ligas are
members.
292
Petitioners filed a complaint for specific performance and damages

against private respondent University of the Philippines before the RTC of
Quezon City. The complaint was later on amended to include private
respondent Quezon City government as defendant. As amended, the
complaint alleged:
that plaintiffs and their ascendants are owners since memory can no
longer recall of that parcel of riceland known Sitio Libis, Barrio Cruz-na-
Ligas, Quezon City (now Diliman, Quezon City), while the members of the
plaintiff Association and their ascendants have possessed since time
immemorial openly, adversely, continuously and also in the concept of an
owner, the rest of the area embraced by and within the Barrio Cruz-na-Ligas,
Diliman, Quezon City;
that since October 1972, the claims of the plaintiffs and/or members of
plaintiff Association have been the subject of quasi-judicial proceedings and
administrative investigations in the different branches of the government
penultimately resulting in the issuance of that Indorsement dated May 7,
1975 by the Bureau of Lands, and ultimately, in the issuance of the
Indorsement of February 12, 1985, by the office of the President of the Rep.
of the Philippines confirming the rights of the bonafide residents of Barrio
Cruz-na-Ligas to the parcel of land they have been possessing or occupying;
that defendant UP, pursuant to the said Indorsement from the Office of
the President of the Rep. of the Philippines, issued that Reply Indorsement
wherein it approved the donation of about 9.2 hectares of the site, directly to
the residents of Brgy. Krus Na Ligas. After several negotiations with the
residents, the area was increased to 15.8 hectares (158,379 square meters);
that, however, defendant UP backed-out from the arrangement to

donate directly to the plaintiff Association for the benefit of the qualified
residents and high-handedly resumed to negotiate the donation thru the
defendant Quezon City Government under the terms disadvantageous or
contrary to the rights of the bonafide residents of the Barrio; that plaintiff
Association forthwith amended its petition and prayed for a writ of
preliminary injunction to restrain defendant UP from donating the area to the
defendant Quezon City Government which was granted;
that in the hearing of the Motion for Reconsideration filed by defendant

UP, plaintiff Association finally agreed to the lifting of the said Order granting
the injunction after defendant UP made an assurance in their said Motion that
the donation to the defendant Quezon City Government will be for the benefit
of the residents of Cruz-Na-Ligas;
that, however, defendant UP took exception to the aforesaid Order

lifting the Order of Injunction and insisted on the dismissal of the case;
that plaintiff manifested its willingness to the dismissal of the case,

provided, that the area to be donated thru the defendant Quezon City
government be subdivided into lots to be given to the qualified residents
together with the certificate of titles, without cost;
that defendant UP failed to deliver the certificate of title covering the

property to be donated thus the defendant Quezon City Government was not
able to register the ownership so that the defendant Quezon City Government
can legally and fully comply with their obligations under the said deed of
donation;that upon expiration of the period of eighteen (18) months, for
alleged non-compliance of the defendant Quezon City Government with terms
and conditions quoted in par. 16 hereof, defendant UP thru its President, Mr.
Jose Abueva, unilaterally, capriciously, whimsically and unlawfully issued that

293
Administrative Order No. 21 declaring the deed of donation revoked and the
donated property be reverted to defendant UP.
The petitioners, then, prayed that a writ of preliminary injunction or at

least a temporary restraining order be issued, ordering defendant UP to
observe status quo; thereafter, after due notice and hearing, a writ of
preliminary injunction be issued; (a) to restrain defendant UP or to their
representative from ejecting the plaintiffs from and demolishing their
improvements on the riceland or farmland situated at Sitio Libis; (b) to order
defendant UP to refrain from executing another deed of donation in favor
another person or entity and in favor of non-bonafide residents of Barrio Cruz-
na-Ligas different from the Deed of Donation, and after trial on the merits,
judgment be rendered:declaring the Deed of Donation as valid and subsisting
and ordering the defendant UP to abide by the terms and conditions thereof.
The Court of Appeals reversed the decision of the trial court.
ISSUE:
Whether or not defendant UP could execute another deed of donation
in favor of third person.
RULING:
The Court found all the elements of a cause of action contained in the
amended complaint of petitioners. While, admittedly, petitioners were not
parties to the deed of donation, they anchor their right to seek its
enforcement upon their allegation that they are intended beneficiaries of the
donation to the Quezon City government. Art. 1311, second paragraph, of the
Civil Code provides:
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.
Under this provision of the Civil Code, the following requisites must be
present in order to have a stipulation pour autrui:(1) there must be a
stipulation in favor of a third person; (2) the stipulation must be a part, not
the whole of the contract;(3) the contracting parties must have clearly and
deliberately conferred a favor upon a third person, not a mere incidental
benefit or interest; (4) the third person must have communicated his
acceptance to the obligor before its revocation; and (5) neither of the
contracting parties bears the legal representation or authorization of the
third party.
The allegations in the following paragraphs of the amended complaint

are sufficient to bring petitioners’ action within the purview of the second
paragraph of Art. 1311 on stipulations pour autrui:
1. Paragraph 17, that the deed of donation contains a stipulation that the
Quezon City government, as donee, is required to transfer to qualified
residents of Cruz-na-Ligas, by way of donations, the lots occupied by them;
2. The same paragraph, that this stipulation is part of conditions and

obligations imposed by UP, as donor, upon the Quezon City government, as
donee;
3. Paragraphs 15 and 16, that the intent of the parties to the deed of
donation was to confer a favor upon petitioners by transferring to the latter
the lots occupied by them;

294
4. Paragraph 19, that conferences were held between the parties to convince
UP to surrender the certificates of title to the city government, implying that
the donation had been accepted by petitioners by demanding fulfillment
thereof and that private respondents were aware of such acceptance; and
5. All the allegations considered together from which it can be fairly inferred
that 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 amended complaint further alleges that respondent UP has an

obligation to transfer the subject parcel of land to the city government so that
the latter can in turn comply with its obligations to make improvements on
the land and thereafter transfer the same to petitioners but that, in breach of
this obligation, UP failed to deliver the title to the land to the city government
and then revoked the deed of donation after the latter failed to fulfill its
obligations within the time allowed in the contract. For the purpose of
determining the sufficiency of petitioners’ cause of action, these allegations of
the amended complaint must be deemed to be hypothetically true. So
assuming the truth of the allegations, we hold that petitioners have a cause of
action against UP.
It is hardly necessary to state that our conclusion that petitioners’

complaint states a cause of action against respondents is in no wise a ruling
on the merits. That is for the trial court to determine in light of respondent
UP’s defense that the donation to the Quezon City government, upon which
petitioners rely, has been validly revoked. Respondents contend, however,
that the trial court has already found that the donation (on which petitioners
base their action) has already been revoked.
This contention has no merit. The trial court’s ruling on this point was
made in connection with petitioners’ application for a writ of preliminary
injunction to stop respondent UP from ejecting petitioners. The trial court
denied injunction on the ground that the donation had already been revoked
and therefore petitioners had no clear legal right to be protected. It is
evident that the trial court’s ruling on this question was only tentative,
without prejudice to the final resolution of the question after the presentation
by the parties of their evidence.
The decision of the Court of Appeals is reversed and the case is

remanded to the RTC of Quezon City for trial on the merits.

295
TORTIOUS INTERFERENCE
1. SO VS. CA, SEPT. 21, 1999

2. TAYAG VS. CA, 25 MARCH 2004
SO PING BUN VS. COURT OF APPEALS

314 SCRA 751
FACTS:
In 1963, Tek Hua Trading Co., through its managing partner, So Pek
Giok, entered into lease agreements with lessor Dee C. Chuan and Sons Inc
(DCCSI). Subjects of four (4) lease contracts were premises located at Nos.
930, 930- Int., 924-B and 924-C, Soler Street, Binondo, Manila. Tek Hua used
the areas to store its textiles. The contracts each had a one year term. They
provided that should the lessee continue to occupy the premises after the
term, the lease shall be on a month to month basis.
When the contracts expired, the parties did not renew the contracts,
but Tek Hua continued to occupy the premises in 1976 Tek Hua Trading
Corp. was dissolved. Later, the original members of Tek Hua Trading Co.,
including Manuel C.Tiong, formed Tek Hua Enterprising Corp., herein
respondent corporation.
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So

Pek Giok’s grandson, petitioner So Ping Bun, occupied the warehouse for his
own textile business, Trendsetter Marketing.
On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua

enterprises, informing the latter of the 25% increase in rent effective
September 1, 1989. The rent increase was later on reduced to 20% effective
January 1, 1990, upon other lessees’ demand. Again on December 1, 1990,
the lessor implemented a 30% rent increase. Enclosed in these letters were
new lease contracts for signing. DCCSI warned that failure of the lessee to
accomplish the contracts shall be deemed as lack of interest on the lessee’s

296
part, and agreement to the termination of the lese. Private respondents did
not answer any of these letters. Still, the lease contracts were not rescinded.
On March 1, 1991, private respondent Tiong sent a letter to petitioner

asking Mr. So Ping Bun to vacate the premise because he used a warehouse.
Petitioner refused to vacate. On March 4, 1992, petitioner requested

formal contracts of lease with DCCSI in favor Trendsetter Marketing. So Ping
Bun claimed that after the death of his grandfather, So Pek Giok, he had been
occupying the premises for his textile business and religiously paid rent.
DCCSI acceded to petitioner’s request. The lease contracts in favor of
Trendsetter were executed.
ISSUE:
Whether the appellate court erred in affirming the trial court’s decision
finding So Ping Bun guilty of tortuous interference of contact.
RULING:
In the instant case, it is clear that petitioner So Ping Bun prevailed
upon DCCSI to lease the warehouse to his enterprise at the expense of
respondent corporation. Though petitioner took interest in the property of
respondent corporation and benefited from it, nothing on record imputes
deliberate wrongful motives or malice on him.
A duty which the law of torts is concerned with is respect for the
property of others, and cause of action ex delicto may be predicated upon an
unlawful interference by one person of the enjoyment by the other of his
private property. This may pertain to a situation where a third person induces
a party to renege on or violate his undertaking under a contract. In the case
before us, petitioner’s Trendsetter Marketing asked DCCSI to execute lease
contracts in its favor, and as a result petitioner deprived respondent
corporation of the latter’s property right. Clearly, and as correctly viewed by
the appellate court, the three elements of tort interference above mentioned
are present in the instant case.
Authorities debate on whether interference may be justified where the

defendant acts for the sole purpose of furthering his own financial or
economic interest. One view is that, as a general rule, justification for
interfering with the business relations of another exist where the actor’s
motive is to benefit himself. Such justification does not exist where his sole
motive is to cause harm to the other. Added to this, some authorities believe
that it is not necessary that the interferer’s interest outweigh that of the party
whose rights are invaded, and that an individual acts under an economic
interest that is substantial, not merely I de minimis for he acts in self
protection. Moreover, justification for protecting ones financial position
should not be made to depend on a comparison of his economic interest in the
subject matter with that of others. It is sufficient if the impetus of his conduct
lies in a proper business interest rather than in wrongful motives.
As early as Gilchrist vs. Cuddy we held that where there was no malice
in the interference of a contract, and the impulse behind one’s conduct lies in
a proper business interest rather than in wrongful motives, a party cannot be
a malicious interferer. Where the alleged interferer is financially interested
and such interest motivates his conduct it cannot be said that he is an
officious or malicious intermeddler.
TORTIOUS INTERFERENCE
TAYAG VS. COURT OF APPEALS

297
219 SCRA 481
FACTS:
Petitioners are the heirs of Juan Galicia, Sr. who are seeking to rescind
the deed of conveyance executed by Galicia, Sr. together with Celerina
Labuguin, in favor of Albrigido Leyva, respondent involving the undivided
one-half portion of a piece of land situated at Poblacion, Guimba, Nueva Ecija.
They contend that respondent is in breach of the conditions of the deed.
Contained in the deed were stipulations regarding the payment and
settlement of the purchase price of the land. The respondent however did not
strictly comply this with. Despite the posterior payments however, petitioners
accepted them. Respondent, on the contention that he fulfilled his obligation
to pay filed this case for specific performance by the petitioners.
The court of origin which tried the suit for specific performance on
account of the herein petitioner’s reluctance to abide by the covenant, ruled
in favor of the vendee while respondent court practically agreed with the trial
court except as to the amount to be paid to petitioners and the refund to
private respondent are concerned.
ISSUE:
The issue is whether or not petitioners’ prayer for the rescission of the
deed can prosper.
RULING:
The Supreme Court affirmed the decision of the lower courts.
The suggestion of petitioners that the covenant must be cancelled in

the light of private respondent’s so-called breach seems to overlook
petitioners’ demeanor who, instead of immediately filing the case precisely to
rescind the instrument because of non-compliance, allowed private
respondent to effect numerous payments posterior to the grace periods
provided in the contract. This apathy of petitioners, who even permitted
private respondent to take the initiative in filing the suit for specific
performance against them, is akin to waiver of abandonment of the right to
rescind.
STAGES IN THE EXECUTION OF A CONTRACT –

CONSUMMATION/TERMINATION
METROPOLITAN MANILA DEVELOPMENT AUTHORITY, petitioner,

VS. JANCOM ENVIRONMENTAL CORPORATION and JANCOM
INTERNATIONAL DEVELOPMENT PROJECTS PTY. LIMITED OF
AUSTRALIA, respondents
January 30, 2002
G.R. No. 147465
FACTS:

298
The Philippine Government under the Ramos Administration, and
through the Metro Manila Development Authority (MMDA) Chairman, and the
Cabinet Officer for Regional Development-National Capital Region (CORD-
NCR), entered into a contract with herein respondent JANCOM, on waste-to-
energy projects for the waste disposal sites in San Mateo, Rizal and Carmona,
Cavite under the build-operate-transfer (BOT) scheme.
However, before President Ramos could have signed the said contract,
there was a change in the Administration and EXECOM. Said change caused
the passage of the law, the Clean Air Act, prohibiting the incineration of
garbage and thus, against the contents of said contract. The Philippine
Government, through the MMDA Chairman, declared said contract inexistent
for several reasons. Herein respondent filed a suit against petitioner. The
Regional Trial Court ruled in favor of the respondent. Instead of filing an
appeal to the decision, petitioner filed a writ of certiorari on the Court of
Appeals, which the latter granted. The Regional Trial Court declared its
decision final and executory, for which the petitioner appealed to the CA,
which the CA denied such appeal and affirming RTC’s decision.
ISSUE:
Whether or not a valid contract is existing between herein petitioner
and respondent.
RULING:
Under Article 1305 of the Civil Code, “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.” A contract undergoes three
distinct stages - preparation or negotiation, its perfection, and finally, its
consummation. Negotiation begins from the time the prospective contracting
parties manifest their interest in the contract and ends at the moment of
agreement of the parties. The perfection or birth of the contract takes place
when the parties agree upon the essential elements of the contract. The last
stage is the consummation of the contract wherein the parties fulfill or
perform the terms agreed upon in the contract, culminating in the
extinguishment thereof. Article 1315 of the Civil Code, provides that a
contract is perfected by mere consent. Consent, on the other hand, is
manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. In the case at bar, the signing
and execution of the contract by the parties clearly show that, as between the
parties, there was a concurrence of offer and acceptance with respect to the
material details of the contract, thereby giving rise to the perfection of the
contract. The execution and signing of the contract is not disputed by the
parties. As the Court of Appeals aptly held: Contrary to petitioners’
insistence that there was no perfected contract, the meeting of the offer and
acceptance upon the thing and the cause, which are to constitute the contract
(Arts. 1315 and 1319, New Civil Code), is borne out by the records.
Admittedly, when petitioners accepted private respondents’ bid

proposal (offer), there was, in effect, a meeting of the minds upon the object
(waste management project) and the cause (BOT scheme). Hence, the
perfection of the contract. In City of Cebu vs. Heirs of Candido Rubi, the
Supreme Court held that “the effect of an unqualified acceptance of the offer
or proposal of the bidder is to perfect a contract, upon notice of the award to
the bidder.
In fact, in asserting that there is no valid and binding contract between

the parties, MMDA can only allege that there was no valid notice of award;
that the contract does not bear the signature of the President of the
Philippines; and that the conditions precedent specified in the contract were
not complied with.

299
In asserting that the notice of award to JANCOM is not a proper notice

of award, MMDA points to the Implementing Rules and Regulations of
Republic Act No. 6957, otherwise known as the BOT Law, which require that
i) prior to the notice of award, an Investment Coordinating Committee
clearance must first be obtained; and ii) the notice of award indicate the time
within which the awardee shall submit the prescribed performance security,
proof of commitment of equity contributions and indications of financing
resources.
Admittedly, the notice of award has not complied with these

requirements. However, the defect was cured by the subsequent execution of
the contract entered into and signed by authorized representatives of the
parties; hence, it may not be gainsaid that there is a perfected contract
existing between the parties giving to them certain rights and obligations
(conditions precedents) in accordance with the terms and conditions thereof.
We borrow the words of the Court of Appeals:
Petitioners belabor the point that there was no valid notice of award as
to constitute acceptance of private respondent’s offer. They maintain that
former MMDA Chairman Oreta’s letter to JANCOM EC dated February 27,
1997 cannot be considered as a valid notice of award as it does not comply
with the rules implementing Rep. Act No. 6957, as amended. The argument
is untenable.

300
ELEMENTS OF CONSENT: OFFER AND ACCEPTANCE
1. MONTECILLO VS. REYNES, 385 SCRA 244

2. SOLER VS. CA, 358 SCRA 57
3. PALATTAO VS. CA, MAY 7, 2002
4. ABS-CBN VS. CA, JAN. 21, 1999
MONTECILLO VS. REYNES

385 SCRA 244
FACTS:
Respondents Ignacia Reynes and spouses Abucay filed on June 20, 1984
a complaint for Declaration of Nullity and Quieting of Title against petitioner
Rico Montecillo. Reynes asserted that she is the owner of a lot situated in
Mabolo, Cebu City. In 1981 Reynes sold 185 square meters of the Mabolo Lot
to the Abucay Spouses who built a residential house on the lot they bought.
Reynes alleged further that on March 1, 1984, she signed a Deed of

Sale of the Mabolo Lot in favor of Montecillo. Reynes, being illiterate signed
by affixing her thumbmark on the document. Montecillo promised to pay the
agreed P47,000.00 purchase price within one month from the signing of the
Deed of Sale.
Reynes further alleged that Montecillo failed to pay the purchase price
after the lapse of the one-month period, prompting Reynes to demand from
Montecillo the return of the Deed of Sale. Since Montecillo refused to return
the Deed of Sale, Reynes executed a document unilaterally revoking the sale
and gave a copy of the document to Montecillo.
Subsequently, on May 23, 1984 Reynes signed a Deed of Sale

transferring to the Abucay Spouses the entire Mabolo Lot, at the same time
confirming the previous sale in 1981 of a 185 square meter portion of the lot.
Reynes and the Abucay Spouses alleged that on June 18, 1984 they
received information that the Register of Deeds of Cebu City issued
Certificate of Title No. 90805 in the name of Montecillo for the Mabolo Lot.
Reynes and the Abucay Spouses argued that “for lack for consideration
there (was) no meeting of the minds) between Reynes and Montecillo. Thus,
the trial court should declare null and void ab initio Monticello’s Deed of sale,
and order the cancellation of certificates of title No. 90805 in the name of
Montecillo.
In his Answer, Montecillo a bank executive with a BS Commerce

degree, claimed he was a buyer in good faith and had actually paid the
P47,000.00 consideration stated on his Deed of Sale. Montecillo however
admitted he still owned Reynes a balance of P10,000.00. He also alleged that
301
he paid P50,000.00 for the release of the chattel mortgage which he argued
constituted a lien on the Mabolo Lot. He further alleged that he paid for the
real property tax as well as the capital gains tax on the sale of the Mabolo
Lot.
In their reply, Reynes and the Abucay Spouses contended that

Montecillo did not have authority to discharge the chattel mortgage especially
after Reynes revoked Montecillo’s Deed of Sale and gave the mortgagee a
copy of the document of revocation. Reynes and the Abucay Spouses claimed
that Montecillo secured the release of the chattel mortgage through
machination. They further asserted that Montecillo took advantage of the
real property taxes paid by the Abucay Spouses and surreptitiously caused
the transfer of the title to the Mabolo Lot in his name.
During pre-trial Montecillo claimed that the consideration for the sale
of the Mabolo Lot was the amount he paid to Cebu Iced and Cold Storage
Corporation for the mortgage debt. Of Bienvenido Jayag. Montecillo argued
that the release of the mortgage was necessary since the mortgage
constituted a lien on the Mabolo Lot.
Reynes, however stated that she had nothing to do with Jayag’s

mortgage debt except that the house mortgaged by Jayag stood on a portion
of the Mabolo Lot. Reynes further stated that the payment by Montecillo to
release the mortgage on Jayag’s house is a matter between Montecillo and
Jayag. The mortgage on the house being a chattel mortgage could not be
interpreted in any way as an encumbrance on the Mabolo Lot. Reynes further
claimed that the mortgage debt had long prescribed since the P47,000.00
mortgage debt was due for payment on January 30,1967.
ISSUE:
Whether or not there was a valid consent in the case at bar to have a valid
contract.
RULING:
One of the three essential requisites of a valid contract is consent of
the parties on the object and cause of the contract. In a contract of sale, the
parities must agree not only on the p[rice, but also on the manner of payment
of the price. An agreement on the price but a disagreement on the manner of
its payment will not result in consent, thus preventing the existence of a valid
contract for a lack of consent. This lack of consent is separate and distinct for
lack of consideration where the contract states that the price has been paid
when in fact it has never been paid.
Reynes expected Montecillo to pay him directly the P47, 000.00

purchase price within one month after the signing of the Deed of Sale. On the
other hand, Montecillo thought that his agreement with Reynes required him
to pay the P47, 000.00-purchase price to Cebu Ice Storage to settle Jayag’s
mortgage debt. Montecillo also acknowledged a balance of P10, 000.00 in
favor of Reynes although this amount is not stated in Montecillo’s Deed of
Sale. Thus, there was no consent or meeting of the minds, between Reynes
and Montecillo on the manner of payment. This prevented the existence of a
valid contract because of lack of consent.
In summary, Montecillo’s Deed of Sale is null and void ab initio not only
for lack of consideration, but also for lack of consent. The cancellation of TCT
No. 90805 in the name of Montecillo is in order as there was no valid
contract transferring ownership of the Mabolo Lot from Reynes to Montecillo.

302
JASMIN SOLER, petitioner,

VS. COURT OF APPEALS, COMMERCIAL BANK OF MANILA, and
NIDA LOPEZ, respondents
May 2, 2001
G.R. No. 123892
FACTS:
Petitioner is a professional interior designer. In November 1986, her
friend Rosario Pardo asked her to talk to Nida Lopez, who was manager of the
COMBANK Ermita Branch for they were planning to renovate the branch
offices. Even prior to November 1986, petitioner and Nida Lopez knew each
other because of Rosario Pardo, the latter’s sister. During their meeting,
petitioner was hesitant to accept the job because of her many out of town
commitments, and also considering that Ms. Lopez was asking that the
designs be submitted by December 1986, which was such a short notice. Ms.
Lopez insisted, however, because she really wanted petitioner to do the
design for renovation. Petitioner acceded to the request. Ms. Lopez assured
her that she would be compensated for her services. Petitioner even told Ms.
Lopez that her professional fee was P10,000.00, to which Ms. Lopez acceded.
During the November 1986 meeting between petitioner and Ms. Lopez,
there were discussions as to what was to be renovated. Ms. Lopez again
assured petitioner that the bank would pay her fees. After a few days,
petitioner requested for the blueprint of the building so that the proper
design, plans and specifications could be given to Ms. Lopez in time for the
board meeting in December 1986. Petitioner then asked her draftsman Jackie
Barcelon to go to the jobsite to make the proper measurements using the blue
303
print. Petitioner also did her research on the designs and individual drawings
of what the bank wanted. Petitioner hired Engineer Ortanez to make the
electrical layout, architects Frison Cruz and De Mesa to do the drafting. For
the services rendered by these individuals, petitioner paid their professional
fees. Petitioner also contacted the suppliers of the wallpaper and the sash
makers for their quotation. So come December 1986, the lay out and the
design were submitted to Ms. Lopez. She even told petitioner that she liked
the designs.
Subsequently, petitioner repeatedly demanded payment for her

services but Ms. Lopez just ignored the demands. In February 1987, by
chance petitioner and Ms. Lopez saw each other in a concert at the Cultural
Center of the Philippines. Petitioner inquired about the payment for her
services, Ms. Lopez curtly replied that she was not entitled to it because her
designs did not conform to the bank’s policy of having a standard design, and
that there was no agreement between her and the bank.
Petitioner, through her lawyers, who wrote Ms. Lopez, demanding

payment for her professional fees in the amount of P10,000.00 which Ms.
Lopez ignored. The lawyers wrote Ms. Lopez once again demanding the
return of the blueprint copies petitioner submitted which Ms. Lopez refused
to return. The petitioner then filed at the trial court a complaint against
COMBANK and Ms. Lopez for collection of professional fees and damages.
In its answer, COMBANK stated that there was no contract between

COMBANK and petitioner; that Ms. Lopez merely invited petitioner to
participate in a bid for the renovation of the COMBANK Ermita Branch; that
any proposal was still subject to the approval of the COMBANK’s head office.
The trial court rendered judgment in favor of plaintiff. On appeal, the

Court of Appeals reversed the decision. Hence, this petition.
ISSUE:
Whether or not the Court of Appeals erred in ruling that there was no
contract between petitioner and respondents, in the absence of the element of
consent.
RULING:
A contract is a meeting of the minds between two persons whereby one
binds himself to give something or to render some service to bind himself to
give something to render some service to another for consideration. There is
no contract unless the following requisites concur: 1. Consent of the
contracting parties; 2. Object certain which is the subject matter of the
contract; and 3. Cause of the obligation which is established.
In the case at bar, there was a perfected oral contract. When Ms. Lopez
and petitioner met in November 1986, and discussed the details of the work,
the first stage of the contract commenced. When they agreed to the payment
of the P10,000.00 as professional fees of petitioner and that she should give
the designs before the December 1986 board meeting of the bank, the second
stage of the contract proceeded, and when finally petitioner gave the designs
to Ms. Lopez, the contract was consummated. Petitioner believed that once
she submitted the designs she would be paid her professional fees. Ms. Lopez
assured petitioner that she would be paid.
It is familiar doctrine that if a corporation knowingly permits one of its

officers, or any other agent, to act within the scope of an apparent authority,
it holds him out to the public as possessing the power to do those acts; and
thus, the corporation will, as against anyone who has in good faith dealt with
it through such agent, be estopped from denying the agent’s authority.

304
Also, petitioner may be paid on the basis of quantum meruit. "It is
essential for the proper operation of the principle that there is an acceptance
of the benefits by one sought to be charged for the services rendered under
circumstances as reasonably to notify him that the lawyer performing the task
was expecting to be paid compensation therefor. The doctrine of quantum
meruit is a device to prevent undue enrichment based on the equitable
postulate that it is unjust for a person to retain benefit without paying for it."
The designs petitioner submitted to Ms. Lopez were not returned. Ms.
Lopez, an officer of the bank as branch manager used such designs for
presentation to the board of the bank. Thus, the designs were in fact useful to
Ms. Lopez for she did not appear to the board without any designs at the time
of the deadline set by the board.
Decision reversed and set aside. Decision of the trial court affirmed.
PALATTAO VS. COURT OF APPEALS

381 SCRA 681
MAY 7, 2002
FACTS:
Petitioner Yolanda Palattao interred into a lease contract whereby she
leased to private respondent a house and a 490-square-meter lot located in
305
101 Caimito Road, Caloocan City, covered by Transfer Certificate of Title No.
247536 and registered in the name of petitioner. The duration of the lease
contract was for three years, commencing from January 1, 1991, to December
31, 1993, renewable at the option of the parties. The agreed monthly rental
was P7,500.00 for the first year; P 8,000.00 for the second year: and
P8,500.l00 for the third year. The contract gave respondent lessee the first
option to purchase the leased property.
During the last year of the contract, the parties began negotiations for
the sale of the leased premises to private respondent. In a letter dated April
2, 1993, petitioner offered to sell to private respondents 413.28 square
meters of the leased lot at P 7,800.00 per square meter, or for the total
amount of P3,223,548.00. private respondents replied on April 15, 1993
wherein he informed petitioner that he “shall definitely exercise his option to
buy” the leased property. Private respondent, however, manifested his desire
to buy the whole 490-square meters inquired from petitioner the reason why
only 413.28 square meters of the leased lot were being offered for sale. In a
letter dated November 6, 1993, petitioner made a final offer to sell the lot at P
7,500.00 per square meter with a down payment of 50% upon the signing of
the contract of conditional sale, the balance payable in one year with a
monthly lease/interest payment P 14,000.00 which must be paid on or before
the fifth day every month that the balance is still outstanding. On November
7, 1993, private respondents accepted petitioners offer and reiterated his
request for respondent accepted petitioner’s offers and reiterated his request
for clarification as to the size of the lot for sale. Petitioner acknowledged
private respondent’s acceptance of the offer in his letter dated November 10,
1993.
Petitioner gave private respondent on or before November 24, 1993,

within which to pay the 50% downpayment in cash or manager’s check.
Petitioner stressed that failure to pay the downpayment on the stipulated
period will enable petitioner to freely sell her property to others. Petitioner
likewise notified private respondent, that she is no longer renewing the lease
agreement upon its expiration on December 31, 1993.
Private respondent did not accept the terms proposed by petitioner.

Neither were there any documents of sale nor payment by private respondent
of the required downpayment. Private respondent wrote a letter to petitioner
on November 29, 1993 manifesting his intention to exercise his option to
renew their lease contract for another three years, starting January 1, 1994 to
December 31, 1996. This was rejected by petitioner, reiterating that she was
no longer renewing the lease. Petitioner demanded that private respondent
vacate the premises, but the latter refused.
Hence, private respondent filed with the Regional Trial Court of

Caloocan, Branch 127, a case for specified performance, docketed as Civil
Case No, 16287, seeking to compel petitioner to sell to him the leased
property. Private respondent further prayed for the issuance of a writ
preliminary injunction to prevent petitioner from filing an ejectment case
upon the expiration of the lease contract on December 31, 1993.
During the proceedings in the specific performance case, the parties

agreed to maintain the status quo. After they failed to reach an amicable
settlement, petitioner filed the instant ejectment case before the Metropolitan
Trial Court of Caloocan City, Branch 53. In his answer, private respondent
alleged that he refused to vacate the leased premises because there was a
perfected contract of sale of the leased property between him and petitioner.
Private respondent argued that he did not abandon his option to buy the
leased property and that his proposal to renew the lease was but an
alternative proposal to the sale. He further contended that the filing of the
ejectment case violated their agreement to maintain the status quo.

306
ISSUE:
Whether or not there was a valid consent in the case at bar.
RULING:
There was no valid consent in the case at bar.
Contracts that are consensual in nature, like a contract of sale, are

perfected upon mere meeting of the minds. Once there is concurrence
between the offer and the acceptance upon the subject matter, consideration,
and terns of payment, a contract is produced. The offer must be certain. To
convert the offer into a contract, the acceptance must be absolute and must
not qualify the terms of the offer; it must be plain, unequivocal, unconditional,
and without variance of any sort from the proposal. A qualified acceptance,
or one that involves a new proposal, constitutes a counter-offer and is a
rejection of the original offer. Consequently, when something is desired which
is not exactly is proposed in the offer, such acceptance is not sufficient to
generate consent because any modification or variation from the terms of the
offer annuals the offer.
In the case at bar, while it is true that private respondent informed

petitioner that he is accepting the latter’s offer to sell the leased property, it
appears that they did not reach an agreement as to the extent of the lot
subject of the proposed sale.
Letters reveal that private respondent did not give his consent to buy
only 413.28 square meters of the leased lot, as he desired to purchase the
whole 490 square-meter- leased premises which, however, was not what was
exactly proposed in petitioner’s offer. Clearly, therefore, private respondent’s
acceptance of petitioner’s offer was not absolute, and will consequently not
generate consent that would perfect a contract.

307
ABS-CBN BROADCASTING CORPORATION

VS. HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING
CORP., VIVA PRODUCTIONS, INC., and VICENTE DEL ROSARIO
G.R. No. 128690
January 21, 1999
301 SCRA 573
FACTS:
In 1990, ABS-CBN and VIVA executed a Film Exhibition Agreement
whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-
president Charo Santos-Concio, a list of three (3) film packages (36 title) from
which ABS-CBN may exercise its right of first refusal under the afore-said
agreement. ABS-CBN, however through Mrs. Concio, "can tick off only ten
(10) titles" (from the list) "we can purchase" and therefore did not accept said
list. The titles ticked off by Mrs. Concio are not the subject of the case at bar
except the film "Maging Sino Ka Man."
On February 27, 1992, defendant Del Rosario approached ABS-CBN’s

Ms. Concio, with a list consisting of 52 original movie titles (i.e., not yet aired
on television) including the 14 titles subject of the present case, as well as
104 re-runs (previously aired on television) from which ABS-CBN may choose
another 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing
rights over this package of 52 originals and 52 re-runs for P60,000,000.00 of
which P30,000,000.00 will be in cash and P30,000,000.00 worth of television
spots.
On April 2, 1992, defendant Del Rosario and ABS-CBN’s general

manager, Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon
City to discuss the package proposal of VIVA. Mr. Lopez testified that he and
Mr. Del Rosario allegedly agreed that ABS-CBN was granted exclusive film
rights to fourteen (14) films for a total consideration of P36 million; that he
allegedly put this agreement as to the price and number of films in a "napkin"
and signed it and gave it to Mr. Del Rosario. On the other hand, Del Rosario
denied having made any agreement with Lopez regarding the 14 Viva films;
denied the existence of a napkin in which Lopez wrote something; and
insisted that what he and Lopez discussed at the lunch meeting was Viva’s
film package offer of 104 films (52 originals and 52 re-runs) for a total price of
P60 million.
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior
vice-president for Finance discussed the terms and conditions of Viva’s offer
to sell the 104 films, after the rejection of the same package by ABS-CBN. On
the following day, Del Rosario received a draft contract from Ms. Concio
which contains a counter-proposal of ABS-CBN on the offer made by VIVA
including the right of first refusal to 1992 Viva Films. However, the proposal

308
was rejected by the Board of Directors of VIVA and such was relayed to Ms.
Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several
negotiations and meetings defendant Del Rosario and Viva’s President
Teresita Cruz, in consideration of P60 million, signed a letter of agreement
dated April 24, 1992, granting RBS the exclusive right to air 104 Viva-
produced and/or acquired films including the fourteen (14) films subject of
the present case.
On 27 May 1992, ABS-CBN filed before the RTC a complaint for

specific performance with a prayer for a writ of preliminary injunction and/or
temporary restraining order against private respondents Republic
Broadcasting System (now GMA Network Inc.) On 28 May 1992, the RTC
issued a temporary restraining order.
The RTC then rendered decision in favor of RBS and against ABS-CBN.
On appeal, the same decision was affirmed. Hence, this decision.
ISSUE:
Whether or not there exists a perfected contract between ABS-CBN
and VIVA.
RULING:
A contract is a meeting of minds between two persons whereby one
binds himself to give something or render some service to another [Art. 1305,
Civil Code.] for a consideration. There is no contract unless the following
requisites concur:
(1) consent of the contracting parties;

(2) object certain which is the subject of the contract; and
(3) cause of the obligation, which is established. [Art. 1318, Civil
Code.]
A contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of
negotiation and bargaining rending at the moment of agreement
of the parties;
(b) perfection or birth of the contract, which is the moment when
the parties come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance
of the terms agreed upon in the contract.
Contracts that are consensual in nature are perfected upon mere

meeting of the minds. Once there is concurrence between the offer and the
acceptance upon the subject matter, consideration, and terms of payment a
contract is produced. The offer must be certain. To convert the offer into a
contract, the acceptance must be absolute and must not qualify the terms of
the offer; it must be plain, unequivocal, unconditional, and without variance of
any sort from the proposal. A qualified acceptance, or one that involves a
new proposal, constitutes a counter-offer and is a rejection of the original
offer. Consequently, when something is desired which is not exactly what is
proposed in the offer, such acceptance is not sufficient to generate consent
because any modification or variation from the terms of the offer annuls the
offer.

