A2010 Compiled Oblicon Digests

Obligations and Contracts BARREDO V GARCIA BOCOBO; July 8, 1942 NATURE Petition for review on certiorari FACTS - from CA, holding Fausto Barredo liable for damages for death pf Faustino Garcia caused by negligence of Pedro Fontanilla, a taxi driver employed by Fausto Barredo - May 3, 1936 – in road between Malabon and Navotas, head-on collision between taxi of Malate Taxicab and carretela guided by Pedro Dimapilis thereby causing overturning of the carretela and the eventual death of Garcia, 16-yo boy and one of the passengers - Fontanilla convicted in CFI and affirmed by CA and separate civil action is reserved - Parents of Garcia filed action against Barredo as sole proprietor of Malate Taxicab as employer of Fontanilla - CFI and CA awarded damages bec Fontanilla’s negligence apparent as he was driving on the wrong side of the road and at a high speed > no proof he exercised diligence of a good father of the family as Barredo is careless in employing (selection and supervision) Fontanilla who had been caught several times for violation of Automobile Law and speeding > CA applied A1903CC that makes inapplicable civil liability arising from crime bec this is under obligations arising from wrongful act or negligent acts or omissions punishable by law - Barredo’s defense is that his liability rests on RPC TF liability only subsidiary and bec no civil action against Fontanilla TF he too cannot be held responsible ISSUE WON parents of Garcia may bring separate civil action against Barredo making him primarily liable and directly responsible under A1903CC as employer of Fontanilla HELD Yes. There are two actions available for parents of Garcia. One is under the A100RPC wherein the employer is only subsidiarily liable for the damages arising from the crime thereby first exhausting the properties of Fontanilla. The other action is under A1903CC (quasi-delict or culpa aquiliana) wherein as the negligent employer of Fontanilla, Barredo is held primarily liable subject to proving that he exercising diligence of a good father of the family. The parents simply took the action under the Civil Code as it is more practical to get damages from the employer bec he has more money to give than Fontanilla who is yet to serve his sentence. Obiter Difference bet Crime and Quasi-delict 1) crimes – public interest; quasi-delict – only private interest 2) Penal code punishes or corrects criminal acts; Civil Code by means of indemnification merely repairs the damage 3) delicts are not as broad as quasi-delicts; crimes are only punished if there is a penal law; quasi-delicts include any kind of fault or negligence intervenes NOTE: not all violations of penal law produce civil responsibility

A2010 page 1 Prof. Labitag e.g. contravention of ordinances, violation of game laws, infraction of rules of traffic when nobody is hurt 4) crime – guilt beyond reasonable doubt; civil – mere preponderance of evidence - Presumptions: 1) injury is caused by servant or employee, there instantly arises presumption of negligence of master or employer in selection, in supervision or both 2) presumption is juris tantum not juris et de jure TF may be rebutted by proving exercise of diligence of a good father of the family - basis of civil law liability: not respondent superior bu the relationship of pater familias - motor accidents – need of stressing and accentuating the responsibility of owners of motor vehicles

MENDOZA V ARRIETA MELENCIO-HERRERA; June 29, 1979

NATURE Petition for review on Certiorari of the Orders of CFI Manila dismissing petitioner’s Complaint for Damages based on quasi-delict FACTS - Three-way vehicular accident occurred along Mac-Arthur Highway, Marilao, Bulacan involving (1) Mercedes Benz, owned and driven by petitioner MENDOZA; (2) private jeep owned and driven by respondent SALAZAR; (3) gravel and sand truck owned by respondent TIBOL and driven by MONTOYA. - Mendoza’s and Montoya’s version: After jeep driver overtook the truck, it swerved to the left going towards Marilao, and hit car which was bound for Manila. Before impact, Salazar jumped from the jeep, Mendoza unaware that jeep was bumped from behind by truck - Salazar’s version: After overtaking truck, he flashed a signal indicating his intention to turn left towards Marilao but was stopped at intersection by a policeman directing traffic. While at stop position, his jeep was bumped at rear by truck causing him to be thrown out of jeep. Jeep then swerved to left and hit the car. - Oct. 22, 1969. In CFI Bulacan, two separate informations for Reckless Imprudence Causing Damage to Proprety were filed against SALAZAR (damage to Mendoza) and MONTOYA (damage to Salazar) - Salazar was acquitted; Motoya found guilty beyond reasonable doubt - Aug. 22, 1970. In CFI Manila, Mendoza filed a civil case against Salazar and Timbol either in alternative or in solidum. - Timbol filed Motion to Dismiss on grounds that complaint is barred by prior judgement; CFI Manila dismissed Complaint against Timbol - Salazar filed Motion to Dismiss; CFI Mla also dismissed Complaint against him on grounds that New Rules of Court rewuires an express reservation of civil action to be made in the criminal action ISSUES 1. WON Mendoza can file an independent civil case against Timbol a) Is the civil suit barred by prior judgment in the criminal case? b) Is the civil suit barred by failure to make a reservation in the criminal action of right to file an independent civil action (as required in Sec.2 of Rule 111)?

Obligations and Contracts 2. WON Mendoza can file an independent civil case against Salazar HELD 1. Yes. a) No, not all requisites of Res Judicata are present. Ratio There is no identity of cause of action between the dismissed criminal case and the new civil case. Reasoning In the criminal case, cause of action was enforcement of civil liability arising from criminal negligence. In the civil case, it was quasi-delict. The two factors a cause of action must consist of are: (1) plaintiff’s primary right – Mendoza as owner of the car; (2) defendant’s delict or wrongful act or omission which violated the primary right – negligence or lack of skill, either of Salazar or of Montoya. b) No, right to file an independent civil action need not be reserved. Ratio Sec. 2 of Rule 111, Rules of Court is inoperative because it is an unauthorized amendment of substantive law, and it cannot stand because of its inconsistency with Art.2177. Reasoning Art.2176 and 2177 of Civil Code create a civil liability distinct and different from the civil action arising from the offense of negligence under the RPC. 2. No. Ratio Civil action had extinguished because “the fact from which civil liability might arise did not exist.” (Sec 3c, Rule 111, Rules of Court) Under the facts of the case, Salazar cannot be held liable. Reasoning The offended party has an option between action for enforcement of civil liability based on culpa CRIMINAL (RPC, Art.100) or action for recovery of damages based on culpa AQUILIANA (CC, Art.2177). First option was deemed simultaneously instituted with the criminal action unless expressly waived or reserved of separate application. It can be concluded that Mendoza opted to base his cause of action on culpa criminal, as evidenced by his active participation in the prosecution of criminal suit against Salazar. Disposition Order dismissing Civil Case against Timbol is set aside and trial court to proceed with hearing on merits; orders dismissing complaint in Civil Case against Salazar are upheld.

PSBA V COURT OF APPEALS PADILLA; February 4, 1992 NATURE Petition to review the decision of Court of Appeals. FACTS - A stabbing incident on August 30, 1985 which caused the death of Carlitos Bautista on the premises of the Philippine School of Business Administration (PSBA) prompted the parents of the deceased to file suit in the Manila RTC. It was established that his assailants were not members of the school’s academic community but were outsiders. - The suit impleaded PSBA, its President, VP, Treasure, Chief of Security and Assistant Chief of Security. It sought to adjudge them liable for the victim’s death due to their alleged negligence, recklessness and lack of security precautions.

A2010 page 2 Prof. Labitag - Defendants (now petitioners) sought to have the suit dismissed alleging that since they are presumably sued under Art. 2180 of the Civil Code, the complaint states no cause of action against them since academic institutions, like PSBA, are beyond the ambit of that rule. - Respondent Trial court denied the motion to dismiss. And the MFR was similarly dealt with. Petitioners the assailed the trial court’s dispositions before the respondent appellate court which affirmed the trial court’s ruling. ISSUES WON respondent court is correct in denying dismissal of the case. HELD Ratio Although a school may not be liable under Art. 2180 on quasi-delicts, it may still be liable under the law on contracts. Reasoning The case should be tried on its merits. But respondent court’s premise is incorrect. It is expressly mentioned in Art. 2180 that the liability arises from acts done by pupils or students of the institution. In this sense, PSBA is not liable. But when an academic institution accepts students for enrollment, the school makes itself responsible in providing their students with an atmosphere that is conducive for learning. Certainly, no student can absorb the intricacies of physics or explore the realm of arts when bullets are flying or where there looms around the school premises a constant threat to life and limb. Disposition WHEREFORE, the foregoing premises considered, the petition is DENIED. The Court of origin is hereby ordered to continue proceedings consistent wit this ruling of the Court. Costs against the petitioners. Voting Melencio-Herrera (Chairman), Paras, Regalado and Nocon, JJ., concur.

AMADORA V CA CRUZ; April 15, 1988 NATURE Petition for certiorari to review the decision of Court of Appeals. FACTS - A few days before high school graduation, while in the auditorium of his school (Colegio de San Jose-Recoletos), a classmate, Pablito Daffon, fired a gun that mortally hit and killed Alfredo Amadora. - The victim’s parents filed a civil action for damages under Article 2180 of the Civil Code against the Colegio de San Jose-Recoletos, its rector, the high school principal, the dean of boys, and the physics teacher (the victim was in school to finish his physics experiment –a prerequisite to graduation), together with Daffon and two other students, through their respective parents. - The pertinent provision reads: “Lastly, teachers or heads of establishments of arts and trades shall be liable for damages caused by their pupils and students or apprentices so long as they remain in their custody.” ISSUE

Obligations and Contracts WON respondents are liable under Art. 2180 HELD Ratio Those liable under the related provision of Art. 2180 shall be taken to mean as teacher(s)-in-charge for academic institutions and heads for schools of arts and trades. Reasoning The difference between academic and arts and trades institutions lie in history. Back in the times of artisan guilds, heads of academic institutions were already focused on administrative work and it is only the teachers who interact closely with students. Heads of schools of arts and trades, on the other hand, because of the technical nature of their craft, interact directly with the appentices. Although the same may not be said for schools of arts and trades at present, it is what is written. And only a re-writing of the law can abolish the intended difference. In the case at bar, none of the respondents were liable. The school is not liable under Art. 2180; the rector, the principal and the dean of boys only exercised general authority; the mere fact that Amadora was in school to finish his physics experiment did not make the physics teacher in-charge; and even if he were incharge, there was no showing that it was his negligence in disciplining Daffon that made Daffon shoot Amadora; and the other respondents didn’t have custody of the offender. Disposition WHEREFORE, the petition is DENIED, without any pronouncements as to costs. Voting Yap, Narvasa, Paras, Feliciano, Gancayco, Bidin, Sarmiento, Cortes and Grino-Aquino, JJ., concur. Teehankee, C.J., did not participate in deliberations. Fernan and Padilla, JJ., no part, formerly counsel for Colegio de San Jose-Recoletos. Gutierrez, Jr., J., concur but please see additional statement. Herrera, J., with separate concurring and dissenting opinion.

SONG FO & CO. V HAWAIIAN- PHILIPPINE CO. MALCOLM; September 16, 1925 NATURE Appeal from a judgment of the Court of First Instance of Iloilo FACTS Plaintiff presented a complaint with two causes of action for breach of contract against the defendant in which judgment was asked for P70,369.50, with legal interest and cost. In an amended answer and cross-complaint, the defendant set up the special defense that since the plaintiff had defaulted in the payment for molasses delivered to it by the defendant under the contract between the parties, the latter was compelled to cancel and rescind the contract. The case was submitted for decision on a stipulation of facts and exhibits. The judgment of the trial court condemned the defendant to pay to the plaintiff a total of P35,317.93 with legal interest from the date of the presentation of the complaint, and with costs. HELD - The written contract between the parties provided for the delivery by the Hawaiian-Philippine Co. to Song Fo & Co. of 300,000 gallons of molasses. The

A2010 page 3 Prof. Labitag language used in another exhibit with reference to the additional 100,000 gallons was not a definite promise. Still less did it constitute an obligation. - The terms of contract fixed by the parties are controlling. The time of payment stipulated for in the contract should be treated as of the essence of the contract. Hawaiian-Philippine Co. had no legal right to rescind the contract of sale because of the failure of Song Fo & Co. to pay for the molasses within the time agreed upon by the parties. The general rule is that the rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches are as so substantial and fundamental as to defeat the object of the parties in making the agreement. A delay in payment for a small quantity of molasses for some 20 days is not such a violation of an essential condition of the contracts as warrants rescission for nonperformance. - The measure of damages for breach of contract in this case is as follows: Song Fo & Co. is allowed P3,000 on account of the greater expense to which it was put in being compelled to secure molasses in the open market. It is allowed nothing for lost profits on account of the breach of the contract, because of failure of proof.

VELARDE V COURT OF APPEALS PANGANIBAN; July 11, 2001 FACTS - David Raymundo (private respondent) is the absolute and registered owner of a parcel of land, together with the house and other improvements. - Gorge Raymundo, David’s father, negotiated with Avelina and Mariano Velarde (plaintiffs) for the sale of David’s property, which was under lease. - Aug 8, 1986, a Deed of Sale with Assumption of Mortgage was executed by David Raymundo in favor of Avelina Velarde. It states that David Raymundo sells, cedes, transfers conveys and delivers the property to Avelina Velarde for P800,000 and that Avelina Velarde assumes to pay the mortgage obligations on the property in the amount of P1,800,000 in favor of BPI. - On the same date, Avelina, with the consent of husband Mariano, executed an Undertaking, parts of which as follows: 1. that Avelina Velarde paid David Raymundo P800,000, and assumes the mortgage obligations on the property with BPI in the amount of P1.8M. 2. while Avelina’s application for the assumption of the mortgage obligations on the property is not yet approved by BPI, Avelina agreed to pay the mortgage obligations on the property, including interest and charges for late payment. 3. Avelina binds and obligates herself to strictly and faithfully comply with the ff terms and conditions: a. until such time that assumption of mortgage obligations on the property is approved by BPI, Avelina shall continue to pay said loan in accordance with its terms and conditions. b. In the event Avelina violates any of the terms and conditions, her downpayment of P800,000 plus all payments made with BPI on the mortgage loan shall be forfeited in favor of David Raymundo, and that David shall resume total and complete possession and ownership of the property, and the Deed of Sale with Assumption of Mortgage shall be deemed automatically cancelled.

Obligations and Contracts - As per agreement, the Velardes paid BPI the monthly interest on the loan for 3 months, (Sept 19, 1986 at P27,225; Oct 20, 1986 at 23,000; Nov 19, 1986 at 23, 925) - Dec. 15, 1986, plaintiffs were advised that their Application for Assumption of Mortgage with BPI was not approved. This prompted the Velardes not to make any further payment. - Jan. 5, 1987, the Raymundos, thru counsel, wrote plaintiffs informing them that their nonpayment to BPI constituted nonperformance of their obligation. - On January 7, 1987, the Velardes responded thru counsel and advised that they are willing to pay the balance in cash not later that Jan 21 1987 provided that: a) respondents deliver actual possession of the property not later that Jan 15, 1987; b) respondents cause the release of title and mortgage from BPI and make the title available and free from any liens and encumbrances; and c) respondents execute an absolute deed of sale in favor of Avelina Velarde not later than Jan 21, 1987. - Jan 8, 1987, defendants sent the Velardes a notarial notice of cancellation/rescission of the intended sale of the property, allegedly due to the plaintiffs’ failure to comply with the terms and conditions of the Deed of Sale with Assumption of Mortgage and the Undertaking. - Feb 9, 1987, the Velardes filed a complaint against respondents for specific performance, nullity of cancellation, writ of possession, and damages. - RTC instructed the parties to proceed with the sale, directing the Velardes to pay the balance of P1.8M and ordered the Raymundos to execute a deed of absolute sale and to surrender possession of property to the Velardes. - CA reversed the ruling and dismissed the Velardes’ Complaint. ISSUES 1. WON there is a breach of contract 2. WON the rescission by the Raymundos of the contract valid 3. WON the finding of the CA that the Velardes’ Jan 7, 1987 letter gave three “new conditions” constituted an attempt to novate, thus necessitating a new agreement between the parties HELD 1. Yes. In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer to pay therefore a price certain in money or its equivalent. - Private respondents already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of property to Velarde through consecutive delivery. Prior physical delivery or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery. - Petitioners did not perform their correlative obligation of paying the contract price in the manner agreed upon. They wanted private respondents to perform obligations beyond those stipulated in the contract before fulfilling their own obligation to pay the full purchase price. 2. Yes. Private respondents’ right to rescind the contract finds basis in Article 1191 of the Civil Code, which provides: “Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek

A2010 page 4 Prof. Labitag rescission even after he has chosen fulfillment, of the latter should become impossible.” - The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. The breach contemplated in said provision is the obligor’s failure to comply with an existing obligation. When the obligor cannot comply with what is incumbent upon it, the oblige may seek rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission. - Private respondents validly exercised their right to rescind the contract, because of the failure of petitioners to comply with their obligation to pay the balance of the purchase price. The Velardes violated the very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondents’ right to rescind the same in accordance with law. - Mutual restitution required in rescission. - the breach committed by petitioners was a nonperformance of a reciprocal obligation, not a violation of the terms and conditions of the mortgage contract. Thus, the automatic rescission and forfeiture of payment clauses do not apply. Civil Code provisions shall govern. - Since breach herein is under A1191, mutual restitution is required to bring back the parties their original situation prior to the inception of the contract. - Rescission creates an obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. - To rescind is t declare a contract void at its inception and to put an end to it as though it never was. 3. SC did not find it necessary to discuss third issue but said that the three conditions were not part of the original contract, and that petitioners had no right to demand preconditions to the fulfillment of their obligation, which had become due. Disposition CA decision affirmed with modification that private respondents are ordered to return to petitioners P874,150 with legal interest.

WOODHOUSE V HALILI LABRADOR; July 31, 1953 FACTS - November 29, 1947- plaintiff entered into a written agreement with defendant: 1. that they shall organize a partnership for the bottling and distribution of Mission soft drinks, plaintiff to act as industrial partner or manager, and the defendant as a capitalist, furnishing the capital necessary therefore 2. that the defendant was to decide matters of general policy regarding the business, while the plaintiff was to attend to the operation and development of the bottling plant 3. that plaintiff was to secure the Mission Soft Drinks franchise for and in behalf of the proposed partnership 4. that the plaintiff was to receive 30 per cent of the net profits of the business - Prior to entering into this agreement, plaintiff had informed the Mission Dry Corporation of Los Angeles, California, U. S. A., manufacturers of the bases and ingredients of the beverages bearing its name, that he had interested a prominent

Obligations and Contracts financier (defendant herein) in the business, who was willing to invest half a million dollars in the bottling and distribution of the said beverages, and requested, in order that he may close the deal with him, that the right to bottle and distribute be granted him for a limited time under the condition that it will finally be transferred to the corporation - Pursuant to this request, plaintiff was given "a thirty days' option on exclusive bottling and distribution rights for the Philippines" - The contract was finally signed by plaintiff on December 3, 1947. - When the bottling plant was already in operation, plaintiff demanded of defendant that the partnership papers be executed. - Defendant gave excuses and would not execute said agreement, thus the complaint by the plaintiff. - Plaintiff: 1. execution of the contract of partnership 2. and accounting of profits 3. share thereof of 30 per cent 4. damages in the amount of P200,000 - Defendant: 1. the defendant’s consent to the agreement, was secured by the representation of plaintiff that he was the owner, or was about to become owner of an exclusive bottling franchise, which representation was false, and that plaintiff did not secure the franchise but was given to defendant himself 2. that defendant did not fail to carry out his undertakings, but that it was plaintiff who failed 3. that plaintiff agreed to contribute to the exclusive franchise to the partnership, but plaintiff failed to do so 4. counterclaim for P200,00 as damages - CFI ruling: 1. accounting of profits and to pay plaintiff 15 % of the profits 2. execution of contract cannot be enforced upon parties 3. fraud wasn’t proved

A2010 page 5 Prof. Labitag - Again, the immediate reaction of defendant, when in California he learned that plaintiff did not have the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiff actually made him believe that he (plaintiff) was the exclusive grantee of the franchise. 2. No. In consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud, which may be ground for the annulment of a contract, and the incidental deceit, which only renders the party who employs it liable for damages. This Court has held that 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. The record abounds with circumstances indicative of the fact that the principal consideration, the main cause that induced defendant to enter into the partnership agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the partnership. The original draft prepared by defendant's counsel was to the effect that plaintiff obligated himself to secure a franchise for the defendant. - But if plaintiff was guilty of a false representation, this was not the causal consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement. On the other hand, this supposed ownership of an exclusive franchise was actually the consideration or price plaintiff gave in exchange for the share of 30 per cent granted him in the net profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net profits because he was transferring his exclusive franchise to the partnership. - May the agreement be carried out or executed? We find no merit in the claim of plaintiff that the partnership was already a fait accompli from the time of the operation of the plant, as it is evident from the very language of the agreement that the parties intended that the execution of the agreement to form a partnership was to be carried out at a later date. , The defendant may not be compelled against his will to carry out the agreement nor execute the partnership papers. The law recognizes the individual's freedom or liberty to do an act he has promised to do, or not to do it, as he pleases.

ISSUES 1. WON plaintiff falsely represented that he had an exclusive franchise to bottle Mission beverages 2. WON false representation, if it existed, annuls the agreement to form the partnership HELD 1. Yes. Plaintiff did make false representations and this can be seen through his letters to Mission Dry Corporation asking for the latter to grant him temporary franchise so that he could settle the agreement with defendant. The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership." The existence of this provision in the final agreement does not militate against plaintiff having represented that he had the exclusive franchise; it rather strengthens belief that he did actually make the representation. defendant believed, or was made to believe, that plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the franchise was to be transferred to the name of the partnership, and that, upon its dissolution or termination, the same shall be reassigned to the plaintiff.

GERALDEZ V CA REGALADO; February 23, 1994 NATURE - Petition for review on Certiorari - This is an action for damages by reason of contractual breach filed by Lydia Geraldez against Kenstar Travel Corporation. FACTS - Lydia came to know about the respondent through advertisements about tours in Europe and eventually availed of one of the packages they offered.

Obligations and Contracts - The package was “VOLARE 3” which covered 22-day tour of Europe for 190,000 Php which she paid for herself and her sister. - Her disappointments (because it was contrary to what was in the brochure) during the trip were: • There was no European tour manager for their group of tourists • The hotels which she and the group were billeted were not firstclass • The UGC Leather Factory, which was a highlight of the tour, was not visited • The Filipino lady tour guide was performing said job for the first time. - RTC: granted a writ of preliminary attachment against private respondent on the ground respondent committed fraud in contracting an obligation (as per petitioner’s motion) but said writ was also lifted upon filing a counterbond of Php 990k - Lydia also filed other complaints at the Department of Tourism and the Securities and Exchange Commission which fined the respondent Php 5k and Php 10k respectively. - RTC awarded moral damages, nominal damages, exemplary damages, and for attorney’s fees to Lydia Geraldez worth Php 500k, Php 200k, Php 300k and Php 50k respectively. Respondent also had to pay for the costs of the suit. - CA modified the RTC’s decision since they found no malice could be imputed against Kenstar Travel Corporation. ISSUE WON private respondent acted in bad faith or with gross negligence in discharging its obligations under the contract. HELD Yes, Kenstar Travel Corporation did commit fraudulent misrepresentations amounting to bad faith to the prejudice of Lydia Geraldez and the members of the tour group. Reasoning - On respondent’s choice of tour guide By providing the Volare 3 tourist group with an inexperienced and a first timer tour escort, KTC manifested its indifference to the convenience, satisfaction and peace of mind of its clients during the trip. Respondent should have selected an experienced European tour guide, or it could have allowed Zapanta (the lady guide) to go as an understudy under the guidance, control, and supervision of an experienced and competent European or Filipino tour guide who could’ve given her training. - The inability of the group to visit the leather factory is likewise reflective of the neglect and ineptness of Zapanta in attentively following the itinerary for the day. This incompetence must necessarily be traced to the lack of due diligence on the part of KTC in the selection of its employees. The UGC leather factory was one of the highlights of the tour and it was incumbent upon the organizers of the tour to take special efforts to ensure the same.

A2010 page 6 Prof. Labitag - Clearly, KTC’s choice of Zapanta as tour guide is a manifest disregard of its specific assurances to the tour group, resulting in agitation and anxiety on their part, and which is contrary to the elementary rules of good faith and fair play. - On the European Tour Manager KTC: the euro tour manager refers to an organization and not to an individual; Geraldez didn’t attend the pre-departure briefing, wherein we explained the concept of the euro tour manager SC: the advertisement reveals that the contemplated tour manager contemplated is a natural person not a juridical one as KTC asserts. Furthermore, the obligation to provide not only a European tour manager, but with local European tour guides were likewise never made available. Zapanta couldn’t even remember the name of the European guide with her supposedly. From the advertisement, it is beyond cavil that the import of the “he” is a natural and not a juridical person (in reference to the euro tour guide). There is no need for further interpretation when the wordings are clear. The meaning that will determine the legal effect of a contract is that which is arrived at by objective standards; One is bound not by what he subjectively intends, but by what he leads others reasonably to think he intends. KTC relies in the delimitation of its responsibility printed on the face of its brochure. (see page 330) SC: * CONTRACT OF ADHESION: contracts drafted by only one party (i.e. corporations); the only participation of the other party is the affixing of his signature or his “adhesion” thereto. Such a contract must be strictly construed against the one who drafted the same, especially where there are stipulations that are printed in fine letters and are hardly legible. SC: Private respondents cannot rely on its defense of “substantial compliance” with the contract. - On the First Class Hotels The respondents likewise committed a grave misrepresentation when it assured in its Volare 3 tour package that the hotels it had chosen would provide the tourists complete amenities and were conveniently located along the way for the daily itineraries. It turned out that some of the hotels were not sufficiently equipped with even the basic facilities and were at a distance from the cities covered by the projected tour. - Even assuming arguendo that there is indeed a difference in classifications , it cannot be denied that a first-class hotel could at the very least provide basic necessities and sanitary accommodations. - if it could not provide the tour participants with first-class lodgings on the basis of the amount that they paid, it could and should have instead increased the price to enable it to arrange for the promised first-class accommodations. - Damages Moral damages may be awarded in breaches of contract where the obligor acted fraudulently or in bad faith. - The fraud or dolo which is present or employed at the time of birth or perfection of a contract may either be dolo causante or dolo incidente. - Dolo Causante – causal fraud , referred to in Art. 1338, - are those deceptions or misrepresentations of a serious character employed by one party

Obligations and Contracts - without which the other party would NOT have entered into the contract - essential cause of the consent - effects: nullity of the contract and indemnification of damages - Dolo Incidente – incidental fraud, referred to in Art. 1334, - are those which are not serious in character -without which the other party would still have entered into the contract - some particular or accident of the obligation - effects: damages - SC: KTC is responsible for damages whether it has committed either dolo causante or incidente. - Lydia joined the tour with the belief of a euro tour guide accompanying them; she suffered serious anxiety and distress when the group was unable to visit the leather factory and when she didn’t receive first-class accommodations in their lodgings. These entitle her to moral damages. - Exemplary damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated or compensatory damages. According to the Code Commission, exemplary damages are required by public policy, for wanton acts must be suppressed. - Under the present state of law, extraordinary diligence is not required in travel or tour contracts, such as that in the case at bar, the travel agency acting as tour operator must nevertheless be held to strict accounting for contracted services, considering the public interest in tourism, whether in the local or in the international scene. Disposition MORAL DAMAGES –Php 100k, EXEMPLARY DAMAGES – Php 50k, ATTY’S FEES –Php 20k and costs against the respondent KTC. Award for nominal damages is deleted. Note Nominal damages are awarded when there the complainant suffered actual or substantial damage from the breach of contract.

GUTERREZ V GUTIERREZ MALCOLM; September 23, 1931 NATURE Appeal from the judgment of the CFI of Manila FACTS - On Feb 2, 1930, a passenger truck and a private automobile collided while attempting to pass each other on the Talon bridge on the Manila South Rd in Las Pinas. The truck was driven by the chauffer Abelardo Velasco (AV) and was owned by Saturnino Cortez (SCor). The auto was being operated by Bonifacio Gutierrez (BG), 18 y/o, and was owned by his parents Mr./Mrs. Manuel Gutierrez (MG). - At the time of the collision, BG was with his mother and several other members of the family. MG was not in the car. - A passenger of the autobus, Narciso Gutierrez (NG) was en route from San Pablo to Manila. The collision resulted in NG suffering a fractured right leg requiring him medical assistance. - The collision was caused by negligence. While the plaintiff blames both sets of defendants, the owner of the passenger truck blames the automobile and vice versa.

A2010 page 7 Prof. Labitag ISSUE What are the liabilities of the owners and drivers of the vehicles involved in the collision HELD - BG was an incompetent chauffer as he was driving in an excessive speed. The guarantee the father gave at the time the son was granted a license to operate motor vehicles gave the father responsible for the acts of his son. - SCor and AV’s liability is based on the contract. The position of the truck on the bridge and the speed in operating the machine and the lack of care employed reached such conclusion. The fact that 2 drivers were approaching a narrow bridge, neither willing to slow up and give right of way inevitably resulted to the collision and the accident. - The contention that there was contributory negligence as the plaintiff kept his foot outside the truck was not pleaded and was dismissed as speculative. Ratio In the US it is uniformly held that the head of the house, the owner of the vehicle, who maintains it for the general use of his family is liable for its negligent operation by one of his children, whom he designates or permits to run it, where the car is occupied and being used for the pleasure of the other members of the family, other than the child driving it.

VAZQUEZ V DE BORJA OZAETA; February 23, 1944 NATURE PETITION to review on certiorari a decision of te Court of Appeals FACTS - de Borja entered into a contract with Natividad-Vazquez Sabani Development to purchased 4,000 sack of palay at P2.10 per sack for a total consideration of P 8,400 which was paid by de Borja. Vazquez and Busuego represented the Company in the transaction as acting manager and treasurer, respectively. In addition, de Borja delivered to the defendants a total of 4,000 empty sacks which presumealy were to be used in the delivery of the palay. - Defendants only deliverd to de Borja a total of 2,488 cavans of palay with a value of P5,224.80 and have since refused to deliver the balance. - Action was commenced by Francisco de Borja in the Court of First Instance of Manila against Antonio Vazquez and Fernando Busuego to recover from them jointly and severally the total amount of P4,702.70 arising out of the non delivery of 1,512 cavans of rice and 1,510 empty sacks. - Vazquez denied entering into the contract in his individual and personal capacity. The contract was between plaintiff and Natividad-Vazquez Sabani Development Co., Inc., a corporation which the defendant Vazquez represented as its acting manager. Vazquez filed a counterclaim for P1,000 as damages. - Trial court found in favor of the plaintiff and ordered Vazquez to pay the total sum of P3,552.70. It also absolved Busuego from the complaint. - Vazquez appealed to the CA and it modified the judgement by reducing the amount to P 3,314.78 plus interest and costs. On motion for reconsideration, the CA

Obligations and Contracts set aside its judgment and ordered the case remanded to the court of origin for further proceedings. - Hence the two petitions from both plaintiff and defendant to the Supreme court for certiorari. ISSUES 1.WON de Borja entered into the contract with Vazquez in his personal capacity or as manager of the Natividad-Vazquez Sabani Development 2. WON Vazquez is entitled to counter damages arising out of the erroneous suit HELD Ratio - The Action being on a contract, and it appearing from the preponderance of the evidence that the party liable is Natividad-Vazquez, which is not a party to the suit, the complaint should have been dismissed. - No award is given to Vazquez as the SC believes that he was morally responsible to the party with whom he contracted to see to it that the corporation represented by him fulfilled the contract by delivering that palay it had sold particularly since the same had already been made. Reasoning - Corporations are artificial beings invested by law with a personality of is own, separate and distinct from that of the shareholders and from that of its officers who manage and run its affairs. The mere fact that its personality is owing to a legal fiction and that it necessarily has to act thru its agents does not make such agents personally liable on a contract duly entered into by them for and in behalf of said corporation. This legal fiction may however be disregarded only when an attempt is made to use its as a cloak to hide an unlawful or fraudulent purpose. As there seems to be no showing that Vazquez personally benefited from the transaction, he is within his rights to invoke the legal fiction to avoid personal liability. - The trial court in finding Vazquez guilty of negligence in the performance of the contract and in holding him personally liable manifestly failed to distinguish a contractual from an extra-contractual obligation, or an obligation arising from contract from an obligation arising from culpa aquiliana. In the contractual obligation, it is the obligor to fulfill said contract and not its agents. Hence, the obligor is the party guilty of negligence in the fulfillment of said contract. On the other hand, if independently from the contract, Vazquez by his fault or negligence cased damage to the plaintiff, then he would be personally liable for such damage. But since the suit is based on the contract, then the court has no jurisdiction over the issue and could not adjudicate upon it. Disposition The judgment of the CA is reversed and the complaint is dismissed, without finding as to cost.

SEPARATE OPINION PARAS [ dissent] -From the facts, it appears that Vasquez prior to entering into contract with de Borja knew that his company was already insolvent. Knowing full well that the contract could not be fulfilled, he nonetheless consummated the transaction and

A2010 page 8 Prof. Labitag received the full payment. Hence the CFI and Ca are both correct in holding the failure to deliver was the result of Vazquez’s fault or negligence. - While it is true that the contract is between de Borja and the company, it was proven during the trial that it was Vazquez who prevented the performance of the contract and also of negligence bordering on fraud which caused damage to de Borja. Hence the technicality of a procedural error should not be hindrance to the rendition. - The suit be considered as based on fault and negligence of Vazquez and to sentence defendant accordingly.

DE GUIA V MANILA ELECTRIC, RAILROAD & LIGHT CO STREET; January 28, 1920 NATURE APPEAL from a judgment of the Court of First Instance of Manila. FACTS -The plaintiff is a physician residing in Caloocan City. -Sept 4, 1915, at about 8pm, the defendant boarded a car at the end of the line with the intention of coming to Caloocan. -At about 30 meters from the starting point the car entered a switch, the plaintiff remaining on the back platform holding the handle of the right-hand door. Upon coming out of the switch, the small wheels of the rear truck left the track ran for a short distance and hit a concrete post. -the post was shattered: at the time the car struck against the concrete post, the plaintiff was allegedly standing on the rear platform, grasping the handle of the right-hand door. The shock of the impact threw him forward, and the left part of his chest struck against the door causing him to fall. In the falling, the plaintiff alleged that his head struck one of the seats and he became unconscious. -the plaintiff was taken to his home which was a short distance away from the site of the incident. A physician of the defendant company visited the plaintiff and noted that the plaintiff was walking about and apparently suffering somewhat from bruises on his chest. The plaintiff said nothing about his head being injured and refused to go to a hospital. -The plaintiff consulted other physicians about his condition, and all these physicians testified for the plaintiff in the trial court. -the plaintiff was awarded with P6,100, with interest and costs, as damages incurred by him in consequence of physical injuries sustained. The plaintiff and the defendant company appealed. ISSUES 1. WON the defendant has disproved the existence of negligence 2. What is the nature of the relation between the parties? 3. WON the defendant is liable for the damages 4. If liable for damages, WON the defendant could avail of the last paragraph of Art 1903 on culpa aquiliana (Art 2180) 5. What is the extent of the defendant’s liability? 5.1 Did the trial judge err in the awarding of the damages for loss of professional earnings (P900)?

Obligations and Contracts 5.2 Did the trial judge err in the awarding of the damages for inability to accept a position as a district health officer? 5.3 Did the trial judge err in not awarding damages for the plaintiff’s supposed incapacitation for future professional practice (P30,000)? 5.4 Is the plaintiff reasonable in demanding P10,000 for the cost of medical treatment and other expenses incident to his cure? 6. WON the trial judge erred in treating written statements of the physicians who testified as primary evidence? HELD 1. NO, the existence of negligence in the operation of the car must be sustained, as not being clearly contrary to the evidence. Ratio An experienced and attentive motorman should have discovered that something was wrong and would have stopped before he had driven the car over the entire distance from the point where the wheels left the track to the place where the post was struck. Reasoning The motorman alleged that he reduced his speed to the point that the car barely entered the switch under its own momentum, and this operation was repeated as he passed out. Upon getting again on the straight track he put the control successively at points one, two, three and lastly at point four. At the moment when the control was placed at point four he perceived that the rear wheels were derailed and applied the brake; but at the same instant the car struck the post, some 40 meters distant from the exit of the switch. However, testimonial evidence alleged that the rate of a car propelled by electricity with the control at point "four" should be about five or 6 miles per hour (around 8 kph) and other evidence showed that the car was behind schedule time and that it was being driven, after leaving the switch, at a higher rate than would ordinarily be indicated by the control at point four. The car was practically empty (so it’s possible that it could run faster???). The court granted that there is negligence as shown by the distance which the car was allowed to run with the front wheels of the rear truck derailed, aside from the fact that the car was running in an excessive speed. 2. The relation between the parties was of a contractual nature. Ratio The company was bound to convey and deliver the plaintiff safely and securely with reference to the degree of care which, under the circumstances, is required by law and custom applicable to the case. Reasoning The plaintiff had boarded the car as a passenger for the city of Manila and the company undertook to convey him for hire. 3. YES, the defendant is liable for the damages Ratio/ Reasoning Upon failure to comply with that obligation arising from the contract, the company incurred the liability defined in articles 1103-1107 of the Civil Code. 4. No, the defendant could not avail of the last paragraph of Art 1903 Ratio/ Reasoning The last paragraph of article 1903 of the civil code refers to liability incurred by negligence in the absence of contractual relation, that is, to the culpa aquiliana of the civil law and not to liability incurred by breach of contract; therefore, it is irrelevant to prove that the defendant company had exercised due care in the selection and instruction of the motorman who was in charge of its car and that he was in experienced and reliable servant.

A2010 page 9 Prof. Labitag 5. The defendant is liable for the damages ordinary recoverable for the breach of contractual obligation, against a person who has acted in good faith, which could be reasonably foreseen at the time the obligation is contracted. Ratio The extent of the liability for the breach of a contract must be determined in the light of the situation in existence at the time the contract is made; and the damages ordinarily recoverable are in all events limited to such as might be reasonably foreseen in the light of the facts then known to the contracting parties. Reasoning The court has the power to moderate liability according to the circumstances of the case, i.e. when the defendant must answer for the consequences of the negligence of its employees. Also, an employer who has displayed due diligence in choosing and instructing his servants is entitled to be considered a debtor in good faith (w/n meaning of article 1107, old CC) 5.1. NO, the trial judge was liberal enough to the plaintiff. Reasoning As a result of the incident, the plaintiff was unable to properly attend his professional labors for 3 months and suspend his practice for that period. By testimonial evidence, his customary income, as a physician, was about P300/month. So the trial judge accordingly allowed P900 as damages for loss of earnings. 5.2 YES. The trial judge erred in awarding such damages. Ratio Damage of this character could not, at the time of the accident, have been foreseen by the delinquent party as a probable consequence of the injury inflicted. Reasoning The representative from Negros Occidental has supposedly asked Dr. Montinola to nominate the plaintiff as district health officer of Negros Occidental for two years, with a salary of P1,600 per annum and a possible outside practice worth of P350. However, even if true, the damages were too speculative to be the basis of recovery in a civil action. 5.3 NO. the trial court was fully justified in rejecting the exaggerated estimate of damages allegedly created. Ratio/ Reasoning The plaintiff alleged, even showing testimonial evidences from numerous medical experts, that he developed infarct of the liver and traumatic neurosis, accompanied by nervousness, vertigo, and other disturbing symptoms of a serious and permanent character, and these manifestations of disorder rendered him liable to a host of other dangerous diseases, and that restoration to health could only be accomplished after long years of complete repose. -The medical experts introduced by the defendant testified however that the plaintiff’s injuries, considered in their physical effects, were trivial and that the attendant nervous derangement, with its complicated train of ailments, was merely simulated. -According to the court, the evidence showed that immediately after the incident the plaintiff, sensing in the situation a possibility of profit, devoted himself with great assiduity to the promotion of this litigation; and with the aid of his own professional knowledge, supplemented by suggestions obtained from his professional friends and associates, he enveloped himself more or less unconsciously in an atmosphere of delusion which rendered him incapable of appreciating at their true value the symptoms of disorder which he developed. 5.4 No. He is only justified with P200, or the amount actually paid to Dr. Montes (the doctor who treated the plaintiff) which is the obligation supposedly incurred with respect to treatment for said injuries. Ratio In order to constitute a proper element of recovery in an action of this character, the medical service for which reimbursement is claimed should not only

Obligations and Contracts be such as to have created a legal obligation upon the plaintiff but such as was reasonably necessary in view of his actual condition. Reasoning Dr. Montes, in his testimony, speaks in the most general terms with respect to the times and extent of the services rendered; and it is not clear that those services which were rendered many months, or year, after the incident had in fact any necessary or legitimate relation to the injuries received by the plaintiff. -On the obligation supposedly incurred by the plaintiff to three other physicians: (1) it does not appear that said physicians have in fact made charges for those services with the intention of imposing obligations on the plaintiff to pay them; (2) in employing so many physicians the plaintiff must have had in view the successful promotion of the issue of this lawsuit rather than the bona fide purpose of effecting the cure of his injuries. 6. YES, certificates or the written statements of the physicians which were referred to in the trial cannot be admitted as primary evidence since it is fundamentally of a hearsay nature Ratio The only legitimate use of certificates could be put, as evidence for plaintiff, was to allow the physician who issued it to refer thereto, to refresh his memory upon details which he might have forgotten Disposition Judgment from the trial court modified by reducing the amount of the recovery to P1,100, with legal interest from Nov. 8, 1916 (all judges – 6 (ponente counted) – concurred)

SARMIENTO V SPS. CABRIDO CORONA; April 9, 1003 NATURE Petition for review on certiorari of a decision of the Court of Appeals FACTS Tomasa Sarmiento’s friend, Dra. Virginia Lao, requested her to find someone to reset a pair of diamond earrings into two gold rings. Sarmiento sent Tita Payag with the earrings to Dingding’s Jewelry Shop, owned and managed by spouses Luis and Rose Cabrido, which accepted the job order for P400. Petitioner provided 12 grams of gold to be used in crafting the pair of ring settings. After 3 days, Payag delivered to the jewelry shop one of the diamond earrings which was earlier appraised as worth .33 carat and almost perfect in cut and clarity. Respondent Marilou Sun went on to dismount the diamond from original settings. Unsuccessful, she asked their goldsmith, Zenon Santos, to do it. He removed the diamond by twisting the setting with a pair of pliers, breaking the gem in the process. Petitioner required the respondents to replace the diamond with the same size and quality. When they refused, the petitioner was forced to buy a replacement in the amount of P30,000. Rose Cabrido, manager, denied having any transaction with Payag whom she met only after the latter came to seek compensation for the broken piece of jewelry. Marilou, on the other hand, admitted knowing Payag to avail their services and recalled that when Santos broke the jewelry, Payag turned to her for

A2010 page 10 Prof. Labitag reimbursement thinking she was the owner. Santos also recalled that Payag requested him to dismount what appeared to him as sapphire and that the stone accidentally broke. He denied being an employee of the Jewelry shop. The MTCC of Tagbilaran City rendered a decision in favor of the petitioner. On appeal, Respondents conceded to the existence of an agreement for crafting a pair of gold rings mounted with diamonds but denied they had obligation to dismount the diamonds from the original setting. Petitioner claims that dismounting the diamonds from the original setting was part of the obligation assumed by respondents under the contract of service. The RTC ruled in favor of the respondents. CA affirmed the judgment of the RTC. ISSUES 1. WON dismounting of the diamond from its original setting was part of the obligation 2. WON respondents are liable for damages 3. WON respondents are liable for moral damages HELD 1. YES Ratio The contemporaneous and subsequent acts of the parties reveal the scope of obligation assumed by the jewelry shop to reset the pair of earrings. Reasoning Marilou expressed no reservation regarding the dismounting of the diamonds. She could have instructed Payag to have the diamonds dismounted first, but instead, she readily accepted the job order and charged P400. After the new settings were completed, she called petitioner to bring the diamond earrings to be reset. She examined one of them and went on to dismount the diamond from the original setting. After failing to do the same, she delegated it to the goldsmith. Having acted the way she did, she cannot deny that the dismounting was part of the shop’s obligation to reset the pair of earrings. 2. YES Ratio Those who, in the performance of their obligations are guilty of fraud, negligence or delay and those who in any manner contravene the tenor thereof, are liable for damages. The fault or negligence of the obligor consists in the ‘omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place.’ Reasoning Santos acted negligently in dismounting the diamond from its original setting. Instead of using a miniature wire, which is the practice of the trade, he used a pair of pliers. Marilou examined the diamond before dismounting and found the same to be in order. The subsequent breakage could only have been caused by Santos’ negligence in using the wrong equipment. Res ipsa loquitur. Facts show that Marilou, who has transacted with Payag on at least 10 occasions, and Santos, who has been accepting job referrals through respondents for 6 mos. now, are employed at the jewelry shop. The jewelry shop failed to perform its obligation with the ordinary diligence required by the circumstances. 3. YES Ratio Moral damages may be awarded in a breach of contract when there is proof that defendant acted in bad faith, or was guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligation. Reasoning Santos was a goldsmith for more than 40 years. He should have known that using a pair of pliers would have entailed unnecessary risk of breakage. The

Obligations and Contracts gross negligence of their employee makes the respondents liable of moral damages. Disposition Petition was granted and CA decision was reversed. Respondents were ordered to pay P30,000 as actual damages and P10,000 as moral damages.

CRISOSTOMO V CA YNARES-SANTIAGO; August 25, 2003 NATURE Petition for review on certiorari of a decision of the Court of Appeals FACTS - Atty. Crisostomo contracted the services of Caravan Travel and Tours Int’l to arrange and facilitate her booking, ticketing, and accommodation in a tour dubbed Jewels of Europe at a total cost of P74k; Crisostomo was given discount for her niece, Menor was the company’s ticketing manager - Pursuant to the contract, Menor went to her aunt’s house on June 12, 1991 (Wednesday) to deliver the travel documents and plane tickets. Crisostomo gave Menor the full payment. Menor told her to be at the airport on Saturday two hours before her flight - Without checking her travel documents, Crisostomo went to NAIA on Saturday. She discovered that the flight she was supposed to take had already departed the previous day. - Crisostomo called up Menor to complain. Menor prevailed upon her aunt to take another tour – the British Pageant. She was asked anew to pay P21k as partial payment and commenced the trip in July - Upon Crisostomo’s return, she demanded the difference between the sum she paid for Jewels of Europe and the amount she owed respondent for British Pageant - Caravan Travel refused to reimburse her saying it was non-refundable - Trial Court held that the Caravan Travel was negligent in erroneously advising Crisostomo of her departure date through it employee, Menor who was not presented as a witness. However, Crisostomo was guilty of contributory negligence for not verifying the exact date of her departure. Accordingly, 10% of the amount was deducted from the amount being claimed as refund - Court of Appeals also found both parties at fault but held that Crisostomo is more negligent because as a lawyer and a well-traveled person, she should have known better. She was ordered to pay the Caravan Travel the balance of British Pageant plus interest ISSUE WON a travel agency is bound under the law to observe extraordinary diligence in the performance of its obligation HELD NO. For reasons of public policy, a common carrier in a contract of carriage is bound by law to carry passengers as far as human care and foresight can provide using the utmost diligence of a very cautious person and with due regard for all circumstances. - However, a travel agency is not a carrier that it is not an entity engaged in the business of transporting either passengers or goods. Respondent’s services as a

A2010 page 11 Prof. Labitag travel agency include procuring tickets and facilitating travel permits or visas and booking customers for tours. It is thus not bound under the law to observe extraordinary diligence in the performance of its obligation

CETUS DEVELOPMENT, INC. V CA MEDIALDEA; August 7, 1989 NATURE Petition for review on certiorari of the decision of the CA FACTS - Respondents Ong, Teng, Liwanag, Canlas, Sudario, Nagbuya, were lessees of premises in Quiapo, Manila, originally owned by the Susana Realty. They were individual, verbal leases, on a month-to-month basis. Rental payments were made to a collector of the Susana Realty who went to the premises monthly. - Premises were sold to petitioner, Cetus Development, in 1984. The private respondents continued to pay monthly rentals to a collector sent by the petitioner from April to June, 1984. In August and September, they failed to pay because no collector came. - In October, petitioner sent letters demanding they vacate the premises and pay back rentals. Immediately upon receipt of the demand letters, private respondents paid arrearages, which were accepted subject to the condition that the acceptance was without prejudice to the filing of an ejectment suit. Subsequent monthly rental payments were accepted under the same condition. - For failure of the private respondents to vacate the premises as demanded in the letter, petitioner filed with the Metropolitan Trial court complaints for ejectment. - Trial court dismissed the case, and subsequently the Regional Trial Court did so, as did the CA. ISSUES WON there exists a cause of action, when the complaints for unlawful detainer were filed considering the fact that upon demand by petitioner for payment of back rentals, respondents immediately tendered payment, which was accepted. HELD -Section 2, RoC, "Landlord to proceed against tenant only after demand." states that the right to bring an action of ejectment or unlawful detainer must be counted from the time the defendants failed to pay rent after the demand therefor. The demand required partakes of an extrajudicial remedy that must be pursued before resorting to judicial action so much so that when there is full compliance with the demand, there is no need for court action. -for purposes of bringing an ejectment suit, 2 requisites: 1) must be failure to pay rent/comply with conditions of lease, and 2) must be DEMAND to both pay or to comply and vacate. - in this case, no cause of action for ejectment has accrued. NO FAILURE YET on the part of private respondents, because upon demand, they paid. **exceptions where demand is not required: (a) when obligation or law so declares; (b) when from the nature and circumstances of obligation it can be inferred that time is of the essence of the contract, (c) when demand would be useless. -without such demand, effects of default do not arise.

Obligations and Contracts - the petitioner's demand to vacate was PREMATURE, an exercise of a non-existing right to rescind. -Petitioner claims that its failure to send a collector is not a valid defense because sending a collector is not one of the obligations of the lessor under Article 1654: but 1) it was established that it was customary for private respondents to pay the rentals through a collector, and 2) Article 1257 provides that where no agreement has been designated for the payment of rentals, the place of payment is at the domicile of the defendants. Disposition petition for certiorari denied, CA decision affirmed.

SANTOS VENTURA HOCORMA FDN V SANTOS QUISUMBING; November 4, 2004 FACTS - Santos Ventura Hocorma Foundation Inc (SVHFI) and Ernesto Santos executed a Compromise Agreement on October 26, 1990. The agreement was judicially approved on September 30, 1991. The agreement stipulated that 1) SVHFI shall Santos P1.5 Million immediately upon the execution of the agreement, and the balance of P13 Million shall be paid within a period of not more than two years from the execution of the agreement; 2) Immediately upon the execution of the agreement Santos shall cause the dismissal with prejudice of Civil Cases and for the immediate lifting of the various notices of lis pendens on the real properties; provided, however, that in the event that defendant Foundation shall sell or dispose of any of the lands previously subject of lis pendens, the proceeds of any such sale shall be partially devoted to the payment of the Foundation’s obligations. - SVHFI sold two real properties, which were previously subjects of lis pendens. Discovering the disposition made by the SVHFI, Santos sent a letter to the petitioner demanding the payment of the remaining P13 million, which SVFHI ignored. Santos applied with the RTC for the issuance of a writ of execution of its compromise judgment. The RTC granted the writ. On November 22, 1994, petitioner’s real properties located in Mabalacat, Pampanga were auctioned.Santos filed a Complaint for Declaratory Relief and Damages alleging that there was delay on the part of petitioner in paying the balance of P13 million. TC dismissed petition. CA reversed and ordered SVHFI to pay legal interest on the principal amount of P13 million at the rate of 12% per annum from the date of demand on October 28, 1992 up to the date of actual payment of the whole obligation. ISSUE WON Santos is entitled to legal interest. HELD YES. - When the petitioner failed to pay its due obligation after the demand was made, it incurred delay. Interest as damages is generally allowed as a matter of right. Santos has been deprived of funds to which he is entitled by virtue of their compromise agreement. The goal of compensation requires that the complainant be compensated for the loss of use of those funds. This compensation is in the form of interest. - Article 1169 of the New Civil Code provides: Those obliged to deliver or to do

A2010 page 12 Prof. Labitag something incur in delay from the time the obligee judicially or extra-judicially demands from them the fulfillment of their obligation. - In order for the debtor to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extra-judicially. - The compromise agreement as a consensual contract became binding between the parties upon its execution and not upon its court approval. From the time a compromise is validly entered into, it becomes the source of the rights and obligations of the parties thereto. The two-year period must be counted from October 26, 1990 (date of execution of the compromise agreement, not on the judicial approval on September 30, 1991). When Santos wrote a demand letter on October 28, 1992, the obligation was already due and demandable. Therefore 3 requisites present: 1) The obligation was already due and demandable after the lapse of the two-year period from the execution of the contract. The obligation is liquidated because the debtor knows precisely how much he is to pay and when he is to pay it. 2) Petitioner delayed in the performance. It was able to fully settle its outstanding balance only on February 8, 1995. 3) The demand letter sent to the petitioner was in accordance with an extra-judicial demand contemplated by law.

VASQUEZ V AYALA CORPORATION TINGA; November 19, 2004 NATURE Petition for Review on Certiorari FACTS -April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez entered into a Memorandum of Agreement (MOA) with AYALA Corporation with Ayala buying from the Vazquez spouses, all of the latter’s shares of stock in Conduit Development, Inc. - The main asset of Conduit was a 49.9 hectare property in Ayala Alabang, Muntinlupa, which was then being developed by Conduit under a development plan where the land was divided into Villages 1, 2 and 3 of the “Don Vicente Village.” The development was then being undertaken for Conduit by G.P. Construction and Development Corp. -Under the MOA, Ayala was to develop the entire property, less what was defined as the “Retained Area” consisting of 18,736 square meters. Ayala agreed to offer 4 lots adjacent to the retained area for sale to the Vazquez spouses at the prevailing price at the time of purchase. The relevant provisions of the MOA on this point are: “5.7. The BUYER hereby commits that it will develop the ‘Remaining Property’ into a first class residential subdivision of the same class as its New Alabang Subdivision, and that it intends to complete the first phase under its amended development plan within three (3) years from the date of this Agreement. x x x” 5.15. The BUYER agrees to give the SELLERS a first option to purchase four developed lots next to the “Retained Area” at the prevailing market price at the time of the purchase.”

Obligations and Contracts -The parties are agreed that the development plan referred to in paragraph 5.7 is not Conduit’s development plan, but Ayala’s amended development plan which was still to be formulated as of the time of the MOA. While in the Conduit plan, the 4 lots to be offered for sale to the Vasquez Spouses were in the first phase thereof or Village 1, in the Ayala plan which was formulated a year later, it was in the third phase, or Phase II-c. -Under the MOA, the Vasquez spouses made several express warranties, as follows: “3.1. The SELLERS shall deliver to the BUYER 3.1.2. The true and complete list, certified by the Secretary and Treasurer of the Company showing: A list of all persons and/or entities with whom the Company has pending contracts, if any. 3.1.5. Audited financial statements of the Company as at Closing date. 6. Representation and Warranties by the SELLERs The SELLERS jointly and severally represent and warrant to the BUYER that at the time of the execution of this Agreement and at the Closing: 6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the SELLERS, threatened against or affecting the SELLERS with respect to the Shares or the Property; and 7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the Company shall own the “Remaining Property”, free from all liens and encumbrances and that the Company shall have no obligation to any party except for billings payable to GP Construction & Development Corporation and advances made by Daniel Vazquez for which BUYER shall be responsible in accordance with Par. 2 of this Agreement. 7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the Company as of Closing, and those disclosed to BUYER, the Company as of the date thereof, has no liabilities of any nature whether accrued, absolute, contingent or otherwise, including, without limitation, tax liabilities due or to become due and whether incurred in respect of or measured in respect of the Company’s income prior to Closing or arising out of transactions or state of facts existing prior thereto. 7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion against the Company as at closing or any liability of any nature and in any amount not fully reflected or reserved against such Audited Financial Statements referred to above, and those disclosed to BUYER. 7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the Company is not engaged in or a party to, or to the best of the knowledge of the SELLERS, threatened with, any legal action or other proceedings before any court or administrative body, nor do the SELLERS know or have reasonable grounds to know of any basis for any such action or proceeding or of any governmental investigation relative to the Company. 7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance and observance by the Company of any term, covenant or condition of any instrument or agreement to which the company is a party or by which it is bound, and no condition exists which, with notice or lapse of time or both, will constitute such default or breach.”

