 STAGES OF CONTRACT Robern paid the balance and a deed of sale
was executed.
(1) Robern v. PELA
FACTS: Al-Amanah owned a 2000-square
meter lot located in Magtu-od, Davao City. Al-
Amanah Davao Branch asked some of the
members of PELA to desist from building their
houses on the lot and to vacate the same,
unless they are interested to buy it. The
informal settlers thus expressed their interest
to buy the lot at P100.00 per square meter,
which Al-Amanah turned down for being far
below its asking price. Consequently, Al-
Amanah reiterated its demand to the informal
settlers to vacate the lot. The informal settlers
together with other members comprising PELA
offered to purchase the lot for P300,000.00,
half of which shall be paid as down payment
and the remaining half to be paid within one
year. In the lower portion of the said letter, Al-
Amanah made the following annotation: Note:
Subject offer has been acknowledged/received
but processing to take effect upon putting up of
the partial amt. of P150,000.00 on or before
April 15, 1993.
PELA had deposited P150,000.00 as
evidenced by four bank receipts. In the
meantime, the PELA members remained in the
property and introduced further improvements.
On November 29, 1993, Al-Amanah informed
PELA of the Head Office’s disapproval of
PELA’s offer to buy the lot due to the reason
that the offered price is way below the selling
price of the Bank which is P500.00 per square
meter. They were told to vacate the lot and
remove all the house structures erected on the
said lot within 15 days upon receipt of this
letter. Furthermore, they can withdraw the
amount deposited.
PELA replied that it had already reached an
agreement with Al-Amanah regarding the sale
of the subject lot based on their offered price.
Meanwhile, Robern was interested to
buy the lot for P400,000.00; that it has already
deposited 20% of the offered purchase price;
that it is buying the lot on “as is” basis; and,
that it is willing to shoulder the relocation of all
informal settlers therein. Al-Amanah accepted
the offer. Robern wrote to Al-Amanah
expressing concerns regarding the eviction of
the so-called informal settlers after it found out
about the previous agreement between them
and Al-Amanah and that the payment of
320,000 be suspended pending the resolution
of the matter.
Al-Amanah provided Robern with
documents to prove that it did not have an
existing contract with PELA and said that
failure of Robern to pay the 320,000 will result
to the forfeiture of the deposit and will
effectively put the lot up for sale to others.
A week later PELA consigned 150,000 in the
RTC asked Al-Amanah to withdraw the same,
stating that they since they have made the
payments as agreed upon, Al-Amanah should
process the documents.
ISSUE: Whether PELA had a perfected
contract with Al-Amanah.
RULING: There is no perfected contract of sale
between PELA and Al-Amanah for want of
consent and agreement on the price.
A contract of sale is perfected at the
moment there is a meeting of minds upon the
thing which is the object of the contract and
upon the price. Thus, for a contract of sale to
be valid, all of the following essential elements
must concur: “a) consent or meeting of the
minds; b) determinate subject matter; and c)
price certain in money or its equivalent.”
Contracts undergo three stages: “[a)
negotiation which begins from the time the
prospective contracting parties indicate interest
in the contract and ends at the moment of their
agreement[; b) perfection or birth, x x x which
takes place when the parties agree upon all the
essential elements of the contract x x x; and (c)
consummation, which occurs when the parties
fulfill or perform the terms agreed upon,
culminating in the extinguishment thereof.”
The transaction between Al-Amanah
and PELA remained in the negotiation stage.
The offer never materialized into a perfected
sale, for no oral or documentary evidence
categorically proves that Al-Amanah expressed
amenability to the offered P300,000.00
purchase price. Before the lapse of the 1-year
period PELA had set to pay the remaining
‘balance,’ Al-Amanah expressly rejected its
offered purchase price, although it took the
latter around seven months to inform the
former and this entitled PELA to award of
damages. Al-Amanah’s act of selling the lot to
another buyer is the final nail in the coffin of the
negotiation with PELA. Clearly, there is no
double sale, thus, we find no reason to disturb
the consummated sale between Al-Amanah
and Robern.
(2) EMILIO BUGATTI v. COURT OF
APPEALS and SPOUSES BEN
BAGUILAT and MARIA BAGUILAT
G.R. No. 138113, October 17, 2000
FACTS: In the complaint, respondents alleged
that they are the owners of a parcel of land
situated in Lagawa, Ifugao and that sometime
in December, 1987, petitioner offered to lease
their land. According to respondents, they
discussed the terms and conditions of the
lease with petitioner. It was agreed by
petitioner and respondents that the aforesaid
terms and conditions should be included in a
written contract of lease to be prepared by
petitioner and presented to respondents for
their approval.
However, even before preparing the
contract of lease, petitioner occupied
respondents’ land and began construction on
January 18, 1988.
Immediately objecting to the
construction, respondent Maria Baguilat
demanded that the contract of lease should
first be signed. Sometime in March, 1988,
petitioner finally presented the lease contract to
respondents but it did not contain the terms
and conditions previously agreed upon. Then
petitioner revised the same, presented to
respondents, contained counter-proposals.
Respondents refused to accede to such
counter-proposals. Despite the fact that no
contract was signed by the parties, petitioner
continued to occupy respondents’ land.
ISSUE: Whether a contract of lease had been
perfected
RULING: The court held that no contract of
lease was perfected between the parties since
the element of consent was missing. The
drafting of the contract - a task entrusted to
petitioner - was deemed by respondents as a
condition precedent to the perfection of the
lease contract and consequently, to any
construction activity upon their land. Although
petitioner submitted two drafts, they did not
contain the terms and conditions spoken of by
the parties during their negotiations and were
accordingly rejected by respondents. However,
despite the absence of a perfected contract
and in total disregard of respondents’ repeated
objections, petitioner occupied respondents’
land and commenced construction thereon,
making him a builder in bad faith.
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.
(3) CABAHUG v. NATIONAL POWER
CORPORATION
G.R. No. 186069, Jan 30, 2013
FACTS: Spouses Cabahug are the owners
of two parcels of land in Leyte. They
were among the defendants in a
Special Civil Action suit for expropriation
earlier filed by NPC before the RTC. The
suit was later dismissed when NPC opted to
settle with the landowners by paying an
easement fee equivalent to 10% of value of
their property in Accordance with RA 6395, “An
Act Revising the Charter of the NPC”. Leyte
Provincial Appraisal Committee fixed
the valuation of the affected properties at
P45.00 per square meter. Jesus
Cabahug executed two
documents denominated as Right of Way
Grant in favor of NPC. For and in consideration
of the easement fees Jesus Cabahug also
granted NPC a continuous easement of right of
way for the latter’s transmissions lines and
their appurtenances.
Jesus Cabahug agreed not to
construct any building or structure whatsoever,
nor plant in any area within the Right of Way
that will adversely affect or obstruct the
transmission line of NPC, except agricultural
crops, the growth of which will not exceed
three meters high. Jesus Cabahug reserved
the option to seek additional compensation
for easement fee, based on the Supreme
Court’s 18 January 1991 Decision. Spouses
Cabahug filed the complaint for the payment of
just compensation, damages, and attorney’s
fees against NPC, claiming to have been totally
deprived of the use of the portions of land
covered by their TCTs.
NPC responded that they already paid
full easement fee. RTC ruled for the Spouses
Cabahug. NPC’s easement of right of way
which indefinitely deprives the owner of their
propriety rights over their property falls within
the purview of the power of eminent domain.
CA: reversed and set aside the RTC decision
finding that the RA 6395 only allows NPC to
acquire an easement right of way over
properties traversed by its transmission lines.
MR denied for lack of merit.
ISSUES:
a. Whether the Grant of Right of way
whereby Jesus Cabahug reserved the
right to seek additional compensation for
easement fee.
b. Whether applying Court’s ruling in
Gutierrez case, in representation of
NPC, the Office of the Solicitor General
argues that the sum paid in 1996 by way
of easement fees represent the full
 amount allowed by law and agreed upon
by the parties. Considering that
Gutierrez concerned the payment of just
compensation for property expropriated
by the NPC, the OSG maintains the CA
did not err in according scant
consideration to the Spouses Cabahug’s
invocation.
RULING: A contract constitutes the law
between the parties who are bound by its
stipulations which, when couched in clear and
plain language, should be applied according to
their literal tenor. Courts cannot supply material
stipulations, read into the contract words it
does not contain or, for that matter, read into it
any other intention that would contradict its
plain import.—It is evident that the Spouses
Cabahug’s receipt of the easement fee did not
bar them from seeking further compensation
from NPC. Even by the basic rules in the
interpretation of contracts, we find that the CA
erred in holding that the payment of additional
sums to the Spouses Cabahug would be
violative of the parties’ contract and amount to
unjust enrichment.
Indeed, the rule is settled that a contract
constitutes the law between the parties who
are bound by its stipulations which, when
couched in clear and plain language, should be
applied according to their literal tenor. Courts
cannot supply material stipulations, read into
the contract words it does not contain or, for
that matter, read into it any other intention that
would contradict its plain import. Neither can
they rewrite contracts because they operate
harshly or inequitably as to one of the parties,
or alter them for the benefit of one party and to
the detriment of the other, or by construction,
relieve one of the parties from the terms which
he voluntarily consented to, or impose on him
those which he did not.
Disregarding the stipulations in the
contract allowing additional compensation
for easement fee, the CA ruled that
Cabahug's attempt to collect further sums
by way of additional easement fee and,or
just compensation is violative of said
contract. It is settled that a contract
constitutes the law between the parties who
are bound by its stipulations which, when
couched in clear and plain language,
should be applied according to their literal
tenor and the courts cannot supply material
stipulations, which contradict the intent of
the parties.
 AUTONOMY OF CONTRACTS
(4) CARMELCRAFT CORP VS. NATIONAL
LABOR RELATIONS COMMISSION
G.R. Nos. 90634-35, June 06, 1990 264 Phil.
763
Autonomy of Contracts – principle that the
contracting parties are free to enter into a
contract and to establish stipulations, clauses
and terms as they may deem convenient save
those that are contrary to law, public policy,
morals, good customs and public order.
FACTS: After its registration as a labor union,
the Carmelcraft Employees Union did not get
recognition from the petitioners. Consequently,
it filed a petition for certification election in June
1987. On July 13, 1987, Carmelcraft
Corporation, through its president and general
manager, Carmen Yulo, announced in a
meeting with the employees that it would cease
operations on August 13, 1987, due to serious
financial losses.
On August 17, 1987, the union filed a
complaint with the Department of Labor against
the petitioners for illegal lockout, unfair labor
practice and damages, followed the next day
with another complaint for payment of unpaid
wages, emergency cost of living allowances,
holiday pay, and other benefits. On November
29, 1988, the Labor Arbiter declared the
shutdown illegal and violative of the
employees’ right to self-organization. The
claim for unpaid benefits was also granted.
ISSUE: Whether the employees are estopped
from any claim brought about by their mutual
understanding with the employer. (quitclaims
made by employees)
RULING: The Court ruled that the reason
invoked by the petitioner company to justify the
cessation of its operations is preposterous. Its
justification is that it sustained losses in the
amount of only P1,603.88. Significantly, the
company is capitalized at P3 million.
Considering such a substantial investment, we
hardly think that a loss of the paltry sum of less
than P2,000.00 could be considered serious
enough to call for the closure of the company.
The real reason for the decision of the
petitioners to cease operations was the
establishment of respondent Carmelcraft
Employees Union. It was apparently
unwelcome to the corporation, which would
rather shut down than deal with the union. The
act of the petitioners was an unfair labor
practice prohibited by Article 248 of the Labor
Code, to wit:
 ART. 248. Unfair labor practices of
employers. - It shall be unlawful for an
employer to commit any of the following unfair
labor practice:
(a) To interfere with, restrain or coerce
employees in the exercise of their right to self-
organization;
More importantly, it was a defiance of
the constitutional provision guaranteeing to
workers the right to self-organization and to
enter into collective bargaining with
management through the labor union of their
own choice and confidence. And, indeed, even
without such motivation, the closure cannot be
justified because the claimed losses are
obviously not serious. In this situation, the
employees are entitled to separation pay at the
rate of one-half month for every year of service
under Art. 283 of the Labor Code.
The contention of the petitioners that the
employees are estopped from claiming the
alleged unpaid wages and other compensation
must also be rejected. This claim is based on
the waivers supposedly made by the
complainants on the understanding that "the
management will implement prospectively all
benefits under existing labor standard laws."
The petitioners argue that this assurance
provided the consideration that made the
quitclaims executed by the employees valid.
They add that the waivers were made
voluntarily and contend that the contract should
be respected as the law between the parties.
Even if voluntarily executed,
agreements are invalid if they are contrary
to public policy. The protection of labor is
one of the policies laid down by the
Constitution not only by specific provision but
also as part of social justice. The Civil Code
itself provides:
ART. 6. Rights may be waived,
unless the waiver is contrary to law, public
order, public policy, morals, or good
customs, or prejudicial to a third person
with a right recognized by law.
ART. 1306. The contracting parties
may establish such stipulations, clauses,
terms and conditions as they may deem
convenient, provided they are not contrary
to law, morals, good customs, public order,
or public policy.
The subordinate position of the
individual employee vis-a-vis management
renders him especially vulnerable to its
blandishments and importunings, and even
intimidations, that may result in his
improvidently if reluctantly signing over benefits
to which he is clearly entitled. Recognizing this
danger, we have consistently held that
quitclaims of the workers’ benefits will not
estop them from asserting them just the same
on the ground that public policy prohibits such
waivers.
That the employee has signed a
satisfaction receipt does not result in a waiver;
the law does not consider as valid any
agreement to receive less compensation than
what a worker is entitled to recover. A deed of
release or quitclaim cannot bar an employee
from demanding benefits to which he is legally
entitled.
Release and quitclaim is inequitable and
incongruous to the declared public policy of the
State to afford protection to labor and to assure
the rights of workers to security of tenure.
WHEREFORE, the petition is
DISMISSED and the challenged decision is
AFFIRMED, with costs against the petitioner.
(5) PILIPINO TELEPHONE CORPORATION
v. DELFINO TECSON
G. R. No. 156966 May 7, 2004
TOPIC: Stipulation as to venue of adhesion
contract, valid
Nature of the Case: The SC, through this
petition, clarifies the query on whether a
stipulation as to venue of suits in a contract of
adhesion is immediately deemed invalid.
FACTS: Delfin Tecson applied for 6 cellular
phone subscriptions with PILTEL on various
dates in 1996, which were all approved and
later on covered by 6 mobiline service
agreements. However, in 2001, Tecson filed
with the RTC of Iligan City a complaint against
PILTEL for “Sum of Money and Damages”.