309
In the present case, when Mr. Del Rosario of Viva met Mr. Lopez of
ABS-CBN at the Tamarind Grill on 2 April 1992 to discuss the package of
films, said package of 104 VIVA films was VIVA’s offer to ABS-CBN to enter
into a new Film Exhibition Agreement. But ABS-CBN, sent through Ms.
Concio, counter-proposal in the form a draft contract proposing exhibition of
53 films for a consideration of P35 million. This counter-proposal could be
nothing less than the counter-offer of Mr. Lopez during his conference with
Del Rosario at Tamarind Grill Restaurant. Clearly, there was no acceptance of
VIVA’s offer, for it was met by a counter-offer which substantially varied the
terms of the offer.
Furthermore, ABS-CBN made no acceptance of VIVA’s offer hence, they

underwent period of bargaining. ABS-CBN then formalized its counter-
proposals or counter-offer in a draft contract. VIVA through its Board of
Directors, rejected such counter-offer. Even if it be conceded arguendo that
Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA,
as there was no proof whatsoever that Del Rosario had the specific authority
to do so.
WHEREFORE, the instant petition is GRANTED.
REQUISITES OF OFFER AS DISTINGUISHED FROM OPTION
LOURDES ONG LIMSON VS. COURT of APPEALS, et al

G. R. No. 135929
April 20, 2001
357 SCRA 209
FACTS:
In July 1978, respondent spouses Lorenzo de Vera and Asuncion
Santos-de Vera, through their agent Marcosa Sanchez, offered to sell to
petitioner Lourdes Ong Limson a parcel of land situated in Barrio San
Dionisio, Paranaque, Metro Manila. The respondent spouses were the owners
of the subject property.
On July 31, 1978, she agreed to but the property at the price of P34. 00
per square meter and gave P20, 000.00 as “earnest money”. The respondent
spouses signed a receipt thereafter and gave her a 10-day option period to
purchase the property. Respondent spouses informed petitioner that the
subject property was mortgaged to Emilio Ramos and Isidro Ramos.
Petitioner was asked to pay the balance of the purchase price to enable the
respondent spouses to settle their obligation with the Ramoses. Petitioner
310
agreed to meet respondent spouses and the Ramoses on August 5, 1978, to
consummate the transaction; however, the respondent spouses and the
Ramoses did not appear, same with their second meeting.
On August 23, 1978, petitioner allegedly gave respondent spouses

three checks for the settlement the back taxes of property. On September 5,
1978, the agent of the respondent spouses informed petitioner that the
property was the subject of a negotiation for the sale to respondent Sunvar
Realty Development Corporation.
Petitioner alleged that it was only on September 15, 1978, that TCT No.
S-72946 covering the property was issued to respondent spouses. On the
same day, petitioner filed and Affidavit of Adverse Claim with the Office of the
Registry of Deeds of Makati, Metro Manila. The Deed of Sale between
respondent spouses and respondent Sunvar was executed on September 15,
1978 and TCT No. S-72377 was issued in favor of Sunvar on September 26,
1978 with the Adverse Claim of petitioner annotated thereon.
Respondent spouses and Sunvar filed their Answers and Answers to

Cross-Claim, respectively. On appeal, the Court of Appeals completely
reversed the decision of the trial court and ordered the Register of Deeds of
Makati City to lift the Adverse Claim and ordered petitioner to pay
respondent Sunvar and respondent spouses exemplary and nominal damages
and attorney’s fees. Hence, this petition.
ISSUE:
Whether or not the agreement between petitioner and respondent
spouses was a mere option or a contract to sell.
RULING:
The Supreme Court held that the agreement between the parties was a
contract of option and not a contract to sell. An option is continuing offer 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 time certain, or under,
or in compliance with, certain terms and conditions, or which gives the owner
of the property the right to sell or demand a sale. It is also sometimes called
an “unaccepted offer”. An option is not of itself a purchase, but merely
secures the privilege to buy. It is not a sale of property but a sale of the right
to purchase. Its distinguishing characteristic is that it imposes no binding
obligation on the person holding the option, aside from the consideration for
the offer.
Hence, the assailed decision is affirmed, with the modification that the
award of nominal and exemplary damages as well as attorney’s fees is
deleted. The petition is denied.
VICES OF CONSENT: VICES OF WILL – UNDUE INFLUENCE,

MISTAKE/ERROR
LIM VS. COURT OF APPEALS

229 SCRA 616
FACTS:
The case involves the partition of the properties of the deceased
spouses Tan Quico and Josefa Oraa. The former died on May 11, 1932 and
311
the latter on August 6, 1932. Both died intestate. They left some ninety six
hectares of land located in the municipality of Guinobatan and Camalig, Albay.
The late spouses were survived by four children; Cresencia, Lorenzo,
Hermogenes and Elias. Elias died on May 2, 1935, without issue. Cresencia
died on December 20, 1967. She was survived by her husband, Lim Chay
Sing, and children, Mariano, Jaime, Jose Jovita, Anacoreta, Antonietta, Ruben,
Benjamin and Rogelio. They are the petitioners in the case at bench. The sad
spectacle of the heirs squabbling over the properties of their deceased
parents was again replayed in the case at bench. The protagonists were the
widower and children of Cresencia on one side, and Lorenzo and Hermogenes
on the other side.
The late Cresencia and Lorenzo had contrasting educational

background. Cresencia only reached the second grade of elementary school.
She could not read or write in English. On the other hand, Lorenzo is a
lawyer and a CPA. Heirs of Cresencia alleged that since the demise of the
spouses Tan Quico and Josefa Oraa, the subject properties had been
administered by respondent Lorenzo. They claimed that before her death,
Cresencia had demanded their partition from Lorenzo. After Cresencia’s
death, they likewise clamored for their partition. Their effort proved fruitless.
Respondents Lorenzo and Hermogenes’ adamant stance against

partition is based on various contentions. Principally, they urge: 1) that the
properties had already been partitioned, albeit, orally; and 2) during her
lifetime, the late Cresencia had sold and conveyed all her interests in said
properties to respondent Lorenzo. They cited as evidence the “Deed of
Confirmation of Extra Judicial Settlement of the Estate of Tan Quico and
Josefa Oraa” and a receipt of payment.
ISSUE:
Whether or not there is error in the signing of the Deed.
RULING:
In the petition at bench, the questioned Deed is written in English, a
language not understood by the late Cresencia an illiterate. It was prepared
by the respondent Lorenzo, a lawyer and CPA. Respondent Lorenzo did not
cause the notarization of the Deed. Considering these circumstances, the
burden was on private respondents to prove that the content of the Deed was
explained to the illiterate Cresencia before she signed it. In this regard, the
evidence adduced by the respondents failed to discharge their burden.
The conclusion drawn by the Honorable of Appeals that there was no

undue influence exerted on Cresencia O. Tan by her (Lawyer-CPA) brother
Lorenzo O. Tan based on facts stated in the questioned judgment is clearly
incorrect. As it is contrary to the provision of Art. 1337, Civil Code.
The respondent court, reversing the trial court, held that the evidence
failed to establish that it was signed by the late Cresencia as a result of fraud,
mistake or undue influence. The Court upheld this ruling erroneous.
In calibrating the credibility of the witnesses on this issue, we take our

mandate from Article 1332 of the Civil Code which provides: “When one of
the parties is unable to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged, the person enforcing the
contract must show that the terms thereof have been fully explained to the
former.”
This substantive law came into being due to the finding of the Code
Commission that there is still a fairly large number of illiterates in this
country, and documents are usually drawn up in English or Spanish. It is also
in accord with our state policy of promoting social justice. It also
supplements Article 24 of the Civil Code which calls on court to be vigilant in
312
the protection of the rights of those who are disadvantaged in life. In the
petition at bench, the questioned Deed is written in English, a language not
understood by the late Cresencia an illiterate.
VICES OF CONSENT: VICES OF WILL – UNDUE INFLUENCE
RUIZ VS. COURT OF APPEALS

401 SCRA 410
G.R. NO. 146942
APRIL 22, 2003
FACTS:
Petitioner Corazon Ruiz is engaged in the business of buying and
selling jewelry. She obtained loans from private respondent Consuelo Torres
on different occasions and in different amounts. Prior to their maturity, the
loans were consolidated under 1 promissory note dated March 22, 1995.
The consolidated loan of P750, 000.00 was secured by a real estate

mortgage on a lot in Quezon City, covered by Transfer of Certificate of Title
No. RT-96686, and registered in the name of petitioner. The mortgage was
signed by petitioner for herself and as attorney-in-fact of her husband
Rogelio. It was executed on 20 March 1995, or 2 days before the execution of
the subject promissory note.
Thereafter, petitioner obtained 3 more loans from private respondent,

under the following promissory notes: 1) promissory note dated 21 April
1995, in the amount of P100,000.00; 2) promissory note dated 23 May !995 in
the amount of P100,000.00, and 3) promissory note dated 21 December 1995,
in the amount of P100,000.00. These combined loans of P300,000.00 were
secured by P571,000.00 worth of jewelry pledged by petitioner to private
respondent.
From April 1995 to March 1996, petitioner paid the stipulated 3%

monthly interest on the P750,000.00 loan, amounting to P270,000. After
March 1996, petitioner was unable to make interest payments as she had
difficulties collecting from her clients in her jewelry business.
Because of petitioner’s failure to pay the principal loan of

P750,000.00, as well as the interest payment for April 1996, private
respondent demanded payment not only of the P750,000.00 loan but also of
the P300,000.00 loan. When petitioner failed to pay, private respondent
sought the extrajudicial foreclosure of the aforementioned real estate
mortgage.
ISSUE:
Whether or not there is undue influence in the signing of the
promissory note, which determines if foreclosure proceedings could proceed.
RULING:
The promissory note in question did not contain any fine print provision
which could have escaped the attention of the petitioner. Petitioner had all
the time to go over and study the stipulations embodied in the promissory
note. Aside from the March 22, 1995 promissory note for P750,000.00, three
other promissory notes of different dates and amounts were executed by
petitioner in favor of private respondent. These promissory notes contain
similar terms and conditions, with a little variance in the terms of interests
and surcharges. The fact that petitioner and private respondent had entered
into not only one but several loan transactions shows that petitioner was not
in any way compelled to accept the terms allegedly imposed by private
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respondent. Moreover, petitioner, in her complaint dated October 7, 1996
filed with the trial court, never claimed that she was forced to sign the subject
note. Therefore, the foreclosure proceedings may now proceed.
KINDS OF FRAUD HOW COMMITTED
1. DELA CRUZ VS. SISON, 451 SCRA 754

2. RURAL BANK OF STA. MARIA VS. CA, 314 SCRA 255
EPIFANIA DELA CRUZ, substituted by LAUREANA V. ALBERTO

VS. SPS. EDUARDO C. SISON and EUFEMIA S. SISON
G.R. No. 163770
February 17, 2005
FACTS:
Initially, the complainant in this case was Epifania S. Dela Cruz
(Epifania), but she died on November 1, 1996, while the case was pending in
the Court of Appeals. Upon her demise, she was substituted by her niece,
Laureana V. Alberto.
Epifania claimed that sometime in 1992, she discovered that her rice
land in Salomague Sur, Bugallon, Pangasinan, has been transferred and
registered in the name of her nephew, Eduardo C. Sison, without her
knowledge and consent, purportedly on the strength of a Deed of Sale she
executed on November 24, 1989.
Epifania thus filed a complaint before the Regional Trial Court of
Lingayen, Pangasinan, to declare the deed of sale null and void. She alleged
that Eduardo tricked her into signing the Deed of Sale, by inserting the deed
among the documents she signed pertaining to the transfer of her residential
land, house and camarin, in favor of Demetrio, her foster child and the
brother of Eduardo.
Respondents, spouses Eduardo and Eufemia Sison (Spouses Sison),
denied that they employed fraud or trickery in the execution of the Deed of
Sale. They claimed that they purchased the property from Epifania for
P20,000.00. They averred that Epifania could not have been deceived into
signing the Deed of Absolute Sale because it was duly notarized before
Notary Public Maximo V. Cuesta, Jr.; and they have complied with all
requisites for its registration, as evidenced by the Investigation Report by the
Department of Agrarian Reform (DAR), Affidavit of Seller/Transferor, Affidavit
of Buyer/Transferee, Certification issued by the Provincial Agrarian Reform
Officer (PARO), Letter for the Secretary of Agrarian Reform, Certificate
Authorizing Payment of Capital Gains Tax, and the payment of the registration

314
fees. Some of these documents even bore the signature of Epifania, proof
that she agreed to the transfer of the property.
ISSUES:
Whether the deed of absolute sale is valid.
Whether fraud attended the execution of a contract.

RULING:
On the issue of whether fraud attended the execution of a contract is
factual in nature. Normally, this Court is bound by the appellate court’s
findings, unless they are contrary to those of the trial court, in which case we
may wade into the factual dispute to settle it with finality. After a careful
perusal of the records, we sustain the Court of Appeals’ ruling that the Deed
of Absolute Sale dated November 24, 1989 is valid.
There being no evidence adduced to support her bare allegations, thus,
Epifania failed to satisfactorily establish her inability to read and understand
the English language.
Although Epifania was 79 years old at the time of the execution of the
assailed contract, her age did not impair her mental faculties as to prevent
her from properly and intelligently protecting her rights. Even at 83 years,
she exhibited mental astuteness when she testified in court. It is, therefore,
inconceivable for her to sign the assailed documents without ascertaining
their contents, especially if, as she alleges, she did not direct Eduardo to
prepare the same.
A comparison of the deed of sale in favor of Demetrio and the deed of

sale in favor Eduardo, draws out the conclusion that there was no trickery
employed. One can readily see that the first deed of sale is in all significant
respects different from the second deed of sale. A casual perusal, even by
someone as old as Epifania, would enable one to easily spot the differences.
Epifania could not have failed to miss them.
Indeed, if the intention was to deceive, both deeds of sale should have
been mirror images as to mislead Epifania into thinking that she was signing
what appeared to be the same document.
In addition, the questioned deed of sale was duly notarized. It is a
settled rule that one who denies the due execution of a deed where one’s
signature appears has the burden of proving that, contrary to the recital in
the jurat, one never appeared before the notary public and acknowledged the
deed to be a voluntary act. Epifania never claimed her signatures as
forgeries. In fact, Epifania never questioned the deed of sale in favor of
Demetrio, accepting it as a valid and binding document. It is only with
respect to the deed of sale in favor of Eduardo that she denies knowledge of
affixing her signature. Unfortunately, for both parties, the notary public, Atty.
Maximo V. Cuesta, Jr. before whom they appeared, died prior to the filing of
the case.

315
KINDS OF FRAUD HOW COMMITTED
RURAL BANK OF ST. MARIA, PANGASINAN VS. COURT OF APPEALS

314 SCRA 255
FACTS:
Manuel Behis mortgaged a land in favor of RBS, Pangasinan, in a Real
Estate Mortgage dated October 23, 1978 as a security for loans obtained
amounting to P156,270.00. Unfortunately thereafter, Manuel, being a
delinquent in paying his debts, sold the land. And so a Deed of Absolute Sale
with Assumption of Mortgage was executed between him as vendor/assignor
and Rayandayan and Arceño as vendees/assignees for the sum of
P250,000.00. On the same day, Rayandayan and Arceño, together with
Manual Behis executed another Agreement embodying the consideration of
the sale of the land in the sum of P2.4 million. The land, however, remained
in the name of Behis because the former did not present to the Register of
Deeds the contracts.
Meanwhile, the loan, still in the name of Behis, accumulated an account

amounting to P316,368.13 in a Statement of Account sent to Behis on May,
30, 1985.

316
Thereafter, Rayandaran and Arceño presented the Deed of Absolute

Sale to the bank and negotiated with the principal stockholder of the bank,
Engr. E. Natividad, in Manila for the assumption of the indebtedness of
Manuel Behis and the subsequent release of the mortgage on the property by
the bank. Rayandaran and Arceño did not show to the bank the agreement
with Manuel Behis providing for the real consideration of P2.4 million.
Subsequently, the bank consented to the substitution of plaintiffs as mortgage
debtors in place of Manuel Behis in a Memorandum of Agreement between
private respondents and the bank with restricted and liberalized terms for the
payment of the mortgage debt including the initial payment of P143,782.22.
The bank discontinued to comply with the Memorandum of Agreement

due to the appearance of Christina Behis, Manuel’s wife and a co-signatory in
the mortgaged land, who claimed that her signature was forged. For this
reason, the bank considered the MA as void.
On January 7, 1986, plaintiffs demanded in a letter that the bank

comply with its obligation under the Memorandum of Agreement to which the
latter denied. Petitioner bank argued that the Memorandum of Agreement is
voidable on the ground that its consent to enter said agreement was vitiated
by fraud because private respondents withheld from petitioner bank the
material information that the real consideration for the sale with assumption
of mortgage of the property by Manuel Behis to Rayandayan and Arceño is
P2,400,000.00, and not P250,000.00 as represented to petitioner bank.
According to petitioner bank, had it known for the real consideration for the
sale, i.e. P2.4 million, it would not have consented into entering the
Memorandum of Agreement with Rayandayan and Arceño as it was put in the
dark as to the real capacity and financial standing of private respondents to
assume the mortgage from Manuel Behis. Petitioner bank pointed out that it
would not have assented to the agreement, as it could not expect the private
respondents to pay the bank the approximately P343,000.00 mortgage debt
when private respondents have to pay at the same time P2,400,000.00 to
Manuel Behis on the sale of the land.
ISSUE:
Whether or not there existed a fraud in the case at bar.
RULING:
NO. The kind of fraud that will vitiate a contract refers to those
insidious words or machinations resorted to by one of the contracting parties
to induce to the other to enter into a contract which without them he would
not have agreed to. Simply stated, the fraud must be determining cause of
the contract, or must have caused the consent to be given. It is believed that
the non-disclosure to the bank of the purchase price of the sale of the land
between private respondents and Manuel Behis cannot be the “fraud”
contemplated by Article 1338 of the Civil Code. From the sole reason
submitted by the petitioner bank that it was kept in the dark as to the
financial capacity of private respondents, we cannot see how the omission or
concealment of the real purchase price could have induced the bank into
giving its consent to the agreement; or that the bank would not have
otherwise given its consent had it known of the real purchase price.
Pursuant to Art. 1339 of the Code, silence or concealment, by itself,

does not constitute fraud unless there is a special duty to disclose certain
facts. In the case at bar, private respondents had no duty to do such.
ESSENTIAL REQUISITES OF CONTRACT: LICIT OBJECT
CHAVEZ VS. PUBLIC ESTATES AUTHORITY

415 SCRA 403
317
SYNOPSIS:
This case involves a government contract conveyed to a private entity
(Amari), where 157.84 hectares of reclaimed public lands along Roxas
Boulevard were sold at a negotiated price of P 1,200/ square meter. Reports
place the market price of land in that area at a high of P 90, 000/ square
meter. The difference is a mammoth P 140.16 B from the purchase price of
the actual sale, equivalent to the Judiciary’s budget for 17 years and three
times the Marcos’ Swiss deposits forfeited in favor of the government as
decided by the Supreme Court. At the end, the contract was voided for
Amari, the private entity, was proven to have inveigled the Public Estates
Authority to sell the reclaimed lands without public bidding, in violation of
the Government Code.
FACTS:
Two Senate Committees, the Senate Blue Ribbon Committee and
Committee on Accountability of Public Officers, conducted extensive public
hearings to determine the actual market value of the public lands; and found
out that the sale of such was grossly undervalued based on official documents
submitted by the proper government agencies during the investigations. It
was found out that the Public Estates Authority (PEA), under the Joint Venture
Agreement (JVA), sold to Amari Coastal Bay Development Corporation 157.84
hectares of reclaimed public lands totaling to P 1.89 B or P 1,200 per square
meter. However during the investigation process, the BIR pitted the value at
P 7,800 per square meter, while the Municipal Assessor of Parañaque at P
6,000 per square meter and by the Commission on Audit (COA) at P21,333
per square meter. Based on the official appraisal of the COA, the actual loss
on the part of the government is a gargantuan value of P 31.78 B. However,
PEA justified the purchase price based from the various appraisals of private
real estate corporations, amounting from P 500 – 1,000 per square meter.
Further, it was also found out that there were various offers from different
private entities to buy the reclaimed public land at a rate higher than the
offer of Amari, but still, PEA finalized the JVA with Amari. During the process
of investigation, Amari did not hide the fact that they agreed to pay huge
commissions and bonuses to various persons for professional efforts and
services in successfully negotiating and securing for Amari the JVA. The
amount constituting the commissions and bonuses totaled to a huge P 1.76 B;
an indicia of great bribery.
ISSUE:
Whether or not the sale between PEA and Amari is unconstitutional.
RULING:
YES, it is unconstitutional for what was sold or alienated are lands of
the public domain. Further, the Ponce doctrine, to which the respondent seeks
refuge and sanctuary, does not fall squarely in the case.
First, the subject of the sale was a submerged land; i.e., 78% of the
total area sold by PEA to Amari is still submerged land. Submerged lands,
like foreshore lands, is of the public domain and cannot be alienated. As
unequivocally stated in Article XII, Section 2 of the Constitution, all lands of
the public domain, waters, minerals, coals, petroleum, forces which are
potential energies, fisheries, forests or timber, wildlife, flora and fauna, and
other natural resources, with the exception of agricultural lands, are
inalienable. Submerged lands fall within the scope of such provision.
Second, in the Ponce case, the “irrevocable option” to purchase

portions of the foreshore lands shall be enforceable only upon reclamation,
not prior to reclamation. In the case at bar, even without actual reclamation,
the submerged lands were immediately transferred and sold to Amari.

318
Third, the Ponce doctrine has been superseded by the provisions of the
Government Auditing Code, which has been bolstered by the provisions of the
Local Government Code, which states that any sale of the public land must be
made only thru a public bidding. There being no public bidding in the subject
sale of land; the amended JVA is a negotiated contract in patent violation of
such law.
Fourth, the Ponce doctrine which involved the validity to reclaim

foreshore lands based on RA 1899 (authorizing municipalities and chartered
cities to reclaim foreshore lands) is not applicable in the instant case because
what is involved in the case at bar are submerged lands.
Fifth, in the Ponce case, the City of Cebu was sanctioned to reclaim
foreshore lands under RA 1899 for it is a qualified end user government
agency; therefore, can sell patrimonial property to private parties. But PEA is
not an end user agency with respect to reclaimed lands under the amended
JVA for reclaimed lands are public and therefore are inalienable.
Finally, the Ponce case was decided under the 1935 Constitution (1965-
66), which allowed private corporations to acquire alienable lands of the
public domain. The case at bar falls within the ambit of the 1987 Constitution
which prohibits corporations from acquiring alienable lands of the public
domain.
Ergo, the submerged lands, being inalienable and outside the

commerce of man, could not be the subject of the commercial transactions
specified in the Amended JVA. Hence, the contract between Amari and the
PEA is void.

319
REQUISITE OF CONTRACT – DETERMINATE OBJECT
MELLIZA VS. CITY OF ILOILO

23 SCRA 477
FACTS:
Juliana Melliza during her lifetime owned three parcels of residential
land in Iloilo City. On 1932, she donated to the then Municipality of Iloilo a
certain lot to serve as site for the municipal hall. The donation was however
revoked by the parties for the reason that area was found inadequate to meet
the requirements of the development plan. Subsequently the said lot was
divided into several divisions.
Sometime in 1938, Juliana Melliza sold her remaining interest on the

said lot to Remedios San Villanueva. Remedios in turn transferred the rights
to said portion of land to Pio Sian Melliza. The transfer Certificate of title in
Melliza’s name bears on annotation stating that a portion of said lot belongs
to the Municipality of Iloilo.
Later the City of Iloilo, which succeeds to the Municipality of Iloilo,

donated the city hall sit to the University of the Philippines, Iloilo Branch. On
1952, the University of the Philippines enclosed the site donated with a wire
fence.
Pio Sian Melliza then filed action in the Court of First Instance of Iloilo
against Iloilo City and the University of the Philippines for recovery of the
parcel of land or of its value specifically LOT 1214-B.
Petitioner contends that LOT 1214-B was not included in those lots
which were sold by Juliana Melliza to the then municipality of Iloilo and to say
he would render the Deed of Sale invalid because the law requires as an
essential element of sale, determinate object.
ISSUE:
Whether or not IF Lot 1214 – B is included in the Deed of Sale, it would
render the contract invalid because the object would allegedly not be
determinate as required by law.
RULING:
NO. The requirement of the law specifically Article 1460 of the Civil
Code, that the sale must have for its object a determinate thing, is fulfilled as
long as, at the time the contract is entered into, the object of the sale is cable

320
of being determinate without the necessity of a new or further agreement
between the parties.
The specific mention of some of the lots plus the statement that the lots
object of the sale are the ones needed for city hall site sufficient provides a
basis, as of the time, of the execution of the contract, for rendering
determinate said lots without the need of a new further agreement of the
parties.
ABSENCE OF CAUSE VS. FAILURE/INADEQUACY OF CAUSE
ASKAY, plaintiff-appellant, VS. FERNANDO A. COSALAN, defendant-

appellee
1924 September 15
46 PHIL 179
FACTS:
The plaintiff in this case is Askay, an illiterate Igorrote between 70 and
80 years of age, residing in the municipal district of Tublay, Province of
Benguet, who at various times has been the owner of mining property. The
defendant is Fernando A. Cosalan, the nephew by marriage of Askay, and
municipal president of Tublay, who likewise has been interested along with
his uncle in mining enterprises
About 1907, Askay obtained title to the Pet Kel Mineral Claim located in
Tublay, Benguet. On November 23, 1914, if we are to accept defendant's
Exhibit 1, Askay sold this claim to Cosalan. Nine years later, in 1923, Askay
instituted action in the Court of First Instance of Benguet to have the sale of
the Pet Kel Mineral Claim declared null, to secure possession of the mineral
claim, and to obtain damages from the defendant in the amount of P10,500.
Following the presentation of various pleadings including the answer of the
defendant, and following trial before Judge of First Instance Harvey, judgment
was rendered dismissing the complaint and absolving the defendant from the
same, with costs against the plaintiff. On being informed of the judgment of
the trial court, plaintiff attacked it on two grounds: The first, jurisdictional,
and the second, formal. Both motions were denied and an appeal was
perfected.
ISSUE:
Whether or not the plaintiff has established his cause of action by a
preponderance of the evidence.
RULING:
321
Plaintiff contends that the sale of the Pet Kel Mineral Claim was
accomplished through fraud and deceit on the part of the defendant. Plaintiff
may be right but in our judgment he has failed to establish his claim. Fraud
must be both alleged and proved. One fact exists in plaintiffs favor, and this
is the age and ignorance of the plaintiff who could be easily by the defendant,
a man of greater intelligence. Another fact is the inadequacy of the
consideration for the transfer which, according to the conveyance, consisted
of P1 and other valuable consideration, and which, according to the oral
testimony, in reality consisted of P107 in cash, a bill-fold, one sheet, one cow,
and two carabaos. Gross inadequacy naturally suggest fraud is some
evidence thereof, so that it may be sufficient to show it when taken in
connection with other circumstances, such as ignorance or the fact that one
of the parties has an advantage over the other. But the fact that the bargain
was a hard one, coupled with mere inadequacy of price when both parties are
in a position to form an independent judgment concerning the transaction, is
not a sufficient ground for the cancellation of a contract.
Against the plaintiff and in favor of the defendant, the Court had the
document itself executed in the presence of witnesses and before a notary
public and filed with the mining recorder. The notary public, Nicanor Sison,
and one of the attesting witnesses, Apolonio Ramos, testified to the effect that
in the presence of the plaintiff and the defendant and of the notary public and
the subscribing witnesses, the deed of sale was interpreted to the plaintiff
and that thereupon he placed his thumb mark on the document. Two finger
print experts, Dr. Charles S. Banks and A. Simkus, have declared in
depositions that the thumb mark on exhibit is that of Askay. No less than four
other witnesses testified that at various times Askay had admitted to them
that he had sold the Pet Kel Mine to Fernando A. Cosalan.
Having in mind of these circumstances, how can the plaintiff expect the
courts to nullify the deed of sale on mere suspicion? Having waited nine
years from the date when the deed was executed, nine years from the time
Fernando A. Cosalan started developing the mine, nine years from the time
Askay himself had been deprived of the possession of the mine, and nine
years permitting of a third party to obtain a contract of lease from Cosalan,
how can the court overlook plaintiff's silent acquiescence in the legal rights of
the defendant? On the facts of record, the trial judge could have done
nothing less than dismiss the action.
The Court concludes, therefore, that the complaint was properly

dismissed. As a result, judgment is affirmed
CAUSE: TRUE/REAL: SIMULATION OF CONTRACTS
HEIRS OF THE LATE SPOUSES AURELIO AND ESPERANZA BALITE

VS. LIM
446 SCRA 57
FACTS:
The spouses Aurelio and Esperanza Balite were the owners of a parcel
of land at Catarman, Northern Samar. When Aurelio died intestate, his wife
Esperanza and their children inherited the subject property and became co-
owners thereof. In the meantime, Esperanza became ill and was in dire need
of money fro her hospital expenses. She, through her daughter, Cristeta,
offered to sell to Rodrigo Lim, her undivided share for the price of
P1,000,000.00. Esperaza and Rodrigo agreed that under the Deed of
Absolute Sale, it will be made to appear that the purchase price of the
property would be P150,000.00 although the actual price agreed upon by
them for the property was P1,000,000.00. On April 16, 1996, Esperanza
executed a Deed of Absolute Sale in favor of Rodrigo. They also executed on

322
the same day a Joint Affidavit under which they declared that the real price of
the property was P1,000,000.00 payable to Esperanza by installments. Only
Esperanza and two of her children Antonio and Cristeta knew about the said
transaction. When the rest of the children knew of the sale, they wrote to the
Register of Deeds saying that their mother did not inform them of the sale of
a portion of the said property nor did they give consent thereto. Nonetheless,
Rodrigo made partial payments to Antonio who is authorized by his mother
through a Special Power of Attorney.
On October 23, 1996, Esperanza signed a letter addressed to Rodrigo

informing the latter that her children did not agree to the sale of the property
to him and that she was withdrawing all her commitments until the validity of
the sale is finally resolved. On October 31, 1996, Esperanza died intestate
and was survived by her children. Meanwhile, Rodrigo caused to be
published in the Samar Reporter the Deed of Absolute Sale.
On June 27, 1997, petitioners filed a complaint against Rodrigo with the
Regional Trial Court for the annulment of sale, quieting of title, injunction and
damages. Subsequently, Rodrigo secured a loan from the Rizal Commercial
Banking Corporation in the amount of P2,000,000.00 and executed a Real
Estate Mortgage over the property as security thereof. On motion of the
petitioners, they were granted leave to file an amended complaint impleading
the bank as additional party defendant. On March 30, 1998, the court issued
an order rejecting the amended complaint of the petitioners. Likewise, the
trial court dismissed the complaint. It held that pursuant to Article 493 of the
Civil Code, a co-owner is not invalidated by the absence of the consent of the
other co-owners. Hence, the sale by Esperanza of the property was valid; the
excess from her undivided share should be taken from the undivided shares of
Cristeta and Antonio, who expressly agreed to and benefit from the sale. The
Court of Appeals likewise held that the sale was valid and binding insofar as
Esperanza Balite’s undivided share of the property was concerned. It
affirmed the trial court’s ruling that the lack of consent of the co-owners did
not nullify the sale.
ISSUE:
Whether or not the Deed of Absolute Sale is null and void on the
ground that it is falsified; it has an unlawful cause; and it is contrary to law
and/or public policy.
RULING:
No. The contract is an example of a simulated contract. Article 1345 of
the Civil Code provides that the simulation of a contract may either be
absolute or relative. In absolute simulation, there is a colorable contract but
without any substance, because the parties have no intention to be bound by
it. An absolutely simulated contract is void, and the parties may recover from
each other what they may have given under the “contract”. On the other
hand, if the parties state a false cause is relatively simulated. Here, the
parties’ real agreement binds them. In the present case, the parties intended
to be bound by the Contract, even if it did not reflect the actual purchase
price of the property. The letter of Esperanza to respondent and petitioner’s
admission that there was partial payment made on the basis of the Absolute
Sale reveals that the parties intended the agreement to produce legal effect.
Since the Deed of Absolute Sale was merely relatively simulated, it

remains valid and enforceable. All the essential requisites prescribed by law
for the validity and perfection of contracts is present. However, the parties
shall be bound by their real agreement for a consideration of P1,000,000 as
reflected by their Joint Affidavit.
The petition is DENIED and the assailed decision AFFIRMED.
CAUSE VS. MOTIVE

323
UY VS. COURT OF APPEALS

314 SCRA 69
SEPTEMBER 9, 1999
FACTS:
Petitioners William Uy and Rodel Roxas are agents authorized to sell
eight (8) parcels of land by the owners thereof. By virtue of such authority,
petitioners offered to sell the lands, located in Tuba, Tadiangan, Benguet to
respondent National Housing Authority (NHA) to be utilized and developed as
a housing project.
On February 14, 1989, NHA approved the acquisition of the said

parcels of land with an area of 31.8231 hectares at the cost of P23.867
million, pursuant to which the parties executed a series of Deeds of Absolute
Sale covering the subject lands. Of the eight parcels of lands, however, only
five were paid for by the NHA because of the report it received from the Land
Geosciences Bureau of the Department of Environment and Natural
Resources that the remaining area is located at an active landslide area and
therefore, not suitable for development into a housing project. NHA
eventually cancelled the sale over the remaining three (3) parcels of land.
On March 9, 1992, petitioners filed a complaint for damages. After

trial, the RTC of Quezon City rendered the cancellation of contract to be
justified and awarded P1.255 million as damages in favor of petitioners.
Upon appeal by petitioners, the Court of Appeals reversed the decision

and entered a new one dismissing the complaint including the award of
damages.
The motion for reconsideration having been denied, petitioners seek

relief from this court contending, inter alia, that the CA erred in declaring
that NHA had any legal basis to rescind the subject sale.
ISSUE:
Whether or not the contention of petitioner is correct.
Whether or not a party’s entry into a contract affects the validity of the
contract.
RULING:
Anent the 1st issue, NO. Petitioners confuse the cancellation of the
contract by the NHA as a rescission of the contract under Article 1191 of the
Civil Code. The right to rescission is predicated on a breach of faith by the
other party that violates the reciprocity between them. The power to rescind
is given to the injured party. In this case, the NHA did not rescind the
contract. Indeed, it did not have the right to do so for the other parties to the
contract, the vendors did not commit any breach, much less a substantial
breach, of their obligation. The NHA did not suffer any injury. The
cancellation was not therefore a rescission under Article 1191. Rather, it was
based on the negation of the cause arising from the realization that the lands,
which were the objects of the sale, were not suitable for housing.
Anent the 2nd issue, as a general rule, a party’s motives for entering
into a contract do not affect the contract. However, when the motive
predetermines the cause, the motive may be regarded as the cause. As held
in Liguez v. CA, ... It is well to note, however, that Manresa himself, while
maintaining the distinction and upholding the inoperativess of the motives of
the parties to determine the validity of the contract, expressly excepts from
the rule those contracts that are conditioned upon the attainment of the
motives of either party. The same view is held by the Supreme Court of
Spain, in its decisions of Fevruary 4, 1941 and December 4, 1946, holdinmg

324
that the motive may be regarded as causa when it predermones the purpose
of the contract.
GRATUITOUS CAUSE
1. LIGUEZ VS. CA, 102 PHIL 577

2. PHILBANK VS. LUI SHE, 21 SCRA 52
CONCHITA LIGUEZ, petitioner, VS. THE HONORABLE COURT OF

APPEALS, MARIA NGO VDA. DE LOPEZ, ET AL., respondents
102 P 577
December 18, 1957
G.R. No. L-11240
FACTS:
The case began upon complaint filed by petitioner-appellant against the
widow and heirs of the late Salvador P. Lopez to recover a parcel of 51.84
hectares of land, situated in Barrio Bogac-Linot, of the municipality of Mati,
Province of Davao. Plaintiff averred to be its legal owner, pursuant to a deed
of donation of said land, executed in her favor by the late owner, Salvador P.
Lopez, on 18 May 1943. The defense interposed was that the donation was
null and void for having an illicit causa or consideration, which was plaintiff's
entering into marital relations with Salvador P. Lopez, a married man; and
that the property had been adjudicated to the appellees as heirs of Lopez by
the Court of First Instance, since 1949.
The Court of Appeals found that the deed of donation was prepared by
the Justice of the Peace of Mati, Davao, before whom it was signed and
ratified on the date aforesaid. At the time, appellant Liguez was a minor, only
16 years of age. Salvador donated it to Liguez out of his love and affection to
her. The Court of Appeals found that when the donation was made, Lopez had
been living with the parents of appellant for barely a month; that the donation
was made in view of the desire of Salvador P. Lopez, a man of mature years to
have sexual relations with appellant Conchita Liguez; that Lopez had
confessed to his love for appellant to the instrumental witnesses, with the
remark that her parents would not allow Lopez to live with her unless he first
donated the land in question; that after the donation, Conchita Liguez and
Salvador P. Lopez lived together in the house that was built upon the latter's
orders, until Lopez was killed on July 1st, 1943, by some guerrillas who
believed him to be pro-Japanese.
It was also ascertained by the Court of Appeals that the donated land
originally belonged to the conjugal partnership of Salvador P. Lopez and his
wife, Maria Ngo; that the latter had met and berated Conchita for living
maritally with her husband, sometime during June of 1943; that the widow
and children of Lopez were in possession of the land and made improvements
thereon; that the land was assessed in the tax rolls first in the name of Lopez
and later in that of his widow; and that the need of donation was never
recorded.