A2010 page 13 Prof. Labitag -After the execution of the MOA, Ayala caused the suspension of work on Village 1 of the Don Vicente Project. Ayala then received a letter from one Maximo Del Rosario of Lancer General Builder Corporation informing Ayala that he was claiming the amount of P1,509,558.80 as the subcontractor of G.P. Construction. - G.P. Construction was not able to reach an amicable settlement with Lancer so Lancer sued G.P. Construction, Conduit and Ayala -G.P. Construction in turn filed a cross-claim against Ayala. -G.P. Construction and Lancer both tried to enjoin Ayala from undertaking the development of the property. -The suit was terminated on February 19, 1987, when it was dismissed with prejudice after Ayala paid both Lancer and GP Construction the total of P4,686,113 .-Vasquez spouses sent several “reminder” letters of the approaching so-called deadline on Ayalas obligation to sell 4 lots to them. -However, no demand after April 23, 1984, was ever made by the Vasquez spouses for Ayala to sell the 4 lots. -One of the letters signed by their authorized agent, Engr. Eduardo Turla, categorically stated that they expected “development of Phase 1 to be completed by February 19, 1990, three years from the settlement of the legal problems with the previous contractor.” -By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered for sale. -The four lots were then offered to be sold to the Vasquez spouses at the prevailing price in 1990. -This was rejected by the Vasquez spouses who wanted to pay at 1984 prices, thereby leading to the suit below. TC ruled in favor or petitioners CA ruled in favor of respondents ISSUES Procedural WON the court should review the factual findings of the Court of Appeals as they are in conflict with those of the trial court Subsantive 1. WON AYALA Corporation is in default for failure to finish the development of the phase in question within 3 years 2. WON the provisions of the MOA constitutes an option to buy for spouses Vasquez HELD Procedural YES. It is well-settled that the jurisdiction of this Court in cases brought to it from the Court of Appeals by way of petition for review under Rule 45 is limited to reviewing or revising errors of law imputed to it, its findings of fact being conclusive on this Court as a matter of general principle. However, since in the instant case there is a conflict between the factual findings of the trial court and the appellate court, particularly as regards the issues of breach of warranty, obligation to develop and incurrence of delay, we have to consider the evidence on record and resolve such factual issues as an exception to the general rule Substantive

Obligations and Contracts 1. NO. In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially. - Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been fixed shall be demandable only when that day comes.There was no fixed date in the MOA, and the “demand letters” which were mere reminders were sent even before three years could pass after the signing. Since the MOA does not specify a period for the development of the subject lots, petitioners should have petitioned the court to fix the period in accordance with Article 1197 of the Civil Code. As no such action was filed by petitioners, their complaint for specific performance was premature, the obligation not being demandable at that point. Accordingly, AYALA Corporation cannot likewise be said to have delayed performance of the obligation. - Moreover, a representative of the spouses even told AYALA that the date of reckoning shall be from the date the case with lancer was finished. 2. It is a mere right of first refusal and not an option contract. Although the paragraph has a definite object, i.e., the sale of subject lots, the period within which they will be offered for sale to petitioners and, necessarily, the price for which the subject lots will be sold are not specified. The phrase “at the prevailing market price at the time of the purchase” connotes that there is no definite period within which AYALA Corporation is bound to reserve the subject lots for petitioners to exercise their privilege to purchase. Neither is there a fixed or determinable price at which the subject lots will be offered for sale. The price is considered certain if it may be determined with reference to another thing certain or if the determination thereof is left to the judgment of a specified person or persons.

ABELLA V FRANCISCO AVANCEÑA; December 20, 1930 NATURE Appeal from a judgment of the CFI of RIzal FACTS - Guillermo Francisco (defendant) purchased from the Government on installments, lots 937-945 of the Tala Estate in Novaliches, Caloocan, Rizal. - He was behind in payment for these installments and on October 31, 1928, he signed a document stating that he received P500 from Julio Abella (plaintiff) on account of lots no. 937-945, containing an area of 221 hectares, at the rate of 100/hectare, the balance of which is due on or before December 15 of the same year, extendible fifteen days thereafter - On Novemer 13, 1928, Abella made another payment of P415.31, upon demand made by Francisco - On December 27,1928, Francisco, being in Cebu, wrote a letter to Roman Mabanta, attaching a power of attorney authorizing him to sign in behalf of the defendant all the documents required by the Bureau of Land for the transfer of lots to the plaintiff - In the same letter, defendant instructed Mabanta to inform the plaintiff that the option would be considered cancelled, and to return the amount of P915.31, in the event that the plaintiff failed to pay the remainder of the selling price

A2010 page 14 Prof. Labitag - On January 3, 1929, Mabanta notified the plaintiff that he had received the power of attorney to sign the deed of conveyance of the lots to him, and that he was willing to execute the deed of sale upon payment of the balance due - The plaintiff asked for a few days’ time, but Mabanta only gave him until January 5 - Plaintiff failed to pay the rest of the price on January 5, but attempted to do so on January 9, but Mabanta refused to accept it and instead returned by check the sum of P915.31 - Plaintiff brought an action to compel the defendant to execute the deed of sale upon receipt of the balance of the price, and asked that he be judicially declared the owner of said lots, and that the defendant be ordered to deliver it to him - The CFI absolved the defendant from the complaint, and the plaintiff appealed ISSUE WON the time was an essential element in the contract, and therefore, the defendant was entitled to rescind the contract for failure of plaintiff to pay the price within the time specified HELD Yes. The defendant is entitled to resolve the contract for failure to pay the price within the time specified. Reasoning In holding that the time was an essential element in the contract, the CFI considered that the agreement in question was an option for the purchase of the lots. The SC, however, was divided on the question of whether the agreement was an option or a sale. But the SC ruled that regardless of whether it was an option or a sale, having agreed that the selling price would be paid not later than December, 1928, and in view of the fact that the vendor executed the contract to pay off with the proceeds thereof certain obligations which fell due in the same month of December, the time fixed for the payment of the selling price was essential in the transaction.

VDA. DE VILLARUEL V MANILA MOTOR CO. INC. AND COLMENARES REYES; December 13, 1958 NATURE Appeal from a judgment of the CFI of Negros Occidental FACTS - This case is a petition of the judgment that ordered Manila Motor Co., Inc. to pay Villaruel for the lease of their building from June 1, 1942 to March 29, 1945 as well as for them to pay for the destruction of the property. - Manila Motor Co., Inc. leased the building from Villaruel and entered a contract, the contract lasts for 5 years and that the amount of Php. 350 a month should be paid. It is to be placed on Manila Motor Co., Inc. possession on the 31 st day of October 1940. The leasing continued until the invasion in 1941. At this time no payment of rental was done during the said period. When the Americans liberated the country they took possession of the said property and paid for the same amount to Villaruel. Manila Motor Co., Inc. wanted to resume the contract given that the contract gives them the option to continue such lease. Villaruel however would want

Obligations and Contracts the contract rescinded and for Manila Motor Co., Inc. to pay for the rentals during from June 1, 1942 until March 29, 1945. While the trial was ongoing, the property got burned. Villaruel then sought for a supplemental complaint demanding reimbursement. CFI granted the petition of Villaruel giving rise for this appeal. ISSUE WON Manila Motor Co., Inc. is liable to pay for the rental fees at the time of the Japanese Occupation and the destruction of property HELD No. The occupation is a pertubacion de derecho (trespassing under color of title) and not pertubacion de hecho (mere act of trespass). This is because the Japanese Occupation was legitimate following both International and Domestic law recognize the use of private properties at the time of war. Applying Art. 1560 the lessors are liable for it and that such occurrence resulted to the deprivation of the lessee from the peaceful use and enjoyment of the property leased. The obligation ceased during such deprivation. Also, mere disturbance entail that the lessee shall have a direct action against the trespasser but the military occupation was not what the drafters had on mind for such occupation is not preventable. Further more, the fact that the military seizure was considered a fortuitous event means that the failure of one party to fulfill its commitment entails that the other party is excused to do his correlative performance since the causa of the lease must exist throughout the term of the contract. - It is unwarranted by the Moratorium Order under EO No. 32. The refusal to accept placed the lessors in default to bear supervening risks of accidental injury or destruction. Failure to consign does not eradicate the default of the lessors nor the risk of loss that lay upon them. Disposition Manila Motor Co., Inc. is asked to pay only Php. 1750 from July to November 1946 and not for the petitioned amount.

TENGCO V CA PADILLA; October 19, 1989 NATURE Review on certiorari of the decision of CA. FACTS - Lutgarda Cifra, the owner of the premises at No. 164 Int., Gov. Pascual St., Navotas, Metro Manila leased the said property to Emilia Tengco. The contract was not in writing, hence, not recorded. - While the contract of lease was still subsisting, Lutgarda Cifra transferred the ownership of the property to Benjamin Cifra. - Tengco, despite her knowledge of this transfer, attempted to pay her rentals to the person whom she used to pay her dues. But that person refused to accept the payment as she is no longer had the authority to accept payments. Tengco, on the other hand, did not give the payment to Benjamin Cifra or consigned the amount to the court. - The record of the case shows that on 16 September 1976, Benjamin Cifra, Jr. filed an action for umlawful detainer with the MTC of Navotas to evict the peititioner,

A2010 page 15 Prof. Labitag Emilia Tengco, from the said premises for her alleged failure to comply with the terms and conditions of the lease contract by failing and refusing to pay the stipulated rentals despite repeated demands. After trial, judgment was rendered against Tengco and ordered the defendant and any and all persons claiming rights under her to vacate the premises occupied by her and to surrender possession thereof to the plaintiff. ISSUES 1. WON Benjamin Cifra, Jr. is the owner of the leased premises 2. WON the lessor was guilty of mora accipiendi 3. WON laches had deprived the lessor of the right to eject her considering that the Complaint was filed only in September 1976 whereas his cause of action arose sometime in February, 1974 when she defaulted in the payment of rentals HELD 1. YES. The question of whether or not private respondent is the owner of the leased premises is one of fact which is within the cognizance of the trial court whose findings thereon will not be disturbed on appeal unless there is a showing that the trial court had overlooked, misunderstood, or misapplied some fact or circumstance of weight and substance that would have affected the result of the case. 2. NO. Under the circumstances, the refusal to accept that proffered rentals is not without justification. The ownership of the property had been transferred by Lutgarda Cifra, the original lessor, to Benjamin Cifra and the person to whom payment was offered had no authority to accept payment. It should be noted that the contract of lease between the petitoner and Lutgarda Cifra, the former owner of the land, was not in writing and, hence, unrecorded. The Court has held that a contract of lease executed by the vendor, unless recorded, ceases to have effect when the property is sold, in the absence of a contrary agreement. 3. NO. The tenant's mere failure to pay rent does not ipso facto make unlawful his possession of the leased premises. It is failure to pay rents after a demand therefore is made that entitles the lessor to bring an action of Unlawful Detainer, Moreover, the lessor has the privilege to waive his right to bring an action against his tenant and give the latter credit for the payment of the rents and allow him to continue indefinitely in the possession of the premises. During such period, the tenant would not be in illegal possession of the premises and the landlord can not maintain an action until after he has taken steps to convert the legal possession into an illegal possession. Consequently, petitioner's non-payment of the rentals on the premises, notwithstanding demand made by Cifra, and her failure to avail of the remedy provided for in Article 1256 of the Civil Code, entitles private respondent to eject her from the premises. Disposition: The petition is denied.

CENTRAL BANK OF THE PHILIPPINES V COURT OF APPEALS MAKASIAR; October 3, 1985 NATURE Petition for certiorari to review the decision of the Court of Appeals.

Obligations and Contracts FACTS - Island Savings Bank approved the loan application for P80K of Sulpicio Tolentino who executed a real estate mortgage over his 100 hectare land. - The loan called for a lump sum of P80K, repayable in semi-annual installments for 3 yrs, w/ 12% annual interest. It was required that Tolentino shall use the loan solely as additional capital to develop his other property into a subdivision. - A mere P17K partial release of the loan was made by the bank and Tolentino and his wife signed a promissory note for the P17K at 12% annual interest payable w/in 3 yrs. An advance interest was deducted fr the partial release but this prededucted interest was refunded to Tolentino after being informed that there was no fund yet for the release of the P63K balance. The bank VP and Treasurer promised release of the balance. - Monetary Board of Central Bank, after finding that bank was suffering liquidity problems, prohibited the bank fr making new loans and investments. And after the bank failed to restore its solvency, the Central Bank prohibited Island Savings Bank fr doing business in the Philippines. - Island Savings Bank in view of the non-payment of the P17K filed an application for foreclosure of the real estate mortgage. - Tolentino filed petition for specific performance or rescission and damages w/ preliminary injunction, alleging that since the bank failed to deliver P63K, he is entitled to specific performance and if not, to rescind the real estate mortgage. - Trial court found Tolentino’s petition unmeritorious. CA affirmed dismissal of Tolentino’s petition for specific performance, but it ruled that the bank can neither foreclose the real estate mortgage nor collect the P17K loan. ISSUES 1. WON Tolentino’s action for specific performance can prosper 2. WON Tolentino is liable to pay the P17K covered by the promissory note 3. If liable to pay P17K, WON Tolentino’s real estate mortgage can be foreclosed HELD 1. NO - The loan agreement implied reciprocal obligations. When one party is willing and ready to perform, the other party not ready nor willing incurs in delay. When Tolentino executed real estate mortgage, he signified willingness to pay. That time, the bank’s obligation to furnish the P80K loan accrued. Now, the Central Bank resolution made it impossible for the bank to furnish the P63K balance. - The prohibition on the bank to make new loans is irrelevant bec it did not prohibit the bank fr releasing the balance of loans previously contracted. - Insolvency of debtor is not an excuse for non-fulfillment of obligation but is a breach of contract. - The bank’s asking for advance interest for the loan is improper considering that the total loan hasn’t been released. A person can’t be charged interest for nonexisting debt. - The alleged discovery by the bank of overvaluation of the loan collateral is not an issue. The bank officials should have been more responsible and the bank bears risk in case the collateral turned out to be overvalued. Furthermore, this was not raised in the pleadings so this issue can’t be raised. - The bank was in default and Tolentino may choose bet specific performance or

A2010 page 16 Prof. Labitag rescission w/ damages in either case. But considering that the bank is now prohibited fr doing business, specific performance cannot be granted. Rescission is the only remedy left, but the rescission shld only be for the P63K balance. 2. YES - The promissory note gave rise to this liability. His failure to pay made him party in default, hence, not entitled to rescission. This time, it is the bank which has right to rescind the promissory note. - Since both Tolentino and the bank are in default, both are liable for damages. Liability may be offset. 3. NO - Since the bank failed to furnish the balance, the real estate mortgage became unenforceable to such extent.

CHAVEZ V GONZALES REYES; April 30, 1970 FACTS - Chavez brought his typewriter on July of 1963 to Gonzales to have it fixed. There was no agreement as to when the typewriter should be ready for return to Chavez. - Gonzales was not able to finish the work after a certain time despite repeated reminders from Chavez. - Gonzales asked Chavez for P6.00 for the purchase of spare parts which Chavez gave. - In October 1963 Chavez went to Gonzales’ house and got the typewriter. It was returned to him with the cover and some essential parts missing. - Chavez formally demanded that the missing parts be returned along with the cover and the sum of P6.00 which Gonzales did. - August 1964 – the typewriter was fixed by another person which cost Chavez P89.95 for materials and labor. - The trial court awarded Chavez damages of only P31.10 out of his total claim of P690.00. ISSUE WON Chavez should be entitled to greater damages than what was awarded to him in the trial court HELD YES - Art. 1197 cannot be raised as a defense. a. Art. 1197 states that the petitioner should have first filed for a petition from the Court, fixing the period. b. This is not applicable because the time for compliance has already expired, the defendant not having worked on the typewriter and returning it to the owner unrepaired. - Gonzales is liable under Art. 1165 because of his non-performance. c. He is liable for the cost of executing the obligation in the proper manner. d. He is also liable for the missing parts. e. But the moral damages and attorney’s fees should not be awarded because they were not alleged in the complaint.

Obligations and Contracts

TELEFAST COMMUNICATIONS / PHILIPPINE WIRELESS, INC. V CASTRO PADILLA; February 29, 1988 NATURE Petition for Review on Certiorari of the decision of the Intermediate Appellate Court dated 11 February 1986, in “Castro, Sr. vs Telefast Communication/Philippine Wireless, Inc.” FACTS - On November 2, 1956, Consolacion Bravo-Castro, wife of plaintiff Ignacio Castro, Sr. and mother of the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia Crouch, who was then in the Philippines, addressed a telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram was accepted by the defendant in its Dagupan office, for transmission, after payment of the required fees or charges. However, the telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in attendance. Neither the husband nor any of the other children of the deceased, then all residing in the United States, returned for the burial. - When Sofia returned to the United States, she discovered that the wire she had caused the defendant to send had not been received. She and the other plaintiffs thereupon brought action for damages arising from defendant's breach of contract. The only defense of the defendant was that it was unable to transmit the telegram because of "technical and atmospheric factors beyond its control." No evidence appears on record that defendant ever made any attempt to advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram. - The CFI of Pangasinan, after trial, ordered the defendant to pay the plaintiffs damages as follows, with interest at 6% per annum: 1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00, as moral damages. 2. Ignacio Castro Sr., P20,000.00 as moral damages. 3. Ignacio Castro Jr., P20,000.00 as moral damages. 4. Aurora Castro, P10,000.00 moral damages. 5. Salvador Castro, P10,000.00 moral damages. 6. Mario Castro, P10,000.00 moral damages. 7. Conrado Castro, P10,000 moral damages. 8. Esmeralda C. Floro, P20,000.00 moral damages. 9. Agerico Castro, P10,000.00 moral damages. 10. Rolando Castro, P10,000.00 moral damages. 11. Virgilio Castro, P10,000.00 moral damages. 12. Gloria Castro, P10,000.00 moral damages. - Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of P1,000.00 to each of the plaintiffs and costs. - On appeal by petitioner, the Court of Appeals affirmed the trial court's decision but eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch

A2010 page 17 Prof. Labitag and the award of P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as moral damages to each - Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to P10,000. 00 for each.] - Petitioner appeals from the judgment of the appellate court contending that the award of moral damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or recklessness." Under its theory, it can only be held liable for P 31.92, the fee or charges paid by Sofia C. Crouch for the telegram that was never sent to the addressee thereof. ISSUE WON petitioner can be henld liable for moral damages. HELD Yes. Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for damages." Art. 2176 also provides that "whoever, by act or omission, causes damage to another, there being fault or negligence, is obliged to pay for the damage done." Petitioner and Sofia Crouch entered into a contract whereby, for a fee, petitioner undertook to send said private respondent's message overseas by telegram. This, petitioner did not do, despite performance by Crouch of her obligation by paying the required charges. Petitioner was, therefore, guilty of contravening its obligation to said private respondent and is thus liable for damages. - This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in this regard would result in an inequitous situation where petitioner will only be held liable for the actual cost of a telegram fixed thirty [30] years ago. Art. 2217 of the Civil Code is applicable to this case. It states: "Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate results of the defendant's wrongful act or omission." - Petitioner's act or omission which amounted to gross negligence, was precisely the cause of the suffering private respondents had to undergo. - As the appellate court properly observed: Who can seriously dispute the shock, the mental anguish and the sorrow that the overseas children must have suffered upon learning of the death of their mother after she had already been interred, without being given the opportunity to even make a choice on whether they wanted to pay her their last respects? There is no doubt that these emotional sufferings were proximately caused by appellant's omission and substantive law provides for the justification for the award of moral damages. - The trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch representing the expenses she incurred when she came to the Philippines from the United States to testify before the trial court is sustained. Had petitioner not been remiss in performing its obligation, there would have been no need for this suit or for Mrs. Crouch's testimony. - The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in the amount of P1,000.00 for each of the private

Obligations and Contracts respondents, as a warning to all telegram companies to observe due diligence in transmitting the messages of their customers. Disposition Petition is DENIED. The Decision appealed from is modified so that petitioner is held liable to private respondents in the following amounts: [1] P10,000.00 as moral damages, to each of private respondents; [2] P1,000.00 as exemplary damages, to each of private respondents; [3] P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch; [4] P5,000.00 as attorney's fees; and [5] Costs of suit.

ARRIETA V NATIONAL RICE AND CORN CORP REGALA; January 31, 1964 NATURE Appeal of the defendant-appellant NARIC from the decision of the trial court dated February 20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of contract and dismissing the counterclaim and third party complaint of the defendant-appellant NARIC. FACTS - On May 19, 1952, plaintiff-appellee participated and won in the public bidding called by the NARIC for the supply of 20,000 metric tons of Burmese rice. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant corporation entered into a Contract of Sale of Rice, under the terms of which the former obligated herself to deliver to the latter 20,000 metric tons of Burmese Rice at $203.00 per metric ton, CIF Manila. In turn, the defendant Corporation committed itself to pay for the imported rice "by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in Burma, immediately." - Despite the commitment to pay immediately "by means of an irrevocable, confirmed and assignable Letter of Credit," however, it was only on July 30, 1952, or a full month from the execution of the contract, that the defendant corporation, thru its general manager, took the first step to open a letter of credit by forwarding to the Philippine National Bank its Application for Commercial Letter of Credit. On the same day, July 30, 1952, Mrs. Paz P. Arrieta, thru counsel, advised the appellant corporation of the extreme necessity for the immediate opening of the letter of credit since she had by then made a tender to her supplier in Rangoon, Burma "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and in compliance with the regulations in Rangoon this 5% will be confiscated if the required letter of credit is not received by them before August 4, 1952." - It turned out however, the appellant corporation was not in any financial position to meet the condition, which it candidly admitted in a communication with PNB. Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months from the execution of the contract) the party named by the appellee as beneficiary of the letter of credit. As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5% deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it must be made of record that although the Burmese authorities had set August 4, 1952 as the deadline for the remittance of the required letter of

A2010 page 18 Prof. Labitag credit, the cancellation of the allocation and the confiscation of the 5% deposit were not effected until August 20. 1952, or, a full half month after the expiration of the deadline. And yet, even with that 15-day grace, appellant corporation was unable to make good its commitment to open the disputed letter of credit. - The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility of reinstating the same became apparent, she offered to substitute Thailand rice instead to the defendant NARIC, communicating at the same time that the offer was "a solution which should be beneficial to the NARIC and to us at the same time." This offer for substitution, however, was rejected by the appellant in a resolution dated November 15, 1952. Appellee sent a letter to the appellant, demanding compensation for the damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The demand having been rejected, she instituted this case now on appeal. ISSUE WON the lower court erred in holding NARIC liable for damages for breach of contract HELD - YES. We do not think the appellant corporation can refute the fact that had it been able to put up the 50 c/o marginal cash deposit demanded by the bank, then the letter of credit would have been approved, opened and released as early as August 4, 1952. The letter of the Philippine National Bank to the NARIC was plain and explicit that as of the said date, appellant's it "application for a letter of credit . . . has been approved by the Board of Directors with the condition that 50% marginal cash deposit be paid and that drafts are to be paid upon presentment." The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirements of the bank. Its culpability arises from its willful and deliberate assumption of contractual obligations even as it was well aware of its financial incapacity to undertake the presentation. - A number of logical inferences may be drawn from NARIC’s admission. First, that the appellant knew the bank requirements for opening letters of credit; second, that appellant also knew it could not meet those requirements. When, therefore, despite this awareness that it was financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of the contract to pay immediately "by means of an irrevocable, confirmed and assignable letter of credit," it must be similarly be held to have bound itself too answer for all and every consequences that would result from the representation. - In relation to the aforequoted observation of the trial court, We would like to make reference also to Article 1170 of the Civil Code which provides: "Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable in damages. - Under this provision, not only debtors guilty of fraud, negligence or default in the performance of obligations are decreed liable: in general, every debtor who fails in the performance of his obligations is bound to indemnify for the losses and damages caused thereby. The phrase "in any manner contravene the tenor" of the obligation includes any illicit act which impairs the strict and faithful fulfillment of the obligation, or every kind of defective performance. (IV Tolentino, Civil Code of the Philippines, citing authorities, p. 103.)

Obligations and Contracts - The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might have derived from the breach of the contract. We disagree. Waivers are not presumed, but must be clearly and convincingly shown, either by express stipulation or acts admitting no other reasonable explanation. (Ramirez vs. Court of Appeals, 98 Phil., 225; 52 Off. Gaz. 779). In the case at bar, no such intent to waive has been established. - In the premises, however, a minor modification must be effected in the disposition portion of the decision appealed from insofar as it expresses the amount of damages in U.S. currency and not in Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any coin or currency which at the time of payment is legal tender for public and private debts." In view of that law, therefore, the award should be converted into and expressed in Philippine Peso. Disposition UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification that the award should be converted into the Philippine peso at the rate of exchange prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was executed. The appellee insurance company, in the light of this judgment, is relieved of any liability under this suit. No pronouncement as to costs.

MAGAT V MEDIALDEA ESCOLIN; April 20, 1983 NATURE Petition for review on certiorari to determine the sufficiency of the averments contained in the complaint for alleged breach of contract filed by petitioner Victorino D. Magat against respondent Santiago A. Guerrero of the CFI of Rizal, presided by respondent Judge Leo D. Medialdea, now Deputy Judicial Administrator, which complaint was dismissed for failure to state a cause of action. FACTS - Defendant entered into a contract with the U.S. Navy Exchange, Subic Bay, Philippines, for the operation of a fleet of taxicabs, each taxicab to be provided with the necessary taximeter and a radio transceiver for receiving and sending of massage from mobile taxicab to fixed base stations within the Naval Base - Because of the experience of the plaintiff in connection with his various contracts with the U.S. Navy and his goodwill already established with the Naval personnel, Isidro Q. Aligada, acting as agent of the defendant approached the plaintiff and proposed to import from Japan thru the plaintiff or thru plaintiff's Japanese business associates, all taximeters and radio transceivers needed by the defendant - Defendant and his agent were able to import from Japan with the assistance of the plaintiff and his Japanese business associates the necessary taximeters for defendant's taxicabs in partial fulfillment of defendant's commitments with the U.S. Navy Exchange, the plaintiff's assistance in this matter having been given to the defendant gratis et amore - Isidro Q. Aligada, acting as agent of the defendant, made representations with the plaintiff that defendant desired to procure from Japan thru the plaintiff the needed radio transceivers and to this end, Isidro Q. Aligada secured a firm offer in writing dated September 25, 1972, wherein the plaintiff quoted in his offer a total price of $77,620.59 FOB Yokohama, the goods or articles offered for sale by the plaintiff to

A2010 page 19 Prof. Labitag the defendant to be delivered sixty to ninety days after receipt of advice from the defendant of the radio frequency assigned to the defendant by the proper authorities - Plaintiff received notice of the fact that the defendant accepted plaintiff's offer to sell to the defendant the items as well as the terms and conditions of said offer, as shown by the signed conformity of the defendant which was duly delivered by the defendant's agent to the plaintiff, whereupon all that the plaintiff had to do was to await advice from the defendant as, to the radio frequency to be assigned by the proper authorities to the defendant - In his letter dated October 6, 1972, the defendant advised his agent that the U.S. Navy provided him with the radio frequency of 34.2 MHZ [Megaherzt] and requested his said agent to proceed with his order placed with the plaintiff, which fact was duly communicated to the plaintiff - By his letter dated October 7, 1972 addressed to the plaintiff by the defendant's agent, defendant's agent qualified defendant's instructions that plaintiff should proceed to fulfill defendant's order only upon receipt by the plaintiff of the defendant's letter of credit - Plaintiff awaited the opening of such a letter of credit by the defendant - Defendant and his agent have repeatedly assured plaintiff of the defendant's financial capabilities to pay for the goods and in fact he accomplished the necessary application for a letter of credit with his banker, but he subsequently instructed his banker not to give due course to his application for a letter of credit and that for reasons only known to the defendant, he fails and refuses to open the necessary letter of credit to cover payment of the goods - It came to the knowledge of the plaintiff that the defendant has been operating his taxicabs without the required radio transceivers and when the U.S. Navy Authorities of Subic Bay, Philippines, were pressing defendant for compliance with his commitments with respect to the installations of radio transceivers on his taxicabs he impliedly laid the blame for the delay upon the plaintiff thus destroying the reputation of the plaintiff with the mid Naval Authorities with whom plaintiff transacts business - On March 27, 1973, plaintiff wrote a letter thru his counsel to ascertain from the defendant as to whether it is his intention to fulfill his pan of the agreement with the plaintiff or whether he desired to have the contract between them definitely cancelled, but defendant did not even have the courtesy to answer plaintiff's demand Petitioner’s Claims The defendant entered into a contract with the plaintiff without the least intention of faithfully complying with his obligations, but he did so only in order to obtain the concession from the U.S. Navy Exchange. of operating a fleet of taxicabs inside the U.S. Naval Base to his financial benefit and at the expense and prejudice of third parties such as the plaintiff. That in view of the defendant's failure to fulfill his contractual obligations with the plaintiff, the plaintiff will suffer several damages Respondent’s Arguments Respondent Guerrero filed a motion to dismiss complaint for lack of cause of action. He alleged that plaintiff was merely anticipating his loss or damage, which might result from the alleged failure of defendant to comply with the terms of the alleged contract. Plaintiff's right of recovery under his cause of action is premised not on any loss or damage actually suffered by him but on a non-existing loss or damage which he is expecting to incur in the near future. Plaintiff's right therefore under his cause of action is not yet fixed or vested.

Obligations and Contracts

A2010 page 20 Prof. Labitag

- The respondent judge, over petitioner's opposition, issued a minute order dismissing the complaint

NATURE Petition for review on certiorari of CA decision

ISSUE WON there is sufficient cause of action

FACTS -April 1987: petitioner Jacinto M. Tanguilig doing business under the name and style J.M.T. Engineering and General Merchandising proposed to respondent Vicente Herce Jr. to construct a windmill system for him. After some negotiations they agreed on the construction of the windmill for a consideration of P60,000.00 with a one-year guaranty from the date of completion and acceptance by respondent Herce Jr. of the project. Pursuant to the agreement respondent paid petitioner a down payment of P30,000.00 and an installment payment of P15,000.00, leaving a balance of P15,000.00. -14 March 1988: due to the refusal and failure of respondent to pay the balance, petitioner filed a complaint to collect the amount. Respondents' Comments -Since the deep well formed part of the system, the P15,000 he tendered to San Pedro General Merchandising Inc. (SPGMI) should be credited to his account by petitioner. -Assuming that he owed petitioner a balance of P15,000.00, this should be offset by the defects in the windmill system which caused the structure to collapse after a strong wind hit their place. Petitioners' Counterclaim -The construction of a deep well was not included in the agreement to build the windmill system. The contract price of P60,000.00 was solely for the windmill assembly and its installation, exclusive of other incidental materials needed for the project. -He also disowned any obligation to repair or reconstruct the system and insisted that he delivered it in good and working condition to respondent who accepted the same without protest. He claims that the collapse was attributable to a typhoon, a force majeure, which relieved him of any liability. Lower Court’s Ruling -RTC ruled in favor of plaintiff-petitioner: that the construction of the deep well was not part of the windmill project & that there is no clear and convincing proof that the windmill system fell down due to the defect of the construction. -CA reversed; it ruled that the construction of the deep well was included in the agreement of the parties because the term "deep well" was mentioned in both proposals. But it rejected petitioner's claim of force majeure and ordered the latter to reconstruct the windmill in accordance with the stipulated one-year guaranty. MFR was also denied.

HELD YES. Ratio The essential elements of a cause of action are: [1] the existence of a legal right of the plaintiff; [2] a correlative duty of the defendant and [3] an act or omission of the defendant in violation of the plaintiff's right, with consequent injury or damage to the latter for which he may maintain an action for recovery of damages or other appropriate relief. - Article 1170 Of the Civil Code provides: "Those who in the performance of their obligation are guilty of fraud. negligence, or delay, and those who in any manner contravene the tenor thereof are liable for damages." The phrase "in any manner contravene the tenor" of the obligation includes any illicit act or omission which impairs the strict and faithful fulfillment of the obligation and every kind of defective performance. - The damages which the obligor is liable for includes not only the value of the loss suffered by the obligee [daño emergense] but also the profits which the latter failed to obtain [lucro cesante]. If the obligor acted in good faith, he shall be liable for those damages that are the natural and probable consequences of the breach of the obligation and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted; and in case of fraud, bad faith, malice or wanton attitude, he shall be liable for all damages which may be reasonably attributed to the nonperformance of the obligation. The same is true with respect to moral and exemplary damages. The applicable legal provisions on the matter, Articles 2220 and 2232 of the Civil Code, allow the award of such damages in breaches of contract where the defendant acted in bad faith. Reasoning The complaint recites the circumstances that led to the perfection of the contract entered into by the parties. It further avers that while petitioner had fulfilled his part of the bargain, private respondent failed to comply with his correlative obligation by refusing to open a letter of credit to cover payment of the goods ordered by him, and that consequently, petitioner suffered not only loss of his expected profits, but moral and exemplary damages as well. From these allegations, the essential elements of a cause of action are present. - Indisputably, the parties, both businessmen, entered into the aforesaid contract with the evident intention of deriving some profits therefrom. Upon breach of the contract by either of them, the other would necessarily suffer loss of his expected profits. Since the loss comes into being at the very moment of breach, such loss is real, "fixed and vested" and, therefore, recoverable under the law. The complaint sufficiently alleges bad faith on the part of the defendant. Disposition The questioned order of dismissal was set aside and the case was ordered remanded to the court of origin for further proceedings. No costs.

TANGUILIG V COURT OF APPEALS BELLOSILLO; January 2, 1997

ISSUES 1. WON the agreement to construct the windmill system included the installation of a deep well. 2. WON respondent can claim that Pili of SPGMI accepted his payment on behalf of petitioner. 3. WON petitioner is under obligation to reconstruct the windmill after it collapsed. 4. WON private respondent is already in default in the payment of his outstanding balance. 5. Who should bear the costs of the reconstruction? HELD

Obligations and Contracts 1. Ratio NO. Where the terms of the instruments are clear and leave no doubt as to their meaning, they should not be disturbed. In interpreting contracts, the intention of the parties shall be accorded primordial consideration and, in case of doubt, their contemporaneous & subsequent acts shall be principally considered. Reasoning The words "deep well" preceded by the prepositions "for" and "suitable for" were meant only to convey the idea that the proposed windmill would be appropriate for a deep well pump with a diameter of 2 to 3 inches. -The claim of Guillermo Pili of SPGMI that Herce Jr. wrote him a letter asking him to build a deep well pump as part of the price/contract Herce had with Tanguilig is unsubstantiated. The alleged letter was never presented in court. -If indeed the deep well were part of the windmill project, the contract for its installation would have been strictly a matter between petitioner and Pili himself with the former assuming the obligation to pay the price. -If the price of P60,000.00 included the deep well, the obligation of respondent was to pay the entire amount to petitioner without prejudice to any action that Guillermo Pili or SPGMI may take, if any, against the latter. 2. Ratio NO. Civil Code provisions on "payments made by a third person” do not apply in the instant case as no creditor-debtor relationship has been established between the parties. Reasoning There was no contract between Pili and Tanguilig for the construction of Herce’s deep well. If SPGMI was really commissioned by petitioner to construct the deep well, an agreement particularly to this effect should have been entered into. 3. Ratio YES. He can not claim exemption by reason of force majeure. In order for a party to claim exemption from liability by reason of fortuitous event under Art. 1174 of the Civil Code the event should be the sole and proximate cause of the loss or destruction of the object of the contract. Four requisites must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and, (d) the debtor must be free from any participation in or aggravation of the injury to the creditor. (Nakpil v CA) Reasoning Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event. A strong wind in this case cannot be fortuitous — unforeseeable nor unavoidable. On the contrary, a strong wind should be present in places where windmills are constructed, otherwise the windmills will not turn. -The presumption that "things have happened according to the ordinary course of nature and the ordinary habits of life" has not been rebutted by petitioner. 4. Ratio NO. Art. 1169, CC: In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Reasoning Tanguilig has not complied with his obligation to repair the windmill system. 5. Ratio TANGUILIG. Art. 1167, CC: if a person obliged to do something fails to do it, the same shall be executed at his cost. Reasoning When the windmill failed to function properly it became incumbent upon petitioner to institute the proper repairs in accordance with the guaranty stated in the contract. Disposition Judgment modified. Herce, Jr directed to pay balance of P15,000 with interest. Tanguilig ordered to reconstruct subject defective windmill system, in accordance with the one-year guaranty, within 3mos. from the finality of decision.

A2010 page 21 Prof. Labitag KHE HONG CHENG V COURT OF APPEAL KAPUNAN; March 28, 2001 NATURE Petition for Review on Certiorari under Rule 45, seeking to set aside the decision of the Court of Appeals dated April 10, 2000 and its resolution dated July 11, 2000 denying the motion for reconsideration of the aforesaid decision. FACTS - Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. - The Philippine Agricultural Trading Corporation shipped on board the vessel M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 bags of copra at Masbate, Masbate, for delivery to Dipolog City, Zamboanga del Norte. - The said shipment of copra was covered by a marine insurance policy issued by American Home Insurance Company (respondent Philam's assured). - M/V PRINCE ERIC sank somewhere between Negros Island and Northeastern Mindanao, resulting in the total loss of the shipment. Because of the loss, the insurer, American Home, paid the amount of P354,000.00 (the value of the copra) to the consignee. - Having been subrogated into the rights of the consignee, American Home instituted a civil case to recover the money paid to the consignee, based on breach of contract of carriage. - While the case was still pending, or on December 20, 1989, petitioner Khe Hong Cheng executed deeds of donations of parcels of land in favor of his children, herein co-petitioners Sandra Joy and Ray Steven. - The trial court rendered judgment against petitioner in the civil case on December 29, 1993, four years after the donations were made and the TCTs were registered in the donees’ names ordering him to pay herein respondents. - After the said decision became final and executory, a writ of execution was forthwith. Said writ of execution, however, was not served. An alias writ of execution was, thereafter, applied for and granted. - Despite earnest efforts, the sheriff found no property under the name of Butuan Shipping Lines and/or petitioner Khe Hong Cheng to levy or garnish for the satisfaction of the trial court's decision. When the sheriff, accompanied by counsel of respondent Philam, went to Butuan City on January 17, 1997, to enforce the alias writ of execution, they discovered that petitioner Khe Hong Cheng no longer had any property and that he had conveyed the subject properties to his children. - Respondent Philam filed a complaint for the rescission of the deeds of donation executed by petitioner Khe Hong Cheng in favor of his children and for the nullification of their titles. Respondent Philam alleged, that petitioner executed the aforesaid deeds in fraud of his creditors, including respondent Philam. Petitioners’ Claim Petitioners moved for its dismissal on the ground that the action had already prescribed. They posited that the registration of the deeds of donation on December 27, 1989 constituted constructive notice and since the complaint a quo was filed only on February 25, 1997, or more than four (4) years after said registration, the action was already barred by prescription. - The trial court denied the motion to dismiss. It held that respondent Philam's complaint had not yet prescribed. According to the trial court, the prescriptive period began to run only from December 29, 1993, the date of the decision of the trial court in Civil Case No. 13357.

Obligations and Contracts - On appeal by petitioners, the CA affirmed the trial court's decision in favor of respondent Philam. The CA declared that the action to rescind the donations had not yet prescribed. Citing Articles 1381 and 1383 of the Civil Code, the CA ruled that the four year period to institute the action for rescission began to run only in January 1997, and not when the decision in the civil case became final and executory on December 29, 1993. The CA reckoned the accrual of respondent Philam's cause of action on January 1997, the time when it first learned that the judgment award could not be satisfied because the judgment creditor, petitioner Khe Hong Cheng, had no more properties in his name. Prior thereto, respondent Philam had not yet exhausted all legal means for the satisfaction of the decision in its favor, as prescribed under Article 1383 of the Civil Code. - Petitioners’ motion for reconsideration was likewise dismissed in the appellate court's resolution dated July 11, 2000. ISSUE 1. WON the action to rescind the donations has already prescribed. 2. When did the four (4) year prescriptive period as provided for in Article 1389 of the Civil Code for respondent Philam to file its action for rescission of the subject deeds of donation commence to run? HELD 1. NO. The action to rescind the donations has already prescribed. Ratio Article 1389 of the Civil Code simply provides that, “The action to claim rescission must be commenced within four years.” Since this provision of law is silent as to when the prescriptive period would commence, the general rule, i.e, from the moment the cause of action accrues, therefore, applies. - Art. 1150. The time for prescription for all kinds of actions, when there is no special provision which ordains otherwise, shall be counted from the day they may be brought. 2. The Court enunciated the principle that it is the legal possibility of bringing the action which determines the starting point for the computation of the prescriptive period for the action. - Art. 1383. An action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. - An action to rescind or an accion pauliana must be of last resort, availed of only after all other legal remedies have been exhausted and have been proven futile. For an accion pauliana to accrue, the following requisites must concur: 1) That the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; 2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; 3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by rescission of the conveyance to the third person; 4) That the act being impugned is fraudulent; 5) That the third person who received the property conveyed, if by onerous title, has been an accomplice in the fraud. - An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the trial court of a writ of execution for the satisfaction of the judgment, and 3) the failure of the sheriff to enforce and satisfy the judgment of the court. It requires that the creditor has exhausted the property of the debtor. The date of the decision of the trial court is immaterial. What is important is that the credit of the plaintiff

A2010 page 22 Prof. Labitag antedates that of the fraudulent alienation by the debtor of his property. After all, the decision of the trial court against the debtor will retroact to the time when the debtor became indebted to the creditor. Reasoning Petitioners argument that the Civil Code must yield to the Mortgage and Registration Laws is misplaced, for in no way does this imply that the specific provisions of the former may be all together ignored. To count the four year prescriptive period to rescind an allegedly fraudulent contract from the date of registration of the conveyance with the Register of Deeds, as alleged by the petitioners, would run counter to Article 1383 of the Civil Code as well as settled jurisprudence. It would likewise violate the third requisite to file an action for rescission of an allegedly fraudulent conveyance of property, i.e., the creditor has no other legal remedy to satisfy his claim. - Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng had executed the deeds of donation in favor of his children, the complaint against Butuan Shipping Lines and/or petitioner Khe Hong Cheng was still pending before the trial court. Respondent Philam had no inkling, at the time, that the trial court's judgment would be in its favor and further, that such judgment would not be satisfied due to the deeds of donation executed by petitioner Khe Hong Cheng during the pendency of the case. Had respondent Philam filed his complaint on December 27, 1989, such complaint would have been dismissed for being premature. Not only were all other legal remedies for the enforcement of respondent Philam’s claims not yet exhausted at the time the deeds of donation were executed and registered. Respondent Philam would also not have been able to prove then that petitioner Khe Hong Chneg had no more property other than those covered by the subject deeds to satisfy a favorable judgment by the trial court. It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented that he had reserved to himself property sufficient to answer for his debts. - Respondent Philam only learned about the unlawful conveyances made by petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan City to attach the properties of petitioner Khe Hong Cheng. There they found that he no longer had any properties in his name. It was only then that respondent Philam's action for rescission of the deeds of donation accrued because then it could be said that respondent Philam had exhausted all legal means to satisfy the trial court's judgment in its favor. Since respondent Philam filed its complaint for accion pauliana against petitioners on February 25, 1997, barely a month from its discovery that petitioner Khe Hong Cheng had no other property to satisfy the judgment award against him, its action for rescission of the subject deeds clearly had not yet prescribed. Disposition The petition was DENIED for lack of merit.

SIGUAN V LIM DAVIDE; November 19, 1999 NATURE This is a petition for review on certiorari of a decision of the Court of Appeals. FACTS - On 25 and 26 August 1990 LIM issued two Metrobank checks in the sums of P300K and P241,668, respectively, payable to “cash”. Upon presentment by petitioner with

Obligations and Contracts the drawee bank, the checks were dishonored for the reason that the account was already “closed.” Demands to make good the checks proved futile. - A criminal case for violation of Batas Pambansa Blg. 22 was filed against LIM. On 29 December 1992 the RTC of Cebu City a quo convicted LIM as charged. - LIM was also convicted of estafa by the RTC of Quezon City filed Victoria Suarez. This was affirmed by CA. However the Supreme Court acquitted LIM but found her civilly liable in the amount of P169K. - On 2 July 1991 a Deed of Donation conveying parcels of land and purportedly executed by LIM on 10 August 1989 in favor of her children, was registered with the Register of Deeds of Cebu. New transfer certificates of title were thereafter issued in the names of the donees. - On 31 December 1994, trial court ordered the rescission of the questioned deed of donation; 2) declared null and void the transfer certificates of title issued in the name of LIM’s children; 3) ordered Registered of Deeds of Cebu to cancel said titles and to reinstate the previous titles in the name of LIM; 4) directed the LIMs to pay the petitioner jointly and severally, the sum of P10K moral damages, P10K attorney’s fees, P5K as expenses of litigation. - 20 February 1998 CA reversed RTC’s decision and dismissed petitioer’s accion pauliana, because two requisites for said action was absent: 1. there must be a credit existing prior to the celebration of the contract; 2. there must be a fraud, or the intent to commit the fraud. Petitioner’s Claim - On 23 June 1993 petitioner filed an accion pauliana against LIM and her children. Petitioner claimed therein that sometime in July 1991 LIM, through a Deed of Donation, fraudulently transferred all her real property to her children in bad faith and in fraud of creditor, including her; that LIM conspired and confederated with her children in antedating the questioned Deed. accion pauliana – action to rescind contracts in fraud of creditors. Respondents’ Comment - LIM denied any liability to petitioner. She claimed that her convictions in criminal cases 22127-28 were erroneous, which was the reason she appealed to the CA. - As regards the questioned Deed of Donation, she asserted that it was not antedated but was made in good faith at a time when she had sufficient property. The Deed was registered only 2 July 1991 because she was seriously ill. ISSUE WON the Deed of Donation executed by respondent Rosa LIM in favor of her children was made in fraud of Petitioner and, therefore, rescissible HELD Ratio No, the Deed of Donation made by LIM in favor of her children was not executed in fraud, and is therefore not rescissible. Reasoning The facts of the RTC and the CA regarding the execution of the Deed are conflicting, therefore the Court has jurisdiction to review errors of fact of the case. - For accion pauliana to prosper, the following must be present: • plaintiff asking for rescission has a credit prior to the alienation;

A2010 page 23 Prof. Labitag • • •

debtor has made a subsequent contract conveying a patrimonial benefit to a 3rd party; creditor has no other legal remedy to satisfy his claim; act impugned is fraudulent;

•

the 3rd person who received the property conveyed (if by onerous title), has been an accomplice in the fraud. GENERAL RULE: rescission requires existence of creditors at the time of the alleged fraud, and this must be proved as one of the bases of the judicial pronouncement setting aside the contract. W/O any prior existing debt, there can neither be no injury nor fraud. - The Deed of Donation executed is a public document, having been acknowledged before a notary public. It is evidence of the fact which gave rise to its execution and of its date (Sec. 23, Rule 132, Rules of Court) Court is not convinced that it was antedated. SEC. 23. Public documents as evidence. – xxx All other public documents are evidence, even against a third person, of the fact which gave rise to their execution and of the date of the latter. This includes “Documents acknowledged before a notary public except last wills and testaments…” - Contracts entered in fraud may be rescinded only when the creditors cannot in any manner collect the claims due them. Action for rescission is a subsidiary remedy only. The petitioner was not able to prove that she had exhausted other legal means to obtain reparation for the same. Subsidiary remedy – the exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission is resorted to. - Fourth requisite for accion pauliana not present either. Art. 759 of Civil Code states that donation is always presumed to be in fraud of creditors when the donor did not reserve sufficient property to pay his debts prior to donation. Petitioner’s alleged credit existed only a year after the deed of donation was executed. She cannot be said to have been prejudiced or defrauded by such alienation. In addition, when the Deed was executed, LIM had properties such as farming lands, a house and lot, residential lots which were sufficient to cover the debts. - In an attempt to support the case for rescission, petitioner brought up the criminal case involving Victoria Suarez. However, Suarez, albeit a creditor prior to the alienation, is not a party to the accion pauliana. Only the creditor who brought the action for rescission can benefit from the rescission (Art. 1384, Civil Code). The revocation is only to the extent of the plaintiff creditor’s unsatisfied credit; as to the excess, alienation is maintained. - As for the awards of moral damages, etc., the trial court made these awards without stating any justification in their ratio decidendi.

JUAN NAKPIL & SONS V COURT OF APPEALS PARAS; October 3, 1986 NATURE Petitions for certiorari to review the decision of the Court of Appeals FACTS - Philippine Bar Association (PBA) decided to construct an office building on its 840 square meter lot located at the corner of Aduana and Arzobispo Streets, Intramuros,

Obligations and Contracts Manila. The contractor was United Construction Inc. and the architect was Juan F. Nakpil & Sons. The building was completed in June, 1966. In the early morning of August 2, 1968 an unusually strong earthquake (7.3 magnitude) hit Manila and the building in question sustained major damage. The front columns of the building buckled, causing the building to tilt forward dangerously. As a temporary remedial measure, the building was shored up by United Construction at the cost of P13, 661.28. - November 29, 1968 PBA commenced action or the recovery of damages arising from the partial collapse of the building. PBA claims that the collapse was due to defects in the construction, the failure of contractors to follow plans and specifications and violations by the defendants of the terms of the contract. On the other hand, United Construction Inc. filed a third-party complaint against the architects Nakpil alleging that the collapse was due to the defects in the said plans and specifications. A pre-trial was conducted during which, among others, the parties agreed to refer the technical issues involved in the case to a Commissioner, Mr. Andres Hizon. Technical issues involve question regarding the design and construction of the building. - during the pendency of the case, three more earthquakes occurred and with the PBA’s request, the building was demolished at their expense. - The Commissioner submitted his report which stated that the damage sustained by the PBA building was directly caused by the earthquake and was also caused by the defects in the plans and specifications prepared by the architects, deviations from said plans and specifications by the contractor and failure of the contractor to observe the requisite workmanship in the construction of the building. The trial court agreed with the findings of the Commissioner. All parties involved appealed and the CA affirmed the decision of the trial court but modified the decision by granting PBA an additional P200,000 to be paid by the contractor and architects jointly. - The parties appealed from the decision of the CA and thus this petition. The United Architects of the Philippines and The Philippine Institute of Architects intervened as amicus curiae and submitted a position paper which said that the plans and specifications of the Nakpils were not defective. When asked by the Court to comment, the Commissioner reiterated his findings and said that there were deficiencies in the design of the architects which contributed to the collapse of the building. Petitioners Nakpil and UCCI on the other hand claimed that it was an act of God that caused the failure of the building which should exempt them from responsibility. ISSUE WON an act of God- an unusually strong earthquake- which caused the failure of the building, exempts from liability, parties who are otherwise liable because of their negligence HELD - No. applicable law is Art.1723 of the New Civil Code which holds the architects liable for damages on the building due to defects in the design, and contractors for damages due to defects in the construction. On the other hand, the general rule is that no person shall be responsible for events which could not be foreseen or which though foreseen, were inevitable. - An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention which by no amount of foresight, pains

A2010 page 24 Prof. Labitag or care, reasonably to have been expected, could have been prevented. To exempt the obligor from liability under art.1174 of the new Civil Code for a breach of obligation due to an act of God, the ff must concur: a) the cause of the breach of obligation must be independent of the will of the debtor; b) the event must be unforeseeable or unavoidable; c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and d) the debtor must be free of any participation in, or aggravation of the injury to the creditor. - Thus if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation which results in loss or damage, the obligor cannot escape liability. Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt, he must be free from any previous negligence or misconduct. - The negligence of the contractor and the architect was established beyond dispute in both the trial court and the CA. UCCI was found to have made substantial deviations from the plans and specifications, and to have failed to observe the requisite workmanship in the construction as well as to exercise the requisite amount of supervision. Nakpil on the other hand were found to have defects in the plans and specifications prepared by them. As correctly assessed by both courts, the defects in the construction and in the plans and specifications were the proximate causes that rendered the PBA building unable to withstand the earthquake.

REPUBLIC V LUZON STEVEDORING CORPORATION REYES; September 29, 1967 NATURE APPEAL from a decision of the Court of First Instance of Manila. FACTS - In the early afternoon of August 17, 1960, barge L-1892, owned by Luzon Stevedoring Corporation was being towed down the Pasig river by tugboats “Bangus” and “Barbero” also belonging to the same corporation, when the barge rammed against one of the wooden piles of the Nagtahan bailey bridge, smashing the posts and causing the bridge to list. The river, at that time, was swollen and the current swift, on account of the heavy downpour of Manila and the surrounding provinces on August 15 and 16, 1960. - Republic of the Philippines sued for actual and consequential damage caused by the said company’s employees amounting to 200,000. Defendant company disclaimed liability on the grounds that it was brought about by force majeure as they exercised due diligence in the selection and supervision of its employees and that the Nagtahan Bailey Bridge is an obstruction to navigation. Defendant claims that got the strongest tugboats, and the more competent and experienced among its patrons. - Trial court found said company liable. It filed before the Supreme Court. ISSUES 1. WON the collision of appellant’s barge with the supports or piers of the Nagtahan bridge was in law caused by fortuitous event or force majeure, and

Obligations and Contracts 2. WON it was error for the Court to have permitted the plaintiff-appellee to introduce additional evidence of damages after said party had rested its case.

A2010 page 25 Prof. Labitag

HELD 1. No. For caso fortuito or force majeure (which in law are identical in so far as they exempt an obligor from liability) by definition, are extraordinary events not foreseeable or avoidable, “events that could not be foreseen, or which, though foreseen, were inevitable” (Art. 1174,CC). It is not therefore enough that the event should not have foreseen or anticipated as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same. The very measures adopted by said company prove that the possibility of danger was not only foreseeable. But actually foreseen, and was not caso foruito. - Luzon Stevedoring Corporation, knowing and appreciating the perils posed by the swollen stream and its swift current, voluntarily entered into a situation involving obvious danger. The appellant company, whose barges and tugs travel up and down the river everyday, could not safely ignore the danger posed by these allegedly improper constructions that had been erected and, in place, for years. 2. This is up to the sound discretion of the trial Judge. Disposition AFFIRMED.

General Rule: No person shall be responsible for those events which could not be, foreseen, or which, though foreseen were inevitable. Obiter Exception: Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk - What is contemplated in the exception is resulting liability even if caused by a fortuitous event where the party charged may be considered as having assumed the risk incident in the nature of the obligation to be performed. - Force Majeure or Caso Fortuito are extraordinary events not foreseeable or unavoidable (events that though foreseen, are inevitable) - Republic v. Luzon Stevedoring Corp – The mere difficulty to foresee the happening is not impossibility to foresee the same. The very precautions adopted by appellant prove that the possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito." In that case then, the risk was quite evident and the nature of the obligation such that a party could rightfully be deemed as having assumed it Disposition Wherefore the decision of the lower court assigning liability to Defendant is Reversed; Affirmed insofar as it dismissed the case against the two other defendants

DIOQUINO V LAUREANO FERNANDO; May 28, 1970

AUSTRIA V COURT OF APPEALS REYES; June 10, 1971

NATURE Appeal from a decision of the CFI Masbate. FACTS NOTE: to separate facts, just put dash before each sentence, idea or paragraph - Plaintiff Atty. Pedro Dioquino is the owner of a car which defendant Federico Laureano borrowed. - Defendant was the sole passenger, aside from plaintiff’s driver, when the car was stoned by some “mischievous boys,” as a result, breaking the windshield - Dioquino sued Laureano; included in the suit are the latter’s wife and father. - Dioquino prevailed in the lower court but only against principal defendant Laureano; wife and father being absolved. - Nonetheless, the appeal hence is by all three defendants. ISSUE WON Laureano should be liable for damages thus sustained by Dioquino’s car HELD Ratio Laureano has no obligation to pay for the damages sustained due to throwing of stones that broke the windshield. The extraordinary circumstance independent of his will as obligor exempts him of the same by reason of force majeure or caso fortuito; There is no requirement of diligence beyond what human care and foresight can provide. Reasoning - Art. 1174 of the Civil Code provides:

NATURE Guillermo Austria petitions for the review of the decision rendered by the Court of Appeals, on the sole issue of whether in a contract of agency (consignment of goods for sale) it is necessary that there be prior conviction for robbery before the loss of the article shall exempt the consignee from liability for such loss. FACTS - On Jan. 1961, Maria G. Abad acknowledged having received from Guillermo Austria one (1) pendant with diamonds valued at P4,500.00, to be sold on commission basis or to be returned on demand. - On Feb. 1961, however, while walking home Abad was said to have been accosted by two men, who hit her and snatched her purse containing the pieces of jewelry and cash. The incident became the subject of a criminal case against certain persons. - As Abad failed to return the jewelry or pay for its value notwithstanding demands, Austria brought an action against her and her husband for recovery of the pendant or of its value, and damages. Answering the allegations of the complaint, defendants spouses set up the defense that the alleged robbery had extinguished their obligation. - Trial court rendered judgment for the plaintiff. It was held that defendants failed to prove the fact of robbery, or, if indeed it was committed, that defendant Maria Abad was guilty of negligence when she went home without any companion, although it was already getting dark and she was carrying a large amount of cash and valuables on the day in question, and such negligence did not free her from liability for damages for the loss of the jewelry.

Obligations and Contracts - CA reversed the judgment on the basis of the lack of credibility of the two defense witnesses who testified on the occurrence of the robbery, and holding that the facts of robbery and defendant Maria Abad's possession of the pendant on that unfortunate day have been duly established, declared respondents not responsible for the loss of the jewelry on account of a fortuitous event. Plaintiff thereupon instituted the present proceeding. ISSUE 1. WON Court of Appeals erred in finding that there was robbery in the case, thus extinguishing Abad’s liability, although nobody has been found guilty of the supposed crime. 2. WON Abad was guilty of negligence. HELD 1. No. To constitute a caso fortuito that would exempt a person from responsibility, it is necessary that (1) the event must be independent of the human will (or rather, of the debtor's or obligor's); (2) the occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner, and that (3) the obligor must be free of participation in, or aggravation of, the injury to the creditor. - The point at issue in this proceeding is how the fact of robbery is to be established in order that a person may avail of the exempting provision of Article 1174 of the new Civil Code, which reads as follows: " ART. 1174. Except in cases expressly specified by law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable." - The emphasis of the provision is on the events, not on the agents or factors responsible for them. To avail of the exemption granted in the law, it is not necessary that the persons responsible for the occurrence should be found or punished; it would only be sufficient to establish that the unforeseeable event, the robbery in this case, did take place without any concurrent fault on the debtor's part, and this can be done by preponderant evidence. 2. No. It is undeniable that in order to completely exonerate the debtor for reason of a fortuitous event, such debtor must also be free of any concurrent or contributory fault or negligence. This is apparent from Article 1170 of the Civil Code of the Philippines, providing that: "ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof. are liable for damages." - It is clear that under the circumstances prevailing at present in the City of Manila and its suburbs, with their high incidence of crimes against persons and property, that renders travel after nightfall a matter to be sedulously avoided without suitable precaution and protection. The conduct of respondent Maria G. Abad, in returning alone to her house in the evening, carrying jewelry of considerable value, would be negligent per se, and would not exempt her from responsibility in the case of a robbery. We are not persuaded, however, that the same rule should obtain ten years previously, in 1961, when the robbery in question did take place, for at that time criminality had not by far reached the levels attained in the present day. Disposition Petition in this case is hereby dismissed, with costs against the petitioner.