PILTEL: Moved to dismiss the case on the
ground of improper venue, citing a common
provision in the mobiline service agreements to
the effect that -
"Venue of all suits arising from this
Agreement or any other suit directly or
indirectly arising from the relationship between
PILTEL and subscriber shall be in the proper
courts of Makati, Metro Manila. Subscriber
hereby expressly waives any other venues.”
RTC of Iligan: Denied the motion to
dismiss and required PILTEL to file an answer
on the complaint within 15 days from receipt
thereof. It also denied PILTEL’s subsequent
MFR.
PILTEL: Appealed to the CA
CA: Affirmed the Decision of the RTC
and denied the subsequent MFR filed by
PILTEL.
ISSUE: Whether the provision in the mobiline
service agreements fixing the venue of all suits
arising from the contract is clear and binding
and that the venue of the complaint was
improperly laid.

RULING: Yes, the provision is clear and
binding, and the venue was improperly laid.
Section 4, Rule 4, of the Revised Rules of Civil
Procedure allows the parties to agree and
stipulate in writing, before the filing of an
action, on the exclusive venue of any litigation
between them. Such an agreement would be
valid and binding provided that the stipulation
on the chosen venue is exclusive in nature or
in intent, that it is expressed in writing by the
parties thereto, and that it is entered into
before the filing of the suit.
So, the added stipulation that the
subscriber "expressly waives any other venue"
should indicate, clearly enough, the intent of
the parties to consider the venue stipulation as
being preclusive in character.
Although such is a clearly a contract of
adhesion, it doesn’t invalidate the subject
stipulation. The rule is that, should there be
ambiguities in a contract of adhesion, such
ambiguities are to be construed against the
party that prepared it. If, however, the
stipulations are not obscure, but are clear and
leave no doubt on the intention of the parties,
the literal meaning of its stipulations must be
held controlling.
A contract of adhesion is just as binding
as ordinary contracts. It is true that the SC
struck down such contracts as being assailable
when the weaker party is left with no choice by
the dominant bargaining party and is thus
completely deprived of an opportunity to
bargain effectively. Nevertheless, contracts of
adhesion are not prohibited even as the courts
remain careful in scrutinizing the factual
circumstances underlying each case to
determine the respective claims of contending
parties on their efficacy.
In the case at bar, respondent secured
six (6) subscription contracts for cellular
phones on various dates. It would be difficult to
assume that, during each of those times,
respondent had no sufficient opportunity to
read and go over the terms and conditions
embodied in the agreements. Respondent
continued, in fact, to acquire in the pursuit of
his business subsequent subscriptions and
remained a subscriber of petitioner for quite
sometime.
A contract duly executed is the law
between the parties, and they are obliged to
comply fully and not selectively with its terms.
A contract of adhesion is no exception.
Hence, PETITION IS GRANTED.
(6) DAISY B. TIU v. PLATINUM PLANS
PHIL., INC.
G.R. No. 163512, February 28, 2007
FACTS: Respondent Platinum Plans
Philippines, Inc. is a domestic corporation
engaged in the pre-need industry. From 1987
to 1989, petitioner Daisy B. Tiu was its Division
Marketing Director.
On January 1, 1993, respondent re-
hired petitioner as Senior Assistant Vice-
President and Territorial Operations Head in
charge of its Hongkong and Asean operations.
The parties executed a contract of employment
valid for five years.
On September 16, 1995, petitioner
stopped reporting for work. In November 1995,
she became the Vice-President for Sales of
Professional Pension Plans, Inc., a corporation
engaged also in the pre-need industry.
Consequently, respondent sued
petitioner for damages before the RTC.
Respondent alleged that petitioner’s
employment with Professional Pension Plans,
Inc. violated the non-involvement clause in her
contract of employment, to wit:
8. NON INVOLVEMENT PROVISION –
The EMPLOYEE further undertakes that during
his/her engagement with EMPLOYER and in
case of separation from the Company, whether
voluntary or for cause, he/she shall not, for the
next TWO (2) years thereafter, engage in or be
involved with any corporation, association or
entity, whether directly or indirectly, engaged in
the same business or belonging to the same
pre-need industry as the EMPLOYER. Any
breach of the foregoing provision shall render
the EMPLOYEE liable to the EMPLOYER in
the amount of One Hundred Thousand Pesos
(P100,000.00) for and as liquidated damages.
Petitioner countered that the non-
involvement clause was unenforceable for
being against public order or public policy:
First, the restraint imposed was much greater
than what was necessary to afford respondent
a fair and reasonable protection. Petitioner
contended that the transfer to a rival company
was an accepted practice in the pre-need
industry. Since the products sold by the
companies were more or less the same, there
was nothing peculiar or unique to protect.
Second, respondent did not invest in
petitioner’s training or improvement. At the time
petitioner was recruited, she already
possessed the knowledge and expertise
required in the pre-need industry and
respondent benefited tremendously from it.
Third, a strict application of the non-
involvement clause would amount to a
deprivation of petitioner’s right to engage in the
only work she knew.
Respondent counters that the validity of
a non-involvement clause has been sustained
by the Supreme Court in a long line of cases. It
contends that the inclusion of the two-year
non-involvement clause in petitioner’s contract
of employment was reasonable and needed
since her job gave her access to the
company’s confidential marketing strategies.
Respondent adds that the non-involvement
clause merely enjoined her from engaging in
pre-need business akin to respondent’s within
two years from petitioner’s separation from
respondent. She had not been prohibited from
marketing other service plans.
The trial court ruled that a contract in
restraint of trade is valid provided that there is
a limitation upon either time or place. In the
case of the pre-need industry, the trial court
found the two-year restriction to be valid and
reasonable.
On appeal, the Court of Appeals
affirmed the trial court’s ruling. It reasoned that
petitioner entered into the contract on her own
will and volition. Thus, she bound herself to
fulfill not only what was expressly stipulated in
the contract, but also all its consequences that
were not against good faith, usage, and law.
The appellate court also ruled that the
stipulation prohibiting non-employment for two
years was valid and enforceable considering
the nature of respondent’s business.
ISSUE: Whether the non-involvement clause is
valid.
RULING: Respondent contends that the
inclusion of the two-year non-involvement
clause in petitioner’s contract of
employment was reasonable and needed
since her job gave her access to the
company’s confidential marketing
strategies. A non-involvement clause is not
necessarily void for being in restraint of
trade as long as there are reasonable
limitations as to time, trade, and place.
In this case, the non-involvement clause
has a time limit: two years from the time
petitioner’s employment with respondent ends.
It is also limited as to trade, since it only
prohibits petitioner from engaging in any pre-
need business akin to respondent’s.
More significantly, since petitioner was
the Senior Assistant Vice-President and
Territorial Operations Head in charge of
respondent’s Hongkong and Asean operations,
she had been privy to confidential and highly
sensitive marketing strategies of respondent’s
business. To allow her to engage in a rival
business soon after she leaves would make
respondent’s trade secrets vulnerable
especially in a highly competitive marketing
environment. In sum, we find the non-
involvement clause not contrary to public
welfare and not greater than is necessary to
afford a fair and reasonable protection to
respondent.
In any event, Article 1306 of the Civil
Code provides that parties to a contract may
establish such stipulations, clauses, terms and
conditions as they may deem convenient,
provided they are not contrary to law, morals,
good customs, public order, or public policy.
Article 1159 of the same Code also
provides that obligations arising from contracts
have the force of law between the contracting
parties and should be complied with in good
faith. Courts cannot stipulate for the parties nor
amend their agreement where the same does
not contravene law, morals, good customs,
public order or public policy, for to do so would
be to alter the real intent of the parties, and
would run contrary to the function of the courts
to give force and effect thereto. Not being
contrary to public policy, the non-involvement
clause, which petitioner and respondent freely
agreed upon, has the force of law between
them, and thus, should be complied with in
good faith.
Thus, as held by the trial court and the
Court of Appeals, petitioner is bound to pay
respondent ₱100,000 as liquidated damages.
(7) LAND BANK OF THE PHILIPPINES v.
HEIRS OF SPOUSES JORJA RIGOR-
SORIANO AND MAGIN SORIANO, NAMELY:
MARIVEL S. CARANDANG AND JOSEPH
SORIANO
G.R. No. 178312, January 30, 2013
FACTS: Marivel Carandang and Joseph
Soriano are the children of the late Sps. Jorja
Rigor- Soriano and Magin Soriano, the owners
of the two parcels of land located in
Macabucod, Aliaga, Nueva Ecija. The
properties became subject to Operation Land
Transfer (OLT) and were valued by the Land
Bank and the Department of Agrarian Reform
(DAR) at P10,000.00/hectare. Contending that
such valuation was too low compared to
existing valuations of agricultural lands, the
heirs commenced an action for just
compensation. They asked that a final
valuation of the properties be pegged at
P1,800,000.00, based on Administrative Order
No. 61, Series of 1992 and R.A. No. 6657.
The RTC ordered Land Bank to pay the
heirs the amount P1,227,571.10 as just
compensation.
Land Bank appealed to the CA. The CA denied
the petition.
Hence, Land Bank appealed to the
Supreme Court.
During the pendency of the appeal, both
parties entered into an agreement re-
evaluating the cost of the parcels of land. Thus,
Land Bank submitted a manifestation informing
the High Court that the parties have already
filed their Joint Motion to Approve submitting
their Agreement dated November 29, 2012.
ISSUE: Whether the present appeal to the
Supreme Court should be dismissed?
RULING: Yes. The Agreement was a
compromise that the parties freely and
voluntarily entered into for the purpose of
finally settling their dispute in this case. Under
Art. 2028 of the Civil Code, a compromise is a
contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put
an end to one already commenced.
Accordingly, a compromise is either judicial, if
the objective is to put an end to a pending
litigation, or extrajudicial, if the objective is to
avoid a litigation.
As a contract, a compromise is
perfected by mutual consent. However, a
judicial compromise, while immediately
binding between the parties upon its
execution, is not executory until it is
approved by the court and reduced to a
judgment. The validity of a compromise is
dependent upon its compliance with the
requisites and principles of contracts dictated
by law. Also, the terms and conditions of a
compromise must not be contrary to law,
morals, good customs, public policy and public
order.
A review of the terms of the Agreement,
indicates that it is a judicial compromise
because the parties intended it to terminate
their pending litigation by fully settling their
dispute.
Topic: Autonomy of Contracts –
Contracts must be binding between the parties.
The principle of the autonomy of
contracts is expressly declared in Art. 1306.
The contracting parties may establish such
agreements as they may deem convenient,
provided they are not contrary to law, morals,
good customs, public order, or public policy.
 MUTUALITY OF CONTRACTS
(8) PHILIPPINE SAVINGS BANK v.
SPOUSES ALFREDO M. CASTILLO AND
ELIZABETH C. CASTILLO, and SPOUSES
ROMEO B. CAPATI and AQUILINA M. LOBO
G.R. No. 193178, May 30, 2011
FACTS: Respondents obtained a loan with
face value of P2,500,000.00 and 17% interest
rate per annum from petitioner with real estate
mortgage over lots they owned in Tondo,
Manila. From the release of the loan, the
highest interest was 29% and the lowest was
15.5% per annum. Respondents were notified
in writing.They neither gave their confirmation
thereto nor did they formally question the
changes.However, respondent Castillo sent
several letters to petitioner requesting for the
reduction of the rates. Respondents defaulted
due to financial constraints.
Thus, petitioner initiated an extrajudicial
foreclosure sale of the mortgaged properties
which were auctioned. A certificate of sale was
then issued and submitted to the Clerk of Court
and to the Ex-Officio Sheriff ofManila. The
same, sansthe approval of the Executive
Judge of the RTC, was registered with the
Registry of Deeds. Respondents failed to
redeem the property.
Respondents filed a case before the
RTC. After trial, the RTC decided that the
questioned increases of the interest were
unreasonable, excessive, and arbitrary; that
Petitioner should refund Respondents of the
amount of interest collected in excess of 17%
per annum; that the Extrajudicial Foreclosure
conducted by the defendants are voidab
initio;that the Register of Deeds is ordered to
cancel the corresponding annotations at the
back of TCTs; that defendant is to pay plaintiffs
moral and exemplary damages, and attorneys
fees.
Petitioner filed an MR.The RTC partially
granted the motion by modifying the interest
rate from 17% to 24% per annum.
The case was appealed to the CA which
modified the decision of the RTC ordering PSB
to refund to the plaintiffs the amount of interest
collected in excess of 17% per annum;
declaring the Extrajudicial Foreclosure
conducted by the defendants as valid; and
modifying the damages awarded to plaintiff.
ISSUE: Did the CA err in
(1) declaring that the modifications in
the interest rates are unreasonable; and
(2) sustaining the award of damages
and attorney’s fees?
RULING: Here, the increase or decrease of
interest rates hinge solely on the discretion of
petitioner, violated the principle of mutuality of
contracts, and is unconscionable; therefore
void.Any stipulation regarding the validity or
compliance of the contract left solely to the will
of one of the parties is likewise invalid.
Petitioner cannot claim that respondent
recognized the legality of the changes.
Respondents exhibits readily shows that the
conformity letter signed by them pertain only to
the amendment of the interest rate review
period from 90 days to 30 days.This is
separate from the modification of the interest
rate itself. Moreover, respondents assent
cannot be implied from their lack of response
to the memos sent by petitioner.No one
receiving a proposal to change a contract is
obliged to answer the proposal; assent is
therefore not implied.
Likewise, it cannot be said that
respondents recognized the rates legality when
it requested for a reduction its reduction. This
does not translate into consent. Further, the
letters were actually questioning the propriety
of the interest rates.
Here, we are not sufficiently convinced
that fraud, bad faith, or wanton disregard of
contractual obligations can be imputed to
petitioner simply because it unilaterally
imposed the changes in interest rates. Thus,
the award of moral and exemplary damages is
unwarranted.In the same vein, respondents
cannot recover attorneys fees and litigation
expenses.
As regards the award for refund to
respondents of their interest payments in
excess of 17% per annum, the same should
include legal interest. We have held that when
an obligation is breached, and it consists in the
payment of a sum of money, the interest on the
amount of damages shall be at the rate of
12%per annum, reckoned from the time of the
filing of the complaint.
(9) PHILIPPINE NATIONAL BANK v. THE
HON. COURT OF "PEALS and AMBROSIO
PADILLA
G.R. No. 88880. April 30, 1991
FACTS: Private respondent (PR) Ambrosio
Padilla, applied for and was granted a credit
line of 321.8 million, by petitioner PNB. This
was for a term of 2 years at 18% interest per
annum and was secured by real estate
mortgage and 2 promissory notes executed in
favor of Petitioner by PR. The credit agreement
and the promissory notes, in effect, provide
that PR agrees to be bound by “increases to
the interest rate stipulated, provided it is within
the limits provided for by law”.