325
Upon these facts, the Court of Appeals held that the deed of donation
was inoperative, and null and void (1) because the husband, Lopez, had no
right to donate conjugal property to the plaintiff appellant; and (2) because
the donation was tainted with illegal causa or consideration, of which donor
and donee were participants.
Appellant vigorously contends that the Court of First Instance as well

as the Court of Appeals erred in holding the donation void for having an illicit
causa or consideration. It is argued that under Article 1274 of the Civil Code
of 1889 (which was the governing law in 1943, when the donation was
executed), "in contracts of pure beneficence the consideration is the liberality
of the donor", and that liberality per se can never be illegal, since it is neither
against law or morals or public policy.
ISSUE:
Whether or not the deed of donation made by Lopez in favor of Liguez
was valid.
RULING:
Under Article 1274, liberality of the donor is deemed causa only in
those contracts that are of "pure" beneficence; that is to say, contracts
designed solely and exclusively to procure the welfare of the beneficiary,
without any intent of producing any satisfaction for the donor; contracts, in
other words, in which the idea of self-interest is totally absent on the part of
the transferor.
For this very reason, the same Article 1274 provides that in
remuneratory contracts, the consideration is the service or benefit for which
the remuneration is given; causa is not liberality in these cases because the
contract or conveyance is not made out of pure beneficence, but "solvendi
animo." In consonance with this view, the Court in Philippine Long Distance
Co. vs. Jeturian* G. R. L-7756, July 30, 1955, like the Supreme Court of Spain
in its decision of 16 Feb. 1899, has ruled that bonuses granted to employees
to excite their zeal and efficiency, with consequent benefit for the employer,
do not constitute donation having liberality for a consideration.
Here the facts as found by the Court of Appeals, which the Supreme
Court could not vary, demonstrate that in making the donation in question,
the late Salvador P. Lopez was not moved exclusively by the desire to benefit
appellant Conchita Liguez, but also to secure her cohabiting with him, so that
he could gratify his sexual impulses. This is clear from the confession of
Lopez to the witnesses Rodriguez and Ragay, that he was in love with
appellant, but her parents would not agree unless he donated the land in
question to her. Actually, therefore, the donation was but one part of an
onerous transaction (at least with appellant's parents) that must be viewed in
its totality. Thus considered, the conveyance was clearly predicated upon an
illicit causa.
Appellant seeks to differentiate between the alleged liberality of Lopez,

as causa for the donation in her favor, and his desire for cohabiting with
appellant, as motives that impelled him to make the donation, and quotes
from Manresa and the jurisprudence of this Court on the distinction that must
be maintained between causa and motives. It is well to note, however, that
Manresa himself, while maintaining the distinction and upholding the
inoperativeness of the motives of the parties to determine the validity of the
contract, expressly excepts from the rule those contracts that are conditioned
upon the attainment of the motives of either party.

326
Appellees, as successors of the late donor, being thus precluded from
pleading the defense of immorality or illegal causa of the donation, the total
or partial ineffectiveness of the same must be decided by different legal
principles. In this regard, the Court of Appeals correctly held that Lopez
could not donate the entirety of the property in litigation, to the prejudice of
his wife Maria Ngo, because said property was conjugal in character, and the
right of the husband to donate community property is strictly limited by law.
The situation of the children and forced heirs of Lopez approximates

that of the widow. As privies of their parent, they are barred from invoking
the illegality of the donation. But their right to a legitime out of his estate is
not thereby affected, since the legitime is granted them by the law itself, over
and above the wishes of the deceased. Hence, the forced heirs are entitled to
have the donation set aside in so far as inofficious: i.e., in excess of the
portion of free disposal , computed as provided in Articles 818 and 819, and
bearing in mind that "collationable gifts" under Article 818 should include
gifts made not only in favor of the forced heirs, but even those made in favor
of strangers, as decided by the Supreme Court of Spain in its decisions of 4
May 1899 and 16 June 1902. So that in computing the legitimes, the value of
the property donated to herein appellant, Conchita Liguez, should be
considered part of the donor's estate. Only the court of origin has the
requisite date to determine whether the donation is inofficious or not. With
regard to the improvements in the land in question, the same should be
governed by the rules of accession and possession in good faith, it being
undisputed that the widow and heirs of Lopez were unaware of the donation
in favor of the appellant when the improvements were made.
Appellant Conchita Liguez was declared by the Supreme Court entitled

to so much of the donated property as may be found, upon proper liquidation,
not to prejudice the share of the widow Maria Ngo in the conjugal partnership
with Salvador P. Lopez or the legitimes of the forced heirs of the latter.
GRATUITOUS CAUSE
PHILIPPINE BANKING CORPORATION, representing the estate

of JUSTINA SANTOS Y CANON FAUSTINO, deceased, plaintiff-
appellant,
VS. LUI SHE, in her own behalf and as administratrix of the
intestate of Wong Heng, deceased, defendant-appellant
21 SCRA 52
FACTS:
Justina Santos and her sister Lorenza were the owners in common of a
piece of land in Manila. In it are two residential houses. The sisters lived in
one of the houses, while Wong Heng, a Chinese, lived with his family in the
restaurant. Wong had been a long time lessee of a portion of the property,
paying monthly rentals. On September 22, 1957, Justina became the owner of
the entire property as her sister died with no other heir.

327
On November 1, 1957, Justina executed a contract of lease in favor of
Wong, covering a portion already leased to him and another portion of the
property. The lease was for 50 years, although the lessee was give the right
to withdraw at anytime from the agreement with a stipulated monthly rental.
On December 1, she executed another contract giving Wong the option

to buy the leased premises for P120,000 payable within 10 years at monthly
installment of P1,000. The option was conditioned on his obtaining Philippine
citizenship, which was then pending. His application for naturalization was
withdrawn when it was discovered that he was a resident of Rizal.
On November 18,1958, she executed two other contracts one extending

the term to 99 years and the term fixing the term of the option of 50 years. In
the two wills, she bade her legatees to respect the contract she had entered
into with Wong, but it appears to have a change of heart in a codicil.
Claiming that the various contracts were made because of her machinations
and inducements practiced by him, she now directed her executor to secure
the annulment of the contracts.
On November 18, the action was filed in the CFI of Manila. The
complaint alleged that Wong obtained the contracts through fraud. Wong
denied having taken advantage of her trust in order to secure the execution of
the contracts on question. He insisted that the various contracts were freely
and voluntarily entered into by the parties.
The lower court declared all the contracts null and void with the
exception of the first, which is the contract of lease of November 15, 1957.
From this decision, both parties appealed directly to the Court. After the case
were submitted for decision, both parties died, Wong on 1962, and Justina on
1964. Wong as substituted by his wife Lui She while Justina by the Philippine
Banking Corporation.
ISSUE:
Whether or not the contracts entered into by the parties are void being
in violation of the Constitutional prohibition on transfer of lands to aliens or
those who are not citizens of the Philippines.
RULING:
YES. The Court held the lease and the rest of the contracts were
obtained with the consent of Justina freely given and voluntarily. However the
contacts are not necessarily valid on the ground that it circumvents the
Constitutional prohibition against the transfer of lands to aliens. The illicit
purpose then becomes the illegal causa, rendering the contracts void.
It does not follow from what has been said that because the parties are
in pari delicto they will be left where they are, without relief. For one thing,
the original parties who were guilty of violation of fundamental charter have
died and have since substituted by their administrators to whom it would e
unjust to impute their guilt. For another thing, Article 1416 of the Civil Code
provides an exception to the pari de licto, that when the agreement is not
illegal per se but is merely prohibited, and the prohibition of the law is
designed for the protection of the plaintiff, he may recover what he has paid
or delivered.
FORM AS ESSENTIAL ELEMENT OF CONTRACTS
SONIA F. LONDRES, ARMANDO V. FUENTES, CHI-CHITA FUENTES

QUINTIA, ROBERTO V. FUENTES, LEOPOLDO V. FUENTES, OSCAR V.
328
FUENTES and MARILOU FUENTES ESPLANA petitioners, vs. THE
COURT OF APPEALS, THE DEPARTMENT OF PUBLIC WORKS AND
HIGHWAYS, THE DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS, ELENA ALOVERA SANTOS and CONSOLACION
ALIVIO ALOVERA, respondents
Dec 17, 2002
G.R. No. 136427
FACTS:
The present case stemmed from a battle of ownership over Lots 1320
and 1333 both located in Barrio Baybay, Roxas City, Capiz. Paulina originally
owned these two parcels of land. After Paulina’s death, ownership of the lots
passed to her daughter, Filomena. The surviving children of Filomena, namely,
Sonia Fuentes Londres, Armando V. Fuentes, Chi-Chita Fuentes Quintia,
Roberto V. Fuentes, Leopoldo V. Fuentes and Marilou Fuentes Esplana, herein
petitioners, now claim ownership over Lots 1320 and 1333. On the other
hand, private respondents Consolacion and Elena anchor their right of
ownership over Lots 1320 and 1333 on the Absolute Sale executed by
Filomena on April 24, 1959. Filomena sold the two lots in favor of Consolacion
and her husband, Julian. Elena is the daughter of Consolacion and Julian.
On March 30, 1989, petitioners filed a complaint for the declaration of

nullity of contract, damages and just compensation. Petitioners sought to
nullify the Absolute Sale conveying Lots 1320 and 1333 and to recover just
compensation from public respondents DPWH and DOTC. Petitioners claimed
that as the surviving children of Filomena, they are the owners of Lots 1320
and 1333. Petitioners claimed that these two lots were never sold to Julian.
Petitioners doubt the validity of the Absolute Sale because it was tampered.
The cadastral lot number of the second lot mentioned in the Absolute Sale
was altered to read Lot 1333 when it was originally written as Lot 2034.
Petitioners pointed out that Lot 2034, situated in Barrio Culasi, Roxas City,
Capiz, was also owned by their grandmother, Paulina. And that it was only
recently that they learned of the claim of private respondents when
Consolacion filed a petition for the judicial reconstitution of the original
certificates of title of Lots 1320 and 1333 with the Capiz Cadastre. Upon
further inquiry, petitioners discovered that there exists a notarized Absolute
Sale executed on April 24, 1959 registered only on September 22, 1982 in the
Office of the Register of Deeds of Roxas City. The private respondents’ copy of
the Absolute Sale was tampered so that the second parcel of lot sold, Lot
2034 would read as Lot 1333. However, the Records Management and
Archives Office kept an unaltered copy of the Absolute Sale. This other copy
shows that the objects of the sale were Lots 1320 and 2034.
Private respondents maintained that they are the legal owners of Lots
1333 and 1320. Julian purchased the lots from Filomena in good faith and for
a valid consideration. Private respondents explained that Julian was deaf and
dumb and as such, was placed in a disadvantageous position compared to
Filomena. Julian had to rely on the representation of other persons in his
business transactions. After the sale, Julian and Consolacion took possession
of the lots. Up to now, the spouses’ successors-in-interest are in possession of
the lots in the concept owners. Private respondents claimed that the
alteration in the Absolute Sale was made by Filomena to make it conform to
the description of the lot in the Absolute Sale. Private respondents filed a
counterclaim with damages.
The cross-claim of petitioners against public respondents was for the

recovery of just compensation. Petitioners claimed that during the lifetime of
Paulina, public respondents took a 3,200-square meter portion of Lot 1320.
The land was used as part of the Arnaldo Boulevard in Roxas City without any
payment of just compensation. In 1988, public respondents also appropriated
a 1,786-square meter portion of Lot 1333 as a vehicular parking area for the
Roxas City Airport. Sonia, one of the petitioners, executed a deed of absolute
329
sale in favor of the Republic of the Philippines over this portion of Lot 1333.
According to petitioners, the vendee agreed to pay petitioners P214,320.00.
Despite demands, the vendee failed to pay the stipulated amount.
The trial court issued its decision upholding the validity of the Absolute
Sale. This was affirmed by the Court of Appeals.
ISSUE
Whether or not the notarized copy should prevail.
RULING
Among others, petitioners harp on the fact that the notarized and
registered copy of the Absolute Sale should have, been correspondingly
corrected. Petitioners believe that the notarized and archived copy should
prevail. We disagree. A contract of sale is perfected at the moment there is a
meeting of the minds upon the thing which is the object of the contract and
upon the price. Being consensual, a contract of sale has the force of law
between the contracting parties and they are expected to abide in good faith
with their respective contractual commitments. Article 1358 of the Civil Code,
which requires certain contracts to be embodied in a public instrument, is
only for convenience, and registration of the instrument is needed only to
adversely affect third parties. Formal requirements are, therefore, for the
purpose of binding or informing third parties. Non-compliance with formal
requirements does not adversely affect the validity of the contract or the
contractual rights and obligations of the parties.
Decision affirmed with the modification that the cross-claim against

public respondents is dismissed.

330
FORM FOR CONVENIENCE OF CONTRACTS (Art. 1358, CC)
UNIVERSAL ROBINA SUGAR MILLING CORPORATION, petitioner,

VS. HEIRS OF ANGEL TEVES, respondents
2002 Sep 18
G.R. No. 128574
389 SCRA 316
FACTS:
Andres Abanto owned two parcels of land situated in Campuyo,
Manjuyod, Negros Oriental. One lot is registered in his name and the other
lot is unregistered. When he died, his heirs executed an "Extrajudicial
Settlement of the Estate of the Deceased and Simultaneous Sale." In this
document, Abanto's heirs adjudicated unto themselves the two lots and sold
the unregistered lot to the United Planters Sugar Milling Company, Inc.
(UPSUMCO), and the registered lot to Angel M. Teves, for a total sum of
P115,000.00. The sale was not registered.
Out of respect for his uncle Montenegro, who was UPSUMCO's founder
and president, Teves verbally allowed UPSUMCO to use the registered lot for
pier and loading facilities, free of charge, subject to the condition that
UPSUMCO shall shoulder the payment of real property taxes and that its
occupation shall be co-terminus with its corporate existence. UPSUMCO then
built a guesthouse and pier facilities on the property. Years later, UPSUMCO’s
properties were acquired by the Philippine National Bank (PNB). Later, PNB
transferred the same properties to the Asset Privatization Trust (APT) which,
in turn, sold the same to the Universal Robina Sugar Milling Corporation
(URSUMCO). URSUMCO then took possession of UPSUMCO’s properties,
including Teves' lot.
Upon learning of the acquisition of his lot, Teves formally asked the
corporation to turn over to him possession thereof or the corresponding
rentals. He stated in his demand letters that he merely allowed UPSUMCO to
use his property until its corporate dissolution; and that it was not mortgaged
by UPSUMCO with the PNB and, therefore, not included among the
foreclosed properties acquired by URSUMCO.
URSUMCO refused to heed Teves' demand, claiming that it acquired

the right to occupy the property from UPSUMCO which purchased it from
Andres Abanto; and that it was merely placed in the name of Angel Teves, as
shown by the "Deed of Transfer and Waiver of Rights and Possession" dated
November 26, 1987. Under this document, UPSUMCO transferred to
URSUMCO its application for agricultural and foreshore lease. The same
document partly states that the lands subject of the foreshore and
agricultural lease applications are bounded on the north by the "titled
property of Andres Abanto bought by the transferor (UPSUMCO) but placed
331
in the name of Angel Teves". URSUMCO further claimed that it was
UPSUMCO, not Teves, which has been paying the corresponding realty taxes.
Consequently, Teves filed a complaint for recovery of possession of real

property with damages against URSUMCO. However, on September 4, 1992,
Teves died and was substituted by his heirs. On April 6, 1994, the RTC held
that URSUMCO has no personality to question the validity of the sale of the
property between the heirs of Andres Abanto and Angel Teves since it is not a
party thereto; that Teves' failure to have the sale registered with the Registry
of Deeds would not vitiate his right of ownership, unless a third party has
acquired the land in good faith and for value and has registered the
subsequent deed; that the list of properties acquired by URSUMCO from the
PNB does not include the disputed lot and, therefore, was not among those
conveyed by UPSUMCO to URSUMCO.
On appeal by URSUMCO, the Court of Appeals affirmed the RTC

decision, holding that the transaction between Angel Teves and Andres
Abanto's heirs is a contract of sale, not one to sell, because ownership was
immediately conveyed to the purchaser upon payment of P115,000.00. On
October 29, 1996, URSUMCO filed a motion for reconsideration but was
denied by the Appellate Court. Hence, the instant petition for review on
certiorari.
ISSUE:
Whether or not the respondents have established a cause of action
against petitioner.
RULING:
No. Petitioner URSUMCO contends that respondents have no cause of
action because the "Extrajudicial Settlement of the Estate of the Deceased
Andres Abanto and Simultaneous Sale" is merely a promise to sell and not an
absolute deed of sale, hence, did not transfer ownership of the disputed lot to
Angel Teves. Assuming that the document is a contract of sale, the same is
void for lack of consideration because the total price of P115,000.00 does not
specifically refer to the registered lot making the price uncertain.
Furthermore, the transaction, being unregistered, does not bind third parties.
Petitioner's contentions lack merit. As held by the RTC and the Court
of Appeals, the transaction is not merely a contract to sell but a contract of
sale. In a contract of sale, title to the property passes to the vendee upon
delivery of the thing sold; while in a contract to sell, ownership is, by
agreement, reserved in the vendor and is not to pass to the vendee until full
payment of the purchase price. In the case at bar, the subject contract, duly
notarized, provides that the Abanto heirs sold to Teves the lot covered by TCT
No. H-37. There is no showing that the Abanto heirs merely promised to sell
the said lot to Teves.
The absolute ownership over the registered land was indeed

transferred to Teves is further shown by his acts subsequent to the execution
of the contract. As found by the trial court, it was Teves, not Andres Abanto's
heirs, who allowed UPSUMCO to construct pier facilities and guesthouse on
the land. When the property was erroneously included among UPSUMCO's
properties that were transferred to petitioner URSUMCO, it was Teves, not
the heirs of Andres Abanto, who informed petitioner that he owns the same
and negotiated for an arrangement regarding its use. Teves even furnished
petitioner documents and letters showing his ownership of the lot, such as a
copy of the "Extrajudicial Settlement of the Estate of the Deceased Andres
Abanto and Simultaneous Sale" and a certified true copy of TCT No. H-37

332
covering the disputed lot. Indeed, the trial court and the Court of Appeals
correctly ruled that Teves purchased the lot from the Abanto heirs.
That the contract of sale was not registered does not affect its validity.
Being consensual in nature, it is binding between the parties, the Abanto
heirs and Teves. Article 1358 of the New Civil Code, which requires the
embodiment of certain contracts in a public instrument, is only for
convenience, and the registration of the instrument would merely affect third
persons. Formalities intended for greater efficacy or convenience or to bind
third persons, if not done, would not adversely affect the validity or
enforceability of the contract between the contracting parties themselves.
Thus, by virtue of the valid sale, Angel Teves stepped into the shoes of the
heirs of Andres Abanto and acquired all their rights to the property.
Thus, petition is denied.
FORM OF CONTRACTS: FORM FOR CONVENIENCE
CLARA M. BALATBAT
VS. COURT OF APPEALS and Spouses JOSE REPUYAN and AURORA
REPUYAN
G.R. No. 109410
August 28, 1996
261 SCRA 128
FACTS:
The lot in question covered by Transfer Certificate of Title No. 51330
was acquired by plaintiff Aurelio Roque and Maria Mesina during their
conjugal union and the house constructed thereon was likewise built during
their marital union. Out of their union, plaintiff and Maria Mesina had four
children. When Maria Mesina died on August 28, 1966, the only conjugal
properties left are the house and lot above stated of which plaintiff herein, as
the legal spouse, is entitled to one-half share pro-indiviso thereof. With
respect to the one-half share pro-indiviso now forming the estate of Maria
Mesina, plaintiff and the four children, the defendants here, are each entitled
to one-fifth (1/5) share pro-indiviso.

333
Aurelio Roque then entered into a contract of Absolute Sale with the
spouses Aurora and Jose Repuyan. However, on August 20, 1980, Aurelio filed
a complaint for Rescission of Contract against Spouses Repuyan for the
latter’s failure to pay the balance of the purchase price. A deed of absolute
sale was then executed on February 4, 1982 between Aurelio S. Roque,
Corazon Roque, Feliciano Roque, Severa Roque and Osmundo Roque and
Clara Balatbat, married to Alejandro Balatbat. On April 14, 1982, Clara
Balatbat filed a motion for the issuance of a writ of possession which was
granted by the trial court on September 14, 1982 "subject, however, to valid
rights and interest of third persons over the same portion thereof, other than
vendor or any other person or persons privy to or claiming any rights or
interests under it." The corresponding writ of possession was issued on
September 20, 1982.
The lower court then rendered judgment in favor of the Spouses

Repuyan and declared the Deed of Absolute Sale as valid. On appeal by
petitioner Balatbat, the Court of Appeals affirmed the lower court’s decision.
ISSUE:
Whether or not the delivery of the owner’s certificate of title to spouses
Repuyan by Aurelio Roque is for convenience or for validity or enforceability.
RULING:
The Supreme Court found that the sale between Aurelio and the
Spouses Repuyan is not merely for the reason that there was no delivery of
the subject property and that consideration/price was not fully paid but the
sale as consummated, hence, valid and enforceable.
The non-delivery of the possession of the subject property to the

private respondent, suffice it to say that ownership of the thing sold is
acquired only from the time of delivery thereof, either actual or constructive.
Article 1498 of the Civil Code provides that when the sale is made through a
public instrument, the execution thereof shall be equivalent to the delivery of
the thing which is the object of the contract, if from the deed the contrary
does not appear or cannot be inferred. The execution of the public
instrument, without actual delivery of the thing, transfers the ownership from
the vendor to the vendee, who may thereafter exercise the rights of an owner
over the same. In the instant case, vendor Roque delivered the owner's
certificate of title to herein private respondent. It is not necessary that vendee
be physically present at every square inch of the land bought by him,
possession of the public instrument of the land is sufficient to accord him the
rights of ownership. Thus, delivery of a parcel of land may be done by placing
the vendee in control and possession of the land (real) or by embodying the
sale in a public instrument (constructive). The provision of Article 1358 on
the necessity of a public document is only for convenience, not for validity or
enforceability. It is not a requirement for the validity of a contract of sale of a
parcel of land that this be embodied in a public instrument.
A contract of sale being consensual, it is perfected by the mere consent

of the parties. Delivery of the thing bought or payment of the price is not
necessary for the perfection of the contract; and failure of the vendee to pay
the price after the execution of the contract does not make the sale null and
void for lack of consideration but results at most in default on the part of the
vendee, for which the vendor may exercise his legal remedies. Tthe petition
for review is hereby dismissed for lack of merit.
REFORMATION OF INSTRUMENTS: WHEN PROHIBITED (Art.

1366-1367, CC)
1. SARMING VS. DY, JUNE 6, 2002

2. CEBU VS. CA, 407 SCRA 154

334
SARMING VS. DY
383 SCRA 131
JUNE 6, 2002
FACTS:
Petitioners are the succesors-in-interest of original defendant Silveria
Flores, while respondents Cresencio Dy and Ludivina Dy-Chan are the
succesors-in-interest of the original plaintiff Alejandra Delfino, the buyer of
one of the lots subject of this case. They were joined in this petition by the
successors-in-interest of Isabel, Juan, Hilario, Ruperto, Tomasa, and Luisa and
Trinidad themselves, all surnamed Flores, who were also the original
plaintiffs in the lower court. They are the descendants of Venancio and Jose,
the brothers of the original defendant Silveria Flores.
A controversy arose regarding the sale of Lot 4163 which was half-
owned by the original defendant, Silveria Flores, although it was solely
registered under her name. The other half was originally owned by Silveria’s
brother, Jose. On January 1956, the heirs of Jose entered into a contract with
plaintiff Alejandra Delfino, for the sale of their one-half share of Lot 4163
after offering the same to their co-owner, Silveria, who declined for lack of
money. Silveria did not object to the sale of said portion to Alejandra.
Atty. Deogracias Pinili, Alejandra’s lawyer then prepared the document

of sale. In the preparation of the document however, OCT no. 4918-A,
covering Lot 5734, and not the correct title covering Lot 4163 was the one
delivered to Pinili.
Unaware of the mistake committed, Alejandra immediately took

possession of Lot 4163 and introduced improvements on the said lot.
Two years later, when Alejandra Delfino purchased the adjoinin portion
of the lot she had been occupying, she discovered that what was designated
in the deed, Lot 5734, was the wrong lot. Thus, Alejandra and the vendors
filed for the feformation of the Deed of Sale.
ISSUE:
Whether or not reformation is proper in this case.
RULING:
YES. Reformation is that remedy in equity by means of which a written
instrument is made or construed so as to express or inform to the real
intention of the parties.
An action for reformation of instrument under this provision of law may

prosper only upon the concurrence of the following requisites: (1) there must
have been a meeting of the minds of the parties to the contract; (2) the
instrument does not express the true intention of the parties; and (3) the
failure of the instrument to express the true intention of the parties is due to
mistake, fraud, inequitable conduct or accident.
All of these requesites are present in this case. There was a meeting of
the minds between the parties to the contract but the deed did not express
the true intention ot the parties due to the designation of the lot subject of the
deed. There is no dispute as to the intention of the parties to sell the land to
Alejandra Delfino but there was a mistake as to the designation of the lot
intended to be sold as stated in the Settlement of Estate and Sale.

335
REFORMATION OF INSTRUMENTS: WHEN PROHIBITED (Art. 1366-

1367, CC)
CEBU CONTRACTORS CONSORTIUM CO., petitioner,

VS. COURT OF APPEALS and
MAKATI LEASING & FINANCE CORPORATION, respondents
G.R. No. 107199
July 22, 2003
FACTS:
The instant Petition for Review on Certiorari stems from a complaint
for collection of a sum of money with replevin filed by respondent Makati
Leasing and Finance Corporation (MLFC) against petitioner Cebu
Contractors Consortium Company (CCCC) before the Regional Trial Court of
Makati.
MLFC alleges that on August 25, 1976 a lease agreement relating to

various equipment was entered into between MLFC, as lessor, and CCCC, as
lessee. The terms and conditions of the lease were defined in said agreement
and in two lease schedules of payment. To secure the lease rentals, a chattel
mortgage, and a subsequent amendment thereto, were executed in favor of
MLFC over other various equipment owned by CCCC.
On June 30, 1977, CCCC began defaulting on the lease rentals,

prompting MLFC to send demand letters. When the demand letters were not
heeded, MLFC filed a complaint for the payment of the rentals due and
prayed that a writ of replevin be issued in order to obtain possession of the
equipment leased and to foreclose on the equipment mortgaged.
CCC’s position is that it is no longer indebted to MLFC because the

total amounts collected by the latter from the Ministry of Public Highways, by
virtue of the deed of assignment, and from the proceeds of the foreclosed
chattels were more than enough to cover CCC’s liabilities. CCC submits that
in any event, the deed of assignment itself already freed CCC from its
obligation to MLFC.
The trial court rendered decision upholding the lease agreement and
finding CCC liable to MLFC in lease rentals. On appeal, the appellate court
affirmed the trial court’s decision.
ISSUE:
Whether or not respondent court erred in upholding the so- called
sale-lease back scheme of the private respondent when the same is in reality
nothing but an equitable mortgage.
RULING:
The Court finds in favor of CCC.
MLFC’s own evidence discloses that it offers two types of financing

lease: a direct lease and a sale- lease back. The client sells to MLFC
equipment that it owns, which will be leased back to him. The transaction
between CCC and MLFC involved the second type of financing lease.CCC
argues that the sale and lease back scheme is nothing more than an equitable
mortgage and consequently, asks for its reformation. The right of action for
reformation accrued from the date of execution of the contract of lease in
1976. This was properly exercised by CCC when it filed its answer with
336
counterclaim to MLFC’s complaint in 1978 and asked for the reformation of
the lease contract.
Wherefore, the decision appealed from is hereby affirmed.
INTERPRETATION OF CONTRACT – LITERAL INTERPRETATION
ADR SHIPPING SERVICESS, INC, Petitioner,

VS. MARCELINO GALLARDO AND Court OF APPEALS, Respondent
G.R. No. 134873
September 17, 2002
FACTS:
Petitioner ADR Shipping Services, Inc. entered into a contract with
private respondent Gallardo for the use of the former’s vessel MV Pacific
Breeze to transport logs to Taiwan. The logs were the subject of a sales
agreement between private respondent as seller being a timber
concessionaire and log dealer, and Stywood Philippines, as buyer. Private
respondent paid an advance charter fee of P242,000 representing ten percent
of the agreed charter fee. Under the charter agreement, the boat should be
ready to load by February 5, 1988.
The boat failed to arrive on time, prompting private respondent to

notify petitioner of its cancellation of the charter contract and the withdrawal
of the advance payment deposited to the account of ADR shipping. ADR
Shipping refused to return the advance payment to Gallardo claiming that the
agreement on the date of February 5, 1988 was just the “reference
commencing date” and the true loading date was February 16, 1988. This
prompted the latter to file a case for sum of money and damages. The
Regional Trial Court ordered ADR Shipping to pay Gallardo the advance
payment with 6 percent interest per annum and attorney’s fees. The decision
of the trial court was affirmed by the Court of Appeals. Hence, this petition.
ISSUE:
Whether or not private respondent is entitled to the refund of the
advance payment representing his deposit for the charter of the ship provided
by petitioner.
RULING:
Yes. Private respondent is entitled to the refund of the advance
payment it made to petitioner.
There was ambiguity in the interpretation of the contract provisions as

to the date of the loading of the ship. Ambiguities in a contract are
interpreted strictly, albeit not unreasonably, against the drafter thereof when
justified in light of the operative facts and surrounding circumstances. In this

337
case, ambiguity must be construed strictly against ADR which drafted and
caused the inclusion of the ambiguous provisions.
The charter agreement explicitly states that February 5, 1988 is the

intended date when the ship is expected ready to load while February 16,
1988 is merely the canceling date. Considering that the subject contract
contains the foregoing express provisions, the parties have no other recourse
but to apply the literal meaning of the stipulations. The cardinal rule is that
when the terms of the contract are clear, leaving no doubt as to the intention
of the parties, the literal meaning of its stipulations is controlling.
Pursuant to the provision of Art 1191 of the Civil Code, 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, and the injured party
may rescind the obligation, with payment of damages. In this case the private
respondent is entitled to the return of his down payment, subject to a legal
interest of 6 percent per annum, and to the payment of damages.
INTERPRETATION OF CONTRACTS: IN CASE OF DOUBT
1. CRUZ VS. CA, 456 SCRA 165

2. GONZALEZ VS. CA, 454 SCRA 8
3. ALMIRA VS. CA, 399 SCRA 351
ADORACION E. CRUZ, THELMA DEBBIE E. CRUZ, GERRY E. CRUZ

and NERISSA CRUZ-TAMAYO vs. THE HONORABLE COURT OF
APPEALS, SUMMIT FINANCING CORP., VICTOR STA. ANA, MAXIMO
C. CONTRERAS, RAMON G. MANALASTAS and VICENTE TORRES
G.R. NO.122904
April 15,2005
FACTS:
Herein petitioner is the mother of her co petitioners Thelma Cruz,
Gerry Cruz and Nerissa Cruz-Tamayo, as well as Arnel Cruz, who was one of
the defendants in Civil Case No. 49466. Petitioners files said case on February
11, 1983 against Arnel Cruz and herein private respondents Summit
Financing Corporation (“Summit”), Victor S. Sta. Ana and Maximo C.
Contreras, the last two in their capacity as deputy sheriff and ex-officio sheriff
of Rizal, respectively, and Ramon G. Manalastas in his capacity as Acting
Register of Deeds of Rizal.
The Complaint alleged that petitioners and Arnel Cruz were co-owners
of a parcel of land situated in Taytay, Rizal. Yet the property, which was then
covered by Transfer Certificate of Title (TCT) No. 495225, was registered only
in the name of Arnel Cruz. According to petitioners, the property was among
the properties they and Arnel Cruz inherited upon the death of Delfin Cruz,
husband of Adoracion Cruz.

338
On August 22, 1977, petitioners and Arnel Cruz executed a Deed of
Partial Partition, distributing to each of them their shares consisting of
several lots previously held by them in common. Among the properties
adjudicated to defendant Cruz was the parcel of land covered at the time by
TCT No. 495225. It is the subject of this case.
Subsequently, the same parties to the Deed of Partition agreed in

writing to share equally in the proceeds of the sale of the properties although
they have been subdivided and individually titled in the names of the former
co-owners pursuant to the Deed of Partition. This arrangement was embodied
in a Memorandum of Agreement executed on August 23, 1977 or a day after
the partition. The tenor of the Memorandum of Agreement was annotated at
the back of the TCT No. 495225 on September 1, 1977.
Sometime in January 1983, petitioner Thelma Cruz discovered that TCT

No. 514477 was issued on October 18, 1982 in the name of Summit. Upon
investigation, petitioners learned that Arnel Cruz had executed a Special
Power of Attorney on May 16, 1980 in favor of one Nelson Tamayo, husband
of petitioner Nerissa Cruz Tamayo, authorizing him to obtain a loan in the
amount of One Hundred Four Thousand Pesos from respondent Summit, to be
secured by a real estate mortgage on the subject parcel of land.
Since the loan remained outstanding on maturity, Summit instituted

extra-judicial foreclosure proceedings, and at the foreclosure sale, it was
declared the highest bidder. Consequently, Sheriff Sta. Ana issued a
Certificate of Sale to respondent Summit which more than a year later
consolidated its ownership of the foreclosed property. Upon presentation of
the affidavit of consolidation of ownership, the Acting Register of Deeds of
Rizal cancelled TCT No. 495225 and issued and in lieu thereof, TCT No.
514477 in the name of respondent Summit.
In their complaint before the RTC, petitioners asserted that they co-
owned the properties with Arnel Cruz, as evidenced by the Memorandum of
Agreement. Hence, they argued that the mortgage was void since they did not
consent to it.
ISSUE:
Whether or not the real estate mortgage on the property then covered
by TCT No. 495225 is valid and whether the mortgaged property was the
exclusive property of Arnel Cruz when it was mortgaged.
RULING:
A reading of the provisions of the Deed of Partition, no other meaning
can be gathered other than that petitioners and Arnel Cruz had put an end to
the co-ownership. In the aforesaid deed, the shares of petitioners and Arnel
Cruz’s in the mass of co-owned properties were concretely determined and
distributed to each of them. In particular, to Arnel Cruz was assigned the
disputed property. There is nothing from the words of said deed which
expressly or impliedly stated that petitioners and Arnel Cruz intended to
remain as co-owners with respect to the disputed property or to any of the
properties for that matter.
Petitioners do not question the validity or efficacy of the Deed of Partial

Partition. In fact, they admitted its existence in their pleadings and submitted
it as a part of their evidence. Thus, the deed is accorded its legal dire effect.
Since a partition legally made confers upon each heir their exclusive
ownership of the property adjudicated to him, it follows that Arnel Cruz
acquired absolute ownership over the specific parcels of land assigned to him
in the Deed of Partial Partition, including the property subject of this case. As
the absolute owner thereof then, Arnel Cruz had the right to enjoy and

339
dispose of the property, as well as the right to constitute a real estate
mortgage over the same without securing the consent of the petitioners.
On the other hand, there is absolutely nothing in the Memorandum of

Agreement which diminishes the right of Arnel Cruz to alienate or encumber
the properties allotted to him in the deed of partition.
As correctly held by the Court of Appeals, the parties only bound

themselves to share in the proceeds of the sale of the properties. The
agreement does not direct reconveyance of the properties to reinstate the
common ownership of the properties.
Moreover, to ascertain the intent of the parties in a contractual

relationship, it is imperative that the various stipulations provided for in the
contracts be construed together, consistent with the parties contemporaneous
and subsequent acts as regards the execution of the contract. Subsequent to
the execution of the Deed of Partition and Memorandum of Agreement, the
properties were titled individually in the names of the co-owners to which
they were respectively adjudicated, to the exclusion of the other co-owners.
Petitioners Adoracion Cruz and Thelma Cruz separately sold the properties
distributed to them as absolute owners thereof. Being clear manifestations of
sole and exclusive dominion over the properties affected, the acts signify total
incongruence with the state of co-ownership claimed by the petitioners.
The real estate mortgage on the disputed property is valid and does not
contravene the agreement of the parties.
GONZALES VS. COURT OF APPEALS

354 SCRA 8
FACTS:
Private respondents, Mr. and Mrs. Gabriel Caballero, are the registered
owneres of two parcels of land situated in Cubao, Quezon City described in

340
Transfer Certificate fo Title No. 247309 (Lot 1) and TCT No. 247310 (Lot 2).
The spouses’ residence stood in Lot 2.
Sometime in 1979, they obtained a loan from the Cavite Development

Bank in the amount of P225,000.00. The two lots were mortgaged to secure
their loan. The loan matured in 1984. To pay the loan they offered Lot 1 for
sale. The offer was advertised in the Bulletin Today. However, offers to
purchase from prospective buyers did not materialize.
On October 24, 1985, a certain Mrs. Lagrimas approached the spouses

offering to broker the sale to an interested buyer. Initially, the spouses told
the broker that they were selling only to direct buyers. Nonetheless, Mrs.
Lagrimas brought to the spouses her buyer, herein petitioner Napoleon H.
Gonzales, who turned out to be Mrs. Lagrimas’ relative.
Petitioner offered to buy the vacant lot for P470,000.00. Initially,

respondents refused to reduce their asking price. Petitioner bargained for a
lower price with the suggestion that on paper the price will be markedly
lower so the spouses would pay lower capital gains tax. Petitioner assured
the spouses this could be done since he had connections with the Bureau of
Internal Revenue. The spouses agreed to sell at P470.000.00. Petitioners
paid the bank P375,000.00, to be deducted from the purchase price. After the
mortgage was cancelled and upon release of the two titles, Gonzales asked for
the deeds of sale of the two lots and delivery of the titles to him. Defendants
signed the deed of sale covering only Lot 1 but refused to deliver its title until
petitioner paid the remaining balance of P70,000.00
This prompted petitioner to file a complaint for specific performance

and damages.
ISSUE:
Whether or not the sale involved only Lot 1 and not both Lots.
RULING:
YES. Principally, the issue here is whether the contract of sale between
the parties involved Lot 1 and 2 as claimed by petitioner or only Lot 1 as
private respondents contend. In a case where we have to judge conflicting
claims on the intent of the parties, as in this instance, judicial determination
of the parties’ intention is mandated. Contemporaneous and subsequent acts
of the parties material to the case are to be considered.
Petitioner admits he himself caused the preparation of the deed of sale

presented before the lower court. Yet he could not explain why I referred
only to the sale of Lot 1 and not to the two lots, if the intention of the parties
was really to cover the sale of two lots. As the courts a quo observed, even if
it were true that two lots were mortgaged and were about to be foreclosed,
the ads private respondents placed in the Bulletin Today offered only Lot 1
and was strong indication that they did not intend to sell Lot 2. The 501 sq.m.
lot was offered for P1,150.00 per sq.m. It alone would have fetched
P576,150.00. The loan still to be paid the bank was only P375,000.00 which
was what petitioner actually paid the bank. As the trial court observed, it was
incomprehensible why the spouses would part with two lots, one with a 2-
storey house, and both situated at a prime commercial district for less than
the price of one lot. Contrary to what petitioner would make us believe, the
sale of Lot 1 valued at P576,150.00 for P470,000.00, with petitioner assuming
the bank loan of P375,000.00 as well as payment of the capital gains tax,
appears more plausible.