A2010 page 26 Prof. Labitag NATIONAL POWER CORPORATION V CA GUTIERREZ; May 16, 1988 NATURE -consolidated petitions filed by NAPOCOR (NPC) and ECI seeking to set aside the decision of Court of Appeals in holding NPC liable for damages against Engineering Construction, Inc. (ECI) and for reducing the consequential damages, attorney’s fees and for eliminating exemplary damages awarded to ECI by the trial court. FACTS - ECI executed a contract with NAWASA on Aug. 4, 1964, to construct the 2nd IpoBicti Tunnel in Norzagaray, Bulacan, complete it within 800 calendar days from the date the Contractor receives the formal notice to proceed and to furnish all tools, labor, equipment, and materials needed. The construction of the tunnel covered an area that included the Ipo river where the Ipo Dam (Angat Hydro-electric Project and Dam) of defendant NPC is located. - On Nov. 4, 1967, typhoon “Welming” struck the project area and bringing with it heavy rains and causing water in the reservoir of Angat Dam to rapidly rise, reaching the danger level of 212 m above sea level. Thus to prevent overflow, NPC caused the opening of the spillway gates. The opening of the gates caused an extraordinary large volume of water to rush out, hitting the installations and construction works of ECI. Effectively washing away, damaging or destroying its stockpile of materials and supplies, camp facilities, permanent structures and accessories. - The Court of Appeals sustained the findings of the trial court that the maintainers of the dam opened the gates when the typhoon was already at its height, when they knew full well that it was far safer to open them gradually. The court also found that NPC had known of the coming of the typhoon 4 days prior to it actually hitting the area. Thus, the trial court and the appellate court found NPC negligent and held liable for the damages. Petitioner NPC contends that this CA decision is erroneous on the ground that the destruction and loss of ECI’s equipment and facilities were due to force majeure, that the heavy rains brought about by the typhoon was an extraordinary occurrence that they could not have foreseen. - On the other hand, ECI assails the CA’s reduction of the consequential damages awarded by the trial court from P 333,200 to P 19K on the grounds that the appellate court had no basis in concluding that ECI acquired a new Crawler-type crane and therefore, it only can claim rentals for the temporary use of the leased crane for a period of one month; and that the award of P 4K a day or P 120K a month bonus is justified since the period limitation on ECI's contract with NAWASA had dual effects, i.e., bonus for earlier completion and liquidated damages for delayed performance; and in either case at the rate of P 4K daily. Thus, since NPC's negligence compelled work stoppage for a period of one month, the said award of P 120K is justified. ISSUES 1. WON respondent CA erred in holding NPC liable for damages 2. WON CA erred in reducing the consequential damages from P 333,200 to P 19,000 3. WON CA erred in eliminating exemplary damages 4. WON CA erred in reducing attorney’s fees from P 50K to P 30K

Obligations and Contracts HELD 1. No. Even though the typhoon was an act of God or force majeure, NPC cannot escape liability because its negligence was the proximate cause of the loss and damage. Ratio As held in Juan Nakpil & Sons v. CA, the act of God doctrine requires that the act must be occasioned exclusively by the violence of nature and human agencies had no part therein. When the effect is found to be in part the result of the participation of man, whether it be active intervention, neglect or failure to act, the whole occurrence is humanized and therefore removed from the rules applicable to the acts of God. - Furthermore, this is question of fact which properly falls within the jurisdiction of the CA and will not be disturbed by this Court unless it is clearly unfounded. Ratio Findings of fact of the CA are generally final and conclusive upon the SC. It is settled that the SC is not a trier of facts. It is not supposed to weigh evidence and will generally not disturb findings of fact when supported by substantial evidence. 2. No. From the findings of the appellate court, while there was no categorical statement or admission on the part of ECI that it bought a new crane to replace the damaged one, a sales contract was presented to the effect that the new crane would be delivered to it by Asian Enterprises within 60 days from the opening of the letter of credit at the cost of P 106,336.75. The offer was made by Asian Enterprises a few days after the flood. Comparing the amount for a brand new crane and paying the alleged amount of P 4K a day as rental for the use of a temporary crane, which use petitioner ECI alleged to have lasted for a period of one year, thus, totaling P 120K plus the fact that there was already a sales contract between it and Asian Enterprises, there is no reason why ECI should opt to rent a temporary crane for a period of one year. The appellate court also found that the damaged crane was subsequently repaired and reactivated and the cost of repair was P 77K. Therefore, it included the said amount in the award of compensatory damages, but not the value of the new crane. We do not find anything erroneous in the decision of the appellate court that the consequential damages should represent only the service of the temporary crane for one month. A contrary ruling would result in the unjust enrichment of ECI. - The P 120K bonus was also properly eliminated as the same was granted by the trial court on the premise that it represented ECI's lost opportunity "to earn the one month bonus from NAWASA." The loss or damage to ECI's equipment and facilities occurred more than 3 years or 1,170 days after the execution of the contract, long after the stipulated deadline (within 800 calendar days) to finish the construction. No bonus, therefore, could have been possibly earned by ECI at that point in time. The supposed liquidated damages for failure to finish the project within the stipulated period or the opposite of the claim for bonus is not clearly presented in the records of these petitions. It is not shown that NAWASA imposed them. 3. No. The appellate court found that there was no bad faith on the part of NPC and that neither can its negligence be considered gross. Ratio As was held in Dee Hua Liong Electrical Equipment Corp. v. Reyes, exemplary damages cannot be awarded to private respondent because petitioner is not shown to have acted in a wanton, fraudulent, reckless or oppressive manner. 4. No. There are no compelling reasons to set aside the appellate court’s finding that the latter amount suffices for the services rendered by ECI’s counsel. Disposition Petitions are both dismissed for lack of merit

A2010 page 27 Prof. Labitag YOBIDO V COURT OF APPEALS ROMERO; October 17, 1997 FACTS - Tito and Lenoy Tumboy, together with their minor children boarded a Yobido Liner bus bound for Davao City from Surigao del Sur - But while driving in Agusan del Sur, the left front tire of the bus exploded, in which the bus fell into ravine - This caused the death of Tito TUmboy and physical injuries to other passengers - Complaint for breach of contract was filed by Leny against the owner of the bus, Alberta Yobido and its driver. The Yobidos used as a defense that the case was a caso fortuito. More so, a separate charge was filed against the Philippine Phoenix Surety and Insurance but was dismissed - During the trip to Davao, Leny cautioned the driver that the bus was running fast but he merely stared at her - The tire that exploded, however was a new one installed only five days before the incident. Drivers on the other hand, underwent driving tests before they were employed ISSUE WON the explosion of a newly installed tire of a passenger vehicle is a fortuitous event that exempts the carrier from liability for the death of passenger HELD - When a passenger boards a common carrier, he takes the risks incidental to the mode of travel he has taken as a carrier is not an insurer of the safety of its passengers and is not bound absolutely and at all events to carry them safely and without injury - However, when a passenger is injured or dies while traveling, the law presumes that the carrier is negligent based on CC Art. 1756; as this is the presumption in culpa contractual, unless the defendant proves that the case was caso fortuito. If carrier be unable to debunk this presumption, there even be no need to make an express finding of negligence or fault - CC 1755 provides that passengers must be carried safely as far as human care and foresight can provide, using utmost diligence of very cautious persons, with a due regard for all circumstances - Liability for a tire blow-out is not a fortuitous event as the requisites for these are o The Cause of the unforeseen and unexpected occurrence or the failure of the debtor to comply with his obligations, must be independent of human will o It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid o The occurrence must be such as to render impossible for the debtor to fulfill his obligation in a normal manner o The obligor must be free from any participation in the aggravation of the injury resulting to the creditor

Obligations and Contracts - The fact that a new tire was installed nor even the existence of force majeure does not imply caso fortuito immediately as the carrier must still prove that it was not negligent in causing the death or injury resulting from the accident - There were human factors involved in this case that showed negligence such as the failure of the driver to slow down despite the caution by a passenger, with a speed a little less than the speed limit, on a road that was rough, winding and wet due to the rain - Driver must have taken precautionary measures given the circumstances but the driver did not do anything to this effect - For failing to overthrow the presumption of negligence with clear an convincing evidence, the Yobidos are held liable for damages amounting to 50,000 pesos - While moral damages are not recoverable in culpa contractual, damages may be recovered in breach of contract of carriage resulting in the death of a passenger, notwithstanding exemplary damages as the carrier through its driver acted recklessly

BACOLOD- MURCIA MILLING CO., INC. V CA PARAS; February 7, 1990 NATURE Petition for review on certiorari of the decision of the CA promulgated on September 11, 1987 affirming in toto the decision of the CFI of Negros Occidental in two consolidated civil cases. FACTS - BMMC is the owner and operator of the sugar central in Bacolod City, Philippines. ALONSO GATUSLAO is a registered planter of the Bacolod-Murcia Mill District, being a registered owner of Lot Nos. 310, 140, 141 and 101-A of the Cadastral Survey of Murcia, Negros Occidental, known as Hacienda San Roque. On May 24, 1957 BMMC and Alonso Gatuslao executed an 'Extension and Modification of Milling Contract' so that from the crop year 1957-1958 up to crop year 1973-1974, inclusive, Alonso Gatuslao will be milling all the sugarcane grown and produced on his plantation with the Mill of BMMC. BMMC had been hauling planter Gatuslao's sugar cane to its mill or factory continuously until the crop year 1967-68. - Since the crop year 1920-21 to crop year 1967-1963, inclusive, the canes of planters adhered to the mill of BMMC were transported from the plantation to the mill by means of cane cars and through railway system operated by BMMC. BMMC constructed the railroad tracks in 1920 and the adherent planters granted the BMMC a right of way over their lands as provided for in the milling contracts. When their milling contracts with BMMC expired at the end of the 1964-1965 crop year, the corresponding right of way of the owners of the hacienda Helvetia granted to the Central also expired. - BMMC filed a complaint for legal easement against the owners of the hacienda, with the CFI of Negros Occidental which issued on October 4, 1965 an ex parte writ of preliminary injunction restraining the landowners from destroying the railroad tracks in question and from impeding, obstructing or in any way preventing the passage and operation of plaintiff's locomotives and cane cars over defendants' property during the pendency of the litigation and maintained the same in its subsequent orders of May 31, and November 26, 1966.

A2010 page 28 Prof. Labitag - The outcome of the case, however, was not favorable to BMMC. In the same case the landowners asked this Court to restrain the lower court from enforcing the writ of preliminary injunction it issued, praying that after the hearing on the merits, the restraining order be made permanent and the orders complained of be annulled and set aside. The Court gave due course to the landowner's petition and on August 10, 1967 issued the writ of preliminary injunction enjoining the lower court from enforcing the writ of preliminary injunction issued by the latter on October 4, 1965. - Thus, the BMMC was unable to use its railroad facilities during the crop year 19681969 due to the closure in 1968 of the portion of the railway traversing the hacienda Helvetia. In the same case the Court ruled that the Central's conventional right of way over the hacienda Helvetia ceased with the expiration of its amended milling contracts with the landowners of the hacienda at the end of the 1964-1965 crop year and that in the absence of a renewal contract or the establishment of a compulsory servitude of right of way on the same spot and route which must be predicated on the satisfaction of the preconditions required by law, there subsists no right of way to be protected. - On October 30, 1968, Alonso Gatuslao, sued BMMC for breach of contract, for the issuance of a writ ordering defendant to immediately send transportation facilities and haul the already cut sugarcane to the mill site and to declare the rescission of the milling contract executed by plaintiffs and defendant in 1957 for seventeen (17) years or up to crop year 1973-74, invoking as ground the alleged failure and/or inability of defendant to comply with its specific obligation of providing the necessary transportation facilities to haul the sugarcane of Gatuslao from plaintiff's plantation specifically for the crop year 1967-1968. Plaintiffs further prayed for the recovery of actual and compensatory damages as well as moral and exemplary damages and attorney's fees. - BMMC filed in the same court a civil case against Alonso Gatuslao, the AgroIndustrial Development of Silay-Saravia (AIDSISA) and the BM-ACMA, seeking specific performance under the milling contract executed on May 24, 1957 between plaintiff and defendant Alonso Gatuslao praying for the issuance of writs of preliminary mandatory injunction to stop the alleged violation of the contract by Alonso Gatuslao in confederation with BM-ACMA, AIDSISA, and for the recovery of actual, moral and exemplary damages and attorney's fees. - The two cases were concolidated and the trial court ruled in favor of Alonso Gatuslao, et al. CA affirmed. ISSUES 1. WON the closure of BMMC’s railroad lines constitutes force majeure. 2. WON Gatuslao has the right to rescind the milling contract with BMMC. 3. WON Gatuslao was justified in violating his milling contract with BMMC. 4. WON Gatuslao and BM-ACMA are guilty of bad faith in the exercise of their duties and are in estoppel to question the adequacy of the transportation facilities of BMMC and its capacity to mill and haul the canes of its adherent planters. HELD 1. No. Ratio An obligor is exempted from liability for a breach of an obligation due to an act of God, when the following elements concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; (b) the debtor

Obligations and Contracts must be free from any participation in, or aggravation of the injury to the creditor. Reasoning The terms of the milling contracts were clear and undoubtedly there was no reason for BMMC to expect otherwise. The closure of any portion of the railroad track, not necessarily in the hacienda Helvetia but in any of the properties whose owners decided not to renew their milling contracts with the Central upon their expiration, was forseeable and inevitable. Despite its awareness that the conventional contract of lease would expire in Crop Year 1964-1965 and that refusal on the part of any one of the landowners to renew their milling contracts and the corresponding use of the right of way on their lands would render impossible compliance of its commitments, petitioner took a calculated risk that all the landowners would renew their contracts. Unfortunately, the sugar plantation of Angela Estate, Inc. which is located at the entrance of the mill, was the one which refused to renew its milling contract. As a result, the closure of the railway located inside said plantation paralyzed the entire transportation system. Thus, the closure of the railway lines was not an act of God nor does it constitute force majeure. It was due to the termination of the contractual relationships of the parties, for which petitioner is charged with knowledge. Angela Estate, Inc. notified BMMC as far back as August or September 1965 of its intention not to allow the passage of the railway system thru its land after the aforesaid crop year. Adequate measures should have been adopted by BMMC to forestall such paralyzation but the records show none. All its efforts were geared toward the outcome of the court litigation but provided no solutions to the transport problem early enough in case of an adverse decision. 2., 3., & 4. Yes, Yes and No, respectively. [were treated as one] Ratio The power to rescind obligations is implied in reciprocal ones in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission even after he had chosen fulfillment if the latter should become impossible. Reasoning The contract in question involves reciprocal obligations; as such party is a debtor and creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously so that the performance of one is conditioned upon the simultaneous fulfillment of the other. The party who deems the contract violated may consider it revoked or rescinded pursuant to their agreement and act accordingly, even without previous court action. It is the general rule, however, that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. The question of whether a breach of a contract is substantial depends upon the attendant circumstances. Both parties are agreed that time is of the essence in the sugar industry; so that the sugarcanes have to be milled at the right time, not too early or too late, if the quantity and quality of the juice are to be assured. BMMC undertook expressly among its principal prestations not only to mill Gatuslao's canes but to haul them by railway to the mill. The mode of transportation is a vital factor in the sugar industry; precisely for this reason the mode of transportation or hauling the canes is embodied in the milling contract. But BMMC is now unable to haul the canes by railways as stipulated because of the closure of the railway lines; so that resolution of this issue ultimately rests on whether or not BMMC was able to provide adequate and efficient transportation facilities of the canes of Gatuslao and the other planters milling with BMMC during the crop year 1968-1969. As found by both the trial court and the CA, the answer is in the negative. BMMC is guilty of breach of the conditions of the milling contract

A2010 page 29 Prof. Labitag and Gatuslao is the injured party. He has the right to rescind the milling contract and neither the court a quo erred in decreeing the rescission claimed nor the CA in affirming the same. Conversely, BMMC cannot claim enforcement of the contract. By virtue of the violations of the terms of the contract, the offending party has forfeited any right to its enforcement. Likewise, the B-M ACMA cannot be faulted for organizing itself to take care of the needs of its members. It was organized at that time when petitioner could not assure the planters that it could definitely haul and mill their canes. More importantly, J. Araneta, Pres. & GM of the BMMC itself suggested that it explore solutions to the problem of hauling the canes to the milling station in the eventuality of a judicial order permanently closing the railroad lines so that the planters may be able to proceed with their planting with absolute peace of mind that they will be properly milled and not left to rot in the fields. The signing of the milling contract between AIDSISA and B-M ACMA was a matter of selfpreservation inasmuch as the sugarcanes were already matured and the planters had crop loans to pay. Further delay would mean tremendous losses. Disposition Petition is DENIED for lack of merit and the decision of the CA is AFFIRMED in toto.

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION V GLOBE TELECOM, INC TINGA; May 25, 2004 NATURE Petition for review on certiorari of a decision of the Court of Appeals FACTS -for several years before 1991, globe coordinated the provision of various communication facilities for US military bases in Clark Air Base and Subic Naval Base -the US Defense Communications Agency (USDCA) contracted with American companies to operate its communication facilities for its military bases. The American companies in turn contracted with Globe for the use of their communication facilities. Globe in turn entered into an Agreement with the Philippine Communications Satellite Corp. (Philcomsat) for a term of 5 years, whereby the latter would obligate itself to establish, operate and provide an IBS Standard B earth station for the use of USDCA. -at the time of the execution of the Agreement, both parties knew the RP-US Military Bases Agreement, the basis for the occupancy of the Clark and Subic bases, was to expire in 1991. -Art XVIII Sec 25 of the 1987 Constitution states that such foreign bases, its facilities, troops personnel, shall not be allowed into the Philippines unless a new treaty is concurred in by the Senate and ratified by a majority vote of the people in a national referendum. 9/16/91: the Senate passed Resolution No. 141, expressing its decision not to concur w/ the ratification of the Treaty of Friendship, Cooperation and Security w/c was extend the US’s term of use of Subic Naval Base, further seeking the withdrawal of all US military forces by 12/31/92 8/06/92: Globe notified Philcomsat of its intention to discontinue the use of the earth stations in view of the withdrawal of the US forces invoking Sec 8 of their Agreement w/c states:

Obligations and Contracts …”neither party will be held liable…for any failure to perform its obligation under this Agreement if such failure results directly or indirectly from force majeure… including any law, order, regulation, direction or request of the Government of the Philippines…” -Philcomsat replied, citing Sec 7 on ‘Discontinuance of Service’ of the same Agreement: “…Notwithstanding the non-use of the earth station, Globe shall continue to pay Philcomsat for the rental of the actual number of T1 circuits in use…for the remaining life of the Agreement…” -after the US forces left, Philcomsat filed a complaint at the RTI of Makati demanding the payment of its outstanding obligations amounting to $4,910,136 plus interest and atty’s fees -Globe answered insisting that it was exempt from paying since the bases ceased operations 1/05/99: the trial court rendered its decision, ordering Globe to pay Philcomsat $92,238 rental for the month of Dec. and P300,000 as atty’s fees, the dismissal of the counterclaim -both parties appealed to the CA. Philcomsat claimed that the RTC erred in considering the non-ratification of the Treaty as force majeure, exempting Globe from complying w/ its obligations under the Agreement and paying Philcomsat exemplary damages. Globe contented that the RTC erred in holding it liable for the Dec. rental fees -both appeals were dismissed; both parties later filed their respective Petitions for Review w/c gave rise to the ff issues w/c the court was tasked to resolve: ISSUES 1. WON the termination of the RP-US Military Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and the withdrawal of the US military forces constitute force majeure exempting Globe from payment 2. WON Globe is liable to pay rental for the month of December, 1992 3. WON Philcomsat is entitled to atty’s fees and exemplary damages HELD No reversible error was committed by the CA in issuing the assailed decision hence petitions are denied 1. YES. Philcomsat contends that Sec 8 of the Agreement should be taken in line w/ Art. 1174 of the Civil Code, and that the termination of the RP-US Military Bases Agreement cannot be considered force majeure since the happening was foreseeable. However, Art. 1174 also states that “…no person shall be responsible for those events which…though foreseen were inevitable…” Art 1306 CC: parties may establish stipulations, terms and conditions so long as these do not counter any law, morals, public policy, etc. Art 1159 CC: obligations arising from contracts have the force of law between the contracting parties and should be complied w/ in good faith -the agreement as to what would constitute fortuitous events in Sec 8 does not run contrary to or expand the concept of fortuitous events under Art. 1174 -Courts cannot stipulate/amend for the parties if the Agreement does not contravene law, morals, public policy and such; hence, Sec 8 has the force of law between the parties -for Globe to be exempt from non-compliance w/ its obligation to pay rental under Sec 8, the ff must be established: (1) the event must be independent of human will

A2010 page 30 Prof. Labitag (2) the occurrence must render it impossible for the debtor to fulfill his obligation in a normal manner (3) the obligor must be free of participation in, or aggravation of, the injury to the creditor -the SC agrees w/ CA and the TC that the said requisites are present in the present case. Both parties had no control over the non-renewal of the RP-US Military Bases Agreement or the subsequent withdrawal of the US forces from Subic -Also, the Court found it unjust to require Globe to continue paying even though Philcomsat cannot be compelled to continue performing its obligation under the Agreement 2. YES. Although Globe alleged that it terminated the Agreement w/ Philcomsat effective 11/08/92, the US military forces and personnel completely withdrew only on 12/31/92 3. NO. Since both parties have legitimate claims against each other and no party prevailed, an award of atty’s fees is unwarranted. Exemplary damages may be awarded if the erring party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner—however, Globe did not. Disposition petitions are DENIED for lack of merit. The assailed decision of the CA is affirmed.

EASTERN SHIPPING LINES V CA VITUG; July 12, 1994 FACTS - On Dec. 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading No. YMA-8. The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for P36,382,466.38. On Dec. 12, 1981, upon arrival of shipment, it was discharged unto the custody of defendant Metro Port Service, Inc. (The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff.) On Jan 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal. On Jan. 8 and 14, 1982 defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake. - Plaintiff argues: [a] due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. (Claims were presented against defendants who failed and refused to pay the same) [b] As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants - Defendant/s argue/s: [a] As for defendant Eastern Shipping (carrier) it alleged that the shipment was discharged in good order from the vessel unto the custody of Metro Port Service so that any damage/losses incurred after the shipment was

Obligations and Contracts incurred after the shipment was turned over to the latter, is no longer its liability; [b] Metroport (arrastre operator) averred that although subject shipment was discharged unto its custody, portion of the same was already in bad order; [c] Allied Brokerage (broker)alleged that plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already in damage and bad order condition when received by it, but nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition shipment was received by it. - Trial Court ruling: [a] Defendants to pay plaintiff, jointly and severally: 1) The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract); 2) P3,000.00 as attorney's fees, and 3) Costs. [b] Dismissed the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation. - CA affirmed the decision of the Trial Court in toto. ISSUES 1. WON a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker 2. WON payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered 3. WON the applicable rate of interest, referred to above, is 12% or 6% HELD 1. The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). - When the goods shipped are either lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). - There are, of course, exceptional cases when such presumption of fault is not observed but these cases, enumerated in Article 1734 of the Civil Code, are exclusive, not one of which can be applied to this case. - The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455) - Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are

A2010 page 31 Prof. Labitag therefore charged with the obligation to deliver the goods in good condition to the consignee. - We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. - The instant petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants" (the herein petitioner among them). - Accordingly, the liability imposed on Eastern Shipping Lines, Inc., sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it. 2, The date of the decision of the court a quo. Notice the Disposition portion of this case which says: “The legal interest to be paid is 6% on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A 12% interest, in lieu of 6%, shall be imposed on such amount upon finality of this decision until the payment thereof.” 3. Art. 2209 CC: If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum. (This was upheld in a number of cases. Kindly check original text) - The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance: A. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages B. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: i. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. ii. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time

Obligations and Contracts the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. iii. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. Disposition Petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is 6% on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A 12% interest, in lieu of 6%, shall be imposed on such amount upon finality of this decision until the payment thereof.

CRISMINA GARMENTS V CA PANGANIBAN; March 9, 1999 FACTS -The petitioner, who was engaged in the export of girls' denim pants, contracted the services of the respondent, the sole proprietress of the D'Wilmar Garments, for the sewing of 20,762 pieces of assorted girls denims. The respondent sewed the materials and delivered them to the petitioner. -Petitioner told the respondent that some were defective. The respondent offered to take the defective goods back, but the petitioner’s representative already said they were good. She was told just to return for her check of P76,410. -The petitioner failed to pay. The respondent demanded payment. The petitioner’s vice president comptroller wrote to the respondent saying that 6,164 pairs of jeans were defective and as such, she was liable to the petitioner for P49,925.51. - The respondent filed before the trial court for the collection of P76,410. The trial court ordered the petitioner to pay the said amount with interest thereon at 12% per annum. The CA affirmed. - petitioner submits that the interest rate should be six percent (6%), pursuant to Article 2209 of the Civil Code. On the other hand, private respondent maintains that the interest rate should be twelve percent (12 %) per annum, in accordance with Central Bank (CB) Circular No. 416. She argues that the circular applies, since "the money sought to be recovered by her is in the form of forbearance." ISSUE WON it is proper to impose interest at the rate of twelve percent (12%) per annum for an obligation that does not involve a loan or forbearance of money in the absence of stipulation of the parties HELD No. The proper interest rate should be 6% per annum. In Reformina v. Tomol Jr., this Court stressed that the interest rate under CB Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3) a judgment involving a loan or forbearance of money, goods or credits. Cases beyond the scope of the said circular are governed by Article 2209 of the Civil Code, which

A2010 page 32 Prof. Labitag considers interest a form of indemnity for the delay in the performance of an obligation. Because the amount due in this case arose from a contract for a piece of work, not from a loan or forbearance of money, the legal interest of six percent (6%) per annum should be applied. Furthermore, since the amount of the demand could be established with certainty when the Complaint was filed, the six percent (6%) interest should be computed from the filing of the said Complaint. But after the judgment becomes final and executory until the obligation is satisfied, the interest should be reckoned at twelve percent (%12) per year. Private respondent maintains that the twelve percent (12%) interest should be imposed, because the obligation arose from a forbearance of money. This is erroneous. In Eastern Shipping , the Court observed that a "forbearance" in the context of the usury law is a "contractual obligation of lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable." Using this standard, the obligation in this case was obviously not a forbearance of money, goods or credit. Disposition Decision modified.The rate of interest shall be six percent (6%) per annum, computed from the time of the filing of the Complaint in the trial court until the finality of the judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the interest rate shall be twelve percent (12%) per annum computed from the time the judgment becomes final and executory until it is fully satisfied. No pronouncement as to costs.

KENG HUA V CA PANGANIBAN; February 12, 1998 NATURE Petition for review on certiorari of a decision of the Court of Appeals. FACTS Respondent Sea-Land Service Inc., a shipping company, received at its Hong Kong terminal a sealed container containing 76 bales of “unsorted waste paper” for shipment to petitioner Keng Hua Paper Products, Co. in Manila. A bill of lading to cover the shipment was issued by the plaintiff. On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of arrival were transmitted to the petitioner but the latter failed to discharge the shipment from the container during the grace period. The said shipment remained inside the respondent’s container from the moment the grace period expired until the time the shipment was unloaded from the container on November 22, 1983 or a total of 481 days. During this period, demurrage charges accrued. Letters demanding payment were sent to the petitioner who refused to settle its obligation which eventually amounted to P67,340.00. Petitioner alleges that it had purchased 50 tons of waste paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in the Letter of Credit; that, under the letter of credit, the remaining balance of the shipment was only 10 metric tons; that the shipment respondent was asking petitioner to accept was 20 metric tons; that if petitioner were to accept the shipment, it would be violating Central Bank rules and regulations and custom and tariff laws; that respondent had no cause of action against petitioner because the latter did not hire the former to carry the merchandise. Petitioner contends that it should not be bound by the bill of lading because it never gave its consent thereto.

Obligations and Contracts Although petitioner admits “physical acceptance” of the bill of lading, it argues that its subsequent actions belie the finding that it accepted the terms therein. Petitioner cites as support the “Notice of Refused or On Hand Freight” it received on November 2, 1982 from respondent, which acknowledged that petitioner declined to accept the shipment. Petitioner points to its January 24, 1983 letter to respondent stressing “that its acceptance of the bill of lading would be tantamount to an act of smuggling as the amount it had imported was only for 10,000 kilograms”. The discrepancy in the amount of waste paper it actually purchased visà-vis the excess amount in the bill of lading allegedly justified its refusal to accept the shipment. ISSUES 1. WON petitioner is bound by the bill of lading 2. WON the amount of demurrage charges is correct 3. WON petitioner was correct in not accepting the overshipment 4. WON the award of interest is correct 5. WON the award of attorney’s fees is correct HELD 1. Yes. A bill of lading serves 2 functions. 1st, it is a receipt for the goods shipped. 2nd, it is a contract by which three parties, namely, the shipper, the carrier, and the consignee undertake specific responsibilities and assume stipulated obligations. The acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its contents, gives rise to the presumption that the same was a perfected and binding contract. In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract between the shipper (Ho Kee), the consignee (petitioner Keng Hua), and the carrier (respondent Sea-Land). Section 17 of the bill of lading provided that the shipper and the consignee were liable for the payment of demurrage charges for the failure to discharge the shipment beyond the grace period allowed by tariff rules. Petitioner admits that its received the bill of lading immediately after the arrival of the shipment on July 8, 1982. It was only 6 months later that petitioner sent a letter to respondent saying that it could not accept the shipment. Petitioner’s inaction for such a long time conveys the clear inference that it accepted the terms and conditions of the bill of lading. Mere apprehension of violating customs, tariff and central bank laws without a clear demonstration that taking delivery of the shipment has become legally impossible cannot defeat the petitioner’s contractual obligation and liability under the bill of lading. In any event, the issue of whether or not petitioner accepted the bill of lading was raised for the first time on appeal to this Court and cannot be entertained. Questions not raised in the trial court cannot be raised for the first time on appeal. 2. Yes. Petitioner’s argument that it is not obligated to pay any demurrage charges because respondent made no demand for the sum of P67,340 prior to the filing of the complaint is puerile. The amount of demurrage charges is a factual conclusion of the trial court that was affirmed by the Court of Appeals and, thus, binding on this Court. 3. No. The contract of carriage, as stipulated in the bill of lading, must be treated independently of the contract of sale between the seller and the buyer, and the contract for the issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between the amount of the goods described in the commercial invoice in the contract of sale and the amount allowed in the letter of credit will not affect the validity and enforceability of the contract of carriage as

A2010 page 33 Prof. Labitag embodied in the bill of lading. Petitioner’s remedy in the case of overshipment lies against the seller/shipper, not against the carrier. 4. No. The case involves an obligation not arising from a loan or forbearance of money, thus pursuant to Art. 2209 of the Civil Code the applicable interest rate is 6% per annum to be computed from the date of the trial court’s decision. The rate of 12% per annum shall be charged on the total then outstanding from the time the judgment becomes final and executory until its satisfaction. 5. No. The Court notes that the matter of attorney’s fees was taken up only in the Disposition portion of the trial court’s decision. The settled requirement is that the text of the decision should state the reason for the award of attorney’s fees. Disposition Decision is AFFIRMED with the MODIFICATION that legal interest be computed at 6% per annum from September 28, 1990, then at 12% per annum from finality of judgment until full satisfaction. The award of attorney’s fees is DELETED.

SECURITY BANK V RTC HERMOSISIMA; October 23, 1996 NATURE Petition for review on certiorari of a decision of the RTC of Makati assailing the decision of Judge Fernando Gorospe, which found private respondent Eusebio liable to petitioner for a sum of money. FACTS - April 27, 1983, private respondent Magtanggol Eusebio executed a promissory note in favor of petitioner Security Bank and Trust Co. (SBTC) in the total amount of P100,000  payable in 6 monthly installments with 23% per annum interest up to the 5th installment - July 28, 198, Eusebio again executed another promissory note to SBTC. He bound himself to pay P100,000  again payable in 6 monthly installments with 23% per annum interest - Finally, another promissory note was executed in Aug. 31, 1983 in the amount of P65,000. - On all promissory notes, Leila Ventura signed as co-maker. - Upon maturity, the principal balance remaining on the note stood as: PN1 – P16, 665 as of Sept. 1983 PN2 – P 83,333 as of Aug. 1983 PN3 – P65,000 as of Aug. 1983 - SBTC filed a collection case upon Euseio’s refusal to pa the balance payable - RTC ordered Eusebio to pay the balance w/ 12% interest - SBTC filed a motion for partial reconsideration contending that: (1) the interest rate agreed upon was 23% (2) the interests awarded should be compounded quarterly from due date (3) Leila Ventura should likewise be held liable to pay the balance since she has signed as co-maker - The court held Leila Ventura to be jointly and severally liable but denied the motion to grant the rates beyond 12%; hence this petition ISSUE

Obligations and Contracts WON the 23% rate of interest per annum agreed upon by petitioner bank and respondents is allowable and not against the Usury law. HELD YES it is allowable Ratio - the applicable provision of law is the Central Bank Circular No. 905 w/c took effect on Dec. 22, 1982, part. Sec. 1&2 - Central Bank Circular 905 was issued by Central Bank Monetary Board which empowers them to prescribe the maximum rates of interest for loans and certain forebearances - This circular did not repeal or in any way amend the Usury Law but simply suspended the latter’s effectivity; basic is the rule in statutory construction that when the law is clear and unambiguous, the court is left with not alternative but to apply the same in its clear language - The rate was agreed upon by the parties freely; respondent did not question that rate and it is not for the respondent court to change stipulation in the contract where it is not illegal - Furthermore, art. 1306 CC provides that contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy - In a loan or forbearance of money, the interest due should be that stipulated in writing and in the absence thereof, the rate shall be 12% per annum; hence only in the absence of a stipulation can a court impose the 12% interest

ALMEDA V COURT OF APPEALS KAPUNAN; April 17, 1996 NATURE Petition for review on certiorari a decision of the CA setting aside the TRO and upholding respondent’s right to foreclose the mortgaged property FACTS - in 1981, Philippine National Bank granted to petitioners, spouses Ponciano Almeda and Eufemia Almeda, several loan/credit accommodations totaling P18 Million payable in 6 years at an interest rate of 21% per annum - to secure the loan, spouses executed a Real Estate Mortgage Contract covering a 3.5 K sq.m. parcel of land and the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati - a credit agreement with the ff pertinent terms and conditions: >interest of 21% per annum, payable semi-annually in arrears, the first interest payment to become due and payable 6 months from date of initial release of loan >”the Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future...the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase/decrease of the maximum interest rate.” - between 1981 and 1984 petitioners made several partial payments on the loan totaling 7,735,004.66, a substantial portion of which was applied to accrued interest

A2010 page 34 Prof. Labitag - March 31, 1984 the bank, over petitioners’ protests, raised the interest rate to 28% pursuant to their credit agreement; interest rate increased to a high of 68% between March 1984 to Sept 1986 - before the loan was to mature in March 1988, the spouses filed a petition for declaratory relied with prayer for a writ of preliminary injunction and TRO—spouses sought clarification as to WON the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreement’s escalation clause - lower court issued TRO; by this time the spouses were already in default of their loan obligations---> invoking the law on Mandatory Foreclosure (Act 3135 and PD 385), PNB countered by ordering the extrajudicial foreclosure of petitioners’ mortgaged properties----> lower court, however, issued a supplemental writ of preliminary injunction - PNB posted a counterbond and the trial court dissolved the supplemental writ; PNB once more set a new date for the foreclosure of Marvin Plaza -spouses tendered to PNB the amount of 40,142,518 pesos (interest calculated at 21%); PNB refused to accept---> spouses formally consigned the amount with the RTC which granted the writ of preliminary injunction enjoining the foreclosure of Marvin Plaza - Judge Capulong refused to lift WPI - PNB filed petition for Certiorari, Prohibition and Mandamus with CA - On August 1993 CA rendered its decision setting aside the assailed orders and upholding respondent’s right to foreclose the mortgaged property pursuant to Act 3135 and PD 385 ISSUES 1. WON PNB was authorized to raise its interest rates from 21% to as high as 68% under the credit agreement 2. WON PNB is granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of PD385 HELD Ratio 1. Any contract which appears to be heavily weighed 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. 2. In facilitating collection of debts through the automatic foreclosure provisions of PD 385, the government is, however, not exempted from observing basic principles of law, and ordinary fairness and decency under the due process clause of the Constitution. Reasoning 1. – the binding effect of any agreement between parties to a contract is premised on two settled principles: that any obligation arising from contract has the force of law between the parties; and that there must be mutuality between the parties based on their essential equality - PNB unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the loan without prior assent of the latter - the manner of agreement is itself explicitly stipulated by the Civil Code in Art.1956 “no interest shall be due unless it has been expressly stipulated in writing”--- what has been stipulated in writing is that petitioners were bound merely to pay 21% interest, subject to possible escalation or de-escalation

Obligations and Contracts

A2010 page 35 Prof. Labitag

when the circumstances warrant it, it is within the limits allowed by law, and upon agreement - in PNB v. CA, PNB was disauthorized from unilaterally raising the interest rate partly because the increase violated the principle of mutuality of contracts expressed in Art.1308 of the CC “the contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them” - increases were arbitrary - escalation clauses in credit agreements are perfectly valid and do not contravene public policy. However, they are still subject to laws and provisions governing agreements between parties, which agreements implicitly incorporate provisions of existing law - the credit agreement requires that the increase be within the limits allowed by law—refers to legislative enactments not admin circulars (PNB relied on CB Circular No. 905) as shown in the credit agreement where there is a distinction made between “law or the Monetary Board Circulars” -Banco Filipino Savings and Mortgage Bank v. Navarro: distinction between a law and an admin regulation is recognized in the Monetary Board guidelines; guidelines thus presuppose that a Central Bank regulation is not within the term ‘any law’ - petitioners never agreed in writing to pay the increased interest rates demanded by PNB 2. – PD 385 was issued principally to guarantee that government financial institutions would not be denied substantial cash inflows necessary to finance the government’s development projects by large borrowers who resort to litigation to prevent or delay the government’s collection of their debts or loans - the dispute regarding the interest rate increases was never settled so the exact amount of petitioners’ obligations could not be determined - the foreclosure provisions could be validly invoked by PNB only after settlement of the question involving the interest rate on the loan, and only after the spouses refused to meet their obligations following such determination - PNB cannot claim that there was no honest-to-goodness attempt on the part of the spouses to settle their obligations Disposition The unilateral and progressive increases imposed by PNB were null and void. The decision and resolution of the CA is REVERSED AND SET ASIDE. The case is remanded to RTC for further proceedings.

date of the first release in accordance with the Schedule of Amortization. Incase of default, an acceleration clause was provided and the amount due was 20% onetime penalty on the amount due and such amount shall bear interest at the highest rate permitted by law plus attorney’s fees equivalent to 25% of the sum sought to be recovered which in no case shall be less than 20,000. respondent Este Del Sol also executed as provided for in the Loan Agreement, an Underwriting Agreement on Jan 31, 1978 whereby FMIC shall get a one-time underwriting fee of P200,000 in the form of 120,000 shares of Este Del Sol’s capital stock. In addition to the underwriting fee, the underwriting agreement provided a supervision fee of 200,000 per annum for a period of 4 consecutive years for the supervision of the public offering of the shares. The underwriting agreement also stipulated for the payment by respondent to FMIC a consultancy fee of P332, 500.00 per annum for a period of 4 years. On February 22, 1978, FMIC billed respondents P200,000 as underwriting fee, P1,330,000 as consultancy fee for 4 years, P200,000 as supervision fee. These amounts were deducted from the first release of the loan. Since respondent failed to meet the schedule of re-payment in accordance with a revised Schedule of Amortization, it appeared to have incurred a total obligation of P12, 679, 630.98 (see p.106 for breakdown). This was unpaid and accordingly, FMIC caused the extrajudicial foreclosure of the real estate mortgage. The property was auctioned and FMIC with 9,000,000 was the highest bidder. After deducting further fees and charges, a balance of 6,863,297.73 was left. Failing to receive payment for the balance, FMIC instituted an instant collection suit over the petitioners, which was approved by the trial court. However, on appeal, CA found and declared that the fees provided for in the underwriting and consultancy agreements were mere subterfuges to camouflage the excessively usurious interest charged by FMIC. They also declared that the one-time 20% penalty on the amount due and the 10% attorney’s fees would be reasonable and suffice to compensate FMIC for those items. CA ordered FMIC to pay or reimburse Este Del Sol the amount of P971, 000 representing the difference between what is due to the petitioner and what is due to Este (computation on p.109).

FIRST METRO INVESTMENT CORPORATION V ESTE DEL SOL MOUNTAIN RESERVE, INC. DE LEON; November 15, 2001

HELD 1. No. Central Bank Circular No. 905 which removed the ceiling on interest rates for secured and unsecured loans regardless of maturity, took effect on Jan 1, 1983. The Loan Agreement in question was executed on Jan 31, 1978 when the law in effect was the Usury Law. It is an elementary rule of contracts that the laws, in force at the time the contract was made and entered into, govern it. Moreover, the circular did not repeal, but only suspended the effectivity of the Usury Law. Furthermore, a Central Bank Circular cannot repeal a law. Thus, retroactive application of a Central Bank Circular cannot and should not be presumed. 2. Yes. An apparently lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender’s services which are of little value or which are not in fact to be rendered. In the instant case, several facts and instances taken altogether show that the Underwriting and Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed by

NATURE Petition for review on certiorari of a decision of the Court of Appeals FACTS On January 31, 1978, petitioner FMIC granted respondent Este Del Sol a loan of P7, 385, 500.00 to finance the construction and development of the Este Del Sol Mountain Reserve, a sports/resort complex project located at Bario Puray, Montalban, Rizal. Under the terms of the loan agreement, interest on the loan was 16% per annum based on the diminishing balance. Loan was payable in 36 equal and consecutive monthly amortizations to commence at the 13th month from the

ISSUES 1. WON Central Bank Circular No. 905 should be applied retroactively 2. WON the Loan Agreement was usurious 3. WON the CA erred in awarding an amount not prayed for by the respondents

Obligations and Contracts petitioner FMIC. These are: 1) the Underwriting and Consultancy Agreements are the same date of the Loan Agreement. This fact means that all the said agreements which were executed simultaneously were set to mature or shall remain effective during the same period of time. 2) As admitted by FMIC, the Underwriting Agreement is “part and parcel of the Loan Agreement”. 3) It is from the first partial release of the loan that the said corresponding bills for Underwriting, Supervision and Consultancy fees were deducted and apparently paid. 4) Regarding the underwriting Agreement involving 120,000 shares of respondent’s capital stock, there was really no need for an Underwriting Agreement since respondent had its own marketing arm to sell its shares. 5) There was no need for a Consultancy Agreement since respondent appeared to be more competent to be consultants in the development of the project. However, in usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal debt still stands and remains but the stipulation as to the usurious interest is void. The nullity of the stipulation on the usurious interest does not affect the lender’s right to receive back the principal amount of the loan. As to the debtor, the amount paid for the usurious interest is recoverable by him. 3. No. Whether the exact amount of the relief was not expressly prayed for is of no moment for the reason that that the relief was plainly warranted by the allegations of the respondents as well as by the facts as found by the appellate court. A party is entitled to as much relief as the facts may warrant.

GAITE V FONACIER REYES; July 31, 1961 NATURE Appeal from CFI Manila FACTS - Isabelo Fonacier was the owner and/ or holder, either by himself or in a representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated in the municipality of Jose Panganiban, province of Camarines Norte - By a "Deed of Assignment" dated September 29, 1952, Fonacier constituted and appointed Fernando A. Gaite as his true and lawful attorney-in-fact to enter into a contract with any individual or juridical person for the exploration and development of the mining claims on a royalty basis of not less than P0.50 per ton of ore that might be extracted therefrom - On March 19, 1954, Gaite in turn executed a general assignment conveying the development and exploitation of said mining claims unto the Larap Iron Mines, a single proprietorship owned solely by and belonging to him, on the same royalty basis - Gaite embarked upon the development and exploitation of the mining claims in question, opening and paving roads within and outside their boundaries, making other improvements and installing facilities therein for use in the development of the mines, and extracted what he claimed and estimated to be approximately 24,000 metric tons of iron ore. - For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to Gaite to exploit and develop the mining claims in question, and Gaite assented subject to certain conditions

A2010 page 36 Prof. Labitag - on December 8, 1954, a document entitled "Revocation of Power of Attorney and Contract" was executed wherein Gaite transferred to Fonacier, for the consideration of P20,000, plus 10% of the royalties that Fonacier would receive from the mining claims > all his rights and interests on all the roads, improvements, and facilities in or outside said claims > the right to use the business name "Larap Iron Mines" and its goodwill > all the records and documents relative to the mines - Gaite transferred to Fonacier all his rights and interests over the "24,000 tons of iron ore, more or less" that had been already extracted from the mineral claims, in consideration of the sum of P75,000, P10,000, of which was paid upon the signing of the agreement, and the balance of P65,000 will be paid from and out of the first letter of credit covering the first shipment of iron ores and or the first amount derived from the local sale of iron ore made by the Larap Mines & Smelting Co, Inc., its assigns, administrators, or successors in interests. - To secure the payment of the balance of P65,000.00, Fonacier executed a surety bond in favor of Gaite dated December 8, 1954 with himself (Fonacier) as principal and the Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties - Gaite testified when this bond was presented to him by Fonacier together with the "Revocation of Power of Attorney and Contract", he refused to sign unless another bond underwritten by a bonding company was put up by defendants to secure the payment of the P65,000 balance of the price of the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated December 8, 1954 was executed by the same parties to the first bond with the Far Eastern Surety and Insurance Co. as additional surety, but it provided that the liability of the surety company would attach only when there had been an actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less than P65,000, and that, furthermore, the liability of said surety company would automatically expire on December 8, 1955. - upon signing, Fonacier entered into a "Contract of Mining Operation", ceding, transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and explore the mining claims in question, together with the improvements therein and the use of the name "Larap Iron Mines" and its goodwill, in consideration of certain royalties and transferred the complete title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the Larap Mines & Smelting Co., in consideration for the signing by the company and its stockholders of the surety bonds delivered by Fonacier to Gaite - Up to December 8, 1955, when the bond expired WRT the Far Eastern Surety and Insurance Company, no sale of the approximately 24,000 tons of iron ore had been made by the Larap Mines & Smelting Co., Inc., nor had the P65,000 balance of the price of said ore been paid to Gaite by Fonacier and his sureties - Gaite demanded from Fonacier and his sureties payment of said amount, on the theory that they had lost every right to make use of the period given them when their bond automatically expired and when Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed the present complaint against them in the Court of First Instance of Manila for the payment of the P65,000 balance of the price of the ore, consequential damages, and attorney's fees. - All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon by Gaite was subject to a condition that the amount would be payable out of the first letter of credit, covering the first shipment of iron ore and/or the first amount derived from the local sale of the iron ore by the Larap Mines &

Obligations and Contracts Smelting Co., Inc. and that up to the time of the filing of the complaint, no sale of the iron ore had been made, hence the condition had not yet been fulfilled and that consequently, the obligation was not yet due and demandable. - Fonacier also contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was actually delivered, and counterclaimed for more than P200,000 damages. - lower court held that the obligation of defendants to pay plaintiff the P65,000 balance of the price of the approximately 24,000 tons of iron ore was one with a term: i.e., that it would be paid upon the sale of sufficient iron ore by defendants, such sale to be effected within one year or before December 8, 1955; that the giving of security was a condition precedent to Gaite's giving of credit to defendants; and that as the latter failed to put up a good and sufficient security in lieu of the Far Eastern Surety bond which expired on December 8, 1955, the obligation became due and demandable under Article 1198 of the New Civil Code - lower court found that plaintiff Gaite did have approximately 24,000 tons of the iron ore at the mining claims in question at the time of the execution of the contract - Judgment of LC was rendered in favor of plaintiff Gaite ordering defendants to pay him, jointly and severally, P65,000 with interest at 6% per annum from December 9, 1955 until full payment, plus costs ISSUES 1. WON the obligation of Fonacier and his sureties to pay Gaite P65,000 is one with a period or term and not one with suspensive condition 2. if it is an obligation with a term, WON defendants have a right to insist that Gaite should wait for the sale or shipment of the ore before receiving payment or WON they are entitled to take full advantage of the period granted them for making the payment 3. WON the estimated 24,006 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were actually in existence in the mining claims when these parties executed the "Revocation of Power of Attorney and Contract" HELD 1. YES. Ratio The shipment or local sale of the iron ore is not a condition precedent (or suspensive) to the payment of the balance of P65,000, but was only a suspensive period or term. Reasoning - What characterizes a conditional obligation is the fact that its efficacy or obligatory force (as distinguished from its demandability) is subordinated to the happening of a future and uncertain event; so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed - That the parties to the contract did not intend any such state of things to prevail is supported by several circumstances: 1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of Sixty-Five Thousand Pesos (P65,000) will be paid out of the first letter of credit covering the first shipment of iron ore . . ." etc. There is no uncertainty that the payment will have to be made sooner or later; what is undetermined is merely the exact date at which it will be made. By the very terms of the contract, therefore, the existence of the obligation to pay is recognized; only its maturity or demandability is deferred.

A2010 page 37 Prof. Labitag 2) A contract of sale is normally commutative and onerous not only does each one of the parties assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and the buyer to pay the price), but each party anticipates performance by the other from the very start. While in a sale the obligation of one party can be lawfully subordinated to an uncertain event, so that the other understands that he assumes the risk of receiving nothing for what he gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in the usual course of business to do so; hence, the contingent character of the obligation must clearly appear. Nothing is found in the record to evidence that Gaite desired or assumed to run the risk of losing his rights over the ore without getting paid for it, or that Fonacier understood that Gaite assumed any such risk. This is proved by the fact that Gaite insisted on a bond to guarantee payment of the P65,000, and not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and the company's stockholders, but also on one by a surety company; and the fact that appellants did put up such bonds indicates that they admitted the definite existence of their obligation to pay the balance of P65,000. 3) To subordinate the obligation to pay the remaining P65,000 to the sale or shipment of the ore as a condition precedent, would be tantamount to leaving the payment at the discretion of the debtor, for the sale or shipment could not be made unless the appellants took steps to sell the ore. Appellants would thus be able to postpone payment indefinitely. 4) Assuming that there could be doubt whether by the wording of the contract the parties intended a suspensive condition or a suspensive period (dies ad quem) for the payment of the P65,000, the rules of interpretation would incline the scales in favor of "the greatest reciprocity of interests", since sale is essentially onerous. The Civil Code of the Philippines, Article 1378, paragraph 1, in fine, provides: "if the contract is onerous, the doubt shall be settled in favor of the. greatest reciprocity of interests."; and there can be no question that greater reciprocity obtains if the buyer's obligation is deemed to be actually existing, with only its maturity (due date) postponed or deferred, than if such obligation were viewed as non-existent or not binding until the ore was sold. - The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit, and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid at all; and that the previous sale or shipment of the ore was not a suspensive condition for the payment of the balance of the agreed price, but was intended merely to fix the future date of the payment. 2. NO. Ratio Appellants have forfeited the right to compel Gaite to wait for the sale of the ore before receiving payment of the balance of P65,000 because of their failure to renew the bond of the Far Eastern Surety Company or else replace it with an equivalent guarantee. Reasoning - The expiration of the bonding company's undertaking on December 8, 1955 substantially reduced the security of the vendor's rights as creditor for the unpaid P65,000, a security that Gaite considered essential and upon which he had insisted when he executed the deed of sale of the ore to Fonacier. - The case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines: "ART. 1198. The debtor shall lose every right to make use of the period:

Obligations and Contracts (1) * * * * * (2) When he does not furnish to the creditor the guaranties or securities which he has promised. (3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through fortuitous event they disappear, unless he immediately gives new ones equally satisfactory." - Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the securities given to the creditor (appellee Gaite), unless immediately renewed or replaced. - no merit in appellants' argument that Gaite's acceptance of the surety company's bond with full knowledge that on its face it would automatically expire within one year was a waiver of its renewal after the expiration date - No such waiver could have been intended, for Gaite stood to lose and had nothing to gain thereby; and if there was any, it could be rationally explained only if the appellants had agreed to sell the ore and pay Gaite before the surety company's bond expired on December 8, 1955. But in the latter case the defendantsappellants' obligation to pay became absolute after one year from the transfer of the ore to Fonacier by virtue of the deed 3. YES Ratio No short-delivery as would entitle Fonacier to the payment of damages, nor could Gaite have been guilty of any fraud in making any misrepresentation as to the total quantity of ore in the stockpiles of the mining claims in question since Gaite's estimate appears to be substantially correct. Reasoning Important things 1. that this is a case of a sale of a specific mass of fungible goods for a single price or a lump sum, the quantity of "24,000 tons of iron ore, more or less", stated in the contract being a mere estimate by the parties of the total tonnage weight of the mass 2. evidence shows that neither of the parties had actually measured or weighed the mass, so that they both tried to arrive at the total quantity by making an estimate of the volume thereof in cubic meters and then multiplying it by the estimated weight per ton of each cubic meter. - The sale between the parties is a sale of a specific mass of iron ore because no provision was made in their contract for the measuring or weighing of the ore sold in order to complete or perfect the sale, nor was the price of P75,000 agreed upon by the parties based upon any such measurement (see Art. 1480, second par., New Civil Code). The subject-matter of the sale is, therefore, a determinate object, the mass, and not the actual number of units or tons contained therein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer all of the ore found in the mass, notwithstanding that the quantity delivered is less than the amount estimated by them - no charge in this case that Gaite did not deliver to appellants all the ore found in the stockpiles in the mining claims in question TF Gaite complied with his promise to deliver, and appellants in turn are bound to pay the lump price - Gaite asserts there was a total of 7,375 cubic meters in the stockpiles of ore that he sold to Fonacier, while appellants contend that by actual measurement, their witness Cipriano Manlañgit found the total volume of ore in the stockpiles to be only 6,609 cubic meters

A2010 page 38 Prof. Labitag - on the average weight in tons per cubic meter, the parties are in disagreement, with Fonacier claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while Gaite claims that the correct tonnage factor is about 3.7. - In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of iron ore in this case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical Division of the Bureau of Mines, a government pensionado to the States and a mining engineering graduate of the Universities of Nevada and California, with almost 22 years of experience in the Bureau of Mines, who placed the tonnage factor of every cubic meter of iron ore at between 3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely corresponds to the average tonnage factor of 3.3 adopted in his corrected report by engineer Nemesio Gamatero, of Bureau of Mines to the mining claim involved at the request of appellant Krakower, precisely to make an official estimate; of the amount of iron ore in Gaite's stockpiles after the dispute arose. - if we multiply it by the, average tonnage factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from the estimate of 24,000 tons made by Gaite, considering that actual weighing of each unit of the mass was practically impossible - It must not be forgotten that the contract expressly stated the amount to be 24,000 tons, more or less. Disposition Judgment affirmed

GONZALES V HEIRS OF THOMAS AND PAULA CRUZ PANGANIBAN; September 16, 1999 NATURE Petition for review on certiorari of a decision of the Court of Appeals reversing decision of trial court and ordering Gonzales to surrender possession of the property. (RTC of San Mateo, Rizal dismissed case in favor of Gonzales) FACTS - Dec 1, 1983 – Paula Ano Cruz, together with heirs of Thomas and Paula Cruz (Lessors) entered into a CONTRACT OF LEASE/PURCHASE with Felix Gonzales (sole proprietor of Felgon Farms/Lessee) of a half-portion of a parcel of land situated in Rodriguez, Rizal, covered by Transfer Certificate of Title - Contract contains the following provisions: PAR.1. The terms of this contract is for a period of one year upon the signing thereof. After the period of this Contract, the LESSEE shall purchase the property on the agreeable price of 1M payable w/in 2 years period with an interest of 12% per annum... PAR.2. The LESSEE shall pay by way of annual rental an amount equivalent to P2,500 per hectare, upon signing of contract on 12/01/83 PAR.9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable period of time which shall not in any case exceed 4 years, after which a new Contract shall be executed by the parties which shall be the same in all respects with this Contract insofar as the terms and conditions are concerned. - Gonzales paid P2500 per hectare or P15T annual rental; he took possession of the property and installed Sambrano as his caretaker

Obligations and Contracts - He did not exercise his option to purchase the property immediately after expiration of 1-yr lease. He remained in possession of the property without paying the purchase price provided for in the Contract, and w/o paying any further rentals. - Cruz sent out a letter to Gonzales informing him of the lessors’ decision to rescind the Contract due to a breach committed by Gonzales; letter also served as a demand for him to vacate the premises within 10 days from the receipt of the letter - Gonzales refused to vacate the property. Issue was brought before Brgy. Captain of San Isidro. - March 18, 1987 – Since Gonzales refused to appear before the Brgy. Capt, a certification allowing the case to be brought to Court was issued. - Aug 24, 1987 – Final demand letter to vacate premises was sent by remaining lessors after the death of Paula Ano Cruz, which Gonzales received but did not heed - Said property is currently the subject of an extra-judicial partition. Title to property remains in the name of Cruz’s predecessors-in-interest, Bernardina Calixto and Severo Cruz - Cruzs filed a complaint for recovery of the possession of the property alleging breach of par.9 and payment of only P50T of the P500T agreed down payment on the purchase price of P1M Ruling of RTC - Par.9 is a condition and it clearly indicates that the Heirs of Cruz shall obtain a Transfer Certificate of Title in the name of the lessee within 4 years before a new contract is to be entered into under the same terms and conditions as the original Contract of Lease/Purchase - Failure of Lessors to secure the TCT does not entitle them to rescind the contract. The power to rescind is given to the injured party. - Also, they cannot terminate the Contract of Lease due to their failure to notify the defendant in due time of such intention. Demand made will come under the implied new lease of Art. 1682 and 1670. Ruling of CA - Transfer of title to the property in Gonzales’ name cannot be interpreted as a condition precedent to the payment of the agreed purchase price. - Terms of contract require no interpretation; normal course of things in sale of real properties dictate that there must first be payment of agreed purchase price before transfer of title can be made. ISSUES 1. WON CA erred in the interpretation of the “law between the parties” 2. WON par. 9 of the Contract of Lease/Purchase is a condition 3. WON respondents can rescind the contract HELD 1. Yes. Ratio In the interpretation of contracts, if some stipulation should admit of several meanings, it shall be understood as bearing that import most adequate to render it effectual. Considering the antecedents of the ownership of the disputed lot, Gonzales’ interpretation that par.9 is a condition precedent to the purchase of the property renders it most effectual. Reasoning Both RTC and CA interpreted par.9 to mean that respondents obliged themselves to obtain a TCT in the name of petitioner. But petitioner maintains that respondents were obligated to obtain a TCT in their names.