Conflict in this case arose when
Petitioner unilaterally increased the interest
rate from 18% to: (1) 32% [July 1984]; (2) 41%
[October 1984]; and (3) 48% [November 1984],
or 3 times within the span of a single year. This
was done despite the numerous letters of
request made by PR that the interest rate be
increased only to 21% or 24%.
PR filed a complaint against Petitioner
with the RTC. The latter dismissed the case
for lack of merit. Appeal by PR to CA resulted
in his favor. Hence the petition for certiorari
under Rule 45 of ROC filed by PNB with SC.
ISSUE: Despite the removal of the Usury Law
ceiling on interest, may the bank validly
increase the stipulated interest rate on loans
contracted with third persons as often as
necessary and against the protest of such
persons.
RULING: NO. Although under Sec. 2 of PD
116, the Monetary Board is authorized to
prescribe the maximum rate of interest for
loans and to change such rates whenever
warranted by prevailing economic and social
conditions, by express provision, it may not do
so “oftener than once every 12 months”. If the
Monetary Board cannot, much less can PNB,
effect increases on the interest rates more than
once a year.
Based on the credit agreement and
promissory notes executed between the
parties, although PR did agree to increase on
the interest rates allowed by law, no law was
passed warranting Petitioner to effect increase
on the interest rates on the existing loan of PR
for the months of July to November of 1984.
Neither there being any document executed
and delivered by PR to effect such increase.
For escalation clauses to be valid and
warrant the increase of the interest rates on
loans, there must be: (1) increase was made
by law or by the Monetary Board; (2) stipulation
must include a clause for the reduction of the
stipulated interest rate in the event that the
maximum interest is lowered by law or by the
Monetary board. In this case, PNB merely
relied on its own Board Resolutions, which are
not laws nor resolutions of the Monetary Board.
Despite the suspension of the Usury
Law, imposing a ceiling on interest rates, this
does not authorize banks to unilaterally and
successively increase interest rates in violation
of Sec. 2 PD 116.
Increases unilaterally effected by PNB
was in violation of the Mutuality of Contracts
under Art. 1308. This provides that the validity
and compliance of the parties to the contract
cannot be left to the will of one of the
contracting parties. Increases made are
therefore void.
Increase on the stipulated interest rates
made by PNB also contravenes Art. 1956. It
provides that, “no interest shall be due unless it
has been expressly stipulated in writing”. PR
never agreed in writing to pay interest imposed
by PNB in excess of 24% per annum. Interest
rate imposed by PNB, as correctly found by
CA, is indubitably excessive.
(10) SPOUSES MARIANO and GILDA
FLORENDO v. COURT OF APPEALS and
LAND BANK OF THE PHILIPPINES
GR NO 101771
FACTS: Gilda Florendo (was) an employee of
Land Bank of the Philippines from May 17,
1976 until August 16, 1984 when she
voluntarily resigned. However, before her
resignation, she applied for a housing loan of
P148,000.00, payable within 25 years from
respondent bank's Provident Fund on July 20,
1983. The petitioners and respondent bank,
through the latter's duly authorized
representative, executed the Housing Loan
Agreement and a Real Estate Mortgage and
Promissory Note. The loan was actually given
to (petitioner) Gilda Florendo in her capacity as
employee of the respondent bank. On March
19, 1985, respondent bank increased the
interest rate on petitioner's loan from 9% per
annum to 17%, the said increase to take effect
on March 19, 1985 and that the details of the
increase are embodied in (Landbank's)
ManCom Resolution No. 85-08 dated March
19, 1985 and in a PF (Provident Fund)
Memorandum Circular (No. 85-08, Series of
1985).
The respondent bank first informed
petitioners of the said increase in a letter dated
June 7, 1985. The petitioners protested the
increase. The respondent bank kept on
demanding that petitioner pay the increased
interest or the new monthly installments based
on the increased interest rate, but petitioners
just as vehemently maintained that the said
increase is unlawful and unjustifiable. Because
of respondent bank's repeated demands,
petitioners were forced to file the instant suit for
Injunction and Damages. Despite respondent
bank's demands that petitioners pay the
increased interest or increased monthly
installments, they (petitioners) have faithfully
paid and discharged their loan obligations,
more particularly the monthly payment of the
original stipulated installment of P1,248.72.
Disregarding respondent bank's
repeated demand for increased interest and
monthly installment, petitioners are presently
up-to-date in the payments of their obligations
under the original contracts (Housing Loan
Agreement, Promissory Note and Real Estate
Mortgage) with respondent bank.
ISSUE: Did the respondent bank have a valid
and legal basis to impose an increased interest
rate on the petitioners' housing loan?
RULING: In order that obligations arising
from contracts may have the force of law
between the parties, there must be
mutuality between the parties based on
their essential equality, hence, a contract
containing a condition which makes its
fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting
parties, is void.
The petition is hereby GRANTED. The
Court hereby REVERSES and SETS ASIDE
the challenged Decision of the Court of
Appeals. The interest rate on the subject
housing loan remains at nine (9) percent per
annum and the monthly amortization at
P1,248.72.
It will not be amiss to point out that the
unilateral determination and imposition of
increased interest rates by the herein
respondent bank is obviously violative of
the principle of mutuality of contracts ordained
in Article 1308 of the Civil Code. As this Court
held in PNB: 16
In order that obligations arising from
contracts may have the force of law
between the parties, there must
be mutuality between the parties based
on their essential equality. A contract
containing a condition which makes its
fulfillment dependent exclusively upon
the uncontrolled will of one of the
contracting parties, is void (Garcia vs.
Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the . . . loan
agreement between the PNB and the
private respondent gave the PNB a
license (although in fact there was none)
to increase the interest rate at will during
the term of the loan, that license would
have been null and void for being
violative of the principle of mutuality
essential in contracts. It would have
invested the loan agreement with the
character of a contract of adhesion,
where the parties do not bargain on
equal footing, the weaker party's (the
debtor) participation being reduced to
the alternative "to take it or leave it"
(Qua vs. Law Union & Rock Insurance
Co., 95 Phil 85). Such a contract is a
veritable trap for the weaker party whom
the courts of justice must protect against
abuse and imposition.
The respondent bank tried to sidestep
this difficulty by averring that petitioner Gilda
Florendo as a former bank employee was very
knowledgeable concerning respondent bank's
lending rates and procedures, and therefore,
petitioners were "on an equal footing" with
respondent bank as far as the subject loan
contract was concerned. That may have been
true insofar as entering into the original loan
agreement and mortgage contract was
concerned. However, that does not hold true
when it comes to the determination and
imposition of escalated rates of interest as
unilaterally provided in the ManCom
Resolution, where she had no voice at all in its
preparation and application.
Let it be clear that this Court
understands respondent bank's position that
the concessional interest rate was really
intended as a means to remunerate its
employees and thus an escalation due to
resignation would have been a valid stipulation.
But no such stipulation was in fact made, and
thus the escalation provision could not be
legally applied and enforced as against herein
petitioners.
(11) SPS JUICO V. CHINA BANKING
CORPORATION
FACTS: Spouses Ignacio F. Juico and Alice P.
Juico obtained a loan from China Banking
Corporation as evidenced by two Promissory
Notes for the sums of P6M and P4M. The loan
was secured by a Real Estate Mortgage over
petitioners’ property.
Petitioners failed to pay the monthly
amortization. Demand letter sent but to no
avail. The amount due totaled P19M inclusive
of interests. The mortgaged property was sold
at public auction, with respondent as highest
bidder.
Another demand letter was sent by
respondent demanding P8M, the amount of
deficiency after applying the proceeds of the
auction. No response from petitioner,
respondent filed in the trial court for collection.
Petitioners contend that there is no
cause of action considering that the principal of
the loan was already paid when the mortgaged
property was extrajudicially foreclosed and sold
for P10.3M.
Ms. Annabelle Yu, respondent's Senior
Loans Assistant, testified as witness. She said
that the interest rate changes every month
based on the prevailing market rate and she
notified petitioners of the prevailing rate by
calling them monthly before their account
becomes past due. When asked if there was
any written authority from petitioners for
respondent to increase the interest rate
unilaterally, she answered that petitioners
signed a promissory note indicating that they
agreed to pay interest at the prevailing rate.
Petitioner Ignacio J. testified that prior
to the release of the loan, he was required to
sign a blank promissory note and was informed
that the interest rate on the loan will be based
on prevailing market rates. That every month,
he was being informed of the prevailing market
rates. He was not able to pay due to financial
crisis. He admitted having read the promissory
notes and that he is aware of his obligation
under them before he signed the same. RTC
ruled in favor of respondent. CA affirmed
Petitioners contend that the interest rates
imposed by respondent are not valid as they
were not by virtue of any law or Bangko Sentral
ng Pilipinas (BSP) regulation or any regulation
that was passed by an appropriate government
entity. They insist that the interest rates were
unilaterally imposed by the bank and thus
violate the principle of mutuality of contracts.
They argue that the escalation clause in the
promissory notes does not give respondent the
unbridled authority to increase the interest rate
unilaterally. Any change must be mutually
agreed upon.
ISSUE: Whether the interest rates imposed
upon them by respondent are valid.
RULING: The principle of mutuality of
contracts is expressed in Article 1308 of the
Civil Code, which provides:
Article 1308. The contract must bind
both contracting parties; its validity or
compliance cannot be left to the will of
one of them.
Article 1956 of the Civil Code likewise
ordains that “[n]o interest shall be due
unless it has been expressly stipulated
in writing.”
The binding effect of any agreement
between parties to a contract is premised on
two settled principles:
(1) that any obligation arising from
contract has the force of law between the
parties; and
(2) that there must be mutuality between
the parties based on their essential equality.
Any contract which appears to be
heavily weighted in favor of one of the parties
so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or
compliance of the contract which is left solely
to the will of one of the parties, is likewise,
invalid.
Escalation clauses refer to stipulations
allowing an increase in the interest rate agreed
upon by the contracting parties. This Court has
long recognized that there is nothing inherently
wrong with escalation clauses which are valid
stipulations in commercial contracts to maintain
fiscal stability and to retain the value of money
in long term contracts. Hence, such stipulations
are not void per se.
Nevertheless, an escalation clause
“which grants the creditor an unbridled right to
adjust the interest independently and upwardly,
completely depriving the debtor of the right to
assent to an important modification in the
agreement” is void. A stipulation of such nature
violates the principle of mutuality of contracts.
Thus, this Court has previously nullified the
unilateral determination and imposition by
creditor banks of increases in the rate of
interest provided in loan contracts. The validity
of the escalation clause did not give petitioner
the unbridled right to unilaterally adjust interest
rates.
The adjustment should have still been
subjected to the mutual agreement of the
contracting parties. In light of the absence of
consent on the part of respondents to the
modifications in the interest rates, the adjusted
rates cannot bind them notwithstanding the
inclusion of a de-escalation clause in the loan
agreement.
Escalation clauses are not basically
wrong or legally objectionable as long as they
are not solely potestative but based on
reasonable and valid grounds. We hold that the
escalation clause is still void because it grants
respondent the power to impose an increased
rate of interest without a written notice to
petitioners and their written consent.
Respondent’s monthly telephone calls to
petitioners advising them of the prevailing
interest rates would not suffice. A detailed
billing statement based on the new imposed
interest with corresponding computation of the
total debt should have been provided by the
respondent to enable petitioners to make an
informed decision. An appropriate form must
also be signed by the petitioners to indicate
their conformity to the new rates. Compliance
with these requisites is essential to preserve
the mutuality of contracts. For indeed, one-
sided impositions do not have the force of law
between the parties, because such impositions
are not based on the parties’ essential equality.
Modifications in the rate of interest for
loans pursuant to an escalation clause must be
the result of an agreement between the parties.
Unless such important change in the contract
terms is mutually agreed upon, it has no
binding effect.
(12) SPOUSES EDUARDO AND LYDIA
SILOS V. PHILIPPINE NATIONAL BANK
G.R. No. 181045, July 02, 2014
FACTS: Spouses Silos have been in business
for about two decades of operating a
department store and buying and selling ready-
to-wear apparel. Spouses Silos then secured a
revolving credit line with Philippine National
Bank (PNB) through a real estate mortgage as
a security. After two years, their credit line
increased.
They then signed a Credit Agreement,
which was also amended 2 years later, and
several Promissory Notes (PN) as regards their
Credit Agreements with PNB. The said loan
was initially subjected to a 19.5% interest rate
per annum. In the Credit Agreements, Spouses
Silos bound themselves to the power of PNB to
modify the interest rate depending on whatever
policy that PNB may adopt in the future without
need of notice upon them. Thus, the said
interest rates played from 16% to as high as
32% per annum.
Spouses Silos acceded to the policy by
pre-signing a total of 26 PNs leaving the
individual applicable interest rates at hand
blank since it would be subject to modification
by PNB. Spouses Silos regularly renewed and
made good on their PNs, religiously paid the
interests without objection or fail. However,
during the 1997 Asian Financial Crisis,
Spouses Silos faltered when the interest rates
soared. The 26th PN became past due and
despite repeated demands by PNB, they failed
to make good on the note. Thus, PNB
foreclosed and auctioned the involved security
for the mortgage.
Spouses Silos instituted an action to
annul the foreclosure sale on the ground that
the succeeding interest rates used in their loan
agreements was left to the sole will of PNB, the
same fixed by the latter without their prior
consent and thus, void. The RTC ruled that
such stipulation authorizing both the increase
and decrease of interest rates as may be
applicable is valid. The CA affirmed the RTC
decision.
ISSUE: Whether or not PNB, on its own,
modify the interest rate in a loan agreement
without violating the mutuality of contracts.
HELD: NO. PNB cannot modify the interest
rate in a loan agreement on its own. However,
contrary to the stubborn insistence of petitioner
bank, the said law and circular did not
authorize either party to unilaterally raise the
interest rate without the other's consent. It is
basic that there can be no contract in the true
sense in the absence of the element of
agreement, or of mutual assent of the parties.
If this assent is wanting on the part of the one
who contracts, his act has no more efficacy
than if it had been done under duress or by a
person of unsound mind.
Similarly, contract changes must be
made with the consent of the contracting
parties. The minds of all the parties must meet
as to the proposed modification, especially
when it affects an important aspect of the
agreement. In the case of loan contracts, it
cannot be gainsaid that the rate of interest is
always a vital component, for it can make or
break a capital venture. Thus, any change
must be mutually agreed upon, otherwise, it is
bereft of any binding effect.