341
ALMIRA VS. COURT OF APPEALS

399 SCRA 351
FACTS:
Petitioners are the wife and the children of the late Julio Garcia who
inherited from his mother, Ma. Alibudbud, a portion of a 90,655 square meter
property denominated as lot 1642 of the Sta. Rosa Estate in Brgy. Caingin
Sta. Rosa Laguna. The lot was co-owned and registered in the names of three
persons with the following shares: Vicente de Guzman (1/2), Enrique
Hemedes (1/4) and Francisco Alibudbud, the father of Ma. Alibudbud (1/4).
Although there wad no separate title in the name of Julio Garcia, there were
tax declaration in his name to the intent of his grandfather’s share covering
the area of 21460 square meter.
On July 5, 1984, petitioner as heirs of Julio Garcia, and respondent

Federico Brines entered a Kasunduan ng Pagbibilihan (Kasunduan for Brevity)
over the 21460 square meter portion for the sum of P150.000.00. Respondent
paid P65, 000.00 upon execution of the contract while the balance of P85,
000.00 was made payable within six (6) months from the date of the execution
of the instrument. The time of the execution of the kasunduan, petitioners
allegedly informed respondent that TCT No. RT-1076 was in the possession of
their cousin, Conchila Alibudbud, who having bought Vicente de Guzman’s ½
shares, owned the bigger portion of lot 1642. This standing notwithstanding,
respondent willingly entered into the Kasunduan provided that the full
payment of the purchase price will be made upon delivery to him of the title.
Respondent took possession of the property subject of the Kasunduan

and made various payments to petitioiners amountiong to P58500.00.
However upon failure of petitionere to deliver to him a separate title to the
property in the name of Julio Garcia he refused to make further payments,
prompting petitioner to file a civil action before the RTC for a rescission of
the Kasunduan, return by respondent to petitioner of the possession of the
subject parcel of land, and payment by respondent of damages in favour of
petitioners.
ISSUE
Whether or not the petitioner may rescind the Kasunduan pursuant to
Article 1191 of the Civil Code for the failure of respondent to give full
payment of the balance of the purchase price.
RULING:
NO, the right of the parties are governed by the terms ands the nature
of the contract they entered. Hence, although the nature of the Kasunduan
was never places in dispute by both parties, it is necessary to ascertain
whether the Kasunduan is a contract to sell or a contract of Sale. Although
both parties have consistency referred to the Kasunduan as a contract to Sell,
a careful reading of the provision of the Kasunduan reveals that it is a
contract of Sale. A deed of sale is absolute in nature in the absence of an any
stipulation reserving title to the vendor until full payment of the purchase
price. The delivery of a separation title in the name of Julio Garcia was a
condition imposed on respondent’s obligation to pay the balance of the
purchase price. It was not a condition imposed in the perfection of the
contract of Sale.

342
The rescission will not prosper since the power to rescind is only given
to the injured party. The injured party is the party who has faithfully fulfilled
his obligation. In the case at bar, the petitioners were not ready, willing and
able to comply with their obligation to deliver a separate title in the name of
Julio Garcia to respondent therefore, thy are not in a position to ask for
rescission. Failure to comply with a condition imposed on the performance of
an obligation gives the other party the option either to refuse to proceed with
the sale or to waive the condition under Art 1545 of the civil code. Hence it is
the respondent who has the option.
DOCTRINE OF “COMPLEMENTARY CONTRACTS CONSTRUED

TOGETHER”
1. PHIL. BANK OF COMMUNICATIONS VS. LIM, 455 SCRA

436
2. RIGOR VS. CONSOLIDATED LEASING, 387 SCRA 437
3. VELASQUEZ VS. CA, JUNE 30, 1999
PHILIPPINE BANK OF COMMUNICATIONS

VS. ELENA LIM, RAMON CALDERON and TRI-ORO INTERNATIONAL
TRADING &MANUFACTURING CORPORATION
G.R. NO. 158138
April 12, 2005
FACTS:
On September 3, 1999, petitioner filed a complaint against respondents
fo0r the collection of a deficiency amounting to P4,014,297.23 exclusive of
interest. Petitioner alleged that respondents obtained a loan from it and
executed a continuing surety agreement dated November 16, 1995 in favor of
petitioner for all loans, credits, etc., that were extended or may be extended
in the future to respondents. Petitioner granted a renewal of said loan upon
respondent’s request, the most recent being on January 21, 1998 as
evidenced by a promissory note renewal BD-Variable No. 8298021001 on the
amount of P3,000,000.00. it was expressly stipulated therein that the venue
for any legal action that may arise out of said promissory note shall be Makati
City “to the excklusion of all other courts.” Respondent allegedly failed to pay
said obligation upon maturity. Thus petitioner foreclosed the real estate
mortgage executed by the respondents valued at P1,081,600.00 leaving a
deficiency balance of P4,014,297.23 as of August 31, 1999.
Respondents moved to dismiss the complaint on the ground of

improper venue, invoking the stipulation contained in the last paragraph of
the promissory note with respect to the restriction/exclusive venue. The trial
court denied said motion asseverating that petitioners had separate causes of
action arising from the promissory note and the continuing surety agreement.
Thus, under Rule 4, Section 2 of the 1997 Rules of Civil Procedure, as
amended, venue was properly laid in Manila. The trial court supported its
order with cases where venue was held to be permissive. A motion for
reconsideration of said order was likewise denied.

343
ISSUE:
Whether or not the “complementary-contracts-construed together”
principle is applicable in the case at bar.
RULING:
According to this principle, an accessory contract must be read in its
entirety and together with the principal agreement. This principle is used in
construing contractual stipulations in order to arrive at their true meaning;
certain stipulations cannot be segregated and then made to control. This no-
segregation principle is based on Article 1374 of the Civil Code.
The aforementioned doctrine is applicable to the present case. In

capable of standing by itself, the surety agreement can be enforced only in
conjuction with the promissory note. The latter documents the debt that is
sought to be collected in the action against the sureties.
The factual milieu of the present case shows that the surety agreement
was entered into to facilitate existing and future loan agreements. Petitioner
approved the loan covered by the promissory note, partly because of the
surety agreement that assured the payment of the principal obligation. The
circumstances that relate to the issuance of the promissory note and the
surety agreement are so intertwined that neither one could be separated from
the other. It makes no sense to argue that the parties to the surety
agreement were not bound by the stipulations in the promissory note.
Notably, the promissory note was a contract of adhesion that petitioner

required the principal debtor to execute as a condition of the approval of the
loan. It was made in the form and language prepared by the bank. By
inserting the provision of that Makati City would be the “venue for any legal
action that may arise out of the promissory note,” petitioner also restricted
the venue of actions against the sureties. The legal action against the
sureties arose not only from the security agreement but also from the
promissory note.

TOGETHER”
SPOUSES EFREN N. RIGOR and ZOSIMA D. RIGOR, for themselves

and as owners of CHIARA CONSTRUCTION, petitioners,
VS. CONSOLIDATED ORIX LEASING and FINANCE CORPORATION,
respondent
2002 Aug 20
FACTS:
Petitioners obtained a loan from private respondent Consolidated Orix
Leasing and Finance Corporation in the amount of P1,630,320.00. Petitioners
executed a promissory note on July 31, 1996 promising to pay the loan in 24
equal monthly installments of P67,930.00 every fifth day of the month
commencing on September 5, 1996. The promissory note also provides that
default in paying any installment renders the entire unpaid amount due and
payable. To secure payment of the loan, petitioners executed in favor of
private respondent a deed of chattel mortgage over two dump trucks.
Petitioners failed to pay several installments despite demand from private
respondent.
On January 5, 1998, private respondent sought to foreclose the chattel

mortgage by filing a complaint for Replevin with Damages against petitioners
before the Regional Trial Court of Dagupan City.After service of summons,
petitioners moved to dismiss the complaint on the ground of improper venue
based on a provision in the promissory note which states that, x x x all legal
actions arising out of this note or in connection with the chattels subject
hereof shall only be brought in or submitted to the proper court in Makati
344
City, Philippines. Private respondent opposed the motion to dismiss and
argued that venue was properly laid in Dagupan City where it has a branch
office based on a provision in the deed of chattel mortgage which states that,
x x x in case of litigation arising out of the transaction that gave rise to this
contract, complete jurisdiction is given the proper court of the city of Makati
or any proper court within the province of Rizal, or any court in the city, or
province where the holder/mortgagee has a branch office, waiving for this
purpose any proper venue. After a further exchange of pleadings, the
Dagupan trial court denied petitioners’ motion to dismiss Not satisfied with
the orders, petitioners filed a petition for certiorari before the Court of
Appeals imputing grave abuse of discretion by the Dagupan trial court in
denying the motion to dismiss which was denied.
ISSUE:
Whether or not venue was properly laid under the provisions of the
chattel mortgage contract in the light of Article 1374 of the Civil Code.
RULING:
Yes. Art. 1374 provides that the various stipulations of a contract shall
be interpreted together, attributing to the doubtful ones that sense which may
result from all of them taken jointly.
Applying the doctrine to the instant case, we cannot sustain petitioners’

contentions. The promissory note and the deed of chattel mortgage must be
construed together. Private respondent explained that its older standard
promissory notes confined venue in Makati City where it had its main office.
After it opened a branch office in Dagupan City, private respondent made
corrections in the deed of chattel mortgage, but due to oversight, failed to
make the corresponding corrections in the promissory notes. Petitioners
affixed their signatures in both contracts. The presumption is applied that a
person takes ordinary care of his concerns. It is presumed that petitioners
did not sign the deed of chattel mortgage without informing themselves of its
contents. As aptly stated in a case, they being of age and businessmen of
experience, it must be presumed that they acted with due care and have
signed the documents in question with full knowledge of their import and the
obligation they were assuming thereby. In any event, petitioners did not
contest the deed of chattel mortgage under Section 8, Rule 8 of the Revised
Rules of Civil Procedure.
As held in Velasquez, this omission effectively eliminated any defense

relating to the authenticity and due execution of the deed, e.g. that the
document was spurious, counterfeit, or of different import on its face as the
one executed by the parties; or that the signatures appearing thereon were
forgeries; or that the signatures were unauthorized. Clearly, the Court of
Appeals did not err in ruling that venue was properly laid in Dagupan City as
provided in the deed of chattel mortgage. The Court holds that private
respondent is not barred from filing its case against petitioners in Dagupan
City where private respondent has a branch office as provided for in the deed
of chattel mortgage.
Petition denied.

TOGETHER”
RODOLFO P. VELASQUEZ, petitioner,

VS. COURT OF APPEALS, and PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, INC., respondents
G.R. No. 124049

345
June 30, 1999
FACTS:
The case arose from a complaint for a sum of money with preliminary
attachment filed with the Regional Trial Court of Makati City by private
respondent Philippine Commercial International Bank (PCIB) against
petitioner Rodolfo P. Velasquez together with Mariano N. Canilao Jr., Inigo A.
Nebrida, Cesar R. Dean and Artemio L. Raymundo.
Sometime in December 1994 the Pick-up Fresh Farms, Inc. (PUFFI), of
which petitioner Velasquez was an officer and stockholder, filed an application
for a loan of P7,500,000.00 with PCIB under the government's Guarantee
Fund for Small and Medium Enterprises (GFSME). On 16 April 1985 the
parties executed the corresponding loan agreement. As security for the loan,
promissory notes numbered TL 121231 and TL 121258 for the amounts of
P4,000,000.00 and P3,500,000.00, respectively, were signed by Inigo A.
Nebrida and Mariano N. Canilao, Jr. as officers of and for both PUFFI and
Aircon and Refrigeration Industries, Inc. (ARII). A chattel mortgage was also
executed by ARII over its equipment and machineries in favor of PCIB.
Petitioner along with Nebrida and Canilao, Jr. also executed deeds of
suretyship in favor of PCIB. Separate deeds of suretyship were further
executed by Cesar R. Dean and Artemio L. Raymundo. When PUFFI defaulted
in the payment of its obligations PCIB foreclosed the chattel mortgage. The
proceeds of the sale amounted to P678,000.00.
Thus, PCIB filed an action to recover the remaining balance of the
entire obligation including interests, penalties and other charges. Exemplary
damages and attorney’s fees of 25% of the total amount due were also sought.
On 9 October 1989 a writ of preliminary attachment was granted by the trial
court. On 20 June 1990 the trial court rendered a summary judgment in favor
of PCIB holding petitioner and Canilao solidarily liable to pay P7,227,624.48
plus annual interest of 17%, and P700,000.00 as attorney’s fees and the costs
of suit. The case was dismissed without prejudice with regard to the other
defendants as they were not properly served with summons. On appeal, the
Court of Appeals on 28 September 1995 affirmed in toto the RTC judgment.
Petitioner’s motion for reconsideration was thereafter denied. Hence this
petition.
ISSUE:
Whether or not the appellate court committed reversible error in
sustaining or affirming the summary judgment despite the existence of
genuine triable issues of facts and in refusing to set aside the default order
against petitioner.
RULING:
The more appropriate doctrine in this case is that of the
“complementary contracts construed together” doctrine. The surety bond
must be read in its entirety and together with the contract between the NPC
and the contractors. The provisions must be construed together to arrive at
their true meaning. Certain stipulations cannot be segregated and then made
to control.
That the “complementary contracts construed together” doctrine
applies in this case finds support in the principle that the surety contract is
merely an accessory contract and must be interpreted with its principal
contract, which in this case was the loan agreement. This doctrine closely
adheres to the spirit of Art. 1374 of the Civil Code which states that
Art. 1374. The various stipulations of a contract shall be
346
interpreted together, attributing to the doubtful ones that sense which
may result from all of them taken jointly.
Applying the “complementary contracts construed together” doctrine

leaves no doubt that it was the intention of the parties that petitioner would
be personally liable in the deed of suretyship because the loan agreement,
among others, provided to further secure the obligations of the BORROWER
to the LENDER, Messrs. Nebrida, Raymundo, Canilao, Dean and Velasquez
and Aircon and Refrigeration Ind. Inc. shall each execute a suretyship
agreement in favor of the LENDER in form and substance acceptable to the
LENDER.
WHEREFORE, the petition is DENIED. The Decision of 28 September
1995 of the Court of Appeals affirming the 20 June 1990 judgment of the RTC-
Br. 61, Makati City, ordering petitioner Rodolfo P. Velasquez and Mariano N.
Canilao, Jr. to solidarily pay respondent Philippine Commercial and Industrial
Bank (PCIB) the amount of P7,227,624.48 with annual interest of 17% and
attorney’s fees of P700,000.00 plus costs of suit as well as its Resolution of 19
February 1995 denying reconsideration, is AFFIRMED.

347
RESCISSIBLE CONTRACTS-NATURE AND EFFECTS-MUTUAL

RESTITUTION
1. EQUATORIAL REALTY VS. MAYFAIR THEATER, 370 SCRA

56
2. SIGUAN VS. LIM, NOVEMBER 19, 1999
3. KHE KONG VS. CA, 355 SCRA 701
4. SUNTAY VS. CA, 251 SCRA 430
EQUATORIAL REALTY DEVELOPMENT, INC.

VS. MAYFAIR THEATER, INC.
370 SCRA 56
FACTS:
Carmelo & Bauermann, Inc. (Carmelo) used to own a parcel of land,
together with two two-storey buildings constructed thereon. On June 1, 1967,
Carmelo entered into a lease with Mayfair Theater, Inc. (Mayfair) for a period
of 20 years. The lease covered a portion of the second floor and mezzanine.
Two (2) years later, Mayfair entered into a second lease with Carmelo for the
lease of another property, a part of the second floor and two spaces on the
ground floor. The lease was also for a period of twenty (20) years. Both
leases contained a provision granting Mayfair a right of first refusal to
purchase the said properties. However, on July 30, 1978, within the 20-year-
lease term, Carmelo sold the subject properties to Equatorial Realty
Development, Inc. (Equatorial) for the sum of P11.3M without their first being
offered to Mayfair.
As a result, Mayfair filed a complaint for specific performance and

damages. After trial, the court ruled in favor of Equatorial. On appeal, the
Court of Appeals (CA) reversed and set aside the judgment of the lower court.
On November 21, 1996, the Supreme Court denied Equatorial’s petition for
review and declared the contract between Carmelo and Equatorial rescinded.
The decision became final and executory and Mayfair filed a motion for its
execution, which the court granted on April 25, 1997. However, Carmelo
could no longer be located thus Mayfair deposited with the court its payment
to Carmelo. The lower court issued a deed of reconveyance in favor of
Carmelo and issued new certificates in the name of Mayfair.
On September 18, 1997, Equatorial filed an action for the collection of

sum of money against Mayfair claiming payment of rentals or reasonable
compensation for the defendant’s use of the premises after its lease contracts
had expired. The lower court debunked the claim of the petitioner for unpaid
rentals, holding that the rescission of the Deed of Absolute Sale in the mother
case did not confer on Equatorial any vested or residual proprietary rights,
even in expectancy.
ISSUE:

348
Whether or not Equatorial may collect rentals or reasonable
compensation for Mayfair’s use of subject premises after its lease contracts
had expired.
RULING:
NO. Rent is a civil fruit that belongs to the owner of the property
producing it by right of accession. Consequently and ordinarily, the rentals
that fell due from the time of the perfection of the sale to petitioner until its
rescission by final judgment should belong to the owner of the property
during that period.
Petitioner never took actual control and possession of the property

sold, in view of the respondent’s timely objection to the sale and continued
actual possession of the property. The objection took the form of a court
action impugning the sale that was rescinded by a judgment rendered by the
Court in the mother case. It has been held that the execution of a contract of
sale as a form of constructive delivery is a legal fiction. It holds true only
when there is no impediment that may prevent the passing of the property
from the hands of the vendor into those of the vendee. When there is such
impediment, fiction yields to reality; the delivery has not been effected.
Hence, respondent’s opposition to the transfer of property by way of sale to
Equatorial was a legally sufficient impediment that effectively prevented the
passing of the property into the latter’s hands.
Article 1386 of the Civil Code provides rescission, which creates the
obligation to return the things, which were the object of the contract,
together with their fruits, and the price with its interest, but also the rentals
paid, if any, had to be returned by the buyer.

RESTITUTION
MARIA ANTONIA SIGUAN, petitioner,

VS. ROSA LIM, LINDE LIM, INGRID LIM and NEIL LIM,
respondents
1999 Nov 19
G.R. No. 134685
FACTS:
On 25 and 26 August 1990, Lim issued two Metrobank checks in the
sums of P300,000 and P241,668, respectively, payable to "cash." Upon
presentment by petitioner with the drawee bank, the checks were dishonored
for the reason "account closed." Demands to make good the checks proved
futile. As a consequence, a criminal case for violation of Batas Pambansa Blg.
22, docketed as Criminal Cases Nos. 22127-28, were filed by petitioner
against LIM with Branch 23 of the Regional Trial Court (RTC) of Cebu City.
In its decision dated 29 December 1992, the court a quo convicted Lim
as charged. The case is pending before this Court for review and docketed as
G.R. No. 134685. It also appears that on 31 July 1990, Lim was convicted of
estafa by the RTC of Quezon City in Criminal Case No. Q-89-22162 filed by a
certain Victoria Suarez. This decision was affirmed by the Court of Appeals.
On appeal, however, the Supreme Court, in a decision promulgated on 7 April
1997, acquitted Lim but held her civilly liable in the amount of P169,000, as
actual damages, plus legal interest.
Meanwhile, on 2 July 1991, a Deed of Donation conveying parcels of

land and purportedly executed by Lim on 10 August 1989 in favor of her
children, Linde, Ingrid and Neil, was registered with the Office of the Register
of Deeds of Cebu City. New transfer certificates of title were thereafter
issued in the names of the donees.

349
On 23 June 1993, petitioner filed an accion pauliana against Lim and
her children before Branch 18 of the RTC of Cebu City to rescind the
questioned Deed of Donation and to declare as null and void the new transfer
certificates of title issued for the lots covered by the questioned Deed. The
complaint was docketed as Civil Case No. CEB-14181. Petitioner claimed
therein that sometime in July 1991, Lim, through a Deed of Donation,
fraudulently transferred all her real property to her children in bad faith and
in fraud of creditors, including her; that Lim conspired and confederated with
her children in antedating the questioned Deed of Donation, to petitioner's
and other creditors' prejudice; and that Lim, at the time of the fraudulent
conveyance, left no sufficient properties to pay her obligations.
On the other hand, Lim denied any liability to petitioner. She claimed
that her convictions in Criminal Cases Nos. 22127-28 were erroneous, which
was the reason why she appealed said decision to the Court of Appeals. As
regards the questioned Deed of Donation, she maintained that it was not
antedated but was made in good faith at a time when she had sufficient
property. Finally, she alleged that the Deed of Donation was registered only
on 2 July 1991 because she was seriously ill.
In its decision of 31 December 1994 the trial court ordered the

rescission of the questioned deed of donation; (2) declared null and void the
transfer certificates of title issued in the names of private respondents Linde,
Ingrid and Neil Lim; (3) ordered the Register of Deeds of Cebu City to cancel
said titles and to reinstate the previous titles in the name of Rosa Lim; and (4)
directed the LIMs to pay the petitioner, jointly and severally, the sum of
P10,000 as moral damages; P10,000 as attorney's fees; and P5,000 as
expenses of litigation.
On appeal, the Court of Appeals, in a promulgated on 20 February

1998, reversed the decision of the trial court and dismissed petitioner's
accion pauliana. It held that two of the requisites for filing an accion pauliana
were absent, namely, (1) there must be a credit existing prior to the
celebration of the contract; and (2) there must be a fraud, or at least the
intent to commit fraud, to the prejudice of the creditor seeking the rescission.
According to the Court of Appeals, the Deed of Donation, which was

executed and acknowledged before a notary public, appears on its face to
have been executed on 10 August 1989. Under Section 23 of Rule 132 of the
Rules of Court, the questioned Deed, being a public document, is evidence of
the fact which gave rise to its execution and of the date thereof. No
antedating of the Deed of Donation was made, there being no convincing
evidence on record to indicate that the notary public and the parties did
antedate it.
Since Lim's indebtedness to petitioner was incurred in August 1990, or

a year after the execution of the Deed of Donation, the first requirement for
accion pauliana was not met.
Anent petitioner's contention that assuming that the Deed of Donation

was not antedated it was nevertheless in fraud of creditors because Victoria
Suarez became Lim’s creditor on 8 October 1987, the Court of Appeals found
the same untenable, for the rule is basic that the fraud must prejudice the
creditor seeking the rescission.
ISSUE:
Whether or not the deed of donation is valid.
RULING:
The Supreme Court upheld the validity of the deed of donation.

350
Article 1381 of the Civil Code enumerates the contracts which are
rescissible, and among them are "those contracts undertaken in fraud of
creditors when the latter cannot in any other manner collect the claims due
them."
The action to rescind contracts in fraud of creditors is known as accion

pauliana. For this action to prosper, the following requisites must be present:
(1) the plaintiff asking for rescission has a credit prior to the alienation,
although demandable later; (2) the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person; (3) the creditor has no
other legal remedy to satisfy his claim; (4) the act being impugned is
fraudulent; (5) the third person who received the property conveyed, if it is by
onerous title, has been an accomplice in the fraud.
The general rule is that rescission requires the existence of creditors at

the time of the alleged fraudulent alienation, and this must be proved as one
of the bases of the judicial pronouncement setting aside the contract.
Without any prior existing debt, there can neither be injury nor fraud. While
it is necessary that the credit of the plaintiff in the accion pauliana must exist
prior to the fraudulent alienation, the date of the judgment enforcing it is
immaterial. Even if the judgment be subsequent to the alienation, it is merely
declaratory, with retroactive effect to the date when the credit was
constituted.
In the instant case, the alleged debt of Lim in favor of petitioner was
incurred in August 1990, while the deed of donation was purportedly
executed on 10 August 1989.
The Supreme Court is not convinced with the allegation of the

petitioner that the questioned deed was antedated to make it appear that it
was made prior to petitioner's credit. Notably, that deed is a public
document, it having been acknowledged before a notary public. As such, it is
evidence of the fact which gave rise to its execution and of its date, pursuant
to Section 23, Rule 132 of the Rules of Court.
In the present case, the fact that the questioned Deed was registered
only on 2 July 1991 is not enough to overcome the presumption as to the
truthfulness of the statement of the date in the questioned deed, which is 10
August 1989. Petitioner's claim against Lim was constituted only in August
1990, or a year after the questioned alienation. Thus, the first two requisites
for the rescission of contracts are absent.
Even assuming arguendo that petitioner became a creditor of Lim prior

to the celebration of the contract of donation, still her action for rescission
would not fare well because the third requisite was not met. Under Article
1381 of the Civil Code, contracts entered into in fraud of creditors may be
rescinded only when the creditors cannot in any manner collect the claims
due them. Also, Article 1383 of the same Code provides that the action for
rescission is but a subsidiary remedy which cannot be instituted except when
the party suffering damage has no other legal means to obtain reparation for
the same. The term "subsidiary remedy" has been defined as "the exhaustion
of all remedies by the prejudiced creditor to collect claims due him before
rescission is resorted to." It is, therefore, essential that the party asking for
rescission prove that he has exhausted all other legal means to obtain
satisfaction of his claim. Petitioner neither alleged nor proved that she did so.
On this score, her action for the rescission of the questioned deed is not
maintainable even if the fraud charged actually did exist." The fourth
requisite for an accion pauliana to prosper is not present either.

351
RESTITUTION
RAFAEL G. SUNTAY, substituted by his heirs, namely: ROSARIO,

RAFAEL, JR., APOLINARIO, RAYMUND, MARIA VICTORIA, MARIA
ROSARIO and MARIA LOURDES, all surnamed SUNTAY, petitioners,
VS. THE HON. COURT OF APPEALS and FEDERICO C. SUNTAY,
respondents
G.R. No. 114950
December 19, 1995
FACTS:
Respondent Federico Suntay was the registered owner of a parcel of
land with an area in Bulacan. On the land may be found: a rice mill, a
warehouse, and other improvements. A rice miller, Federico, in a letter, dated
September 30, 1960, applied as a miller-contractor of the then National Rice
and Corn Corporation (NARIC). He informed the NARIC that he had a daily
rice mill output of 400 cavans of palay and warehouse storage capacity of
150,000 cavans of palay. His application, although prepared by his nephew-
lawyer, petitioner Rafael Suntay, was disapproved, obviously because at that
time he was tied up with several unpaid loans.
For purposes of circumvention, he had thought of allowing Rafael to

make the application for him. Rafael prepared an absolute deed of sale
whereby Federico, for and in consideration of P20,000.00 conveyed to Rafael
said parcel of land with all its existing structures. Said deed was notarized as
Document No. 57 and recorded on Page 13 of Book 1, Series of 1962, of the
Notarial Register of Atty. Herminio V. Flores. Less than three months after
this conveyance, a counter sale was prepared and signed by Rafael who also
caused its delivery to Federico. Through this counter conveyance, the same
parcel of land with all its existing structures was sold by Rafael back to
Federico for the same consideration of P20,000.00. Although on its face, this
second deed appears to have been notarized as Document No. 56 and
recorded on Page 15 of Book 1, Series of 1962, of the notarial register of Atty.
Herminio V. Flores, an examination thereof will show that, recorded as
Document No. 56 on Page 13, is not the said deed of sale but a certain "real
estate mortgage on a parcel of land with TCT No. 16157 to secure a loan of
P3,500.00 in favor of the Hagonoy Rural Bank."
Nowhere on page 13 of the same notarial register could be found any

entry pertaining to Rafael's deed of sale. Testifying on this irregularity, Atty.
Flores admitted that he failed to submit to the Clerk of Court a copy of the
second deed. Neither was he able to enter the same in his notarial register.
Even Federico himself alleged in his Complaint that, when Rafael delivered
the second deed to him, it was neither dated nor notarized.
Upon the execution and registration of the first deed, Certificate of

Title No. 0-2015 in the name of Federico was cancelled and in lieu thereof,
TCT No. T-36714 was issued in the name of Rafael. Even after the execution
of the deed, Federico remained in possession of the property sold in concept
of owner. Significantly, notwithstanding the fact that Rafael became the titled
owner of said land and rice mill, he never made any attempt to take
possession thereof at any time, while Federico continued to exercise rights of
absolute ownership over the property.
In a letter, dated August 14, 1969, Federico, through his new counsel,
Agrava & Agrava, requested that Rafael deliver his copy of TCT No. T-36714
so that Federico could have the counter deed of sale in his favor registered in
his name. The request having been obviously turned down, Agrava & Agrava
filed a petition with the Court of First Instance of Bulacan asking Rafael to
surrender his owner's duplicate certificate of TCT No. T-36714. In opposition
thereto, Rafael chronicled the discrepancy in the notarization of the second
352
deed of sale upon which said petition was premised and ultimately concluded
that said deed was a counterfeit or "at least not a public document which is
sufficient to transfer real rights according to law." On September 8, 1969,
Agrava & Agrava filed a motion to withdraw said petition, and, on September
13, 1969, the Court granted the same.
On July 8, 1970, Federico filed a complaint for reconveyance and

damages against Rafael. In his answer, Rafael scoffed at the attack against
the validity and genuineness of the sale to him of Federico's land and rice
mill. Rafael insisted that said property was "absolutely sold and conveyed . . .
for a consideration of P20,000.00, Philippine currency, and for other valuable
consideration".
While the trial court upheld the validity and genuineness of the deed of
sale executed by Federico in favor of Rafael, which deed is referred to above
as Exhibit A, it ruled that the counter-deed, referred to as Exhibit B, executed
by Rafael in favor of Federico, was simulated and without consideration,
hence, null and void ab initio.
Moreover, while the trial court adjudged Rafael as the owner of the
property in dispute, it did not go to the extent of ordering Federico to pay
back rentals for the use of the property as the court made the evidential
finding that Rafael simply allowed his uncle to have continuous possession of
the property because or their understanding that Federico would
subsequently repurchase the same.
From the aforecited decision of the trial court, both Federico and
Rafael appealed. The Court of Appeals rendered judgment affirming the trial
court's decision, with a modification that Federico was ordered to surrender
the possession of the disputed property to Rafael. Counsel of Federico filed a
motion for reconsideration of the aforecited decision. While the motion was
pending resolution, Atty. Ricardo M. Fojas entered his appearance in behalf of
the heirs of Rafael who had passed away on November 23, 1988. Atty. Fojas
prayed that said heirs be substituted as defendants-appellants in the case.
The prayer for substitution was duly noted by the court in a resolution dated
April 6, 1993. Thereafter, Atty. Fojas filed in behalf of the heirs an opposition
to the motion for reconsideration. The parties to the case were heard on oral
argument on October 12, 1993. On December 15, 1993, the Court of Appeals
reversed itself and rendered an amended judgment.
ISSUE:
Whether or not the deed of sale executed by Federico in favor of Rafael
is simulated and fictitious and, hence, null and void.
RULING:
In the aggregate, the evidence on record demonstrate a combination of
circumstances from which may be reasonably inferred certain badges of
simulation that attach themselves to the deed of sale in question. The
complete absence of an attempt on the part of the buyer to assert his rights of
ownership over the land and rice mill in question is the most protuberant
index of simulation.
The deed of sale executed by Federico in favor of his now deceased

nephew, Rafael, is absolutely simulated and fictitious and, hence, null and
void, said parties having entered into a sale transaction to which they did not
intend to be legally bound. As no property was validly conveyed under the
deed, the second deed of sale executed by the late Rafael in favor of his uncle,
should be considered ineffective and unavailing.
The allegation of Rafael that the lapse of seven years before Federico
sought the issuance of a new title in his name necessarily makes Federico's
claim stale and unenforceable does not hold water. Federico's title was not in
353
the hands of a stranger or mere acquaintance; it was in the possession of his
nephew who, being his lawyer, had served him faithfully for many years.
Federico had been all the while in possession of the land covered by his title
and so there was no pressing reason for Federico to have a title in his name
issued. Even when the relationship between the late Rafael and Federico
deteriorated, and eventually ended, it is not at all strange for Federico to have
been complacent and unconcerned about the status of his title over the
disputed property since he has been possessing the same actually, openly, and
adversely, to the exclusion of Rafael. It was only when Federico needed the
title in order to obtain a collaterized loan that Federico began to attend to the
task of obtaining a title in his name over the subject land and rice mill.
Decision affirmed. Petitioners, the heirs of Rafael G. Suntay, were

ordered to reconvey to private respondent Federico G. Suntay the property
described in paragraph 2.1 of the complaint, within 10 days from the finality
of the Decision, and to surrender to him within the same period the owner's
duplicate copy of Transfer Certificate of Title No. T-36714 of the Registry of
Deeds of the Province of Bulacan. In the event that the petitioners fail or
refuse to execute the necessary deed of reconveyance as herein directed, the
Clerk of Court of the Regional Trial Court of Bulacan was ordered to execute
the same at the expense of the aforesaid heirs.