A2010 page 39 Prof. Labitag - Par.9 was intended to ensure that respondents would have a valid title over the specific portion they were selling to the petitioner. At the time the contract was executed, land was not registered in the names of lessors, and extra-judicial proceedings were still ongoing. - In a contract of sale, title to the property passes to the vendee upon the delivery of the thing sold. (NEMO DAT QUOD NON HABET: no one can give what one does not have) - In the Contract, respondents were given a maximum of 4 years to obtain a separate TCT. Gonzales also advanced P50T to them expedite transfer of TCT to their names. - CA interpretation ignores last part of par.9, stating that after a separate TCT had been obtained, “a new contract shall be executed which shall be the same in all respects with this Contract...” - Par.1 was effectively modified by par.9. Gonzales can only be compelled to perform his obligation under par1, after Cruz’s have complied with par9. 2. Yes. Ratio In requiring the lessors to obtain first a separate and distinct TCT in their names, such undertaking is a condition precedent to the lessee’s obligation to purchase and pay for the land. Reasoning Condition is defined as “every future and uncertain event upon which an obligation or provision is made to depend. It is a future and uncertain event upon which the acquisition or resolution of rights is made to depend by those who execute the juridical act.” - Without the fulfillment of the condition, sale of the property under the Contract cannot be perfected, and Gonzales cannot be obliged to purchase the property. 3. No. Ratio There can be no rescission of an obligation as yet non-existent, because the suspensive condition has not happened. Reasoning They have not caused the transfer of the TCT to their names which is a condition precedent to Gonzales’ obligation. Disposition Petition granted. Decision of RTC is reinstated, but the award of moral damages and attorney’s fees is deleted for lack of basis.

CORONEL V CA MELO; October 7, 1996 NATURE Petition for review on certiorari of a decision of the Court of Appeals. FACTS - On Jan. 19, 1985, the Coronels executed a document entitled “Receipt of Down Payment” in favor of Ramona Patricia Alcaraz containing the following conditions appurtenant to the sale of their house and lot: 1. Ramona will make a down payment of P50,000 upon execution of the document aforestated. 2. The Coronels will cause the transfer in their names of the title of their property registered in the name of their deceased father, Constancio P. Coronel, upon receipt of the P50,000 down payment.

Obligations and Contracts 3.

Upon the transfer in their names of the subject property, the Coronels will execute the deed of absolute sale in favor of Ramona and the latter will pay the former the whole balance of P1,190,000. - On the same date, Concepcion Alcaraz, mother of Ramona, paid the down payment of P50,000. On Feb. 6, 1985, the property originally registered in the name of the Coronels’ father was transferred in their names under TCT No. 327043. Subsequently, the Coronels sold the property covered by TCT No. 327043 to intervenor-appellant Mabanag for P1,580,000 after the latter paid P300,000. For this reason, the Coronels canceled and rescinded the contract with Ramona by depositing the down payment paid by Concepcion in the bank in trust for Ramona Patricia Alcaraz. A few days later, Concepcion, et al., filed a complaint for specific performance against the Coronels and caused the annotation of a notice of lis pendens at the back of TCT No. 327403. Mabanag then caused the annotation of a notice of adverse claim covering the same property with the Registry of Deeds of Quezon City. The Coronels executed a Deed of Absolute Sale over the subject property in favor of Mabanag. A new title on the subject property was issued in the name of Mabanag under TCT No. 351582. - The lower court rendered judgment for specific performance ordering the Coronels to execute in favor of Concepcion, et al., a deed of absolute sale covering that parcel of land embraced in and covered by TCT No. 327403 (now TCT No. 331582) of the Registry of Deeds for Quezon City, together with all the improvements existing thereon free from all liens and encumbrances and once accomplished, to immediately deliver the said document of sale to Concepcion, et al. Upon receipt thereof, Concepcion, et al., were ordered to pay the Coronels the whole balance of the purchase price amounting to P1,190,000 in cash. TCT No. 331582 in the name of Mabanag was canceled and delivered to be without force and effect. Further, the Coronels, Mabanag, and all other persons claiming under them were ordered to vacate the subject property and deliver possession thereof to Concepcion, et al. The claim for damages and attorney’s fees filed by Concepcion, et al., as well as the counterclaims by the Coronels and intervenors were dismissed. On appeal, the Court fully agreed to the decision of the trial court. ISSUE WON petitioners and private respondents entered into a conditional contract of sale HELD - Yes. What is clearly established by the plain language of the subject document is that when the said “Receipt of Down Payment” was prepared and signed by the Coronels, the parties had agreed to a conditional contract of sale, consummation of which is subject only to the successful transfer of the certificate of title from the name of petitioners’ father, Constancio P. Coronel, to their names. The Court significantly notes that this suspensive condition was, in fact, fulfilled on February 6, 1985. Thus, on said date, the conditional contract of sale between petitioners and private respondent Ramona became obligatory, the only act required for the consummation thereof being the delivery of the property by means of the execution of the deed of absolute sale in a public instrument, which petitioners unequivocally committed themselves to do as evidenced by the “Receipt of Down Payment.” - Art. 1475, in correlation with Art. 1181, both of the Civil Code, plainly applies to the case at bench. Thus:

A2010 page 40 Prof. Labitag Art. 1475. The 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. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment of loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. - Since the condition contemplated by the parties which is the issuance of a certificate of title in petitioners’ names was fulfilled on Feb. 6, 1985, the respective obligations of the parties under the contract of sale became mutually demandable, that is, petitioners, as sellers, were obliged to present the transfer certificate of title already in their names to private respondent Ramona Alcaraz, the buyer, and to immediately execute the said deed of absolute sale, while the buyer on her part, was obliged to forthwith pay the balance of the purchase price amounting to P1,190,000. - It is also significant to note that in the first paragraph in page 9 of their petition, petitioners conclusively admitted that: 3. The petitioners-sellers Coronel bound themselves “to effect the transfer in our names from our deceased father Constancio P. Coronel, the transfer certificate of title immediately upon receipt of the downpayment abovestated.” The sale was still subject to this suspensive condition. - Petitioners themselves recognized that they entered into a contract of sale subject to a suspensive condition. Only, they contend, continuing in the same paragraph, that: … Had petitioners-sellers not complied with this condition of first transferring the title to the property under their names, there could be no perfected contract of sale. not aware that they have set their own trap for themselves, for Art. 1186 of the Civil Code expressly provides that: Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. - Besides, it should be stressed and emphasized that what is more controlling than these mere hypothetical arguments is the fact that the condition herein referred to was actually and indisputably fulfilled on Feb. 6, 1985, when a new title was issued in the names of petitioners as evidenced by TCT No. 327403. - The inevitable conclusion is that on Jan. 19, 1985, as evidenced by the document denominated as “Receipt of Down Payment”, the parties entered into a contract of sale subject only to the suspensive condition that the sellers shall effect the issuance of new certificate title from that of their father’s name to their names and that, on Feb. 6, 1985, this condition was fulfilled. - We, therefore, hold that in accordance with Art. 1187 which pertinently provides — Art. 1187. The effects of conditional obligations to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation…

Obligations and Contracts In obligations to do or not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. - the rights and obligations of the parties with respect to the perfected contract of sale became mutually due and demandable as of the time of fulfillment or occurrence of the suspensive condition on Feb. 6, 1985. As of that point in time, reciprocal obligations of both seller and buyer arose. - When the sellers declared in the “Receipt of Down Payment” that they received an amount as purchase price for their house and lot without any reservation of title until full payment of the entire purchase price, the natural and ordinary idea conveyed is that they sold their property. When the “Receipt of Down Payment” is considered in its entirety, it becomes more manifest that there was a clear intent on the part of petitioners to transfer title to the buyer, but since the transfer certificate of title was still in the name of petitioners’ father, they could not fully effect such transfer although the buyer was then willing and able to immediately pay the purchase price. - The parties did not merely enter into a contract to sell where the sellers, after compliance by the buyer with certain terms and conditions, promised to sell the property to the latter. What may be perceived form the respective undertakings of the parties to the contract is that petitioners had already agreed to sell the house and lot they inherited from their father, completely willing to transfer full ownership of the subject house and lot to the buyer if the documents were then in order. It just so happened, however, that the transfer certificate of title was then still in the name of their father. It was more expedient to first effect the change in the certificate of title so as to bear their names. That is why they undertook to cause the issuance of a new transfer of the certificate of title in their names upon receipt of the down payment in the amount of P50,000. As soon as the new certificate of title is issued in their names, petitioners were committed to immediately execute the deed of absolute sale. Only then will the obligation of the buyer to pay the remainder of the purchase price arise.

PARKS V PROVINCE OF TARLAC AVENCENA; July 13, 1926 NATURE APPEAL from a judgment of the Court of First Instance of Tarlac FACTS - Plaintiff-appelant brought this action against the Province of Tarlac, the municipality of Tarlac, Concepcion Cirer and James Hill and prayed that he be declared the absolute owner entitled to the possession of the parcel of land, that the transfer of the same by the municipality of Tarlac to the Province of Tarlac be annulled, and the transfer certificate issued to the Province of Tarlac cancelled. - Oct 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land No. 2, donated it perpetually to the municipality of Tarlac, Province of Tarlac, under certain conditions specified in the public document in which they made the donation.

A2010 page 41 Prof. Labitag - The donation was accepted by Mr. Santiago de Jesus, as municipal president, in the same document on behalf of the municipal council of Tarlac. The parcel thus donated was later registered in the name of the donee, the municipality of Tarlac. - Jan 15, 1921, Concepcion Cirer and James Hill sold this parcel to plaintiff George L. Parks. - Aug 24, 1923, the municipality of Tarlac transferred the parcel to Province of Tarlac. The Province of Tarlac, by reason of the transfer, applied for and obtained the registration of the land in its name, the corresponding certificate of title having been issued to it. - Lower court dismissed the complaint. Petitioners' Claim - The plaintiff alleges that the conditions of the donation had not been complied with, and invokes the sale of the parcel of land made by Concepcion Cirer and James Hill in his favor. a) Appellant contends that a condition precedent having been imposed in the donation and the same not having been complied with, the donation never became effective. This “condition precedent” according to appellant, refers to the condition imposed that one of the parcels donated was to be used absolutely and exclusively for the erection of a central school and the other for a public park, the work to commence in both cases within the period of six months from the date of the ratification by the parties of the document evidencing the donation. b) Appellant also contends that, in any event, the condition not having been complied with, even supposing that it was not a condition precedent but subsequent, the noncompliance thereof is sufficient cause for the revocation of the donation. ISSUE WON plaintiff has right of action HELD - The plaintiff has no right of action. The sale made by Cirer and Hill to Parks cannot have any effect. The parcel having been donated by Cirer and Hill to the municipality of Tarlac, which donation was accepted by the latter, the title to the property was transferred to the municipality of Tarlac. The donation was not revoked when Cirer and Hill made the sale to the plaintiff. In order to consider it revoked, it is necessary either: 1) that the revocation had been consented to by the donee, the municipality of Tarlac, or 2) that it had been judicially decreed. None of these circumstances existed when Cirer and Hill sold the parcel to the plaintiff. Consequently, when the sale was made, Cirer and Hill were no longer the owners of this parcel and could not have sold it to the plaintiff, nor could Parks have acquired it from them. a) with regard to the “condition precedent”, it is true that the condition has not been complied with. But the allegation that it is a condition precedent is erroneous. The characteristic of a condition precedent is that the acquisition of the right is not effected while said condition is not complied with or is not deemed complied with. Meanwhile nothing is acquired and there is only an expectancy of right. Consequently, when a condition is imposed, the compliance of which cannot be effected except when the right is deemed acquired, such condition cannot be a condition precedent. In the present case the condition that a public school be erected and a public park made of the donated land could not be complied with except after giving effect to the donation.

Obligations and Contracts

A2010 page 42 Prof. Labitag

b) Although the appellant’s contention that noncompliance of the condition of the donation is sufficient ground for revocation, the period for bringing an action for the revocation of the donation has prescribed. Under the laws in force (sec. 43, Code of Civ. Proc.), the period of prescription of this class of action is ten years. The action for the revocation of the donation for this cause arose or April 19, 1911, that is, six months after the ratification of the instrument of donation of October 18, 1910. The complaint in this action was presented July 5, 1924, more than ten years after this cause accrued. Disposition The judgment appealed from is affirmed, with costs against the appellant.

could not be considered as having failed to comply with its part of the bargain, thus, it remanded the case to the court of origin for the determination of the time within which the petitioner should comply with the first condition annotated in the certificate of title

CENTRAL PHILIPPINE UNIVERSITY V COURT OF APPEALS BELLOSILLO; 1995

HELD 1. Yes. Don Ramon Lopez, Sr. executed for a valuable consideration which is considered the equivalent of the donation itself. Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the even which constitutes the condition. 2. No. The condition imposed by the donor depended upon the exclusive will of the donee as to when this condition shall be fulfilled. Since the time within which the condition should be fulfilled depended upon the exclusive will of the petitioner, it has been held that its absolute acceptance and the acknowledgment of its obligation provided in the deed of donation were sufficient to prevent the statute of limitations from barring the action of private respondents upon the original contract which was the deed of donation. In this case, the starting point from which the obligation to comply must be counted from the expiration of a reasonable period and opportunity for petitioner to fulfill what has been charged upon it by the donor. 3. No. Art. 1197, where the courts may fix the duration for fulfillment, cannot be applied in this case. More than a reasonable period of 50 years has already been allowed petitioner to avail of the opportunity to comply with the condition even if it be burdensome, to make the donation in its favor forever valid, hence, there is no more need to fix the duration of a term of the obligation when such procedure would be a mere technicality and formality and would serve no purpose than to delay or lead to an unnecessary and expensive multiplication of suits.

FACTS - in 1939, Don Ramon Lopez, Sr. who was a member of the Board of Trustees of the Central Philippine College (now Central Philippine University) executed a deed of donation in favor of the latter of a parcel of land with the following annotations: 1. the land described shall be utilized by the CPU exclusively for the establishment and use of a medical college with all its buildings as part of the curriculum 2. the said college shall not sell, transfer or convey to any third party nor in any way encumber said land 3. the said land shall be called RAMON LOPEZ CAMPUS and the said college shall be under obligation to erect a cornerstone bearing that name. Any net income from the land or any of its parks shall be put in a fund to be known as the RAMON LOPEZ CAMPUS FUND to be used for improvements of said campus and erection of a building thereon - on May 31, 1989, the heirs of Don Ramon Lopez, Sr. filed an action for annulment of donation, reconveyance and damages against CPU alleging that: 1. since 1939 up to the time the action was filed the latter had not complied with the conditions of the donation 2. that CPU had in fact negotiated with the National Housing Authority to exchange the donated property with another land owned by the latter - CPU, in its answer alleged that: 1. the right of the private respondents to file the action had prescribed 2. that it did not violate any of the conditions in the deed of donation because it never used the donated property for any other purpose than that for which it was intended 3. that it did not sell, transfer, or convey it to any third party - the TC held that petitioner failed to comply with the conditions of the donation and declared it null and void. It further directed the petitioner to execute a deed of reconveyance of the property in favor of the heirs of the donor, namely, private respondents herein- the CA ruled that the annotations at the back of petitioner’s certificate of title were resolutory conditions breach of which should terminate the rights of the donee thus making the donation revocable. It also found that while the first condition mandated petitioner to utilize the donated property for the establishment of a medical school, the donor did not fix a period within which the condition must be fulfilled, hence, until a period was fixed for the fulfillment of the condition, petitioner

ISSUES 1. WON the quoted annotations are onerous obligations and resolutory conditions 2. WON the right of the respondents to initiate an action has already prescribed 3. WON the Court may fix a period within which petitioner would establish a medical college

SEPARATE OPINION DAVIDE [ dissent] - pointed out an inconsistency in the majority opinion’s description of the donation in question. In one part, it says that the donation in question is onerous. Yet in the last paragraph it states that the donation is basically a gratuitous one. - the discussion on conditional obligations is unnecessary as there is no conditional obligation to speak of in this case. The conditions imposed by the donor determines neither the existence nor the extinguishment of the obligations of the donor and the donee with respect to the donation. In fact, the conditions imposed are the very obligations of the donation. - the court should fix the duration for the performance of the conditions/obligations in the donation. The mere fact that there is no time fixed as to when the conditions of the donation are to be fulfilled does not ipso facto mean that the statute of limitations will not apply anymore and the action to revoke the donation becomes imprescriptible.

Obligations and Contracts QUIJADA V CA MARTINEZ; December 4, 1998 NATURE Certiorari of CA’s decision FACTS - April 5, 1956-Trinidad Quijada , together with her siblings, donated a two-hectare land to the Municipality of Talacogon, Agusan del Sur with the condidtion that the parcel of land shall be used SOLELY and EXCLUSIVELY as part of the campus of the proposed provincial high school of the said municipality. - Trinidad remained in possession of the land despite the donation. - July 29, 1962- Trinidad sold one hectare of the said land to Regalado Mondejar (respondent) without the benefit of a deed of sale and evidenced only by receipts of payment. - 1980- the heirs of Trinidad (who at this time was dead already) instituted a complaint which was dismissed for failure to prosecute. - 1987- the proposed provincial high school failed to materialize, the Sangguniang Bayan of the municipality enacted a resolution reverting the two-hectare land donated back to the donors. - In the meantime, Mondejar sold portions of the land to respondents, Fernando Bautista, Rodolfo Goloran, Efren Guden, and Ernesto Goloran. - The heirs of Trinidad filed for this action (quieting of title, recovery of possession and ownership of parcels of land with claim for attorney’s fees and damages.) - According to the heirs, their mother Trinidad never sold, conveyed, transferred or disposed of the property in question to any person or entity much less to Mondejar save the donation made to the Municipality of Talacogon. - Since the land still belonged to the municipality at the time of the alleged sale to Mondejar, the supposed sale is null and void. - Mondejar claims that one hectare of the land was sold to him on July 29, 1962, and the remaining one-hectare on installment basis until fully paid. As a defense, he claims that the action is barred by LACHES or has prescribed. - TC- Trinidad had no legal right to sell the land to Mondejar since the ownership belongs to the municipality and the deed of sale executed by Trinidad to Mondejar did not carry with it the conformity and acquiescence of her children since she was a widow and 63 yrs old at that time. So the respondents were asked to vacate the land and restore the possession to the heirs. - CA- reversed the decision of the TC; sale to Mondejar was valid as Trinidad retained an inchoate interest on the lots by virtue of the automatic reversion clause in the deed of donation. ISSUE WON the sale of the land to Mondejar was valid since the ownership of the said land belonged to the municipality at the time of the sale by virtue of the conditional deed of donation executed by Trinidad and her siblings and WON the action is barred by laches

A2010 page 43 Prof. Labitag HELD The decision of the CA is upheld; sale is valid. No atty’s fees awarded; No moral damages were likewise awarded. Reasoning On donation - When the Municipality’s acceptance of the donation was made known to the donor, the Municipality became the new owner of the donated property - donation being a mode of acquiring and transmitting ownership- notwithstanding the condition imposed by the donee. - The condition was that if the school never materializes or that it is opened but discontinued or closed in the future, the property shall revert to the donor. - The donation is perfected once the acceptance by the donee is made known to the donor. - The resolutory condition is the construction of the school. It has been ruled that when a person donates land to another on the condition that the latter would build upon the land a school, the condition imposed is not a condtion precedent or a suspensive condition but a resolutory one. - At the time of the sales, Trinidad could not have sold the lots since the ownership had been transferred by virtue of the deed of donation. So long as the resolutory condtion subsists and capable of fulfillment, the donation remains effective and the donee continues to be the owner subject only to the rights of the donor or his successors-in-interest under the deed of donation. - Since no period was imposed by the donor on when the must the donee must comply with the condition, the latter remains the owner so long as he has tried to comply with the condition within a reasonable period. In this case, the Municipality manifested in a resolution that they cannot comply with the condition of building a school and the same was made known to the donor. This was when the ownership reverted back to Trinidad as provided in the reversion clause of the deed of donation. - The donor may have inchoate (meaning: imperfect) interest in the donated property during the time that ownership of the land has not reverted to her. Such inchoate interest may be the subject of contracts including a contract of sale. Here what the donor sold was the land itself which she no longer owned. It would have been different if what she sold were her interests over the property under the deed of donation which is subject to the possibility of reversion of ownership arising from the non-fulfillment of the resolutory condition. On laches - The petitioners’ action in NOT YET barred by laches. It cannot be said that the petitioners had slept on their rights for along time since they initiated the action a year after upon knowledge of the reversion of the property to the donor. - Laches presupposes failure or neglect for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could have or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, thus, giving rise to a presumption that the party entitled to assert it either has abandoned or declined to assert it. - Essential elements: a. Conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation complained of; b. delay in asserting complainant’s right after he had knowledge of the defendant’s conduct and after he has an opportunity to sue;

Obligations and Contracts c. Lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit; d. injury or prejudice to the defendant in the event relief is accorded to the complaint. - these elements are not present in this case On sale - Sale being a consensual contract is perfected by mere consent which is manifested the moment there is a meeting of the minds as to the offer and acceptance thereof on 3 elements: subject matter, price and terms of payment of the price. - Ownership by the seller on the thing sold at the time of the perfection of the contract of sale is not an element for its perfection. Perfection per se does not transfer ownership which occurs upon the actual or constructive delivery of the thing sold. - The consummation of the perfected contract is another matter. It occurs upon the actual or constructive delivery of the subject matter to the buyer when the seller or her successors-in-interest subsequently acquires ownership thereof.

LAO LIM V CA REGALADO; October 31, 1990 NATURE Petition to review the decision of the Court of Appeals FACTS - Dy entered into a contract of lease with Lim foe a period of 3 years (1976-1979). After the stipulated term expired, Dy refused to vacate the premises, hence Lim filed for an ejectment suit against Dy. The case was terminated by a judicially approved compromise agreement. - The compromise agreement provides “that the term of lease shall be renewed every three years retroacting from Oct 1979 – 1982; after which the rental shall be raised automatically by 20% every three years for as long as the defendant (DY) needed the premises and can meet and pay the said increases, the defendant to give notice of his intent to renew 60 days before the expiration of the term.” - April 17, 1985 – petitioner advised that he would no longer renew the contract October 1985. On August 5, 1985, Dy informed the petitioner in writing of his intention to renew the contract of lease for another term. Lim advised that he did not agree to a renewal. - January 15, 1986 – Lim filed another ejectment suit which was dismissed on the grounds that (1) the lease contract has not expired being a continuous one the period whereof depended on upon the lessee’s need for the premises and his ability to pay rents and (2) the compromise agreement constitutes res judicata. - On appeal, the respondent court affirmed the lower court’s judgment in toto. ISSUES 1. WON the lease contract only depends on the party’s need for the premises and his ability to pay the rents 2. WON the compromise agreement constitute res judicata

A2010 page 44 Prof. Labitag HELD 1. Ratio The lease contract cannot be made to depend solely on the free and uncontrolled choice of the lessee. Reasoning - The stipulation “for as long as the defendant needed the premises and can meet and pay the said increases” is purely potestative. The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing payment of the rentals or not, depriving the owner of any say in the matter. - Where the instrument is susceptible of two interpretations, the one which will make it valid and legal should be adopted. 2. Ratio The second action for ejectment does not constitute res judicata. Reasoning - For a judgment be a bar to a subsequent case, it must be (1) a final judgment, (2) rendered by a court with jurisdiction over the subject matter of the parties, (3) it must be judgment on the merits, and (4) there must be identity between the two cases as to parties, subject matter and cause of action. - The fourth is lacking in the case at bar. There is no identity of subject matter and cause of action. Disposition Wherefore, the decision of respondent Court of Appeals is reversed and set aside. Private respondent is hereby ordered to immediately vacate and return the possession of the leased premises subject of the present action to the petitioner and to pay the monthly rentals due thereon in accordance with the compromise agreement until he has actually vacated the same.

NAGA TELEPHONE V COURT OF APPEALS NOCON; February 24, 1994 NATURE PETITION for a review of the decision of the CA. FACTS - Petitioner, Naga Telephone Co., Inc. (NATELCO), is a telephone company rendering local as well as long distance telephone service in Naga City. On November 1, 1977, it entered into a contract with Camarines Sur II Electric Cooperative, Inc. (CASURECO II), a corporation established for the purpose of operating an electric power service in the same city, “for the use by the petitioner in the operation of its telephone service the electric light posts of the respondent”. In consideration of such use, NATELCO agreed to provide the respondent with free use of ten telephone connections. - The contract between included, among others, a stipulation to the effect that the contract shall “be as long as the party of the first part (NATELCO) has need for the electric post of the second part (CASURECO II) it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned its operation as a public service and it becomes necessary to remove the electric post”. - After over ten years, the respondent filed on January 2, 1989 with the RTC of Naga City action against the petitioner for reformation of the contract on the grounds that it is too one sided in favor of the petitioner. The action also prayed that petitioner be ordered to pay for the use of electric posts which are not covered by the

Obligations and Contracts agreement. And finally, that CASURECO be indemnified no less than P100,000 arising out of the poor servicing of the ten telephone units which had caused it great inconvenience and damages. - The trial court found in favor of the respondents and ordered the reformation of the contract in the interest of justice and equity. As part of the ruling, the court ordered NATELCO to pay respondent a monthly rental of P10.00 per electric post being used from the time of the filing of the case. On the other and, CASURECO was ordered by the same trial court to pay NATELCO for the use and transfers of its telephone units at the same rate that the public are paying. - Appeal to the CA was made and the CA affirmed the ruling of the trial court but this time not based on the reformation but rather on the operation of Article 1267 of the Civil Code and on the potestative condition with rendered the condition void. - The CA held that as reformation only lie or may prosper when the contract failed to express the true intentions of the parties due to error or mistake, accident , or fraud and there is no allegation to this effect, the proper basis is the aforementioned Article. - The section on the continued use of the electric post for so long as these are needed by NATELCO was considered as being purely potestative on the part of the petitioner as it leaves the continued effectivity of the contract to NATELCO’s sole and exclusive will. As held in previous jurisprudence, there must be mutuality and equality in any contract. - Hence the appeal. ISSUE WON the ruling of the CA is valid HELD Yes. The agreement between the parties has become too one sided in favor of the petitioner to the great disadvantage of the respondent. Continuing with the agreement will result in the petitioner’s unjust enrichment at the expense of the respondent.

OSMEÑA V RAMA JOHNSON; September 9, 1909 NATURE APPEAL from a judgment of the Court of First Instance of Cebu. FACTS -15 Nov 1890: Doña Rama executed and delivered to Victoriano Osmeña a contract (EXHIBIT A) which stated that she received P200 in cash from Don Osmeña which she would pay in sugar in January/February the next year at the price on the day of delivering the sugar into the Don’s warehouses + Interest w/ rate of half a cuartillo per month on each peso from Nov 15 to the day of the settlement; if ever the Doña could not pay in full, a balance shall be struck, showing the amount outstanding at the end of each June, including interest, and outstanding balance of the respondent would be considered as capital which the respondent would pay in sugar. The respondent also promised that she would sell to Don Osmeña all her sugar that would be harvested, and as security, she pledged all her present and future

A2010 page 45 Prof. Labitag property, and as a special security, she would give her house in Pagina. The contract was signed by 2 witnesses. -27 Oct. 1891: Defendant asked a further loan from the Don of P70, P50 of which would be loaned to Don Peñares, and the P70 would be paid in sugar. -Some time after the execution and delivery of the above contracts, Don Osmeña died. In the settlement and division of the property of his estate the above contracts became the property of one of his hieirs, Agustina Rafols. Later(no date given) the said Agustina Rafols ceded to the present plaintiff all of her right and interest in said contracts. -( my copy is missing some paragraphs, can’t find a copy in the internet so just look at your copies for the periods between the death of Don Osmeña and March 15) -15 March 1902: Doña Rama recognized her obligations in the said contract with Don Osmeña, stating in the contract she executed (EXHIBIT C) that if her house in Pagina would be sold she would use the money to pay for her debts. -26 June 1906: Doña Tomasa did not pay the amount due so the plaintiff commenced this action in CFI Cebu. CFI deci judgment in favor of the plaintiff and against the defendant for the sum of P200 with interest at the rate of 18 3/4 per cent per annum, from the 15th day of November, 1890, and for the sum of P20, with interest at the rate of 181 per cent per annum, from the 27th day of October, 1891, until the said sums were paid. Plaintiff’s Claim the execution and delivery of the above contracts, the demand for payment, and the failure to pay on the part of the defendant, and the prayer for a judgment for the amount due on the said contracts. (own testimony – I don’t know if Agustina is a guy – my copy said “the plaintiff himself”) Defendant’s defense general denial and setting up the special defense of prescription. (no evidence presented) ISSUE WON the proof presented during the trial in CFI is sufficient for the lower court to recognize the debt of Doña Rama, provided that she imposed the condition that she would pay her debts upon selling her house HELD YES, the proof presented is sufficient. Ratio A condition imposed upon a contract by the promisor, the performance of which depends upon his exclusive will, is void, in accordance with the provisions of article 1115 of the Civil Code. Reasoning It was suggested during the discussion of the case in this court that, in the acknowledgment of the indebtedness made by the defendant, she imposed the condition that she would pay the obligation if she sold her house. If that statement found in her acknowledgment of the indebtedness should be regarded as a condition, it was a condition which depended upon her exclusive will, and is, therefore, void. (Art. 1115, Civil Code.) The acknowledgment, therefore, was an absolute acknowledgment of the obligation and was sufficient to prevent the statute of limitation from barring the action upon the original contract. Disposition We are satisfied, from all of the evidence adduced during the trial, that the judgment of the lower court should be affirmed. So ordered.

HERMOSA V LONGORA LABRADOR; October 27, 1953

Obligations and Contracts NATURE Petition for review by certiorari of a decision of the Court of Appeals FACTS Epifanio Longora had three claims against the intestate estate of Fernando Hermosa, Sr. The first represented credit advances made to the intestate from 1932 to 1944, the second made to his son, and the third made to his grandson from 1945 to 1947 after the death of the intestate, which occurred in December 1944. The claimant presented evidence that the intestate had asked for said credit advances for himself and the members of his family “on condition that their payment should be made by Fernando Hermosa Sr. as soon as he receive funds derived from the sale of his property in Spain. CA held that the payment did not become due until the administrstrix received the payment from the buyer of the property. Upon authorization of the probate court, the property was sold in November 1947. the claim was filed on Oct. 1948. ISSUES 1. WON the claim was subject to a condition exclusively dependent upon the will of the debtor (condicion potestativa) and therefore null and void 2. WON the action has already prescribed 3. WON claims furnished after the death of the intestate (third claim) should have been allowed HELD 1. NO Ratio The condition in question is not a condicion potestativa since it also depends upon other circumstances beyond the debtor’s control Reasoning The condition of the obligation was not purely a potestative one, depending exclusively upon the will of the intestate, but a mixed one, depending partly upon the will of the intestate and partly upon chance. The will to sell on the part of the intestate was present in fact, or presumed to legally exist, although the price and other conditions thereof were still within his discretion and final approval. There were still other conditions that had to concur to effect the sale, mainly that a buyer, ready, able and willing to purchase the property under the conditions demanded by the intestate. 2. NO Ratio As the obligation retroacts to the date of when the contract was entered into, all amounts advanced from the time of the agreement became due, upon the happening of the suspensive condition. Reasoning As the obligation to pay became due and demandable only when the house was sold and the proceeds received in the islands, the action to recover the same only accrued, within the meaning of the statute of limitations, on the date the money became available here, hence the action to recover the advances has not yet prescribed 3. NO Ratio Even if authorization to furnish necessaries to his grandson may have been given, this authorization could not be made to extend after intestate’s death Reasoning The court gave two reasons: (1) the obligation to furnish support is personal and is extinguished upon the death of the person obliged to give support;

A2010 page 46 Prof. Labitag (2) upon the death of the intestate, his agent’s authority or authorization is deemed terminated Disposition Judgment appealed from is hereby affirmed in so far as it approves the first and second claims and reversed as to that of the third.

SEPARATE OPINION PARAS [ concur] I concur insofar as it reverses the appealed judgment allowing the third claim but dissent therefrom insofar as it affirms the appealed judgment approving other claims. The matter of the sale of the house rested on the sole will of the debtor, unaffected by any outside consideration or influence. The terms are subject to the sole judgment—if not whims and caprice—of Fernando Hermosa, Sr. In fact no sale was effected during his lifetime. As the condition above is null and void, the debt resulting from the advances made to Fernando Hermosa, Sr. became either immediately demandable or payable within a term fixed by the court. In both cases, the action has prescribed after the lapse of ten years.

TAYLOR V UY TIENG PIAO AND TAN LIUAN STREET; October 2, 1922 NATURE Appeal from a judgment of CFI of Manila FACTS - Taylor contracted his services to Tan Liuan & Co as superintendent of an oil factory which the latter contemplated establishing - The contract extended over 2 years and the salary was P600/month during the first year and P700/month during the second with electric, light and water for domestic consumption or in lieu thereof, P60/month - At this time, the machinery for contemplated factory had not been acquired, though ten expellers had been ordered from the US - It was understood that should the machinery to be installed fail, for any reason, to arrive in Manila within the period of 6 months, the contract may be cancelled by the party of the second part at its option, such cancellation not to occur before the expiration of such 6 months - The machinery did not arrive in Manila within the 6 months; the reason does not appear, but a preponderance of evidence show that the defendants seeing that oil business no longer promised large returns, either cancelled the order for machinery from choice or were unable to supply the capital necessary to finance the project. - Defendants communicated to Taylor that they had decided to rescind the contract. - Taylor instituted this action to recover damages in the amount of P13k, covering salary and perks due and to become due ISSUE WON in a contract for the prestation of service, it is lawful for the parties to insert a provision giving the employer the power to cancel the contract in contingency which may be dominated by himself HELD YES.

Obligations and Contracts - One of the consequences of the stipulation was that the employers were left in a position where they could dominate the contingency, and the result was about the same as if they had been given an unqualified option to dispense with the services of Taylor at the end of 6 months. But this circumstance does not make the stipulation illegal. - A condition at once facultative and resolutory may be valid even though the condition is made to depend upon the will of the obligor. - If it were apparent, or could be demonstrated that the defendants were under positive obligation to cause the machinery to arrive in Manila, they would of course be liable, in the absence of affirmative proof showing that the non-arrival of the machinery was due to some cause not having its origin in their own act or will. - The contract, however, expresses no such positive obligation, and its existence cannot be implied in the face of the stipulation, defining the conditions under which the defendants can cancel the contract. - CFI no error in rejecting Taylor’s claim in so far as damages are sought for the period subsequent to the expiration of 6 months, but in assessing the damages due for the six-month period, the trial judge overlooked the item of P60 (commutation of house rent) This amount Taylor is entitled to recover in addition to P300 awarded by CFI.

SMITH, BELL & CO. V SOTELO MATTI ROMUALDEZ; 1922 NATURE APPEAL from a judgement of the CFI of Manila FACTS - August, 1918: Plaintiff Corporation Smith, Bell & Co., and defendant Sotelo entered into contract: - Plaintiff obligated itself to sell (and the defendant to purchase) 1) 2 steel tanks, to be shipped from New York and delivered at Manila “within 3 or 4 months”; 2) 2 expellers to be shipped from San Francisco in the month of September, 1918, or as soon as possible; 3) 2 electric motors to be delivered “Approximate delivery within ninety days. – This is not guaranteed.” - tanks arrived at Manila April 27, 1919 - expellers arrived October 26, 1918 - motors arrived Feb. 27, 1919. -The plaintiff corporation notified Sotelo of the arrival of these goods, but Sotelo refused to receive them and to pay the prices stipulated. - The court below absolved the defendants from the complaint insofar as the tanks and electric motors were concerned, but rendered judgment against them for the expellers, ordering them to “receive the aforesaid expellers and pay the plaintiff the price of the said goods” - both parties appeal Petitioners' Claim - petitioner immediately notified the defendant of the arrival of the goods - defendant refused to receive and pay the price - expellers and motors in good conditions Respondents' Comments - denied the allegations as to the shipment and arrival of the goods

A2010 page 47 Prof. Labitag - denied the notification and the refusal and the good conditions of the goods - alleged as special defense: Sotelo made the contracts in question as manager of the intervenor, the Manila Oil Refining and ByProducts Co. - it was only in May, 1919, that it notified the intervenor that goods had arrived, incomplete and long after the date stipulated - as a consequence of the delay, the intervenor suffered damages in the sum of P116,783.91 for the nondelivery fo the tanks, and P21,250 for the expellers and motors arriving late. ISSUES 1. WON, under the contracts entered into and the circumstances established in the record, the plaintiff has fulfilled, in due time, its obligation to bring the goods in question to Manila 2. WON the intervenor has right of action HELD 1. Yes. The plaintiff has not been guilty of any delay in the fulfillment of its obligation, and it could not have incurred any of the liabilities mentioned by the intervenor in its counterclaim. Ratio When no definite date has been fixed for the delivery of goods, the obligor shall not be held guilty of delay in the fulfillment of its obligation if it delivers the goods within a reasonable time. Reasoning - The obligation is regarded as conditional: the term which the parties attempted to fix is so uncertain that one cannot tell just whether those articles could be brought to Manila or not. *They were executed at the time of the world war when there existed rigid restrictions on the export from the US of articles like the machinery in question, and transportation was difficult. - When the delivery is subject to the fulfillment of a condition dependent on the will of third persons who could in no way be compelled to fulfill the condition (like in this case), the obligor will be deemed to have sufficiently performed his part of the obligation, if he has done all that was in his power, even if the condition has not been fulfilled in reality- and he has the right to demand performance of the contract by the other party. - In such cases, delivery must be made within reasonable time. - What is reasonable time? – to be determined by the circumstances attending the particular transaction, such as the character of the goods, the purpose for which they are intended, the ability of the seller to produce the goods if they are to be manufactured, the facilities available for transportation, and the distance the goods must be carried, and the usual course of business in the particular trade. 2. No. Ratio When an agent acts in his own name, the principal shall have no right of action against the persons with whom the agent has contracted. Reasoning When the agent transacts business in his own name, it shall not be necessary to state who is the principal and he shall be directly liable, as if the business were for his own account. (Code of Com., art 246) Disposition the judgment appealed from is modified, and the defendant sentenced to accept and receive from the plaintiff the tanks, expellers, motors, and to pay the plaintiff the sum of P96,000, with legal interest, and the costs of both instances.

RUSTAN PULP AND PAPER MILLS V IAC

Obligations and Contracts MELO; October 19, 1992 NATURE Petition for review of the decision of the then Intermediate Appellate Court. FACTS - Rustan established a pulp and paper mill in Lanao del Norte in 1966. - Lluch, a holder of a forest products license, wrote to Rustan and offered to supply raw materials. In response, petitioner Rustan proposed, among other things, in a letter “That the contract to supply is not exclusive because Rustan shall have the option to buy from other suppliers who are qualified and holder of appropriate government authority or license to sell and dispose pulp wood." - On April 1968, they executed a contract of sale whereby Lluch agreed to sell, and Rustan Pulp and Paper Mill, Inc. to pay the price of P30.00 per cubic meter of pulp wood raw materials to be delivered at the buyer's plant. - In the bilateral undertaking, they stipulated the following: "That BUYER shall have the option to buy from other SELLERS… that BUYER shall not buy from any other seller whose pulp woods being sold shall have been established to have emanated from the SELLER'S lumber and/or firewood concession. . . .And that SELLER has the priority to supply the pulp wood materials requirement of the BUYER; “(Par 7) That the BUYER shall have the right to stop delivery of the said raw materials by the seller covered by this contract when supply of the same shall become sufficient until such time when need for said raw materials shall have become necessary provided, however, that the SELLER is given sufficient notice." - During the test run of the pulp mill, the machinery line had major defects while deliveries of the raw materials piled up, which prompted the Japanese supplier of the machinery to recommend the stoppage of the deliveries. - The suppliers were informed to stop deliveries and Rustan sent a letter (dated Sept 1968) to Lluch informing him that “the supply of raw materials to us has become sufficient and we will not be needing further delivery from you. As per the terms of our contract, please stop delivery 30 days from today.” It was signed by Dr. Romeo Vergara, the resident manager. - Lluch sought to clarify whether stoppage of delivery or termination of the contract of sale was intended, but the query was not answered by petitioners. This alleged ambiguity notwithstanding, Lluch and the other suppliers resumed deliveries after the series of talks between Vergara and Lluch. - On January 23, 1969, a complaint for contractual breach was filed. The trial court dismissed it. On appeal, the IAC modified the judgment by directing Rustan, Tantoco and Vergara to pay respondents, jointly and severally, the sum of P30,000.00 as moral damages and P15,000.00 as attorney's fees ISSUES 1. WON the contractual provisions mentioned above as regards the stoppage of delivery when there is sufficient supply of raw materials are valid 2. WON Tantoco and Vergara should be personally liable HELD 1. NO - The SC’s simple understanding of the literal import of par 7 of the obligation in question is that petitioners can stop delivery of pulp wood from private respondents

A2010 page 48 Prof. Labitag if supply at the plant is sufficient as ascertained by petitioners, subject to redelivery when the need arises as determined likewise by petitioners. This is a potestative imposition in the contract which must be obliterated for being invalid as it is purely dependent upon the will of one party. - Though it is a legal truism that a condition which is both potestative and resolutory may be valid even though that saving clause is left entirely to the will of the obligor, the same cannot be said to apply in the present case. - Petitioners contend that they are within the right stoppage guaranteed by par 7. There is no doubt that the contract speaks loudly about petitioners' prerogative but what diminishes the legal efficacy of such right is the condition attached to it which is dependent exclusively on will of the petitioner… for which reason, the SC treated the controversial stipulation as inoperative 2. NO. - The President and Manager of a corporation who entered into and signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of the corporation being separate and distinct from the persons composing it. And because of this precept, Vergara's supposed non-participation in the contract of sale although he signed the letter dated Sept 30, 1968 is completely immaterial. The two exceptions contemplated by Article 1897 of the New Civil Code where agents are directly responsible are absent and wanting. Disposition The decision appealed from is MODIFIED in the sense that only petitioner Rustan Pulp and Paper Mills is ordered to pay moral damages and attorney's fees as awarded by respondent Court.

ROMERO V CA VITUG; November 23, 1995 FACTS -Petitioner Virgilio R. Romero, his foreign partners decided to put up a central warehouse in Metro Manila on a land area of approximately 2,000 square meters. -The project was made known to several freelance real estate brokers. -A day or so after the announcement, Alfonso Flores and his wife offered a parcel of land measuring 1,952 square meters located in Barangay San Dionisio, Parañaque, Metro Manila, the lot was in the name of private respondent Enriqueta Chua vda. de Ongsiong. -Petitioner visited the property and, except for the presence of squatters in the area, he found the place suitable for a central warehouse. -Flores spouses called on petitioner with a proposal that should he advance the amount of P50,000.00 which could be used in taking up an ejectment case against the squatters, private respondent would agree to sell the property for only P800 00 per square meter. – -Petitioner expressed his concurrence. On 09 June 1988, a contract denominated "Deed of Conditional Sale," was executed between petitioner and private respondent.with the following terms and conditions: "1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY Philippine Currency, is to be paid upon signing and execution of this instrument.

Obligations and Contracts "2. The balance of the purchase price in the amount of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY shall be paid 45 days after the removal of all squatters from the above described property. "3. Upon full payment of the overall purchase price as aforesaid, VENDOR without necessity of demand shall immediately sign, execute, acknowledged (sic) and deliver the corresponding deed of absolute sale in favor of the VENDEE free from all liens and encumbrances and all Real Estate taxes are all paid and updated. 4.That if after 60 days from the date of the signing of this contract the VENDOR shall not be able to remove the squatters from the property being purchased, the downpayment made by the buyer shall be returned /reimbursed by the VENDOR to the VENDEE. 5.That in the event that the VENDEE shall not be able to pay the VENDOR the balance of the purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from written notification to the VENDEE of the removal of the squatters from the property being purchased, the FIFTY THOUSAND PESOS (P50,000, 00) previously paid as downpayment shall be forfeited in favor of the VENDOR. 6.Expenses for the registration such as registration fees, documentary stamp, transfer fee, assurances and such other fees and expenses as may be necessary to transfer the title to the name of the VENDEE shall be for the account of the VENDEE while capital gains tax shall be paid by the VENDOR. - Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check for P50,000 002 from petitioner. -Private respondent filed a complaint for ejectment (Civil Case No. 7579) against Melchor Musa and 29 other squatter families with the Metropolitan Trial Court of Parañaque. -A few months later, or on 21 February 1989, judgment was rendered ordering the defendants to vacate the premises. The decision was handed down beyond the 60day period (expiring 09 August 1988) stipulated in the contract. The writ of execution of the judgment was issued, still later, on 30 March 1989. -In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received from petitioner since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio A. F. Apostol, counsel for petitioner, in his reply of 17 April 1989, refused the tender and stated: "Our client believes that with the exercise of reasonable diligence considering the favorable decision rendered by the Court and the writ of execution issued pursuant thereto, it is now possible to eject the squatters from the premises of the subject property, for which reason, he proposes that he shall take it upon himself to eject the squatters, provided, that expenses which shall be incurred by reason thereof shall be chargeable to the purchase price of the land. ISSUE WON the vendor may demand the rescission of a contract for the sale of a parcel of land for a cause traceable to his own failure to have the squatters on the subject property evicted within the contractually stipulated period HELD NO. Private respondent's failure "to remove the squatters from the property" within the stipulated period gives petitioner the right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the Civil Code." This option clearly belongs to petitioner and not to private respondent.

A2010 page 49 Prof. Labitag -The undertaking required of private respondent does not constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in accordance with Article 1182 of the Civil Codebut a "mixed" condition "dependent not on the will of the vendor alone but also of third persons like the squatters and government agencies and personnel concerned.". Where the so-called "potestative condition" is imposed not on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation itself. -In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose between proceeding with the agreement or waiving the performance of the condition. Petitioner has waived the performance of the condition imposed on private respondent to free the property from squatters. -Private respondent's action for rescission is not warranted. She is not the injured party. The right of resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party that violates the reciprocity between them. It is private respondent who has failed in her obligation under the contract. Petitioner did not breach the agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in the ejectment case and to make arrangements with the sheriff to effect such execution. In his letter of 23 June 1989, counsel for petitioner has tendered payment and demanded forthwith the execution of the deed of absolute sale. Parenthetically, this offer to pay, having been made prior to the demand for rescission, assuming for the sake of argument that such a demand is proper under Article 159223 of the Civil Code, would likewise suffice to defeat private respondent's prerogative to rescind thereunder.

ROMAN CATHOLIC ARCHBISHOP OF MANILA V. CA REGALADO; June 19, 1991 NATURE Petition for review on certiorari to overturn the decision of the Court of Appeals FACTS - On August 23, 1930, the spouses Eusebio de Castro and Martina Rieta, now both deceased, executed a deed of donation in favor of therein defendant Roman Catholic Archbishop of Manila covering a parcel of land at Kawit, Cavite containing an area of 964 sq. meters -The deed of donation provides that the donee shall not dispose or sell the property within a period of one hundred (100) years from the execution of the deed of donation, otherwise a violation of such condition would render ipso facto null and void the deed of donation and the property would revert to the estate of the donors. -On or about June 30, 1980, and while still within the prohibitive period to dispose of the property, petitioner Roman Catholic Bishop of Imus, in whose administration all properties within the province of Cavite owned by the Archdiocese of Manila was allegedly transferred on April 26, 1962, executed a deed of absolute sale of the property subject of the donation in favor of petitioners Florencio and Soledad Ignao in consideration of the sum of P114,000.00. -On November 29, 1984, private respondents as plaintiffs, filed a complaint for nullification of deed of donation, rescission of contract and reconvoyance of real

Obligations and Contracts property with damages against petitioners Florencio and Soledad C. Ignao and the Roman Catholic Bishop of Imus, Cavite, together with the Roman Catholic Archbishop of Manila -On December 17, 1984, petitioners Florencio Ignao and Soledad C. Ignao filed a motion to dismiss based on the grounds that (1) herein private respondents, as plaintiffs therein, have no legal capacity to sue; and (2) the complaint states no cause of action. -On December 19, 1984, petitioner Roman Catholic Bishop of Imus also filed a motion to dismiss on three (3) grounds, the first two (2) grounds of which were identical to that of the motion to dismiss filed by the Ignao spouses, and the third ground being that the cause of action has prescribed. -On January 9, 1985, the Roman Catholic Archbishop of Manila likewise filed a motion to dismiss on the ground that he is not a real party in interest and, therefore, the complaint does not state a cause of action against him. -Trial Court dismissed the case on the ground that the action has prescribed -CA reversed, and remanded the case; MFRs filed separately by the spouses Ignao and the RC Bishop of Imus were denied ISSUES 1. WON the action has already prescribed 2. WON the private respondent has a cause of action against petitioners HELD 1. No. It is the contention of petitioners that the cause of action of herein private respondents has already prescribed, invoking Article 764 of the Civil Code which provides that "When donation shall be revoked at the instance of the donor, when the donee fails to comply with any of the conditions which the former imposed upon the latter," and that "his action shall prescribe after four years from the noncompliance with the condition, may be transmitted to the heirs of the donor, and may be exercised against the donee's heirs." Reasoning -Said provision does not apply in the case at bar. The deed of donation involved herein expressly provides for automatic reversion of the property donated in case of violation of the condition therein, hence a judicial declaration revoking the same is not necessary - A judicial action for rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions -The aforesaid rule apply to contracts, but we see no reason why the same should not be applied to the donation in the present case -Article 732 of the Civil Code provides that donations inter vivos shall be governed by the general provisions on contracts and obligations in all that is not determined in Title III, Book III on donations. -Now, said Title III does not have an explicit provision on the matter of a donation with a resolutory condition and which is subject to an express provision that the same shall be considered ipso facto revoked upon the breach of said resolutory condition imposed in the deed therefor, as is the case of the deed presently in question. The suppletory application of the foregoing doctrinal ruling to the present controversy is consequently justified

A2010 page 50 Prof. Labitag - When a deed of donation, as in this case, expressly provides for automatic revocation and reversion of the property donated, the rules on contract and the general rules on prescription should apply, and not Article 764 of the Civil Code. -The cause of action of herein private respondents has not yet prescribed since an action to enforce a written contract prescribes in ten (10) years. -Article 764 was intended to provide a judicial remedy in case of non-fulfillment or contravention of conditions specified in the deed of donation if and when the parties have not agreed on the automatic revocation of such donation upon the occurrence of the contingency contemplated therein. That is not the situation in the case at bar -The action filed by private respondents may not be dismissed by reason of prescription 2. No. The cause of action of private respondents is based on the alleged breach by petitioners of the resolutory condition in the deed of donation that the property donated should not be sold within a period of one hundred (100) years from the date of execution of the deed of donation. Said condition, in our opinion, constitutes an undue restriction on the rights arising from ownership of petitioners and is, therefore, contrary to public policy. -Donation, as a mode of acquiring ownership, results in an effective transfer of title over the property from the donor to the donee. Once a donation is accepted, the donee becomes the absolute owner of the property donated. Although the donor may impose certain conditions in the deed of donation, the same must not be contrary to law, morals, good customs, public order and public policy. The condition imposed in the deed of donation in the case before us constitutes a patently unreasonable and undue restriction on the right of the donee to dispose of the property donated, which right is an indispensable attribute of ownership. Such a prohibition against alienation, in order to be valid, must not be perpetual or for an unreasonable period of time -In the case at bar, we hold that the prohibition in the deed of donation against the alienation of the property for an entire century, being an unreasonable emasculation and denial of an integral attribute of ownership, should be declared as an illegal or impossible condition within the contemplation of Article 727 of the Civil Code. Consequently, as specifically stated in said statutory provision, such condition shall be considered as not imposed. No reliance may accordingly be placed on said prohibitory paragraph in the deed of donation -The validity of such prohibitory provision in the deed of donation was not specifically put in issue in the pleadings of the parties. That may be true, but such oversight or inaction does not prevent this Court from passing upon and resolving the same Disposition WHEREFORE, the judgment of respondent court is SET ASIDE and another judgment is hereby rendered DISMISSING Civil Case No. 095-84 of the Regional Trial Court, Branch XX, Imus, Cavite

Obligations and Contracts

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HERRERA V L. P. LEVISTE & CO. INC. MELENCIO-HERRERA; February 28, 1985 NATURE Petition for certiorari FACTS - Leviste had obtained a loan from the GSIS. As security therefore, Leviste mortgaged two (2) lots, one located at Paranaque and the other at Buendia with the 3-storey building thereon. - Leviste sold to Petitoner Herrera the Buendia Property on the conditions that petitioner would (1) pay Leviste; (2) assume Leviste’s indebtedness to the GSIS and (3) substitute the Paranaque property with his own within a period of six months. It was also stipulated in the Contract of Sell that “failure to comply with any of the conditions contained therein, particularly the payment of the scheduled amortizations on the dates herein specified shall render this contract automatically cancelled and any and all payments made shall be forfeited in favor of the vendor and deemed as rental and/or liquidated damages.” - Leviste then undertook to arrange for the conformity of the GSIS to petitioner’s assumption of the obligation. - Herrera took possession of the Buendia property, earned from it, but failed to fully settle its obligation in the GSIS. Due to Herrera’s default, his property was foreclosed and auctioned in favor of GSIS, the highest bidder. - Leviste assigned its right to redeem both foreclosed properties to Marcelo. Marcelo redeemed the properties and later the properties were turned over by Marcelo to Leviste upon payment of the latter. - Herrera’s request to GSIS to allow him redeem his property in installments was apparently disapproved, thus this petition. ISSUE WON the assigning of Leviste of his right to redeem the foreclosed property to Marcelo result in unjust enrichment of Leviste and patent injustice on the part of Herrera as he would not only forfeit the Buendia property to Marcelo but would also lose the amount he paid to Leviste and the GSIS HELD NO. Reasoning: 1. Neither the GSIS, Marcelo nor Leviste benefited in any way at the expense of Herrera. They paid and received what is due them. 2. Though Herrera actually suffered loss (amount he paid to Leviste, payment to GSIS less rentals received), but this loss are attributable to his fault in: (a) not being able to submit collateral to GSIS in substitution of Paranaque property, (b) not paying off the mortgage debt, and (c)not making earnest effort to redeem the property as possible redemptioner. Disposition DENIED

BOYSAW V INTERPHIL PROMOTIONS FERNAN; March 20, 1987 NATURE Appeal from the decision of the court of first instance of Rizal, Br. V.