We cannot countenance petitioner
bank's posturing that the escalation clause at
bench gives it unbridled right to unilaterally
upwardly adjust the interest on private
respondents' loan. That would completely take
away from private respondents the right to
assent to an important modification in their
agreement, and would negate the element of
mutuality in contracts.
RATIO: Article 1308 of the Civil Code: Art.
1308. The contract must bind both contracting
parties; its validity or compliance cannot be left
to the will of one of them.

 RELATIVITY OF CONTRACTS
(13) DKC Holdings Corp. v. CA
G.R. No. 118248 (329 SCRA 666), 5 April
2000
(Relativity of Contracts)
FACTS: DKC Holdings Corporation entered
into a Contract of Lease with Option to Buy
with Encarnacion Bartolome, which option
must be exercised within a period of two years
counted from the signing of the Contract. In
turn, DKC undertook to pay P3,000.00 a month
as consideration for the reservation of its
option. Within the two-year period, DKC shall
serve formal written notice upon the lessor of
its desire to exercise its option.
When Encarnacion died, petitioner
coursed its payment to private respondent
Victor Bartolome, being the sole heir of
Encarnacion. Victor, however, refused to
accept the payments. Subsequently, petitioner
served upon Victor, via registered mail, notice
that it was exercising its option to lease the
property, tendering the amount of P15,000.00
as rent. Again, Victor refused to accept the
tendered rental fee and to
surrender possession of the property to
petitioner. On April 23, 1990, petitioner filed
a complaint for specific performance and
damages against Victor and the Register of
Deeds
ISSUE: Whether or not the rights under a
Contact of Lease with Option to Buy were
transmissible.
RULING: Article 1311 of the Civil Code states
that the general rule, therefore, is that heirs are
bound by contracts entered into by their
predecessors-in-interest except when the
rights and obligations arising therefrom are not
transmissible by (1) their nature, (2) stipulation
or (3) provision of law. The Court held that
there is neither contractual stipulation nor
legal provision making the rights
and obligations under the lease contract
intransmissible. More importantly, the nature of
the rights and obligations therein are
transmissible.
In the case at bar, the subject matter of
the contract is a lease, which is a property
right. The death of a party does not excuse
nonperformance of a contract which involves a
property right and the rights
and obligations thereunder pass to the
personal representatives of the deceased.
Similarly, nonperformance is not excused by
the death of the party when the other party has
a property interest in the subject matter of the
contract.
Therefore, Victor is bound by the subject
Contract of Lease with Option to Buy.
(14) SPOUSES MAMARIL VS. THE BOY
SCOUTS OF THE PHILIPPINES
FACTS: Spouses Benjamin C. Mamaril and
Sonia P. Mamaril (Sps. Mamaril) are jeepney
operators since 1971. They would park their six
6 passenger jeepneys every night at the Boy
Scout of the Philippines’ (BSP) compound
located at Malate, Manila for a fee of ₱300.00
per month for each unit. On May 26, 1995 at 8
o’clock in the evening, all these vehicles were
parked inside the BSP compound. The
following morning, however, one of the
vehicles was missing and was never
recovered. According to the security guards
Cesario Peña (Peña) and Vicente Gaddi
(Gaddi) of AIB Security Agency, Inc. (AIB) with
whom BSP had contracted for its security and
protection, a male person who looked familiar
to them took the subject vehicle out of the
compound.
Sps. Mamaril filed a complaint for
damages before the RTC of Manila against
BSP, AIB, Peña and Gaddi. They averred that
the loss of the subject vehicle was due to the
gross negligence of the above-named security
guards on-duty who allowed the subject vehicle
to be driven out by a stranger despite their
agreement that only authorized drivers duly
endorsed by the owners could do so. Peña and
Gaddi even admitted their negligence during
the ensuing investigation. Notwithstanding,
BSP and AIB did not heed Sps. Mamaril’s
demands for a conference to settle the matter.
They therefore prayed that Peña and Gaddi,
together with AIB and BSP, be held liable for:
(a) the value of the subject vehicle and its
accessories in the aggregate amount of
₱300,000.00; (b) ₱275.00 representing daily
loss of income/boundary reckoned from the
day the vehicle was lost; (c) exemplary
damages; (d) moral damages; I attorney’s fees;
and (f) cost of suit.
In its Answer, BSP denied any liability
contending that not only did Sps. Mamaril
directly deal with AIB with respect to the
manner by which the parked vehicles would be
handled, but the parking ticket itself expressly
stated that the “Management shall not be
responsible for loss of vehicle or any of its
accessories or article left therein.” It also
claimed that Sps. Mamaril erroneously relied
on the Guard Service Contract. Apart from not
being parties thereto, its provisions cover only
the protection of BSP’s properties, its officers,
and employees.
ISSUE: Whether BSP may be held liable for
the loss of the vehicle

RULING: NO.The proximate cause of the loss
of Sps. Mamaril’s vehicle was the negligent act
of security guards Peña and Gaddi in allowing
an unidentified person to drive out the subject
vehicle. The records are bereft of any finding of
negligence on the part of BSP. Neither will the
vicarious liability of an employer under Article
2180 of the Civil Code apply in this case. Peña
and Gaddi were assigned as security
guards by AIB to BSP pursuant to the
Guard Service Contract. No employer-
employee relationship existed between BSP
and the security guards assigned in its
premises. Sps. Mamaril are not parties to
the Guard Service Contract. The Guard
Service Contract between defendant-
appellant BSP and defendant AIB Security
Agency is purely between the parties
therein.
Article 1311 of the Civil Code states:
Art. 1311. Contracts take effect
only between the parties, their
assigns and heirs, except in case
where the rights and obligations
arising from the contract are not
transmissible by their nature, or by
stipulation or by provision of law.
The heir is not liable beyond the
value of the property he received
from the decedent.
If a contract should contain some
stipulation in favor of a third person, he
may demand its fulfillment provided he
communicated his acceptance to the
obligor before its revocation. A mere
incidental benefit or interest of a person is
not sufficient. The contracting parties must
have clearly and deliberately conferred a
favor upon a third person.
Thus, in order that a third person
benefited by the second paragraph of Article
1311, referred to as a stipulation pour autrui,
may demand its fulfillment, the following
requisites must concur:
(1) There is a stipulation in favor of a
third person;
(2) The stipulation is a part, not the
whole, of the contract;
(3) The contracting parties clearly and
deliberately conferred a favor to the third
person – the favor is not merely incidental;
(4) The favor is unconditional and
uncompensated;
(5) The third person communicated his
or her acceptance of the favor before its
revocation; and
(6) The contracting parties do not
represent, or are not authorized, by the third
party. However, none of the foregoing
elements obtains in this case.
It is undisputed that Sps. Mamaril are
not parties to the Guard Service Contract.
Neither did the subject agreement contain any
stipulation pour autrui. And even if there was,
Sps. Mamaril did not convey any acceptance
thereof. Thus, under the principle of
relativity of contracts, they cannot validly
claim any rights or favor under the said
agreement.
BSP sought the services of defendant
AIB Security Agency for the purpose of the
security and protection of its properties, as well
as that of its officers and employees, so much
so that in case of loss of [sic] damage suffered
by it as a result of any act or negligence of the
guards, the security agency would then be held
responsible therefor. There is absolutely
nothing in the said contract that would
indicate any obligation and/or liability on
the part of the parties therein in favor of
third persons such as herein plaintiffs-
appellees.
Moreover, the Court concurs with the
finding of the CA that the contract between the
parties herein was one of lease as defined
under Article 1643 of the Civil Code. It has
been held that the act of parking a vehicle in a
garage, upon payment of a fixed amount, is a
lease. The agreement with respect to the
ingress and egress of Sps. Mamaril’s vehicles
were coordinated only with AIB and its security
guards, without the knowledge and consent of
BSP. Accordingly, the mishandling of the
parked vehicles that resulted in herein
complained loss should be recovered only from
the tort feasors (Peña and Gaddi) and their
employer, AIB; and not against the lessor,
BSP.
(15) PRUDENTIAL BANK AND TRUST
COMPANY (now BANK OF THE PHILIPPINE
ISLANDS) vs. LIWAYWAY ABASOLO
G.R. No. 186738
FACTS: Leonor Valenzuela-Rosales inherited
two parcels of land situated in Palanan, Sta.
Cruz, Laguna (the properties), registered as
OCT Nos. RO-527 and RO-528. After she
passed away, her heirs executed on June 14,
1993 a Special Power of Attorney (SPA) in
favor of Liwayway Abasolo empowering her to
sell the properties.
Sometime in 1995, Corazon Marasigan
wanted to buy the properties which were being
sold for P2,448,960, but as she had no
available cash, she broached the idea of first
mortgaging the properties to petitioner
Prudential Bank and Trust Company (PBTC),
the proceeds of which would be paid directly to
Abasolo which she agreed to the proposal.
Corazon and Abasolo consultation with
PBTCs Head Office, its employee, Norberto
Mendiola, allegedly advised Abasolo to issue
an authorization for Corazon to mortgage the
properties, and for her to act as one of the co-
makers so that the proceeds could be released
to both of them.
To guarantee the payment of the property,
Corazon executed on August 25, 1995 a
Promissory Note for P2,448,960 in favor of
Abasolo.
In October 1995, Mendiola advised her
to transfer the properties first to Corazon for
the immediate processing of Corazons loan
application with assurance that the proceeds
thereof would be paid directly to Abasolo, and
the obligation would be reflected in a bank
guarantee.
Heeding Mendiolas advice, Abasolo
executed a Deed of Absolute Sale over the
properties in favor of Corazon following which
or on December 4, 1995, TCT Nos. 164159
and 164160 were issued in the name of
Corazon.
Corazons application for a loan with
PBTCs Tondo Branch was approved on
December 1995. She thereupon executed a
real estate mortgage covering the properties to
secure the payment of the loan. In the absence
of a written request I bank guarantee, the
PBTC released the proceeds of the loan to
Corazon.
Abasolo later got wind of the approval of
Corazons loan application and the release of
its proceeds to Corazon who, despite repeated
demands, failed to pay the purchase price of
the properties.
Abasolo eventually accepted from Corazon
partial payment in kind consisting of one owner
type jeepney and four passenger jeepneys,
plus installment payments, which, by the trial
courts computation, totaled P665,000.
In view of Corazons failure to fully pay
the purchase price, Abasolo filed a complaint
for collection of sum of money and annulment
of sale and mortgage with damages, against
Corazon and PBTC before the (RTC) of Sta.
Cruz, Laguna.
Petitioners Contention (Corazon and
PBTC): Corazon denied that there was an
agreement that the proceeds of the loan would
be paid directly to Abasolo. And she claimed
that the vehicles represented full payment of
the properties, and had in fact overpaid
P76,040.
PBTC also denied that there was any
arrangement between it and respondent that
the proceeds of the loan would be released to
her. It claimed that it may process a loan
application of the registered owner of the real
property who requests that proceeds of the
loan or part thereof be payable directly to a
third party [but] the applicant must submit a
letter request to the Bank.
On March 12, 2004, RTC rendered
judgment in favor of Abasolo and against
Corazon who was made directly liable to
respondent, and against PBTC who was made
subsidiarily liable in the event that Corazon
fails to pay. Thus the trial court disposed:
Defendant Corazon Marasigan to pay
the plaintiff the amount of P1,783,960.00 plus
three percent (3%) monthly interest per month
from August 25, 1995 until fully paid. Further,
to pay the plaintiff the sum equivalent to twenty
percent five (25%) of P1,783,960.00 as
attorney’s fees.
Defendant Prudential Bank and Trust
Company to pay the plaintiff the amount of
P1,783,960.00 or a portion thereof plus the
legal rate of interest per annum until fully paid
in the event that Defendant Corazon
Marasigan fails to pay the said amount or a
portion thereof.
On appeal, the Court of Appeals by
Decision of January 14, 2008, affirmed the trial
courts decision with modification on the
amount of the balance of the purchase price
which was reduced from P1,783,960 to
P1,753,960.
Petitioners motion for reconsideration
having been denied by the appellate court by
Resolution of February 23, 2009
ISSUE: Whether the PBCT is subsidiary liable?
HELD: In the absence of a lender-borrower
relationship between petitioner and Liwayway,
there is no inherent obligation of PBTC to
release the proceeds of the loan to Abasolo.
To a banking institution, well-defined
lending policies and sound lending practices
are essential to perform its lending function
effectively and minimize the risk inherent in any
extension of credit.
In order to identify and monitor loans
that a bank has extended, a system of
documentation is necessary. Under this fold
falls the issuance by a bank of a guarantee
which is essentially a promise to repay the
liabilities of a debtor, in this case Corazon. It
would be contrary to established banking
practice if Mendiola issued a bank guarantee,
even if no request to that effect was made.
The principle of relativity of contracts in
Article 1311 of the Civil Code supports
petitioners cause; for Liwayway to prove her
claim against petitioner, a clear and deliberate
act of conferring a favor upon her must be
present. A written re quest would have sufficed
to prove this, given the nature of a banking
business, not to mention the amount involved.
Since it has not been established that
petitioner had an obligation to Liwayway, there
is no breach to speak of. Layaway’s claim
should only be directed against Corazon.
Petitioner cannot thus be held subisidiarily
liable.
WHEREFORE, the Decision of January
14, 2008 of the Court of Appeals, in so far as it
holds petitioner, Prudential Bank and Trust
Company (now Bank of the Philippine Islands),
subsidiary liable in case its co-defendant
Corazon Marasigan, who did not appeal the
trial court’s decision, fails to pay the judgment
debt, is R EVERSED and SET ASIDE. The
complaint against petitioner is accordingly
DISMISSED.
(16) SPOUSES FRANCISCO SIERRA
(SUBSTITUTED BY DONATO, TERESITA,
TEODORA, LORENZA, LUCINA, IMELDA,
VILMA, AND MILAGROS SIERRA) AND
ANTONINA SANTOS, SPOUSES ROSARIO
SIERRA AND EUSEBIO CALUMA LEYVA,
AND SPOUSES SALOME SIERRA AND
FELIX GATLABAYAN (SUBSTITUTED BY
BUENAVENTURA, ELPIDIO, PAULINO,
CATALINA, GREGORIO, AND EDGARDO
GATLABAYAN, LORETO REILLO, FERMINA
PEREGRINA, AND NIDA HASHIMOTO) v.
PAIC SAVINGS AND MORTGAGE BANK,
INC.