RESTITUTION
KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and
RAY STEVEN KHE, petitioners,
VS. COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI
CITY and PHILAM INSURANCE CO., INC., respondents
G.R. No. 144169
28 March 2001
355 SCRA 701
FACTS:
Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan
Shipping Lines to which the Philippine Agricultural Trading Corporation used
its vessel M/V Prince Eric Corporation to ship 3,400 bags of Copra at Masbate
for delivery to Dipolog. Such shipping of 3, 400 bags was covered by a marine
insurance policy issued by American Home Insurance Company (eventually
Philam). However, M/V Prince Eric sank somewhere between Negros Island
and Northern Mindanao which resulted to the total loss of the shipment.
Insurer Philam paid the amount of P 354, 000.00, which is the value of the
copra, to Philippine Agricultural Trading Corporation. American Home was
thereby subrogated unto the rights of the consignee and filed a case to
recover money paid to the latter, based on breach of common carriage.
While the case was pending, Khe Hong Cheng executed deeds of
donations of parcels of land in favor of his children. As a consequence of a
favorable judgment for American Home, a writ of execution to garnish Khe
Hong Cheng’s property was issued but the sheriff failed to implement the
354
same for Cheng’s property were already transferred to his children.
Consequently, American home filed a case for the rescission of the deeds of
donation executed by petitioner in favor of children for such were made in
fraud of his creditors. Petitioner answered saying that the action should be
dismissed for it already prescribed. Petitioner posited that the registration of
the donation was on December 27, 1989 and such constituted constructive
notice. And since the complaint was filed only in 1997, more than four (4)
years after registration, the action is thereby barred by prescription.
ISSUE:
Whether or not the action for the rescission of the deed of donation has
prescribed.
RULING:
An accion pauliana accrues only when the creditor discovers that he
has no other legal remedy for the satisfaction of his claim against the debtor
other than an accion pauliana. The accion pauliana is an action of a last
resort. For as long as the creditor still has a remedy at law for the
enforcement of his claim against the debtor, the creditor will not have any
cause of action against the creditor for rescission of the contracts entered
into by and between the debtor and another person or persons. Indeed, an
accion pauliana presupposes a judgment and the issuance by the trial court of
a writ of execution for the satisfaction of the judgment and the failure of the
Sheriff to enforce and satisfy the judgment of the court. It presupposes that
the creditor has exhausted the property of the debtor. The date of the
decision of the trial court against the debtor is immaterial. What is
important is that the credit of the plaintiff antedates that of the fraudulent
alienation by the debtor of his property. After all, the decision of the trial
court against the debtor will retroact to the time when the debtor became
indebted to the creditor.
Although Article 1389 of the Civil Code provides that “The action to
claim rescission must be commenced within four (4) years” is silent as to
where the prescriptive period would commence, the general rule is such shall
be reckoned from the moment the cause of action accrues; i.e., the legal
possibility of bringing the action. Since accion pauliana is an action of last
resort after all other legal remedies have been exhausted and have been
proven futile, in the case at bar, it was only in February 25, 1997, barely a
month from discovering that petitioner Khe Hong Cheng had no other
property to satisfy the judgment award against him that the action for
rescission accrued. So the contention of Khe Hong Cheng that the action
accrued from the time of the constructive notice; i.e., December 27, 1989, the
date that the deed of donation was registered, is untenable.
EFFECTS OF ANNULMENT OF VOIDABLE CONTRACTS
1. VDA. DE APE VS. CA, 456 SCRA 193

2. FRANCISCO VS. HERRERA, 392 SCRA 317
3. BRAGANZA VS. VILLA ABRILLE, 105 PHIL. 456
4. MIAILHE VS. CA, 354 SCRA 675
5. KATIPUNAN VS. KATIPUNAN, JANUARY 30, 2002
6. JUMALON VS. CA, JANUARY 30, 2002
PERPETUA VDA. DE APE, petitioner,

355
VS. THE HONORABLE COURT OF APPEALS and GENOROSA CAWIT
VDA. DE LUMAYNO, respondents
G.R. No. 133638
April 15, 2005
FACTS:
Cleopas Ape was the registered owner of a parcel of land (Lot No.
2319) which is covered by Original Certificate of Title (OCT) No. RP 1379 (RP-
154 [300]). Upon Cleopas Ape’s death sometime in 1950, the property passed
on to his wife, Maria Ondoy, and their eleven (11) children, namely:
Fortunato, Cornelio, Bernalda, Bienvenido, Encarnacion, Loreta, Lourdes,
Felicidad, Adela, Dominador, and Angelina. On 15 March 1973, private
respondent, joined by her husband, Braulio, instituted a case for “Specific
Performance of a Deed of Sale with Damages” against Fortunato and his wife
Perpetua (petitioner herein). It was alleged in the complaint that on 11 April
1971, private respondent and Fortunato entered into a contract of sale of land
under which for a consideration of P5,000.00, Fortunato agreed to sell his
share in Lot No. 2319 to private respondent. The agreement was contained in
a receipt prepared by private respondent’s son-in-law, Andres Flores, at her
behest.
As private respondent wanted to register the claimed sale transaction,

she supposedly demanded that Fortunato executes the corresponding deed of
sale and to receive the balance of the consideration. However, Fortunato
unjustifiably refused to heed her demands. Private respondent, therefore,
prayed that Fortunato be ordered to execute and deliver to her “a sufficient
and registrable deed of sale involving his one-eleventh (1/11) share; to pay
P5,000.00 in damages; P500.00 reimbursement for litigation expenses as well
as additional P500.00 for every appeal made; P2,000.00 for attorney’s fees;
and to pay the costs.
Fortunato and petitioner denied the material allegations of the

complaint and claimed that Fortunato never sold his share in Lot No. 2319 to
private respondent and that his signature appearing on the purported receipt
was forged. By way of counterclaim, the defendants below maintained having
entered into a contract of lease with respondent involving Fortunato’s portion
of Lot No. 2319.
In their reply, the private respondent and her husband alleged that they
had purchased from Fortunato’s co-owners, as evidenced by various written
instruments, their respective portions of Lot No. 2319. By virtue of these
sales, they insisted that Fortunato was no longer a co-owner of Lot No. 2319
thus, his right of redemption no longer existed.
At the trial court level, Fortunato died and was substituted by his
children named Salodada, Clarita, Narciso, Romeo, Rodrigo, Marieta,
Furtunato, Jr., and Salvador, all surnamed Ape.
During the trial, private respondent contended that her husband

caused the annotation of an adverse claim on the certificate of title of Lot No.
2319. In addition, she and her husband had the whole Lot No. 2319 surveyed
by a certain Oscar Mascada who came up with a technical description of said
piece of land. Significantly, private respondent alleged that Fortunato was
present when the survey was conducted.
After due trial, the court a quo rendered a decision dismissing both the
complaint and the counterclaim. The Court of Appeals, reversed and set
aside the trial court’s dismissal of the private respondent’s complaint but
upheld the portion of the court a quo’s decision ordering the dismissal of
petitioner and her children’s counterclaim. It upheld private respondent’s
position that Exhibit “G” which is the receipt of partial payment had all the
earmarks of a valid contract of sale.
356
ISSUE:
Whether the receipt signed by Fortunato proves the existence of a
contract of sale between him and private respondent.
RULING:
No, the Court ruled that the records of this case betray the stance of
private respondent that Fortunato Ape entered into such an agreement with
her.
A contract of sale is a consensual contract, thus, it is perfected by mere

consent of the parties. Upon its perfection, the parties may reciprocally
demand performance, that is, the vendee may compel the transfer of the
ownership and to deliver the object of the sale while the vendor may demand
the vendee to pay the thing sold. For there to be a perfected contract of sale,
however, the following elements must be present: consent, object, and price
in money or its equivalent.
To be valid, consent: (a) should be intelligent; (b) should be free and (c)
should be spontaneous. Intelligence in consent is vitiated by error; freedom
by violence, intimidation or undue influence; spontaneity by fraud.
In this jurisdiction, the general rule is that he who alleges fraud or

mistake in a transaction must substantiate his allegation as the presumption
is that a person takes ordinary care for his concerns and that private dealings
have been entered into fairly and regularly. The exception to this rule is
provided for under Article 1332 of the Civil Code which provides that “when
one of the parties is unable to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged, the person enforcing the
contract must show that the terms thereof have been fully explained to the
former.”
In this case, as private respondent is the one seeking to enforce the

claimed contract of sale, she bears the burden of proving that the terms of the
agreement were fully explained to Fortunato Ape who was an illiterate. This
she failed to do. While she claimed in her testimony that the contents of the
receipt were made clear to Fortunato, such allegation was debunked by
Andres Flores himself when the latter took the witness stand.
Flores testified that, while he was very much aware of Fortunato’s

inability to read and write in the English language, he did not bother to fully
explain to the latter the substance of the receipt (Exhibit “G”). He even
dismissed the idea of asking somebody else to assist Fortunato considering
that a measly sum of thirty pesos was involved. Evidently, it did not occur to
Flores that the document he himself prepared pertains to the transfer
altogether of Fortunato’s property to his mother-in-law. It is precisely in
situations such as this when the wisdom of Article 1332 of the Civil Code
readily becomes apparent which is “to protect a party to a contract
disadvantaged by illiteracy, ignorance, mental weakness or some other
handicap.”
Thus, the Court annuls the contract of sale between Fortunato and
private respondent on the ground of vitiated consent.

357
JULIAN FRANCISCO, ET. AL. VS. PASTOR HERRERA

G.R. No. 139982
November 21, 2002
392 SCRA 317
FACTS:
Eligio Herrera, Sr., the father of respondent, was the owner of two
parcels of land, one consisting of 500 sq. m. and another consisting of 451 sq.
m., covered by Tax Declaration (TD) Nos. 01-00495 and 01-00497,
respectively. Both were located at Barangay San Andres, Cainta, Rizal.
On January 3, 1991, petitioner Julian Francisco bought from said

landowner the first parcel, covered by TD No. 01-00495, for the price of
P1,000,000, paid in installments from November 30, 1990 to August 10, 1991.
And on March 12, 1991, petitioner bought the second parcel covered by TD
No. 01-00497, for P750,000.
Contending that the contract price for the two parcels of land was
grossly inadequate, the children of Eligio, Sr., namely, Josefina Cavestany,
Eligio Herrera, Jr., and respondent Pastor Herrera, tried to negotiate with
petitioner to increase the purchase price. When petitioner refused, herein
respondent then filed a complaint for annulment of sale, with the RTC of
Antipolo City. In his complaint, respondent claimed ownership over the
second parcel allegedly by virtue of a sale in his favor since 1973. He likewise
claimed that the first parcel was subject to the co-ownership of the surviving
heirs of Francisca A. Herrera, the wife of Eligio, Sr., considering that she died
intestate on April 2, 1990, before the alleged sale to petitioner. Finally,
respondent also alleged that the sale of the two lots was null and void on the
ground that at the time of sale, Eligio, Sr. was already incapacitated to give
consent to a contract because he was already afflicted with senile dementia,
characterized by deteriorating mental and physical condition including loss of
memory.
The RTC rendered decision declaring the contract null and void. The
Court of Appeals affirmed the decision of the RTC, hence, this appeal.
ISSUE:
Whether or not the contract is void or merely voidable.
RULING:
A void or inexistent contract is one which has no force and effect from
the very beginning. Hence, it is as if it has never been entered into and
cannot be validated either by the passage of time or by ratification. There are
two types of void contracts: (1) those where one of the essential requisites of
a valid contract as provided for by Article 1318 of the Civil Code is totally
wanting; and (2) those declared to be so under Article 1409 of the Civil Code.
358
By contrast, a voidable or annullable contract is one in which the essential
requisites for validity under Article 1318 are present, but vitiated by want of
capacity, error, violence, intimidation, undue influence, or deceit.
Article 1318 of the Civil Code states that no contract exists unless there
is a concurrence of consent of the parties, object certain as subject matter,
and cause of the obligation established. Article 1327 provides that insane or
demented persons cannot give consent to a contract. But, if an insane or
demented person does enter into a contract, the legal effect is that the
contract is voidable or annullable as specifically provided in Article 1390.
In the present case, it was established that the vendor Eligio, Sr.
entered into an agreement with petitioner, but that the former’s capacity to
consent was vitiated by senile dementia. Hence, we must rule that the
assailed contracts are not void or inexistent per se; rather, these are contracts
that are valid and binding unless annulled through a proper action filed in
court seasonably.
An annullable contract may be rendered perfectly valid by ratification,

which can be express or implied. Implied ratification may take the form of
accepting and retaining the benefits of a contract. This is what happened in
this case. As found by the trial court and the Court of Appeals, upon learning
of the sale, respondent negotiated for the increase of the purchase price while
receiving the installment payments. It was only when respondent failed to
convince petitioner to increase the price that the former instituted the
complaint for reconveyance of the properties. Clearly, respondent was
agreeable to the contracts, only he wanted to get more. Further, there is no
showing that respondent returned the payments or made an offer to do so.
This bolsters the view that indeed there was ratification.
One cannot negotiate for an increase in the price in one breath and in
the same breath contend that the contract of sale is void.
WHEREFORE, the instant petition is GRANTED. The two contracts of

sale covering lots under TD No. 01-00495 and No. 01-00497 are hereby
declared VALID.
BRAGANZA VS. VILLA ABRILLE

105 PHIL 456
FACTS:
Petitioners Braganza and her two sons, Rodolfo and Guillermo appears
to have received from Villa Abrille, as a loan, on October 30, 1944 P70, 000 in
Japanese war note and in consideration thereof, promised in writing to pay
him P10, 000 in legal currency on the P.I. two years after the cessation of the
present hostilities or as soon as International Exchange has been established
in the Philippines, plus 2% per annum.
Because of no payment had been made, Abrille sued them on March

1949. In their answer, defendants claimed to have received P40, 000 only
instead of P70, 000 as plaintiff asserted. Also they raised the defense of
minority because at the time they signed the promissory notes, Rodolfo and
Guillermo were only 16 and 18 yrs. of age. The lower court rendered
judgment whereby the defendants were required solidarily to pay Abrille the
sum of P10, 000 plus 2% interest from October 30, 1944, which was affirmed
by the CA.

359
ISSUE:
Whether or not petitioners are excused from complying with their
monetary obligation on account of minority of the two consigners.
RULING:
NO. Petitioners are not absolved from monetary responsibility. In
accordance with the provisions of the Civil Code, even if the contract is
unenforceable because of non-age, they shall make restitution to the extent
that they may have profited by the money they received. There is testimony
that the funds delivered to them by Abrille were used for their support during
the Japanese occupation. Such being the case, it is but fair to hold that they
had profited to the extent of the value of such money, which value has been
authoritatively established in the so-called Ballantine Schedule: in October
1944, P40.00 Japanese notes were equivalent to P1.00 of current Philippine
money.
WILLIAM ALAIN MIALHE, petitioner,

VS. COURT OF APPEALS and REPUBLIC OF THE PHILIPPINES,
respondent
G.R. No. 10899
March 20, 2001
FACTS:
On March 23, 1990, William Alain Mialhe, on his own behalf and on
behalf of Victoria Desbarats-Mialhe, Momique Mialhe-Sichere and Elaine
Mialhe-Lencquesaing filed a Complaint for Annulment of Sale, Reconveyance
and Damages against Republic of the Philippines and defendant Development
Bank of the Philippines before the court.
On May 25, 1990 filed its Answer denying the substantial facts allrged
in the complaint and raising, as special and affirmative defenses, that there
was no forcible take-over of the subject properties and that the amount paid
to private respondents was fair and reasonable Defendant DBP also filed its
Answer raising as Special and Affirmative Defense that action had already
prescribed.
On September 11, 1992, the court issued an Order.

360
The Court of Appeals ruled that petitioner’s action had prescribed. A

suit to annul a voidable contract may be filed within four (4) years from the
time the defect ceases.
The CA also ruled that Article 1155 of the Civil Code, according to
which a written extrajudicial demand by the creditors would interrupt
prescription, referred only to a creditor-debtor relationship, which is not the
case here.
ISSUE:
Whether or not the action for the annulment of the Contract of Sale has
prescribed.
RULING:
CA correctly set aside the Order of the trial court.
The records in this case indubitably show the lapse of the prescriptive
period, thus warranting the immediate dismissal of the Complaint.
The suit before the trial court was an action for the annulment on the
Contract of Sale on the alleged ground of vitiation of consent by intimidation.
The reconveyance of the three parcels of land, which the petitioner half-
heatedly espouses as the real nature of the action, can prosper only if and
when the Contract of Sale covering the subject lots is annulled. Thus, the
reckoning period for prescription would be that pertaining to an action for the
annulment of contract; that is, four years from the time the defect in the
consent ceases.
There is as yet no obligation in existence. Respondent has no obligation

to reconvey the subject lots because of the existing Contract of Sale. Although
allegedly voidable, it is binding unless annulled by a proper action in court.
Not binding a determinate conduct that can be extra judicially demanded, it
cannot be considered as an obligation either. Since Article 1390 of the Civil
Code states that voidable “contracts are binding, unless they are annulled by
a proper action in court,” it is clear that the defendant were not obligated to
accede to any extra judicial demand to annul the Contract of Sale.
KATIPUNAN VS. KATIPUNAN

375 SCRA 199
FACTS:
Respondent is the owner of a lot and a five-door apartment constructed

thereon occupied by lessees. On December 29, 1985, respondent, assisted by
361
his brother, petitioner, entered into a Deed of Absolute Sale with their other
brothers (co-petitioners, represented by their father, Atty. Balguma involving
the subject property for P187, 000. 00. Consequently, respondent’s title to the
property was cancelled and in lieu thereof, a new TCT was issued in favor of
petitioners.
Thereafter, respondent filed with the RTC a complaint for annulment of

the above Deed of Absolute Sale on the ground that petitioners, with evident
bad faith, conspired with one another in taking advantage of his ignorance, he
being only a third grader and through insidious words and machinations, they
made him sign a document purportedly a contract of employment, which
turned out to be a Deed of Absolute Sale.
The lower court dismissed the complaint holding that respondent failed
to prove his causes of action since he admitted that: 1.) He obtained loans
from the Balgumas; 2.) He signed the Deed of Absolute Sale; and 3.) He
acknowledged selling the property and that he stopped collecting the rentals.
The said decision was however reversed by the Court of Appeals.
ISSUE:
Whether or not the subject contract is void ab initio or voidable on the

ground that one of the parties is incapable of giving consent or where consent
is vitiated by mistake, fraud, or intimidation.
RULING:
A contract of sale is born from the moment there is meeting of minds

upon the thing which is the object of the contract and upon the price. This
meeting of minds speaks of the intent of the parties in entering into the
contract respecting the subject matter and the consideration thereof. Thus,
the elements of a contract of sale are consent, object, and price in money or
its equivalent. Under Article 1330 of the Civil Code, consent may be vitiated
by any of the following: 1.) mistake, 2.) violence, 3.) intimidation, 4.) undue
influence, and 5.) fraud. The presence of any of these vices renders the
contract voidable.
A contract where one of the parties is incapable of giving consent or

where the consent is vitiated by mistake, fraud, or intimidation, is not void ab
initio but only voidable and is binding upon the parties unless annulled by
proper court action. The effect of annulment is to restore the parties to the
status quo ante in so far as legally and equitably possible. As an exception,
however, to the principle of mutual restitution, Article 1399 provides that
when the defect of the contract consists in the incapacity of one of the
parties, the incapacitated person is not obliged to make restitution, except
when he has been benefited by the things or price received by him. Since the
Deed of Absolute Sale between Respondent and the Balguma brothers is
voidable, and hereby annulled, then the restitution of the property and its
fruits to respondent is just and proper.
Therefore, the petitioners are hereby ordered to turn over to

respondent Braulio Katipunan, Jr. the rentals they received for the five-door
apartment corresponding to the period from January, 1986 up to the time the
property shall have been returned to him, with interest at the legal rate.

362
JUMALON VS. COURT OF APPEALS

375 SCRA 175
JANUARY 30, 2002
FACTS:
On July 16, 1991, petitioner and complainant entered into a Conditional
Sales Agreement whereby the latter purchased from the former a house and
lot. On July 24, 1991, petitioner executed in favor of complainant a Deed of
Absolute Sale. Title was transferred to complainant on July 29, 1991.
Thereafter, complainant learned from neighboring residents that the

presence of high-tension wires in the subdivision where the house and lot is
located generate tremendous static electricity and produce electric sparks
whenever it rains. Upon complainant’s inquiries to the Meralco and HLURB,
he found out that the subject house and lot was built within the 30-meter
right of way of Meralco wherein high tension wires carrying 115, 000 volts
are located which posed serious risks on the property and its occupants.
Consequently, sometime in November 1992, complainant filed a case

for declaration of nullity or annulment of sale of real property before the
R.T.C.. The lower court dismissed the case. Thereafter, complainant filed
before the HLURB a complaint before the HLURB seeking the rescission of
the Conditional Sales Agreement and the Absolute Deed of Sale on the ground
of fraud. HLURB rendered decision in favor of complainant which was upheld
by the Court of Appeals, hence this petition.
ISSUE:
Whether or not there was fraud on the part of petitioner as to warrant

the rescission of the Conditional Sales Agreement and of the Absolute Deed of
Sale.
RULING:
The Supreme Court found the petition without merit for it involved
questions of fact which is not reviewable unless it is within the ambit of
exceptions.
Nonetheless, SC agrees with the Court of Appeals that respondent de

Leon was entitled to annul the sale. There was fraud in the sale of the subject
house. It is not safely habitable. It is built in a subdivision area where there is
an existing 30-meter right of way of the Manila Electric Company (Meralco)
with high-tension wires over the property, posing a danger to life and
property. The construction of houses underneath the high tension wires is
prohibited as hazardous to life and property because the line carries 115,000
volts of electricity, generates tremendous static electricity and produces
electric sparks whenever it rained.

363
REMEDIES IN UNERFORCEABLE CONTRACTS

1. ROSENCOR VS. INQUING, 354 SCRA 119
2. FIRME VS. BUKA, 414 SCRA 190
ROSENCOR v. INQUING
354 SCRA 119
FACTS:
Respondents are the lessees of a 2-storey residential apartment owned
by the late spouses Tiangco who were succeeded management of the leased
premises by their heirs as represented by Eufrocina de Leon. The lease was
not covered by any contract and allegedly, the lessors, both the late spouses
and their heirs, verbally granted them the pre-emptive right to purchase the
property if ever they decide to sell the same.
In June 01, 1990, the lessors received a letter from Atty. Aguila,
Rosencor’s lawyer, demanding them to vacate the premises for demolition.
They refused to do so. Thereafter, they received a letter from de Leon offering
them to sell to them the property they were leasing for P2M which the former
on the other hand, offered to buy the same for P1M. De Leon told them that
she would be submitting the offer to the heirs. Since then, no answer was
given by de Leon regarding the matter.
In January 1991, the lessees again received another letter from Atty.
Aguila demanding that they vacate the premises. A month thereafter, the
lessees received a letter from de Leon advising them that the heirs of the late
spouses Tiangcos have already sold the property to Rosencor. The following
month Atty. Aguila wrote them another letter demanding the rental payment
and introducing herself as counsel for Rosencor/Rene Joaquin, the new
owners of the premises. Respondents, however insisted to pay their rentals to
de Leon and demanded the latter for an explanation why she disregarded
their pre-emptive right to purchase. They also asked both Rosencor and de
Leon to show present to them the copy of their alleged Deed of Absolute Sale.
Before the demolition, the Deed of Absolute Sale was issued to them. It
was then when they found out that the offer made by de Leon to them was
made after the sale between Rosencor and the heirs of the spouses Tiangco,
as represented by de Leon took place or has been consummated. They also
noted that the property was sold only for P726, 000.00.
The lessees offered to reimburse de Leon the selling price of P726, 000
plus an additional P274, 000.00 to complete their P1M offer, but the latter
refused to accept it. As a result, respondents filed an action for the rescission
of the Deed of Absolute Sale between de Leon and Rosencor invoking their
right of first refusal.
The lower court ruled in favor of petitioner, but the same was reversed
in favor of respondents by the Court of Appeals. Both courts relied their
decisions on Article 1403 of the New Civil Code, more specifically the
provisions on the Statute of Frauds.

364
ISSUE:
Whether or not there is a remedy available for a person with the right
of first refusal.
RULING:
The prevailing doctrine is that a contract of sale entered into in

violation of a right of first refusal of another person, while valid, is rescissible.
There is, however, a circumstance which prevents the application of this
doctrine in the case at bench. Under Article 1381 of the New Civil Code,
paragraph 3, a contract validly agreed upon may be rescinded if it is
"undertaken in fraud of creditors when the latter cannot in any manner
collect the claim due them." Moreover, under Article 1385, rescission shall
not take place "when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.”
It must be borne in mind that the right of first refusal involved in the
instant case was an oral one given to respondents by the deceased spouses
Tiangco and subsequently recognized by their heirs. As such, in order to hold
that petitioners were in bad faith, there must be clear and convincing proof
that petitioners were made aware of the said right of first refusal either by
the respondents or by the heirs of the spouses Tiangco.
It is axiomatic that good faith is always presumed unless contrary

evidence is adduced. A purchaser in good faith is one who buys the property
of another without notice that some other person has a right or interest in
such a property and pays a full and fair price at the time of the purchase or
before he has notice of the claim or interest of some other person in the
property. In this regard, the rule on constructive notice would be inapplicable
as it is undisputed that the right of first refusal was an oral one and that the
same was never reduced to writing, much less registered with the Registry of
Deeds. In fact, even the lease contract by which respondents derive their
right to possess the property involved was an oral one.
On this point, we hold that the evidence on record fails to show that
petitioners acted in bad faith in entering into the deed of sale over the
disputed property with the heirs of the spouses Tiangco. Respondents failed
to present any evidence that prior to the sale of the property on September 4,
1990, petitioners were aware or had notice of the oral right of first refusal.
Considering that there is no showing of bad faith on the part of the

petitioners, the Court of Appeals thus erred in ordering the rescission of the
Deed of Absolute Sale dated September 4, 1990 between petitioner Rosencor
and the heirs of the spouses Tiangco. The acquisition by Rosencor of the
property subject of the right of first refusal is an obstacle to the action for its
rescission where, as in this case, it was shown that Rosencor is in lawful
possession of the subject of the contract and that it did not act in bad faith.
This does not mean however that respondents are left without any
remedy for the unjustified violation of their right of first refusal. Their remedy
however is not an action for the rescission of the Deed of Absolute Sale but an
action for damages against the heirs of the spouses Tiangco for the
unjustified disregard of their right of first refusal.

365
REMEDIES IN UNERFORCEABLE CONTRACTS
FIRME VS. BUKAL ENTERPRISES AND DEV’T. CORP.

414 SCRA 190
FACTS:
Spouses Firme are the owners of a parcel of land. De Castro, the vice-
president of Bukal Enterprises authorized his friend Aviles, a broker, to
negotiate with the spouses for the purchase of the property. Aviles informed
de Castro that the spouses agreed to sell the property at P4, 000 per square
meter. Bukal Enterprises agreed to pay the taxes due and to undertake the
relocation of the squatters on the property.
Bukal Enterprises relocated the families and fenced the area. After the
improvements made by the Bukal Enterprises, they offered to pay the
purchase price to the spouses, which the latter did not accept instead, sent
Bukal Enterprises a letter demanding its workers to vacate the property.
Bukal Enterprises then filed a complaint for specific performance. The
spouses Firme met again with Aviles upon the latter’s insistence to show the
third draft of the Deed of Sale, however, the former did not accept again the
draft because they found its provisions one-sided. Thereafter, Spouses Firme
received a letter from Bukal Enterprises demanding that they sell the
property.
The trial court rendered judgment against Bukal Enterprises which was
reversed by the Court of Appeals in favor of the spouses, hence, this petition.
ISSUE:

366
Whether or not there exists a contract between the parties as to
warrant the other’s remedy of specific performance under the provisions of
Statute of Frauds.
RULING:
NO, there exists no contract. Consent is one of the essential elements
of a valid contract. The Civil Code provides:
“ There is no contract unless the following requisites concur:

1. Consent of the contracting parties;
2. Object certain, which is the subject matter of the contract;
3. Cause of the obligation, which is established.”
The absence of any of these essential elements will negate the

existence of a perfected contract of sale. Thus, where there is want of
consent, the contract is non-existent.
There being no perfected contract of sale between the parties, the application
of the Statute of Frauds is without basis.
VOID/ INEXISTENT CONTRACTS: WHO MAY BRING ACTION

FOR DECLARATION OF NULLITY
1. HEIRS OF BALITE VS. LIM, 446 SCRA 56

2. PINEDA VS. CA, 376 SCRA 222
3. LA BUGAL-B’LAAN TRIBAL ASSOCIATION VS. RAMOS,
DEC. 1, 2004
4. AGAN VS. PIATCO, JANUARY 21, 2004
5. COMELEC VS. QUIJANO-PADILLA, 389 SCRA 353
6. JAWORSKI VS. PAGCOR, JAN. 14, 2004
7. CAUTON VS. SALUD, JAN. 27, 2004
HEIRS OF THE LATE SPOUSES AURELIO AND ESPERANZA BALITE

VS. RODRIGO N. LIM,
G.R. No. 152168, December 10, 2004
446 SCRA 56
FACTS:
367
The spouses Aurelio and Esperanza Balite were the owners of a parcel
of land, located at Poblacion Barangay Molave, Catarman, Northern Samar,
with an area of 17,551 square meters. When Aurelio died intestate in 1985,
his wife, Esperanza Balite, and their children, petitioner Antonio Balite, Flor
Balite-Zamar, Visitacion Balite-Difuntorum, Pedro Balite, Pablo Balite, Gaspar
Balite, Cristeta Balite and Aurelio Balite, Jr., inherited the subject property
and became co-owners thereof, with Esperanza inheriting an undivided share
of 9,751 square meters.
In the meantime, Esperanza became ill and was in dire need of money
for her hospital expenses. She, through her daughter, Cristeta, offered to sell
to Rodrigo Lim, her undivided share for the price of P1,000,000.00.
Esperanza and Rodrigo agreed that, under the “Deed of Absolute Sale”, to be
executed by Esperanza over the property, it will be made to appear that the
purchase price of the property would be P150,000.00, although the actual
price agreed upon by them for the property was P1,000,000.00.
Gaspar, Visitacion, Flor, Pedro and Aurelio, Jr. learned of the sale, and
on August 21, 1996, they wrote a letter to the Register of Deeds [RD] of
Northern Samar, saying that they were not informed of the sale of a portion of
the said property by their mother nor did they give their consent thereto, and
requested the RD to hold the approval of any application for the registration
of title of ownership in the name of the buyer of said lot which has not yet
been partitioned judicially or extrajudicially, until the issue of the
legality/validity of the above sale has been cleared.
On October 23, 1996, Esperanza signed a letter addressed to Rodrigo

informing the latter that her children did not agree to the sale of the property
to him and that she was withdrawing all her commitments until the validity of
the sale is finally resolved. On October 31, 1996, Esperanza died intestate and
was survived by her children.
On June 27, 1997, petitioners filed a complaint against Rodrigo with the
Regional Trial Court of Northern Samar for “Annulment of Sale, Quieting of
Title, Injunction and Damages.
The trial court dismissed the Complaint. The Court of Appeals held that
the sale was valid and binding insofar as Ezperanza Balite’s undivided share
of the property was concerned.
Hence, this Petition.
ISSUE:
Whether or not the heirs of Esperanza has the right to question the said
contract.
RULING:
The Supreme Court held that the petitioners cannot be permitted to
unmake the Contract voluntarily entered into by their predecessor, even if the
stated consideration included therein was for an unlawful purpose. The
binding force of a contract must be recognized as far as it is legally possible
to do so.
Article 1345 of the Civil Code provides that the simulation of a contract
may either be absolute or relative. In absolute simulation, there is a colorable
contract but without any substance, because the parties have no intention to
be bound by it. An absolutely simulated contract is void, and the parties may
recover from each other what they may have given under the “contract.” On
the other hand, if the parties state a false cause in the contract to conceal

368
their real agreement, such a contract is relatively simulated. Here, the
parties’ real agreement binds them.
In the present case, the parties intended to be bound by the Contract,

even if it did not reflect the actual purchase price of the property. That the
parties intended the agreement to produce legal effect is revealed by the
letter of Esperanza Balite to respondent dated October 23, 1996 and
petitioners’ admission that there was a partial payment of P320,000 made on
the basis of the Deed of Absolute Sale. There was an intention to transfer the
ownership of over 10,000 square meters of the property. The Deed of
Absolute Sale was merely relatively simulated, it remains valid and
enforceable between the parties and their successors in interest since all the
essential requisites prescribed by law for the validity and perfection of
contracts are present.

369
VOID/ INEXISTENT CONTRACTS: WHO MAY BRING ACTION FOR

DECLARATION OF NULLITY
ALEJANDRIA PINEDA and SPOUSES ADEODATO DUQUE, JR., and

EVANGELINE MARY JANE DUQUE, petitioners,
VS. COURT OF APPEALS and SPOUSES NELSON BAÑEZ and
MERCEDES BAÑEZ, respondents
2002 Feb 6
FACTS:
The appellees and the petitioner, Pineda, executed an Agreement to
Exchange Real Properties. The appellees exchanging their property at White
Plains with that of the Pinedas located in California. At the time of the
execution of the agreement, the white plains property was mortgaged with
the GSIS, while the California property also had a mortgaged obligation. As
stated in the exchange agreement, Pineda paid the appellees the total amount
of $12, 000. Pineda and the spouses Duque executed an agreement to sell
over the white plains property, whereby Pineda sold the property in the
amount of P1.6M. Pineda paid the mortgage of the white plains property and
requested the appellees for a written authority for the release of the title from
GSIS. The appellees gave Pineda the authority with the understanding that
Pineda will deliver the title to the appellees. Upon their return to the
Philippines, the appellees discovered that the spouses Duque were occupying
the white plains property and a fictitious deed of sale in the name of Pineda.
In a civil case filed by the appellees, the trial court declared them as the
absolute owners of the property located in White Plains.
ISSUE:
Whether petitioners validly acquired the subject property.
RULING:
No. The Court denies the petition. It appears that the Bañez spouses
were the original owners of the parcel of land and improvements located at
32 Sarangaya St., White Plains, Quezon City. On January 11, 1983, the Bañez
spouses and petitioner Pineda executed an agreement to exchange real
properties. However, the exchange did not materialize. Petitioner Pineda’s
"sale" of the property to petitioners Duque was not authorized by the real
owners of the land, respondent Bañez. The Civil Code provides that in a sale
of a parcel of land or any interest therein made through an agent, a special
power of attorney is essential. This authority must be in writing; otherwise
the sale shall be void. In his testimony, petitioner Adeodato Duque confirmed
that at the time he "purchased" respondents’ property from Pineda, the latter
had no Special Power of Authority to sell the property.
A special power of attorney is necessary to enter into any contract by

which the ownership of an immovable is transmitted or acquired for a
valuable consideration. Without an authority in writing, petitioner Pineda
could not validly sell the subject property to petitioners Duque. Hence, any
"sale" in favor of petitioners Duque is void. Further, Article 1318 of the Civil
Code lists the requisites of a valid and perfected contract, namely: (1) consent
of the contracting parties; (2) object certain which the subject matter of the
contract; (3) cause of the obligation which is established. Pineda was not
authorized to enter into a contract to sell the property. As the consent of the
real owner of the property was not obtained, no contract was perfected.
Consequently, petitioner Duque failed to validly acquire the subject property.

370

LA BUGAL-B’LAAN TRIBAL ASSOCIATION, INC. et al VS. RAMOS

G.R. No. 127882
December 1, 2004
445 SCRA 1
FACTS:
Petitioners challenged constitutionality of Republic Act No. 7942 (The
Philippine Mining Act of 1995) and its Implementing Rules and Regulations
and the Financial and Technical Assistance Agreement dated March 30, 1995,
executed by the government with Western Mining Corporation (Philippines),
Inc. On January 27, 2004, the Supreme Court en banc promulgated its
decision declaring the unconstitutionality of certain provisions of RA 7942 as
well as of the entire FTAA executed between the government and WMCP,
mainly on the finding that FTAAs are service contracts prohibited by the 1987
Constitution. Subsequently, respondents filed separate Motions for
Reconsideration.
In a Resolution dated March 9, 2004, the Supreme Court required

petitioners to comment. The case was set for Oral Argument on June 29,
2004. After hearing the opposing sides, the Court required the parties to
submit their respective memoranda in amplification of their arguments. On
the same day, the Court noted inter alia, the Manifestation and Motion for
Intervention filed by the Office of the Solicitor General on behalf of public
respondents. The OSG said that it was not interposing any objection to the
Motion for Intervention filed by the Chamber of Mines of the Philippines, Inc.
and was in fact joining and adopting the latter’s Motion for Reconsideration.
Memoranda were accordingly filed by the intervenor as well as by petitioners,
public respondents, and private respondent, dwelling at length on three
issues, namely, (1) mootness of the case by the sale of WMC shares in WMCP
to Sagittarius which 60% its equity is owned by Filipinos and by the
subsequent transfer and registration of the FTAA from WMCP to Sagittarius;
(2) constitutionality of the assailed provisions of the Mining Law, its
Implementing Rules and Regulations and the WMCP FTAA; and, (3) proper
interpretation of the phrase “agreements involving either technical of
financial assistance contained in paragraph 4 of Section 2 of Article XII of the
Constitution.
Among the assailed provisions of the Mining Law were Section 80 and
the colatilla in Section 84, as well as Section 112. The petitioners alleged that
these sections limit the State’s share in a mineral production-sharing
agreement to just the excise tax on the mineral product and the WMCP FTAA
contains a provision which grants the contractor unbridled and automatic
authority to convert the FTAA into MPSA (mineral production-sharing
agreements. However, the Court ruled that these were not argued upon by
the parties in their respective pleadings. Also, the Court stated that these
371
particular provisions do not come within issues that were defined and
delineated by during the Oral Argument, particularly the third issue, which
pertained exclusively to FTAAs.
Later, WMCP submitted its Reply Memorandum, while the OSG, in

compliance to the order of the Supreme Court, filed a Compliance submitting
copies of more FTAAs entered into by the government.
ISSUE:
Whether or not petitioners have a right to assail the statutory
provisions (Sections 80, 84 and 112) for its unconstitutionality.
RULING:
The Supreme Court held that it cannot rule on mere surmises and
hypothetical assumptions, without firm factual anchor, in relation to the
assailed provisions. Stated in Article 1421, “The defense of illegality of
contracts is not available to third persons whose interests are not directly
affected.” The Court thus held that due process requires hearing the parties
who have a real legal interests in the MPSAs (i.e. the parties who executed
them) before the MPSAs can be reviewed, or worse, struck down by the
Court.
Thus, the petitioners have no right to question the assailed provisions.

COMMISSION ON ELECTIONS, COMELEC CHAIRMAN ALFREDO L.