FACTS On May 1, 1961, Boysaw and manager Ketchum signed with Interphil (represented by Sarreal) a contract to engage Flash Elorde in a boxing match at Rizal Memorial Stadium on Sept 30, 1961 or not later than 30 days shld a postponement be mutually agreed upon. Boysaw, accdg to contract, shld not engage in other bouts prior to the contest. - Interphil signed Elorde to a similar agreement. - Boysaw fought and defeated Louis Avila in Nevada. - Ketchum assigned to Amado Araneta his managerial rights, who later transferred the rights to Alfredo Yulo. - Sarreal wrote to Games and Amusement Board (GAB) regarding this switch of managers bec they weren’t notified. - GAB called for conferences and decided to schedule the Elorde-Boysaw bout on Nov 4, 1961. USA National Boxing Assoc approved. - Sarreal offered to move the fight to Oct 28 for it to be w/in the 30 day allowable postponement in the contract. Yulo refused. He was willing to approve the fight on Nov 4 provided it will be promoted by a certain Mamerto Besa. - The fight contemplated in the May 1 contract never materialized. Boysaw and Yulo sued Interphil, Sarreal and Nieto. - Boysaw was abroad when he was scheduled to take the witness stand. Lower court reset the trial. Boysaw was still absent on the later date. Court reset. On the third instance, a motion for postponement was denied. - Boysaw and Yulo moved for a new trial, but it was denied. Hence, this appeal. ISSUES 1. WON 2. WON 3. WON 4. WON 5. WON

there was a violation of the May 1 contract and if so, who was guilty there was legal ground for postponement of the fight lower court erred in refusing postponement of the trial for 3rd time lower court erred in denying new trial lower court erred in awarding appellees damages

HELD 1. Boysaw violated the contract when he fought with Avila. Civil Code provides, the power to rescind obligations is implied, in reciprocal ones, (as in this case) in case one of the obligors shld not comply w/ what is incumbent upon him. Another violation was made in the transfers of managerial rights. These were in fact novations which, to be valid, must be consented to by Interphil. When a

Obligations and Contracts contract is unlawfully novated, the aggrieved creditor may not deal with the substitute. 2. The appellees could have opted to rescind or refuse to recognize the new manager, but all they wanted was to postpone the fight owing to an injury Elorde sustained. The desire to postpone the fight is lawful and reasonable. The GAB did not act arbitrarily in acceding to the request to reset the date of the fight and Yulo himself agreed to abide by the GAB ruling. The appellees offered to move the fight w/in the 30 day period for postponement but this was refused by the appellants, notwithstanding the fact that by virtue of the appellants’ violations, they have forfeited any right to the enforcement of the contract. 3. The issue of denial of postponement of trial was raised in another petition for certiorari and prohibition. It can’t be resurrected in this case. 4. The court was correct in denying new trial. The alleged newly discovered evidence are merely clearances fr clerk of court, which can’t alter the result of the trial. 5. Because the appellants willfully refused to participate in the final hearing and refused to present documentary evidence, they prevented themselves fr objecting to or presenting proof contrary to those adduced by the appellees.

UP V DE LOS ANGELES REYES; September 29, 1970 NATURE Petition for certiorari and prohibition FACTS - Nov. 2, 1960 – UP entered into a logging agreement with ALUMCO wherein ALUMCO was granted the exclusive authority to cut, collect and remove timber from the Land Grant. The said logging agreement began on the date of agreement to Dec. 31, 1965, extendible for a period of five years. - Dec. 8, 1964 – ALUMCO accumulated unpaid dues of P219,362.94 which it failed to pay despite repeated demands. - UP sent a notice to ALUMCO, saying that the former would terminate/rescind the contract. ALUMCO then drew up an “Acknowledgment of Debt and Proposed Mariner of Payments” dated Dec. 9, 1964 and was approved by the UP president. - ALUMCO should pay its outstanding balance to UP on or before June 30, 1965 - If ALUMCO fails to do that, UP will have the right to rescind the contract without the necessity of a judicial suit and UP shall have the right to P50,000 in damages. - ALUMCO continued the logging concession but once more incurred an outstanding balance of P61,133.74 from Dec. 9, 1964 to July 15, 1965 on top of its existing outstanding obligation. - July 19, 1965 – UP rescinded the contract and filed a civil suit against ALUMCO on September 7 of the same year. - Sept. 30, 1965 – UP obtained an order which prevented ALUMCO from continuing its logging activities.

A2010 page 52 Prof. Labitag - Before the preliminary injunction was granted, UP already conducted a bidding and eventually awarded the concession to Sta. Clara Lumber. The contract with Santa Clara was signed on Feb. 16, 1966. - Feb. 25, 1966 – ALUMCO obtained an order which enjoined UP from awarding logging rights to a different concessionaire. - April 12, 1966 – UP declared in contempt of court and Sta. Clara was told to stop the logging activities. Respondents’ Comments: - Respondents blame their former manager for their financial turmoil because he did not turn over the company to ALUMCO. - It was unable to comply with the manner of payments stated in the “Acknowledgement” because the logs they harvested were rotten. - It is only upon a judicial declaration that the contract can be considered rescinded. ISSUE WON UP can treat the contract with ALUMCO as rescinded without any judicial pronouncement HELD Yes, UP can treat the contract with ALUMCO as rescinded without any judicial pronouncement. Ratio The party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. It is only the final judgment of the corresponding court that will and finally settle whether the action taken was or was not correct in law. Reasoning - The “Acknowledgement ” already indicated that should ALUMCO fail to pay its dues on time, the contract would be rescinded. - But since the decision finding UP in contempt is on appeal in the CA, the SC decided not to make any comment.

DE ERQUIAGA V CA GRIÑO-AQUINO, September 27,1989 NATURE PETITION to review the decision of the Court of Appeals. FACTS - This is a case that began in the CFI of Sorsogon in 1970. Although the decision dated September 30, 1972 of the trial court became final and executory because none of the parties appealed, its execution has taken all of the past seventeen (17) years with the end nowhere in sight. The delay in writing finis to this case is attributable to several factors, not the least of which is the intransigents of the defeated party. - Santiago de Erquiaga was the owner of 100% or 3,100 paid-up shares of stock of the Erquiaga Development Corporation (EDC) which owns the Hacienda San Jose in Irosin, Sorsogon. - On November 4,1968, he entered into an Agreement with Jose L. Reynoso to sell to the latter his 3,100 shares of EDC for P900,000 payable in installments on definite dates fixed in the contract but not later than November 30, 1968. Because

Obligations and Contracts Reynoso failed to pay the second and third installments on time, the total price of the sale was later increased to P971,371.70 payable on or before December 17, 1969. The difference of P71,371.70 represented brokers' commission and interest - As of December 17, 1968, Reynoso was able to pay the total sum of P410,000 to Erquiaga who thereupon transferred all his shares (3,100 paid up shares) in EDC to Reynoso, as well as the possession of the Hacienda San Jose, the only asset of the corporation. However, as provided in paragraph 3, subparagraph (c) of the contract to sell, Reynoso pledged 1,500 shares in favor of Erquiaga as security for the balance of his obligation. Reynoso failed to pay the balance of P561,321.70 on or before December 17, 1969, as provided in the promissory notes he delivered to Erquiaga. So, on March 2, 1970, Erquiaga, through counsel, formally informed Reynoso that he was rescinding the sale of his shares in the Erquiaga. Development Corporation. - On September 30 1972, upon the complaint filed by de Erquiaga, the CFI of Sorsogon, rendered judgment in favor of the de Erquiaga, rescinding the sale of 3,100 paid up shares of stock of the EDC to Reynoso, and ordering: a) the defendant to return and reconvey to the plaintiff the 3,100 paid up shares of stock of the EDC which now stand in his name in the books of the corporation; b) the defendant to render a full accounting of the fruits he received by virtue of said 3,100 paid up shares of stock of the EDC, as well as to return said fruits received by him to plaintiff ; c) the plaintiff to return to the defendant the amount of P100,000.00 plus legal interest from November 4,1968, and the amount of P310,000.00 plus legal interest from December 17, 1968, until paid; d) the defendant to pay the plaintiff as actual damages the amount of P12,000.00; P50,000.00 as attorney's fees; and to pay the costs of this suit and expenses of litigation. - The parties did not appeal therefrom and it became final and executory. - On March 21, 1973, the CFI of Sorsogon issued an Order, stating that, although the decision has become final and executory, the payment to the defendant of the total sum ofP410,000.00 plus the interest, damages and attorney’s fees, should be held in abeyance pending rendition of the accounting by the defendant of the fruits received by him on account of the 3,100 shares of the capital stock of EDC. Indeed it is reasonable to suppose that when such accounting is made (not only to the dividends due from the shares of stock but to the products of the hacienda which is the only asset of the EDC) certain sums may be found due to the plaintiff from the defendant which may partially or entirely off set the amount adjudged against him in the decision. - The court also held that the fruits referred to in the decision include not only the dividends received, if any, on the 3,100 shares of stocks but more particularly the products received by the defendant from the hacienda. The hacienda and the products thereon produced constitute the physical assets of the EDC represented by the shares of stock and it would be absurd to suppose that any accounting could be made by the defendant without necessarily taking into account the products received which could be the only basis for determining whether dividends are due or not on account of the investment. The hacienda and its natural fruits as represented by the shares of stock which the defendant received as manager and controlling stockholder of the EDC can not be divorced from the certificates of stock in order to determine whether the defendant has correctly reported the income of the corporation or concealed part of it for his personal advantage. The EDC and

A2010 page 53 Prof. Labitag defendant Jose Reynoso are one and the same persons as far as the obligation to account for the products of the hacienda is concerned, - In the same Order, the CFI of Sorsogon appointed a receiver upon the filing of a bond in the amount of P100,000.00 because Erquiaga has shown sufficient and justifiable ground for the appointment of a receiver' in order to preserve the Hacienda which has obviously been mismanaged by the defendant to a point where the amortization of the loan with the DBP has been neglected and the arrears in payments have risen to the amount of P503,510.70 as of October 19,1972, and there is danger that the DBP may institute foreclosure proceedings to the damage and prejudice of the plaintiff. - On April 26, 1973, defendant Reynoso died and he was substituted by his surviving spouse Valdez Vda. de Reynoso and children, who filed a petition for certiorari with a prayer for a writ of preliminary injunction seeking the annulment of the aforementioned. - On February 12, 1975, upon motion of Erquiaga, the CFl of Sorsogon issued an order, dissolving the receivership and ordering the delivery of the possession of the Hacienda San Jose to Erquiaga, the filing of bond by said Erquiaga in the amount of P410,000.00 conditioned to the payment of whatever may be due to the substituted heirs of deceased defendant Reynoso after the approval of the accounting report submitted by Reynoso. -On March 3, 1975, the CFI of Sorsogon approved the P410,000.00 bond submitted by Erquiaga and the possession, management and control of the hacienda were turned over to Erquiaga. Reynosos filed their motion for reconsideration which the CFI of Sorsogon but was denied - On October 9, 1975, the CFI of Sorsogon issued an order directing defendants to deliver to the plaintiff or his counsel within five (5) days from receipt of this order the 1,600 shares of stock of the EDC which are in their possession. Should the defendants refuse or delay in delivering such shares of stock, as prayed for, the plaintiff is authorized: a) To call and hold a special meeting of the stockholders of the EDC to elect the members of the Board of Directors; b) In the said meeting the plaintiff is authorized to vote not only the 1,500 shares of stock in his name but also the 1,600 shares in the name and possession of the defendants; c) The question as to who shall be elected members of the Board of Directors and officers of the board is left to the discretion of the plaintiff; d) The members of the board and the officers who are elected are authorized to execute any and a contracts or agreements under such conditions as may be required by the DBP for the purpose of restructuring the loan of the EDC with the said bank. - Hence, the present petition for certiorari, prohibition and mandamus with the CA instituted by the substitute defendants. - On May 31, 1976, with a view of putting an end to a much protracted litigation and for the best interests of the parties, the CA issued a writ of mandamus, commanding the respondent Judge to order (1) the Clerk of Court of the CFI of Sorsogon to execute the necessary deed of conveyance to effect the transfer of ownership of the entire 3,100 shares of stock of the EDC to Erquiaga in case of failure of petitioners to comply with the Order of October 9, 1975 insofar as the delivery of the 1,600 shares of stock to private respondent is concerned, within five (5) days from receipt hereof; and (2) upon delivery by petitioners or transfer by the Clerk of Court of said shares of stock to private respondent, as the case may be, to

Obligations and Contracts issue a writ of execution ordering private respondent to pay petitioners the amount of P410,000.00 plus interests, setting-off therewith the amount of P62,000.00 adjudged in favor of private respondent, and against petitioners' predecessor-ininterest, Jose L. Reynoso, in the same decision, as damages and attorney's fees. - As of the time the Court of Appeals rendered its decision on May 31, 1976,only the following have been done by the parties in compliance with the final judgment in the main case: 1. The Hacienda San Jose was returned to Erquiaga on March 3, 1975 upon approval of Erquiaga's surety bond of P410,000 in favor of Reynoso; 2. Reynoso has returned to Erquiaga only the pledged 1,500 shares of stock of the Erquiaga Development Corporation, instead of 3,100 shares, as ordered in paragraph (a) of the final judgment. - What the parties have not done yet are: 1. Reynoso has not returned 1,600 shares of stock to Erquiaga as ordered in paragraph (a) of the decision; 2. Reynoso has riot rendered a full accounting of the fruits he has received from Hacienda San Jose by virtue of the 3,100 shares of stock of the Erquiaga Development Corporation delivered to him under the sale, as ordered in paragraph (b) of the decision; 3. Erquiaga. has not returned the sum of P100,000 paid by Reynoso on the sale, with legal interest from November 4,1968 and P31 0,000 plus legal interest from December 17,1968, until paid (total: P410,000) as ordered in paragraph (c) of the decision; 4. Reynoso has not paid the judgment of P12,000 as actual damages in favor of Erquiaga, under paragraph (d) of the judgment; 5. Reynoso has not paid the sum of P50,000 as attorney's fees to Erquiaga under paragraph (e) of the judgment; and 6. Reynoso has not paid the costs of suit and expenses of litigation as ordered in paragraph (f) of the final judgment. ISSUE WON the decision of the Court of Appeals requiring the petitioner to pay the private respondents the sum of P410,000 plus interest, without first awaiting Reynoso's accounting of the fruits of the Hacienda San Jose, violates Article 1385 of the Civil Code HELD NO. The order of respondent Court directing Erquiaga to return the sum of P410,000 (or net P348,000 after deducting P62,000 due from Reynoso under the decision) as the price paid by Reynoso for the shares of stock, with legal rate of interest, and the return by Reynoso of Erquiaga's 3,100 shares with the fruits (construed to mean not only dividends but also fruits of the corporation's Hacienda San Jose) is in full accord with Art. 1385 of the Civil Code which provides: "ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. "Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. "In this case, indemnity for damages may be demanded from the person causing the loss."

A2010 page 54 Prof. Labitag - The Hacienda San Jose and 1,500 shares of stock have already been returned to Erquiaga. Therefore, upon the conveyance to him of the remaining 1,600 shares, Erquiaga (or his heirs) should return to Reynoso the price of P410,000 which the latter paid for those shares. Pursuant to the rescission decreed in the final judgment, there should be simultaneous mutual restitution of the principal object of the contract to sell (3,100 shares) and of the consideration paid (P410,000). This should not await the mutual restitution of the fruits, namely: the legal interest earned by Reynoso's P410,000 while in the possession of Erquiaga, and its counterpart: the fruits of Hacienda San Jose which Reynoso received from the time the hacienda was delivered to him on November 4, 1968 until it was placed under receivership by the court on March 3, 1975. - However, since Reynoso has not yet given an accounting of those fruits, it is only fair that Erquiaga's obligation to deliver to Reynosa the legal interest earned by his money, should await the rendition and approval of his accounting. To this extent, the decision of the Court of Appeals should be modified. For it would be inequitable and oppressive to require Erquiaga to pay the legal interest earned by Reynosa's P410,000 since 1968 or for the past 20 years (amounting to over P400,000 by this time) without first requiring Reynoso to account for the fruits of Erquiaga's hacienda which he allegedly squandered while it was in his possession from November 1968 up to March 3,1975. - The payment of legal interest by Erquiaga to Reynoso on the price of P410,000 paid by Reynoso for Erquiaga's 3,100 shares of stock of the EDC should be computed up to September 30,1972, the date of said judgment. Since Reynoso's judgment liability to Erquiaga for attorney's fees and damages in the total sum of P62,000 should be set off against the price of P410,000 that Erquiaga is obligated to return to Reynoso, the balance of the judgment in favor of Reynoso would be only P348,000 which should earn legal rate of interest after September 30, 1972, the date of the judgment. However, the payment of said interest by Erquiaga should await Reynoso's accounting of the fruits received by him from the Hacienda San Jose. Upon payment of P348,000 by Erquiaga to Reynoso, Erquiaga's P410,000 surety bond shall be deemed cancelled. In all other respects, the decision of the Court of Appeals in CA is affirmed.

ANGELES V CALASANZ GUTIERREZ; March 18, 1985 NATURE Appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District, Branch X, declaring the contract to sell as not having been validly cancelled and ordering the defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay P500.00 attorneys fees and costs. FACTS - On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum. The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay the balance in monthly installments of P41.20 until fully paid, the installments being

Obligations and Contracts due and payable on the 19th day of each month. The plaintiffs appellees paid the monthly installments until July 1966, when their aggregate payment already amounted to P4,533.38. On numerous occasions, the defendants-appellants accepted and received delayed installment payments from the plaintiffs-appellees. - On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting the remittance of past due accounts. On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration, of the said cancellation was denied by the defendants-appellants. The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh Judicial District Branch X to compel the defendants-appellants to execute in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they found out that they have already paid the total amount of P4,533.38 including interests, realty taxes and incidental expenses for the registration and transfer of the land. CFI rendered a ruling favor of the plaintiffs-appellees prompting Calasanz spouses to appeal. ISSUES 1. WON the contract to sell has been automatically and validly cancelled by the defendants-appellants Calasanz spouses 2. WON the contract partakes of a contract of adhesion and therefore must be strictly construed against the one who drafted it (defendants-appellants) HELD 1. NO. "The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is substantial depends upon the attendant circumstances. - The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P3,920.00 excluding the 7 percent interests, the plaintiffs-appellees had already paid an aggregate amount of P4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs-appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the defendantsappellants. - Article 1234 of the Civil Code which provides that: “If the obligation has been substantially performed in good faith, the obligor may recovers though there had been a strict and complete fulfillment, less damages suffered by the obligee." - Also militates against the unilateral act of the defendants-appellants in cancelling the contract. We agree with the observation of the lower court to the effect that: "Although the primary object of selling subdivided lots is business, yet, it cannot be denied that this subdivision is likewise purposely done to afford those landless, low income group people of realizing their dream of a little parcel of land which they can really call their own." - The defendants-appellants argue that paragraph nine of the contract clearly allows the seller to waive the observance of paragraph 6 not merely once, but for as many

A2010 page 55 Prof. Labitag times as he wishes. The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted and received delayed payments of installments, though the plaintiffs-appellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendantsappellants have waived and are now estopped from exercising their alleged right of rescission. 2. YES. We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some characteristics of a contract of adhesion. The defendantsappellants drafted and prepared the contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed their signatures and assented to the terms and conditions of the contract. They had no opportunity to question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it" basis. "x x x (W)hile generally, stipulations in a contract come about after deliberate drafting by the parties thereto, . . . there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the signing of his signature or his 'adhesion' thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this category. '(Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p. 80.)" (Italics supplied) - While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the P3,920.00 price sale. The contract to sell, being a contract of adhesion, must be construed against the party causing it. We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted against the party who drafted the same, especially where such interpretation will help effect justice to buyers who, after having invested a big amount of money, are now sought to be deprived of the same thru the prayed application of a contract clever in its phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the buyers." Disposition Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an aggregate amount of P4,533.38, the courts should only order the payment of the few remaining installments but not uphold the cancellation of the contract. Upon payment of the balance of P671.67 without any interests thereon, the defendants-appellants must immediately execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer documents as provided in paragraph 12 of the contract. The attorney's fees are justified. WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX HUNDRED SEVENTY-ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any interests.

ONG V COURT OF APPEALS YNARES-SANTIAGO; July 6, 1999

Obligations and Contracts

A2010 page 56 Prof. Labitag

NATURE Petition for review on certiorari from the judgment rendered by the Court of Appeals which, except as to the award of exemplary damages, affirmed the decision of the Regional Trial Court of Lucena City, Branch 60, setting aside the "Agreement of Purchase and Sale" entered into by herein petitioner and private respondent spouses

ISSUES 1. WON the contract entered into by the parties may be validly rescinded under Article 1191 of the New Civil Code 2. WON the parties had novated their original contract as to the time and manner of payment

FACTS - Petitioner Jaime Ong and respondent spouses Miguel K. Robles and Alejandra Robles, executed an "Agreement of Purchase and Sale" respecting two parcels of land situated at Barrio Puri, San Antonio, Quezon. - Petitioner Ong took possession of the subject parcels of land together with the piggery, building, ricemill, residential house and other improvements thereon. - Pursuant to the contract they executed, petitioner paid respondent spouses the sum of P103,499.91 by depositing it with the United Coconut Planters Bank. Subsequently, petitioner deposited sums of money with the Bank of Philippine Islands (BPI), in accordance with their stipulation that petitioner pay the loan of respondents with BPI. - To answer for his balance of P1,400,000.00 petitioner issued four (4) post-dated Metro Bank checks payable to respondent spouses. When presented for payment, however, the checks were dishonored due to insufficient funds. - Petitioner promised to replace the checks but failed to do so. To make matters worse, out of the P496,500.00 loan of respondent spouses with the Bank of the Philippine Islands, which petitioner, should have paid, petitioner only managed to dole out no more than P393,679.60. - When the bank threatened to foreclose the respondent spouses' mortgage, they sold three transformers of the rice mill worth P51,411.00 to pay off their outstanding obligation with said bank, with the knowledge and conformity of petitioner. - Petitioner, in return, voluntarily gave the spouses authority to operate the rice mill. He, however, continued to be in possession of the two parcels of land while private respondents were forced to use the rice mill for residential purposes. - Respondent spouses, sent petitioner a demand letter asking for the return of the properties. Their demand was left unheeded, so, on September 2, 1985, they filed a complaint for rescission of contract and recovery of properties with damages. - Later, while the case was still pending with the trial court, petitioner introduced major improvements on the subject properties by constructing a complete fence made of hollow blocks and expanding the piggery. These prompted the respondent spouses to ask for a writ of preliminary injunction. The trial court granted the application and enjoined petitioner from introducing improvements on the properties except for repairs. - The trial court rendered a decision, ordering that the contract entered into by plaintiff spouses and the defendant, Jaime Ong be set aside - Petitioner appealed to the Court of Appeals, which affirmed the decision of the RTC but deleted the award of exemplary damages. In affirming the decision of the trial court, the Court of Appeals noted that the failure of petitioner to completely pay the purchase price is a substantial breach of his obligation which entitles the private respondents to rescind their contract under Article 1191 of the New Civil Code. Hence, the instant petition.

HELD 1. NO. - Article 1191 of the New Civil Code refers to rescission applicable to reciprocal obligations. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should be distinguished from rescission of contracts under Article 1383. - While Article 1191 uses the term “rescission,” the original term which was used in the old Civil Code, from which the article was based, was “resolution.” Resolution is a principal action which is based on breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil Code, which expressly enumerates the rescissible contracts. - The contract entered into by the parties in the case at bar does not fall under any of those mentioned by Article 1381. Consequently, Article 1383 is inapplicable. - The "Agreement of Purchase and Sale" shows that it is in the nature of a contract to sell, as distinguished from a contract of sale. In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price. In a contract to sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. - Respondents in the case at bar bound themselves to deliver a deed of absolute sale and clean title covering the two parcels of land upon full payment by the buyer of the purchase price of P2,000,000.00. This promise to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price by the petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the condition of full payment rendered the contract to sell ineffective and without force and effect. It must be stressed that the breach contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation. Failure to pay, in this instance, is not even a breach but merely an event which prevents the vendor's obligation to convey title from acquiring binding force. Hence, the agreement of the parties may be set aside, but not because of a breach on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force. 2. NO. - Novation is never presumed, it must be proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between the old and the new obligation. Contrary to petitioner's claim, records show that the parties never even intended to novate their previous agreement.

Obligations and Contracts - In order for novation to take place, the concurrence of the following requisites is indispensable: (1) there must be a previous valid obligation; (2) there must be an agreement of the parties concerned to a new contract; (3) there must be the extinguishment of the old contract; and (4) there must be the validity of the new contract. - The aforesaid requisites are not found in the case at bench. The subsequent acts of the parties hardly demonstrate their intent to dissolve the old obligation as a consideration for the emergence of the new one. Disposition The decision rendered by the Court of Appeals was AFFIRMED with the MODIFICATION that respondent spouses were ordered to return to petitioner the sum of P48,680.00 in addition to the amounts already awarded.

VISAYAN SAWMILL COMPANY, INC. V CA DAVIDE; March 3, 1993 NATURE Petition for review on certiorari to set aside CA decision in favor of RJH Trading in an action for specific performance and damages against Visayan Sawmill Company (VSC) and Ang Tay FACTS -1 May 1983: RJH Trading and VSC entered into a sale involving scrap iron subject subject to the condition that RJH Trading will open a letter of credit in the amount of P250k in favor of VSC on or before May 15, 1983. This is evidenced by a contract entitled "Purchase and Sale of Scrap Iron" duly signed by both parties. -17 May 1983: RJH Trading sent laborers to dig and gather scrap iron at the VSC’s premises, proceeding with such endeavor until May 30 when VSC allegedly directed the laborers to desist from pursuing the work in view of an alleged case filed against RJH Trading by a certain Alberto Pursuelo. This is denied by VSC which alleges that on May 23, 1983, they sent a telegram to RJH Trading cancelling the contract of sale because of failure of the latter to comply with the conditions thereof. 24 May 1983: RJH Trading informed VSC by telegram that the letter of credit was opened May 12, 1983 at the Bank of the Philippine Islands main office in Ayala, but that the transmittal was delayed. 26 May 1983: VSC received a letter advice from BPI Dumaguete City Branch dated May 26, 1983 to the effect that on that date a letter of credit was opened in favor of petitioner Ang Tay c/o Visayan Sawmill Co. Inc., drawn on ARMACO-MARSTEEL ALLOY CORPORATION and set to expire on 24 July 1983. 19 July 1983: RJH Trading sent a series of telegrams stating that the case filed against him by Pursuelo had been dismissed and demanding that VSC comply with the deed of sale, otherwise a case will be filed against them. In reply to those telegrams, VSC’s lawyer informed RJH Trading’s lawyer that VSC is unwilling to continue with the sale due to RJH Trading's failure to comply with essential preconditions of the contract. 29 July 1983: RJH Trading filed an action for specific performance and damages with a petition for preliminary attachment. The writ of attachment was returned unserved because the VSC was no longer in operation and also because the scrap

A2010 page 57 Prof. Labitag iron as well as other pieces of machinery can no longer be found on the premises of the corporation. ISSUES 1. WON the "Purchase and Sale of Scrap Iron" contract entered into by both parties is a contract to sell (promise to sell) or a contact of sale 2. WON there was delivery of the scrap iron subject of the sale 3. WON moral and exemplary damages should lie HELD 1. What obtains in the case at bar is a mere contract to sell or promise to sell, and not a contract of sale. The contract is not one of sale where the buyer acquired ownership over the property subject to the resolutory condition that the purchase price would be paid after delivery. There was to be no actual sale until the opening, making or indorsing of the irrevocable and unconditional letter of credit. -VSC’s obligation to sell is unequivocally subject to a positive suspensive condition, i.e., RJH Trading’s making or indorsing of an irrevocable and unconditional letter of credit. VSC agreed to deliver the scrap iron only upon payment of the purchase price by means of an irrevocable and unconditional letter of credit. -Since what obtains in the case at bar is a mere promise to sell, the failure of the RJH TRading to comply with the positive suspensive condition cannot even be considered a breach – casual or serious – but simply an event that prevented the obligation of VSC to convey title from acquiring binding force. -In the instant case, not only did RJH Trading fail to open, make or indorse an irrevocable and unconditional letter of credit on or before 15 May 1983, it also violated certain stipulations of the agreement: (1) it was not opened, made or indorsed by RJH Trading but by a corporation which is not a party to the contract; (2) it was not opened with the bank agreed upon; and (3) it is not irrevocable and unconditional, for it is without recourse, it is set to expire on a specific date and it stipulates certain conditions with respect to shipment. -Consequently, the obligation of VSC to sell did not arise; it therefore cannot be compelled by specific performance to comply with its prestation. In short, Article 1191 of the Civil Code does not apply; on the contrary, pursuant to Article 1597 of the Civil Code, VSC may totally rescind, as it did in this case, the contract. 2. NONE. The permission or consent in par6 of the agreement cannot be construed as delivery of the scrap iron. -the obligation imposed in Article 1497, NCC is premised on an existing obligation to deliver the subject of the contract. In the instant case, in view of the RJH Trading’s failure to comply within the positive suspensive condition, such an obligation had not yet arisen. -RJH Trading was not placed in possession of and control over the scrap iron. Indeed, VSC demanded the fulfillment of the suspensive condition and eventually cancelled the contract. 3. NO. In contracts, moral damages may be recovered if defendants acted fraudulently and in bad faith, while exemplary damages may only be awarded if defendants acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. Moral damages are emphatically not intended to enrich a complainant at the expense of the defendant. -In the instant case, the refusal of the petitioners to deliver the scrap iron was founded on the non-fulfillment by the private respondent of a suspensive condition. There is no evidence of bad faith.

Obligations and Contracts Disposition Petition granted. CA decision reversed. Civil Case dismissed. Costs against the private respondent. Voting 8 concur, 5 disssent, 2 no part, 1 on leave.

SEPARATE OPINION ROMERO [ dissent] -the agreement in question is a contract of sale. The breach of the contract was not substantial and therefore petitioners were not justified in law to rescind the agreement. -When the parties entered into the contract entitled "Purchase and Sale of Scrap Iron" on May 1, 1983, the contract reached the stage of perfection, there being a meeting of the minds upon the object which is the subject matter of the contract and the price which is the consideration. -From the time the seller gave access to the buyer to enter his premises, manifesting no objection thereto but even sending 18 or 20 people to start the operation, he has placed the goods in the control and possession of the vendee and delivery is effected. -That payment of the price in any form was not yet effected is immaterial to the transfer of the right of ownership. In a contract of sale, the non-payment of the price is a resolutory condition which extinguishes the transaction that, for a time, existed and discharges the obligations created thereunder. -Dignos v. Court of Appeals: Absent a proviso in the contract that the title to the property is reserved in the vendor until full payment of the purchase price or a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within the fixed period, the transaction is an absolute contract of sale and not a contract to sell. -In every contract which contains reciprocal obligations, the right to rescind is always implied under Article 1191 of the Civil Code in case one of the parties fails to comply with his obligations. -Song Fo and Co. v. Hawaiian-Philippine Co.: a delay in payment for 20 days was not a violation of an essential condition of the contract which would warrant rescission for non-performance. In the instant case, the contract is bereft of any suggestion that time was of the essence; the eleven-day delay must be deemed a casual breach which cannot justify a rescission.

DEIPARINE, JR. V CA CRUZ; April 23, 1993 NATURE Petition for review of decision of CA FACTS - Spouses Carungay entered into an agreement with Deiparine for the construction of a 3-storey dormitory. The Carungays agreed to pay Php970K, and Deiparine bound himself to erect the building in strict accordance to the plans and specifications. In the General Conditions and Specifications document, the minimum acceptable compressive strength of the building was set at 3,000 psi (pounds per square inch). However, the Carungays found out that Deiparine was deviating from the plans and specifications, thus impairing the strength and safety of the building.

A2010 page 58 Prof. Labitag The spouses even issued a memorandum complaining that the construction works were faulty and done haphazardly mainly due to lax supervision coupled with inexperienced and unqualified staff. The memorandum was ignored. After several conferences, the parties agreed to conduct cylinder tests to ascertain compliance with safety standards. Carungay suggested core testing (a more reliable test of safety and strength), and although Deiparine was relunctant at first, he agreed to it and even promised that should the structure fail the test, he would shoulder the test expenses. The core test was conducted, and the building was found to be structurally defective. - The spouses then filed in the RTC for rescission of the construction contract and for damages. Deiparine alleged that RTC did not have jurisdiction for construction contracts are now cognizable by the Philippine Construction Development Board. RTC declared the contract rescinded, Deiparine to have forfeited his expenses in the construction, and ordered Deiparine to reimburse the spouses for the core testing and restore the premises to their former condition before the construction began. CA affirmed RTC. ISSUES 1. WON RTC had jurisdiction over the case 2. WON rescission is the proper remedy HELD 1. Yes. Firstly, there is no Philippine Construction Development Board in existence. There is however, a Philippine Domestic Construction Board (PDCB), but this body has jurisdiction to settle claims and disputes in the implementation of PUBLIC construction contracts (only), and thus does not have jurisdiction over private construction contracts. (Deiparine’s counsel is even held in contempt of court for changing the wording of the relevant provision in the law, making it appear that the PDCB had jurisdiction over the instant case.) 2. Yes. - The facts show that Deiparine deliberately deviated from the specifications of the Carungays (changing the minimum strength, concrete mixture, etc.), possibly to avoid additional expenses so as to avoid reduction in profits. His breach of duty constituted a substantial violation of the contract, which is correctible by judicial rescission. Particularly for reciprocal obligations, Art.1191 CC provides that: “The power to rewind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. - The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.” - Clearly, the construction contract falls squarely under the coverage of Art.1191 because it imposes upon Deiparine the obligation to build the structure and upon the Carungays the obligation to pay for the project upon its completion. - Art.1191 is not predicated on economic prejudice to one of the parties but on breach of faith by one of them that violates the reciprocity between them. The violation of reciprocity between the parties, to wit, the breach caused by Deiparine's

Obligations and Contracts failure to follow the stipulated plans and specifications, has given the Carungay spouses the right to rescind or cancel the contract. Disposition Decision affirmed.

IRINGAN V COURT OF APPEALS QUISIMBING; September 26, 2006 \ NATURE Petition assailing decision of Court of Appeals. FACTS - On March 22, 1985 private respondent Antonio Palao sold to petitioner Alfonso Iringan an undivided portion of Lot No. 992 of the Tuguegarao Cadastre, located in Poblacion of Tuguegarao. Parties executed a Deed of Sale on same date with the purchase price of P295K, payable as follows: a) P10K upon execution of this instrument, and vendor acknowledges having received the amount; b) P140K on or before April 30, 1985; c) P145K on or before December 31, 1985. - When second payment was due, Iringan paid only P40K. On July 18, 1985, Palao sent a letter to Iringan stating that he would not accept any further payment considering that Iringan failed to comply with his obligation to pay full amount of second installment. - On August 20, 1985, Iringan replied that they were not opposing the revocation of the Deed of Sale, but asked for the reimbursement of the ff: • P50K –cash received; • P3,200—geodetic engineer’s fee; • P500—attorney’s fee; • Interest on P53,700 - Palao declared he was not amenable to the reimbursements claimed by Iringan. Iringan then proposed that the P50K which he had paid Palao be reimbursed, or Palao could sell to Iringin an equivalent portion of the land. - Palao replied that Iringan’s standing obligation had reached P61,600 representing payment of arrears for rentals from October 1985 to March 1989. - Spouses Iringan alleged that the contract of sale was a consummated contract, hence the remedy for Palao was for collection of the balance of the purchase price and not rescission. In addition they declared that they had always been ready and willing to comply with their obligations to Palao. - RTC ruled in favor of Palao and affirmed the rescission of the contract. Petitioner’s Claim - That no rescission was effected simply by virtue of the letter sent by respondent stating that he considered the contract of sale rescinded. - That a judicial or notarial act is necessary before one party can unilaterally effect a rescission. Respondent’s Comment - The right to rescind is vested by law on the obligee and since petitioner did not oppose the intent to rescind the contract, Iringan in effect agreed to it and had the legal effect of a mutually agreed rescission. ISSUES

A2010 page 59 Prof. Labitag 1. WON the contract of sale was validly rescinded; 2. WON the award of moral and exemplary damages is proper. HELD 1. Ratio The contract of sale between the parties as far as the prescriptive period applies, can still be, validly rescinded. Reasoning - Art 1592 requires the rescinding party to serve judicial or notarial notice of his intent to resolve the contract. ART. 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay xxx as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. - Art 1592 “refers to a demand that the vendor makes upon the vendee for the latter to agree to the resolution of the obligation and to create no obstacle to this contractual mode of extinguishing obligations.” (Manresa) - A judicial and notarial act is necessary before a valid rescission can take place, whether or not automatic rescission has been stipulated. The phrase “even though” emphasizes that when no stipulation is found on automatic rescission, the judicial or notarial requirement still applies. ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed xxx. - The right to resolve reciprocal obligations is deemed implied in case one of the obligors shall fail to comply with what is incumbent upon him. But the right must be invoked judicially. Even if the right to rescind is made available to the injured party, the obligation is not ipso facto erased by the failure of the other party to comply with what is incumbent upon him. The party entitled to rescind should apply to the court for a decree of rescission. The operative act is the decree of the court. - However, when private respondent filed an action for Judicial Confirmation of Rescission and Damages before RTC, he complied with the requirement of the law for judicial decree of rescission in stating that its purpose is: 1) To compel appellants to formalize in public document, their mutual agreement of revocation and rescission; 2) To have judicial confirmation. 2. Ratio The award of moral and exemplary damages is proper. Reasoning Petitioner claimed he was ready to pay but never actually paid respondent, even when he knew that the reason for selling the lot was for Palao to needed to raise money to pay his SSS loan. 1) Iringan knew Palao’s reason for selling the property, and still he did not pay Palao. 2) Petitioner refused to formally execute an instrument showing their mutual agreement to rescind the contract of sale, even when it was Iringan who breached the terms of their contract, leaving Palao desperate to find other sources of funds to pay off the loan.

Obligations and Contracts 3)

Petitioner did not substantiate by clear and convincing proof that he was ready and willing to pay respondent. It was more of an afterthought to evade the consequence of the breach.

VDA. DE MISTICA V NAGUIAT PANGANIBAN; December 11, 2003 NATURE Petition for review on certiorari of the decision and resolution of the Court of Appeals FACTS - Eulalio Mistica owned a parcel of land in Meycauayan, Bulacan, a portion of it was leased by Bernardino Naguiat sometime during 1970. On 5 April 1979 they entered into a contract to sell a portion of the lot that contains around 200 sq. meters. A written document was signed by both parties acknowledging the sale for the amount of Php. 20,000 with the downpayment of Php. 2,000 and the rest of the balance of Php. 18,000 to be paid within ten (10) years. Naguiat paid the downpayment of two thousand and subsequently paid another one-thousand, however, no other payment was given thereafter the said payment in 1980. Eulalio died in 1986. In 1991 the wife of the late Eulalio filed for a complaint for rescission for the failure of Naguiat to pay the remaining balance of Php. 17,000. Naguiat responded that there was no breach of contract and that he got hold of the land through the Free Patent Title duly awarded to him by the Bureau of lands making it indefeasible and incontrovertible. Judgment was served by the CA disallowing rescission saying that the contract did not have a resolutory term and that it was highlighted by the option of paying 12 percent interest if the respondent Naguiat so chooses, Also, it was said that payment was offered during the funeral of Eulalio but was not accepted by his wife. With regards to the additional 58 sq. meters that was taken by Naguiat the CA held that since it is already included in the title then it was no longer feasible to reconvey, payment was for the said land is the only remedy for petitioner. ISSUE 1. WON the CA erred in applying Art. 1191 of the Civil Code in their ruling that there is no Breach of Contract regardless of the lapse of the stipulated period for Naguiat to pay 2. WON rescission is no longer feasible due to the certificate of title issued in favor of Naguiat 3. WON the CA erred in ruling that the 58 sq. m. portion in question is covered by a certificate of title in the names of respondents reconveyance and thus is no longer feasible and proper HELD 1. NO, it did not. - The Kasulatan was a Contract of Sale therefore absolute in nature given that there is neither a stipulation in the deed that title to the property sold is reserved to the seller until the full payment of the price nor a stipulation giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period. Art. 1191 gives the right to rescind on the violation of the reciprocity

A2010 page 60 Prof. Labitag between parties brought about by the breach of faith by one of them. It is allowed only is the breach is substantial and fundamental. The present case shows that it is not given that the 12 percent interest is in place for late payment. Petitioner also did not give any demand for the remaining balance. Petitioner also refused to accept the payment at the time of her husband’s funeral. 2. NO, it is still feasible. - The title is merely an evidence of an indefeasible and incontrovertible title to the party in favor of the person whose name appears therein. However, such title could only be modified, altered, or canceled in direct proceedings in accordance with law. Hence it is not determinable in the present civil case. 3. YES, it was a mistake. - Such ruling allows a collateral attack on the certificate of title. However, given that there is already a case filed by the State in favor of the petitioner and the heirs of her husband there is no need to pass upon the right of respondents to the registration of the subject land under their names. There is no necessity to ask for the payment of 58 sq.m. importunately included in the title.

LACHICA V ARANETA PAREDES; August 19, 1949 FACTS - Early part of July 1943 – defendant Araneta Inc. offered for sale a parcel of land with improvements thereon (TCT No. 14841, Land Records of Manila) - First week of July 1943 – RIC’s fieldman Navarro informed Sadang of the offer to sell the property by the defendant - Rizal Investment Corp (RIC; where plaintiff Sadang was at that time the Sales Manager) acted as defendant’s agent in the sale of such property - July 12, 1943 (morning) – Sadang submitted to Jose Araneta (president of defendant corp) a letter of the same date addressed by RIC to the defendant, containing a proposal of the buyer: PROPOSAL I: (Exhibit E; this was rejected by Araneta) 1) to purchase property for P 18,000 2) with a downpayment of P 7,500 3) the balance to be paid anytime bet now and within 90 days after the peace of treaty bet warring nations - July 12, 1943 (afternoon) – Sadang submitted another proposalto Jose Araneta addressed by RIC to the defendant, ctg a proposal of the buyer: PROPOSAL II (Exhibit F; Araneta told Sadang to return after 2 days – he wanted to consider other offers and to select amongst them, that with a bigger dp and w the fastest mode of settlement) 1) purchase price: P20k 2) dp: P7.5k 3) the balance to be paid anytime bet now and w/in 90 days after the peace of treaty bet warring nations - July 14, 1943- after further negotiations a letter addressed to RIC, signed by Araneta in behalf of the defendant corp (delivered to Sadang, accompanied by Flores, RIC president and mgr) RIC letter (Exhibit A; product of negotiations) 1) Purchase price: P20k 2) P8k of purchase price to be paid in cash

Obligations and Contracts 3) 12k of purchase price to be paid in installments: 4) 1k on or before Dec. 31, 1943 5) 1k on or before Dec. 31, 1944 6) 10k (balance) on or before Dec. 31, 1945 7) “this same property will be mortgaged to us to guarantee the unpaid balance; 8) And the same will bear an interest of 8% per annum; 9) Said interest to be paid in advance” - July 15, 1943 – pursuant ot par 7 of the provisions of the RIC letter, plaintiffs deposited with defendant corp a sum of P1k “as good faith money” - July 16, 1943 (noon): DEED OF SALE with MORTGAGE (Exhibit C) 1) parties: a) VENDEE–MORTGAGOR: plaintiff Lachica with concurrence of husband Sadang b) VENDOR– MORTGAGEE: Gregorio Araneta, Inc 2) conditions: a) form and manner of the payment of the P12k balance (as stated in RIC letter, Exhibit A); b) P12k balance shall bear interest of 8% per annum; c) Interest payable in advance within the first 5 days of each month; d) Interest, while not paid, shall be paid liquidated and accumulated monthly and added to the capital until the vendee has brought payments up-to-date (periods of payment agreed for the benefit of both vendor and vendee) e) Shoud the vendee be in default in payment of any amount due, either for capital or interest, the whole balance shall automatically become due and payable and the vendor shall have the right to foreclose the mortgage in its entrirety - Payments by plaintiff to defendant: P1k – July 15, 1943 (deposit) P7k – upon execution of deed of sale with mortgage P80 – Aug 16 (interest) P80 – Sep 16 (interest) P80 – Oct 18 (interest) P80 – Nov 15 (interest) P80 – Dec 16 (interest) P1k – Jan 15, 1944 (on account of principal) P73.33 – Jan 15 (interest) P73.33 – Feb 19 (interest) P73.33 – Mar 15 (interest) P5k – Apr 10 (on account of principal) P73.33 – Apr 13 (interest) P146.66 – Jun 17 (interest) P219.99 – Aug 31 (interest) - Anent the P5k (April 10, 1944) payment, Pres. Araneta wrote to Lachica, returning the check covering the payment because it is not in accord with what was stated in the contract.

A2010 page 61 Prof. Labitag - Lachica returned said check to defendant (april 12, 1944) stating that she acknowledges her being “forced to assume an oblication which I could now very well pay” - April 12, 1944 – Araneta wrote back to Lachica stating that “besides the interest you have to pay us for the balance of P6k at the rate of 8% per annum, we will also charge you the interest in accordance with the terms of the contract, which interest represents P317.80 on P5k (March 16 – Dec 30, 1944) and P320 on P4k (Dec 31, 1944 – Dec 31, 1945). - April 1944 – Lachica wrote Araneta another letter asking for the computations to be made for the period April 15, 1944 – Dec 31, 1945 (enclosing PNB check No. 37255-K for P73.33 to cover the payment of interests on P11k for March 16 – April 15, 1944) - Defendant corp thereafter applied the P5k sum to the payment of indebtedness of the plaintiff, and received payments on interest charges, so theat as of Sept 15, 1944, plaintiff’s account with the defendant under the mortgage contract was P6k unpaid balance of the principal - Sept 5, 1944 – plaintiff Sadang went to Araneta to pay the entire balance (including interest) and to ask the cancellation of the mortgage but Araneta refused to accept the tender of the payment then made - Sept 5, 1944 afternoon – Sadang said Atty Salazar to intervene in the case but Araneta persisted in his denial - Sept 6, 1944 – Atty Quisumbing, in behalf of the plaintiffs, tendered to Araneta the sum of P7,060.03 in satisfaction of the balance of the mortgage indebtedness (including interests not yet due, which the defendant would have earned were the payments made on Dec 31, 1945) but Araneta reasoned that his non-acceptance was due to the payments in accordance with the terns of the deed of sale with mortgage. - Atty Salazar gave notice of plaintiffs’ intention to consign the sum of P7,060.03 as he did in effect deposit the sum of P7,061 on Sept 6, 1944 with the Manila CFI by way of consignation, and at the same time presented the complaint - Sept 11, 1944 – counsel for plaintiffs notified the defendant in writing of the fact of consignation ISSUES 1. WON TC erred in holding that the plaintiffs had a right to pay the remaining principal of P6k (balance of theor obligation) before Dec 31, 1945 (date of maturity) – NO 2. WON TC erred in holding that the plaintiffs made a valid tender of payment to defendant – NO 3. WON TC erred in dismissing defendant’s counterclaim – NO HELD 1. Plaintiffs did not appeal form the TC findings that the Deed of Sale with Mortgage is the contract that defines the duties and obligations of the parties. - Proposal I (Exhibit E), Proposal II (Exhibit F), verbal negotiations, and RIC Letter (Exhibit A) were merely among the steps taken in the transactions leading to the formulation of the Deed of Sale with Mortgage - While the RIC letter may be a skeleton of the contract, it should be reduced into a public document sufficient in form, so that it may be recorded in the corresponding

Obligations and Contracts office of the register of deeds, for the purposes of transfer under the Torrens system - Theory of Integration of Jural Acts-a written contract merges all prior and contemporaneous negotiations in connection with the same subject, and all agreements verbal or written, made at, or before the time of the execution of that contract are to be considered as merged and integrated in the same written instrument. -was the RIC letter novated by the formal deed of sale with mortgage?-yes but this is immaterial. - While diligence and erudiation were displayed by plaintiffs counsel in their dissertation on the question of novation, the materiality of this cannot be seen in the present issues - All that may be conceded for the RIC letter is that it may explain the intention of the parties in having entered into the contract of the deed of sale with mortgage -did Sadang and Lachica sign the deed of sale with mortgage without reading the contents thereof?-no. - We believe that the plaintiffs had read the deed of sale with mortgage before signing it, considering that Sadang was a USAFFE captain and that he was a licensed real estate man and manager of RIC. - The testimony of the defendant’s attorney also attested to the fact that plaintiffs first read the said document before it was signed. - It is by legal presumption that a person takes ordinary care and precaution of his business. - It is however reasonable to conclude that although they read the contents of the Deed of Sale with Mortgage (Ex C) due to the mistaken belief that the RIC letter (Ex A) was reproduced in toto in the Deed of Sale with Mortgage, for in fact, all of the terms of both exhibits are the same except:-the omission of the word “or before” in the Deed of Sale with Mortgage for the time of the payment; insertion of the equally technical clause “these periods of payment have been agreed for the benefit of both vendor and vendee” - Plaintiffs might not have noticed the change, or if they had, they might not have attached much importance to it - If to trained legalists, such terms had caused a great divergence of opinions, how much more to an ordinary layman, unassisted by a lawyer in the execution of a contract who had not been apprised of such clause by the attorney who had prepared the Deed of Sale with Mortgage - In the realm of reality, how many persons stamp their signatures on documents because of the representations of people who command great respect, faith and truth in their fellow beings - There is a case where plaintiffs construed the contract according to the way they understood it contrary to the construction made by defendant because it did not make its position clear to the other party “on or before December 31, 1943/December 31, 1944/December 31, 1945” - This proposition was accepted by the plaintiffs as shown by the fact that they had deposited the sum of 1k with the defendant corporation as “good faith money” - The plaintiffs (as revealed by records) understood these terms as conveying the simple meaning which they plainly express that these installments might be paid on or before the due dates - As in the RIC letter (Ex A), the plaintiffs did not have intervention in the preparation of the Deed of Sale with Mortgage, and the attorney who prepared it did

A2010 page 62 Prof. Labitag not explain or call the attention of the plaintiffs to the changes made and effect of such changes - The construction by plaintiffs as to the terms of the agreement should prevail (“When the terms of an agreement have been intended in a different sense by the different parties to it, that sense to prevail against either party in which he supposed the other understood it.”) Such payment may be made on or before the date specified. - Defendant alleges that the payment must be made on the date specified and not before - Contract does not prohibit if payment is done before due dates - A term is foxed and “it is presumed to have been established for the benefit of the creditor as well as that of the debtor, unless from its tenor or other circumstances it should appear that the term was established for the benefit of one or the other.” (Art 1127, CC) - Deed of Sale with Mortgage: “these periods of payment have been agreed for the benefit of the vendor and vendee” - Mutual benefit has been interpreted to consist of the time granted a debtor to find means to comply with his obligation, and the fruits of such interest accruing to the creditor - The only impediment to a debtor making payment before the term is fixed, is the denial of the creditor of the benefits, such as the interests, accruing to the latter by reason of the fixed term (inferred from the SC decision on Villasenor v. Javellana) - To uphold defendants’ claim would be virtually compelling an obligor to assume an obligation later when he offers to, and could very well, discharge it earlier - The law should not be so interpreted as to compel a debtor to remain so, when he is in a position to release himself - The parties could not have contemplated payments of the last installments on Dec. 31, 1945, in good Philippine currency - Because at the execution of the contract, they did not expect such depreciation of currency as would render the interest on a loan barely sufficient to cover the depreciation of the military notes - If such depreciation occurred and the performance of the obligation had become more burdensome in its operation than was anticipated, then the parties should not complain - The rights of the parties must be measured by the contract which they themselves made, and the courts can not alter them because they work a hardship - The fact that the Americans were already in the Islands on December 31, 1945 and the placing of that date as the maturity date of the last installment of 10k constitutes a mere coincidence - The contentions of the appellant (Araneta et al) are not well-taken - The rule is to the effect that the benefit which would be derived by the creditor from the fixing of a term for the performance of an obligation to pay money is the stipulated interest for the prescribed term, is true under normal circumstances; - But Deed of Sale with Mortgage, executed during the Japanese occupation, the benefit which it was to derive consisted of the receipt of the last installment of 10k in good Philippine money and not in Japanese military notes - The real benefit thereto was foreseen and contemplated by the parties

Obligations and Contracts - Conditions when Deed was executed (July 16, 1943, when Japanese invaders were lords of the pacific) were comparatively normal (Ballantine schedule: 1 war peso = P.1.40 Japanese military notes) and at the time, few would prophesy in whose favor the world war would end, and when it would end - It would be presumptuous to say that on Dec. 31, 1945 (stipulated date), the American liberation would be here, and the parties fixed purposely this particular date for the payment of the last installment of 10k. - When MacArthur promised return, he did not day when - When Americans landed in Leyte on October 1944, many remarked that it was sooner than expected - Were it not for the great naval battle at the Sibuyan Sea, the wr would have been prolonged for another year more or at least beyond Dec. 31, 1945 - Benefit which defendant (Araneta) wanted to reap by the insertion of the disputed clause, was the payment of the interest, more than anything else in the letter of April 12, 1944 - the defendant meant that besides the interest that would have to be paid for the balance of 6k at the rate of 8% per annum, the defendant shall also charge the interest in accordance with the terms of the contract which interest represents: P317.80 on P5k (March 16-Dec, 30, 1944) P320 on P4k (Dec. 31, 1944-Dec. 1945) - Defendant credited the plaintiffs with the sum of 5k notwithstanding that: 1) the acceptance of the payment was made under protest; and 2) payment was made under protest - The refusal of the defendant to follow this construction on Sept. 5, 1944 (the balance of 6k and the interests of the unexpired period was tendered to it) was because the Japanese notes had been greatly depreciated - While the acceleration clause is a standard one contained in most mortgage deeds, we cannot escape the conclusion derived from the clause itself that the payments may be made by the vendee before the dates stated in the contract - The mortgage loan is payable in several installments - Deed of Sale with Mortgage Acceleration Clause: in the event of defaults in the payment of any amount due, either for capital or interest, the whole balance shall automatically become due and payable, and the vendor shall have the right the foreclosure the mortgage in its entirety - Even if it were true that the appellees could not be sure of their ability to pay during the Japanese occupation, they, as any businessman of ordinary foresight, would not have agreed to a stipulation which would prohibit them from paying, even if they had the money with which to pay the same - Contentions of appellant were not tenable - With the Deed containing an acceleration clause, it could practically be sure that the plaintiffs would pay the installments on time, since failure to do so would have made the balance due and payable - This was one contingency which said plaintiffs would have naturally desired to avoid, since it appears that their income was only P2,500 a month which was not big enough, considering its purchase power during the Japanese occupation - Appellees were precisely looking for investments and not for obligations ‘plaintiff Sadang was then engaged in real estate business Sadang’s wife was engaged in jewelry business - It could not have been probable that plaintiffs would agree to prohibition of payment

A2010 page 63 Prof. Labitag - It does not necessarily imply with appellees’ expectation to receive his back pay as a USAFFE after the liberation of the Philippines that he would have agreed to a prohibition of payment before due dates expected back pay was merely in the nature of a guaranty or inducement that even if the worst should happen, he would still be able to pay the obligation the appellees’ offers to buy (Proposals I and II) provides for the settlement of the balance: “at any time between now and within 90 days after the signing of the peace treaty between the “warring nations” this indicates the spirit guiding the parties then was the desire to permit the plaintiffs to pay within a specific period, on a specific date 2. Appellant did not refuse payment by check as tendered, for insufficiency of funds in the bank, or on account of the medium in which the payment was made, but because it believed that it could not be forced to accept the payment prior to the date specified in the contract. - General rule: an objection to tender must, to be available to the creditor, be made in good time and that the grounds for objection must be specified, and that an objection to a tender on one ground is waiver of all other objections which could have been made at that time. - To afford the debtor an opportunity to secure the specific money which the law prescribes shall be accepted in payment of debts - Non-observance of this duty would mislead the debtor and might inflict a loss which could be avoided if the creditor had objected to the form and character of the tender - By the mere fact of the drawing of the check, the plaintiffs engaged that on die presentment, they would honor it, or if dishonored, they would pay the amount thereof to the holder - Presumption that they have the sufficient funds in bank to cover the amount of said check, was not rebutted by the appellant upon which the burden of proving that ther were no funds in the bank fails - Where the great bilk of business is transacted through the medium of checks, drafts, and negotiable instruments, “it would be a dangerous rule, which could be easily turned into an engine of oppression that a tender of payment especially where it involves the maturing of obligations not then due (as in this case), could not be made by check where no question was raised as to the value of the check tendered - It is ordinarily required of one to whom payment is offered in the form of check that he make his objection at the time, to the offer of a check, instead of an offer of payment - Payment by check has been generally so recognized as acceptable in business transactions that it has been held that omissions to make objection to a check as tender of payment is regarded as waiver of right to demand payment in money - Allegation, that apellees did not introduce to show that the president of the appellant corp to whom the alleged tender was made was not shown so as to have given him the opportunity to object, runs counter to the facts of the case as found by the TC - If the president had not seen the check, he could not have refused the tender of payment

Obligations and Contracts - And as stated, the president reasoned tat his non-acceptance was due to his opinion that such payment was not in accordance with the terms of the deed of sale. 3) In view of the positive resolution of the second issue, dismissal of counterclaim was fully justified Moreover, as state by the appellant, this assignment of error is made as a mere formality. Disposition The judgment appealed from is affirmed, with costs against the defendant-appellant.