FACTS: On May 31, 1983, Goldstar
Conglomerates, Inc. (GCI), represented by
Guillermo Zaldaga, obtained from First Summa
Savings and Mortgage Bank (Summa Bank),
now respondent Paic Savings and Mortgage
Bank, Inc. (PSMB), a loan in the amount of
P1,500,000.00. As security, GCI executed in
favor of PSMB six promissory note in the
aggregate amount of P1,500,000.00 as well as
a Deed of Real Estate Mortgage over a parcel
of land. As additional security, petitioners four
parcels of land in Antipolo City registered in
their names (subject properties). Records show
that after the signing of the mortgage deed,
Zaldaga gave petitioner Francisco Sierra four
manager’s checks with an aggregate amount
of P200,000.00, which were later successfully
encashed, as well as several post-dated
checks.
Eventually, GCI defaulted in the payment of its
loan to PSMB, prompting the latter to
extrajudicially foreclose the mortgage on the
subject properties after due notice to
petitioners. Since petitioners failed to redeem
the subject properties within the redemption
period, their certificates of title were cancelled
and new ones were issued in PSMB’s name.
7 years after loan, On September 16,
1991, petitioners filed a complaint for the
declaration of nullity of the real estate
mortgage and its extrajudicial foreclosure, and
damages against PSMB and Summa Bank
before the RTC. Petitioners averred that under
pressing need of money, with very limited
education and lacking proper instructions, they
fell prey to a group who misrepresented to
have connections with Summa Bank and, thus,
could help them secure a loan.
They were made to believe that they
applied for a loan, the proceeds of which would
be released through checks drawn against
Summa Bank. Relying in good faith on the
checks issued to them, petitioners
unsuspectingly signed a document
denominated as Deed of Real Estate Mortgage
(subject deed), couched in highly technical
legal terms, which was not interpreted in a
language/dialect known to them, and which
was not accompanied by the loan documents.
However, when they presented for payment
the earliest-dated checks to the drawee bank,
the same were dishonored for the reason
“Account Closed.”
ISSUE: The essential issues in this case are
whether or not the CA erred in:
(a) ruling that petitioners were aware that they
were mere accommodation mortgagors, and
(b) dismissing the complaint on the grounds of
prescription and laches.
RULING: Time and again, the Court has
stressed that allegations must be proven by
sufficient evidence because mere allegation is
not evidence. Thus, one who alleges any
defect or the lack of a valid consent to a
contract must establish the same by full, clear,
and convincing evidence, not merely by
preponderance of evidence. The rule is that he
who alleges mistake affecting a transaction
must substantiate his allegation, since it is
presumed that a person takes ordinary care of
his concerns and that private transactions have
been fair and regular.
After a judicious perusal of the records, the
Court finds petitioners’ claim of mistake or error
(that they acted merely as accommodation
mortgagors) grounded on their “very limited
education” and “lack of proper instruction” not
to be firmly supported by the evidence on
record.
A. there being valid consent on the part of
petitioners to act as accommodation
mortgagors, no reversible error was
committed by the CA. Petitioners are not
entitled to the proceeds of the loan, nor
were required to be furnished with the
loan documents or notice of the
borrower’s default in paying the principal
obligation but merely secures it by
mortgaging his or her own property.
B. Based on case law, a “mortgage action”
refers to an action to enforce a right
necessarily arising from a mortgage.In
the present case, petitioners are not
“enforcing” their rights under the
 mortgage but are, in fact, seeking to be
relieved therefrom. The complaint filed
by petitioners is, therefore, not a
mortgage action as contemplated under
Article 1142.
Considering, however, petitioners’
failure to establish that their consent to the
mortgage was vitiated, rendering them without
a cause of action, much less a right of action to
annul the mortgage, the question of whether or
not the complaint has prescribed becomes
merely academic.
In any event, even assuming that
petitioners have a valid cause of action, the
four-year prescriptive period on voidable
contracts shall apply. Since the complaint for
annulment was anchored on a claim of
mistake, i.e., that petitioners are the borrowers
under the loan secured by the mortgage, the
action should have been brought within four (4)
years from its discovery.
C. Laches. The Court holds that laches
applies.
As mortgagors desiring to attack a
mortgage as invalid, petitioners should act with
reasonable promptness, else its unreasonable
delay may amount to ratification. Verily, to
allow petitioners to assert their right to the
subject properties now after their unjustified
failure to act within a reasonable time would be
grossly unfair to PSMB, and perforce should
not be sanctioned.
 CONSENT
(17) LAUDICO vs. ARIAS
G.R. No. 16530 March 31, 1922
FACTS: Vicente Arias, who owned 2 buildings
in Carriedo, on his behalf and that of his co-
owners, wrote a letter to Mamerto Laudico,
giving him an option to lease the building to a
3rd person, and transmitting to him a tentative
contract in writing containing the conditions
upon which the proposed lease should be
made.
Laudico presented Fred Harden as the
part desiring to lease the building.
Other conditions were added and
counter-propositions were made.
These negotiations were carried on by
correspondence and verbally at interviews held
with Vicente, no definite agreement having
been arrived at until Laudico finally wrote a
letter to Arias on March 6,1919, advising him
that all his propositions, as amended and
supplemented, were accepted.
It is admitted that this letter was
received by Arias thru special delivery at 2:53
p.m. of that day.
On that same day, at 11:25 a.m., Arias
had, in turn, written a letter to Laudico,
withdrawing the offer to lease the building.
Laudico prays that the defendants be
compelled to execute the contract of lease of
the building in question.
Lower court rendered judgment in favor
of Laudico.
SC reversed the decision of the lower
court and absolved the defendants from the
complaint.
ISSUE: Whether a contract was created
between the parties through the letter of
acceptance sent by Laudico?
RULING: No. In the Civil Code, an acceptance
by letter does not have any effect until it comes
to the knowledge of the offeror. Therefore,
before he learns of the acceptance, the offeror
is not yet bound by it and can still withdraw the
offer.
Consequently, when Arias wrote to
Laudico, withdrawing the offer, he had the right
to do so, inasmuch as he had not yet received
notice of the acceptance. And when the notice
of the acceptance was received by Arias, it no
longer had any effect, as the offer was not then
in existence, the same having already been
withdrawn. There was no meeting of the minds,
through offer and acceptance, which is the
essence of the contract. While there was an
offer, there was no acceptance, and when the
latter was made and could have a binding
effect, the offer was then lacking. Though both
the offer and the acceptance existed, they did
not meet to give birth to a contract.
When Arias received the letter of
acceptance, his letter of revocation had already
been received. The latter was sent through a
messenger at 11:25 in the morning directly to
the office of Laudico and should have been
received immediately on that same morning, or
at least, before Arias received the letter of
acceptance. On this point, the SC do not give
any credence to the testimony of Laudico that
he received this letter of revocation at 3:30 in
the afternoon of that day.
DOCTRINE:
A contract is created through the
meeting of the minds of the parties and by
communicating the acceptance of the offer to
the other party.
An offer can be withdrawn and must be
communicated to the offeree before the
acceptance of the offeree is received by the
offeror.
 (17) MAMERTO LAUDICO and FRED M.
HARDEN, vs. MANUEL ARIAS RODRIGUEZ,
ET AL.,
G.R. No. 16530
FACTS: On February 5, 1919, the defendant,
Vicente Arias, who, with his codefendants,
owned the building Nos. 205 to 221 on
Carriedo Street, on his behalf and that of his
coowners, wrote a letter to the plaintiff,
Mamerto Laudico, giving him an option to lease
the building to a third person, and transmitting
to him for that purpose a tentative contract in
writing containing the conditions upon which
the proposed lease should be made. Later Mr.
Laudico presented his co-plaintiff, Mr. Fred. M.
Harden, as the party desiring to lease the
building. On one hand, other conditions were
added to those originally contained in the
tentative contract, and, on the other, counter-
propositions were made and explanations
requested on certain points in order to make
them clear.
These negotiations were carried on by
correspondence and verbally at interviews held
with Mr. Vicente Arias, no definite agreement
having been arrived at until the plaintiff, Mr.
Laudico, finally wrote a letter to Mr. Arias on
March 6, 1919, advising him that all his
propositions, as amended and supplemented,
were accepted. It is admitted that this letter
was received by Mr. Arias by special delivery
at 2.53 p.m. of that day. On that same day, at
11.25 in the morning, Mr. Arias had, in turn,
written a letter to the plaintiff, Mr. Laudico,
withdrawing the offer to lease the building. The
chief prayer of the plaintiff in this action is that
the defendants be compelled to execute the
contract of lease of the building in question.
It thus results that when Arias sent his
letter of withdrawal to Laudico, he had not yet
received the letter of acceptance, and when it
reached him, he had already sent his letter of
withdrawal. Under these facts we believe that
no contract was perfected between the
plaintiffs and the defendants. The parties agree
that the circumstances under which that offer
was made were such that the offer could be
withdrawn at any time before acceptance.
ISSUE: Whether there is a valid withdrawal of
offer Arias to Laudico
RULING: Under article 1262, paragraph 2, of
the Civil Code, an acceptance by letter does
not have any effect until it comes to the
knowledge of the offerer. Therefore, before he
learns of the acceptance, the latter is not yet
bound by it and can still withdraw the offer.
Consequently, when Mr. Arias wrote Mr.
Laudico, withdrawing the offer, he had the right
to do so, inasmuch as he had not yet receive
notice of the acceptance. And when the notice
of the acceptance was received by Mr. Arias, it
no longer had any effect, as the offer was not
then in existence, the same having already
been withdrawn. There was no meeting of the
minds, through offer and acceptance, which is
the essence of the contract. While there was
an offer, there was no acceptance, and when
the latter was made and could have a binding
effect, the offer was then lacking. Though both
the offer and the acceptance existed, they did
not meet to give birth to a contract.
The latter was sent through a
messenger at 11.25 in the morning directly to
the office of Laudico and should have been
received immediately on that same morning, or
at least, before Arias received the letter of
acceptance. On this point we do not give any
credence to the testimony of Laudico that he
received this letter of revocation at 3.30 in the
afternoon of that day. Laudico is interested in
destroying the effect of this revocation so that
the acceptance may be valid, which is the
principal ground of his complaint.
But even supposing Laudico’s testimony
to be true, still the doctrine invoked has no
application here. With regard to contracts
between absent persons there are two
principal theories, to wit, one holding that an
acceptance by letter of an offer has no effect
until it comes to the knowledge of the offerer,
and the other maintaining that it is effective
from the time the letter is sent.
(18) MALBAROSA V. CA
(APRIL 30, 2003)
DOCTRINE: A contract is perfected (i.e.
consent is deemed validly given) when
there is acceptance of the offer duly
communicated and must come to the
knowledge of the offeror. Non-acceptance
by the offeree reserves the right of the
offeror to withdraw the offer in the absence
of any stipulation.
FACTS: Salvador P. Malbarosa was the
president and general manager of Philtectic
Corporation, and an officer of other
corporations belonging to the SEADC group of
companies. SEADC assigned to the Malbarosa
one of its cars and membership certificates in
the Architectural Center, Inc.
Sometime January 1990, Malbarosa
decided to retire from the SEADC group of
companies and requested that his 1989
incentive compensation as president of
Philtectic Corporation be paid to him. It was
determined that he was entitled to a 395,000
incentive but SEADC made an offer of
P251,057.67 consisting of the car valued at
220,000 assigned to him which shall be
transferred to him and membership share in
one of their subsidiaries.
SEADC made its offer through its Vice-
Chairman of the Board of Directors, Senen
Valero. On March 16, 1990, Da Costa
(insurance rep) handed over the original of the
March 14, 1990 Letter-offer of the respondent
to the petitioner. The SEADC required the
MALBAROSA to accept the offer by affixing his
signature on the space provided in said letter-
offer and writing the date of said acceptance,
thus foreclosing an implied acceptance or any
other mode of acceptance by the petitioner.
However, when the letter-offer of the
respondent was delivered to the petitioner on
March 16, 1990, he did not accept or reject
the same for the reason that he needed time to
decide whether to reject or accept the same.
SEADC decided to withdraw its March 14,
1990 Offer.
On April 3, 1990, the Board of Directors
of the respondent approved a resolution
authorizing the Philtectic Corporation and/or
Senen Valero to demand from the petitioner for
the return of the car and to take such action
against the petitioner, including the institution
of an action in court against the petitioner for
the recovery of car.
Malbarosa refused to give the car
claiming that he cannot comply with said
demand as he already accepted the March 14,
1990 Letter-offer.
ISSUE: Whether there was valid acceptance of
the offer thus consent was given to perfect the
contract.
RULING: No. There was no contract perfected
between the petitioner and the respondent
corporation i.e. he has to return the car.
Although the Malbarosa claims that he
had affixed his conformity to the letter-offer on
March 28, 1990, the he failed to transmit the
said copy to the SEADC. It was only on April
7, 1990 when the petitioner appended to his
letter to the respondent a copy of the said
March 14, 1990 Letter-offer bearing his
conformity that he notified the respondent of
his acceptance to said offer. But then, the
respondent, through Philtectic Corporation,
had already withdrawn its offer and had
already notified the petitioner of said
withdrawal via respondent’s letter dated April
4, 1990 which was delivered to the petitioner
on the same day. Indubitably, there was no
contract perfected by the parties on the March
14, 1990 Letter-offer of the Respondent.
Even if it is assumed that the petitioner
was given a reasonable period to accept or
reject the offer of the respondent, the evidence
on record shows that from March 16, 1990 to
April 3, 1990, the petitioner had more than two
weeks which was more than sufficient for the
petitioner to accept the offer of the
Respondent. Although the petitioner avers that
he had accepted the offer of the respondent on
March 28, 1990, however, he failed to transmit
to the respondent the copy of the March 14,
1990 Letter-offer bearing his conformity
thereto. Unless and until the respondent
received said copy of the letter-offer, it cannot
be argued that a contract had already been
perfected between the petitioner and the
Respondent.
(19) NICOLAS SANCHEZ vs. SEVERINA
RIGOS
G.R. No. L-25494 June 14, 1972
ART. 1479. A promise to buy and sell a
determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or sell a
determinate thing for a price certain is binding
upon the promisor if the promise is supported
by a consideration distinct from the price.
FACTS: Nicolas Sanchez and Severina Rigos
executed an instrument entitled “Option to
Purchase” wherein Mrs. Rigos agreed,
promised and committed to sell to Mr. Sanchez
a parcel of land situated in Nueva Ecija for P1,
510. 00 within 2 years from the date of the
instrument, with the understanding that the
said option shall be deemed terminated and
elapsed if Mr. Sanchez shall fail to exercise his
right to buy the property within the stipulated
period.