BENIPAYO, COMELEC COMMISSIONERS RESURRECCION Z. BORRA
and FLORENTINO A. TUASON, JR., petitioners,
VS. JUDGE MA. LUISA QUIJANO-PADILLA, REGIONAL TRIAL COURT
OF QUEZON CITY, BRANCH 215 and PHOTOKINA MARKETING CORP.,
respondents
September 18, 2002
G.R. No. 151992
FACTS:
In 1996, the Philippine Congress passed Republic Act No. 8189,
otherwise known as the "Voter's Registration Act of 1996," providing for the
modernization and computerization of the voters' registration list and the
appropriate of funds therefor "in order to establish a clean, complete,
permanent and updated list of voters."
Pursuant thereto, the Commission on Elections (COMELEC)

promulgated Resolution No. 00-0315 approving in principle the Voter's
Registration and Identification System Project [(VRIS) Project]. The VRIS
Project envisions a computerized database system for the May 2004
Elections. The idea is to have a national registration of voters whereby each
registrant's fingerprints will be digitally entered into the system and upon
completion of registration, compared and matched with other entries to
eliminate double entries. A tamper-proof and counterfeit-resistant voter's
identification card will then be issues to each registrant as a visual record of
the registration.
On September 9, 1999, the COMELEC issued invitations to pre-qualify

and bid for the supply and installations of information technology equipment
and ancillary services for its VRIS Project. Private respondent Photokina
Marketing Corporation (PHOTOKINA) pre-qualified and was allowed to
participate as one of the bidders, and eventually won. A contract was
372
perfected between the parties, but COMELEC failed to comply with the
contract due to insufficiency of funds. Respondent filed a suit against
petitioner, of which respondent judge granted the writ of prohibitory
injunction to private respondent. Upon motion for reconsideration of both
parties, respondent judge granted the writ of mandatory injunction of
respondent and denying the Omnibus Motion of petitioner. Hence, the instant
petition for certiorari filed by the Office of the Solicitor General (OSG) in
behalf of then COMELEC. PHOTOKINA filed a Comment with Motion to
Dismiss, the present petition, on two procedural grounds. First, the petition
violates the doctrine of hierarchy of courts. And second, the OSG has no
authority and/or standing to file the petition considering that the petitioners
have not been authorized by the COMELEC en banc to take such action.
Without the concurrence of at least a majority of the members of the
COMELEC, neither petitioners nor the OSG could file the petition in behalf of
the COMELEC.
ISSUE:
Whether or not the Office of the Solicitor-General has no authority
and/or standing to file the petition considering that the petitioners have not
been authorized by the COMELEC en banc to take such action.
RULING:
The OSG is an independent office. Its hands are not shackled to the
cause of its client agency. In the discharge of its task, the primordial concern
of the OSG is to see to it that the best interest of the government is upheld.
This is regardless of the fact that what it perceived as the "best interest of the
government" runs counter to its client agency’s position. Endowed with a
broad perspective that spans the legal interest of virtually the entire
government officialdom, the OSG may transcend the parochial concerns of a
particular client agency and instead, promote and protect the public wealth.
The Supreme Court’s ruling in Orbos vs. Civil Service Commission, is
relevant, thus:
"x x x It is incumbent upon him (Solicitor General) to present to the court

what he considers would legally uphold the best interest of the government
although it may run counter to a client’s position. x x x."
In the present case, it appears that after the Solicitor General studied
the issues he found merit in the cause of the petitioner based on the
applicable law and jurisprudence. Thus, it is his duty to represent the
petitioner as he did by filing this petition. He cannot be disqualified from
appearing for the petitioner even if in so doing his representation runs
against the interests of the CSC.
This is not the first time that the Office of the Solicitor General has
taken a position adverse to his clients like the CSC, the National Labor
Relations Commission, among others, and even the People of the Philippines.
x x x"
Hence, while petitioners’ stand is contrary to that of the majority of the

Commissioners, still, the OSG may represent the COMELEC as long as in its
assessment, such would be for the best interest of the government. For,
indeed, in the final analysis, the client of the OSG is not the agency but no
less than the Republic of the Philippines in whom the plenum of sovereignty
resides.
Moreover, it must be emphasized that petitioners are also public

officials entitled to be represented by the OSG. Under Executive Order No.
292 and Presidential Decree No. 478, the OSG is the lawyer of the
government, its agencies and instrumentalities, and its officials or agents.
Surely, this mandate includes the three petitioners who have been impleaded
as public respondents in Special Civil Action No. Q-01-45405.
373
Anent the alleged breach of the doctrine of hierarchy of courts, suffice

it to say that it is not an iron-clad dictum. On several instances where this
Court was confronted with cases of national interest and of serious
implications, it never hesitated to set aside the rule and proceed with the
judicial determination of the case. The case at bar is of similar import. It is
in the interest of the State that questions relating to government contracts be
settled without delay. This is more so when the contract, as in this case,
involves the disbursement of public funds and the modernization of our
country’s election process, a project that has long been overdue.

MANSUETO CUATON, petitioner,

VS. REBECCA SALUD and
COURT OF APPEALS (Special Fourteenth Division), respondents
G.R. No. 158382
January 27, 2004

374
FACTS:
On January 5, 1993, respondent Rebecca Salud, joined by her husband
Rolando Salud, instituted a suit for foreclosure of real estate mortgage with
damages against petitioner Mansueto Cuaton and his mother, Conchita
Cuaton, with the trial court. The trial court rendered a decision declaring the
mortgage constituted on October 31, 1991 as void, because it was executed
by Mansueto Cuaton in favor of Rebecca Salud without expressly stating that
he was merely acting as a representative of Conchita Cuaton, in whose name
the mortgaged lot was titled. The court ordered petitioner to pay Rebecca
Salud, inter alia, the loan secured by the mortgage in the amount of
P1,000,000 plus a total P610,000.00 representing interests of 10% and 8%
per month for the period February 1992 to August 1992.
Both parties filed their respective notices of appeal.
The Court of Appeals affirmed the judgment of the trial court.
Petitioner filed a motion for partial reconsideration of the trial court’s
decision with respect to the award of interest in the amount of P610,000.00,
arguing that the same was iniquitous and exorbitant. This was denied by the
Court of Appeals.
ISSUE:
Whether or not the excessive interest rates cannot be considered as an
issue presented for the first time on appeal.
RULING:
The contention regarding the excessive interest rates cannot be
considered as an issue presented for the first time on appeal. The records
show that petitioner raised the validity of the 10% monthly interest in his
answer filed with the trial court. To deprive him of his right to assail the
imposition of excessive interests would be to sacrifice justice to technicality.
Furthermore, an appellate court is clothed with ample authority to review
rulings even if they are not assigned as errors. This is especially so if the
court finds that their consideration is necessary in arriving at a just decision
of the case before it. The Court has consistently held that an unassigned
error closely related to an error properly assigned, or upon which a
determination of the question raised by the error properly assigned is
dependent, will be considered by the appellate court notwithstanding the
failure to assign it as an error. Since respondents pointed out the matter of
interest in their Appellants’ Brief before the Court of Appeals, the fairness of
the imposition thereof was opened to further evaluation. The Court therefore
is empowered to review the same.
Petition granted. Decision modified. The interest rates of 10% and 8%
per month imposed by the trial court is reduced to 12% per annum, computed
from the date of the execution of the loan on October 31, 1991 until finality of
this decision. After the judgment becomes final and executory until the
obligation is satisfied, the amount due shall further earn interest at 12% per
year.

375

DEMOSTHENES P. AGAN, JR., et al., petitioners, VS.

PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA,
respondents
G.R. No. 155001
January 21, 2004
FACTS:
On October 5, 1994, Asia’s Emerging Dragon Corp. (AEDC) submitted an unsolicited proposal to the Philippine
Government through the Department of Transportation and Communication (DOTC) and Manila International Airport
Authority (MIAA) for the construction and development of the NAIA IPT III under a build-operate-and-transfer
arrangement pursuant to R.A. No. 6957, as amended by R.A. No. 7718 (BOT Law). In accordance with the BOT Law and
its Implementing Rules and Regulations (Implementing Rules), the DOTC/MIAA invited the public for submission of
competitive and comparative proposals to the unsolicited proposal of AEDC.
On September 20, 1996 a consortium composed of the People’s Air Cargo and Warehousing Co., Inc.
(Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security Bank) (collectively, Paircargo
Consortium), submitted their competitive proposal to the Prequalification Bids and Awards Committee (PBAC).After
finding that the Paircargo Consortium submitted a bid superior to the unsolicited proposal of AEDC and after failure by
AEDC to match the said bid, the DOTC issued the notice of award for the NAIA IPT III project to the Paircargo Consortium,
which later organized into herein respondent PIATCO. Hence, on July 12, 1997, the Government, through then DOTC
Secretary Arturo T. Enrile, and PIATCO, through its President, Henry T. Go, signed the “Concession Agreement for the
Build-Operate-and-Transfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal III” (1997
Concession Agreement).
On November 26, 1998, the 1997 Concession Agreement was superseded by the Amended and Restated
Concession Agreement (ARCA) containing certain revisions and modifications from the original contract. A series of
supplemental agreements was also entered into by the Government and PIATCO. The First Supplement was signed on
August 27, 1999, the Second Supplement on September 4, 2000, and the Third Supplement on June 22, 2001 (collectively,
Supplements) (the 1997 Concession Agreement, ARCA and the Supplements collectively referred to as the PIATCO
Contracts).On September 17, 2002, various petitions were filed before this Court to annul the 1997 Concession
Agreement, the ARCA and the Supplements and to prohibit the public respondents DOTC and MIAA from
implementing them.
In a decision dated May 5, 2003, this Court granted the said petitions and declared the 1997 Concession
Agreement, the ARCA and the Supplements null and void.Respondent PIATCO, respondent-Congressmen and respondents-
intervenors now seek the reversal of the May 5, 2003 decision and pray that the petitions be dismissed. In the alternative,
PIATCO prays that the Court should not strike down the entire 1997 Concession Agreement, the ARCA and its
supplements in light of their separability clause.
Respondent-Congressmen and NMTAI also pray that in the alternative, the cases at bar should be referred to
arbitration pursuant to the provisions of the ARCA. PIATCO-Employees pray that the petitions be dismissed and remanded
to the trial courts for trial on the merits or in the alternative that the 1997 Concession Agreement, the ARCA and the
Supplements be declared valid and binding.
ISSUE:
Whether or not that petitioners lack legal personality to file the cases at bar as they are not real parties in
interest who are bound principally or subsidiarily to the PIATCO Contracts.
RULING:
The determination of whether a person may institute an action or become a party to a suit brings to fore the
concepts of real party in interest, capacity to sue and standing to sue. To the legally discerning, these three concepts are
different although commonly directed towards ensuring that only certain parties can maintain an action. As defined in the
Rules of Court, a real party in interest is the party who stands to be benefited or injured by the judgment in the suit or the
party entitled to the avails of the suit.Capacity to sue deals with a situation where a person who may have a cause of
action is disqualified from bringing a suit under applicable law or is incompetent to bring a suit or is under some legal
disability that would prevent him from maintaining an action unless represented by a guardian ad litem.
Legal standing is relevant in the realm of public law. In certain instances, courts have allowed private parties to
institute actions challenging the validity of governmental action for violation of private rights or constitutional principles.
In these cases, courts apply the doctrine of legal standing by determining whether the party has a direct and personal
interest in the controversy and whether such party has sustained or is in imminent danger of sustaining an injury as a
result of the act complained of, a standard which is distinct from the concept of real party in interest. Measured by this
yardstick, the application of the doctrine on legal standing necessarily involves a preliminary consideration of the merits of
the case and is not purely a procedural issue.
Considering the nature of the controversy and the issues raised in the cases at bar, this Court affirms its ruling
that the petitioners have the requisite legal standing. The petitioners in G.R. Nos. 155001 and 155661 are employees of
service providers operating at the existing international airports and employees of MIAA while petitioners-intervenors are
service providers with existing contracts with MIAA and they will all sustain direct injury upon the implementation of the
PIATCO Contracts. The 1997 Concession Agreement and the ARCA both provide that upon the commencement of
operations at the NAIA IPT III, NAIA Passenger Terminals I and II will cease to be used as international passenger
terminals. Further, the ARCA provides:
(d) For the purpose of an orderly transition, MIAA shall not renew any expired concession
agreement relative to any service or operation currently being undertaken at the Ninoy Aquino International
Airport Passenger Terminal I, or extend any concession agreement which may expire subsequent hereto,
except to the extent that the continuation of the existing services and operations shall lapse on or before the
In-Service Date.
Beyond iota of doubt, the implementation of the PIATCO Contracts, which the petitioners and petitioners-
intervenors denounce as unconstitutional and illegal, would deprive them of their sources of livelihood.
Under settled jurisprudence, one's employment, profession, trade, or calling is a property right and is protected
from wrongful interference. It is also self evident that the petitioning service providers stand in imminent danger of losing
legitimate business investments in the event the PIATCO Contracts are upheld.
Over and above all these, constitutional and other legal issues with far-reaching economic and social

376
implications are embedded in the cases at bar, hence, this Court liberally granted legal standing to the petitioning
members of the House of RepresentativesFirst, at stake is the build-operate-and–transfer contract of the country’s premier
international airport with a projected capacity of 10 million passengers a year. Second, the huge amount of investment to
complete the project is estimated to be P13,000,000,000.00. Third, the primary issues posed in the cases at bar demand a
discussion and interpretation of the Constitution, the BOT Law and its implementing rules which have not been passed
upon by this Court in previous cases. They can chart the future inflow of investment under the BOT Law.
The Court notes the bid of new parties to participate in the cases at bar as respondents-intervenors, namely, (1)
the PIATCO Employees and (2) NMTAI (collectively, the New Respondents-Intervenors). After the Court’s Decision, the
New Respondents-Intervenors filed separate Motions for Reconsideration-In-Intervention alleging prejudice and direct
injury. PIATCO employees claim that “they have a direct and personal interest [in the controversy]... since they stand to
lose their jobs should the government’s contract with PIATCO be declared null and void.” NMTAI, on the other hand,
represents itself as a corporation composed of responsible tax-paying Filipino citizens with the objective of “protecting and
sustaining the rights of its members to civil liberties, decent livelihood, opportunities for social advancement, and to a
good, conscientious and honest government.”
The Rules of Court govern the time of filing a Motion to Intervene. Section 2, Rule 19 provides that a Motion to
Intervene should be filed “before rendition of judgment....” The New Respondents-Intervenors filed their separate motions
after a decision has been promulgated in the present cases. They have not offered any worthy explanation to justify their
late intervention. Consequently, their Motions for Reconsideration-In-Intervention are denied for the rules cannot be
relaxed to await litigants who sleep on their rights. In any event, a sideglance at these late motions will show that they
hoist no novel arguments.

SENATOR ROBERT S. JAWORSKI, petitioner, vs. PHILIPPINE

AMUSEMENT AND GAMING CORPORATION and SPORTS AND GAMES
ENTERTAINMENT CORPORATION, respondents
2004 Jan 14
G.R. No. 144463
FACTS:
On March 31, 1998, PAGCOR’s board of directors approved an
instrument denominated as “Grant of Authority and Agreement for the
Operation of Sports Betting and Internet Gaming”, which granted SAGE the
authority to operate and maintain Sports Betting station in PAGCOR’s casino
locations, and Internet Gaming facilities to service local and international
bettors, provided that to the satisfaction of PAGCOR, appropriate safeguards
and procedures are established to ensure the integrity and fairness of the
games.
Petitioner, in his capacity as member of the Senate and Chairman of the

Senate Committee on Games, Amusement and Sports, files the instant
petition, praying that the grant of authority by PAGCOR in favor of SAGE be
nullified. He maintains that PAGCOR committed grave abuse of discretion
amounting to lack or excess of jurisdiction when it authorized SAGE to
operate gambling on the internet. He contends that PAGCOR is not
authorized under its legislative franchise, P.D. 1869, to operate gambling on
the internet for the simple reason that the said decree could not have possibly
contemplated internet gambling since at the time of its enactment on July 11,
1983 the internet was yet inexistent and gambling activities were confined
exclusively to real-space. Further, he argues that the internet, being an
international network of computers, necessarily transcends the territorial
jurisdiction of the Philippines, and the grant to SAGE of authority to operate
internet gambling contravenes the limitation in PAGCOR’s franchise, under
Section 14 of P.D. No. 1869. According to petitioner, internet gambling does
not fall under any of the categories of the authorized gambling activities
enumerated under Section 10 of P.D. No. 1869 which grants PAGCOR the
“right, privilege and authority to operate and maintain gambling casinos,
clubs, and other recreation or amusement places, sports gaming pools, within
the territorial jurisdiction of the Republic of the Philippines.”
Respondents argue that petitioner does not have the requisite personal
and substantial interest to impugn the validity of PAGCOR’s grant of authority
to SAGE.
ISSUE:
377
Whether or not the petitioner has legal standing to file the instant
petition as a concerned citizen or as a member of the Philippine Senate.
RULING:
Objections to the legal standing of a member of the Senate or House of
Representative to maintain a suit and assail the constitutionality or validity of
laws, acts, decisions, rulings, or orders of various government agencies or
instrumentalities are not without precedent. Ordinarily, before a member of
Congress may properly challenge the validity of an official act of any
department of the government there must be an unmistakable showing that
the challenged official act affects or impairs his rights and prerogatives as
legislator. However in a number of cases, the Court clarified that where a
case involves an issue of utmost importance, or one of overreaching
significance to society, the Court, in its discretion, can brush aside procedural
technicalities and take cognizance of the petition. Considering that the
instant petition involves legal questions that may have serious implications on
public interests, petitioner has the requisite legal standing to file this petition.
The instant petition is GRANTED. The “Grant of Authority and

Agreement to Operate Sports Betting and Internet Gaming” executed by
PAGCOR in favor of SAGE is declared NULL and VOID.
PROHIBITED CONTRACTS: EFFECTS AND REMEDIES IN CASE

ONE PARTY IS INNOCENT / DISADVANTAGED
1. INFORMATION TECH. FOUNDATION VS. COMELEC, JAN.

13, 2004
2. PABUGAIS VS. SAHIJWANI, 423 SCRA 596
3. LIGUEZ VS. CA, 102 PHIL 577
4. PHILBANK VS. LUI SHE, 21 SCRA 52
5. EPG CONSTRUCTION VS. VIGILAR, 354 SCRA 566
6. GO CHAN VS. YOUNG, 354 SCRA 566
7. FRANCISCO VS. HERRERA, 392 SCRA 317
8. MENDEZONA VS. OZAMIZ, 376 SCRA 482
INFORMATION TECHNOLOGY FOUNDATION OF THE PHILIPPINES

VS. COMMISSION ON ELECTIONS
2004 Jan 13
G.R. No. 159139
FACTS:
On June 7, 1995, Congress passed Republic Act 8046, which authorized
Comelec to conduct a nationwide demonstration of a computerized election
system and allowed the poll body to pilot-test the system in the March 1996
elections in the Autonomous Region in Muslim Mindanao (ARMM). On
December 22, 1997, Congress enacted Republic Act 8436authorizing Comelec
to use an automated election system (AES) for the process of voting, counting
votes and canvassing/consolidating the results of the national and local
elections. It also mandated the poll body to acquire automated counting
machines (ACMs), computer equipment, devices and materials; and to adopt
new electoral forms and printing materials.

378
Initially intending to implement the automation during the May 11,
1998 presidential elections, Comelec eventually decided against full national
implementation and limited the automation to the Autonomous Region in
Muslim Mindanao (ARMM). However, due to the failure of the machines to
read correctly some automated ballots in one town, the poll body later
ordered their manual count for the entire Province of Sulu.
In the May 2001 elections, the counting and canvassing of votes for
both national and local positions were also done manually, as no additional
ACMs had been acquired for that electoral exercise allegedly because of time
constraints.
On October 29, 2002, Comelec adopted in its Resolution 02-0170 a

modernization program for the 2004 elections. It resolved to conduct biddings
for the three (3) phases of its Automated Election System; namely, Phase I -
Voter Registration and Validation System; Phase II - Automated Counting and
Canvassing System; and Phase III - Electronic Transmission.
On January 24, 2003, President Macapagal-Arroyo issued EO No. 172,

which allocated the sum of P2.5 billion to fund the AES for the May 10, 2004
elections. Upon the request of Comelec, she authorized the release of an
additional P500 million.
On January 28, 2003, the Commission issued an “Invitation to Apply for

Eligibility and to Bid.
On February 17, 2003, the poll body released the Request for Proposal
(RFP) to procure the election automation machines. The Bids and Awards
Committee (BAC) of Comelec convened a pre-bid conference on February 18,
2003 and gave prospective bidders until March 10, 2003 to submit their
respective bids.
Among others, the RFP provided that bids from manufacturers,

suppliers and/or distributors forming themselves into a joint venture may be
entertained, provided that the Philippine ownership thereof shall be at least
60 percent. Joint venture is defined in the RFP as “a group of two or more
manufacturers, suppliers and/or distributors that intend to be jointly and
severally responsible or liable for a particular contract.” Basically, the public
bidding was to be conducted under a two-envelope/two stage system. The
bidder’s first envelope or the Eligibility Envelope should establish the bidder’s
eligibility to bid and its qualifications to perform the acts if accepted. On the
other hand, the second envelope would be the Bid Envelope itself.
Out of the 57 bidders, the BAC found MPC and the Total Information
Management Corporation (TIMC) eligible. For technical evaluation, they
were referred to the BAC’s Technical Working Group (TWG) and the
Department of Science and Technology (DOST).
In its Report on the Evaluation of the Technical Proposals on Phase II,

DOST said that both MPC and TIMC had obtained a number of failed marks in
the technical evaluation. Notwithstanding these failures, Comelec en banc,
on April 15, 2003, promulgated Resolution No. 6074 awarding the project to
MPC. The Commission publicized this Resolution and the award of the project
to MPC on May 16, 2003.
On May 29, 2003, five individuals and entities (including the herein
Petitioners Information Technology Foundation of the Philippines, represented
by its president, Alfredo M. Torres; and Ma. Corazon Akol) wrote a letter to
Comelec Chairman Benjamin Abalos Sr. They protested the award of the
Contract to Respondent MPC “due to glaring irregularities in the manner in
which the bidding process had been conducted.” Citing therein the
noncompliance with eligibility as well as technical and procedural
379
requirements (many of which have been discussed at length in the Petition),
they sought a re-bidding. However, the Comelec chairman -- speaking through
Atty. Jaime Paz, his head executive assistant -- rejected the protest and
declared that the award “would stand up to the strictest scrutiny.”
Hence, the present Petition.
ISSUE:
Whether or not the Commission on Elections, the agency vested with
the exclusive constitutional mandate to oversee elections, gravely abused its
discretion when, in the exercise of its administrative functions, it awarded to
MPC the contract for the second phase of the comprehensive Automated
Election System.
RULING:
Yes. There is grave abuse of discretion (1) when an act is done
contrary to the Constitution, the law or jurisprudence; or (2) when it is
executed whimsically, capriciously or arbitrarily out of malice, ill will or
personal bias. In the present case, the Commission on Elections approved the
assailed Resolution and awarded the subject Contract not only in clear
violation of law and jurisprudence, but also in reckless disregard of its own
bidding rules and procedure.
For the automation of the counting and canvassing of the ballots in the
2004 elections, Comelec awarded the Contract to “Mega Pacific Consortium”
an entity that had not participated in the bidding. Despite this grant, the poll
body signed the actual automation Contract with “Mega Pacific eSolutions,
Inc.,” a company that joined the bidding but had not met the eligibility
requirements.
Comelec awarded this billion-peso undertaking with inexplicable haste,

without adequately checking and observing mandatory financial, technical
and legal requirements. It also accepted the proferred computer hardware
and software even if, at the time of the award, they had undeniably failed to
pass eight critical requirements designed to safeguard the integrity of
elections, especially the following three items: (a) They failed to achieve the
accuracy rating criteria of 99.9995 percent set-up by the Comelec itself, (b)
They were not able to detect previously downloaded results at various
canvassing or consolidation levels and to prevent these from being inputted
again and (c) They were unable to print the statutorily required audit trails of
the count/canvass at different levels without any loss of data
Because of the foregoing violations of law and the glaring grave abuse
of discretion committed by Comelec, the Court declared null and void the
assailed Resolution and the subject Contract. The illegal, imprudent and
hasty actions of the Commission have not only desecrated legal and
jurisprudential norms, but have also cast serious doubts upon the poll body’s
ability and capacity to conduct automated elections. Truly, the pith and soul
of democracy -- credible, orderly, and peaceful elections -- has been put in
jeopardy by the illegal and gravely abusive acts of Comelec.
The letter-protest is sufficient compliance with the requirement to

exhaust administrative remedies particularly because it hews closely to the
procedure outlined in Section 55 of RA 9184. And even without that May 29,
2003 letter-protest, the Court still holds that petitioners need not exhaust
administrative remedies in the light of Paat v. Court of Appeals. Paat
enumerates the instances when the rule on exhaustion of administrative
remedies may be disregarded, as follows: “(1) when there is a violation of due
process, (2) when the issue involved is purely a legal question, (3) when the
administrative action is patently illegal amounting to lack or excess of

jurisdiction, (4) when there is estoppel on the part of the administrative
380
agency concerned, (5) when there is irreparable injury, (6) when the
respondent is a department secretary whose acts as an alter ego of the
President bears the implied and assumed approval of the latter, (7) when to
require exhaustion of administrative remedies would be unreasonable, (8)
when it would amount to a nullification of a claim, (9) when the subject
matter is a private land in land case proceedings, (10) when the rule does not
provide a plain, speedy and adequate remedy, and (11) when there are
circumstances indicating the urgency of judicial intervention.”
The present controversy precisely falls within the exceptions listed as

Nos. “(7) when to require exhaustion of administrative remedies would be
unreasonable; (10) when the rule does not provide a plain, speedy and
adequate remedy, and (11) when there are circumstances indicating the
urgency of judicial intervention.” As already stated, Comelec itself made the
exhaustion of administrative remedies legally impossible or, at the very least,
“unreasonable.”

381
PROHIBITED CONTRACTS: EFFECTS AND REMEDIES IN CASE ONE

PARTY IS INNOCENT / DISADVANTAGED
TEDDY G. PABUGAIS v. DAVE P. SAHIJWANI

G.R. No. 156846
February 23, 2004
423 SCRA 596
FACTS:
Pursuant to an “Agreement And Undertaking” on December 3, 1993,
petitioner Teddy G. Pabugais, in consideration of the amount of
P15,487,500.00, agreed to sell to respondent Dave P. Sahijwani a lot
containing 1,239 square meters located at Jacaranda Street, North Forbes
Park, Makati, Metro Manila. Respondent paid petitioner the amount of
P600,000.00 as option/reservation fee and the balance of P14,887,500.00 to
be paid within 60 days from the execution of the contract, simultaneous with
delivery of the owner’s duplicate Transfer Certificate of Title in respondent’s
name the Deed of Absolute Sale; the Certificate of Non-Tax Delinquency on
real estate taxes and Clearance on Payment of Association Dues. The parties
further agreed that failure on the part of respondent to pay the balance of the
purchase price entitles petitioner to forfeit the P600,000.00
option/reservation fee; while non-delivery by the latter of the necessary
documents obliges him to return to respondent the said option/reservation fee
with interest at 18% per annum.
Petitioner failed to deliver the required documents. In compliance with

their agreement, he returned to respondent the latter’s P600,000.00
option/reservation fee by way of Far East Bank & Trust Company Check,
which was, however, dishonored.
Petitioner claimed that he twice tendered to respondent, through his

counsel, the amount of P672,900.00 (representing the P600,000.00
option/reservation fee plus 18% interest per annum computed from December
3, 1993 to August 3, 1994) in the form of Far East Bank & Trust Company
Manager’s Check No. 088498, dated August 3, 1994, but said counsel refused
to accept the same. On August 11, 1994, petitioner wrote a letter to
respondent saying that he is consigning the amount tendered with the
Regional Trial Court of Makati City. On August 15, 1994, petitioner filed a
complaint for consignation.
Respondent’s counsel, on the other hand, admitted that his office

received petitioner’s letter dated August 5, 1994, but claimed that no check
was appended thereto. He averred that there was no valid tender of payment
because no check was tendered and the computation of the amount to be
tendered was insufficient, because petitioner verbally promised to pay 3%
monthly interest and 25% attorney’s fees as penalty for default, in addition to
the interest of 18% per annum on the P600,000.00 option/reservation fee.
On November 29, 1996, the trial court rendered a decision declaring

the consignation invalid for failure to prove that petitioner tendered payment
to respondent and that the latter refused to receive the same. Petitioner
appealed the decision to the Court of Appeals. Petitioner’s motion to
withdraw the amount consigned was denied by the Court of Appeals and the
decision of the trial court was affirmed.
On a motion for reconsideration, the Court of Appeals declared the

consignation as valid in an Amended Decision dated January 16, 2003. It held
that the validity of the consignation had the effect of extinguishing

382
petitioner’s obligation to return the option/reservation fee to respondent.
Hence, petitioner can no longer withdraw the same.
Unfazed, petitioner filed the instant petition for review contending that
he can withdraw the amount deposited with the trial court as a matter of
right because at the time he moved for the withdrawal thereof, the Court of
Appeals has yet to rule on the consignation’s validity and the respondent had
not yet accepted the same.
ISSUE:
Whether or not assigning the amount of P672, 900.00 to Atty. De
Guzman is prohibited.
RULING:
The amount consigned with the trial court can no longer be withdrawn
by petitioner because respondent’s prayer in his answer that the amount
consigned be awarded to him is equivalent to an acceptance of the
consignation, which has the effect of extinguishing petitioner’s obligation.
Moreover, petitioner failed to manifest his intention to comply with the

“Agreement And Undertaking” by delivering the necessary documents and the
lot subject of the sale to respondent in exchange for the amount deposited.
Withdrawal of the money consigned would enrich petitioner and unjustly
prejudice respondent.
The withdrawal of the amount deposited in order to pay attorney’s fees

to petitioner’s counsel, Atty. De Guzman, Jr., violates Article 1491 of the Civil
Code which forbids lawyers from acquiring by assignment, property and
rights which are the object of any litigation in which they may take part by
virtue of their profession. Furthermore, Rule 10 of the Canons of Professional
Ethics provides that “the lawyer should not purchase any interest in the
subject matter of the litigation which he is conducting.” The assailed
transaction falls within the prohibition because the Deed assigning the
amount of P672,900.00 to Atty. De Guzman, Jr., as part of his attorney’s fees
was executed during the pendency of this case with the Court of Appeals. In
his Motion to Intervene, Atty. De Guzman, Jr., not only asserted ownership
over said amount, but likewise prayed that the same be released to him. That
petitioner knowingly and voluntarily assigned the subject amount to his
counsel did not remove their agreement within the ambit of the prohibitory
provisions. To grant the withdrawal would be to sanction a void contract.
WHEREFORE, in view of all the foregoing, the instant petition for

review is DENIED.

383

LIGUEZ VS. COURT OF APPEALS

102 PHIL 577
FACTS:
Petitioner filed a complaint for the recovery of parcel of land against
the widow and heirs of Salvador Lopez. Petitioner averred that he is the
owner of the aforementioned parcel of land pursuant to a Deed of Donation
executed in her favor by the late owner, Salvador Lopez. The defense
interposed that the donation was null and void for having illicit cause or
consideration which was the petitioner’s entering into a marital relations with
Salvador, a married man, and that the property had been adjudicated to the
appellees as heirs of Salvador Lopez by the Court of First Instance.
Meanwhile, the Court of Appeals found that the Deed of Donation was
prepared by a Justice of Peace and was ratified and signed when petitioner
Liquez was still a minor, 16 years of age. It was the ascertainment of the
Court of Appeals that the donated land belonged to the conjugal partnership
of Salvador and his wife and that the Deed of Donation was never recorded.
Hence, the Court of Appeals held that the Deed of Donation was inoperative
and null and void because the donation was tainted with illegal cause or
consideration.
ISSUE:
Whether or not the Deed of Donation is void for having illicit cause or
consideration.
RULING:
NO. Under Article 1279 of the Civil Code of 1989, which was the
governing law during the execution of the Deed of Donation, the liberality of
the donor is deemed cover only in those contracts that are pure beneficence.
In these contracts, the idea of self interest is totally absent in the part of the
384
transferee. Here, the facts as found demonstrated that in making the
donation, Salvador Lopez was not moved exclusively by the desire to benefit
the petitioner but also to secure her cohabiting with him. Petitioner seeks to
differentiate between the liberality of Lopez as cause and his desire as a
motive. However, motive may be regarded as cause when it predetermined
the purpose of the contract. The Court of Appeals rejected the claim of
petitioner on the ground on the rule on pari delicto embodied in Article 1912
of the Civil Code. However, this rule cannot be applied in the case because it
cannot be said that both parties had equal guilt where petitioner was a mere
minor when the donation was made and that it was not shown that she was
fully aware of the terms of the said donation.

PHILBANK VS. LUI SHE

21 SCRA 52
FACTS:
Justinia Santos was the owner of the property where a restaurant
owned by Weng Heng is located. Being 90 years of age, without any surviving
relatives, delivered to Weng being closed to her then, various sum of money
for safekeeping. Subsequently, she executed a contract of lease in favor of
Weng for a period of 50 years. However, the lessee was given the right to
withdraw at any time from the agreement. Subsequently, she again executed
another contract giving Weng the option to buy the premises. The option was
conditioned on Weng’s obtaining a Filipino citizenship, which however, Weng
failed to obtain. After which, Justinia again executed two other contracts,
extending the term of the lease to 99 years and another fixing the term of the
option to 50 years. However, a year later, she filed a complaint before the
trial court alleging that the various contracts were executed by her because
of machination, and inducement practiced by Weng, thereby she directed her
executor to secure the annulment of the contract.
ISSUE:
385
Whether or not the various contracts were void.
RULING:
Article 1308 of the Civil Code creates no impediment to the insertion in
a contract of a resolutory condition permitting the cancellation of the contract
by one of the parties. Such a stipulation does not make either the validity or
the fulfillment of the contract dependent upon the will of the party to whom It
conceded the privilege of the cancellation.
In the case, the lease for an alien for a reasonable period is valid. So is
the option giving the alien the right to buy the real property subject to the
condition that he must obtain Filipino citizenship. Since alien’s residence in
the Philippines is temporary, they may be grated temporary rights such as a
lease contract which is not forbidden. However, if the alien is given not only
the lease of, but also the option to buy a piece of land by virtue of which the
Filipino owner cannot sell, or otherwise dispose of his property, this to last for
50 years, then it becomes clear that the arrangement is a virtual transfer of
ownership. As such, the constitutional ban against alien landholding is in
grave peril.
However, it does not follow that because the parties are in pari delicto,
they will be left where they are without relief. Article 1416 of the Civil Code
provides an exception when the agreement is not illegal per se but is merely
prohibited, and the prohibition by law is designed for the protection of the
plaintiff, he may, if public policy is thereby enhanced, recover what he had
paid on delivery.

EPG CONSTRUCTION VS. VIGILAR

259 SCRA 566
FACTS:
In 1989, the Ministry of Human Settlement through the BLISS
Development Corporation, initiated a housing project on a government
property. For this purpose, the MHS entered into a Memorandum of
Agreement (MOA) with the Ministry of Public Works (MPWH) and Highway
where the latter undertook to develop the housing site and construct therein
386
145 housing units. By virtue of the MOA, the MPWH forged individual
contracts with petitioners for the construction of the housing units. Under
the contracts, the scope of construction covered only 2/3 of each housing unit.
After complying, the MPWH undersecretary made a verbal request for the
additional construction, for the completion of the housing units, which the
petitioner agreed.
Subsequently, petitioner received payment for the construction work

duly covered by the individual contracts, however, the amount covering the
additional contracts were unpaid. The petitioner then sent a demand letter.
The MPWH assistant secretary averred that the money claim should be based
on quantum meruit to be forwarded to the COA. The amount of money was
finally released, however, the MPWH secretary denied the subject money
claim, which prompted the petitioner to file a case before the RTC. However,
the trial court dismissed the case.
ISSUE:
Whether or not the petitioner has the right to be compensated for the
public works housing project by virtue of the implied contract which was
verbally executed.
RULING:
YES, the petitioner has the right to be compensated for the additional
construction applying the principle of quantum meruit. Notably, the peculiar
circumstances present in the instant case buttress petitioner’s claim for
compensation for the additional construction, despite the illegality and void
nature of the “implied contracts” forged between the MPWH and petitioners.
In this matter, it is bear stressing that, the illegality of the subject contracts
proceeds from the express declaration or prohibition of the law, and not for
any intrinsic illegality. Stated differently, the subject contracts are not illegal
per se.
The Court cannot sanction an injustice so patent on its face and allow
itself to be an instrument in the perpetration thereof. Justice and equity
demands that the State’s cloak of invincibility against suit be shred in this
particular case and that the petitioners-contractors be duly compensated, on
the basis of quantum meruit, for the construction done on the public housing
project.
Petition is granted. Accordingly, the Commission on Audit is hereby

directed to determine as ascertain with dispatch the total compensation due
petitioners for the additional constructions on the housing project and to
allow payment thereof.