PONCE DE LEON V SYJUCO, INC. BAUTISTA; October 31, 1951 NATURE This is an appeal from a decision of the Court of First Instance of Manila absolving defendant Santiago Syjuco, Inc. of the complaint and condemning the plaintiff to pay to said defendant the sum of P18,000 as principal and the further sum of P5,130 as interest thereon from August 6, 1944, to May 5, 1949, or a total of P23,130, Philippine currency, with interest thereon at the rate of 6% per annum from May 6, 1949, until said amount is paid in full, with costs against the plaintiff. FACTS - The appellee, Philippine National Bank, was the owner of 2 parcels of land known as Lots 871 and 872 of the Murcia Cadastre, Negros Occidental. - On March 9, 1936 the Bank executed a contract to sell the said properties to the plaintiff, Jose Ponce de Leon, the total price of P26,300, payable as follows: (a) P2,630 upon the execution of the said deed; and (b) the balance P23,670 in 10 annual amortizations, the first amortization to fall due one year after the execution of the said contract. - On May 5, 1944, Ponce de Leon obtained a loan from Santiago Syjuco, Inc., in the amount of P200,000 in Japanese Military Notes, payable within one (1) year from May 5, 1948. - It was also provided in said promissory note that the promisor (Ponce de Leon) could not pay, and the payee (Syjuco) could not demand, the payment of said note except within the aforementioned period. - To secure the payment of said obligation, Ponce de Leon mortgaged in favor of Syjuco the parcels of land which he agreed to purchase from the Bank. - On May 6, 1944, Ponce de Leon paid the Bank of the balance of the purchase price amounting to P23,670 in Japanese Military notes and, on the same date, the Bank executed in favor of Ponce de Leon, a deed of absolute sale of the aforementioned parcels of land. - The deed of sale executed by the Bank in favor of Ponce de Leon and the deed of mortgage executed by Ponce de Leon in favor of Syjuco were registered in the Office of the Register of Deeds. - On July 31, 1944, Ponce de Leon obtained an additional loan from Syjuco in the amount of P16,000 in Japanese Military notes and executed in the latter's favor a promissory note of the same tenor as the one had previously executed.

A2010 page 64 Prof. Labitag - On several occasions in October, 1944, Ponce de Leon tendered to Syjuco the amount of P254,880 in Japanese military notes in full payment of his indebtedness to Syjuco. - The amount tendered included not only the interest up to the time of the tender, but also all the interest up to May 5, 1948. - Ponce de Leon also wrote to Syjuco a letter tendering the payment of his indebtedness, including interests up to May 5, 1948. - Syjuco, however, refused to accept such repeated tenders. - During the trial, Ponce de Leon explained that he wanted to settle his obligations because as a member of the guerilla forces he was being hunted by the Japanese and he was afraid of getting caught and killed. - In view of Syjuco's refusal to accept the payment tendered by Ponce de Leon, the latter deposited with the Clerk of Court P254,880. - On November 4, 1944, Ponce de Leon filed a complaint consigning the amount so deposited to Syjuco. - On May 15, 1946, Ponce de Leon filed a petition for the reconstitution of Transfer Certificates of Title Nos. 17175 and 17176 in the name of the Bank. - The Court ordered the reconstitution of said titles. - On August 16, 1946, Ponce de Leon obtained an overdraft account from the Bank in an amount not exceeding P135,000. - Ponce de Leon executed a mortgage of the two parcels of land covered by the reconstituted Transfer Certificates of Title in favor of the said Bank to secure the payment of any amount, which he may obtain from the Bank under the aforementioned overdraft account. - The overdraft account was granted by the Bank to Ponce de Leon in good faith, said Bank not being aware of the mortgage which Ponce de Leon had executed in favor of Syjuco and the said Bank believing that the said properties had no lien or encumbrance. - Syjuco claimed that Ponce de Leon had violated the conditions of the mortgage which Ponce de Leon had executed in its favor. - Syjuco prayed that the mortgage executed by Ponce de Leon in favor of the Bank be declared null and void. - The lower court absolved Syjuco from Ponce de Leon's complaint and condemned Ponce de Leon to pay Syjuco the total amount of P23,130 with interest at the legal rate from May 6, 1949, until fully paid. ISSUES 1. WON the plaintiff is justified in accelerating the payment of the obligation because he was willing to pay the interests due up to the date of its maturity 2. WON the consignation made by the plaintiff is valid in the light of the law and the stipulations agreed upon in the two promissory notes signed by the plaintiff HELD 1. NO. Ratio - In the 2 promissory notes, it was expressly agreed upon that plaintiff shall pay the loans "within one year from May 5, 1948, . . . peso for peso in the coin or currency of the Government of the Philippines that, at the time of payment above fixed it is the legal tender for public and private debts, with interests at the rate of 6% per annum, payable in advance for the first year, and semi-annually in advance during the succeeding years".

Obligations and Contracts - And that, the period above set forth having been established for the mutual benefit of the debtor and creditor, the former binds himself to pay, and the latter not to demand the payment of, the loans except within the period above mentioned. Reasoning - Under the law, in a monetary obligation contracted with a period, the presumption is that the same is deemed constituted in favor of both the creditor and the debtor unless from its tenor or from other circumstances it appears that the period has been established for the benefit of either one of them (Art. 1127, Civil Code). - Here no such exception or circumstance exists. - It may be argued that the creditor has nothing to lose but everything to gain by the acceleration of payment of the obligation because the debtor has offered to pay all the interests up to the date it would become due. - But this argument loses force if we consider that the payment of interests is not the only reason why a creditor cannot be forced to accept payment contrary to the stipulation. - There are other reasons why this cannot be done. One of them is that the creditor may want to keep his money invested safely instead of having it in his hands, or that the creditor by fixing a period protects himself against sudden decline in the purchasing power of the currency loaned specially at a time when there are many factors that influence the fluctuation of the currency. - Unless the creditor consents, the debtor has no right to accelerate the time of payment even if the premature tender included an offer to pay principal and interest in full. 2. NO. The consignation is invalid, and, therefore, did not have the effect of relieving him of his obligation. Ratio - In order that consignation may be effective, the debtor must first comply with certain requirements. - In the instant case, while it is admitted a debt existed, that the consignation was made because of the refusal of the creditor to accept it, and the filing of the complaint to compel its acceptance on the part of the creditor can be considered sufficient notice of the consignation to the creditor, nevertheless, it appears that at least two of the requirements have not been complied with. - The plaintiff, before making the consignation with the clerk of the court, failed to give previous notice thereof to the person interested in the performance of the obligation. - More importantly, the obligation was not yet due and demandable when the money was consigned, because the obligation was to be paid within one year after May 5, 1948. - The consignation was made before this period matured. - The failure of these two requirements is enough ground to render the consignation ineffective. Reasoning In order that cogsignation may be effective, the debtor must first comply with certain requirements prescribed by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation had been made bacause the creditor to whom tender of payment was made refused to accept it, or

A2010 page 65 Prof. Labitag because he was absent for incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation have been given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art 1178, Civil Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code).

BUCE V CA DAVIDE; May 12, 2000 NATURE Petition to review the decision of the CA. FACTS - Petitioner leased a 56-square meter parcel of land. The lease contract was for a period of fifteen years to commence on 1 June 1979 and to end on 1 June 1994 "subject to renewal for another ten (10) years, under the same terms and conditions." -Petitioner then constructed a building and paid the required monthly rental of P200. Private respondents, later demanded a gradual increase in the rental until it reached P400 in 1985. For July and August 1991, petitioner paid private respondents P1,000 as monthly rental. - On 6 December 1991, private respondents' counsel wrote petitioner informing her of the increase in the rent to P1,576.58 effective January 1992 pursuant to the provisions of the Rent Control Law. Petitioner, however, tendered checks dated 5 October 1991, 5 November 1991, 5 December 1991, 5 January 1992, 31 May 1992, and 2 January 1993 for only P400 each. Private respondents refused to accept the same. - Petitioner filed with the RTC of Manila a complaint for specific performance with prayer for consignation, that private respondents be ordered to accept the rentals in accordance with the lease contract and to respect the lease of fifteen years, which was renewable for another ten years, at the rate of P200 a month. - In their Answer, private respondents countered that petitioner had already paid the monthly rent of P1,000 for July and August 1991. Under Republic Act No. 877, as amended, rental payments should already be P1,576.5810 per month; hence, they were justified in refusing the checks for P400 that petitioner tendered. Moreover, the phrase in the lease contract authorizing renewal for another ten years does not mean automatic renewal; rather, it contemplates a mutual agreement between the parties. - During the pendency of the controversy, counsel for private respondents wrote petitioner reminding her that the contract expired on 1 June 1994 and demanding that she pay the rentals in arrears, which then amounted to P33,000. - RTC declared the lease contract automatically renewed for ten years and considered as evidence thereof (a) the stipulations in the contract giving the lessee the right to construct buildings and improvements and (b) the filing by petitioner of the complaint almost one year before the expiration of the initial term of fifteen years. It then fixed the monthly rent at P400 from 1 June 1990 to 1 June 1994; P1,000 from 1 June 1994 until 1 June 1999; and P1,500 for the rest of the period or

Obligations and Contracts from 1 June 2000 to 1 June 2004, reasoning that the continuous increase of rent from P200 to P250 then P300, P400 and finally P1,000 caused "an inevitable novation of their contract." - Court of Appeals reversed the decision of the RTC, and ordered petitioner to immediately vacate the leased premises on the ground that the contract expired on 1 June 1994 without being renewed and to pay the rental arrearages at the rate of P1,000 monthly. - The Court of Appeals denied petitioner's motion for reconsideration. Hence this petition. ISSUES 1. WON the parties intended an automatic renewal of the lease contract when they agreed that the lease shall be for a period of fifteen years "subject to renewal for another ten (10) years." 2. WON CA erred in ordering the petitioner to vacate the land upon expiration of the lease contract. HELD 1. NO. - Rules of interpretation: the literal meaning of the stipulations shall control if the terms of the contract are clear and leave no doubt upon the intention of the contracting parties. However, if the terms of the agreement are ambiguous resort is made to contract interpretation which is the determination of the meaning attached to written or spoken words that make the contract. Also, to ascertain the true intention of the parties, their actions, subsequent or contemporaneous, must be principally considered. - *The phrase "subject to renewal for another ten (10) years" is unclear on whether the parties contemplated an automatic renewal or extension of the term, or just an option to renew the contract; and if what exists is the latter, who may exercise the same or for whose benefit it was stipulated. -There is nothing in the stipulations in the contract and the parties' actuation that shows that the parties intended an automatic renewal or extension of the term of the contract. The fact that the lessee was allowed to introduce improvements on the property is not indicative of the intention of the lessors to automatically extend the contract. Neither the filing of the complaint a year before the expiration of the 15-year term nor private respondents' acceptance of the increased rentals has any bearing on the intention of the parties regarding renewal. It must be recalled that the filing of the complaint was even spawned by private respondents' refusal to accept the payment of monthly rental in the amount of only P400. - Fernandez v. CA is applicable to the case at bar, thus: In a reciprocal contract like a lease, the period must be deemed to have been agreed upon for the benefit of both parties, absent language showing that the term was deliberately set for the benefit of the lessee or lessor alone. It was not specifically indicated who may exercise the option to renew, neither was it stated that the option was given for the benefit of herein petitioner. Thus, pursuant to the Fernandez ruling and Article 1196 of the Civil Code, the period of the lease contract is deemed to have been set for the benefit of both parties. Renewal of the contract may be had only upon their mutual agreement or at the will of both of them. Since the private respondents were not amenable to a renewal, they cannot be compelled to execute a new contract when the old contract terminated on 1 June 1994. It is the owner-lessor's prerogative to terminate the lease at its expiration.

A2010 page 66 Prof. Labitag 2. YES - After the lease terminated on 1 June 1994 without any agreement for renewal being reached, petitioner became subject to ejectment from the premises. It must be noted, however, that private respondents did not include in their Answer with Counterclaim a prayer for the restoration of possession of the leased premises. Neither did they file with the proper Metropolitan Trial Court an unlawful detainer suit against petitioner after the expiration of the lease contact. Moreover, the issues agreed upon by the parties to be resolved during the pre-trial were the correct interpretation of the contract and the validity of private respondents' refusal to accept petitioner's payment of P400 as monthly rental. The issue of possession of the leased premises was not among the issues agreed upon by the parties or threshed out before the court a quo. Neither was it raised by private respondents on appeal. T he Court of Appeals went beyond the bounds of its authority when after interpreting the questioned provision of the lease contract in favor of the private respondents it proceeded to order petitioner to vacate the subject premises. Disposition Petition is partly GRANTED. The decision of the CA is REVERSED insofar as it ordered the petitioner to immediately vacate the leased premises, without prejudice, however, to the filing by the private respondents of an action for the recovery of possession of the subject property.

ARANETA V PHILIPPINE SUGAR ESTATES DEVT. CO. REYES; May 31, 1967 NATURE Review by certiorari FACTS - On July 28, 1950, J. M. Tuason & Co. sold a portion of its land in Sta. Mesa Heights Subdivision, Q.C. to Philippine Sugar Estates Development (PSED) Co., Ltd., through Gregorio Araneta Inc. (GAI) for P 430, 514. In their contract of purchase and sale, the parties stipulated that the buyer will build the Sto. Domingo Church and the seller will construct streets on the NE and NW and SW sides of the land. - The buyer PSED finished the construction of the church but the seller, GAI, was unable to finish the construction of the street in the NE side because a certain third party, Manuel Abundo, who has been physically occupying a middle part thereof, refused to vacate the same. - On May 7, 1958, PSED filed a complaint against J. M. Tuason & Co, Inc., and GAI in CFI Manila, seeking to compel the latter to comply with their obligation and/or to pay damages in the event they failed or refused to perform the obligation. - Both defendants answered the complaint with GAI setting up the principal defense that the action was premature since its obligation to construct the streets in question was without a definite period which needs to be fixed first by the court in a proper suit for that purpose before a complaint for specific performance will prosper. - After the lower court dismissed the complaint, PSED moved for a reconsideration praying that the court fix a period within which defendants will comply with their obligation to construct the streets in question. Defendant GAI opposed said motion, maintaining that plaintiff's complaint did not expressly or impliedly allege and pray for the fixing of a period to comply with its obligation and that the evidence presented at the trial was insufficient to warrant the fixing of such a period.

Obligations and Contracts - On July 16, 1960, the lower court amended its previous decision and, after finding that the proven facts warrant the fixing of such a period, rendered judgment giving defendant GAI, a period of Two (2) Years from notice within which to comply with its obligation under the contract: to construct streets on the NE, NW and SW sides of the land sold to plaintiff so that the same would be a block surrounded by streets on all four sides. - The case was brought to the CA by GAI and the same rendered a decision affirming that of the lower court’s, setting a period of 2 years from finality of judgment to comply with the obligation. GAI now resorted to the SC, hence this petition for certiorari ISSUE WON the trial court and the CA erred in setting the date for the performance of the contract HELD The decision of the CA, affirming that of the CFI is legally untenable. It does not lie within them to fix the period of the performance of the obligation. Ratio Article 1197 is predicated on the absence of any period fixed by the parties and it involves a two-step process. The court must first determine that “the obligation does not fix a period” (or that the period is made to depend upon the will of the debtor), “but from the nature and the circumstances it can be inferred that a period was intended.” The court must then proceed to the second step, and decide what period was “probably contemplated by the parties.” Reasoning - In no case can it be logically held that the intervention of the court to fix the period for performance was warranted, for even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (the trial court's amended decision nowhere declared any such fact) still, the complaint not having sought that the court should set a period, the court could not proceed to do so unless the complaint was first amended; for the original decision is clear that the complaint proceeded on the theory that the period for performance had elapsed already, that the contract had been breached and defendant was already answerable in damages. - Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is defective in that no basis is stated to support the conclusion that the period should be set at two years after finality of the judgment. The last paragraph of Article 1197 is clear that the period can not be set arbitrarily. The law expressly prescribes that “the courts shall determine such period as may under the circumstance have been probably contemplated by the parties.” All that the trial court's amended decision says is that “the proven facts precisely warrant the fixing of such a period,” which is insufficient to explain how the twoyear period given to petitioner herein was arrived at. The trial court appears to have pulled the two-year period set in its decision out of thin air, no circumstances are mentioned to support it. - The contract shows that the parties were fully aware that the land described was occupied by squatters. As the parties must have known that they could not take the law into their own hands and must resort to legal processes in evicting the squatters, they must have realized that the duration of the suits to be brought would not be under their control nor could the same be determined in advance. The

A2010 page 67 Prof. Labitag conclusion is thus forced that the parties must have intended to defer the performance of the obligations under the contract until the squatters were duly evicted, as contended by the petitioner GAI. - CA objected to this conclusion that it would render the date of performance indefinite. However, this very indefiniteness is what explains why the agreement did not specify any exact periods or dates of performance. It follows that there is no justification in law, for the setting of the date of performance at any other time than that of the eviction of the squatters occupying the land in question; and in not so holding, both the trial court and the CA committed reversible error. In addition, the case against one of the squatters, Abundo, was still pending in the CA when its decision in this case was rendered. Disposition decision appealed from is reversed. The time for the performance of the obligations of petitioner Gregorio Araneta, Inc. fixed at the date that all the squatters on affected areas are finally evicted.

YNCHAUSTI V YULO ARELLANO; March 25, 1914 NATURE Suit for the recovery of a certain sum of money, the balance of a current account opened by the firm of Inchausti & Company with Teodoro Yulo and after his death continued with his widow and children, whose principal representative is Gregorio Yulo. FACTS - Teodoro Yulo, a property owner of Iloilo, for the exploitation and cultivation of his numerous haciendas in the province of Negros Occidental, had been borrowing money from the firm of Inchausti & Company under specific conditions. - On April 9, 1903, Teodoro Yulo died testate and for the execution of the provisions of his will he had appointed as administrators his widow and five of his sons, Gregorio Yulo being one of the latter. He thus left a widow, Gregoria Regalado, who died on October 22d of the following year, 1904, there remaining of the marriage the following legitimate children: Pedro, Francisco, Teodoro, Manuel, Gregorio, Mariano, Carmen, Concepción, and Jose Yulo y Regalado. Of these children Concepcion and Jose were minors, while Teodoro was mentally incompetent. His widow and children held the conjugal property in common and at the death of Gregoria, these children preserved the same relations under the name of Hijos de T. Yulo continuing their current account with Inchausti & Company until said balance amounted to P200,000 upon which the creditor firm tried to obtain security for the payment of the money. - Gregorio Yulo, for himself and in representation of his brothers Pedro, Francisco, Manuel, Mariano, and Carmen, executed on June 26, 1908, a notarial document whereby all admitted their indebtedness to Inchausti & Company in the sum of P203,221.27 and, in order to secure the same with interest thereon at 10% per annum, they especially mortgaged an undivided six-ninth of their 38 rural properties, their remaining urban properties, lorchas, and family credits which were listed, obligating themselves to make a formal inventory and to describe in due form all the said properties, as well as to cure all the defects which might prevent the inscription of the said instrument in the registry of property and finally to extend by the necessary formalities the mortgage over the remaining three-ninths

Obligations and Contracts part of all the property and rights belonging to their other brothers, the incompetent Teodoro, and the minors Concepcion and Jose. - On January 11, 1909, Gregorio Yulo in representation of Hijos de T. Yulo answered a letter of the firm of Inchausti & Company in these terms: "With your favor of the 2d inst. we have received an abstract of our current account with your important firm, closed on the 31st of last December, with which we desire to express our entire conformity as also with the balance in your favor of P271,863.12." On July 17, 1909, Inchausti & Company informed Hijos de T. Yulo of the reduction of the said balance to P253,445.42, with which balance Hijos de T. Yulo expressed its conformity by means of a letter of the 19th of the same month and year. Regarding this conformity a new document evidencing the mortgage credit was formalized. - On August 12, 1909, Gregorio Yulo, for himself and in representation of his brother Manuel Yulo, and in their own behalf Pedro Yulo, Francisco Yulo, Carmen Yulo, and Concepcion Yulo, the latter being of age at the time, ratified all the contents of the prior document of June 26, 1908, severally and jointly acknowledged and admitted their indebtedness to Inchausti & Company for the net amount of P253,445.42 which they obligated themselves to pay, with interest at 10% per annum, in five installments at the rate of P50,000, except the last, this being P53,445.42, beginning June 30, 1910, continuing successively on the 30th of each June until the last payment on June 30, 1914. - Among other clauses, they expressly stipulated the following: - The default in payment of any of the installments or the noncompliance of any of the other obligations will result in the maturity of all the said installments, and Inchausti & Co. may exercise at once all the rights and actions in order to obtain the immediate and total payment of our debt. - All the obligations will be understood as having been contracted in solidum by all the Yulos, brothers and sisters. - The instrument shall be confirmed and ratified in all its parts, within the present week, by their brother Mariano Yulo y Regalado who resides in Bacolod, otherwise it will not be binding on Inchausti & Co. who can make use of their rights to demand and obtain the immediate payment of their credit without any further extension or delay. - This instrument was neither ratified nor confirmed by Mariano Yulo. - The Yulos did not pay the first installment of the obligation. - On March 27, 1911, Inchausti & Co. brought an ordinary action in the CFI of Iloilo, against Gregorio Yulo for the payment of the balance of P253,445.42 with interest at 10% per annum, on that date aggregating to P42,944.76. - On May 12, 1911, Francisco, Manuel, and Carmen Yulo y Regalado executed in favor of Inchausti & Co. another notarial instrument in recognition of the debt and the obligation of payment in the following terms: "First, the debt is reduced for them to P225,000; second, the interest is likewise reduced for them to 6% per annum, from March 15, 1911; third, the installments are increased to 8, the first of P20,000, beginning on June 30, 1911, and the rest of P30,000 each on the same date of each successive year until the total obligation shall be finally and satisfactorily paid on June 30, 1919," it being expressly agreed "that if any of the partial payments specified in the foregoing clause be not paid at its maturity, the amount of the said partial payment together with its interest shall bear interest at the rate of 15% per annum from the date of said maturity, without the necessity of demand until its complete payment;" that "if during two consecutive years the partial payments agreed upon be not made, they shall lose the right to make use of the period granted to them for the payment of the debt or the part thereof which

A2010 page 68 Prof. Labitag remains unpaid, and that Messrs. Inchausti & Co. may consider the total obligation due and demandable, and proceed to collect the same together with the interest for the delay above stipulated through all legal means." - Stipulated in addition: Inchausti & Co. should include in their suit brought in the CFI of Iloilo against Gregorio Yulo, his brother and joint co-obligee, Pedro Yulo, and they will procure by all legal means and in the least time possible a judgment in their favor against Gregorio and Pedro, sentencing the latter to pay the total amount of the obligation acknowledged by them in the instrument of August 12, 1909; with the understanding that if they should deem it convenient for their interests, Francisco, Manuel, and Carmen Yulo may appoint an attorney to cooperate with the lawyers of Inchausti & Co. in the proceedings of the said case. [Traitors!] - On July 10, 1911, Gregorio Yulo answered the complaint and alleged as defenses: first, that an accumulation of interest had taken place and that compound interest was asked for in Philippine currency at par with Mexican; second, that in the instrument of August 12, 1909, two conditions were agreed one of which ought to be approved by the CFI, and the other ratified and confirmed by the other brother Mariano Yulo, neither of which was complied with; third, that with regard to the same debt claims were presented before the commissioners in the special proceedings over the inheritances of Teodoro Yulo and Gregoria Regalado, though later they were dismissed, pending the present suit; fourth and finally, that the instrument of August 12, 1909, was novated by that of May 12, 1911, executed by Manuel, Francisco and Carmen Yulo. - The CFI of Iloilo decided the case "in favor of the defendant without prejudice to the plaintiff's bringing within the proper time another suit for his proportional part of the joint debt, and that the plaintiff pay the costs." ISSUES 1. WON the plaintiff can sue Gregorio Yulo alone, there being other obligors 2. WON plaintiff lost this right by the fact of its having agreed with the other obligors in the reduction of the debt, the proroguing of the obligation and the extension of the time for payment, in accordance with the instrument of May 12, 1911 3. WON the contract with the three obligors constitutes a novation of that of August 12, 1999, entered into with the six debtors who assumed the payment of P253,445.42 4. If in the negative, WON it has any effect in the action brought and in this present suit HELD 1. Yes. Ratio The debtors having obligated themselves in solidum, the creditor can bring its action in toto against any one of them. Reasoning This was surely the purpose in demanding that the obligation contracted should be solidary having in mind the principle of law that, "when the obligation is constituted as a conjoint and solidary obligation each one of the debtors is bound to perform in full the undertaking which is the subject matter of such obligation." 2. No. Ratio Solidarity may exist even though the debtors are not bound in the same manner and for the same periods and under the same conditions.

Obligations and Contracts Reasoning Even though the creditor may have stipulated with some of the solidary debtors diverse installments and conditions, as in this case, Inchausti & Co. did with its debtors Manuel, Francisco, and Carmen Yulo through the instrument of May 12, 1911, this does not lead to the conclusion that the solidarity stipulated in the instrument of August 12, 1909 is broken. 3. No. Ratio An obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified, by changing only the term of payment and adding other obligations not incompatible with the old one. Reasoning The contract of May 12, 1911, does not constitute a novation of the former one of August 12, 1909, with respect to the other debtors who executed this contract, or more concretely, with respect to the defendant Gregorio Yulo: First, because in order that an obligation may be extinguished by another which substitutes it, it is necessary that it should be so expressly declared or that the old and the new be incompatible in all points; and the instrument of May 12, 1911, far from expressly declaring that the obligation of the three who executed it substitutes the former signed by Gregorio Yulo and the other debtors, expressly and clearly stated that the said obligation of Gregorio Yulo to pay the P253,445.42 sued for exists, stipulating that the suit must continue its course and, if necessary, these three parties would cooperate in order that the action against Gregorio Yulo might prosper. It is always necessary to state that it is the intention of the contracting parties to extinguish the former obligation by the new one. There exist no incompatibility between the old and the new obligation. 4. Yes. [Total amount and amount due and demandable, respectively.] Ratio The obligation being solidary, the remission of any part of the debt made by a creditor in favor of one or more of the solidary debtors necessarily benefits the others. Reasoning Although the contract of May 12, 1911, has not novated that of August 12, 1909, it has affected that contract and the outcome of the suit brought against Gregorio Yulo alone for the sum of P253,445.42; and in consequence, the amount stated in the contract of August 12, 1909, cannot be recovered but only that stated in the contract of May 12, 1911, by virtue of the remission granted to the three of the solidary debtors in this instrument. He cannot be ordered to pay the P253,445.42 claimed from him in the suit here, because he has been benefited by the remission made by the plaintiff to three of his co-debtors. Consequently, the debt is reduced to 225,000 pesos. 5. Ratio Before the performance of the condition, or before the execution of a term which affects one debtor alone, proceedings may be had against him or against any of the others for the remainder which may be already demandable but the conditional obligation or that which has not yet matured cannot be demanded from any one of them. Reasoning If the efficacy of the later instrument over the former touching the amount of the debt had been recognized, should such efficacy not likewise be recognized concerning the maturity of the same? If Francisco, Manuel, and Carmen had been included in the suit, they could have alleged the defense of the nonmaturity of the installments since the first installment did not mature until June 30, 1912, and without doubt the defense would have prospered. Cannot this defense of the pre-maturity of the action, which is implied in the last special defense set up in the answer of the defendant Gregorio Yulo be made available to him in this proceeding? Gregorio Yulo cannot allege as a defense to the action that it is

A2010 page 69 Prof. Labitag premature. When the suit was brought on March 27, 1911, the first installment of the obligation had already matured as of June 30, 1910, and not having been paid, the whole debt had become mature, according to the express agreement of the parties, independently of the resolutory condition which gave the creditor the right to demand the immediate payment of the whole debt upon the expiration of the stipulated term of one week allowed to secure from Mariano Yulo the ratification and confirmation of the contract of August 12, 1909. Neither could he invoke a like exception for the shares of his solidary co-debtors Pedro and Concepcion Yulo, they being in identical condition as he. But as regards Francisco, Manuel, and Carmen Yulo, none of the installments payable under their obligation, contracted later, had as yet matured. The first payment, as already stated, was to mature on June 30, 1912. This exception or personal defense of Francisco, Manuel, and Carmen Yulo "as to that part of the debt for which they were responsible" can be set up by Gregorio Yulo as a partial defense to the action. The part of the debt for which these three are responsible is three-sixths of P225,000 or P112,500, so that Gregorio Yulo may claim that, even acknowledging that the debt for which he is liable is P225,000, nevertheless not all of it can now be demanded of him, for that part of it which pertained to his co-debtors is not yet due, a state of affairs which not only prevents any action against the persons who were granted the term which has not yet matured, but also against the other solidary debtors who being ordered to pay could not now sue for a contribution, and for this reason the action will be only as to the P112,500. Against the propriety and legality of a judgment against Gregorio Yulo for this sum, to wit, the three-sixths part of the debt which forms the subject matter of the suit, we do not think that there was any reason or argument offered which sustains an opinion that for the present it is not proper to order him to pay all or part of the debt, the object of the action. Disposition We therefore sentence the defendant Gregorio Yulo to pay the plaintiff Inchausti & Co. P112,500, with the interest stipulated in the instrument of May 12, 1911, from March 15, 1911, and the legal interest on this interest due, from the time that it was claimed, without any special finding as to costs. The judgment appealed from is reversed. So ordered.

LAFARGE CEMENT PHLIPPINES, INC. V CONTINENTAL CEMENT CORPORATION PANGANIBAN; November 23, 2004 FACTS - 8/11/98: in a Letter of Intent (LOI), petitioner Lafarge—on behalf of its affiliates including Petitioner Luzon Continental Land Corp. (LCLC) agreed to purchase respondent Continental Cement Corporation (CCC). At the time, CCC were respondents in a pending case against Asset Privatization Trust (APT) [GR No. 119712] - 10/21/98: both parties entered into a Sale and Purchase Agreement (SPA) - under clause 2 of the SPA the parties allegedly agreed to retain P117,020,846.84 from the purchase price to be deposited in an interest-bearing account in Citibank NY for payment to APT - petitioners allegedly refused to pay APT; fearing foreclosure, CCC filed w/ the RTC of QC a “Complaint w/ Application for Preliminary Attachment” against petitioners [CC No. Q-00-41103] - petitioners moved to dismiss the complaint on the grounds of forum-shopping

Obligations and Contracts - to avoid being in default, petitioners filed their Answer and Compulsory Counterclaims ad Cautelam against Respondent CCC, its majority stockholder Gregory Lim, and its corporate secretary Anthony Mariano, praying for the sums of P2.7M as actual damages, P100M as exemplary damages, P100M as moral damages and P5M as atty’s fees and costs each - petitioners allege that the Writ of Attachment was procured in bad faith - the RTC dismissed petitioners’ counterclaims since the counterclaims against Lim and Mariano were not compulsory, the Sapugay ruling wasn’t applicable, and the Counterclaims violated procedural rules on the proper joinder of causes of action - acting for MFR, the TC admitted an error in pronouncing the counterclaim was against Lim and Mariano only; the RTC clarified that it impleaded the two, even if CCC was included then ISSUES 1. WON the RTC gravely erred in ruling that (a) petitioners’ counterclaims against Respondents Lim and Mariano are not compulsory; (b) Sapugay v. Court of Appeals is inapplicable here; and (c) petitioners violated the rule on joinder of causes of action.” 2. WON the RTC gravely erred in refusing to rule that Respondent CCC has no personality to move to dismiss petitioners’ compulsory counterclaims on Respondents Lim and Mariano’s behalf. HELD 1. 1(a) Sec 6 Rule 6 of the Rules of Civil Procedure states: “(A counterclaim is) any claim which a defending party may have against an opposing party” - they are generally allowed to facilitate the disposition of the whole controversy in a single action - a counterclaim is permissive if it is not necessarily connected w/ the subject matter of the opposing party’s claim and may be filed in a separate case - a counterclaim is compulsory if it arises out of the transaction or occurrence of the subject matter - compulsory counterclaims must be set up in the same action or be barred forever NAMARCO v. Fed of United Namarco Dist. lays down the criteria to determine counterclaim type: 1. are issues of fact and law raised by the claim and by the counterclaim largely the same?

2.

Would res judicata bar a subsequent suit on defendant’s claim, absent the compulsory counterclaim rule? 3. Will substantially the same evidence support or refute plaintiff’s claim/counterclaim? 4. Is there any logical relation b/w the claim and counterclaim? - a positive answer to all four would indicate it is compulsory - The court then examined petitioners’ basis for their allegations using these criteria: 1. Lim and Mariano were responsible for making the bad faith decisions and causing the plaintiff to file this baseless suit and procure an unwarranted Writ of Attachment 2. They are also the plaintiff’s co-joint tortfeasors in the commission of complained acts and as such are jointly and solidarily liable

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Lim and Mariano should pay P5M each for counsel fees and litigation costs. For damage to the reputations of defendants, a sum of P100M each for moral damages is prayed for - since the alleged damages suffered by the defendants were a consequence of petiitioners’ actions, the requisites for compulsory counterclaim are met. 1(b) In the Sugapay case, Respondent Mobil Phils. filed an action for replevin against the sps Sugapay. The sps failed to keep their end of a Dealership Agreement; they answered with a counterclaim alleging the plaintiff refused to give them gas. They still had a post surety bond w/c they couldn’t claim w/o the Agreement, later discovering Mobil and its manager, Cardenas, intended all along to award the agreement to Island Air Product Corp. - an issue raised was whether Cardenas, who wasn’t a party to the original action, could be impleaded in the counterclaim - the Court held that new parties may be brought to the action to accord complete relief to all in a single action and to avert a multiplicity of suits - respondent CCC contends that as a corporation with a separate legal personality, it has the juridical capacity to indemnify petitioners even w/o Lim and Mariano; the Court however points out that the inclusion of the co-defendants is not premised on the assumption of CCC’s financial ability but on the allegations of fraud and bad faith against them, making them indispensable parties - in Sagupay, Cardenas was furnished w/ a copy of the Answer w/ Counterclaim but he did not respond. Hence the Court considered his apparent acquiescence, despite his active participation in the trial, and adopted as his answer the allegations in the complaint, and is deemed to have submitted to the TC’s jurisdiction. Sec 12 Rule 6 of the Rules of Court state that “only upon service of summons can the TC obtain jurisdiction over them.” - in the instant case, no records show that Lim and Mariano are aware of the counterclaims or that they actively participated in the proceeding. So unlike in Sagupay, the court cannot be said to have treated CCC’s motion to dismiss as having been filed on their behalf 1(c) CCC claims that while the original complaint was a suit for specific performance based on a contract, the counterclaim was based on tortuous acts of the respondents, violating the rule on joinder of causes of action as stated in S5 Rule 2 and S6 Rule 3 of the Rules of Civil Procedure -these rules are founded on practicality—dismissing the counterclaim for damages would likely only lead to a separate case re-filing it. Nevertheless, the two are indispensable parties 2. Art 1207 of the Civil Code provides that obligations are generally considered joint unless expressly stated or when the nature of the obligation requires solidarity. Obligations arising from tort, however, are always solidary. -the fact that liability sought against CCC is for specific performance and tort, while those against Lim and Mariano are based solely on tort does not negate the solidary nature of their liablility -petitioners’ assertion that CCC cannot move to dismiss the counterclaims on the grounds that pertain solely to its individual co-debtors cannot be given credence. A1222 of the CC provides:

Obligations and Contracts “With respect to (defenses) w/c personally belong to the others, (a solidary debtor) may avail himself thereof as regards that part of the debt for w/c the latter are responsible.” -the filing of CCC of a motion to dismiss on grounds pertaining to its individual debtors is allowed -however, it lacks the requisite authority to file this motion on the behalf of Lim and Mariano—thus, unless expressly adopted by Lim and Mariano, the motion has no force and effect as to them Disposition Wherefore, the petition is granted and the assailed orders reversed. The court of origin is ordered to take cognizance of the counterclaims and to cause the service of summons on Lim and Mariano

JAUCIAN V QUEROL STREET; October 5, 1918

FACTS - In October, 1908, Lino Dayandante and Hermenegilda Rogero executed a private writing in which they acknowledged themselves to be indebted to Roman Jaucian in the sum of P13,332.33. - Hermenegilda Rogero signed this document in the capacity of surety for Lino Dayandante; but as clearly appears from the instrument itself both debtors bound themselves jointly and severally to the creditor - There is nothing in the terms of the obligation itself to show that the relation between the two debtors was that of principal and surety. - In November, 1909, Hermenegilda Rogero brought an action in the Court of First Instance of Albay against Jaucian, asking that the document in question be cancelled as to her upon the ground that her signature was obtained by means of fraud. - In his answer to the complaint, Jaucian, by way of cross-complaint, asked for judgment against the plaintiff for the amount due upon the obligation, which appears to have matured at that time. - While the case was pending in the Supreme Court, Hermenegilda Rogero died and the administrator of her estate was substituted as the party plaintiff and appellee. On November 25, 1913, the Supreme Court rendered its decision reversing the judgment of the trial court and holding that the disputed claim was valid. - During the pendency of the appeal, proceedings were had in the Court of First Instance of Albay for the administration of the estate of Hermenegilda Rogero; Francisco Querol was named administrator; and a committee was appointed to pass upon claims against the estate. - This committee made its report on September 3, 1912. On March 24, 1914, or about a year and a half after the filing of the report of the committee on claims against the Rogero estate, Jaucian entered an appearance in the estate proceedings, and filed with the court a petition in which he averred the execution of the document of October, 1908, by the deceased, the failure of her coöbligor Dayandante, to pay any part of the debt, except P100 received from him in March, 1914, and the complete insolvency of Dayandante (note: 1918 pa ito kaya mahal na ang P100). - Upon these facts Jaucian prayed the court for an order directing the administrator of the Rogero estate to pay him the principal sum plus its interest. - CFI held that: "Hermenegilda Rogero having been simply surety for Lino Dayandante, the administrator has a right to require that Roman Jaucian produce a

A2010 page 71 Prof. Labitag judgment for his claim against Lino Dayandante, in order that the said administrator may be subrogated to the rights of Jaucian against Dayandante. The simple affidavit of the principal debtor that he had no property except P100 worth of property which he has ceded to the creditor is not sufficient for the court to order the surety to pay the debt of the principal. When this action shall have been taken against Lino Dayandante and an execution returned 'no effects,' then the claim of Jaucian against the estate will be ordered paid or any balance that may be due to him." - Acting upon the suggestions contained in this order Jaucian brought an action against Dayandante and recovered a judgment against him for the full amount of the obligation evidenced by the document of October 24, 1908. Execution was issued upon this judgment, but was returned by the sheriff wholly unsatisfied, no property of the judgment debtor having been found. - On October 28, 1914, counsel for Jaucian filed another petition in the proceedings upon the estate of Hermenegilda Rogero, in which they averred, upon the grounds last stated, that Dayandante was insolvent, and renewed the prayer of the original petition. It was contended that the court, by, its order of April 13, 1914, had "admitted the claim" of Dayadante that he had no property left. - CFI, after hearing argument, entered an order refusing to grant Jaucian's petition. To this ruling the appellant excepted and moved for a rehearing. On December 11, 1914, the judge a quo entered an order denying the rehearing and setting forth at length, the reasons upon which he based his denial of the petition. - In this court the appellant contends that the trial judge erred (a) in refusing to give effect to the order made by the CFI, dated April 13, 1914; and (b), in refusing to order the administrator of the estate of Hermenegilda, Rogero to pay the appellant the amount demanded by him. The contention with regard to the order of April 13, 1914, is that no appeal from it having been taken, it became final. - An examination of the order in question, however, leads us to conclude that it was not a final order, and therefore it was not appealable. - In effect, it held that whatever rights Jaucian might have against the estate of Rogero were subject to the performance of a condition precedent, namely, that he should first exhaust this remedy against Dayandante. - The court regarded Dayandante as the principal debtor, and the deceased as a surety only liable for such deficiency as might result after the exhaustion of the assets of the principal coöbligor. - The pivotal fact upon which the order was based was the failure of appellant to show that he had exhausted his remedy against Dayandante, and this failure the court regarded as a complete bar to the granting of the petition at that time. ISSUES 1. WON the order of April 13, 1914 is final and hence appealable 2. WON Hermenegilda Rogero’s liability was that of principal, though she was only a surety for Lino Dayadante HELD 1. NO - The court made no order requiring the appellee to make any payment whatever, and that part of the opinion, upon which the order was based, which contained statements of what the court intended to do when the petition should be renewed, was not binding upon him or any other judge by whom he might be succeeded.

Obligations and Contracts - It is quite clear from what we have stated that the order of April 13, 1914, required no action by the administrator at that time, was not final, and therefore was not appealable. - We therefore conclude that no rights were conferred by the said order of April 13, 1914, and that it did not preclude the administrator from making opposition to the petition of the appellant when it was renewed. 2. YES - Bearing in mind that the deceased Hermenegilda Rogero, though surety for Lino Dayandante, was nevertheless bound jointly and severally with him in the obligation, the following provisions of the Old Civil Code are here pertinent: - Art 1822: “By security a person binds himself to pay or perform for a third person in case the latter should fail to do so. If the surety binds himself jointly with the principal debtor, the provisions of section fourth, chapter third, title first, of this book shall be observed." - Art 1144: "A creditor may sue any of the joint and several (solidarios) debtors or all of them simultaneously. The claims instituted against one shall not be an obstacle for those that may be later presented against the others, as long as it does not appear that the debt has been collected in full." - Art 1830: "The surety can not be compelled to pay a creditor until application has been previously made of all the property of the debtor." - Art 1831: "This application can not take place… …. If he has jointly bound himself with the debtor " - The foregoing articles of the Civil Code make it clear that Hermenegilda Rogero was liable absolutely and unconditionally for the full amount of the obligation without any right to demand the exhaustion of the property of the principal debtor previous to its payment. Her position so far as the creditor was concerned was exactly the same as if she had been the principal debtor. - The absolute character of the claim and the duty of the committee to have allowed it in full as such against the estate of Hermenegilda Rogero had it been opportunely presented and found to be a valid claim is further established by section 698 of the Code of Civil Procedure, which provides: • "When two or more persons are indebted on a joint contract, or upon a judgment founded on a joint contract, and either of them dies, his estate shall be liable therefor, and it shall be allowed by the committee as if the contract had been with him alone or the judgment against him alone. But the estate shall have the right to recover contribution from the other joint debtor." - In the official Spanish translation of the Code of Civil Procedure, the sense of the English word "joint," as used in two places in the section above quoted, is rendered by the Spanish word "mancomunadamente." This is incorrect. The sense of the word "joint," as here used, would be more properly translated in Spanish by the word "solidaria," though even this word does not express the meaning of the English with entire fidelity. • The section quoted, it should be explained, was originally taken by the author, or compiler, of our Code of Civil Procedure from the statutes of the State of Vermont; and the word "joint" is, therefore, here used in the sense which attaches to it in the common law. - In the common law system there is no conception of obligation corresponding to the divisible joint obligation contemplated in article 1138 of the Civil Code.

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This article declares in effect that, if not otherwise expressly determined, every obligation in which there are numerous debtors--we here ignore plurality of creditors-shall be considered divided into as many parts as there are debtors, and each part shall be deemed to be the distinct obligation of one of the respective debtors. - In other words, the obligation is apportionable among the debtors; and in case of the simple joint contract neither debtor can be required to satisfy more than his aliquot part. - In the common law system every debtor in a joint obligation is liable in solidum for the whole; and the only legal peculiarity worthy of remark concerning the "joint" contract at common law is that the creditor is required to sue all the debtors at once. - To avoid the inconvenience of this procedural requirement and to permit the creditor in a joint contract to do what the creditor in a solidary obligation can do under article 1144 of the Civil Code, it is not unusual for the parties to a common law contract to stipulate that the debtors shall be "jointly and severally" liable. - The force of this expression is to enable the creditor to sue any one of the debtors or all together at pleasure. - The joint contract of the common law is and always has been a solidary obligation so far as the extent of the debtor's liability is concerned. - Hermenegilda Rogero, and her estate after her death, was liable absolutely for the whole obligation, under section 698 of the Code of Civil Procedure; and if the claim had been duly presented to the committee for allowance it should have been allowed, just as if the contract had been with her alone. - There is no force, in our judgment, in the contention that the pendency of the suit was a bar to the presentation of the claim against the estate. The fact that the lower court had declared the document void was not conclusive, as its judgment was not final, and even assuming that if the claim had been presented to the committee for allowance, it would have been rejected and that the decision of the committee would have been sustained by the CFI, the rights of the creditor could have been protected by an appeal from that decision. - Furthermore, even had Jaucian, in his appeal from the decision in the cancellation suit, endeavored to obtain judgment on his crosscomplaint, the death of the debtor would probably have required the discontinuance of the action presented by crosscomplaint or counterclaim, under section 703. - The only concrete illustration of a contingent claim given in section 746 of the Code of Civil Procedure is the case where a person is liable as surety for the deceased, that is, where the principal debtor is dead. In the case before us, it is the surety who is dead. In the illustration put in section 746-where the principal debtor is dead and the surety is the party preferring the claim against the estate of the deceased-it is obvious that the surety has no claim against the estate of the principal debtor, unless he himself satisfies the obligation in whole or in part upon which both are bound. It is at this moment, and not before, that the obligation of the principal to indemnify the surety arises (art. 1838, Civil Code); and by virtue of such payment the surety is subrogated in all the rights which the creditor had against the debtor (art. 1839, same Code). - It is possible that "contingency," in the cases contemplated in section 746, may depend upon other facts than those which relate to the creation or inception of liability. It may be, for instance, that the circumstance that a liability is subsidiary,

Obligations and Contracts and the execution has to be postponed after judgment is obtained until the exhaustion of the assets of the person or entity primarily liable, makes a claim contingent within the meaning of said section; but upon this point it is unnecessary to express an opinion. It is enough to say that where, as in the case now before us, liability extends unconditionally to the entire amount stated in the obligation, or, in other words, where the debtor is liable in solidum and without postponement of execution, the liability is not contingent but absolute. Disposition For the reasons stated, the decision of the trial court denying appellant's petition and his motion for a new trial was correct and must be affirmed.

RFC V CA CONCEPCION; May 14, 1954 FACTS - On October 31, 1951, Jesus Anduiza and Quintana Cano executed a promissory note binding themselves to jointly and severally pay the Agricultural and Industrial Bank P13800, with an interest rate of 6%. Payments are to be paid in 10 years in annual installments. - Anduiza and Cano failed to pay the yearly amortizations that fall due on October 1942 and 1943. When Estelito Madrid, who temporarily lived in Anduiza’s house during the Japanese occupation, learned this, he offered to pay for Anduiza’s indebtedness. He paid P10000 on Oct 23, 1944. - Alleging that Anduiza failed to pay, the Agricultural and Industrial Bank (now RFC) refused to cancel his mortgage. Madrid then instituted an action with the CFI to declare that Anduiza’s indebtedness of P16,425.17 has been paid, to release the properties mortgaged to RFC, and condemning Anduiza to pay him P16, 425.17. - RFC replied that the loan was not due and demandable in Oct 1944. They also claim that they only held Madrid’s payment as deposit pending proof of approval by Anduiza and that if Anduiza refused to approve, the deposit will be annulled. - Anduiza claims that the payment made by Madrid was without his knowledge or consent and that RFC did not accept such payment. - The trial court rendered in favor of RFC, but the CA reversed. ISSUE WON Madrid’s payment should be accepted HELD YES. - Art 1158 of the Spanish CC states that payment can be made by any person, whether approved by the debtor or not. One who makes the payment may recover from the debtor, unless it was made against his express will. In the latter case, he can recover only in so far as the payment was beneficial to him. - Madrid then is entitled to pay the obligation irrespective of Anduiza’s will or the bank. - The payments were not made against the objection of either Anduiza or Madrid. Although Anduiza later on questioned such payments, he impliedly acquiesced therin, for he joined Madrid in his appeal from the decision of the CFI.

A2010 page 73 Prof. Labitag - Similarly, the receipts issued by the bank acknowledging said payments without qualification belie its alleged objection thereto. The bank as a creditor had no other right than to exact payment. - Two consequences flow from the foregoing: o Good or bad faith is immaterial to the issue. o The bank cannot invoke the provision that the payor may opnly recover from the debtor insofar as the payment has been beneficial to him. This defense may be availed only by the debtor. For the debtor to avail of this defense, he must oppose the payments before or at the time the same were made. Disposition Decision affirmed

QUIOMBING V CA CRUZ; August 30, 1990 NATURE PETITION to review the decision of the Court of Appeals FACTS - This case stemmed from a "Construction and Service Agreement"1 concluded on August 30, 1983, whereby Nicencio Tan Quiombing and Dante Biscocho, as the 1st Party, jointly and severally bound themselves to construct a house for private respondents Francisco and Manuelita Saligo, as the 2nd Party, for the contract price of P137,940.00, which the latter agreed to pay. On October 10, 1984, Quiombing and Manuelita Saligo entered into a second written agreement under which the latter acknowledged the completion of the house and undertook to pay the balance of the contract price in the manner prescribed in the said second agreement. - On November 19,1984, Manuelita Saligo signed a promissory note for P1 25,363.50 representing the amount still due from her and her husband, payable on or before December 31, 1984, to Nicencio Tan Quiombing. On October 9,1986, Quiombing filed a complaint for recovery of the said amount, plus charges and interests, which the private respondents had acknowledged and promised to pay but had not, despite repeated demands. Instead of filing an answer, the defendants moved to dismiss the complaint on February 4, 1987, contending that Biscocho was an indispensable party and therefore should have been included as a co-plaintiff. The motion was initially denied but was subsequently reconsidered and granted by the trial court. The complaint was dismissed, but without prejudice to the filing of an amended complaint to include the other solidary creditor as a co-plaintiff. - Rather than file the amended complaint, Quiombing chose to appeal the order of dismissal to the respondent court, where he argued that as a solidary creditor he could act by himself alone in the enforcement of his claim against the private respondents. Moreover, the amounts due were payable only to him under the second agreement, where Biscocho was not mentioned at all. ISSUES WON one of the two solidary creditors may sue by himself alone for the recovery of amounts due to both of them without joining the other creditor as a co-plaintiff. HELD 1. Ratio YES. The essence of active solidarity consists in the authority of each

Obligations and Contracts creditor to claim and enforce the rights of all, with the resulting obligation of paying every one what belongs to him; there is no merger, much less a renunciation of rights, but only mutual representation. Inclusion of Biscocho as a coplaintiff, when Quiombing was competent to sue by himself alone, would be a useless formality. Reasoning The question of who should sue the private respondents was a personal issue between Quiombing and Biscocho in which the spouses Saligo had no right to interfere. It did not matter who as between them filed the complaint because the private respondents were liable to either of the two as a solidary creditor for the full amount of the debt. Full satisfaction of a judgment obtained against them by Quiombing would discharge their obligation to Biscocho, and vice versa. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. Suing for the recovery of the contract price is certainly a useful act that Quiombing could do by himself alone. Parenthetically, it must be observed that the complaint having been filed by the petitioner, whatever amount is awarded against the debtor must be paid exclusively to him, pursuant to Article 1214. This provision states that "the debtor may pay any of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by any one of them, payment should be made to him." If Quiombing eventually collects the amount due from the solidary debtors, Biscocho may later claim his share thereof, but that decision is for him alone to make. It will affect only the petitioner as the other solidary creditor and not the private respondents, who have absolutely nothing to do with this matter. As far as they are concerned, payment of the judgment debt to the complainant will be considered payment to the other solidary creditor even if the latter was not a party to the suit. Disposition Petition granted. Decision set aside.

INCIONG V COURT OF APPEALS ROMERO; June 26, 1996 NATURE A petition for review on certiorari of the decision of the Court of Appeals affirming that of the Regional Trial Court of Misamis Oriental, which disposed of Civil Case No. 10507 for collection of a sum of money and damages FACTS - RTC ordered Inciong to pay Phil. Bank of Communications (PBC) P50,000 w/ interest. His liability resulted from the promissory note (P50,000) w/c he signed w/ Rene Naybe and Gregorio Pantanosas on Feb. 3, 1983 holding themselves jointly and severally liable to private respondent PBC. The promissory note was due on May 5, 1983 - The due date expired w/o the promissors having paid their obligation - PBC sent telegrams demanding payment and a final letter demand through registered mail - Since both obligors did not respond, PBC filed a complaint for collection of the money against the 3 obligors. - Only the summon addressed to Inciong was served bec. Naybe was already in Saudi Arabia Petitioners' Claim

A2010 page 74 Prof. Labitag - In his answer, petitioner Inciong alleged that he was persuaded by Campos to act as a co-maker in the said loan in order to go into the falcate log operations business - Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos at his office. He affixed his signature thereto but in one copy, he indicated that he bound himself only for the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that he was made liable for the amount of P50,000.00. - Annexed to the present petition is a copy of an affidavit executed by Gregorio Pantanosas, who is a co-maker in the promissory note. In the affidavit, he supports the allegation that they were induced to sign the promissory note on the belief that it was only for P5,000. - He also said that the promissory note should be declared bull and void also on the grounds that: o The promissory note was signed outside the premises of the bank o The loan was incurred only for the purpose of buying a chainsaw worth 5thousand; even a new chain saw would cost only P27k o Petitioner and Pantanosas were not present during the time the loan was released ISSUE WON the promissory note should be declared null and void HELD No - The stated points are factual, which should be determined in the lower court not in this court - By alleging fraud in his answer, petitioner was in the right direction towards proving that he agreed to a loan of P5k only. However, fraud must be established by clear and convincing evidence. Mere preponderance of evidence is not adequate - On his argument that since the complaint against Naybe was dismissed, his should be dismissed as well: It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a guarantor. While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor - A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation. - Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally liable, any one, some or all of them may be proceeded against for the entire obligation - The choice is left to the solidary creditor to determine against whom he will enforce collection. Ratio - as a general rule, bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence - (Tolentino) explains: "A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary codebtor, and a fiador in solidum (surely). The later, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by

Obligations and Contracts reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, title 1, Book IV of the Civil Code. - when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part of the debt. There is a solidarily liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires.

ALIPIO V COURT OF APPEALS MENDOZA; September 29, 2000 FACTS - Respondent Romeo Jaring[1] was the lessee of a 14.5 hectare fishpond in Barito, Mabuco, Hermosa, Bataan. The lease was for a period of five years ending on September 12, 1990. On June 19, 1987, he subleased the fishpond, for the remaining period of his lease, to the spouses Placido and Purita Alipio and the spouses Bienvenido and Remedios Manuel. The stipulated amount of rent was P485,600.00, payable in two installments of P300,000.00 and P185,600.00, with the second installment falling due on June 30, 1989. Each of the four sublessees signed the contract. - The first installment was duly paid but only a portion of the second was paid leaving a balance of P50,600. despite demand, the balance remained unpaid thus Jaring sued for the collection of such amount. In the alternative, he prayed for the recission of the sublease contract should the defendants fail to pay the balance. Purita Alipio on the other hand moved to dismiss the case on the ground that her husband, Placido Alipio, had passed away on December 1, 1988.[2] She based her action on Rule 3, §21 of the 1964 Rules of Court which is now amended and reads: - When the action is for the recovery of money arising from contract, express or implied, and the defendant dies before entry of final judgment in the court in which the action was pending at the time of such death, it shall not be dismissed but shall instead be allowed to continue until entry of final judgment. A favorable judgment obtained by the plaintiff therein shall be enforced in the manner especially provided in these Rules for prosecuting claims against the estate of a deceased person. - Trial court denied motion on the ground that since petitioner was herself a party to the sublease contract, she could be independently impleaded in the suit together with the Manuel spouses and that the death of her husband merely resulted in his exclusion from the case. CA also denied appeal stating: - The rule that an action for recovery of money, debt or interest thereon must be dismissed when the defendant dies before final judgment in the regional trial court, does not apply where there are other defendants against whom the action should be maintained as mentioned in Climaco v. Siy Uy wherein the court stated that “the deceased Siy Uy was not the only defendant, Manuel Co was also named defendant in the complaint… the remaining defendants cannot avoid the action by claiming that the death of one of the parties to the contract has totally extinguished their obligation”. This was also the case in Imperial Insurance, Inc. v. David. In the said case, the court stated that “. Under the law and well settled jurisprudence, when the obligation is a solidary one, the creditor may bring his action in toto against any of the debtors obligated in solidum. Thus, if husband and wife bound themselves jointly and severally, in case of his death, her liability is independent of and separate from her husband's; she may be sued for the whole debt and it would be

A2010 page 75 Prof. Labitag error to hold that the claim against her as well as the claim against her husband should be made in the decedent's estate.” - Petitioner filed a motion for reconsideration but it was also denied, hence this appeal. ISSUE WON a creditor can sue the surviving spouse for the collection of a debt which is owed by the conjugal partnership of gains, or whether such claim must be filed in proceedings for the settlement of the estate of the decedent HELD NO. Ratio We hold that a creditor cannot sue the surviving spouse of a decedent in an ordinary proceeding for the collection of a sum of money chargeable against the conjugal partnership and that the proper remedy is for him to file a claim in the settlement of estate of the decedent. - Petitioner's husband died on December 1, 1988, more than ten months before private respondent filed the collection suit in the trial court on October 13, 1989. This case thus falls outside of the ambit of Rule 3, §21 which deals with dismissals of collection suits because of the death of the defendant during the pendency of the case and the subsequent procedure to be undertaken by the plaintiff. The issue to be resolved is whether private respondent can, in the first place, file this case against petitioner. Under the law, the Alipios' obligation (and also that of the Manuels) is one which is chargeable against their conjugal partnership. When petitioner's husband died, their conjugal partnership was automatically dissolved[9] and debts chargeable against it are to be paid in the settlement of estate proceedings in accordance with Rule 73, §2 which states: “…When the marriage is dissolved by the death of the husband or wife, the community property shall be inventoried, administered, and liquidated, and the debts thereof paid, in the testate or intestate proceedings of the deceased spouse.” - As held in Calma v. Tañedo, after the death of either of the spouses, no complaint for the collection of indebtedness chargeable against the conjugal partnership can be brought against the surviving spouse. Instead, the claim must be made in the proceedings for the liquidation and settlement of the conjugal property. The reason for this is that upon the death of one spouse, the powers of administration of the surviving spouse ceases and is passed to the administrator appointed by the court having jurisdiction over the settlement of estate proceedings. Indeed, the surviving spouse is not even a de facto administrator such that conveyances made by him of any property belonging to the partnership prior to the liquidation of the mass of conjugal partnership property is void - This ruling was reaffirmed in the recent case of Ventura v. Militante wherein it was stated that “the conjugal partnership terminates upon the death of either spouse. . . . Where a complaint is brought against the surviving spouse for the recovery of an indebtedness chargeable against said conjugal [partnership], any judgment obtained thereby is void. The proper action should be in the form of a claim to be filed in the testate or intestate proceedings of the deceased spouse.” Furthermore, the Court said that the cases cited by the CA were based on facts different from the case at hand. - It must be noted that for marriages governed by the rules of conjugal partnership of gains, an obligation entered into by the husband and wife is chargeable against

Obligations and Contracts their conjugal partnership and it is the partnership which is primarily bound for its repayment. Thus, when the spouses are sued for the enforcement of an obligation entered into by them, they are being impleaded in their capacity as representatives of the conjugal partnership and not as independent debtors such that the concept of joint or solidary liability, as between them, does not apply Disposition complaint against petitioner is dismissed without prejudice to the filing of a claim by private respondent in the proceedings for the settlement of estate of Placido Alipio for the collection of the share of the Alipio spouses in the unpaid balance of the rent in the amount of P25,300.00.”