Several tenders of payment were made
by Sanchez within said period but were
rejected by Mrs. Rigos thus the former
deposited said amount with the Court of First
Instance of Nueva Ecija and commenced
against the latter the present action, for specific
performance and damages.
Rigos contended that the contract
between them was only a unilateral promise
to sell , and the same being unsupported by
any valuable consideration, by force of the
New Civil Code, is null and void.
Sanchez alleged in his complaint that,
by virtue of the option under consideration,
“Rigos agreed and committed to sell” and “he
agreed and committed to buy” the land
described in the option.
The lower court rendered judgment in
favor of Sanchez and ordered Rigos to accept
the sum Sanchez judicially consigned, and to
execute in his favor the requisite deed of
conveyance.
ISSUE: Whether there was a contract to buy
and sell between the parties or only a unilateral
promise to sell.
RULING: The Supreme Court affirmed the
lower court’s decision.
The instrument executed is not “
contract to buy and sell ,” but merely granted
SANCHEZ an option to buy, as indicated by its
own title “ Option to Purchase .” The option did
not impose upon Sanchez the obligation to
purchase Rigos’ property. Rigos “agreed,
promised and committed” herself to sell the
land to Sanchez, but there is nothing in the
contract to indicate that her aforementioned
agreement, promise and undertaking is
supported by a consideration “distinct from
the price” stipulated for the sale of the land.
Article 1479 refers to “an accepted
unilateral promise to buy or to sell.” Since there
may be no valid contract without a cause or
consideration, the promisor is not bound by his
promise and may, accordingly, withdraw it.
Pending notice of its withdrawal, his accepted
promise partakes, however, of the nature of an
offer to sell which, if accepted, results in a
perfected contract of sale.
(19) Sanchez vs. Rigos
June 14, 1972
FACTS: Nicolas Sanchez and Severina Rigos
executed an instrument entitled “Option to
Purchase” wherein Mrs. Rigos agreed,
promised and committed to sell to Mr. Sanchez
a parcel of land for the amount of P1,510 within
two years from the date of the instrument, with
the understanding that the said option shall be
deemed terminated and elapsed if Mr.
Sanchez shall fail to exercise his right to buy
the property within the stipulated period. Mrs.
Rigos agreed and committed to sell and Mr.
Sanchez agreed and committed to buy. But
there is nothing in the contract to indicate that
her agreement, promise and undertaking is
supported by a consideration distinct from the
price stipulated for the sale of the land. Mr.
Sanchez has made several tenders of payment
in the said amount within the period before any
withdrawals from the contract has been made
by Mrs. Rigos, but were rejected nevertheless.
ISSUE: Whether an accepted unilateral
promise to sell without consideration distinct
from the price be withdrawn arbitrarily.
RULING: No. An accepted promise to sell is an
offer to sell when accepted becomes a contract
of sale.
Since there may be no valid contract
without a cause or consideration, the promisor
is not bound by his promise and may,
accordingly, withdraw it. Pending notice of its
withdrawal, his accepted promise partakes,
however, of the nature of an offer to sell which,
if accepted, results in a perfected contract of
sale. This view has the advantage of avoiding
a conflict between Articles 1324 – on the
general principles on contracts – and 1479 –
on sales – of the Civil Code.
Article 1324. When the offeror has
allowed the offeree a certain period to accept,
the offer may be withdrawn at any time before
acceptance by communicating such
withdrawal, except when the option is founded
upon consideration, as something paid or
promised.
Article 1479. A promise to buy and sell a
determinate thing for a price certain is
reciprocally demandable. An accepted
unilateral promise to buy or to sell a
determinate thing for a price certain is binding
upon the promissory if the promise is
supported by a consideration distinct from the
price. The Court is of the considered opinion
that it should, as it hereby reiterates the
doctrine laid down in the Atkins, Kroll and Co.
case, and that, insofar as inconsistent
therewith, the view adhered to in the
Southwestern Sugar & Molasses Co. case
should be deemed abandoned or modified.
 VITIATION OF CONSENT
(20) SPOUSES CARMEN S. TONGSON AND
JOSE C. TONGSON SUBSTITUTED BY HIS
CHILDREN NAMELY: JOSE TONGSON, JR.,
RAUL TONGSON, TITA TONGSON, GLORIA
TONGSON ALMA TONGSON v.
EMERGENCY PAWNSHOP BULA, INC. AND
DANILO R. NAPALA
G.R. No. 167874, January 15, 2010
FACTS: In May 1992, Napala offered to
purchase from the Spouses Tongson their 364-
square meter parcel of land covered by
Transfer Certificate of Title (TCT) No. 143020,
for P3,000,000. Finding the offer acceptable,
the Spouses Tongson executed with Napala a
Memorandum of Agreement. Upon signing the
Deed of Absolute Sale, Napala paid P200,000
in cash to the Spouses Tongson and issued a
postdated Philippine National Bank (PNB)
check in the amount of
P2,800,000, representing the remaining
balance of the purchase price of the subject
property. Thereafter, TCT No. 143020 was
cancelled and TCT No. T-186128 was issued
in the name of EPBI. When presented for
payment, the PNB check was dishonored for
the reason “Drawn Against Insufficient Funds.”
Despite the Spouses Tongson’s repeated
demands to either pay the full value of the
check or to return the subject parcel of land,
Napala failed to do either.
ISSUE: Whether the contract of sale can be
annulled based on the fraud employed by
Napala.
RULING: NO. The following are the essential
elements of a valid contract: (1) consent or
meeting of the minds, that is, consent to
transfer ownership in exchange for the price;
(2) determinate subject matter; and (3) price
certain in money or its equivalent. The
problem lies with the element of consent or
meeting of the minds.
Under Article 1338 of the Civil Code,
there is fraud when, through insidious words or
machinations of one of the contracting parties,
the other is induced to enter into a contract
which, without them, he would not have agreed
to. In order that fraud may vitiate consent, it
must be the causal (dolo causante), not
merely the incidental (dolo incidente),
inducement to the making of the
contract. Additionally, the fraud must be
serious. No causal fraud in this case to
justify the annulment of the contract of sale
between the parties. It is clear that the
Spouses Tongson agreed to sell their 364-
square meter Davao property to Napala who
offered to pay P3,000,000 as purchase price
therefor. Napala’s assurance that the check he
issued was fully funded was not the principal
inducement for the Spouses Tongson to sign
the Deed of Absolute Sale. Even before
Napala issued the check, the parties had
already consented and agreed to the sale
transaction. The Spouses Tongson were never
tricked into selling their property to Napala. On
the contrary, they willingly accepted Napala’s
offer to purchase the property at P3,000,000.
In short, there was a meeting of the minds as
to the object of the sale as well as the
consideration therefor.
(21) SPOUSES VICTOR AND EDNA BINUA
v. LUCIA P. ONG
FACTS: From the decision of RTC Davao,
petitioner Edna was found guilty of Estafa and
sentenced 6-30 years imprisonment. Also,
petitioner was ordered to pay the respondent
amount of P2,285,000. In order to avoid
criminal liability, Edna executed a real estate
mortgage over their property with her spouse
amounting to P7,000,000 in favour of the
respondent. Petitioner Edna, however, failed to
settle her obligation, forcing the respondent to
foreclose the mortgage on the properties, with
the latter as the highest bidder during the
public sale. Petitioners then filed for an action
for the nullity of mortgage because according
to them, they “were still suffering from the
effect of the conviction of [petitioner] Edna, and
could not have been freely entered into said
contracts.” The petitioners also allege that the
respondent subsequently “rammed the two (2)
mortgage contracts involving two (2) prime
properties on [petitioner Victor’s] throat, so to
speak[,] just so to make him sign the said
documents,” and that the respondent took
advantage of the misfortune of the petitioners
and was able to secure in her 20avour the real
estate mortgages.
ISSUE: Whether the mortgage contracts were
executed under duress.
RULING: Article 1390(2) of the Civil Code
provides that contracts where the consent is
vitiated by mistake, violence, intimidation,
undue influence or fraud are voidable or
annullable. Article 1335 of the Civil Code,
meanwhile, states that “[t]here is intimidation
when one of the contracting parties is
compelled by a reasonable and well-grounded
fear of an imminent and grave evil upon his
person or property, or upon the person or
property of his spouse, descendants or
ascendants, to give his consent.” The same
article, however, further states that “[a] threat
to enforce one’s claim through competent
authority, if the claim is just or legal, does not
vitiate consent.”
In De Leon v. Court of Appeals, the
Court held that in order that intimidation may
vitiate consent and render the contract invalid,
the following requisites must concur: (1) that
the intimidation must be the determining
cause of the contract, or must have caused
the consent to be given; (2) that the
threatened act be unjust or unlawful; (3)
that the threat be real and serious, there
being an evident disproportion between the
evil and the resistance which all men can
offer, leading to the choice of the contract
as the lesser evil; and (4) that it produces a
reasonable and well-grounded fear from the
fact that the person from whom it comes
has the necessary means or ability to inflict
the threatened injury.
Based on the petitioners’ own
allegations, what the respondent did was
merely inform them of petitioner Edna’s
conviction in the criminal cases for estafa. It
might have evoked a sense of fear or dread on
the petitioners’ part, but certainly there is
nothing unjust, unlawful or evil in the
respondent’s act. The petitioners also failed to
show how such information was used by the
respondent in coercing them into signing the
mortgages. The petitioners must remember
that petitioner Edna’s conviction was a result of
a valid judicial process and even without the
respondent allegedly “ramming it into petitioner
Victor’s throat,” petitioner Edna’s imprisonment
would be a legal consequence of such
conviction. In Callanta v. National Labor
Relations Commission, the Court stated that
the threat to prosecute for estafa not being an
unjust act, but rather a valid and legal act to
enforce a claim, cannot at all be considered as
intimidation.
(22) ECE Realty v Mandap
G.R. No. 196182. September 1, 2014
Petitioner: ECE REALTY AND
DEVELOPMENT, INC., vs.
Respondent: Rachel G. Mandap
FACTS: Petitioner ECE Realty is a corporation
engaged in the building and development of
condominium units. Sometime in 1995, it
started the construction of a condominium
project called
Central Park Condominium Building located in
Pasay City. However, printed advertisements
of the condominium indicated that it will be
constructed in Makati.
In December 1995, Respondent
Mandap bought a unit from the project, paying
reservation fee, down payment and monthly
instalments. Six months later, Mandap and the
representative of the Petitioner executed a
Contract to Sell, where it was indicated that the
project will be constructed in Pasay.
In 1998, more than two years after the
execution of the Contract to Sell, respondent,
through her counsel, wrote petitioner a letter
demanding the return of P422,500.00,
representing the payments she made, on the
ground that she subsequently discovered
that the condominium project was being
built in Pasay City and not in Makati City as
indicated in its printed advertisements.
However, instead of answering Mandap’s
letter, the petitioner sent her a written
communication dated informing her that
her unit is ready for inspection and
occupancy.
Treating the written communication as
denial in petitioner’s part of her letter, Mandap
filed a complaint with the Expanded National
Capital Region Field Office (ENCRFO) of the
Housing and Land Use Regulatory Board
(HLURB) seeking the annulment of her
contract with petitioner, the return of her
payments, and damages. But ENCRFO
dismissed respondent’s complaint and
ruled that the respondent failed to show the
legal grounds that consist of a fraudulent or
malicious dealing with her by the petitioner,
such as, the latter’s employment of
insidious words or machinations which
induced or entrapped her into the contract,
without which, the respondent would not
want to buy a unit in the project.
On appeal, the HLURB Board of
Commissioners rendered judgment
dismissing respondent’s complaint and
affirming the decision of the ENCRFO. The
Board of Commissioners held that when the
parties reduced their contract in writing, their
rights and duties must be found in their
contract and neither party can place a greater
obligation than what the contract provides.
Aggrieved, respondent filed an appeal
with the Office of the President but it
dismissed the case and affirmed in toto the
decision of the HLURB Board of
Commissioners.
Respondent then filed an appeal at the
CA where the CA decided in respondent’s
favour. The CA held that petitioner
employed fraud and machinations to induce
respondent to enter into a contract with it.
The CA ordered the annulment of the
Contract to Sell between both parties and
ordered petitioner to return the sum of
money that respondent made in the project
starting from the reservation fee paid by the
respondent. The CA also expressed doubt
on the due execution of the Contract to Sell
between the parties.
Hence, this petition by ECE Realty
assailing the decision of the CA.
ISSUE: Whether petitioner ECE Realty
committed fraud against respondent Mandap
and if so, whether such fraud is sufficient
ground to nullify its contract with respondent.
HELD: Yes, petitioner committed fraud but it
was not sufficient to nullify its contract with
petitioner. The Supreme Court sustained the
decision of the Housing and Land Use Arbiter,
the HLURB Board of Commissioners and the
Office of the President. Petition granted.
Article 1344 of the same Code provides
that “[i]n order that fraud may make a contract
voidable, it should be serious and should not
have been employed by both contracting
parties.”
Jurisprudence has shown that in
order to constitute fraud that provides
basis to annul contracts, it must fulfil two
conditions:
1. The fraud must be dolo causante or
it must be fraud in obtaining the
consent of the party. This is referred
to as causal fraud. The deceit must
be serious. The fraud is serious
when it is sufficient to impress, or to
lead an ordinarily prudent person
into error; that which cannot deceive
a prudent person cannot be a ground
for nullity. The circumstances of
each case should be considered,
taking into account the personal
conditions of the victim.
2. The fraud must be proven by clear
and convincing evidence and not
merely by a preponderance thereof.
In the present case, this Court finds
that petitioner is guilty of false
representation of a fact. This is evidenced
by its printed advertisements indicating
that its subject condominium project is
located in Makati City when, in fact, it is in
Pasay City.
However, the Court agrees with the
Housing and Land Use Arbiter, the HLURB
Board of Commissioners, and the Office of
the President, that the misrepresentation
made by petitioner in its advertisements
does not constitute causal fraud since
respondent failed to prove that the location
of the said project was the causal
consideration or the principal inducement
which led her into buying her unit in the
said condominium project.
Evidence shows that respondent
proceeded to sign the Contract to Sell
despite information contained therein that
the condominium is located in Pasay City.
This only means that she still agreed to buy
the subject property regardless of the fact
that it is located in a place different from
what she was originally informed. If she had
a problem with the property’s location, she
should not have signed the Contract to Sell
and, instead, immediately raised this issue with
petitioner. But she did not.
As correctly observed by the Office
of the President, it took respondent more
than two years from the execution of the
Contract to Sell to demand the return of the
amount she paid on the ground that she
was misled into believing that the subject
property is located in Makati City. In the
meantime, she continued to make
payments.