387

GO CHAN VS. YOUNG

354 SCRA 201
FACTS:
Gochan Realty was registered with the Security and Exchange
Commission with Felix Gochan Sr., Maria Tiong, Pedro Gochan, Tomasa
Gochan, Esteban Gochan and Crispo Gochan as its incorporators. Later, Felix
Gochan Sr.’s daughter, Alice, mother of herein respondents, inherited 50
shares of stocks in Gochan Realty from the former. Alice subsequently died
leaving the 50 shares to her husband, John Young Sr. Sometime in 1962, the
RTC adjudicated 6/14 of these shares to her children. When her children,
herein respondents, reached the age of majority, their father requested
Gochan Realty to partition the shares of his late wife by canceling the stock
certificate in his name and issuing, in lieu thereof, a new stock certificate in
favor of his children. The Realty however, refused.
Meanwhile, fifteen years later, Cecilia Uy and Miguel Uy filed a

complaint with the SEC for issuance of shares of stocks to the rightful
owners, nullification of shares of stock, reconveyance of the property
impressed with trust and damages. The petitioners moved to dismiss the
complaint. The SEC thereafter held that the Youngs were not shown to have
been stockholders stock holders of Gochan Realty to confer them with the
legal capacity to bring and maintain their action. That is why the case cannot
be considered as an intra-corporate controversy within the jurisdiction of the
Commission. The Court of Appeals, on appeal, held that the SEC had no
jurisdiction over the case as far as the heirs of Alice Gochan were concerned;
however, it upheld the capacity of Cecilia Gochan Uy and her spouse, Miguel
Uy.
ISSUE:
Whether or not the spouses Uy have personality to file the suit before
the Security and Exchange Commission.
RULING:
YES, the spouses have the personality. As a general rule, the
jurisdiction of a court or tribunal over the subject matter is determined by the
allegation in the complaint. The spouse averment in the complaint that the
purchase of her stocks by the corporation was null and void ab initio was
deemed admitted. It is elementary that a void contract produces no effect
either against or in favor of anyone; it cannot create, modify or extinguish the
juridical relations to where it attaches. Thus, Cecilia remains a stockholder of
the corporation in view of the nullity of the contract of sale. Although she
was no longer registered as a stock holder in the corporate record, the
admitted allegation in the complaint made her still a bona fide stock holder of
the corporation.

388

FRANCISCO VS. HERRERA

392 SCRA 317
FACTS:
Eligio Herrera Sr. was the owner of 2 parcels of land located in Cainta,
Rizal. On January 3, 1991, petitioner Julian Francisco bought from Herrera
the first parcel of land covered by tax Declaration No. 01-00495 for P1M pain
in installments from November 30, 1990 to August 10, 1991. Eventually,
Francisco bought the second parcel of land covered by TD No. 01-00497 for
P750T.
Thereafter, the children of Eligio Sr. tried to negotiate with petitioner

to increase the purchase price contending that it was grossly inadequate.
When petitioner refused, respondent Pastor Herrera, son of Eligio, filed a
complaint for annulment of sale. He claimed ownership over the second
parcel of land allegedly by virtue of a sale in his favor since 1973. Moreover,
he claimed that the first lot was subject to co-ownership of the surviving heirs
of his parents before the alleged sale to Francisco. Ultimately, Pastor alleged
that the sale of the 2 parcels of land was null and void on the ground that at
the time of sale, Eligio Sr. was already incapacitated to give consent to a
contract because of Senile Dementia which is characterized by deteriorating
mental and physical condition including loss of memory.
At variance, Francisco alleged that respondent was estopped from

assailing the sale of the lots because respondent had effectively ratified both
sales by receiving the consideration offered in each transaction.
On November 14, 1994, the trial court declared the Deeds of Sale null
and void. Francisco was ordered to return the lots in question including all
improvements. Concomitantly, Herrera was ordered to return the purchase
price of the lots sold.
ISSUE:
Whether or not the assailed contracts of sale are void or merely
voidable and hence capable of being ratified.
RULING:
YES, the Supreme Court ruled that the contracts are merely voidable or
annullable. Note that Article 1390 of the Civil Code specifically provides that
when an insane or demented person enters into a contract, the legal effect is
that the contract is voidable, not void or inexistent per se. Therefore, the
contracts of sale entered into by Eligio Sr. are valid and binding unless
annulled through a proper action filed in court seasonably. Furthermore, the
questioned annullable contract was rendered perfectly valid in this case
because of respondent’s acts of ratification. He actually received the
payments on behalf of his father further manifesting that he was agreeable to
the contracts. Similarly, respondent’s previous negotiation for an increase in
389
the price bolster that indeed there was ratification of what he himself
questions as a void contract.

MENDEZONA VS. OZAMIZ

376 SCRA 482
2002 Feb 6
FACTS:
A civil case for quieting of title was instituted on September 25, 1991
by petitioner spouses Mendezona as plaintiffs.
In their complaint, the petitioners, as plaintiffs therein, alleged that

petitioner spouses own a parcel of land each with almost similar areas
covered and described in Transfer Certificates of Title (TCT). The petitioners
ultimately traced their titles of ownership over their respective properties
from a notarized Deed of Absolute Sale dated April 28, 1989 executed in their
favor by Carmen Ozamiz for and in consideration of the sum of One Million
Forty Thousand Pesos (P1,040,000.00).
The petitioners initiated the suit to remove a cloud on their said

respective titles caused by the inscription thereon of a notice of lis pendens,
which came about as a result of an incident in a Special Proceeding of the
RTC. This Special Proceeding is a proceeding for guardianship over the
person and properties of Carmen Ozamiz.
In the course of the guardianship proceeding, the petitioners and the

oppositors thereto agreed that Carmen Ozamiz needed a guardian over her
person and her properties, and thus respondent Montalvan was designated as
guardian over the person of Carmen Ozamiz while petitioner Mendezona,
respondents Roberto J. Montalvan and Julio H. Ozamiz were designated as
joint guardians over the properties of the said ward.
The respondents opposed the petitioners’ claim of ownership of the

Lahug property and alleged that the titles issued in the petitioners names are
defective and illegal, and the ownership of the said property was acquired in
bad faith and without value inasmuch as the consideration for the sale is
grossly inadequate and unconscionable. Respondents further alleged that at
the time of the sale on April 28, 1989 Carmen Ozamiz was already ailing and
not in full possession of her mental faculties; and that her properties having

390
been placed in administration, she was in effect incapacitated to contract with
petitioners.
Trial on the merits ensued and the lower court ruled in favor of
petitioners. The appellate court reversed the factual findings of the trial
court and ruled that the Deed of Absolute Sale dated April 28, 1989 was a
simulated contract since the petitioners failed to prove that the consideration
was actually paid, and, furthermore, that at the time of the execution of the
contract the mental faculties of Carmen Ozamiz were already seriously
impaired. Thus, the appellate court declared that the Deed of Absolute Sale
of April 28, 1989 is null and void. It ordered the cancellation of the
certificates of title issued in the petitioners’ names and directed the issuance
of new certificates of title in favor of Carmen Ozamiz or her estate. The
motion for reconsideration was denied.
ISSUE:
Whether or not the CA erred in ruling that the Deed of Absolute Sale
dated on April 28, 1989 was a Simulated Contract.
RULING:
YES. Simulation is defined as "the declaration of a fictitious will,
deliberately made by agreement of the parties, in order to produce, for the
purposes of deception, the appearances of a juridical act which does not exist
or is different from what that which was really executed." The requisites of
simulation are: (a) an outward declaration of will different from the will of the
parties; (b) the false appearance must have been intended by mutual
agreement; and (c) the purpose is to deceive third persons. None of these
were clearly shown to exist in the case at bar.
Contrary to the erroneous conclusions of the appellate court, a

simulated contract cannot be inferred from the mere non-production of the
checks. It was not the burden of the petitioners to prove so. It is significant
to note that the Deed of Absolute Sale dated April 28, 1989 is a notarized
document duly acknowledged before a notary public. As such, it has in its
favor the presumption of regularity, and it carries the evidentiary weight
conferred upon it with respect to its due execution.
It is admissible in evidence without further proof of its authenticity

and is entitled to full faith and credit upon its face.
Payment is not merely presumed from the fact that the notarized Deed
of Absolute Sale dated April 28, 1989 has gone through the regular procedure
as evidenced by the transfer certificates of title issued in petitioners’ names
by the Register of Deeds.
Considering that Carmen Ozamiz acknowledged, on the face of the

notarized deed, that she received the consideration at One Million Forty
Thousand Pesos (P1,040,000.00), the appellate court should not have placed
too much emphasis on the checks, the presentation of which is not really
necessary. Besides, the burden to prove alleged non-payment of the
consideration of the sale was on the respondents, not on the petitioners. Also,
between its conclusion based on inconsistent oral testimonies and a duly
notarized document that enjoys presumption of regularity, the appellate court
should have given more weight to the latter. Spoken words could be
notoriously unreliable as against a written document that speaks a uniform
language.
It has been held that a person is not incapacitated to contract merely

because of advanced years or by reason of physical infirmities. Only when
such age or infirmities impair her mental faculties to such extent as to
prevent her from properly, intelligently, and fairly protecting her property
391
rights, is she considered incapacitated. The respondents utterly failed to show
adequate proof that at the time of the sale on April 28, 1989 Carmen Ozamiz
had allegedly lost control of her mental faculties.
A person is presumed to be of sound mind at any particular time and

the condition is presumed to continue to exist, in the absence of proof to the
contrary. Competency and freedom from undue influence, shown to have
existed in the other acts done or contracts executed, are presumed to
continue until the contrary is shown.
WHEREFORE, the instant petition is hereby GRANTED and the

assailed Decision and Resolution of the Court of Appeals are hereby
REVERSED and SET ASIDE. The Decision dated September 23, 1992 of the
Regional Trial Court of Cebu City, Branch 6, in Civil Case No. CEB-10766 is
REINSTATED. No pronouncement as to costs.
NATURAL OBLIGATIONS: KINDS (1424-1430)
1. MANZANILLA VS. CA, MARCH 15, 1990

2. RURAL BANK OF PARAÑAQUE VS. REMOLADO, MARCH
18, 1985
MANZANILLA VS. COURT OF APPEALS

183 SCRA 207
FACTS:
In 1963, spouses Celedonio and Dolores Manzanilla sold on installment
an undivided one-half portion of their residential house and lot. At the time of
392
the sale, the said property was mortgaged to the Government Service
Insurance System (GSIS), which fact was known to the vendees, spouses
Magdaleno and Justina Campo. The Campo spouses took possession of the
premises upon payment of the first installment. Some payments were made to
petitioners while some were made directly to GSIS.
On May 17, 1965, the GSIS filed its application to foreclose the
mortgage on the property for failure of the Manzanilla spouses to pay their
monthly amortizations.
On October 11, 1965, the property was sold at public auction where
GSIS was the highest bidder.
Two months before the expiration of the period to redeem or on August

31, 1966, the Manzanilla spouses executed a Deed of Absolute Sale of the
undivided one half portion of their property in favor of the Campo spouses.
Upon the expiration of the period to redeem without the Manzanilla

spouses exercising their right of redemption, title to the property was
consolidated in favor of the GSIS and a new title issued in its name.
In January 1969, the Manzanilla spouses made representations and

succeeded in re-acquiring the property form the GSIS. Upon full payment of
the purchase price, an Absolute Deed Of Sale was executed by GSIS in favor
of the Manzanilla spouses.
On May 14, 1973, the Manzanilla spouses mortgaged the property to

the Biñan Rural Bank. On September 7, 1973, petitioner Ines Carpio
purchased the property from the Manzanilla spouses and agreed to assume
the mortgage in favor of Biñan Rural Bank.
On November 12, 1973, private respondent Justina Campo registered

her adverse claim over the said lot.
On October 3, 1977, petitioner Carpio filed an ejectment case against

private respondent Justina Campo.
On July 31, 1979, private respondent Justina Campo (already a widow)

filed a complaint for quieting of title against the Manzanilla spouses and Ines
Carpio praying among others, for the issuance to her of a certificate of title
over the undivided one-half portion of the property.
The trial court rendered its decision in favor of Campo. The decision
was appealed by petitioners to the Court of Appeals; however it only affirmed
the decision of the trial court. Petitioners’ Motion for reconsideration was
denied.
ISSUE:
Whether or not petitioners are under any legal duty to reconvey the
undivided one-half portion of the property to private respondent Justina
Campo.
RULING:
NO, there may be a moral duty on the part of petitioners to convey the
one-half portion of the property previously sold to private respondent.
However, they are under no legal obligation to do so. Hence, the action to
quiet title filed by private respondent must fail.
NATURAL OBLIGATIONS: KINDS (1424-1430)
RURAL BANK OF PARAÑAQUE, INC., petitioner,

393
VS. ISIDRA REMOLADO and COURT OF APPEALS, respondents
1985 March 18
FACTS:
This case is about the repurchase of mortgaged property after the
period of redemption had expired. Isidra Remolado, 64, a widow, and resident
of Makati, Rizal, owned a lot with an area of 308 square meters, with a
bungalow thereon, which was leased to Beatriz Cabagnot. In 1966 she
mortgaged it to the Rural Bank of Parañaque, Inc. as security for a loan of
P15,000. She paid the loan. On April 17, 1971 she mortgaged it again to the
bank. She eventually secured loans totalling P18,000. The loans become
overdue. The bank foreclosed the mortgage on July 21, 1972 and bought the
property at the foreclosure sale for P22,192.70. The one-year, period of
redemption was to expire on August 21, 1973. On August 8, 1973 the bank
advised Remolado that she had until August 23 to redeem the property. On
August 9, 1973 or 14 days before the expiration of the one-year redemption
period, the bank gave her a statement showing that she should pay
P25,491.96 for the redemption of the property on August 23. No redemption
was made on that date. On September 3, 1973 the bank consolidated its
ownership over the property. Remolado's title was cancelled. A new title,
TCT No. 418737, was issued to the bank on September 5. On September 24,
1973, the bank gave Remolado up to ten o'clock in the morning of October 31,
1973, or 37 days, within which to repurchase (not redeem since the period of
redemption had expired) the property. The bank did not specify the price.
On October 26, 1973 Remolado and her daughter, Patrocinio Gomez,

promised to pay the bank P33,000 on October 31 for the repurchase of the
property. Contrary to her promise, Remolado did not repurchase the property
on October 31. Five days later, or on November 5, Remolado and her
daughter delivered P33,000 cash to the bank's assistant manager as
repurchase price. The amount was returned to them the next day, November
6, 1973. At that time, the bank was no longer willing to allow the repurchase.
Remolado filed an action to compel the bank to reconvey the property to her
for P25,491.96 plus interest and other charges and to pay P35,000 as
damages. The repurchase price was not consigned. A notice of lis pendens
was registered. On November 15, the bank sold the property to Pilar Aysip
for P50,000. A new title was issued to Aysip with an annotation of lis pendens
The trial court ordered the bank to return the property to Remolado
upon payment of the redemption price of P25,491.96 plus interest and other
bank charges and to pay her P15,000 as damages. The Appellate Court
affirmed the judgment.
ISSUE:
Whether or not the appellate court erred in reconveying the disputed
property to Remolado.
RULING:
Yes. We hold that the trial court and the Appellate Court erred in
ordering the reconveyance of the property. There was no binding agreement
for its repurchase. Even on the assumption that the bank should be bound by
its commitment to allow repurchase on or before October 31, 1973, still
Remolado had no cause of action because she did not repurchase the property
on that date.
Justice is done according to law. As a rule, equity follows the law.

There may be a moral obligation, often regarded as an equitable
consideration (meaning compassion), but if there is no enforceable legal duty,
the action must fail although the disadvantaged party deserves
commiseration or sympathy. The choice between what is legally just and what
is morally just, when these two options do not coincide, is explained by Justice
Moreland in Vales vs. Villa, 35 Phil. 769, 788 where he said: "Courts operate
394
not because one person has been defeated or overcome by another, but
because he has been defeated or overcome illegally. Men may do foolish
things, make ridiculous contracts, use miserable judgment, and lose money by
them - indeed, all they have in the world; but not for that alone can the law
intervene and restore. There must be, in addition, a violation of law, the
commission of what the law knows as an actionable wrong before the courts
are authorized to lay hold of the situation and remedy it."
In the instant case, the bank acted within its legal rights when it
refused to give Remolado any extension to repurchase after October 31, 1973.
It had given her about two years to liquidate her obligation. She failed to do
so. Thus, the Appellate Court's judgment is reversed and set aside.
KINDS OF TRUSTS: EXPRESS TRUST VS. IMPLIED TRUST
1. HUANG VS. CA, 236 SCRA 420

2. VDA. DE ESCONDE VS. CA, 253 SCRA 66
3. ANCOG VS. CA, JUNE 30, 1997
4. MORALES VS. CA, JUNE 19, 1997
5. TALA REALTY VS. BANCO FILIPINO, 392 SCRA 506
SPS. RICARDO AND MILAGROS HUANG, Petitioner,

VS. COURT OF APPEALS,Et. al, Respondents
G.R. No. 108525
September 13, 1994
FACTS:
Private respondents Dolores and Aniceto Sandoval wanted to buy two
lots in Dasmarinas Village, Makati but was allowed to buy only one lot per
policy of the subdivision owner. Private respondents bought Lot 21 and
registered it in their name. Respondents also bought Lot 20 but the deed of
sale was in the name of petitioner Ricardo Huang and registered in his name.
Respondents constructed a house on Lot 21 while petitioners were allowed by
respondents to build a house on Lot 20. Petitioners were also allowed to
mortgage the Lot 20 to the SSS to secure a loan. Respondents actually
financed the construction of the house, the swimming pool, and the fence
surrounding the properties on the understanding that the petitioners would
merely hold title in trust for the respondents’ beneficial interest.
Petitioner Huangs leased the property to Deltron Corporation for its

official quarters without the permission of the respondents. But later, the
lessees prohibited the use of the swimming pool by the respondents, and the
Huangs began challenging the respondents’ ownership of the property. Thus,
respondents filed a complaint before the trial court for the nullification of the
deed of sale to the petitioners and the quieting of title of Lot 20.
The trial court found that the respondents were the real owners of the
Lot 20 and therefore ordered the petitioners to vacate the property and to
remit to the respondents the rentals earned from Lot 20. The Court of
Appeals affirmed the lower court’s decision. Hence, the instant recourse.
ISSUE:
Whether or not petitioners can claim ownership of the property
registered in their name but for which was paid by the respondents.
RULING:
No. Respondent Sandoval provided the money for the purchase of Lot
20 but the corresponding deed of sale and transfer certificate of title were
395
placed in the name of petitioner Huang. Through this transaction, a resulting
trust was created. Petitioner became the trustee of Lot 20 and its
improvements for the benefit of respondent as owner. Article 1448 of the
New Civil Code provides that there is an implied trust when property is sold
and the legal estate is granted to one party but the price is paid by another
for the purpose of having the beneficial interest for the property. A resulting
trust arises because of the presumption the he who pays for a thing intends a
beneficial therein for himself.
Given these provisions of law, petitioner was only a trustee of the

property in question for the benefit of the respondent who is the real owner.
Therefore, petitioner cannot claim ownership of the property even when it
was registered in his name. Thus, petition is denied. The decision of the trial
court as sustained by the Court of Appeals is affirmed, with costs against
petitioners.
CATALINA BUAN VDA. DE ESCONDE, CONSTANCIA ESCONDE VDA.

DE PERALTA, ELENITA ESCONDE and BENJAMIN ESCONDE,
petitioners,
VS. HONORABLE COURT OF APPEALS and PEDRO ESCONDE,
respondents
1996 February 01
G.R. No. 103635
FACTS:
Petitioners Constancia, Benjamin and Elenita, and private respondent
Pedro, are the children of the late Eulogio Esconde and petitioner Catalina
Buan. Eulogio Esconde was one of the children and heirs of Andres Esconde.
Andres is the brother of Estanislao Esconde, the original owner of the
disputed lot who died without issue on April 1942. Survived by his only
brother, Andres, Estanislao left an estate consisting of four (4) parcels of land
in Samal, Bataan.
Eulogio died in April, 1944 survived by petitioners and private

respondent. At that time, Lazara and Ciriaca, Eulogio's sisters, had already
died without having partitioned the estate of the late Estanislao Esconde.
On December 5, 1946, the heirs of Lazara, Ciriaca and Eulogio

executed a deed of extrajudicial partition, with the heirs of Lazara identified
therein as the Party of the First Part, that of Ciriaca, the Party of the Second
Part and that of Eulogio, the Party of the Third Part. Since the children of
Eulogio, with the exception of Constancia, were then all minors, they were
represented by their mother and judicial guardian, petitioner Catalina Buan
vda. de Esconde who renounced and waived her usufructuary rights over the
parcels of land in favor of her children in the same deed. The deed bears the
thumbmark of Catalina Buan and the signature of Constancia Esconde, as
well as the approval and signature of Judge Basilio Bautista.
Pursuant to the same deed, transfer certificates of title were issued to

the new owners of the properties. Transfer Certificate of Title No. 394 for Lot
No. 1700 was issued on February 11, 1947 in the name of private respondent

396
but Catalina kept it in her possession until she delivered it to him in 1949
when private respondent got married.
Meanwhile, Benjamin constructed the family home on Lot No. 1698-B

which is adjacent to Lot No. 1700. A portion of the house occupied an area of
twenty (20) square meters, more or less, of Lot No. 1700. Benjamin also built
a concrete fence and a common gate enclosing the two (2) lots, as well as an
artesian well within Lot No. 1700.
Sometime in December, 1982, Benjamin discovered that Lot No. 1700

was registered in the name of his brother, private respondent. Believing that
the lot was co-owned by all the children of Eulogio Esconde, Benjamin
demanded his share of the lot from private respondent. However, private
respondent asserted exclusive ownership thereof pursuant to the deed of
extrajudicial partition and, in 1985 constructed a "buho" fence to segregate
Lot No. 1700 from Lot No. 1698-B.
Hence, on June 29, 1987, petitioners herein filed a complaint before the
Regional Trial Court of Bataan against private respondent for the annulment
of TCT No. 394. They further prayed that private respondent be directed to
enter into a partition agreement with them, and for damages (Civil Case No.
5552).
In its decision of July 31, 1989, the lower court dismissed the complaint
and the counterclaims. It found that the deed of extrajudicial partition was an
unenforceable contract as far as Lot No. 1700 was concerned because
petitioner Catalina Buan vda. de Esconde, as mother and judicial guardian of
her children, exceeded her authority as such in "donating" the lot to private
respondent or waiving the rights thereto of Benjamin and Elenita in favor of
private respondent. Because of the unenforceability of the deed, a trust
relationship was created with private respondent as trustee and Benjamin and
Elenita as beneficiaries
However, the lower court ruled that the action had been barred by both
prescription and laches. Lot No. 1700 having been registered in the name of
private respondent on February 11, 1947, the action to annul such title
prescribed within ten (10) years on February 11, 1957 or more than thirty
(30) years before the action was filed on June 29, 1987.
Thus, even if Art. 1963 of the old Civil Code providing for a 30-year
prescriptive period for real actions over immovable properties were to be
applied, still, the action would have prescribed on February 11, 1977. Hence,
petitioners elevated the case to the Court of Appeals which affirmed the lower
court's decision. The appellate court held that the deed of extrajudicial
partition established "an implied trust arising from the mistake of the judicial
guardian in favoring one heir by giving him a bigger share in the hereditary
property." It stressed that "an action for reconveyance based on implied or
constructive trust" prescribes in ten (10) years "counted from the registration
of the property in the sole name of the co-heir."
ISSUE:
Whether or not the action was already barred with laches and
prescription.
RULING:
Trust is the legal relationship between one person having an equitable
ownership in property and another person owning the legal title to such
property, the equitable ownership of the former entitling him to the
performance of certain duties and the exercise of certain powers by the latter.
Trusts are either express or implied. An express trust is created by the direct
397
and positive acts of the parties, by some writing or deed or will or by words
evidencing an intention to create a trust. No particular words are required
for the creation of an express trust, it being sufficient that a trust is clearly
intended.
On the other hand, implied trusts are those which, without being
expressed, are deducible from the nature of the transaction as matters of
intent or which are superinduced on the transaction by operation of law as
matters of equity, independently of the particular intention of the parties. In
turn, implied trusts are either resulting or constructive trusts. These two are
differentiated from each other as follows:
Resulting trusts are based on the equitable doctrine that valuable

consideration and not legal title determines the equitable title or interest and
are presumed always to have been contemplated by the parties. They arise
from the nature or circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title but
is obligated in equity to hold his legal title for the benefit of another. On the
other hand, constructive trusts are created by the construction of equity in
order to satisfy the demands of justice and prevent unjust enrichment. They
arise contrary to intention against one who, by fraud, duress or abuse of
confidence, obtains or holds the legal right to property which he ought not, in
equity and good conscience, to hold.
While the deed of extrajudicial partition and the registration of Lot No.
1700 occurred in 1947 when the Code of Civil Procedure or Act No. 190 was
yet in force, the Supreme Court held that the trial court correctly applied
Article 1456.
A deeper analysis of Article 1456 reveals that it is not a trust in the

technical sense for in a typical trust, confidence is reposed in one person who
is named a trustee for the benefit of another who is called the cestui que
trust, respecting property which is held by the trustee for the benefit of the
cestui que trust. A constructive trust, unlike an express trust, does not
emanate from, or generate a fiduciary relation. While in an express trust, a
beneficiary and a trustee are linked by confidential or fiduciary relations, in a
constructive trust, there is neither a promise nor any fiduciary relation to
speak of and the so-called trustee neither accepts any trust nor intends
holding the property for the beneficiary.
In the case at bench, petitioner Catalina Buan vda. de Esconde, as

mother and legal guardian of her children, appears to have favored her elder
son, private respondent, in allowing that he be given Lot No. 1700 in its
entirety in the extrajudicial partition of the Esconde estate to the prejudice of
her other children. Although it does not appear on record whether Catalina
intentionally granted private respondent that privileged bestowal, the fact is
that, said lot was registered in private respondent's name. After TCT No. 394
was handed to him by his mother, private respondent exercised exclusive
rights of ownership therein to the extent of even mortgaging the lot when he
needed money.
If, as petitioners insist, a mistake was committed in allotting Lot No.

1700 to private respondent, then a trust relationship was created between
them and private respondent. However, private respondent never considered
himself a trustee. If he allowed his brother Benjamin to construct or make
improvements thereon, it appears to have been out of tolerance to a brother.
Consequently, if indeed, by mistake, private respondent was given the

entirety of Lot No. 1700, the trust relationship between him and petitioners
was a constructive, not resulting, implied trust. Petitioners, therefore,
398
correctly questioned private respondent's exercise of absolute ownership over
the property. Unfortunately, however, petitioners assailed it long after their
right to do so had prescribed.
The rule that a trustee cannot acquire by prescription ownership over

property entrusted to him until and unless he repudiates the trust, applies to
express trusts and resulting implied trusts. However, in constructive implied
trusts, prescription may supervene even if the trustee does not repudiate the
relationship. Necessarily, repudiation of the said trust is not a condition
precedent to the running of the prescriptive period.
Since the action for the annulment of private respondent's title to Lot
No. 1700 accrued during the effectivity of Act No. 190, Section 40 of Chapter
III thereof applies. It provides: Sec. 40. Period of prescription as to real
estate. An action for recovery of title to, or possession of, real property, or an
interest therein, can only be brought within ten years after the cause of such
action accrues.
Thus, in Heirs of Jose Olviga v. Court of Appeals, the Court ruled that
the ten-year prescriptive period for an action for reconveyance of real
property based on implied or constructive trust which is counted from the
date of registration of the property, applies when the plaintiff is not in
possession of the contested property. In this case, private respondent, not
petitioners who instituted the action, is in actual possession of Lot No. 1700.
Having filed their action only on June 29, 1987, petitioners' action has been
barred by prescription. Not only that. Laches has also circumscribed the
action for, whether the implied trust is constructive or resulting, this doctrine
applies. 23 As regards constructive implied trusts, the Court held in Diaz, et
al. v. Gorricho and Aguado that:
. . . in constructive trusts (that are imposed by law), there is neither promise
nor fiduciary relation; the so-called trustee does not recognize any trust and
has no intent to hold for the beneficiary; therefore, the latter is not justified in
delaying action to recover his property. It is his fault if he delays; hence, he
may be estopped by his own laches.
It is tragic that a land dispute has once again driven a wedge between
brothers. However, credit must be given to petitioner Benjamin Esconde for
resorting to all means possible in arriving at a settlement between him and
his brother in accordance with Article 222 of the Civil Code. Verbally and in
two letters, he demanded that private respondent give him and his sisters
their share in Lot No. 1700. He even reported the matter to the barangay
authorities for which three conferences were held. Unfortunately, his efforts
droved fruitless. Even the action he brought before the court was filed too
late.
On the other hand, private respondent should not be unjustly enriched

by the improvements introduced by his brother on Lot No. 1700 which he
himself had tolerated. He is obliged by law to indemnify his brother,
petitioner Benjamin Esconde, for whatever expenses the latter had incurred.

399
JOVITA YAP ANCOG, and GREGORIO YAP, JR., petitioners,

VS. COURT OF APPEALS, ROSARIO DIEZ, and CARIDAD YAP,
respondents
G.R. No. 112260
June 30, 1997
FACTS:
The land, with improvements thereon, was formerly the conjugal property of the spouses Gregorio Yap and
Rosario Diez. In 1946, Gregorio Yap died, leaving his wife, private respondent Rosario Diez, and children, petitioners
Jovita Yap Ancog and Gregorio Yap, Jr., and private respondent Caridad Yap as his heirs. In 1954 and again 1958, Rosario
Diez obtained loans from the Bank of Calape, secured by a mortgage on the disputed land, which was annotated on its
Original Certificate of Title No. 622. When Rosario Diez applied again for a loan to the bank, offering the land in question
as security, the bank’s lawyer, Atty. Narciso de la Serna, suggested that she submit an extrajudicial settlement covering
the disputed land as a means of facilitating the approval of her application. The suggestion was accepted and on April 4,
1961, Atty. de la Serna prepared an extrajudicial settlement, which the heirs, with the exception of petitioner Gregorio
Yap, Jr., then only 15 years old, signed. As a result, OCT No. 622 was cancelled and Transfer Certificate of Title No. 3447
(T-2411) was issued on April 13, 1961. On April 14, 1961, upon the execution of a real estate mortgage on the land, the
loan was approved by the bank. Rosario Diez exercised rights of ownership over the land. In 1985, she brought an
ejectment suit against petitioner Jovita Yap Ancog’s husband and son to evict them from the ground floor of the house built
on the land for failure to pay rent. Shortly thereafter, petitioner Jovita Ancog learned that private respondent Rosario Diez
had offered the land for sale.Petitioner Ancog immediately informed her younger brother, petitioner Gregorio Yap, Jr., who
was living in Davao, of their mother’s plan to sell the land. On June 6, 1985, they filed this action for partition in the
Regional Trial Court of Bohol where it was docketed as Civil Case No. 3094. As private respondent Caridad Yap was
unwilling to join in the action against their mother, Caridad was impleaded as a defendant.
Petitioners alleged that the extrajudicial instrument was simulated and therefore void. They claimed that in
signing the instrument they did not really intend to convey their interests in the property to their mother, but only to
enable her to obtain a loan on the security of the land to cover expenses for Caridad’s school fees and for household
repairs. The trial court rendered judgment dismissing petitioners’ action. It dismissed petitioners’ claim that the
extrajudicial settlement was simulated and held it was voluntarily signed by the parties. Observing that even without the
need of having title in her name Rosario Diez was able to obtain a loan using the land in question as collateral, the court
held that the extrajudicial settlement could not have been simulated for the purpose of enabling her to obtain another
loan. Petitioners failed to overcome the presumptive validity of the extrajudicial settlement as a public instrument.
The court instead found that petitioner Ancog had waived her right to the land, as shown by the fact that on
February 28, 1975, petitioner’s husband, Ildefonso Ancog, leased the property from private respondent Diez.
Furthermore, when the spouses Ancog applied for a loan to the Development Bank of the Philippines using the land in
question as collateral, they accepted an appointment from Rosario Diez as the latter’s attorney-in-fact. The court
also found that the action for partition had already prescribed.On appeal, the Court of Appeals upheld the validity of the
extrajudicial settlement and sustained the trial court’s dismissal of the case. The appellate court emphasized that the
extrajudicial settlement could not have been simulated in order to obtain a loan, as the new loan was merely “in addition
to” a previous one which private respondent Diez had been able to obtain even without an extrajudicial settlement.
Neither did petitioners adduce evidence to prove that an extrajudicial settlement was indeed required in order to obtain
the additional loan. The appellate court held that considering petitioner Jovita Yap Ancog’s educational attainment
(Master of Arts and Bachelor of Laws), it was improbable that she would sign the settlement if she did not mean it to be
such. Hence, this petition.
ISSUE:
Whether or not the appellate court erred in ruling that petitioner Gregorio Yap, Jr., one of the co-owners of the
litigated property, had lost his rights to the property through prescription or laches.
RULING:
In this case, the trial court and the Court of Appeals found no evidence to show that the extrajudicial settlement
was required to enable private respondent Rosario Diez to obtain a loan from the Bank of Calape. Petitioners merely
claimed that the extrajudicial settlement was demanded by the bank.To the contrary, that the heirs (Jovita Yap Ancog and
Caridad Yap) meant the extrajudicial settlement to be fully effective is shown by the fact that Rosario Diez performed acts
of dominion over the entire land, beginning with its registration, without any objection from them. Instead, petitioner
Jovita Ancog agreed to lease the land from her mother, private respondent Rosario Diez, and accepted from her a special
power of attorney to use the land in question as collateral for a loan she was applying from the DBP. Indeed, it was private
respondent Diez who paid the loan of the Ancogs in order to secure the release of the property from mortgage Petitioner
Jovita Yap Ancog contends that she could not have waived her share in the land because she is landless. For that matter,
private respondent Caridad Yap is also landless, but she signed the agreement. She testified that she did so out of filial
devotion to her mother. Thus, what the record of this case reveals is the intention of Jovita Ancog and Caridad Yap to cede
their interest in the land to their mother Rosario Diez. It is immaterial that they had been initially motivated by a desire to
acquire a loan. Under Art. 1082 of the Civil Code, every act which is intended to put an end to indivision among co-heirs is
deemed to be a partition even though it should purport to be a sale, an exchange, or any other transaction.
The Supreme Court held that the Court of Appeals erred in ruling that the claim of petitioner Gregorio Yap, Jr.
was barred by laches. In accordance with Rule 74, §1 of the Rules of Court, as he did not take part in the partition, he is
not bound by the settlement. It is uncontroverted that, at the time the extrajudicial settlement was executed, Gregorio Yap,
Jr. was a minor. For this reason, he was not included or even informed of the partition. Instead, the registration of the

400
land in Rosario Diez’s name created an implied trust in his favor by analogy to Art. 1451 of the Civil Code, which provides:
“When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is
established by implication of law for the benefit of the true owner.” In the case of O’Laco v. Co Cho Chit, Art. 1451 was
held as creating a resulting trust, which is founded on the presumed intention of the parties. As a general rule, it arises
where such may be reasonably presumed to be the intention of the parties, as determined from the facts and
circumstances existing at the time of the transaction out of which it is sought to be established. In this case, the records
disclose that the intention of the parties to the extrajudicial settlement was to establish a trust in favor of petitioner Yap,
Jr. to the extent of his share. Rosario Diez testified that she did not claim the entire property, while Atty. de la Serna added
that the partition only involved the shares of the three participants.
A cestui que trust may make a claim under a resulting trust within 10 years from the time the trust is
repudiated. Although the registration of the land in private respondent Diez’s name operated as a constructive notice of
her claim of ownership, it cannot be taken as an act of repudiation adverse to petitioner Gregorio Yap, Jr.’s claim, whose
share in the property was precisely not included by the parties in the partition. Indeed, it has not been shown whether he
had been informed of her exclusive claim over the entire property before 1985 when he was notified by petitioner Jovita
Yap Ancog of their mother’s plan to sell the property.This Court has ruled that for prescription to run in favor of the
trustee, the trust must be repudiated by unequivocal acts made known to the cestui que trust and proved by clear and
conclusive evidence. Furthermore, the rule that the prescriptive period should be counted from the date of issuance of the
Torrens certificate of title applies only to the remedy of reconveyance under the Property Registration Decree. Since the
action brought by petitioner Yap to claim his share was brought shortly after he was informed by Jovita Ancog of their
mother’s effort to sell the property, Gregorio Yap, Jr.’s claim cannot be considered barred either by prescription or by
laches.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION that this case is
REMANDED to the Regional Trial Court for the determination of the claim of petitioner Gregorio Yap, Jr.
RODOLFO MORALES, represented by his heirs, and PRISCILA

MORALES, petitioners,
VS. COURT OF APPEALS (Former Seventeenth Division), RANULFO
ORTIZ, JR., and ERLINDA ORTIZ, respondents
Jun 19, 1997
G.R. No. 117228
FACTS:
This is an action for recovery of possession of land and damages with a
prayer for a writ of preliminary mandatory injunction filed by private
respondents herein, spouses Ranulfo Ortiz, Jr. and Erlinda Ortiz, against
Rodolfo Morales. The complaint prayed that private respondents be declared
the lawful owners of a parcel of land and the two-storey residential building
standing thereon, and that Morales be ordered to remove whatever
improvements he constructed thereon, vacate the premises, and pay actual
and moral damages, litigation expenses, attorney's fees and costs of the suit.
Priscila Morales, one of the daughters of late Rosendo Avelino and