MAKATI DEVELOPMENT CORP. V EMPIRE INSURANCE CO. CASTRO; June 30, 1967 NATURE Appeal from CFI Rizal FACTS - March 31, 1959, the Makati Development Corporation sold to Rodolfo P. Andal a lot, with an area of 1,589 square meters, in the Urdaneta Village, Makati, Rizal, for P55,615 - so-called "special condition" contained in the deed of sale provides that > vendee/s shall commence the construction and complete at least 50% of residence on the property within two (2) years from March 31, 1959 to the satisfaction of the vendor > in the event of failure to do so, the bond which the vendee/s has delivered to the vendor in the sum of P11,123.00 and evidenced by a cash bond receipt dated April 10, 1959 will be forfeited in favor of the vendor by the mere fact of failure of the vendee/s to comply with this special condition > to insure faithful compliance with this "condition," Andal gave a surety bond on April 10, 1959 wherein he, as principal, and the Empire Insurance Company, as surety, jointly and severally, undertook to pay the MDC the sum of P12,000 in case Andal failed to comply with his obligation under the deed of sale - January 18, 1960 - Andal did not build his house and instead sold the lot to Juan Carlos - April 3, 1961 - neither Andal nor Juan Carlos built a house on the lot within the stipulated period, the MDC, three days after the lapse of the two-year period, sent a notice of claim to the EIC advising Andal's failure to comply with his undertaking. - May 22, 1961 - Demand for the payment of P12,000 was refused and MDC filed a complaint in CFI Rizal against the Empire Insurance Co. to recover on the bond in the full amount, plus attorney's fees - EIC filed answer with a third-party complaint against Andal and asked that the complaint be dismissed or, in the event of a judgment in favor of the MDC, judgment be rendered ordering Andal to pay the EIC whatever amount it maybe ordered to pay the MDC plus interest at 12%, from the date of the filing of the complaint until said amount was fully reimbursed and attorney's fees. - Andal admitted the execution of the bond but alleged that the "special condition" was contrary to law, morals and public policy. Also, Juan Carlos had started construction of a house on the lot.

A2010 page 76 Prof. Labitag - March 28, 1963 - CFI sentenced EIC to pay the MDC P1,500, with interest at 12% from the time of filing of the complaint until the amount was fully paid, and to pay attorney's fees of P500, and the proportionate part of the costs and EIC is to be reimbursed by Andal. MDC appealed directly to SC. ISSUES 1. WON the reduction in liability for breach in the undertaking is valid 2. WON partial performance by Carlos can be considered partial performance by Andal HELD 1. YES - CFI noted that reducing liability from P12,000 (as stipulated in the bond) to P1,500 that > While no building has actually been constructed before the target date which is March 31, 1961, it is also a fact that even before that date the entire area was already fenced with a stone wall and building materials were also stocked in the premises which are clear indicia of the owner's desire to construct his house with the least possible delay > incontrovertible testimony of Juan Carlos is that by the end of April 1961, he had finished very much more than the required 50% stipulated in the contract of sale TF there was only really a little delay - MDC argues that Andal became liable for full amount of his bond upon his failure to build a house within the two-year period and that the trial court was without authority to reduce Andal's liability on the basis of Carlos' construction of a house a month after the stipulated period because there was no privity of contract between Carlos and the Makati Development Corporation. But, to begin with, the so-called "special condition" in the deed of sale is in reality an obligation — to build a house at least 50% of which must be finished within 2 years, inserting a penal clause to secure the performance of this obligation. - While in obligations with a penal sanction the penalty takes the place of damages and the payment of interest in case of non-compliance and that the obligee is entitled to recover upon the breach of the obligation without the need of proving damages, it is true that a mitigation of the obligor's liability is allowed under A1229 CC: The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. - General Ins. & Surety Corp. vs. Republic cannot be invoked for the forfeiture of the full amount of the bond because unlike this case there was in that case no performance at all of any part of the obligation to secure the payment of salaries to teachers - Partial performance or irregular compliance with the provisions in a contract for special indemnification in the event of failure to comply with its terms, courts will rigidly apply the doctrine of strict construction against the enforcement in its entirety of the indemnification, where it is clear from the contract that the amount or character of the indemnity is fixed without regard to the probable damages which might be anticipated as a result of a breach of the terms of the contract, or, in other words, where the indemnity provided for is essentially a mere penalty having for its object the enforcement of compliance with the contract

Obligations and Contracts - penal clause in this case was inserted not to indemnify MDC for any damage it might suffer as a result of a breach of the contract but rather to compel performance of the so-called "special condition" and thus encourage home building among lot owners in the Urdaneta Village 2. YES - In Insular Gov't. vs. Amechazurra where SC allowed mitigation of liability even if recovery of the firearms was made possible through the efforts of third parties (the Constabulary) Disposition Decision appealed from is affirmed

TAN V COURT OF APPEALS DE LEON, JR; October 19, 2001 NATURE Petition for review on certiorari of a decision of the CA FACTS - On May 14, 1978 and July 6, 1978, petitioner Antonio TAN obtained two (2) loans from respondent Cultural Center of the Philippines (CCP), each in the principal amount of Two Million Pesos. This is evidenced by 2 promissory notes with maturity dates on May 14, 1979 and July 6, 1979. - TAN defaulted but after a few partial payments, he had the loans restructured by CCP. TAN executed a promissory note on Aug 31, 1979 in the amount of P3,411,421.32 payable in 5 installments. He failed to pay any installment, the last one falling due on December 31, 1980. - In a letter dated Jan 26, 1982, petitioner requested and proposed to CCP a mode of paying the restructured loan, i.e., (a) 20% of the principal amount of the loan upon CCP’s conformity to the proposal; and (b) the balance on the principal obligation payable in 36 equal monthly installments until fully paid. - Oct 20, 1983 – TAN again sent a letter to CCP requesting for a moratorium on his loan obligation until the following year allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No favorable response was made to these letters. - Instead, CCP wrote TAN a letter dated May 30, 1984 demanding full payment of the petitioner’s restructured loan (as of April 30, 1984 amounted to P6,088,735.03 within 10 days from receipt of the letter. - Aug 29, 1984 – CCP filed in the RTC of Manila a complaint for collection of a sum of money. TAN interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from CCP and he has not been able to locate Lucmen. While the case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a down payment of P140,000.00 and to issue 12 checks every beginning of the year to cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent CCP did not agree to the petitioner’s proposals and so the trial of the case ensued. - On May 8, 1991, the trial court ruled against Tan, ordering him to pay CCP the amount of P7,996,314.67, representing his outstanding account as of August 28, 1986, with the corresponding stipulated interest and charges, until fully paid, plus attorney’s fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages.

A2010 page 77 Prof. Labitag Trial Court’s Ruling (1) gave little weight to the petitioner’s contention that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense propounded was not credible in itself. (2) assuming, that the petitioner did not personally benefit from the said loan, he should have filed a third party complaint against Wilson Lucmen, but he did not. (3) in fact, Tan offered to settle his loan obligation with respondent CCP thrice. (4) he may not avoid his liability to pay his obligation under the promissory note, which he must comply with in good faith pursuant to Article 1159 of the New Civil Code. (5) he is estopped from denying his liability or loan obligation to the private respondent. CA’s Ruling - His liability cannot be modified on account of partial or irregular performance because there is none. His offer or tender of payment cannot be deemed as a partial or irregular performance of the contract, not a single centavo appears to have been paid by the defendant. Petitioners' Claim - If penalty is to be awarded, he is asking for the non-imposition of interest on the surcharges because the compounding of interest on surcharges is not provided in the promissory note. HE also contests the computation whereby the interest, surcharge and the principal were added together and that on the total sum interest was imposed. - There is no basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges. - His obligation to pay the interest and surcharge should have been suspended because this obligation has become conditional, which consists of whether the petitioner’s request for condonation of interest and surcharge would be recommended by the Commission on Audit and the Office of the President to the House of Representatives for approval. Since the condition has not happened due to respondent’s reneging on its promise, his liability to pay the interest and surcharge on the loan has not arisen. ISSUES 1. WON there are contractual and legal bases for the imposition of the penalty 2. WON interest may accrue on the penalty or compensatory interest without violating Art. 19591 of NCC 3. WON the penalty should be reduced pursuant to Art. 12292 4. WON imposition of interest should be suspended for the period of time that respondent failed to assist petitioner in applying for relief of liability through COA and Office of the President 5. WON CA erred in not deleting award of attorney’s fees and in reducing penalties HELD 1. YES 1

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. 2

Art. 1229: “The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may be also be reduced by the courts if it is iniquitous or unconscionable.”

Obligations and Contracts Article 1226 of the New Civil Code provides that: “In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.” Reasoning The promissory note expressly provides for the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the restructured loan. - The stipulated 14% per annum interest charge until full payment of the loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code. The stipulated 2% per month penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal. - The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner. The penalty charge is also called penalty or compensatory interest. 2. YES Since penalty clauses can be in the form of penalty or compensatory interest, the compounding of the penalty or compensatory interest is allowed pursuant to Art. 1959. Reasoning First, there is an express stipulation in the promissory note permitting the compounding of interest. Second, Article 2212 of the NCC provides that “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” In this case, interest began to run on the penalty interest upon the filing of the complaint in court. 3. YES - The continued monthly accrual of the 2% penalty charge on the total amount due is “unconscionable” inasmuch as it is compounded monthly. (But it shall not be reduced to 10% of the unpaid balance as the petitioner contends) Reasoning Considering petitioner’s several partial payments and the fact he is liable under the note for 21 years since his default in 1980, it is equitable to reduce the penalty charge to a straight 12% per annum on the total amount due starting Aug 28, 1986 (the date of the last Statement of Account) - Also considered were petitioner’s offers to enter into a compromise for the settlement of his debt by presenting proposed payment schemes to CCP. This showed his good faith despite difficulty in complying with his loan obligation due to his financial problems. 4. NO Reasoning It was the primary responsibility of petitioner to inform the Commission on Audit and the Office of the President of his application for condonation of interest and surcharge. - Also, the letter dated Sept 28, 1988 alleged to have been sent by the CCP to the petitioner is not part of the formally offered documentary evidence of either party in the trial court. It also does not contain any categorical agreement on the part of respondent CCP that the payment of the interest and surcharge on the loan is deemed suspended while his appeal for condonation of the interest and surcharge was being processed. 5. NO

A2010 page 78 Prof. Labitag - The appellate court ruled correctly and justly in reducing the trial court’s award of twenty-five percent (25%) attorney’s fees to five percent (5%) of the total amount due. Disposition Decision appealed from is AFFIRMED with MODIFICATION in that the penalty charge of two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to a straight twelve percent (12%) per annum starting from August 28, 1986.

COUNTRY BANKERS INSURANCE V CA MEDIALDEA; September 9, 1991 NATURE Petition for certiorari to review the decision of the Court of Appeals. FACTS - The CA affirmed the RTC’s decision, to wit: “WHEREFORE, THE COMPLAINT OF THE PLAINTIFF Enrique F. Sy is dismissed, and on the counterclaim of the defendant O. Ventanilla Enterprises Corporation, judgment is hereby rendered: ‘1. Declaring as lawful, the cancellation and termination of the Lease Agreement (Exh. A) and the defendant’s re-entry and repossession of the Avenue, Broadway and Capitol theaters under lease on February 11, 1980; ‘2. Declaring as lawful, the forfeiture clause under paragraph 12 of the said Lease Agreement, and confirming the forfeiture of the plaintiff’s remaining cash deposit of P290,000.00 in favor of the defendant thereunder, as of February 11, 1980; ‘3. Ordering the plaintiff to pay the defendant the sum of P289,534.78, representing arrears in rentals, unremitted amounts for amusement tax delinquency and accrued interest thereon, with further interest on said amounts at the rate of 12% per annum (per lease agreement) from December 1, 1980 until the same is fully paid; ‘4. Ordering the plaintiff to pay the defendant the amount of P100,000.00, representing the P10,000 portion of the monthly lease rental which were not deducted from the cash deposit of the plaintiff from February to November, 1980, with interest thereon at the rate of 12% per annum on each of the said monthly amounts of P10,000.00 from the time the same became due until it is paid; ‘5. Ordering the plaintiff to pay the defendant through the injunction bond, the sum of P100,000.00, representing the P10,000.00 monthly increase in rentals which the defendant failed to realize from February to November 1980 resulting from the injunction, with legal interest thereon from the finality of this decision until fully paid; ‘6. Ordering the plaintiff to pay the defendant the sum equivalent to ten per centum (10%) of the above-mentioned amounts of P289,534.78, P100,000.00 and P100,000.00, as and for attorney’s fees; and ‘7. Ordering the plaintiff to pay the costs.’” -Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner Enrique F. Sy, as lessee entered into a lease agreement over the Avenue, Broadway and Capitol Theaters and the land on which they are situated in Cabanatuan City. The term of the lease was for six years from June 13, 1977 to June 12, 1983. After more than two years of operation of the theaters, the lessor OVEC

Obligations and Contracts made demands for the repossession of the said leased properties in view of Sy’s arrears in monthly rentals and non-payment of amusement taxes. On August 8, 1979, OVEC and Sy had a conference and by reason of Sy’s request for reconsideration, he was allowed to continue operating the leased premises upon his conformity to certain conditions imposed by the latter in a supplemental agreement dated August 13, 1979. - In pursuance to their latter agreement, Sy reduced his arrears in rental. However, the accrued amusement liability tax had accumulated to 84,000.00 despite the fact that Sy had been deducting amounts from his monthly rental with the obligation to remit said deductions to the city government. Hence, letters of demand dated January 7, 1980 and February 3, 1980 were sent to Sy demanding payment of the arrears in rentals and amusement tax delinquency. The latter demand was with the warning that OVEC will repossess the theaters on February 11, 1980 in pursuance with their lease contract and their supplemental letter-agreement. But notwithstanding the said demands and warnings Sy failed to pay the abovementioned amounts in full. Consequently, OVEC took possession thereof in the morning of February 11, 1990. - Sy filed the present action for reformation of the lease agreement, damages and injunction. And by virtue of a restraining order dated February 12, 1980 followed by an order to issue a writ of preliminary injunction, Sy regained possession of the theaters. Petitioners' Claim - Sy alleged that the amount of deposit—P600,00.00 as agreed upon, P300,000.00 of which was to be paid on June 13, 1977 and the balance on December 13, 1977— was too big; and OVEC assured him that said forfeiture will not come to pass. - Sy sought to recover from OVEC the sums of P100,000.00 for repairs in the Broadway theater; P48,000.00 for electrical cost of OVEC’s “illegal connection” in the Capitol theater; and P31,000.00 for electrical cost of OVEC’s “illegal connection” in the Broadway theater and for damages suffered by SY as a result of each connection. - It is also alleged that on February 11, 1980, OVEC had the three theaters padlocked with the use of force, and as aresult, Sy suffered damages at the rate of P5,000 a day because of his failure to go thru the contracts with movie and booking companies for the showing of movies. - Finally, Sy prayed for the issuance of a restraining order/ preliminary injunction to enjoin OVEC from entering and taking possession of the theaters upon Sy’s filing of a P500,000.00 bond supplied by Country Bankers Insurance Corporation (CBISCO). Respondents' Counterclaim - By reason of Sy’s violation of the lease agreement, OVRC became authorized to enter and possess the theaters as well as to terminate said agreement so the balance of deposits given by Sy had thus become forfeited. - OVEC would be losing P50,000.00 for every month that the possession and operation of the theaters remain with Sy. - OVEC incurred P500,000.00 for attorney’s fees. ISSUE WON respondent is unjustly enriched at the expense of petitioners HELD NO.

A2010 page 79 Prof. Labitag Ratio As a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance. However, there are exceptions: 1) when there is a stipulation to the contrary 2) when the obligor is sued fro refusal to pay the agreed penalty 3) when the obligor is guilty of fraud Reasoning The forfeiture clause in the lease agreement would not unjustly enrich OVEC at expense of Sy and CBISCO—contrary to law, morals, good customs, public order or policy. A penal clause is an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the debtor a special prestation (generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled. In the case at bar, the penalty cannot substitute for the P100,000.00 supposed damage suffered by OVEC from opportunity cost. It represents the P10,000 per month in additional rental during the ten months of injunction period. Thus, it must be applied against the injunction bond. Disposition ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the same is hereby DENIED and the decision dated June 15, 1988 and the resolution dated September 21, 1988, both of the respondent Court of Appeals are AFFIRMED.

KALALO V LUZ ZALDIVAR; JULY 31, 1970

NATURE Appeal from the decision, dated February 10, 1967, of the Court of First Instance of Rizal (Branch V. Quezon City) in its Civil Case No. Q-6561 FACTS - On November 17, 1959, appellee Kalalo, a licensed civil engineer doing business under the firm name of O. A. Kalalo and Associates, entered into an agreement with appellant Luz, a licensed architect, doing business under the firm name of AJ. Luz and Associates, whereby the former was to render engineering design services to the latter for fees, as stipulated in the agreement. The services included design computation and sketches, contract drawing and technical specifications of all engineering phases of the project designed by O.A. Kalalo and Associates, bill of quantities and cost estimate, and consultation and advice during construction relative to the work. Pursuant to said agreement, appellee rendered engineering services to appellant in the following projects: (a)Fil-American Life Insurance Building at Legaspi City; (b)Fil-American Life Insurance Building at Iloilo City; (c)General Milling Corporation Flour Mill at Opon, Cebu; (d)Menzi Building at Ayala Blvd., Makati, Rizal; (e)International Rice Research Institute, Research Center, Los Baños, Laguna; (f)Aurelia's Building at Mabina, Ermita, Manila; (g)Far East Bank's Office at Fil-American Life Insurance Building at Isaac Peral, Ernita, Manila; (h)Arthur Young's residence at Forbes Park, Makati, Rizal; (i) L & S Building at Dewey Blvd., Manila; and

Obligations and Contracts (j)Stanvac Refinery Service Building at Limay, Bataan. - On December 11, 1961, appellee sent to appellant a statement of account to which was attached an itemized statement of defendant-appellant's account, according to which the total engineering fee asked by appellee for services rendered amounted to P116,565.00 from which sum was to be deducted the previous payments made in the amount of P57,000.00, thus leaving a balance due in the amount of P59,565.00. On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said fees, according to appellant, amounted to P10,861.08 instead of the amount claimed by the appellee. On June 14, 1962 appellant sent appellee a check for said amount, which appellee refused to accept as full payment of the balance of the fees due him. - On August 10, 1962, appellee filed a complaint against appellant, containing four causes of action. In the first cause of action, appellee alleged that for services rendered in connection with the different projects therein mentioned there was due him fees in sums consisting of $28,000 (U.S.) and P100,204.46, excluding interests, of which sums only P69,323.21 had been paid, thus leaving unpaid the $28,000.00 and the balance of P30,881.25. In the second cause of action, appellee claimed P17,000.00 as consequential and moral damages; in the third cause of action he claimed P55,000.00 as moral damages, attorney's fees and expenses of litigation; and in the fourth cause of action he claimed P25,000.00 as actual damages, and also for attorney's fees and expenses of litigation. - In his answer, appellant admitted that appellee rendered engineering services, as alleged in the first cause of action, but averred that some of appellee's services were not in accordance with the agreement and appellee's claims were not justified by the services actually rendered, and that the aggregate amount actually due to appellee was only P80,336.29, of which P69,475.21 had already been paid, thus leaving a balance of only P10,861.08. Appellant denied liability for any damage claimed by appellee to have suffered, as alleged in the second, third and fourth causes of action. Appellant set up affirmative and special defenses, alleging that appellee had no cause of action, that appellee was in estoppel because of certain acts, representations, admissions and/or silence, which led appellant to believe certain facts to exist and to act upon said facts, that appellee's claim regarding the Menzi project was premature because appellant had not yet been paid for said project, and that appellee's services were not complete or were performed in violation of the agreement and/or otherwise unsatisfactory. Appellant also set up a counterclaim for actual and moral damages for such amount as the court may deem fair to assess, and for attorney's fees of P10,000.00. - Inasmuch as the pleadings showed that the appellee's right to certain fees for services rendered was not denied, the only question being the assessment of the proper fees and the balance due to appellee after deducting the admitted payments made by appellant, the trial court, upon agreement of the parties, authorized the case to be heard before a Commissioner. The Commissioner rendered a report which, in resume, states that the amount due to appellee was $28,000.00 (U.S.) as his fee in the International Research Institute Project which was 20% of the $140,000.00 that was paid to appellant, and P51,539.91 for the other projects, less the sum of P69,475.46 which was already paid by the appellant. The trial court ruled in favor of Kalalo by ordering Luz to pay him the sum of P51,539.91 and $28,000.00, the latter to be converted into the Philippine currency on the basis of the current rate of exchange at the time of the payment of this judgment, as certified to by the Central Bank of the Philippines.

A2010 page 80 Prof. Labitag ISSUE WON payment of the amount due to the appellee in dollars is legally permissible, and if not, at what rate of exchange it should be paid in pesos HELD NO. Payment in dollars is prohibited by Republic Act (RA) No. 529 which provides that if the obligation was incurred prior to the enactment of the Act and require payment in a particular kind of coin or currency other than the Philippine currency the same shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred. RA No. 529 was enacted on June 16, 1950. In the case now before Us the obligation of appellant to pay appellee the 20% of $140,000.00, or the sum of $28,000.00, accrued on August 25, 1961, or after the enactment of RA No. 529. It follows that the provision of RA No. 529 which requires payment at the prevailing rate of exchange when the obligation was incurred cannot be applied. RA No. 529 does not provide for the rate of exchange for the payment of obligation incurred after the enactment of said Act. The logical conclusion, therefore, is that the rate of exchange should be that prevailing at the time of payment. This view finds support in the ruling of this Court in the case of Engel vs. Velasco & Co. where this Court held that even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be expressed in Philippine currency at the rate of exchange at the time of judgment rather than at the rate of exchange prevailing on the date of defendant's breach. Disposition Therefore, appellant should pay the appellee the equivalent in pesos of the $28,000.00 at the free market rate of exchange at the time of payment. The trial court did not err when it held that herein appellant should pay appellee $28,000.00 to be converted into the Philippine currency on the basis of the current rate of exchange at the time of payment of this judgment, as certified to by the Central Bank of the Philippines.

ST. PAUL FIRE & MARINE INSURANCE CO. V MACONDRAY & CO., INC. ANTONIO; March 25, 1976 NATURE Certified by CA in its Resolution of May 8, 1967 on the ground that the appeal involves purely questions of law. FACTS - June 29, 1960, Winthrop Products, Inc., of New York, shipped aboard the SS "Tai Ping", owned and operated by Wilhelm Wilhelmsen, 218 cartons and drums of drugs and medicine, with the freight prepaid, which were consigned to Winthrop-Stearns, Inc., Manila, Philippines. - Barber Steamship Lines, Inc., agent of Wilhelmsen, issued Bill of Lading No. 34, in the name of Winthrop Products, Inc. as shipper, with arrival notice in Manila to consignee Winthrop-Stearns, Inc., Manila, Philippines. - The shipment was insured by the shipper against loss and/or damage with the St. Paul Fire & Marine Insurance Company under its insurance Special Policy No. OC173766 dated June 23, 1960 - Aug 7, 1960, SS "Tai Ping" arrived at the Port of Manila and discharged its

Obligations and Contracts shipment into the custody of Manila Port Service. The shipment was complete and in good order with the exception of one (1) drum and several cartons, which were in bad order condition. - Consignee filed the corresponding claim in the amount of P1,109.67 representing the C.I.F. value of the damaged drum and cartons of medicine with the carrier and the Manila Port Service. However, both refused to pay such claim. - Consignee filed its claim with the insurer, St. Paul Fire & Marine Insurance Co. The insurance company paid to consignee the insured value of the lost and damaged goods, including other expenses in connection therewith, in the total amount of $1,134.46. - Aug 5, 1961, as subrogee of the rights of the shipper and/or consignee, St. Paul Fire & Marine Insurance Co. instituted with the CFI Manila the present action against the defendants for the recovery of $1,134.46, plus costs. - Mar 10, 1965 lower court rendered judgment ordering defendants Macondray & Co., Inc. Barber Steamship Lines, Inc. and Wilhelm Wilhelmsen to pay to the plaintiff, jointly and severally, P300.00, with legal interest from the filing of the complaint until fully paid, and defendants Manila Railroad Company and Manila Port Service to pay to plaintiff, jointly and severally, P809.67, with legal interest thereon from the filing of the complaint until fully paid, the costs to be borne by all the said defendants. Plaintiff’s Claims - Plaintiff-appellant argues that, as subrogee of the consignee, it should be entitled to recover from defendants-appellees the amount of $1,134.46 which it actually paid to the consignee and which represents the value of the lost and damaged shipment as well as other legitimate expenses such as the duties and cost of survey of said shipment, and that the exchange rate on the date of the judgment, which was P3.90 for every US$1.00, should have been applied by the lower court. Defendants’ Comments - They countered that their liability is limited to the C.I.F. value of the goods, pursuant to contract of sea carriage embodied in the bill of lading; that the consignee's (Winthro, Stearns, Inc.) claim against the carrier (Macondray & Co., Inc., Barber Steamship Lines, Inc., Wilhelm Wilhelmsen) and the arrastre operators (Manila Port Service and Manila Railroad Company) was only for the sum of 1,109.67 representing the C.I.F. value of the loss and damage sustained by the shipment which was the amount awarded by the lower court to the plaintiffappellant; defendants appellees are not insurers of the goods and as such they should not be made to pay the insured value; the obligation of the defendantsappellees was established as of the date of discharge, hence the rate of exchange should be based on the rate existing on that date, i.e., August 7, 1960, and not the value of the currency at the time the lower court rendered its decision on March 10, 1965. ISSUES 1. WON in case of loss or damage, the liability of the carrier to the consignee is limited to the C.I.F. value of the goods which were lost or damaged 2. Whether the insurer who has paid the claim in dollars to the consignee should be reimbursed in its peso equivalent on the date of discharge of the cargo or on the date of the decision HELD 1. YES

A2010 page 81 Prof. Labitag - The purpose of the bill of lading is to provide for the rights and liabilities of the parties in reference to the contract to carry. The stipulation in the bill of lading limiting the common carrier's liability to the value of the goods appearing in the bill, unless the shipper or owner declares a greater value, is valid and binding. This limitation of the carrier's liability is sanctioned by the freedom of the contracting parties to establish such stipulations, clauses, terms, or conditions as they may deem convenient, provided they are not contrary to law, morals, good customs and public policy. A stipulation fixing or limiting the sum that may be recovered from the carrier on the loss or deterioration of the goods is valid, provided it is (a) reasonable and just under the circumstances, and (b) has been fairly and freely agreed upon. In this case, the liabilities of the defendants-appellees with respect to the lost or damaged shipments are expressly limited to the C.I.F. value of the goods as per contract of sea carriage embodied in the bill of lading. - The plaintiff-appellant, as insurer, after paying the claim of the insured for damages under the insurance, is subrogated merely to the rights of the assured. As subrogee, it can recover only the amount that is recoverable by the latter. Since the right of the assured, in case of loss or damage to the goods, is limited or restricted by the provisions in the bill of lading, a suit by the insurer as subrogee necessarily is subject to like limitations and restrictions. 2. The contention of the plaintiff-appellant that because of extraordinary inflation, it should be reimbursed for its dollar payments at the rate of exchange on the date of the judgment and not on the date of the loss or damage, is untenable. The obligation of the carrier to pay for the damage commenced on the date it failed to deliver the shipment in good condition to the consignee. The C.I.F. Manila value of the goods which were lost or damaged, according to the claim of the consignee dated September 26, 1960 is $226.37 and $324.3 or P456.14 and P653.53, respectively, in Philippine Currency. The peso equivalent was based by the consignee on the exchange rate of P2.015 to $1.00 which was the rate existing at that time. The trial court committed no error in adopting the aforesaid rate of exchange. Disposition Appealed decision is affirmed, with costs against the plaintiffappellant.

PAPA V VALENCIA KAPUNAN; 1998

FACTS In June 1982, herein private respondents A.U. Valencia and Co., Inc. and Felix Peñarroyo, filed a complaint for specific performance against herein petitioner Myron C. Papa, in his capacity as administrator of the Testate Estate of one Angela M. Butte The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-fact of Angela M. Butte, sold to respondent Peñarroyo, through respondent Valencia, a parcel of land, consisting of 286.60 square meters, located at corner Retiro and Cadiz Streets, La Loma, Quezon City, and covered by Transfer Certificate of Title No. 28993 of the Register of Deeds of Quezon City Prior to the alleged sale, the said property, together with several other parcels of land likewise owned by Angela M. Butte, had been mortgaged by her to the Associated Banking Corporation After the alleged sale, but before the title to the subject property had been released, Angela M. Butte passed away

Obligations and Contracts -

Despite representations made by herein respondents to the bank to release the title to the property sold to respondent Peñarroyo, the bank refused to release it unless and until all the mortgaged properties of the late Angela M. Butte were also redeemed In order to protect his rights and interests over the property, respondent Peñarroyo caused the annotation on the title of an adverse claim as evidenced by Entry No. PE. - 6118/T-28993, inscribed on 18 January 1977 The complaint further alleged that it was only upon the release of the title to the property, sometime in April 1977, that respondents Valencia and Peñarroyo discovered that the mortgage rights of the bank had been assigned to one Tomas L. Parpana (now deceased), as special administrator of the Estate of Ramon Papa. Jr., on 12 April 1977 That since then, herein petitioner had been collecting monthly rentals in the amount of P800.00 from the tenants of the property, knowing that said property had already been sold to private respondents on 15 June 1973 Despite repeated demands from said respondents, petitioner refused and failed to deliver the title to the property Thereupon, respondents Valencia and Peñarroyo filed a complaint for specific performance In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking Corporation. He contended, however, that the complaint did not state a cause of action; that the real property in interest was the Testate Estate of Angela M. Butte, which should have been joined as a party defendant; that the case amounted to a claim against the Estate of Angela M. Butte and should have been filed in Special Proceedings No. A-17910 before the Probate Court in Quezon City; and that, if as alleged in the complaint, the property had been assigned to Tomas L. Parpana, as special administrator of the Estate of Ramon Papa, Jr., said estate should be impleaded Petitioner, likewise, claimed that he could not recall in detail the transaction which allegedly occurred in 1973; that he did not have TCT No. 28993 in his possession; that he could not be held personally liable as he signed the deed merely as attorney-in-fact of said Angela M. Butte Finally, petitioner asseverated that as a result of the filing of the case, he was compelled to hire the services of counsel for a fee of P20,000.00, for which respondents should be held liable. Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a third-party complaint against herein private respondents, spouses Arsenio B. Reyes and Amanda Santos Respondent Reyes spouses in their Answer raised the defense of prescription of petitioner's right to redeem the property. At the trial, only respondent Peñarroyo testified. All the other parties only submitted documentary proof. On 29 June 1987, the trial court rendered a decision: 1. Allowing defendant to redeem from third-party defendants and ordering the latter to allow the former to redeem the property in question, by paying the sum of P14,000.00 plus legal interest of 12% thereon from January 2, 1980 2. Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff Felix Peñarroyo covering the property in question and to deliver peaceful

A2010 page 82 Prof. Labitag possession and enjoyment of the said property to the said plaintiff, free from any liens and encumbrances. Should this not be possible, for any reason not attributable to defendant, said defendant is ordered to pay to plaintiff Felix Peñarroyo the sum of P45,000.00 plus legal interest of 12% from June 15, 1973 3. Ordering plaintiff Felix Peñarroyo to execute and deliver to intervenor a deed of absolute sale over the same property, upon the latter's payment to the former of the balance of the purchase price of P71,500.000. Should this not be possible, plaintiff Felix Peñarroyo is ordered to pay intervenor the sum of P5,000.00 plus legal interest of 12% from August 23, 1973 4. Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as attorney's fees and litigation expenses. Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging among others that the sale was never "consummated" as he did not encash the check (in the amount of P40,000.00) given by respondents Valencia and Peñarroyo in payment of the full purchase price of the subject lot. He maintained that what said respondents had actually paid was only the amount of P5,000.00 (in cash) as earnest money. Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal was dismissed because of failure to file their appellants' brief On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification the trial court's decision In affirming the trial court's decision, respondent court held that contrary to petitioner's claim that he did not encash the aforesaid check, and therefore, the sale was not consummated, there was no evidence at all that petitioner did not, in fact, encash said check. On the other hand, respondent Peñarroyo testified in court that petitioner Papa had received the amount of P45,000.00 and issued receipts therefor. According to respondent court, the presumption is that the check was encashed, especially since the payment by check was not denied by defendantappellant (herein petitioner) who, in his Answer, merely alleged that he "can no longer recall the transaction which is supposed to have happened 10 years ago." On petitioner's claim that he cannot be held personally liable as he had acted merely as attorney-in-fact of the owner, Angela M. Butte, respondent court held that such contention is without merit Petitioner filed a motion for reconsideration of the above decision, which motion was denied by respondent Court of Appeals. ISSUES 1. WON the sale in question was consummated 2. WON the decision of the CA cancelled the assignment of the subject property rights in favor of the estate of Ramon Papa, Jr. 3. WON the estate of Angela M. Butte and the estate of Ramon Papa, Jr. are indispensable parties HELD 1. YES. - Petitioner argues that respondent Court of Appeals erred in concluding that the alleged sale of the subject property had been consummated. He contends that such

Obligations and Contracts a conclusion is based on the erroneous presumption that the check (in the amount of P40,000.00) had been cashed, citing Art. 1249 of the Civil Code, which provides, in part, that payment by checks shall produce the effect of payment only when they have been cashed or when through the fault of the creditor they have been impaired. Petitioner insists that he never cashed said check; and, such being the case, its delivery never produced the effect of payment. - It is an undisputed fact that respondents Valencia and Peñarroyo had given petitioner Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in check on 15 June 1973, in payment of the purchase price of the subject lot. Petitioner himself admits having received said amounts, and having issued receipts therefor. Petitioner's assertion that he never encashed the aforesaid check is not substantiated and is at odds with his statement in his answer that "he can no longer recall the transaction which is supposed to have happened 10 years ago." After more than ten (10) years from the payment in part by cash and in part by check, the presumption is that the check had been encashed. As already stated, he even waived the presentation of oral evidence. - Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay. - While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a cheek implies an undertaking of due diligence in presenting it for payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given. It has, likewise, been held that if no presentment is made at all, the drawer cannot be held liable irrespective of loss or injury unless presentment is otherwise excused. This is in harmony with Article 1249 of the Civil Code under which payment by way of check or other negotiable instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under this provision and if its nonpayment is caused by his negligence, payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged. - Considering that respondents Valencia and Peñarroyo had fulfilled their part of the contract of sale by delivering the payment of the purchase price, said respondents, therefore, had the right to compel petitioner to deliver to them the owner's duplicate of TCT No. 28993 of Angela M. Butte and the peaceful possession and enjoyment of the lot in question 2. NO. - With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has found that the conditions under which said mortgage rights of the bank were assigned are not clear. Indeed, a perusal of the original records of the case would show that there is nothing there that could shed light on the transactions leading to the said assignment of rights; nor is there any evidence on record of the conditions under which said mortgage rights were assigned. What is certain is that despite the said assignment of mortgage rights, the title to the subject property has remained in the name of the late Angela M. Butte. Assuming arguendo that the mortgage rights of the Associated Citizens Bank had been assigned to the estate of Ramon Papa, Jr., and granting that the assigned mortgage rights validly exist and constitute a lien on the property, the estate may file the appropriate action to

A2010 page 83 Prof. Labitag enforce such lien. The cause of action for specific performance which respondents Valencia and Peñarroyo have against petitioner is different from the cause of action which the estate of Ramon Papa, Jr. may have to enforce whatever rights or liens it has on the property by reason of its being an alleged assignee of the bank's rights of mortgage. 3. NO. - Under Section 3 of Rule 3 of the Rules of Court, an executor or administrator may sue or be sued without joining the party for whose benefit the action is presented or defended, thus: Sec. 3. Representative parties. - A trustee of an express trust, a guardian, executor or administrator, or a party authorized by statute, may sue or be sued without joining the party for whose benefit the action is presented or defended; but the court may, at any stage of the proceedings, order such beneficiary to be made a party. An agent acting in his own name and for the benefit of an undisclosed principal may sue or be sued without joining the principal except when the contract involves things belonging to the principal. - Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final determination of the action can be had. Whatever prior and subsisting mortgage rights the estate of Ramon Papa, Jr. has over the property may still be enforced regardless of the change in ownership thereof. Disposition CA decision affirmed.

PHILIPPINE AIRLINES, INC V COURT OF APPEALS, STO. TOMAS REGALADO; August 13, 1990 NATURE Certiorari FACTS - November 16, 1970,- Adelina Bagadiong and Rosario Sto. Tomas, made reservations with, and bought 2 plane tickets from,PAL (Naga City branch station), , a common carrier engaged in the business of transporting passengers by air for compensation, for Naga-Manila flight on November 26, 1970 - November 24, 1970- they went back to PAL Naga City branch station and paid the fare for two round trip tickets. They were not only issued their round trips tickets, but also their reservation in PAL's 3:40 pm Naga-Manila flight on November 26, 1970 were expressly confirmed by the Naga City branch station; - At 3 PM of November 26, 1970, or 45 minutes before the scheduled departure time of the Naga-Manila flight, they checked in at the Pili airport counter of PAL and there the latter's agent or employees got the tickets of the plaintiffs allegedly for the purpose of issuing to them a boarding pass - A few minutes before departure time, their luggage was loaded to the plane, but they were not given back their tickets and were not allowed by PAL' s agent or employees to board the plane

Obligations and Contracts - After the plane had taken off from the Pili airport with their luggage, in spite of their complaint, PAL’ s agent or employees at the Naga City branch station just returned their fares. - (This is another case consolidated with above case) November 24, 1970- Ladislao Santos, bought a plane ticket at the branch station of defendant in Naga City for Flight 296 from Naga to Manila scheduled on the afternoon of November 26, 1970. - He was assured by the PAL employees that his reservation for the flight was confirmed - At 2 PM of November 29, 1970, 1 hr and 40 minutes before the departure of Flight 296, Santos checked in at the Pili airport counter and there the PAL employees asked for his ticket, allegedly for the purpose of issuing to him a boarding pass - About 3 minutes before departure of Flight 296, the ticket was returned to him by a PAL employee, informing him that there was no more seat available and he could not ride on that flight to Manila - The employees of PAL acted rudely and discourteously to his embarrassment in the presence of so many people who were at the airport at that time - It was very important and urgent for him to be in Manila on the afternoon of November 26, 1970, because he had an appointment with an eye specialist for medical treatment of his eye and he and his brother were "to close a contract they entered into to supply shrimps to some restaurants and market vendors in Manila - He and his brother failed to close the contract to supply shrimps, because it was on December 1, 1970 that he was finally able to reach Manila by train. - In both cases the appellees alleged that there is a breach of contract and asked for moral damages. - PAL’s defense: o that due to the cancellation of a morning flight from Virac, some of its passengers for said flight took Flight 296R; o that on the representations of Gov Alberto of Catanduanes, one of those in the cancelled morning flight, its employees at its Virac station were constrained "to allow the Governor to take Flight 296R together with several companions" with the assurance of the Governor that two (2) of his companions would deplane in Naga; that on arrival in Naga, the two companions of the Governor refused to deplane despite repeated pleas and entreaties of its employees o unable to persuade the 2 Virac passengers to deplane in Naga and "compelled by a reasonable and well-grounded fear that an untoward incident may ensue should the two (2) be forced to leave the aircraft," its employee "had to act in a manner dictated by the circumstances and by reasons of safety both of the passenger and the aircraft and crew;" o it was necessitated by reason of safety and/or compliance with applicable laws regulations, or orders, and the same are valid grounds for refusal to carry plaintiffs in accordance with its Domestic Passenger Tariff No. 2 (Section A, Rule 8[a]) which is incorporated by reference into the conditions of carriage as expressly provided for in plaintiffs plane tickets; and o the error of its employees was an honest mistake or constitutes excusable negligence.

A2010 page 84 Prof. Labitag - TC- there was a breach of contract; awarded moral, actual and exemplary damages and legal interest to the complainants in both cases. Affirmed decision on MR. - CA- on appeal it affirmed with modifications said decision of the lower court. ISSUES 1. WON moral damages could be awarded to a passenger when the failure of the carrier to accommodate the passenger resulted from unlawful acts of third parties against the carrier's personnel 2. WON respondents are entitled to exemplary damages when there is no sufficient evidence to show, and neither the appellate court nor the trial court found facts showing reckless, oppressive or malevolent conduct by the carrier 3. WON a passenger in a contract of air transportation can validly claim damages when she could have taken the flight had she not instead opted, of her own volition, to give her confirmed seat to another passenger who was accommodated by the carrier in her place 4. WON a trial court, in a MR, may increase the damages it awarded in the original decision to an amount drastically over that it initially found to be warranted and significantly more than claimed by plaintiffs themselves HELD - On first and second issue: SC finds no error in awarding moral and exemplary damages to respondents. - On the third issue: SC finds it without merit. As noted by the CA, the act of respondent Bagadiong was motivated solely by her concern for her son who also risked being denied accommodation but who was then returning to school in Manila. Such sacrifice was not voluntary on her part, and her inability to take the flight was the consequence of the wrongful act of PAL's employees for which it has to answer. - On the last issue: CA precisely resolved said issue by modifying the decision of the lower court, awarding each respondent instead an aggregate amount of P30,000.00 as moral and exemplary damages, plus P6,000.00 as attorney's fees. The award of moral and exemplary damages in an aggregate amount may not be the usual way of awarding said damages. However, there can be no question that the entitlement to moral damages having been established, exemplary damages may be awarded; and exemplary damages may be awarded even though not so expressly pleaded in the complaint nor proved . Reasoning - Moral damages are recoverable in a breach of contract of carriage where the air carrier through its agents acted fraudulently or in bad faith. The TC and the CA are in agreement that PAL through its agents acted in bad faith in "bumping off" private respondents. CA-> the failure of PAL to accommodate private respondents was not the result of an honest mistake, because its employees knew and were aware that what they were doing was wrong. This whole incident could have been avoided had Mr. Borjal (branch supervisor) not recklessly took a chance on the two overbooked passengers (Gov. Alberto and Mayor Antonio) in getting confirmed reservations in Naga. The PAL employees knowingly and deliberately disregarded the rights of the plaintiffs to board the plane and take Flight 296R by virtue of their being holders of tickets duly issued and paid for with confirmed reservations on Flight 296R. - A contract to transport passengers is quite different in kind and degree from any other contractual relation. And this, because of the relation which an air-carrier with the public. Its business is mainly with the travelling public. It invites people to avail of the comforts and advantages it offers. The contract of air carriage, therefore,

Obligations and Contracts generates a relation attended with a public duty. Neglect or malfeasance of the carrier's employees naturally could give ground for an action for damages. The operation of a common carrier is a business affected with public interest and must be directed to serve the comfort and convenience of the passengers. In case of breach in bad faith of a contract of carriage, award of damages is in order. - The contention of PAL that was due to the unlawful acts of third persons and, constitutes caso fortuito, is untenable. To constitute a caso fortuito that would exempt a person from responsibility, it is essential that (a) the event must be independent of the will of the obligor; (b) it must be either unforseeable or inevitable; (c) its occurrence renders it impossible for the obligor to fulfill his obligation in a normal manner; and (d) the obligor must be free from any participation in the aggravation of the injury resulting to the obligee or creditor. - One essential characteristic of a fortuitous event is that it was independent of the will of the obligor or of his employees, is N/A in this case. The alleged fortuitous event, supposedly consisting of the unlawful acts of Gov Alberto and Mayor Antonio, is not independent of the will of PAL as the obligor but was caused by the very act of its agents in allowing the governor and the mayor to board Flight 296R in excess of the number of passengers allotted to them and with full knowledge that the said flight for Manila was fully booked. The impossibility of their being accommodated was necessarily forseeable. The fear spoken of by witness Azuela is speculative, fanciful and remote. The statement attributed to Governor Alberto and/or the mayors, that "if we cannot board the plane there will be something that will happen," is vague. The threat, if ever it was, was not of such a serious character and imminent as to create fear of greater injury in the minds of the PAL employees if they would not allow Governor Alberto and the mayors to remain in the plane which was then scheduled to fly to Manila. It is difficult to believe that Governor Alberto and the mayors would make any threat or intimidation to keep their seats in the plane. They were provincial and municipal executives with a common duty to maintain peace and order and to prevent the commission of crimes. Disposition CA’s decision is AFFIRMED in toto.

REPARATIONS COMMISSION V UNIVERSAL DEEP- SEA FISHING CORPORATION CONCEPCION; June 27, 1978 NATURE Appeal from the decision of the Court of First Instance FACTS - Universal was awarded 6 trawl boats by the Reparations Commission as end-user of reparation goods. These were delivered 2 at a time. - The first 2 boats were delivered Nov 20, 1958 and the Contract of Conditional Purchase and Sale of Reparations Goods executed Feb 12, 1960 provided among others, that "the first installment representing 10% of the amount… shall be paid within 24 months from the date of complete delivery thereof, the balance shall be paid in the manner herein stated as shown in the Schedule of Payments". To guarantee the compliance with the obligations under said contract, a performance bond in the amount of P53,643.00, with UNIVERSAL as principal and the Manila

A2010 page 85 Prof. Labitag Surety & Fidelity Co., Inc., as surety, was executed in favor of the Reparations Commission. A corresponding indemnity agreement was executed to indemnify the surety company for any damage, loss charges, etc., which it may sustain or incur as a consequence of having become a surety upon the performance bond - The next 2 boats were delivered April 20, 1959 with contract dated Nov 25, 1959 provided for a similar stipulation on the schedule of payments. A performance bond in the amount of P68,777.77, issued by the Manila Surety & Fidelity Co., Inc., was also submitted to guarantee the faithful compliance with the obligations set forth in the contract,6 and indemnity agreement was executed in favor of the surety company in consideration of the said bond. - The delivery of the last 2 boats were covered by a contract for the Utilization of Reparation Goods executed by the parties on February 12, 1960 with a similar schedule of 10 equal yearly installments. A performance bond in the amount of P54,500.00 issued by the Manila Surety & Fidelity Co., Inc., was submitted, and an indemnity agreement was executed by UNIVERSAL in favor of the surety company. - On August 10, 1962, the Reparations Commission instituted the present action against UNIVERSAL and the surety company to recover various amounts of money due under these contracts. In answer, UNIVERSAL claimed that the amounts of money sought to be collected are not yet due and demandable. The surety company also contended that the action is premature, but set up a cross-claim against UNIVERSAL for reimbursement of whatever amount of money it may have to pay the plaintiff by reason of the complaint, including interest, and for the collection of accumulated and unpaid premiums on the bonds with interest thereon. With leave of courts first obtained, the surety company filed a third-party complaint against Pablo S. Sarmiento, one of the indemnitors in the indemnity agreements. The third-party defendant Pablo S. Sarmiento denied personal liability claiming that he signed the indemnity agreements in question in his capacity as acting general manager of UNIVERSAL. After appropriate proceedings and upon the preceding facts, the trial court rendered the judgment stated. Hence, this appeal. - UNIVERSAL claims that there is an obscurity in the terms of the contracts in question which were caused by the plaintiff as to the amounts and due dates of the first installments which should have been first fixed before a creditor can demand its payment from the debtor. The Schedule of Payment attached to, and forming a part of, the contract for the purchase and sale of the first 2 boats which states that the amount of first installment is P53,642.84 and the due date of is payment is May 8, 1961. However, the amount of the first of the succeeding itemized installments is P56,597.20 and the due date is May 8, 1962. In the case of the 3 rd and 4th boats, the first installments are P68,777.77 and due in July, 1961 and P72,565.68 and due in July, 1962, respectively. In the contract for the purchase and sale of the last 2 boats, the amounts indicated as first installments are P54,500.00 and P57,501.57, and the due dates of payment are October 17, 1961 and October 17, 1962, respectively. ISSUES 1. WON the first installments under the 3 contracts of conditional purchase and sale were already due and demandable when the complaint was filed 2. WON the TC erred in not awarding the surety company premiums on the performance bonds

Obligations and Contracts 3. WON the court erred in not applying the down payment to the guaranteed indebtedness applying Art 12543 4. WON Pablo Sarmiento is liable having executed the indemnity agreements in his capacity as acting general manager of universal HELD 1. YES Ratio The obligation of UNIVERSAL to pay the first installments on the purchase price of the six (6) reparations vessels was already due and demandable when the present action was commenced on August 10, 1962. Also due and demanded from UNIVERSAL were the first of the ten (10) equal yearly installments on the balance of the purchase price of the first 2 boats as well as the second pair of boats. The first accrued on May 8, 1962, while the second fell due on July 31,1962. Reasoning In the contract concerning the first 2 boats, the parties expressly agreed that the first installment representing 10% of the purchase price or P53,642.84 shall be paid within 24 months from the date of complete delivery of the vessel or on May 8, 1961, and the balance to be paid in ten (10) equal yearly installments. The amount of P56,597.20 due on May 8, 1962, which is also claimed to be a "first installment," is but the first of the ten (10) equal yearly installments of the balance of the purchase price. - The 24 months fixed by the law for the payment of the 'first' installment are the very dates stated in the aforementioned schedules for the payment of the respective '1st' installments. What is more, in view of said legal provision, the Commission had no authority to agree that the 1st installment shall be paid on any later date, and the Buyer must have been aware of this fact. 2. YES - Universal should award the premiums to the surety company. Reasoning The payment of premiums on the bonds to the surety company had been expressly undertaken by UNIVERSAL in the indemnity agreements executed by .it in favor of the surety company. The premium is the consideration for furnishing the bonds and the obligation to pay the same subsists for as long as the liability of the surety shall exist. 3. NO - Art 1254 is not applicable. Reasoning The rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular, which in this case is the full and faithful compliance with the terms of the contract of conditional purchase and sale of reparations goods. 4. YES - He is liable. Reasoning He signed the indemnity agreement twice – the first in his capacity as acting general manager and second in his individual capacity. Besides acknowledgment, stated that Pablo Sarmiento for himself and in behalf of Universal personally appeared before the notary and acknowledged that the document is his own free and voluntary act and deed. Disposition WHEREFORE, the judgment appealed from is hereby affirmed with the modification that the UNIVERSAL Deep-Sea Fishing Corporation is further ordered to 3

Where there is no imputation of payment made by either the debtor or creditor, the debt which is the most onerous to the debtor shall be deemed to have been satisfied

A2010 page 86 Prof. Labitag pay the Manila Surety & Fidelity Co., Inc., the amount of P7,251.42 for the premiums and documentary stamps on the performance bonds. Appellants shall pay proportionate costs.

PACULDO V REGALADO PARDO; 2000 NATURE APPEAL via certiorari from a decision of the CA on ejectment case FACTS - Nereo Paculdo, petitioner, and Bonifacio Regalado, respondent, entered into a lease contract over a 16,478 square meter property with a wet market building located along Don Mariano Marcos Avenue, Fairview Park, Quezon City on December 27, 1990. Lease period is for 25 years beginning January 1, 1991 up to December 31 , 2015. - On top of this lease contract, petitioner also leased from respondent eleven other properties and purchased from the same respondent eight units of heavy equipment and vehicles. - The petitioner failed to pay rentals for the wet market property for May, June, and July 1992. Respondent on July 6, wrote demand letter to petitioner for payment of the due rent with advise that if payment is not received within fifteen days the lease contract will be cancelled. - Another letter was sent by the respondent on July 17, 1992 reiterating demand for payment and for the petitioner to vacate the premises. - Petitioner tried to pay on a daily basis the rental beginning August 25, 1992 but the petitioner refused to accept the same. - On August 20, 1992, petitioner filed an action for injunction and damages seeking to enjoin respondent from disturbing his possession of the leased property. On the same day the respondent filed an ejectment case against the petitioner. The ejectment case was however withdrawn five days later on the ground that certain details included therein had been omitted and must be re-computed. - On April 22, 1993, the case for ejectment was re-filed with the MTC. On January 31, 1994, the MTC ruled in favor of Regalado and ordered the petitioner and all persons claiming right under him to vacate the leased premises and to pay the respondent the back rentals beginning July 1992. This order was appealed to the RTC which subsequently affirmed the MTC decision en toto. - Despite having completely turned over the leased property, petitioner nevertheless filed a petition for review with the Court of Appeals alledging among others that portions of his payments to respondents were applied to his other obligations. The CA found for the respondent when it ruled that petitioner consented to the respondent’s application of payment to the petitioner’s other obligations. - Hence the appeal. ISSUE WON the petitioner was truly in arrears in the payment of the rentals on the subject property at the time of the filing of the complaint for ejectment HELD NO.

Obligations and Contracts - There was no clear assent from the petitioner to the change in the manner of application of payment. The silence of the petitioner with regard the request of the respondent with regard the application of the rental did not mean that he consented thereto. - Assuming further that petitioner did not choose the obligation to be first satisfied, giving the respondent the right to apply the payments to the other obligations of the petitioner, the law provided that no payment shall be made to a debt not yet due (Article 1252 of the Civil Code) and that payment must be first applied to the debt most onerous to the debtor (Article 1254 of the Civil Code). - The decision of the CA was a misappreciation of the facts and of the law.