The Court is not persuaded by the
ruling of the CA which expresses doubt on
the due execution of the Contract to Sell.
The fact remains that the said Contract to
Sell was notarized. It is settled that absent
any clear and convincing proof to the
contrary, a notarized document enjoys the
presumption of regularity and is conclusive
as to the truthfulness of its contents.
The Court does not agree that the
presumption of regularity accorded to the
notarized Contract to Sell was overcome by
evidence to the contrary. Respondent’s
allegation that she signed the said
Contract to Sell with several blank spaces, and
which allegedly did not indicate the location of
the condominium, was not supported by proof.
The basic rule is that mere allegation is not
evidence and is not equivalent to proof.
The contention that Mandap signed the
Contract to Sell in blank, and [that] it was ECE
Realty that supplied the details on it is
remarkably threadbare for no evidence was
submitted to support such claim in all the
proceedings before the ENCRFO and the
Board of Commissioners.
In any case, even assuming that
petitioner’s misrepresentation consists of
fraud which could be a ground for annulling
their Contract to Sell, respondent’s act of
affixing her signature to the said Contract,
after having acquired knowledge of the
property’s actual location, can be
construed as an implied ratification thereof.
 SIMULATION OF CONTRACTS
(23) HEIRS OF POLICRONIO M. URETA,
SR., v. HEIRS OF LIBERATO M. URETA
G.R. No. 165748, September 14, 2011
Facts: In his lifetime, Alfonso Ureta (Alfonso)
begot 14 children, namely, Policronio, Liberato,
Narciso, Prudencia, Vicente, Francisco,
Inocensio, Roque, Adela, Wenefreda,
Merlinda, Benedicto, Jorge, and Andres. The
children of Policronio (Heirs of Policronio), are
opposed to the rest of Alfonso's children and
their descendants (Heirs of Alfonso).
In October 1969, Alfonso and four of his
children, namely, Policronio, Liberato,
Prudencia, and Francisco, met at the house of
Liberato. Francisco, who was then a
municipal judge, suggested that in order to
reduce the inheritance taxes, their father
should make it appear that he had sold
some of his lands to his children.
Accordingly, Alfonso executed four (4)
Deeds of Sale covering several parcels of
land in favor of Policronio, Liberato,
Prudencia, and his common-law wife,
Valeriana Dela Cruz. The Deed of Sale
executed on October 25, 1969, in favor of
Policronio, covered six parcels of land,
which are the properties in dispute in this
case.
Since the sales were only made for
taxation purposes and no monetary
consideration was given, Alfonso continued
to own, possess and enjoy the lands and
their produce.
When Alfonso died on October 11,
1972, Liberato acted as the administrator of his
father's estate. He was later succeeded by his
sister Prudencia, and then by her daughter,
Carmencita Perlas. Except for a portion of
parcel 5, the rest of the parcels transferred to
Policronio were tenanted by the Fernandez
Family. These tenants never turned over the
produce of the lands to Policronio or any of his
heirs, but to Alfonso and, later, to the
administrators of his estate.
Policronio died on November 22,
1974. Except for the said portion of parcel
5, neither Policronio nor his heirs ever took
possession of the subject lands.
On April 19, 1989, Alfonso's heirs
executed a Deed of Extra-Judicial Partition,
which included all the lands that were covered
by the four (4) deeds of sale that were
previously executed by Alfonso for taxation
purposes. Conrado, Policronio's eldest son,
representing the Heirs of Policronio, signed the
Deed of Extra-Judicial Partition in behalf of his
co-heirs.
After their father's death, the Heirs of
Policronio found tax declarations in his name
covering the six parcels of land. On June 15,
1995, they obtained a copy of the Deed of Sale
executed on October 25, 1969 by Alfonso in
favor of Policronio.
On July 30, 1995, the Heirs of Policronio
allegedly learned about the Deed of Extra-
Judicial Partition involving Alfonso's estate
when it was published in the July 19, 1995
issue of the Aklan Reporter.
Believing that the six parcels of land
belonged to their late father, and as such,
excluded from the Deed of Extra-Judicial
Partition, the Heirs of Policronio sought to
amicably settle the matter with the Heirs of
Alfonso. Earnest efforts proving futile, the Heirs
of Policronio filed a Complaint for Declaration
of Ownership, Recovery of Possession,
Annulment of Documents, Partition, and
Damages against the Heirs of Alfonso before
the RTC on November 17, 1995 where the
following issues were submitted: (1) whether or
not the Deed of Sale was valid; (2) whether or
not the Deed of Extra-Judicial Partition was
valid; and (3) who between the parties was
entitled to damages.
The RTC found that the Heirs of Alfonso clearly
established that the Deed of Sale was null and
void. In the CA, it was ruled that The Deed of
Sale in favor of Policronio Ureta, Sr., dated 25
October 1969, covering six (6) parcels of land
is hereby declared VOID for being
ABSOLUTELY SIMULATED because the
parties did not intend to be legally bound by it.
ISSUE: Whether the Court of Appeals is
correct in ruling that the Deed of Absolute Sale
of 25 October 1969 is void for being absolutely
fictitious.
RULING: Yes. The Deed of Sale was not the
result of a fair and regular private transaction
because it was absolutely simulated.
The Civil Code provides in Art 1345 that
Simulation of a contract may be absolute or
relative. The former takes place when the
parties do not intend to be bound at all; the
latter, when the parties conceal their true
agreement. Also, in Art. 1346, An absolutely
simulated or fictitious contract is void. A
relative simulation, when it does not prejudice
a third person and is not intended for any
purpose contrary to law, morals, good
customs, public order or public policy binds the
parties to their real agreement.
In absolute simulation, there is a
colorable contract but it has no substance
as the parties have no intention to be
bound by it.The main characteristic of an
absolute simulation is that the apparent
contract is not really desired or intended to
produce legal effect or in any way alter the
juridical situation of the parties. As a result,
an absolutely simulated or fictitious
contract is void, and the parties may
recover from each other what they may
have given under the contract.However, if
the parties state a false cause in the
contract to conceal their real agreement,
the contract is relatively simulated and the
parties are still bound by their real
agreement.Hence, where the essential
requisites of a contract are present and the
simulation refers only to the content or
terms of the contract, the agreement is
absolutely binding and enforceable
between the parties and their successors in
interest.
Lacking, therefore, in an absolutely
simulated contract is consent which is
essential to a valid and enforceable
contract. In this case, Alfonso simulated a
transfer to Policronio purely for taxation
purposes, without intending to transfer
ownership over the subject lands.
As found by the CA, Alfonso continued
to exercise all the rights of an owner even after
the execution of the Deeds of Sale. It was
undisputed that Alfonso remained in
possession of the subject lands and enjoyed
their produce until his death. It was also
admitted by the Heirs of Policronio that the
tenants of the subject lands never turned over
the produce of the properties to Policronio or
his heirs but only to Alfonso and the
administrators of his estate. Neither was there
a demand for their delivery to Policronio or his
heirs. Neither did Policronio ever pay real
estate taxes on the properties, the only
payment on record being those made by his
heirs in 1996 and 1997 ten years after his
death. In sum, Policronio never exercised any
rights pertaining to an owner over the subject
lands.It is further telling that Policronio never
disclosed the existence of the Deed of Sale to
his children. Theses circumstances lead to the
conclusion that he was aware that the transfer
was only made for taxation purposes and
never intended to bind the parties thereto.
Since the Deed of Sale is void, the
subject properties were properly included in the
Deed of Extra-Judicial Partition of the estate of
Alfonso.
(24) AVELINA ABARIENTOS REBUSQUILLO
[substituted by her heirs, except Emelinda
R. Gualvez] and SALVADOR A. OROSCO
vs. SPS. DOMINGO and EMELINDA
REBUSQUILLO GUALVEZ and the CITY
ASSESSOR OF LEGAZPI CITY
G.R. No. 204029, June 4, 2014
DOCTRINE: An absolutely simulated or
fictitious contract is void. A relative simulation,
when it does not prejudice a third person and is
not intended for any purpose contrary to law,
morals, good customs, public order or public
policy binds the parties to their real agreement.
(Art. 1346, NCC)
FACTS: Petitioner was one of the seven
children of deceased, Eulalio Abarientos and
Victoria Villareal. Both of them died intestate.
The deceased left a parcel of land in Legazpi
City. In 2001, respondent Emelinda (daughter
of petitioner), made petitioner sign two
documents. In 2003, the petitioner discovered
that the two documents were an affidavit of
self-adjudication, and a deed of absolute sale
in favor of the respondent spouses. Petitioner
then filed an action to annul the two documents
before the RTC. In the respondents’ answer,
they admitted the execution of the affidavit and
deed, but they argued that it was with the
consent of all the heirs of Eulalio and Victoria,
and that such was agreed to be done to
facilitate the titling of the property.
Respondents further argued that the petitioner
received the amount of Php 50,000 for the
sale.
The RTC ruled in favor of the petitioner.
The CA reversed the RTC’s decision and said
that the affidavit and the sale were valid.
ISSUE: Whether or not the affidavit of self-
adjudication and the sale are valid
HELD: No. The petition is granted. Both the
affidavit and the deed of sale are void.
An Affidavit of Self-Adjudication is only
proper when the affiant is the sole heir of the
decedent. (Sec. 1, Rule 74, ROC). As admitted
by respondents, Avelina was not the sole heir
of Eulalio. In fact, as admitted by respondents,
petitioner Salvador is one of the co-heirs by
right of representation of his mother. Without a
doubt, Avelina had perjured herself when she
declared in the affidavit that she is the only
daughter and sole heir of spouses Eulalio and
Victoria. The falsity of this claim renders her
act of adjudicating to herself the inheritance left
by her father invalid.
In effect, Avelina was not in the right
position to sell and transfer the absolute
ownership of the subject property to
respondents. As she was not the sole heir of
Eulalio and her Affidavit of Self- Adjudication is
void, the subject property is still subject to
partition. Avelina, in fine, did not have the
absolute ownership of the subject property but
only an aliquot portion. What she could have
transferred to respondents was only the
ownership of such aliquot portion. It is apparent
from the admissions of respondents and the
records of this case that Avelina had no
intention to transfer the ownership, of whatever
extent, over the property to respondents.
Hence, the Deed of Absolute Sale is nothing
more than a simulated contract.
The Civil Code provides:
Art. 1345. Simulation of a
contract may be absolute or relative.
The former takes place when the parties
do not intend to be bound at all; the
latter, when the parties conceal their
true agreement.
Art. 1346. An absolutely
simulated or fictitious contract is void. A
relative simulation, when it does not
prejudice a third person and is not
intended for any purpose contrary to
law, morals, good customs, public order
or public policy binds the parties to their
real agreement.
In the present case, respondents
admitted that the purpose of the sale was to
facilitate titling and not the transfer of
ownership.
 CONSENT AND CONSIDERATION
(25) Mangahas v. Brobio
G.R. No. 183852
CARMELA BROBIO MANGAHAS v.
EUFROCINA A. BROBIO

FACTS: Pacifico S. Brobio (Pacifico) died
intestate, leaving three parcels of land. He was
survived by his wife, respondent Eufrocina A.
Brobio, and four legitimate and three
illegitimate children; petitioner Carmela Brobio
Mangahas is one of the illegitimate children.
The heirs of the deceased executed a Deed of
Extrajudicial Settlement of Estate of the Late
Pacifico Brobio with Waiver. In the Deed,
petitioner and Pacifico’s other children, in
consideration of their love and affection for
respondent and the sum of ₱150,000.00,
waived and ceded their respective shares over
the three parcels of land in favor of respondent.
According to petitioner, respondent promised
to give her an additional amount for her share
in her father’s estate. Thus, after the signing of
the Deed, petitioner demanded from
respondent the promised additional amount,
but respondent refused to pay, claiming that
she had no more money.
A year later, while processing her tax
obligations with the Bureau of Internal
Revenue (BIR), respondent was required to
submit an original copy of the Deed. Left with
no more original copy of the Deed, respondent
summoned petitioner to her office on May 31,
2003 and asked her to countersign a copy of
the Deed. Petitioner refused to countersign the
document, demanding that respondent first
give her the additional amount that she
promised. Considering the value of the three
parcels of land (which she claimed to be worth
₱20M), petitioner asked for ₱1M, but
respondent begged her to lower the amount.
Petitioner agreed to lower it to ₱600,000.00.
Because respondent did not have the money at
that time and petitioner refused to countersign
the Deed without any assurance that the
amount would be paid, respondent executed a
promissory note. Petitioner agreed to sign the
Deed when respondent signed the promissory
note which read —
31 May 2003
This is to promise that I will give a
Financial Assistance to CARMELA B.
MANGAHAS the amount of ₱600,000.00 Six
Hundred Thousand only on June 15, 2003.
(SGD)
EUFROCINA A. BROBIO
Upon maturity of the PN, Eufrocina
failed and refused to pay despite several
demands so Carmela filed a complaint with the
RTC. Eufrocina alleged that she was practically
held “hostage” by the demand of Carmela
because at that time, Eufrocina was so much
pressured to submit the documents to the BIR.
She also claimed that the circumstances in the
execution of the PN were obviously attended
by involuntariness and the same was issued
without consideration at all or for illegal
consideration.
The RTC ruled in favor of Carmela. The
CA reversed that RTC decision because there
was a complete absence of consideration in
the execution of the PN which made it
inexistent and without any legal force and
effect. The court noted that “financial
assistance” was not the real reason why
Eufrocina executed the PN, but only to secure
Carmela’s signature. The CA held that the
waiver of Carmela’s share in the properties
may not be considered as the consideration
because of the Deed signed by Carmela and
the P150k she received. The CA also found
intimidation attended the signing of the PN
since Eufrocina needed the Deed
countersigned by Carmela in order to comply
with a BIR requirement so she was forced to
sign the PN to assure Carmela that the money
promised to her would be paid.
ISSUE/S:
1. Whether there involve intimidation attended
the execution of the promissory note subject of
this case which vitiates the consent.
2. Whether the promissory note was without
consideration.
3. Whether petitioner should have filed [an
action] for partition instead of a case for
specific performance.
RULING: The petition is meritorious.
1. Contracts are voidable where
consent thereto is given through
mistake, violence, intimidation,
undue influence, or fraud. In
determining whether consent is
vitiated by any of these
circumstances, courts are given a wide
latitude in weighing the facts or
circumstances in a given case and in
deciding in favor of what they believe
actually occurred, considering the
age, physical infirmity, intelligence,
relationship, and conduct of the
parties at the time of the execution of
the contract and subsequent thereto,
irrespective of whether the contract
is in a public or private writing.