Juana Ricaforte, filed a motion to intervene in the case. No opposition thereto
having been filed, the motion was granted on March 4, 1988. On November
30, 1988 Rodolfo Morales passed away. The trial court allowed his
substitution by his heirs, Roda, Rosalia, Cesar and Priscila, all surnamed
Morales. The trial court rendered its decision in favor of plaintiffs, private
respondents herein. Dissatisfied with the trial court's decision, defendants
heirs of Rodolfo Morales and intervenor Priscila Morales, petitioners herein,
appealed to the Court of Appeals which in turn affirmed the decision.
ISSUE:
Whether or not Celso Avelino purchase the land in question from the
Mendiolas as a mere trustee for his parents and siblings.
RULING:
Trusts are either express or implied.
Express trusts are created by the intention of the trustor or of the

parties, while implied trusts come into being by operation of law, either

401
through implication of an intention to create a trust as a matter of law or
through the imposition of the trust irrespective of, and even contrary to, any
such intention. In turn, implied trusts are either resulting or constructive
trusts.
Resulting trusts are based on the equitable doctrine that valuable

consideration and not legal title determines the equitable title or interest and
are presumed always to have been contemplated by the parties. They arise
from the nature or circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title but
is obligated in equity to hold his legal title for the benefit of another.
On the other hand, constructive trusts are created by the construction

of equity in order to satisfy the demands of justice and prevent unjust
enrichment. They arise contrary to intention against one who, by fraud,
duress or abuse of confidence, obtains or holds the legal right to property
which he ought not, in equity and good conscience, to hold.
In the instant case, petitioners' theory is that Rosendo Avelino owned

the money for the purchase of the property and he requested Celso, his son,
to buy the property allegedly in trust for the former. The fact remains,
however, that title to the property was conveyed to Celso. Accordingly, the
situation is governed by or falls within the exception under the third sentence
of Article 1448, “However, if the person to whom the title is conveyed is a
child, legitimate or illegitimate, of the one paying the price of the sale, no
trust is implied by law, it being disputably presumed that there is a gift in
favor of the child.”
The preponderance of evidence, as found by the trial court and

affirmed by the Court of Appeals, established positive acts of Celso Avelino
indicating, without doubt, that he considered the property he purchased from
the Mendiolas as his exclusive property. He had its tax declaration
transferred in his name, caused the property surveyed for him by the Bureau
of Lands, and faithfully paid the realty taxes. Finally, he sold the property to
private respondents. The theory of implied trust with Celso Avelino as the
trustor and his parents Rosendo Avelino and Juan Ricaforte as trustees is not
even alleged, expressly or impliedly. Decision affirmed.
TALA REALTY SERVICES CORPORATION, petitioner,

VS. BANCO FILIPINO SAVINGS AND MORTGAGE BANK, respondent
2004 Jan 29
G.R. No. 143263
FACTS:
In 1979, Banco Filipino, respondent, had to unload some of its branch
sites since it has reached its allowable limit under Section 25(a) and 34 of
Republic Act 337, as amended, otherwise known as the General Banking Act.
The major stockholders of Banco Filipino formed a corporation known

as TALA Realty Services Corporation, herein petitioner. TALA stands for the
names of Banco Filipino’s four major stockholders, namely, Antonio Tiu,
Tomas Aguirre, Nancy Lim and Pedro Aguirre.
On August 25, 1981, respondent bank executed in favor of petitioner

TALA eleven deeds of sale transferring to the latter its branch sites. In turn,
petitioner leased these branch sites to respondent through separate contracts
of lease for a period of twenty years, renewable for another twenty years, at
the option of respondent, with a monthly rental of P12,000.00 and require
respondent bank to pay petitioner P602,500.00 as advance rentals.
402
That day, another lease contract was executed by the parties covering
each branch site providing for a period of eleven years, renewable for another
nine years at the option of respondent. And respondent bank was required to
pay P602,500.00 as security deposit for the performance of the terms and
conditions of the contract.
In August 1992, petitioner wrote respondent informing it of the

expiration of the 11-year lease contract. They failed to reach an agreement.
Thus, on April 14, 1994, petitioner notified respondent that the lease shall no
longer be renewed and demanded that it vacate the premises and pay the
rents in arrears amounting to P2,057,600.00. Respondent did not heed such
demand, prompting petitioner to file civil case for illegal detainer.
On February 5, 1998, the RTC rendered its Decision dismissing

petitioner’s complaint for ejectment for lack of merit. On appeal via a petition
for review, the Court of Appeals, on July 23, 1999, had dismissed the petition
and upholding the 20-year lease contract between the parties.
ISSUE:
Whether respondent may be ejected from the leased premises for non-
payment of rent.
RULING:
No, the Supreme Court ruled that the parties deliberately
circumvented the real estate investment limit under Sections 25(a) and 34 of
the General Banking Act. Being in pari delicto, they should suffer the
consequences of their deception by denying them any affirmative relief.
Equity dictates that Tala should not be allowed to collect rent from the Bank.
Both the Bank and Tala participated in the deceptive creation of a trust to
circumvent the real estate investment limit under Sections 25(a) and 34 of the
General Banking Act. Upholding Tala’s right to collect rent from the period
during which the Bank was arbitrarily closed would allow Tala to benefit from
the illegal ‘warehousing agreement.’ This would result in the application of
the Bank’s advance rentals covering the eleventh to the twentieth years of the
lease, to the rentals due for the period during which the Bank was arbitrarily
closed. With the advance rentals already used up, and the Bank having
stopped payment of the rent on the thirteenth year of the lease or in April
1994, rentals would be due Tala from the time the Bank stopped paying rent
in April 1994 up to the expiration of the lease period. The Bank should not be
allowed to dispute the sale of its lands to Tala nor should Tala be allowed to
further collect rent from the Bank. The clean hands doctrine will not allow
the creation or the use of a juridical relation such as a trust to subvert,
directly or indirectly, the law. Neither the Bank nor Tala came to court with
clean hands; neither will obtain relief from the court as one who seeks equity
and justice must come to court with clean hands
Thus, the petition is DENIED. The challenged Decision of the Court of

Appeals dated July 23, 1999 and its Resolution dated May 16, 2000, are
REVERSED and SET ASIDE.
IMPLIED TRUSTS: PRESCRIPTIVE PERIODS OF ACTION TO

ENFORCE IMPLIED TRUSTS: IN ACTIONS TO QUIET TITLE
1. HEIRS OF KIONISALA VS. HEIRS OF DACUT, 378 SCRA

206
2. RAMOS VS. RAMOS, 61 SCRA 284
3. INTESTATE ESTATE OF TY VS. CA, 356 SCRA 661
4. VDA. DE RETERTO VS. BARZ, 372 SCRA 712
5. CHIA LIONG TAN VS. CA, 228 SCRA 75
403
6. O’LACO VS. CO CHO CHIT, 220 SCRA 656
HEIRS OF AMBROCIO KIONISALA, namely, ANA, ISABEL, GRACE,

JOVEN and CARMELO, all surnamed KIONISALA v
VS. HEIRS OF HONORIO DACUT
G.R. No. 147379
February 27, 2002
378 SCRA 206
FACTS:
On 19 December 1995 private respondents filed a complaint for
declaration of nullity of titles, reconveyance and damages against petitioners
in the Regional Trial Court of Manolo Fortich, Bukidnon. This complaint
involved 2 parcels of land known as Lot No. 1017 and Lot No. 1015 with areas
of 117,744 square meters and 69,974 square meters respectively, located in
Pongol, Libona, Bukidnon. On 7 September 1990 Lot No. 1017 was granted a
free patent to petitioners Heirs of Ambrocio Kionisala under Free Patent No.
603393, and on 13 November 1991 Lot 1015 was bestowed upon Isabel
Kionisala, one of the impleaded heirs of Ambrocio Kionisala under Free Patent
No. 101311-91-904. Thereafter, on 19 November 1990 Lot 1017 was
registered under the Torrens system and was issued Original Certificate of
Title No. P-19819 in petitioners’ name, while on 5 December 1991 Lot No.
1015 was registered in the name of Isabel Kionisala under Original Certificate
of Title No. P-20229.
In support of their causes of action for declaration of nullity of titles

and reconveyance, private respondents claimed absolute ownership of Lot
1015 and 1017 even prior to the issuance of the corresponding free patents
and certificates of title.
After the hearing on 3 December 1996 the trial court dismissed the
complaint on the ground that the cause of action of private respondents was
truly for reversion so that only the Director of Lands could have filed the
complaint. On 23 December 1996 private respondents moved for
reconsideration of the order of dismissal but on 3 June 1997 the motion was
denied by the trial court.
On 7 June 1997 private respondents appealed the order of dismissal to

the Court of Appeals. On 15 February 2000 the appellate court promulgated
its assailed Decision reversing the order of dismissal. On 7 March 2000
petitioners moved for reconsideration of the CA Decision. On 22 January 2001
the appellate court denied the motion for lack of merit, hence this petition for
review.
ISSUE:
Whether or not the action for nullity of free patents and certificates of
title of Lot 1015 and Lot 1017 or the action for reconveyance based on
implied trust of the same lots has prescribed.
RULING:
The Supreme Court ruled that neither the action for declaration of
nullity of free patents and certificates of title of Lot 1015 and Lot 1017 nor
the action for reconveyance based on an implied trust of the same lots has
prescribed. It ruled that “a free patent issued over private land is null and
void, and produces no legal effects whatsoever. Moreover, private
respondents’ claim of open, public, peaceful, continuous and adverse
possession of the 2 parcels of land and its illegal inclusion in the free patents
of petitioners and in their original certificates of title also amounts to an
action for quieting of title which is imprescriptible.

404
The action for reconveyance based on implied trust, on the other hand,
prescribes only after 10 years from 1990 and 1991 when the free patents and
the certificates of title over Lot 1017 and Lot 1015, respectively, were
registered.
Obviously the action had not prescribed when private respondents filed
their complaint against petitioners on 19 December 1995. At any rate, the
action for reconveyance in the case at bar is also significantly deemed to be
an action to quiet title for purposes of determining the prescriptive period on
account of private respondents’ allegations of actual possession of the
disputed lots. In such a case, the cause of action is truly imprescriptible.
Wherefore, the instant petition for review is denied.

RAMOS VS. RAMOS

61 SCRA 284
FACTS:
Spouses Martin Ramos and Candida Tanate died on October 4, 1906
and October 26, 1880, respectively. They were survived by their 3 children.
Moreover, Martin was survived by his 7 natural children. In December 1906,
a special proceeding for the settlement of the intestate estate of said spouses
was conducted. Rafael Ramos, a brother of Martin, administered the estate
for more than 6 years. Eventually, a partition project was submitted which
was signed by the 3 legitimate children and 2 of the 7 natural children. A
certain Timoteo Zayco signed in representation of the other 5 natural children
who were minors. The partition was sworn to before a justice of peace.
The conjugal hereditary estate was appraised at P74,984.93, consisting

of 18 parcels of land, some head of cattle and the advances to the legitimate
children. ½ thereof represented the estate of Martin. 1/3 thereof was the free
portion or P12,497.98. The shares of the 7 natural children were to be taken
from that 1/3 free portion. Indeed, the partition was made in accordance with
the Old Civil code. Thereafter, Judge Richard Campbell approved the
partition project. The court declared that the proceeding will be considered
closed and the record should be archived as soon as proof was submitted that
each he3ir had received the portion adjudicated to him.
On February 3, 1914, Judge Nepumoceno asked the administrator to

submit a report showing that the shares of the heirs had been delivered to
them as required by the previous decision. Nevertheless, the manifestation
was not in strict conformity with the terms of the judge’s order and with the
partition project itself. 8 lots of the Himamaylan Cadastre were registered in
equal shares in the names of Gregoria (widow of Jose Ramos) and her
daughter, when in fact the administrator was supposed to pay the cash
adjudications to each of them as enshrined in the partition project. Plaintiffs
were then constrained to bring the suit before the court seeking for the
reconveyance in their favor their corresponding participations in said parcels
of land in accordance with Article 840 of the old Civil Code. Note that 1/6 of
the subject lots represents the 1/3 free portion of martin’s shares which will
eventually redound to the shares of his 7 legally acknowledged natural
children. The petitioners’ action was predicated on the theory that their
shares were merely held in trust by defendants. Nonetheless, no Deed of
Trust was alleged and proven. Ultimately, the lower court dismissed the
complaint on the grounds of res judicata, prescription and laches.
ISSUE:
405
Whether or not the plaintiffs’ action was barred by prescription, laches
and res judicata to the effect that they were denied of their right to share in
their father’s estate.
RULING:
YES, there was inexcusable delay thereby making the plaintiffs’ action
unquestionably barred by prescription and laches and also by res judicata.
Inextricably interwoven with the questions of prescription and res judicata is
the question on the existence of a trust. It is noteworthy that the main thrust
of plaintiffs’ action is the alleged holding of their shares in trust by
defendants. Emanating from such, the Supreme Court elucidated on the
nature of trusts and the availability of prescription and laches to bar the
action for reconveyance of property allegedly held in trust. It is said that
trust is the right, enforceable solely in equity to the beneficial enjoyment of
property, the legal title to which is vested in another. It may either be express
or implied. The latter ids further subdivided into resulting and constructive
trusts. Applying it now to the case at bar, the plaintiffs did not prove any
express trust. Neither did they specify the kind of implied trust contemplated
in their action. Therefore, its enforcement maybe barred by laches and
prescription whether they contemplate a resulting or a constructive trust.

THE INTESTATE ESTATE OF ALEXANDER T. TY, represented by the

Administratrix, SYLVIA S. TE, petitioner,
VS. COURT OF APPEALS, HON. ILDEFONSO E. GASCON,
and ALEJANDRO B. TY, respondents
G.R. No. 112872
April 19, 2001
FACTS:
Petitioner Sylvia S. Tywas married to Alexander T. Ty, son of private
respondent Alejandro b. ty, on January 11, 1981. Alexander died of leukemia
on May 19, 1988 and was survived by his wife, petitioner Silvia, and only
child, Krizia Katrina. In the settlement of his estate, petitioner was appointed
administratrix of her late husband’s intestate estate.
On November 4, 1992, petitioner filed a motion for leave to sell or

mortgage estate property in order to generate funds for the payment of
deficiency estate taxes in the sum of P4,714,560.00.
Privite respondent Alejandro Ty then filed two complaints for the

recovery of the above-mentioned property, praying for the declaration of
nullity of the deed of absolute sale of the shares of stock executed by private
respondent in favor of the deceased Alexander, praying for the recovery of the
pieces of property that were placed in the name of deceased Alexander, they
were acquired through private-respondent’s money, without any cause or
consideration from deceased Alexander.
The motions to dismiss were denied. Petitioner then filed petitions for
certiorari in the Courts of Appeals, which were also dismissed for lack of
merit. Thus, the present petitions now before the Court.
ISSUE:
Whether or not an express trust was created by private respondent
when he transferred the property to his son.
RULING:
Private respondent contends that the pieces of property were
transferred in the name of the deceased Alexander for the purpose of taking

406
care of the property for him and his siblings. Such transfer having been
effected without cause of consideration, a resulting trust was created.
WHEREFORE, the petition for certiorari in G.R. No. 112872 is

DISMISSED, having failed to show that grave abuse of discretion was
committed in declaring that the regional trial court had jurisdiction over the
case. The petition for review on certiorari in G.R. 114672 is DENIED, having
found no reversible error was committed.

VDA. DE RETUERTO VS. BARZ

372 SCRA 712
FACTS:
Petitioners are the heirs of Panfilo Retuerto, while respondents are the
heirs of Pedro Barz who is the sole heir of Juana Perez Barz. Juana Perez Barz
was the original owner of Lot No. 896 having an area of 13,160 square
meters. Before her death on April 16, 1929, Juana Perez executed a Deed of
Absolute Sale in favor of Panfilo Retuerto over a parcel of land, identified as
Lot No. 896-A, a subdivision of Lot No. 896, with an approximate area of
2,505 square meters. On July 22, 1940, the Court issued an Order directing
the Land Registration Commission for the issuance of the appropriate Decree
in favor of Panfilo Retuerto over the said parcel of land. However, no such
Decree was issued as directed by the Court because, by December 8, 1941,
the Second World War ensued in the Pacific. However, Panfilo failed to secure
the appropriate decree after the war.
Sometime in 1966, Pedro Barz, as the sole heir of Juana Perez, filed and
application, with the then CFI of Cebu for the confirmation of his title over
Lot 896 which included the Lot sold to Panfilo Retuerto. The Court ruled in
his favor declaring him the lawful owner of the said property, and thus
Original Certificate of Title No. 521 was issued. Lot No. 896-A however was
continuously occupied by the petitioners. Thus, a confrontation arose and as
a result respondents filed an action on September 5, 1989 for “Quieting of
Title, Damages and Attorney’s Fees.” In their answer, petitioners claimed
that they were the owners of a portion of the lot which was registered under
the name of Pedro Barz and therefore the issuance of the Original Certificate
of Title in Pedro Barz’s name did not vest ownership but rather it merely
constituted him as a trustee under a constructive trust. Petitioners further
407
contend that Pedro Barz misrepresented with the land registration court that
he inherited the whole lot thereby constituting fraud on his part.
ISSUE:
Whether or not petitioners’ defense is tenable.
RULING:
NO, the contention is bereft of merit. Constructive trusts are created
in equity to prevent unjust enrichment, arising against one who, by fraud,
duress or abuse of confidence, obtains or holds the legal right to property
which he ought not, in equity and good conscience, to hold. Petitioners failed
to substantiate their allegation that their predecessor-in-interest had acquired
any legal right to the property subject of the present controversy. Nor had
they adduced evidence to show that the certificate of title of Pedro Barz was
obtained through fraud.
Even assuming arguendo that Pedro Barz acquired title to the property
through mistake or fraud, petitioners are nonetheless barred from filing their
claim of ownership. An action for reconveyance based on an implied or
constructive trust prescribes within ten years from the time of its creation or
upon the alleged fraudulent registration of the property. Since registration of
real property is considered a constructive notice to all persons, then the ten-
year prescriptive period is reckoned from the time of such registering, filing
or entering. Thus, petitioners should have filed an action for reconveyance
within ten years from the issuance of OCT No. 521 in November 16, 1968.
This, they failed to do so.

CHIAO LIONG TAN VS. COURT OF APPEALS

228 SCRA 75
FACTS:
Petitioner Chiao Liong Tan claims to be the owner of a motor vehicle,
particularly described as Isuzu Elf van, 1976 Model that he purchased in
March 1987. As owner thereof, petitioner says he has been in possession,
enjoyment and utilization of the said motor vehicle until his older brother, Tan
Ban Yong, the private respondent, took it from him.
Petitioner relies principally on the fact that the van is registered in his
name under Certificate of Registration. He claims in his testimony before the
trial court that the said motor vehicle was purchased from Balintawak Isuzu
Motor Center for a price of over P100, 000. 00; that he sent his brother to pay
for the van and the receipt fro payment was placed in his name because it
was his money that was used to pay for the vehicle; that he allowed his
brother to use the van because the latter was working for his company, the
408
CLT Industries; and that his brother later refused to return the van to him and
appropriated the same for himself.
On the other hand, private respondent testified that CLT Industries is a

family business that was placed in petitioner’s name because at that time he
was then leaving for the United Stated and petitioner remaining Filipino in
the family residing in the Philippines. When the family business needed a
vehicle in 1987 for use in the deliver of machinery to its customers, he asked
petitioner to look for a vehicle and gave him the amount of P5,000.00 to be
deposited as down payment for the van, which would be available in about a
month. After a month, he himself paid the whole price out of a loan of P140,
000.00 from his friend Tan Pit Sin. Nevertheless, respondent allowed the
registration of the vehicle in petitioner’s name. It was also their
understanding that he would keep the van for himself because CLT Industries
was not in a position to pay him. Hence, from the time of the purchase, he
had been in possession of the vehicle including the original registration
papers thereof, but allowing petitioner from time to time to use the van for
deliveries of machinery.
After hearing, the trial court found for the private respondent. Finding
no merit in the appeal, the Court of Appeals affirmed the decision of the trail
court.
ISSUE:
Whether or not the petitioner-appellant established proof of ownership
over the subject motor vehicle.
RULING:
No. Petitioner did not have in his possession the Certificate of
Registration of the motor vehicle and the official receipt of payment for the
same, thereby lending credence to the claim of private respondent who has
possession thereof, that he owns the subject motor vehicle. A certificate of
registration of a motor vehicle in one’s name indeed creates a strong
presumption of ownership. For all practical purposes, the person in whose
favor it has been issued is virtually the owner thereof unless proved
otherwise. In other words, such presumption is rebuttable by competent
proof.
The New Civil Code recognizes cases of implied trusts other than those
enumerated therein. Thus, although no specific provision could be cited to
apply to the parties herein, it is undeniable that an implied trust was created
when the certificate of registration of the motor vehicle was placed in the
name of the petitioner although the price thereof was not paid by him but by
private respondent. The principle that a trustee who puts a certificate of
registration in his name cannot repudiate the trust relying on the registration
is one of the well-known limitations upon a title. A trust, which derives its
strength from the confidence one reposes on another especially between
brothers, does not lose that character simply because of what appears in a
legal document.
WHEREFORE, the instant petition for review is hereby DENIED for

lack of merit.


409
O'LACO VS. CO CHO CHIT
220 SCRA 656
1993 Mar 31
FACTS:
This Case involves half-sisters each claiming ownership over a parcel of
land. While petitioner Emilia O'Laco asserts that she merely left the
certificate of title covering the property with private respondent O Lay Kia for
safekeeping, the latter who is the former's older sister insists that the title
was in her possession because she and her husband bought the property from
their conjugal funds.
The trial court declared that there was no trust relation of any sort
between the sisters. The Court of Appeals ruled otherwise. Hence, the
instant petition for review on certiorari of the decision of the appellate court
together with its resolution denying reconsideration.
ISSUE:
Whether a resulting trust was intended by them in the acquisition of
the property; Whether Prescription has set in.
HELD:
I. YES. By definition, trust relations between parties may either be
express or implied.
Express trusts are those which are created by the direct and positive
acts of the parties, by some writing or deed, or will, or by words evincing an
intention to create a trust. Implied trusts are those which, without being
express, are deducible from the nature of the transaction as matters of intent,
or which are superinduced on the transaction by operation of law as matters
of equity, independently of the particular intention of the parties. Implied
trusts may either be resulting or constructive trusts, both coming into being
by operation of law.
A resulting trust was indeed intended by the parties under Art. 1448 of
the New Civil Code which states ----
"Art. 1448. There is an implied trust when property is sold, and the legal
estate is granted to one party but the price is paid by another for the purpose
of having the beneficial interest of the property. The former is the trustee,
while the latter is the beneficiary . . ."
II. As differentiated from constructive trusts, where the settled rule

is that prescription may supervene, in resulting trust, the rule of
imprescriptibility may apply for as long as the trustee has not repudiated the
trust. Once the resulting trust is repudiated, however, it is converted into a
constructive trust and is subject to prescription.
A resulting trust is repudiated if the following requisites concur: (a) the

trustee has performed unequivocal acts of repudiation amounting to an ouster
of the cestui qui trust; (b) such positive acts of repudiation have been made
known to the cestui qui trust; and, (c) the evidence thereon is clear and
convincing.
In Tale v. Court of Appeals, the Court categorically ruled that an action

for reconveyance based on an implied or constructive trust must perforce
prescribe in ten (10) years, and not otherwise, thereby modifying previous
decisions holding that the prescriptive period was four (4) years.
Neither the registration of the Oroquieta property in the name of

petitioner Emilia O'Laco nor the issuance of a new Torrens title in 1944 in her
410
name in lieu of the alleged loss of the original may be made the basis for the
commencement of the prescriptive period. For, the issuance of the Torrens
title in the name of Emilia O'Laco could not be considered adverse, much less
fraudulent. Precisely, although the property was bought by respondent-
spouses, the legal title was placed in the name of Emilia O'Laco. The transfer
of the Torrens title in her name was only in consonance with the deed of sale
in her favor. Consequently, there was no cause for any alarm on the part of
respondent-spouses. As late as 1959, or just before she got married, Emilia
continued to recognize the ownership of respondent-spouses over the
Oroquieta property.
Thus, until that point, respondent-spouses were not aware of any act of
Emilia which would convey to them the idea that she was repudiating the
resulting trust. The second requisite is therefore absent. Hence, prescription
did not begin to run until the sale of the Oroquieta property, which was
clearly an act of repudiation. But immediately after Emilia sold the Oroquieta
property which is obviously a disavowal of the resulting trust, respondent-
spouses instituted the present suit for breach of trust. Correspondingly,
laches cannot lie against them.
After all, so long as the trustee recognizes the trust, the beneficiary
may rely upon the recognition, and ordinarily will not be in fault for omitting
to bring an action to enforce his rights. There is no running of the
prescriptive period if the trustee expressly recognizes the resulting trust.
Since the complaint for breach of trust was filed by respondent-spouses two
(2) months after acquiring knowledge of the sale, the action therefore has not
yet prescribed.
WHEREFORE, the Petition for Review on Certiorari is DENIED. The

Decision of the Court of Appeals of 9 April 1981, which reversed the trial
court, is AFFIRMED. Costs against petitioners.
THE END

411
Note: This is page 188A of Casebook (Part I-Obligations)

IDENTITY OF PRESTATION (WHERE PAYMENT MUST BE MADE)
BINALBAGAN VS. COURT OF APPEALS

G.R. No. 100594
March 10, 1993
FACTS:
On May 11, 1967, private respondents, through Angelina P. Echaus, in
her capacity as Judicial Administrator of the intestate estate of Luis B.
Puentevella, executed a Contract to Sell and a Deed of Sale of forty-two
subdivision lots within the Phib-Khik Subdivision of the Puentevella family,
conveying and transferring said lots to petitioner Binalbagan Tech., Inc.
(hereinafter referred to as Binalbagan). In turn Binalbagan, through its
president, petitioner Hermilo J. Nava (hereinafter referred to as Nava),
executed an Acknowledgment of Debt with Mortgage Agreement, mortgaging
said lots in favor of the estate of Puentevella.
Upon the transfer to Binalbagan of titles to the 42 subdivision lots, said

petitioner took possession of the lots and the building and improvements
thereon. Binalbagan started operating a school on the property from 1967
when the titles and possession of the lots were transferred to it.
It appears that there was a pending case, Civil Case No. 7435 of
Regional Trial Court stationed at Himamaylan, Negros Occidental. In this
pending case the intestate estate of the late Luis B. Puentevella, thru Judicial
Administratrix, Angelina L. Puentevella sold said aforementioned lots to Raul
Javellana with the condition that the vendee-promisee would not transfer his
rights to said lots without the express consent of Puentevella and that in case
of the cancellation of the contract by reason of the violation of any of the
terms thereof, all payments therefor made and all improvements introduced
on the property shall pertain to the promissor and shall be considered as
rentals for the use and occupation thereof.
Javellana having failed to pay the installments for a period of five years,
Civil Case No. 7435 was filed by defendant Puentevella against Raul Javellana
and the Southern Negros Colleges which was impleaded as a party defendant
it being in actual possession thereof, for the rescission of their contract to sell
and the recovery of possession of the lots and buildings with damages.
Accordingly, after trial, judgment was rendered in favor of Puentevella.

Came December 29, 1965 when the plaintiffs in the instant case on appeal
filed their Third-Party Claim based on an alleged Deed of Sale executed in
their favor by spouses Jose and Lolita Lopez, thus Puentevella was

412
constrained to assert physical possession of the premises to counteract the
fictitious and unenforceable claim of herein plaintiffs.
Upon the filing of the instant case for injunction and damages on
January 3, 1966, an ex-parte writ of preliminary injunction was issued by the
Honorable Presiding Judge Carlos Abiera, which order, however, was elevated
to the Honorable Court of Appeals which issued a writ of preliminary
injunction ordering Judge Carlos Abiera or any other person or persons in his
behalf to refrain from further enforcing the injunction issued by him in this
case and from further issuing any other writs or prohibitions which would in
any manner affect the enforcement of the judgment rendered in Civil Case
7435, pending the finality of the decision of the Honorable Court of Appeals in
the latter case. Thus, defendant Puentevella was restored to the possession of
the lots and buildings subject of this case. However, plaintiffs filed a petition
for review with the Supreme Court which issued a restraining order against
the sale of the properties claimed by the spouses-plaintiffs.
When the Supreme Court dissolved the aforesaid injunction issued by

the Court of Appeals, possession of the building and other property was taken
from petitioner Binalbagan and given to the third-party claimants, the de la
Cruz spouses. Petitioner Binalbagan transferred its school to another
location. In the meantime, the defendants in Civil Case No. 293 with the
Court of Appeals interposed an appeal. On October 30, 1978, the Court of
Appeals rendered judgment, reversing the appealed decision in Civil Case No.
293. On April 29, 1981, judgment was entered in CA-G.R. No. 42211, and the
record of the case was remanded to the court of origin on December 22,
1981. Consequently, in 1982 the judgment in Civil Case No. 7435 was finally
executed and enforced, and petitioner was restored to the possession of the
subdivision lots an May 31, 1982. It will be noted that petitioner was not in
possession of the lots from 1974 to May 31, 1982.
After petitioner Binalbagan was again placed in possession of the

subdivision lots, private respondent Angelina Echaus demanded payment
from petitioner Binalbagan for the subdivision lots, enclosing in the letter of
demand a statement of account as of September 1982 showing a total amount
due of P367,509.93, representing the price of the land and accrued interest
as of that date.
As petitioner Binalbagan failed to effect payment, private respondent

Angelina P. Echaus filed on October 8, 1982 Civil Case No. 1354 of the
Regional Trial Court of the Sixth Judicial Region stationed in Himamaylan,
Negros Occidental against petitioners for recovery of title and damages.
Private respondent Angelina P. Echaus filed an amended complaint by
including her mother, brothers, and sisters as co-plaintiffs, which was
admitted by the trial court on March 18, 1983.
The trial court rendered a decision in favor of the petitioner because of

prescription. Nonetheless, the Court of Appeals reversed said decision.
ISSUE:
Whether or not the petition is with merit.
RULING:
No. A party to a contract cannot demand performance of the other
party's obligations unless he is in a position to comply with his own
obligations. Similarly, the right to rescind a contract can be demanded only if
a party thereto is ready, willing and able to comply with his own obligations
there under (Art. 1191, Civil Code).

413
In a contract of sale, the vendor is bound to transfer the ownership of
and deliver, as well as warrant, the thing which is the object of the sale (Art.
1495, Civil Code); he warrants that the buyer shall, from the time ownership
is passed, have and enjoy the legal and peaceful possession of the thing. As
afore-stated, petitioner was evicted from the subject subdivision lots in 1974
by virtue of a court order in Civil Case No. 293 and reinstated to the
possession thereof only in 1982. During the period, therefore, from 1974 to
1982, seller private respondent Angelina Echaus' warranty against eviction
given to buyer petitioner was breached though, admittedly, through no fault
of her own. It follows that during that period, 1974 to 1982, private
respondent Echaus was not in a legal position to demand compliance of the
prestation of petitioner to pay the price of said subdivision lots. In short, her
right to demand payment was suspended during that period, 1974-1982.
The prescriptive period within which to institute an action upon a

written contract is ten years (Art. 1144, Civil Code). The cause of action of
private respondent Echaus is based on the deed of sale afore-mentioned. The
deed of sale whereby private respondent Echaus transferred ownership of the
subdivision lots was executed on May 11, 1967. She filed Civil Case No. 1354
for recovery of title and damages only on October 8, 1982. From May 11,
1967 to October 8, 1982, more than fifteen (15) years elapsed. Seemingly, the
10-year prescriptive period had expired before she brought her action to
recover title. However, the period 1974 to 1982 should be deducted in
computing the prescriptive period for the reason that, as above discussed,
from 1974 to 1982, private respondent Echaus was not in a legal position to
initiate action against petitioner since as afore-stated, through no fault of
hers, her warranty against eviction was breached. In the case of it was held
that a court order deferring action on the execution of judgment suspended
the running of the 5-year period for execution of a judgment. Here the
execution of the judgment in Civil Case No. 7435 was stopped by the writ of
preliminary injunction issued in Civil Case No. 293. It was only when Civil
Case No. 293 was dismissed that the writ of execution in Civil Case No. 7435
could be implemented and petitioner Binalbagan restored to the possession of
the subject lots.
Deducting eight years (1974 to 1982) from the period 1967 to 1982,
only seven years elapsed. Consequently, Civil Case No. 1354 was filed within
the 10-year prescriptive period. Working against petitioner's position too is
the principle against unjust enrichment, which would certainly be the result if
petitioner were allowed to own the 42 lots without full payment thereof.
WHEREFORE, the petition is DENIED and the decision of the Court of

Appeals in CA-G.R. CV No. 24635 is AFFIRMED.

414


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1

SLU-COL: OBLIGATIONS AND CONTRACTS

1. LEUNG BEN VS. O’BRIEN, 38 PHIL 182

LEUNG BEN; plaintiff,

It is however, unnecessary to place the decision on this ground. In the

Digested by: (1-A) B. Mendoza, S. Mappang, F. Dangli, A. Gandeza, J. Apolonio, E. Santiago,

LAW AS A SOURCE OF OBLIGATION

ARTURO PELAYO, plaintiff-appellant

On November 23, 1906, Arturo Pelayo, a physician, filed a complaint

Digested by: (1-A) B. Mendoza, S. Mappang, F. Dangli, A. Gandeza, J. Apolonio, E. Santiago,

LAW AS A SOURCE OF OBLIGATION

NIKKO HOTEL MANILA GARDEN AND RUBY LIM

Respondent filed an action for actual, moral and/or exemplary damages

Digested by: (1-A) B. Mendoza, S. Mappang, F. Dangli, A. Gandeza, J. Apolonio, E. Santiago,

LAW AS A SOURCE OF OBLIGATION

ST. MARY’S ACADEMY, petitioner,

Digested by: (1-A) B. Mendoza, S. Mappang, F. Dangli, A. Gandeza, J. Apolonio, E. Santiago,

Respondents Daniel spouses and Villanueva admitted that the

Hence, liability for the accident, whether caused by the negligence of

LAW AS A SOURCE OF OBLIGATION

KHRISTINE REA M. REGINO,

In February 2002, PCST held a fund raising campaign dubbed the

Financially strapped and prohibited by her religion from attending

On April 25, 2002, petitioner filed, as a pauper litigant, a Complaint for

On May 30, 2002, respondents filed a Motion to Dismiss on the ground

In her Comment to respondents’ Motion, petitioner argued that prior

Such contract is by no means an ordinary one. In Non, the Court

Digested by: (1-A) B. Mendoza, S. Mappang, F. Dangli, A. Gandeza, J. Apolonio, E. Santiago,

“Every student has a right to select a profession or course of study, subject to

The same state policy resonates in Section 9(2) of BP 232, otherwise

“Section 9. Rights of Students in School. – In addition to other rights, and

xxx xxx xxx

In her Complaint, petitioner also charged that private respondents

“x x x A perusal of Article 2176 [of the Civil Code] shows that

Digested by: (1-A) B. Mendoza, S. Mappang, F. Dangli, A. Gandeza, J. Apolonio, E. Santiago,

LAW AS A SOURCE OF OBLIGATION

COSMO ENTERTAINMENT MANAGEMENT, INC., Petitioner,

The petitioner, however, suffered business reverses and was

After negotiations between the parties failed, the respondent, on May

After due proceedings, the MeTC rendered judgment in favor of the

The petition is DENIED.

1. PSBA VS. CA, FEB. 4, 1992

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, ET AL.

The defendants filed a motion to dismiss, claiming that the compliant

Article 2180, in conjunction with Article 2176 of the Civil Code,

When an academic institution accepts students for enrollment, there is

CONTRACT AS A SOURCE OF OBLIGATION

1) a building proposal must be submitted to Ayala which must be in

Digested by: (1-A) B. Mendoza, S. Mappang, F. Dangli, A. Gandeza, J. Apolonio, E. Santiago,

Contractual Obligations between parties have the force of law between

CONTRACT AS A SOURCE OF OBLIGATION

BRICKTOWN DEVELOPMENT CORP. and MARIANO Z. VERALDE

The total price of P21,639,875.00 was stipulated to be paid by private

Several months later, private respondent’s counsel, demanded the

CONTRACT AS A SOURCE OF OBLIGATION

PILIPINAS HINO, INC. VS. COURT of APPEALS

After the expiration of the contract, the petitioner and respondents

On August 10, 1990, petitioner and respondents entered into a contract

Unfortunately, petitioner failed to pay the third installment and

Digested by: (1-A) B. Mendoza, S. Mappang, F. Dangli, A. Gandeza, J. Apolonio, E. Santiago,

Hence, the decision of the Court of Appeals is modified in that private

CONTRACT AS A SOURCE OF OBLIGATION

SECURITY BANK AND TRUST COMPANY (SBTC) and ROSITO