Nowhere is it alleged that mistake,
violence, fraud, or intimidation attended the
execution of the promissory note. Still,
respondent insists that she was "forced" into
signing the promissory note because petitioner
would not sign the document required by the
BIR. In one case, the Court – in characterizing
a similar argument by respondents therein –
held that such allegation is tantamount to
saying that the other party exerted undue
influence upon them. However, the Court said
that the fact that respondents were "forced" to
sign the documents does not amount to
vitiated consent.
There is undue influence when a
person takes improper advantage of his
power over the will of another, depriving
the latter of a reasonable freedom of
choice. For undue influence to be present,
the influence exerted must have so
overpowered or subjugated the mind of a
contracting party as to destroy his free
agency, making him express the will of
another rather than his own.
Respondent may have desperately
needed petitioner’s signature on the Deed, but
there is no showing that she was deprived of
free agency when she signed the promissory
note. Being forced into a situation does not
amount to vitiated consent where it is not
shown that the party is deprived of free will and
choice. Respondent still had a choice: she
could have refused to execute the promissory
note and resorted to judicial means to obtain
petitioner’s signature. Instead, respondent
chose to execute the promissory note to obtain
petitioner’s signature, thereby agreeing to pay
the amount demanded by petitioner.
The fact that respondent may have felt
compelled, under the circumstances, to
execute the promissory note will not negate the
voluntariness of the act. As rightly observed by
the trial court, the execution of the promissory
note in the amount of ₱600,000.00 was, in fact,
the product of a negotiation between the
parties. Respondent herself testified that she
bargained with petitioner to lower the amount:
Contrary to the CA’s findings, the
situation did not amount to intimidation that
vitiated consent. There is intimidation when
one of the contracting parties is compelled to
give his consent by a reasonable and well-
grounded fear of an imminent and grave evil
upon his person or property, or upon the
person or property of his spouse, descendants,
or ascendants. Certainly, the payment of
penalties for delayed payment of taxes would
not qualify as a "reasonable and well-grounded
fear of an imminent and grave evil."
We join the RTC in holding that courts will
not set aside contracts merely because
solicitation, importunity, argument, persuasion,
or appeal to affection was used to obtain the
consent of the other party. Influence obtained
by persuasion or argument or by appeal to
affection is not prohibited either in law or
morals and is not obnoxious even in courts of
equity.
2. On the issue that the promissory note is
void for not being supported by a
consideration, we likewise disagree with
the CA.
A contract is presumed to be
supported by cause or consideration. The
presumption that a contract has sufficient
consideration cannot be overthrown by a
mere assertion that it has no consideration.
To overcome the presumption, the alleged lack
of consideration must be shown by
preponderance of evidence. The burden to
prove lack of consideration rests upon
whoever alleges it, which, in the present
case, is respondent.
Respondent failed to prove that the
promissory note was not supported by any
consideration. From her testimony and her
assertions in the pleadings, it is clear that the
promissory note was issued for a cause or
consideration, which, at the very least, was
petitioner’s signature on the document.
It may very well be argued that if such was the
consideration, it was inadequate. Nonetheless,
even if the consideration is inadequate, the
contract would not be invalidated, unless there
has been fraud, mistake, or undue influence.
As previously stated, none of these grounds
had been proven present in this case.
3. The foregoing discussion renders the
final issue insignificant. Be that as it
may, we would like to state that the
remedy suggested by the CA is not the
proper one under the circumstances. An
action for partition implies that the
property is still owned in common.
Considering that the heirs had already
executed a deed of extrajudicial
settlement and waived their shares in
favor of respondent, the properties are
no longer under a state of co-ownership;
there is nothing more to be partitioned,
as ownership had already been merged
in one person.
WHEREFORE, premises considered,
the CA Decision dated February 21, 2008 and
its Resolution dated July 9, 2008 are
REVERSED and SET ASIDE. The RTC
decision dated May 15, 2006 is REINSTATED.
(26) Pentacapital v. Mahinay
FACTS: Petitioner filed a complaint for a sum
of money against respondent Makilito Mahinay
based on two separate loans obtained by the
latter, a total amount of P1,936,800.00. These
loans were evidenced by two
promissory notes dated February 23,
1996.Despite repeated demands, respondent
failed to pay the loans, hence, the complaint.
In his Answer with Compulsory
Counterclaim, respondent claimed that
petitioner had no cause of action because the
promissory notes on which its complaint was
based were subject to a condition that did not
occur. While admitting that he indeed signed
the promissory notes, he insisted that he never
took out a loan and that the notes were not
intended to be evidences of indebtedness. By
way of counterclaim, respondent prayed for the
payment of moral and exemplary damages
plus attorney’s fees.
Respondent explained that he was the
counsel of Ciudad Real Development Inc.
(CRDI). In 1994, Pentacapital Realty
Corporation offered to buy parcels of land
known as the Molino Properties, owned by
CRDI. As the Molino Properties were the
subject of a pending case, Pentacapital Realty
paid only the down payment amounting to
P12,000,000.00. CRDI allegedly instructed
Pentacapital Realty to pay the former’s
creditors, including respondent who thus
received a check worth P1,715,156.90. It was
further agreed that the balance would be
payable upon the submission of an Entry of
Judgment showing that the case involving the
Molino Properties had been decided in favor of
CRDI. Respondent, Pentacapital Realty and
CRDI allegedly agreed that respondent had a
charging lien equivalent to 20% of the total
consideration of the sale in the amount of
P10,277,040.00. Pending the submission of
the Entry of Judgment and as a sign of good
faith,
respondent purportedly returned the P1,715,15
6.90 check to Pentacapital Realty. However,
the Molino Properties continued to be haunted
by the seemingly interminable court actions
initiated by different parties which thus
prevented respondent from collecting his
commission.
Admittedly, respondent earlier instituted
an action for Specific Performance against
Pentacapital Realty before the RTC of Cebu
City, Branch 57, praying for the payment of his
commission on the sale of the Molino
Properties. In an Amended Complaint,
respondent referred to the action he instituted
as one of Preliminary Mandatory Injunction
instead of Specific Performance. Acting on
Pentacapital Realty’s Motion to Dismiss, the
RTC dismissed the case for lack of cause of
action. The dismissal became final and
executory. With the dismissal of the aforesaid
case, respondent filed a Motion to Permit
Supplemental Compulsory Counterclaim. In
addition to the damages that respondent
prayed for in his compulsory counterclaim, he
sought the payment of his commission
amounting to P10,316,640.00, plus interest at
the rate of 16% per annum, as well as
attorney’s fees equivalent to 12% of his
principal claim.
Respondent claimed that Pentacapital
Realty is a 100% subsidiary of petitioner. Thus,
although petitioner did not directly participate in
the transaction between Pentacapital Realty,
CRDI and respondent, the latter’s claim against
petitioner was based on the doctrine of piercing
the veil of corporate fiction. Simply stated,
respondent alleged that petitioner and
Pentacapital Realty are one and the same
entity belonging to the Pentacapital Group of
Companies. Over the opposition of petitioner,
the RTC, in an Order dated August22, 2002,
allowed the filing of the supplemental
counterclaim. Aggrieved, petitioner sought
recourse in the CA through a special civil
action for certiorari, seeking to reverse and set
aside the RTC Order. On December 20, 2005,
the CA rendered the assailed Decision
dismissing the petition. The appellate court
sustained the allowance of the supplemental
compulsory counterclaim based on the
allegations in respondent’s pleading.
After trial on the merits, the RTC
rendered a decision in favor of respondent.
This court, instead, finds that defendant
(respondent) was able to prove by a clear
preponderance of evidence his cause of action
against plaintiff as to defendant’s compulsory
and supplemental counterclaims. On appeal,
the CA, in CA-G.R. CV No. 86939, affirmed in
toto the above decision. The CA found no
basis for petitioner to collect the amount
demanded, there being no perfected contract
of loan for lack of consideration. As to
respondent’s supplemental compulsory
counterclaim, quoting the findings of the RTC,
the appellate court held that respondent was
able to prove by preponderance of evidence
that it was the intent of Pentacapital Group of
Companies and CRDI to give him
P10,316,640.00 and
P1,715,156.90.Unsatisfied, petitioner moved
for reconsideration of the aforesaid Decision,
but it was denied in a Resolution. Hence, the
present petition in G.R. No. 181482
ISSUE: Whether respondent is bound by the
promissory notes.
RULING: YES. Under Article 1354 of the Civil
Code, it is presumed that consideration exists
and is lawful unless the debtor proves the
contrary. Moreover, under Section 3, Rule 131
of the Rules of Court
he following are disputable presumptions:
(1) private transactions have
been fair and regular;
(2) the ordinary course of
business has been followed; and
(3) there was sufficient
consideration for a contract.
A presumption may operate against an
adversary who has not introduced proof to
rebut it. The effect of a legal presumption upon
a burden of proof is to create the necessity of
presenting evidence to meet the legal
presumption or the prima facie case created
thereby, and which, if no proof to the contrary
is presented and offered, will prevail. In the
present case, as proof of his claim of lack of
consideration, respondent denied under oath
that he owed petitioner a single centavo. He
added that he did not apply for a loan and that
when he signed the promissory notes, they
were all blank forms and all the blank spaces
were to be filled up only if the sale transaction
over the subject properties would not push
through because of a possible adverse
decision in the civil cases involving them (the
properties).He thus posits that since the sale
pushed through, the promissory notes did not
become effective. Contrary to the conclusions
of the RTC and the CA, we find such proof
insufficient to overcome the presumption of
consideration. The presumption that a contract
has sufficient consideration cannot be
overthrown by the bare, uncorroborated and
self-serving assertion of respondent that it has
no consideration.
The alleged lack of consideration must
be shown by preponderance of evidence.
As it now appears, the promissory notes
clearly stated that
respondent promised to pay petitioner P1,520,
000.00and P416,800.00, plus interests and
penalty charges, a year after their execution.
Nowhere in the notes was it stated
that they were subject to a condition. As
correctly observed by petitioner,
respondent is not only a lawyer but a
law professor as well.
Respondent’s liability is not negated
by the fact that he has Uncollected
commissions from the sale of the Molino
properties. As the records of the case
show, at the time of the execution of the
promissory notes, the Molino properties
were subject of various court actions
commenced by different parties. Thus, the
sale of the properties and, consequently,
the payment of respondent’s commissions
were put on hold. The non-payment of his
commissions could very well be the reason
why he obtained a loan from petitioner.
Aside from the payment of the principal
obligation of P1,936,800.00,the parties agreed
that respondent pay interest at the rate of
25%from February 17, 1997 until fully paid.
Such rate, however, is excessive and thus,
void. Since the stipulation on the interest rate is
void, it is as if there was no express contract
thereon. To be sure, courts may reduce the
interest rate as reason and equity demand. In
this case, 12% interest is reasonable. The
promissory notes likewise required the
payment of a penalty charge of 3% per month
or 36% per annum. However, a penalty charge
of 3% per month is unconscionable; hence, we
reduce it to1% per month or 12% per annum.
Lastly, respondent promised to pay
25% of his outstanding obligations as
attorney’s fees in case of non-payment
thereof.
Attorney’s fees here are in the nature
of liquidated damages. As long as said
stipulation does not contravene law,
morals, or public order, it is strictly binding
upon respondent. Nonetheless, courts are
empowered to reduce such rate if the same
is iniquitous or unconscionable
pursuant to the above-quoted
provision. This sentiment is echoed in
Article 2227 of the Civil Code, to wit:
Art. 2227. Liquidated damages,
whether intended as an indemnity or
a penalty, shall be equitably reduced
if they are iniquitous or
unconscionable.
Hence, we reduce the stipulated
attorney’s fees from 25% to 10%.
 FORMALITIES OF CONTRACT
(27) Gallardo v. IAC
MELITON GALLARDO and TERESA
VILLANUEVA vs. HONORABLE
INTERMEDIATE APPELLATE COURT,
MARTA VILLANUEVA VDA. DE AGANA,
VISITACION AGANA KIPPING, PEDRO V.
AGANA, MARCELO V. AGANA, JR.,
TERESITA AGANA SANTOS and JESUS V.
AGANA
G.R. No. L-67742 October 29, 1987
FACTS: The subject matter of this controversy
involves a parcel of land in Cavinti, Laguna
consisting of 81,300 sq.m owned by the late
Pedro Villanueva. Petitioners were nephew
and niece of the Pedro and first cousin of the
private respondent Marta Villanueva, the latter
being the daughter of Pedro.
Petitioners claim that the land was sold
to them in a private document, an unnotarized
deed of sale written in Tagalog and was
allegedly signed by Pedro. The Original
Certificate of Title was then transferred in the
name of the petitioners as covered by Transfer
Certificate of Title.
During the Second World War, the
records of the Office of the Register of Deeds
of Laguna including the new transfer certificate
of title were completely burned. Defendant
Marta filed an Affidavit of Adverse Claim on
said parcel of land. Petitioners learned of this
and they demanded Marta to withdraw their
adverse claim. As a result, They then executed
a Deed of Conveyance and Release of Claim
over a 1,000 sq. m potion of the land, but
Marta refused to sign it. Petitioners sued Marta
and her husband. The Court declared that the
deed of sale and transfer certificate of title to
the petitioners is void ab initio. The petitioners
then filed an appeal. They claim that the sale,
although not in a public document, is
nevertheless valid and binding.

ISSUE: 1. Whether there was a valid

reconstitution of the transfer certificate title
issued in the names of petitioners. – If the sale
was valid –
2. Whether the unnotarized deed of sale
purportedly executed by Pedro in favor of
petitioners can be considered as a valid
instrument.

RULING: 1. No. The issuance of reconstituted

Transfer Certificate is based on the Affidavit for
Reconstitution by petitioners, and not of Pedro.
As a consequence, it was held void ab initio.
As to the validity of the Affidavit for
Reconstitution, petitioner testified that she did
not know anything about it since it was their
children who took charge of the same. She
never appeared before the Notary Public.
2. No. The general rule enunciated in
Art. 1356 is that contracts are obligatory, in
whatever form they may have been, provided
all the essential requisites for their validly are
present. The next sentence provides the
exception, requiring a contract to be in some
form. Said law is Section 127 of Act 496 which
requires that the conveyance be executed
“before the judge of a court of record or clerk of
a court of record or a notary public or a justice
of the peace, who shall certify such
acknowledgement substantially in form”. Such
law was violated in this case. It is evident that
the Deed of Sale, being unnotarized, is not
registerable. The private document is null and
void and that it was signed by somebody else
and not Pedro.