DBP V CA DAVIDE; January 5, 1998 NATURE Consolidated petition for review of the decision of the Court of Appeals FACTS - Plaintiff CUBA is a grantee of a Fishpond Lease Agreement from the Government; - CUBA obtained from DBP three separate loans totalling P335,000, each of which was covered by a promissory note and as security for said loans, CUBA executed two Deeds of Assignment of her Leasehold Rights; - Plaintiff failed to pay her loan on the scheduled dates in accordance with the terms of the Promissory Notes; - Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP appropriated the leasehold Rights of plaintiff CUBA over the fishpond in question; then executed a Deed of Conditional Sale of the Leasehold Rights in favor of plaintiff CUBA over the same fishpond; - In the negotiation for repurchase, plaintiff CUBA addressed two letters (offers to repurchase the fishpond) to the Manager DBP, which DBP accepted; - After the Deed of Conditional Sale was executed in favor of plaintiff CUBA, a new Fishpond Lease Agreement was issued by the Ministry of Agriculture and Food in favor of plaintiff CUBA but CUBA failed to pay the amortizations stipulated in the Deed of Conditional Sale and entered with the DBP a temporary arrangement whereby in consideration for the deferment of the Notarial Rescission of Deed of Conditional Sale, plaintiff CUBA promised to make certain payments as stated in temporary Arrangement; - Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act which CUBA received,a and thereafter, defendant DBP took possession of the Leasehold Rights of the fishpond in question, advertised the public bidding to dispose of the property; and thereafter executed a Deed of Conditional Sale in favor of defendant Agripina Caperal; defendant Caperal was awarded Fishpond Lease Agreement by the Ministry of Agriculture and Food. - CUBA filed complaint against DBP and Caperal - RTC: sided with CUBA, holding that (1) DBP's taking possession and ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil Code; (2) condition no. 12 of the Assignment of Leasehold Rights is void for being a clear case of pactum commissorium expressly prohibited and declared null and void by Article 2088 of the Civil Code; (3) the Deed of Conditional Sale in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale in favor of

A2010 page 87 Prof. Labitag defendant Caperal, as well as the Assignment of Leasehold Rights executed by Caperal in favor of DBP, were also void and ineffective; awarding P1,067,500.00 for actual damages.; P100,000.00as moral damages; P50,000.00 for exemplary damages; P100,000.00 for attorney's fees; and ordering DBP to reimburse and pay to defendant Agripina Caperal P1,532,610.75 representing the amounts paid by defendant Agripina Caperal to defendant Development Bank of the Philippines under their Deed of Conditional Sale; - CA: declared valid the ff: (1) the act of DBP in appropriating Cuba's leasehold rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the deed of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered DBP to turn over possession of the property to Caperal as lawful holder of the leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as actual damages; P50,000 as moral damages; and P50,000 as attorney's fees. ISSUES 1. WON the assignment of leasehold rights was a mortgage contract, not amounting to novation, cession under Art. 1255 of Civil Code, nor a Dation under Art. 1254 2. WON condition no. 12 of the deed of assignment constituted pactum commissionrum, as was held by the trial court 3. WON the act of DBP of appropriating CUBA’s leasehold rights was violative of Art. 2088 of the Civil Code, and that DBP should have just conducted a foreclosure proceeding, so that the execution of the Deed of Conditional Sale in favor of Caperal was void 4. WON CUBA is estopped from questioning DBP’s act of appropriation 5. WON the award for the damages were correctly awarded 5.1 WON the award for actual damages was correctly awarded 5.2 WON the award for moral damages was correctly awarded, and therefore the awarding of exemplary damages and attorney’s fees HELD 1. YES, the assignment of leasehold rights was a mortgage contract. Ratio An assignment to guarantee an obligation is in effect a mortgage, and being in its essence a mortgage, is but a security and not a satisfaction of indebtedness. Reasoning The stipulations of the deeds of assignment constantly referred to the contract as a mortgage contract. The parties admitted that the assignment was by way of security for the payment of the loans. - on NOVATION: the said assignment merely complemented or supplemented the notes; both could stand together. The obligation to pay a sum of money remained, and the assignment merely served as security for the loans covered by the promissory notes. - on CESSION: Article 1255 contemplates the existence of two or more creditors and involves the assignment of all the debtor's property, but in the case only DBP is the creditor - on DATION: The assignment, being in its essence a mortgage, was but a security and not a satisfaction of indebtedness so not Dation as defined in Article 1254 2. NO

Obligations and Contracts Ratio To have a pactum commissiorum, the following elements must be present: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. Reasoning Condition no. 12 merely provided for the appointment of DBP as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in case of default by CUBA, and to apply the proceeds to the payment of the loan. -The provision is a standard condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged property for the payment of the principal obligation. 3. YES Ratio Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the consequent auction sale for failure to comply with the requirements laid down by law, such as Act No. 3135, as amended. 15 With more reason that the sale of property given as security for the payment of a debt be set aside if there was no prior foreclosure proceeding. Reasoning Article 2088 of the Civil Code forbids a creditor from appropriating, or disposing of, the thing given as security for the payment of a debt. - DBP knew that foreclosure proceedings were necessary, however it did not conduct any. In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of Fisheries canceled CUBA's original lease permit, approved the deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which were predicated on such false representation, as well as the subsequent acts emanating from DBP's appropriation of the leasehold rights, should therefore be set aside. To validate these acts would open the floodgates to circumvention of Article 2088 of the Civil Code. 4. NO Ratio Estoppel cannot give validity to an act that is prohibited by law or against public policy Reasoning The appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code and to public policy, cannot be deemed validated by estoppel. 5. 5.1 NO Ratio Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty. Reasoning Other than the testimony of CUBA and her caretaker, there was no proof as to the existence of those items which were allegedly damaged before DBP took over the fishpond in question (no inventory, receipts presented). - Such claim for "losses of property," having been made before knowledge of the alleged actual loss, was therefore speculative. The alleged loss could have been a mere afterthought or subterfuge to justify her claim for actual damages. - From 1979 until after the filing of her complaint in court in May 1985, CUBA did not bring to the attention of DBP the alleged loss, and CUBA even admitted that the loss was due to the fraudulent acts of her fishpond workers. 5.2 YES, but reduced Reasoning DBP's act of appropriating CUBA's leasehold rights which was contrary to law and public policy, as well as its false representation to the then Ministry of

A2010 page 88 Prof. Labitag Agriculture and Natural Resources that it had "foreclosed the mortgage," an award of moral damages in the amount of P50,000 is in order. - Exemplary or corrective damages in the amount of P25,000 should likewise be awarded by way of example or correction for the public good. There being an award of exemplary damages, attorney's fees are also recoverable. Disposition WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CAG.R. CV No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral damages, which is hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the finding that condition no. 12 of the deed of assignment constituted pactum commissorium and the award of actual damages; and by reducing the amounts of moral damages from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the attorney's fees, from P100,000 to P20,000. The Development Bank of the Philippines is hereby ordered to render an accounting of the income derived from the operation of the fishpond in question. Case is REMANDED to the trial court for the reception of the income statement of DBP, as well as the statement of the account of Lydia P. Cuba, and for the determination of each party's financial obligation to one another.

FILINVEST CREDIT CORP. V PHILIPPINE ACETYLENE CO, INC. DE CASTRO; January 30, 1982 NATURE Appeal from the decision of the Court of First Instance of Manila FACTS - On October 30, 1971, the Philippine Acetylene Co., Inc. purchased from Alexander Lim a 1969 Chevorlet for P55,247.80 with a down payment of P20,000.00 and the balance of P35,247.80 payable, under the terms and conditions of the promissory note, at a monthly installment of P1,036.70 for thirty-four months, due and payable on the first day of each month starting December 1971 through and inclusive September 1, 1974 with 12 % interest per annum on each unpaid installment, and attorney's fees in the amount equivalent to 25% of the total of the outstanding unpaid amount. As security for the payment, the appellant executed a chattel mortgage over vehicle in favor of Lim. On November 2, 1971, Alexander Lim assigned to the Filinvest Finance Corporation all his rights, title, and interests in the promissory note and chattel mortgage by virtue of a Deed of Assignment. Thereafter, the Filinvest Finance Corporation, as a consequence of its merger with the Credit and Development Corporation assigned to the new corporation, Filinvest Credit Corporation, all its rights, title, and interests on the aforesaid promissory note and chattel mortgage which, in effect, the payment of the unpaid balance owed by Phil. Acetylene to Alexander Lim was financed by Filinvest such that Lim became fully paid. Phil Acetylene had defaulted in the payment of nine successive installments. Filinvest then sent a demand letter for the aforesaid amount in full in addition to stipulated interest and charges or return the mortgaged property to be remitted at Filinvest’s office within five days from date of the letter during office hours. Appellant, thru its asst. general-manager advised Filinvest of its decision to return the mortgaged property, which return shall be in full satisfaction of its indebtedness pursuant to Article 1484 of the New Civil Code. The car was returned

Obligations and Contracts to the Filinvest together with the document "Voluntary Surrender with Special Power of Attorney To Sell" executed by appellant on March 12, 1973 and confirmed to by Filinvest's vice-president. On April 4, 1973, Filinvest wrote a letter to appellant informing the latter that Filinvest cannot sell the car as there were unpaid taxes worth P70,122.00 on the car. Filinvest requested the appellant to update its account by paying the installments in arrears and accruing interest in the amount of P4,232.21 on or before April 9, 1973. On May 8, 1973, Filinvest offered to deliver back the motor vehicle to the appellant but the latter refused to accept it, so Filinvest instituted an action for collection of a sum of money with damages in this petition. Respondent’s Comments - Filinvest has no cause of action against it since its obligation towards Filinvest was extinguished when in compliance with the demand letter, it returned the mortgaged property. Assuming that the return of the property did not extinguish its obligation, it was nonetheless justified in refusing payment since Filinvest is not entitled to recover the same due to the breach of warranty committed by Lim. ISSUES 1. WON the return of the mortgaged motor vehicle to Filinvest by totally extinguished and/or cancelled Phil Acetylene’s obligation 2. WON the warranty for the unpaid taxes on the mortgaged motor vehicle may be properly raised and imputed to or passed over to the appellee. HELD 1. NO Ratio The mere return of the mortgaged motor vehicle by the mortgagor, the herein appellant, to the mortgagee, the herein appellee, does not constitute dation in payment or dacion en pago in the absence, express or implied of the true intention of the parties. Reasoning Dacion en pago is the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of obligation. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale or innovation to have the effect of totally extinguishing the debt or obligation. The evidence on the record fails to show that Filinvest consented, or at least intended, that the mere delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as actual payment, more specifically dation in payment or dacion en pago. The fact that the mortgaged motor vehicle was delivered to him does not necessarily mean that ownership thereof, as juridically contemplated by dacion en pago, was transferred from appellant to appellee. In the absence of clear consent of appellee to the proferred special mode of payment, there can be no transfer of ownership of the mortgaged motor vehicle from appellant to appellee. If at all, only transfer of possession of the

A2010 page 89 Prof. Labitag mortgaged motor vehicle took place, for it is quite possible that appellee, as mortgagee, merely wanted to secure possession to forestall the loss, destruction, fraudulent transfer of the vehicle to third persons, or its being rendered valueless if left in the hands of the appellant. Filinvest is also not guilty of estoppel since it never accepted the mortgaged car in full satisfaction of the debt. It is the fact of foreclosure and actual sale of the mortgaged chattel that bar the recovery by the vendor of any balance of the purchaser's outstanding obligation not satisfied by the sale 2. NO Ratio The unpaid taxes on the vehicle is a burden on the property and must be borne by the owner. Reasoning There is a specific provision in the Deed of Sale that the Lim warrants the sale of the car to be free from liens and encumbrances. When Filinvest accepted the assignment of credit from the Lim, there is a specific agreement that Lim continued to be bound by the warranties he had given to Filinvest and that if it appears subsequently that "there are such counterclaims, offsets or defenses that may be interposed by the debtor at the time of the assignment, such counterclaims, offsets or defenses shall not prejudice the FILINVEST FINANCE CORPORATION and I (Alexander Lim) further warrant and hold the said corporation free and harmless from any such claims, offsets, or defenses that may be availed of.". Since as earlier shown, the ownership of the mortgaged property never left the mortgagor, the Phil Acetylene Co., the burden of the unpaid taxes should be borne by him, who, in any case, may not be said to be without remedy under the law, but definitely not against appellee to whom were transferred only rights, title and interest, as such is the essence of assignment of credit. Disposition The judgment appealed from is hereby affirmed in toto with costs against defendant-appellant.

SEPARATE OPINION ABAD SANTOS [ concur]

The document indicated that the appellee was to foreclose the chattel mortgage. The surrender of the car to the appellee was a mere preparatory act for its sale in a foreclosure of the chattel mortgage. After the appellee discovered, without negligence on its part, that foreclosure of the chattel mortgage was impractical, it had the right which it exercised to abandon the chattel mortgage and demand fulfillment of the obligation.

DE GUZMAN V COURT OF APPEALS CONCEPCION, July 23, 1985

NATURE Petition for the reversal of the decision of the respondent appeal appellate court which dismissed the petition to annul and set aside the orders of the Court of First Instance of Rizal, Pasay City Branch, dismissing the petitioners' appeal in Civil Case No. 5247- P and to restrain the respondents from enforcing the same FACTS - The de Guzman et al, as SELLER, and Singh, as BUYER, executed a Contract to Sell covering two parcels of land owned by the petitioners located at Pasay City

Obligations and Contracts - Sigh should pay the balance of the purchase price of P133,640 on or before February 17, 1975. - Two days before the said date, Singh asked the petitioners to furnish her with a statement of account of the balance due; copies of the certificates of title covering the two parcels of land subject of the sale; and a copy of the power of attorney executed by Gestuvo in favor of de Guzman. Petitioners denied the request. - Singh filed a complaint for specific performance with damages against the petitioners before the CFI of Rizal. - She said that petitioners committed a breach of contract, and had also acted unfairly and in manifest bad faith for which they should be held liable for damages. - Petitioners claimed that the complaint failed to state a cause of action; that the balance due was already pre-determined in the contract; that the petitioners have no obligation to furnish Singh with copies of the documents requested; and that Singh's failure to pay the balance of the purchase price on the date specified had caused the contract to expire and become ineffective without necessity of notice or of any judicial declaration to that effect. - Trial court approved the compromise agreement submitted by the parties wherein they agreed on the following: 1. Not later than December 18, 1977, plaintiff will pay defendants the total amount of P240,000 and in case of failure to do so, she shall have only until January 27, 1978 within which to pay the total amount of P250,000, which shall be treated as complete and final payment of the consideration in the contract to sell 2. Immediately upon receipt of either amount within the periods so contemplated, defendants undertake to immediately execute the necessary legal instruments to transfer to plaintiff the title to the parcels of land 3. That defendants would temporarily desist from enforcing their right or possession over the properties involved herein until January 27, 1978, but this shall not be construed as an abandonment or waiver of its causes of action 4. Should plaintiff fail to pay either of the amounts within the period herein stipulated, the aforesaid Contract to Sell dated February 17, 1971 shall be deemed rescinded and plaintiff agrees to voluntarily surrender and vacate the same without further notice or demand; 5. That payment of either amounts above-stated shall take place at CFI Rizal Branch 3 at 10:00 a.m. Friday, January 27, 1978 unless payment has been earlier made, in which case plaintiff shall produce receipt of the same at the same time and place 6.Both parties waive and abandon, by reason hereof, their respective claims and counterclaims as embodied in the Complaint and Answer. - On January 28, 1978, the petitioners filed a motion for the issuance of a writ of execution, claiming that Singh had failed to abide by the terms of the compromise agreement and pay the amount specified in their compromise agreement within the period stipulated. - Singh opposed the motion, saying that she had complied with the terms and conditions of the compromise agreement and asked the court to direct the petitioners to comply with the court's decision and execute the necessary documents to effect the transfer of ownership of the two parcels of land to her. - CFI directed the petitioners to immediately execute the necessary documents, transferring to private respondent the title to the properties. CA affirmed.

A2010 page 90 Prof. Labitag ISSUE WON Singh had complied with the terms of the compromise agreement HELD YES. - Singh had substantially complied with the terms and conditions of the compromise agreement. Her failure to deliver to the petitioners the full amount on January 27, 1978 was not her fault. The blame lies with the petitioners. The record shows that Singh went to the sala of Judge Bautista on the appointed day to make payment, as agreed upon in their compromise agreement. But, the petitioners were not there to receive it. Only the petitioners' counsel appeared later, but, he informed Singh that he had no authority to receive and accept payment. Instead, he invited Singh and her companions to the house of the petitioners to effect payment. But, the petitioners were not there either. They were informed that the petitioner Pilar de Guzman would arrive late in the afternoon. Singh was assured, however, that she would be informed as soon as the petitioners arrived. Singh, in her eagerness to settle her obligation, consented and waited for the call which did not come and unwittingly let the period lapse. - The next day, January 28, 1978, Singh went to the office of the Clerk of the Court of First Instance of Rizal, Pasay City Branch, to deposit the balance of the purchase price. But, it being a Saturday, the cashier was not there to receive it. So, on the next working day, Monday, January 30, 1978, Singh deposited the amount of P30,000 with the cashier of the Office of the Clerk of the Court of First Instance of Rizal, Pasay City Branch, to complete the payment of the purchase price of P250,000. - Since the deposit of the balance of the purchase price was made in good faith and that the failure of Singh to deposit the purchase price on the date specified was due to the petitioners who also make no claim that they had sustained damages because of the two days delay, there was substantial compliance with the terms and conditions of the compromise agreement. Disposition WHEREFORE, the petition should be, as it is hereby DISMISSED. The temporary restraining order heretofore issued is LIFTED and SET ASIDE. With costs against the petitioners.

TLG INTERNATIONAL CONTINENTAL ENTERPRISING, INC. V FLORES ANTONIO; October 31, 1972 NATURE Petition for certiorari to set aside orders (of June 23, 1972 and July 30, 1972) of respondent judge denying petitioner’s motion to withdraw sum of P3,750.00 deposited by it by way of consignation FACTS - In Oct. 5, 1971, Respondent judge granted petitioner’s “Motion To Intervene”, and admitted its “Complaint in Intervention” in the case of Bearcon Trading Co., Inc. v. Juan Fabella Et Al - the case was an action for declaratory relief involving the rights of Bearcon as lessee of the premises of the defendants in that case.

Obligations and Contracts - Petitioner intervened as sub-lessee of Bearcon over the property. - Purpose: 1. to protect its rights as such sub-lessee, 2. to make a consignation of the monthly rentals as it didn’t know who was lawfully entitled to receive payments of the monthly rentals. - Because of the admission of the “Complaint In Intervention”, petitioner deposited P3,750 with the CFI, by way of rentals. - Oct. 20, 1971: defendants in the case filed an “Omnibus Motion”, praying that the complain, as well as the Complaint In Intervention be dismissed. - the court a quo dismissed both the complaint and the complaint in intervention - May, 1972: petitioner filed Motion to withdraw the sums it deposited, because the order which dismissed the case without a resolution left the intervenor “without any recourse but to apply for authority to withdraw the amount and turn over the same to the defendants in accordance with the understanding arrived at between the parties hereto”. - June 23 and July 15, 1972: respondent denied the motion and the motion for consideration ISSUE WON Respondent could authorize the withdrawal of the deposits considering that according to Respondent, the Court “has not ordered the intervenor to make any deposit in connection” with the case HELD Yes. Respondent Judge had the authority to authorize the withdrawal of the deposits. Ratio A court shall have the authority to authorize the withdrawal of a deposit, when the intervenor made the deposit as a consequence of the admission by the Court of its “Complaint In Intervention”. Reasoning - In general, Art. 1260: Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force”. - The case was dismissed before the amount deposited was either accepted by the creditor, or a declaration was made by the court approving such consignation. - Dismissal rendered the consignation ineffectual - the Respondent should have allowed withdrawal. - Repondent’s claim that it had no authority since it “has not ordered intervenor to make” the deposit ignores the fact that the deposit was made because of the admission of its “Complaint in Intervention” - Deposit was made and officially receipted by the Clerk of Court - From the moment the money was deposited, the money remained under the control and jurisdiction of the court and the former could not recover it without an express order of restitution.” Disposition WHEREFORE, the orders dated June 23, 1972 and July 15, 1972 subject of the petition for certiorari are hereby set aside and Respondent directed to grant the withdrawal of the deposit in accordance with the foregoing.

MCLAUGHLIN V COURT OF APPEALS FERIA; October 10, 1986

A2010 page 91 Prof. Labitag NATURE Appeal by certiorari from the decision of the Court of Appeals FACTS - On Feb 28, 1977, petitioner Luisa F. McLaughlin and private respondent Ramon Flores entered into a contract of conditional sale of real property. Paragraph 1 of the deed of conditional sale fixed the total purchase price of P140,000.00 payable as follows: a) P26,550.00 upon the execution of the deed; and b) the balance of P113,450.00 to be paid not later than May 31, 1977. The parties also agreed that the balance shall bear interest at the rate of 1% per month to commence from Dec 1, 1976, until the full purchase price was paid. - On June 19, 1979, petitioner filed a complaint for the rescission of the deed of conditional sale due to the failure of Flores to pay the balance due on May 31, 1977. - On Dec 27, 1979, the parties submitted a Compromise Agreement on the basis of which the court rendered a decision on Jan 22, 1980. In said compromise agreement, Flores acknowledged his indebtedness to petitioner under the deed of conditional sale in the amount of P119,050.71, and the parties agreed that said amount would be payable as follows: a) P50,000.00 upon signing of the agreement; and b) the balance of P69,059.71 in two equal installments on June 30, 1980 and Dec 31, 1980. - As agreed upon, Flores paid P50,000.00 upon the signing of the agreement and he also paid an "escalation cost" of P25,000.00. - Under paragraph 3 of the Compromise Agreement, private respondent agreed to pay P1,000 pesos monthly rental beginning Dec 5, 1979 until the obligation is duly paid, for the use of the said property - Paragraphs 6 and 7 of the Compromise Agreement further state: -"That the parties are agreed that in the event the defendant (Flores) fails to comply with his obligations herein provided, the plaintiff (Mclaughlin) will be entitled to the issuance of a writ of execution rescinding the Deed of Conditional Sale of Real Property. In such eventuality, defendant (Flores) hereby waives his right to appeal to (from) the Order of Rescission and the Writ of Execution which the Court shall render in accordance with the stipulations herein provided for. -"That in the event of execution all payments made by defendant (private respondent) will be forfeited in favor of the plaintiff (petitioner) as liquidated damages." - On Oct 15, 1980, McLaughlin wrote to private respondent demanding that he pay the balance of P69,059.71 on or before Oct 31, 1980. This demand included not only the installment due on June 30, 1980 but also the installment due on Dec 31, 1980. - On Oct 30, 1980, Flores sent a letter to petitioner signifying his willingness and intention to pay the full balance of P69,059.71 - On Nov 7, 1980, petitioner filed a Motion for Writ of Execution alleging that Flores failed to pay the installment due on June 1980 and that since June 1980 he had failed to pay the monthly rental of P1,000.00. Petitioner prayed that a) the deed of conditional sale of real property be declared rescinded with forfeiture of all payments as liquidated damages; and b) the court order the payment of P1,000.00 back rentals since June 1980 and the eviction of private respondent. - TC granted the motion for writ of execution.

Obligations and Contracts - CA held that the Song Fo v Hawaian Ruling is applicable in the case at bar – Recission will not be permitted for slight breach of contract. ISSUES 1. WON contract should be rescinded 2. WON respondent is liable for the P76,059.71 he attempted to pay to the petitioner but the petitioner did not accept (even though the 30-day period provided by R.A. 6552 has not yet expired) HELD 1. NO - SC agrees with the CA that it would be inequitable to cancel the contract of conditional sale and to have the amount of P101,550.00 (P148,126.97 according to private respondent in his brief) already paid by him under said contract, excluding the monthly rentals paid, forfeited in favor of petitioner, particularly after private respondent had tendered the amount of P76,059.71 in full payment of his obligation. - Private respondent had substantially complied with the terms and conditions of the compromise agreement. - Section 4 of RA No. 6552 which took effect on Sept14, 1972 provides as follows: "In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of the cancellation or the demand for rescission of the contract by a notarial act." - Petitioner demanded payment of the balance of P69,059.71 on or before October 31, 1980, petitioner could cancel the contract after 30 days from receipt by private respondent of the notice of cancellation. Considering petitioner's motion for execution filed on November 7, 1980 as a notice of cancellation, petitioner could cancel the contract of conditional sale after 30 days from receipt by private respondent of said motion. Private respondent's tender of payment of the amount of P76,059.71 together with his motion for reconsideration on November 17, 1980 was, therefore, within the thirty-day period granted by R.A.6552. 2. YES - The tender made by private respondent of a certified bank manager's check payable to petitioner was a valid tender of payment. The certified check covered not only the balance of the purchase price in the amount of P69,059.71, but also the arrears in the rental payments from June to December, 1980 (P7,000.00) or a total of P76,059.71. Section 49, Rule 130 of the Revised Rules of Court provides that: "An offer in writing to pay a particular sum of money or to deliver a written instrument or specific property is, if rejected, equivalent to the actual production and tender of the money, instrument, or property." - However, although private respondent had made a valid tender of payment which preserved his rights as a vendee in the contract of conditional sale of real property, respondent did not follow it with a consignation or deposit of the sum due with the court. The Manager's Check tendered by private respondent on November 17, 1980 was subsequently cancelled and converted into cash, but the cash was not deposited with the court.

A2010 page 92 Prof. Labitag - According to Article 1256 (Civil Code), if the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due, and that consignation alone shall produce the same effect in the five cases enumerated therein; Article 1257 provides that in order that the consignation of the thing (or sum) due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation; and Article 1258 provides that consignation shall be made by depositing the thing (or sum) due at the disposal of the judicial authority and that the interested parties shall also be notified thereof. - Soco vs. Militante: "Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. - Although private respondent had preserved his rights as a vendee in the contract of conditional sale of real property by a timely valid tender of payment of the balance of his obligation which was not accepted by petitioner, he remains liable for the payment of his obligation because of his failure to deposit the amount due with the court. - Inasmuch as petitioner did not accept the aforesaid amount, it was incumbent on private respondent to deposit the same with the court in order to be released from responsibility. Since private respondent did not deposit said amount with the court, his obligation was not paid and he is liable in addition for the payment of the monthly rental of P1,000.00 from January 1, 1981 until said obligation is duly paid, in accordance with paragraph 3 of the Compromise Agreement. Upon full payment of the amount of P76,059.71 and the rentals in arrears, private respondent shall be entitled to a deed of absolute sale in his favor of the real property in question. Disposition. Decision of the CA AFFIRMED w/ the modifications: (a) Petitioner ordered to accept from private respondent the Metrobank Cashier's Check in the amount of P76,059.71 (b) Private respondent ordered to pay petitioner the rentals in arrears of P1,000.00 a month from Jan 1, 1981 until full payment; and (c) Petitioner ordered to execute a deed of absolute sale in favor of private respondent over the real property upon full payment of the amounts .

SOCO V MILITANTE GUERRERO; June 28, 1983 NATURE Petition to review the decision of the Court of First Instance of Cebu

Obligations and Contracts FACTS - Soco and Francisco entered a contract of lease on January 17, 1973 whereby Soco leased her commercial building and lot situated at Manalili Street, Cebu City, to Francisco for a monthly rental of Php 800.00 for a period of 10 years renewable for another 10 years at the option of the lessee. - Sometime later, Francisco noticed that Soco did not anymore send her collector for the payment of rentals and at times there were payments made but no receipts were issued. This situation prompted Francisco to write Soco, the letter dated February 7, 1975 which the latter received. - On May 13, 1975, Francisco wrote the Vice-President of Comtrust, Cebu Branch requesting the latter to issue checks to Soco in the amount of Php 840.00 every 10th of the month, obviously for payment of his monthly rentals. This request of Francisco was complied with by Comtrust in its letter dated June 4, 1975. - Pursuant to his letter dated February 7, 1975, Francisco paid his monthly rentals to Soco by issuing checks of the Commercial Bank and Trust Company where he had a checking account. - These payments in checks were received because Soco admitted that prior to May 1977 defendant Francisco had been religiously paying the rental. - Soon after Soco learned that Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more than Php 3,000.00 which is much higher than what Francisco was paying to Soco, the latter felt that she was on the losing end so she tried to look for ways and means to terminate the contract. - In view of the alleged non-payment of rental of the leased premises from May, 1977, Soco, through her lawyer, sent a letter dated November 23, 1978 to Francisco serving notice to the latter “to vacate the premises leased.” - In answer to this letter, Francisco through his lawyer informed Soco and her lawyer that all payments of rental due her were in fact paid by Commercial Bank and Trust Company through the Clerk of Court of the City Court of Cebu. Despite this explanation, Soco filed this instant case of Illegal Detainer on January 8, 1979. - Soco alleged that she personally demanded form Francisco the May, June, July and August rentals but Francisco did not pay for the reason that he had no funds available at that time. - This allegation of Soco was denied by Francisco because per his instructions, the Commercial Bank and Trust Company issued checks in favor of Soco representing payments for monthly rentals for the months of May, June, July, August, 1977 as shown in Debit Memorandum issued by Comtrust. These payments are further bolstered by the certification issued by Comtrust dated October 29, 1979. - Soco was informed of the deposits made to the Clerk of Court through a letter of Atty. Pampio Abarientos dated June 9, 1977 (requesting Soco to claim the rental payment from Francisco’s office otherwise the latter would be constrained to make a consignation) and July 6, 1977 (informing Soco that Francisco has consigned rental payment for May and June, 1977 to the Clerk of Court of City Court of Cebu) as well as in the answer of Francisco in Civil Case R-16261. -She was further notified of these payments by consignation in the letter of Atty. Menchavez dated November 28, 1978 (answer to Soco’s letter alleging non-payment; the letter proved Francisco’s payment for November, 1978 as deposited in the Clerk of Court). - The City Court of Cebu ruled that the consignation was not valid and ordered Francisco to vacate immediately the leased premises, pay the rentals due, pay the plaintiff’s attorney’s fee, pay for damages and incidental litigation expenses and pay the costs.

A2010 page 93 Prof. Labitag - The Court of First Instance reversed this judgment and found the consignation to be valid. Hence, this appeal. ISSUES 1. WON the lessee failed to pay the monthly rentals beginning May, 1977 up to the time the complaint for eviction was filed on January 8, 1979. (WON lessee made a valid tender of payment) 2. WON the consignation of the rentals was valid HELD 1 YES (NO) - The June and July, 1977 letters may be proof of tender of payment but only for the months they refer to. They are not proof of tender of payment of other or subsequent monthly rentals. The November, 1978 letter likewise is not a proof of tender of payment for the said month. It merely proves rental deposit for the particular month of November, 1978 and no other. - Furthermore, there is no factual basis for the lower court’s finding that the lessee had tendered payment of the monthly rentals, thru his bank, citing the lessee’s letter requesting the bank to issue checks in favor of Soco in the amount of Php840.00 every 10th of each month and to deduct the full amount and service fee from his current account. It must be noted that the letter also requested said bank to notify them every time the check is ready so they may send somebody to get it. Evidently, it was the lessee’s duty to send someone to get the cashier’s check from the bank and logically, the lessee has the obligation to make and tender the check to the lessor. This the lessee failed to do. - Tender of payment must be made in lawful currency. While payment in check by the debtor may be acceptable as valid, if no prompt objection to said payment is made the fact that in previous years payment in check was accepted does not place its creditor in estoppel from requiring the debtor to pay his obligation in cash. Thus, tender of a check to pay for an obligation is not a valid tender of payment thereof. 2. NO - For a consignation to be valid, its essential requisites must be complied with fully and strictly in accordance with the law, Articles 1256 to 1261, new Civil Code. That these articles must be accorded a mandatory construction is clearly evident from the very language of the codal provisions themselves which require absolute compliance with the essential requisites therein provided. - Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment. In order that consignation may be effective, the debtor must first comply with certain requirements prescribed by laws. The debtor must show, (a) that there was a debt due; (b) that the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due, Article 1176; (c) that previous notice of the consignation had been given to the person interested in the performance of the obligation, Article 1177; (d) that the amount due was placed at the disposal of the court, Article 1178; (e) that after the consignation had been made the person interested was notified thereof, Article 1178. - Failure in any of these requirements is enough ground to

Obligations and Contracts render a consignation ineffective. Furthermore, without notice first announced to the persons interested in the fulfillment of the obligation, the consignation as payment is void. - In the case at bar, respondent Francisco failed to prove the following requisites of a valid consignation, (a) tender of payment of the monthly rentals to the lesser except that indicated in the June, 1977 letter (tender of payment already discussed above); (b) respondent lessee failed to prove the first notice to the lessor prior to consignation, except payment referred to in the June, 1977 letter. The lessee must give prior notice of consignation for each monthly rental; (c) respondent lessee likewise failed to prove the second notice, that is after consignation has been made, to the lessor except the consignation referred to in the May and June cashier’s check. The lessee should give a notice of consignation of each deposit every monthly rental. The bank did not send notice to Soco that checks will be deposited and have actually been deposited in consignation with the Clerk of Court because no instructions were given by its depositor; (d) the respondent failed to prove actual deposit or consignation of the monthly rentals except the two cashier’s checks previously mentioned. Not a single copy of the official receipts issued by the Clerk of Court was presented at the trial of the case to prove actual deposit or consignation. The official receipts are the best proof of actual consignation. The court also found that the tenant only made the deposits due in court two years later and after the filing of the complaint for illegal detainer. The debit memorandums presented as evidence does not prove payment of rentals or deposits in court. These debit memorandums are merely internal banking practices or office procedures involving the bank and its depositor which is not binding upon a third person such as the lessor. What is important is whether the checks were picked up by the lessee as per the arrangement, wherein the lessee shall pick up the check issued by the bank to tender the same to the lessor. The lessee failed to prove that he complied with the arrangement

SOTTO V MIJARES MAKALINTAL; May 8, 1969 NATURE Appeal from the order of the CFI of Negros Occidental FACTS - Cristina Sotto (plaintiff-appellee) and Hernani Mijares along with other individuals (defendants-appellants), were parties to a contract - On November 13, 1962, during the pendency of Civil Case No. 6796, a proceeding to foreclose a real estate mortgage earlier executed by defendants to plaintiff in consideration of a P5,000.00 loan which the former had allegedly failed to pay, plaintiff filed a "Motion for Deposit" which stated: 1. that the balance indebtedness of the defendants in favor of the plaintiff is the amount of P5,106.00 2. that defendants, in their answer, admitted the said claim of P5,106.00 3. that in view of the admission of the defendants of the same it is fitting and proper that the said amount of P5,106.00 be deposited in the Office of the Clerk of Court of this province or to deliver the same to the plaintiff and/or her counsel. - Defendants, in their "Opposition" signified their willingness to deposit the requested amount provided that the complaint be dismissed and that they be absolved of all other liabilities, expenses and costs.

A2010 page 94 Prof. Labitag - On November 26, 1962 the lower court ordered the defendants to deposit said amount to the Clerk of Court - On November 28, 1962 plaintiff filed a motion for partial judgment on the pleadings with respect to the amount of P5,106.00, modifying their previous request for judicial deposit, which had already been granted - Defendants moved to reconsider the order of November 26, explaining that through oversight they failed to allege in their "Opposition" that the sum of P5,106.00 was actually secured by a real estate mortgage. They would thus premise their willingness to deposit said amount upon the condition that the plaintiff will cancel the mortgage above-mentioned - On March 20, 1963 the lower court resolved both motions, in effect denying them and reiterating its previous order - Hence, this appeal ISSUES Procedural WON the order is unappealable Substantive WON the court below acted with authority and in the judicious exercise of its discretion in ordering the defendants to make the deposit but without the condition they had stated HELD Procedural Plaintiff-appellant maintains that the order is interlocutory, since it does not dispose of the case with finality but leaves something still to be done, and hence is unappealable. - The remedy, it is pointed out, should have been by petition for certiorari but this Court sees fit to disregard technicalities and treat this appeal as such a petition and consider it on the merits Substantive - Whether or not to deposit at all the amount of an admitted indebtedness, or to do so under certain conditions, is a right which belongs to the debtor exclusively - If he refuses he may not be compelled to do so, and the creditor must fall back on the proper coercive processes provided by law to secure or satisfy his credit, as by attachment, judgment and execution - From the viewpoint of the debtor a deposit such as the one involved here is in the nature of consignation, and consignation is a facultative remedy which he may or may not avail of. - Indeed, the law says that "before the creditor has accepted the consignation or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. - If the debtor has such right of withdrawal, he surely has the right to refuse to make the deposit in the first place - The court, in issuing the order complained of, committed grave abuse of discretion amounting to excess of jurisdiction. Disposition The order appealed from is set aside

Obligations and Contracts MEAT PACKING CORPORATION OF THE PHILIPPINES V SANDIGANBAYAN YNARES-SANTIAGO; June 22, 2001 NATURE Special Civil Action FACTS Meat Packing Corporation of the Philippines (MPCP) is a corporation wholly owned by the GSIS the MPCP entered an Agreement with the Philippine Integrated Meat at the rate of P1,375,563.92 payable over 28 years with it totaling P38,515,789.87. In 1986, PCGG sequestered all the assets, properties, and records of PIMECO which included the meat packing plant and the lease-purchase agreement. MPCP wrote a letter of rescission of the lease-purchase agreement on ther ground of non-payment of non-payment of rentals of more than P.2,000,000.00 for the year 1986. A case was filed in the Sandiganbayan for a Writ of Preliminary Injunction stating that the transfer of PIMECO to MPCP will result in the dissipation of assets and that the PCGG commited a grave abuse of authority in its termination of the lease-purchase agreement. The Sandiganbayan issued the writ of preliminary injunction; it also continued to conduct its hearings regarding the validity of the turn-over of the meat packing plant to GSIS. The Sandiganbayan ruled that the PCGG gravely abused its discretion. PIMECO asked for declaratory relief and remedies. It stated that it has paid rentals from 1981-1985 and prior to the sequestration it was able to pay MPCP P846,269.70, however, since the PCGG management took over the plant and presented the danger of making PIMECO in default in the payment of the rentals to MPCP for three annual installments and causing the cancellation. PIMECO prayed for a declaration that it was not bound by the said payment. PCGG paid MPCP two checks amounting to P5 M. The Sandiganbayan set a hearing for the declaration and MPCP through a special appearance filed its comment. The Sandiganbayan ruled that MPCP should accept the P5 M payment made by the PCGG. MPCP filed for a Motion for Reconsideration that was denied. The Petition for relief on the other hand was dismissed since the P5 M already covered part of the P7,530,036.21 previously unpaid rentals thus making it moot and academic. This gave rise to this petition for certiorari, mandamus, and prohibition. ISSUES 1. WON MPCPs refusal to accept the payment was unjustified 2. WON Sandiganbayan has a jurisdiction to accept the consignation HELD 1. YES, it is unjustified. - The Sandiganbayan already approved the consignation by the PCGG wherein consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment, and it generally requiresa a prior tendser of payment. Tender on the otherhand is the antecedent of conmsignation, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment maybe extrajudicial while consigning is necessarily judicial. The priority of tendering payment is to attempt to make a private settlement before proceeding to the solemnities of consignation. Both tender and consignation validly made produces the effect of payment and

A2010 page 95 Prof. Labitag extinguishes the obligation. Refusal due to the said rescission of contract is untenable since MPCP accepted annual amortizations or rentals, advances, insurance, and taxes from PIMECO. The acceptance negates the said rescission. 2. YES - The voluntary appearance in court and its submission to its authority or by service of summons gives the courts jurisdiction over the person. MPCPs appearance in the courts in the Civil Case alreadr created the said jurisdiction

PABUGAIS V SAHIJWANI YNARES-SANTIAGO; February 23, 2004 NATURE Petition for review on certiorari of the decision of Court of Appeals which set aside the Decision of the Regional Trial Court of Makati. FACTS - Pursuant to an "Agreement And Undertaking", petitioner Teddy G. Pabugais, in consideration of the amount of Fifteen Million Four Hundred Eighty Seven Thousand Five Hundred Pesos (P15,487,500.00), agreed to sell to respondent Dave P. Sahijwani a lot containing 1,239 square meters located at Jacaranda Street, North Forbes Park, Makati, Metro Manila. Respondent paid petitioner the amount of P600,000.00 as option/reservation fee and the balance of P14,887,500.00 to be paid within 60 days from the execution of the contract, simultaneous with delivery of the owner's duplicate Transfer Certificate of Title in respondent's name the Deed of Absolute Sale; the Certificate of Non-Tax Delinquency on real estate taxes and Clearance on Payment of Association Dues. The parties further agreed that failure on the part of respondent to pay the balance of the purchase price entitles petitioner to forfeit the P600,000.00 option/reservation fee; while non-delivery by the latter of the necessary documents obliges him to return to respondent the said option/reservation fee with interest at 18% per annum. - Petitioner failed to deliver the required documents. In compliance with their agreement, he returned to respondent the latter's P600,000.00 option/reservation fee by way of Far East Bank & Trust Company which was, however, dishonored. Petitioner's Claims - He twice tendered to respondent, through his counsel, the amount of P672,900.00 (representing the P600,000.00 option/reservation fee plus 18% interest per annum computed from December 3, 1993 to August 3, 1994) in the form of a check but said counsel refused to accept the same (1st-via messenger; 2nd-via DHL) Because of these refusals, he wrote a letter saying saying that he is consigning the amount tendered with the RTC Makati City. Respondent's Claims - Admitted that his office received petitioner's letter but claimed that no check was appended thereto. He averred that there was no valid tender of payment because no check was tendered and the computation of the amount to be tendered was insufficient, because petitioner verbally promised to pay 3% monthly interest and 25% attorney's fees as penalty for default, in addition to the interest of 18% per annum on the P600,000.00 option/reservation fee. ISSUES

Obligations and Contracts 1. WON there was a valid consignation 2. WON the petitioner can withdraw the amount consigned as a matter of right HELD 1. YES - If there is a valid tender of payment in an amount sufficient to extinguish the obligation, the consignation is valid. Reasoning a. The amount tendered is sufficient since it appears that only the interest of 18% per annum on the P600,000.00 option/reservation fee stated in the default clause of the "Agreement And Undertaking" was agreed upon by the parties. b. petitioner's tender of payment in the form of manager's check is valid even though it is not a legal tender since he did not object to the form. - Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment. - Requisites of an effective consignation: (1) there was a debt due; (2) the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due or because the title to the obligation has been lost; (3) previous notice of the consignation had been given to the person interested in the performance of the obligation; (4) the amount due was placed at the disposal of the court; and (5) after the consignation had been made the person interested was notified thereof. 2. NO. - Withdrawal of the money consigned would enrich petitioner and unjustly prejudice respondent. Reasoning a. Article 1260 is not applicable here. It provides that “Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation” b. Respondent's prayer in his answer that the amount consigned be awarded to him is equivalent to an acceptance of the consignation, which has the effect of extinguishing petitioner's obligation. c. Petitioner failed to manifest his intention to comply with the "Agreement And Undertaking" by delivering the necessary documents and the lot subject of the sale to respondent in exchange for the amount deposited. Disposition The instant petition for review is DENIED and the petitioner's obligation to respondent under paragraph 5 of the "Agreement And Undertaking" as having been extinguished, is AFFIRMED.

A2010 page 96 Prof. Labitag OCCEÑA V COURT OF APPEALS TEEHANKEE; October 29, 1976 NATURE Appeal from resolution of CA FACTS - Tropical Homes filed complaint for modification of terms and conditions of its subdivision contract with petitioners due to increase in price of oil w/c are not w/in control. Accdg to them, it will result in situation where defendants would be unjustly enriched at expense of plaintiff. - They are invoking Art 1267 of Civil Code w/c states that a positive right is created in favor of obligor to be released fr performance when its performance has become so difficult as to be manifestly beyond the contemplation of the parties ISSUE WON the ground cited justifies modification of the subdivision contract HELD NO - Release could have been granted. However, the complaint seeks not release from contract but that the court modify the terms and conditions. - Court does not have authority to remake, modify, revise contract. Modification has no basis in law. Disposition Resolution is reversed and certiorari is granted.

PNCC V COURT OF APPEALS DAVIDE; May 5, 1997 NATURE - Petition for review on certiorari. FACTS - The lease contract executed by petitioner and private respondents Raymundos on November 18, 1985, reads in part as follows: 1.TERM OF LEASE - 5 years, commencing on the date of issuance of the industrial clearance by the Ministry of Human Settlements (MHS), renewable for 5 years or other period at the option of the Lessee under the same terms and conditions. 2.RATE OF RENT - monthly rate of P20,000, to be increased yearly by 5% based on the agreed monthly rate of P20,000.00 as follows: P21,000 starting on the 2nd year; P22,000 starting on the 3rd year; P23,000 starting on the 4th year; P24.000 starting on the 5th year 3.TERMS OF PAYMENT - The rent stipulated shall be paid yearly in advance. The first annual rent of P240,000.00 shall be due and payable upon the execution of this Agreement and the succeeding annual rents shall be payable every 12 months thereafter during the effectivity of this Agreement. 4.USE OF LEASED PROPERTY - Property shall be used as the site, grounds and premises of a rock crushing plant and field office, sleeping quarters and canteen/mess hall.

Obligations and Contracts xxx xxx xxx 11.TERMINATION OF LEASE - This Agreement may be terminated by mutual agreement of the parties. Upon the termination or expiration of the period of lease without the same being renewed, the Lessee shall vacate the Leased Property at its expense. - On 7 January 1986, petitioner obtained from the MHS a Temporary Use Permit for the proposed rock crushing project, valid for 2 years unless sooner revoked by MHS. - On 16 January 1986, private respondents wrote petitioner requesting payment of the first annual rental in the amount of P240,000 which was due and payable upon the execution of the contract. They also assured the latter that they had already stopped considering the proposals of other aggregates plants to lease the property because of the existing contract with petitioner. - Petitioner argued that under paragraph 1 of the lease contract, payment of rental would commence on the date of the issuance of an industrial clearance by the MHS, and not from the date of signing of the contract. It then expressed its intention to terminate the contract, as it had decided to cancel or discontinue with the rock crushing project "due to financial, as well as technical, difficulties." - Private respondents refused to accede to petitioner's request for the pretermination of the lease contract. They insisted on the performance of petitioner's obligation and reiterated their demand for the payment of the first annual rental. - Petitioner objected to private respondents' claim and argued that it was "only obligated to pay the amount of P20,000.00 as rental payments for the one-month period of lease, counted from January 7, 1986 when the Industrial Permit was issued by the MHS up to February 7, 1986 when the Notice of Termination was served on private respondents. - On 19 May 1986, private respondents instituted an action against petitioner for Specific Performance with Damages. - On 12 April 1989, the trial court rendered a decision ordering petitioner to pay private respondents the amount of P492,000 which represented the rentals for two years, with legal interest from January 7,1986 until the amount was fully paid, plus attorney's fees in the amount of P20,000 and costs. - Upon appeal by petitioner, the CA affirmed the trial court’s decision. ISSUES 1. WON the Temporary Use Permit is the Industrial Clearance referred to in the contract 2. WON the suspensive condition -issuance of an industrial clearance- has been fulfilled 3. WON Article 1266 and the principle of rebus sic stantibus apply to this case 4. WON the award of P492,000.00 representing the rent for two years is excessive, considering that PNCC did not benefit from the property HELD 1. NO - The Temporary Use Permit is not the industrial clearance referred to in the contract, for the said permit requires that a clearance from the National Production Control Commission be first secured. However, petitioner is estopped from claiming that the Temporary Use Permit was not the industrial clearance contemplated in the contract. In its letter dated 24 April 1986, petitioner states:

A2010 page 97 Prof. Labitag “We wish to reiterate PNCC Management's previous stand that it is only obligated to pay your clients the amount of P20,000.00 as rental payments for the one-month period of the lease, counted from January 7, 1986 when the Industrial Permit was issued by the MHS up to February 7, 1986 when the Notice of Termination was served on your clients”. The Industrial Permit mentioned in the said letter could only refer to the Temporary Use Permit issued by the MHS January 7, 1986. And it can be gleaned from this letter that petitioner has considered the permit as industrial clearance; otherwise, petitioner could have simply told private respondents that its obligation to pay rentals has not yet arisen because the Temporary Use Permit is not the industrial clearance contemplated by them. Instead, petitioner recognized its obligation to pay rentals counted from the date the permit was issued. 2. YES - Aside from the letter mentioned in no. 1, it can be deduced from another letter by petitioner that the suspensive condition - issuance of industrial clearance - has already been fulfilled and that the lease contract has become operative. The letter states: “Please be advised of PNCC Management's decision to cancel or discontinue with the rock crushing project due to financial as well as technical difficulties. In view thereof, we would like to terminate our Lease Contract dated 18 November, 1985. Should you agree to the mutual termination of our Lease Contract, kindly indicate your conformity hereto by affixing your signature on the space provided below.” If petitioner thought otherwise, it did not have to solicit the conformity of private respondents to the termination of the contract for the simple reason that no juridical relation was created because of the non-fulfillment of the condition. - Moreover, the reason of petitioner in discontinuing with its project and in consequently cancelling the lease contract was "financial as well as technical difficulties," not the alleged insufficiency of the Temporary Use Permit. 3. NO - The fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the force of law between the parties and should be compiled with in good faith, recognizes exceptions. One exception is laid down in Article 1266 of the Civil Code, which reads: 'The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.’ However, petitioner cannot successfully take refuge in the said article, since it is applicable only to obligations "to do," and not to obligations "to give". The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation "to give"; hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen event and causes mentioned by petitioner are not the legal or physical impossibilities contemplated in the said article. Besides, petitioner failed to state specifically the circumstances brought about by 'the abrupt change in the political climate in the country" except the alleged prevailing uncertainties in government policies on infrastructure projects. - The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. This theory is said to be the basis of Article 1267 of the Civil Code, which provides: When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in

Obligations and Contracts absolutely exceptional changes of circumstances that equity demands assistance for the debtor. - This Court cannot subscribe to the argument that the abrupt change in the political climate of the country after the EDSA Revolution and its poor financial condition "rendered the performance of the lease contract impractical and inimical to the corporate survival of the petitioner." PNCC entered into the contract of lease with private respondents with open eyes of the deteriorating conditions of the country. - Anent petitioner's alleged poor financial condition, the same will neither release petitioner from the binding effect of the contract of lease. Mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute a defense to an action for specific performance. - With regard to the non-materialization of petitioner's particular purpose in entering into the contract of lease, i.e., to use the leased premises as a site of a rock crushing plant, the same will not invalidate the contract. The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. As a general principle, the motive or particular purpose of a party in entering into a contract does not affect the validity nor existence of the contract; an exception is when the realization of such motive or particular purpose has been made a condition upon which the contract is made to depend.24 The exception does not apply here. 4. NO - Petitioner cannot be heard to complain that the award is excessive. The temporary permit was valid for two years but was automatically revoked because of its nonuse within one year from its issuance. The non-use of the permit and the non-entry into the property subject of the lease contract were both imputable to petitioner and cannot, therefore, be taken advantage of in order to evade or lessen petitioner's monetary obligation. The damage or prejudice to private respondents is beyond dispute. They unquestionably suffered pecuniary losses because of their inability to use the leased premises. Thus, in accordance with Article 1659 of the Civil Code, they are entitled to indemnification for damages; and the award of P492,000 is fair and just under the circumstances of the case. Disposition Petition is DENIED.

YAM V COURT OF APPEALS MENDOZA; February 11, 1999 FACTS - On May 10, 1979, the parties in this case entered into a Loan Agreement with Assumption of Solidary Liability whereby petitioners were given a loan of P500,000.00 by private respondent. The contract provided for the payment of 12% annual interest, 2% monthly penalty, 1 1/2% monthly service charge, and 10% attorney’s fees. Denominated the first Industrial Guarantee and Loan Fund (IGLF), the loan was secured by a chattel mortgage on the printing machinery in petitioners’ establishment. Petitioners subsequently obtained a second IGLF loan of P300,000.00 evidenced by two promissory notes, dated July 3, 1981 and September 30, 1981. For this purpose, a new loan agreement was entered into by the parties containing identical provisions as the first one, except as to the annual interest which was increased to 14% and the service charge which was reduced to 1% per annum. The deed of chattel mortgage was amended correspondingly. By April 2, 1985, petitioners had paid their first loan of P500,000.00. On November 4, 1985,

A2010 page 98 Prof. Labitag private respondent was placed under receivership by the Central Bank and Ricardo Lirio and Cristina Destajo were appointed as receiver and in-house examiner, respectively. - On May 17, 1986, petitioners made a partial payment of P50,000.00 on the second loan. They later wrote private respondent a letter, dated June 18, 1986, proposing to settle their obligation. On July 2, 1986, private respondent, through its counsel, replied with a counter-offer, namely, that it would reduce the penalty charges up to P140,000.00, provided petitioners can pay their obligation on or before July 30, 1986. - As of July 31, 1986, petitioners’ total liability to private respondent was P727,001.35, broken down as follows: Principal P295,469.47 Interest 165,385.00 Penalties 254,820.55 Service Charges 11,326.33 TOTAL P 727,001.35 - On this date, petitioners paid P410,854.47 by means of a Pilipinas Bank check, receipt of which was acknowledged by Destajo. The corresponding voucher for the check bears the following notation: “full payment of IGLF LOAN.” - The amount of P410,854.47 was the sum of the principal (P295,469.47) and the interest (P165,385.00) less the partial payment of P50,000.00. The private respondent sent two demand letters to petitioners, dated September 4, 1986 and September 25, 1986, seeking payment of the balance of P266,146.88. As petitioners did not respond, private respondent filed this case in the Regional Trial Court of Metro Manila for the collection of P266,146.88 plus interests, penalties, and service charges or, in the alternative, for the foreclosure of the mortgaged machineries. - In their Answer, petitioners claimed that they had fully paid their obligation to private respondent. They contended that some time after receiving private respondent’s letter of July 2, 1986 (concerning the conditional offer to reduce their penalty charges), petitioner Victor Yam and his wife, Elena Yam, met with Carlos Sobrepeñas, president of respondent corporation, during which the latter agreed to waive the penalties and service charges (in short, there allegedly was condonation), provided petitioners paid the principal and interest, computed as of July 31, 1986, less the earlier payment of P50,000.00. This is the reason why according to them they only paid P410,854.47. Petitioners added that this fact of full payment is reflected in the voucher accompanying the Pilipinas Bank check they issued, which bore the notation “full payment of IGLF loan.” ISSUE WON petitioners are liable for the payment of the penalties and service charges on their loan which, as of July 31, 1986, amounted to P266,146.88 HELD YES - Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of donation. Art. 748, par. 3 provides that the donation and acceptance of a movable, the value of which exceeds P5,000.00, must be made in writing, otherwise the same shall be void. In this connection, under Art. 417, par. 1, obligations, actually referring to credits, are considered movable property. In the

Obligations and Contracts case at bar, it is undisputed that the alleged agreement to condone P266,146.88 of the second IGLF loan was not reduced in writing. Disposition the decision of the Court of Appeals is AFFIRMED.

A2010 page 99 Prof. Labitag Disposition The judgment of the Court of Appeals was reversed, and the writ of execution issued by the CFI of Manila is set aside. Costs against respondent.

GAN TION V COURT OF APPEALS MAKALINTAL; May 21, 1969

SILAHIS MARKETING CORP V IAC FERNAN; December 7, 1989

FACTS - Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. - In 1961 the latter filed an ejectment case against the former, alleging nonpayment of rents for August and September of that year, at P180 a month, or P360 altogether. Defendant denied the allegation and said that the agreed monthly rental was only P160, which he had offered to but was refused by the plaintiff. The plaintiff obtained a favorable judgment in the municipal court, but upon appeal the CFI, reversed the judgment and dismissed the complaint, and ordered the plaintiff to pay the defendant the sum of P500 as attorney's fees. That judgment became final. - On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate amount of P4,320.00, corresponding to a period from August 1961 to October 1963. - Ong Wan Sieng was able to obtain a writ of execution of the judgment for attorney's fees in his favor. - Gan Tion went on certiorari to the Court of Appeals, where he pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for unpaid rents. - The appellate court accepted the petition but eventually decided for the respondent, holding that although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount of more than P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust fund for the benefit of the lawyer, which would have to be turned over by the client to his counsel." - In the opinion of said Court, the requisites of legal compensation, namely, that the parties must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each one of them must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not present in the instant case, since the real creditor with respect to the sum of P500 was the defendant's counsel.

NATURE Petition for certiorari to review the decision of IAC disallowing Silahis Marketing Corporation’s counterclaim for commission to partially offset the claim against it of Gregorio de Leon (doing business under the name and style of Mark Industrial Sales) for the purchase price of certain merchandise.

ISSUE WON the award for attorney’s fees may be the subject of legal compensation HELD YES - The award for attorney's fees is made in favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the former in the cases enumerated in Article 2208 of the Civil Code. It is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit, may properly be the subject of legal compensation. Quite obviously it would be unjust to compel petitioner to pay his debt for P500 when admittedly his creditor is indebted to him for more than P4,000.

FACTS - On various dates in Oct-Dec 1975, De Leon sold and delivered to Silahis various items of merchandise in the aggregate amount of P22,213.75 payable within 30days from date of the covering invoices. Allegedly due to Silahis' failure to pay its account upon maturity despite repeated demands, de Leon filed before CFI Manila a complaint for the collection of the said accounts including accrued interest thereon in the amount of P 661.03 and attorney's fees of P 5,000.00 plus costs of litigation. - Silahis admitted the allegations insofar as the invoices were concerned but presented a debit memo for P 22,200 as unrealized profit for a supposed commission that Silahis should have received from de Leon for the sale of sprockets made directly to Dole Philippines, Inc in violation of their usual practice. Silahis also claim that it is entitled to return the stainless steel screen which was found defective by its client, Borden International, Davao City, and to have the corresponding amount cancelled from its account with de Leon. - RTC confirmed the liability of Silahis for the claim of de Leon but at the same time ordered that it be partially offset by Silahis' counterclaim as contained in the debit memo for unrealized profit and commission. IAC set aside the RTC decision and dismissed herein Silahis’ counterclaim for lack of factual or legal basis. ISSUE WON de Leon is liable to Silahis for the commission or margin for the direct sale which the former concluded and consummated with Dole Philippines, Inc without coursing the same through Silahis. HELD Ratio Compensation is not proper where the claim of the person asserting the setoff against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim existing from breach of contract. Compensation takes place when two persons, in their own right, are creditors and debtors to each other. Article 1279 of the Civil Code provides that: “In order that compensation may be proper, it is necessary: [1] that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; [2] that both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; [3] that the two debts be due;

Obligations and Contracts 100 [4] that they be liquidated and demandable; [5] that over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. Reasoning Silahis admits the validity of its outstanding accounts with de Leon. But whether de Leon is liable to pay Silahis a 20% margin or commission on the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents legal compensation from taking place. -There is no evidence on record from which it can be inferred that there was any agreement between Silahis and de Leon prohibiting the latter from selling directly to Dole Philippines, Inc. The debit memo is not a binding contract since it was not signed by de Leon nor was there any mention therein of any commitment by the latter to pay any commission to the former involving the subject sale of sprockets. Disposition Decision affirmed.

BPI V REYES PUNO; MARCH 29, 1996

NATURE Petition for review of decision of CA FACTS - Reyes maintained two joint “and/or” accounts in BPI Cubao branch: one with his wife and another with his grandmother. He normally deposits US Treasury warrants payable to the order of his grandmother (as a monthly pension) in the latter joint “and/or” account. - The grandmother died on December 28, 1989 without the knowledge of the US Treasury. A US Treasury Warrant dated January 1, 1990 was still sent to her in the amount of $377 (P10,556). Reyes deposited the check in the joint account with the grandmother. The US Veterans Administration Office in Manila conditionally cleared the check and sent the same to the US for further clearing. - 2 months after (March 8, 1990), Reyes closed the joint account with his grandmother and transferred the funds to the joint account with his wife. Almost a year later (January 16, 1991), the last US Treasury Warrant was dishonored as it was discovered that it was issued 3 days after the (pensioned) grandmother died. The US treasury requested BPI for a refund. A month later, Reyes received an urgent telegram requesting him to contact the bank, and when he did, he was informed that the treasury check was the subject of a claim of Citibank. Reyes assured the bank and verbally authorized them to debit from his joint account the amount in the warrant. Few days later, Reyes went to the bank with his lawyer and “surprisingly, demanded from BPI restitution of the debited amount.” He claimed that because of the debit, he failed to withdraw his money when he needed them. He filed suit for damages. RTC dismissed for lack of cause of action, but CA reversed and ordered BPI to credit the amount to Reyes’ account. ISSUES 1. WON Reyes gave a verbal authorization to transfer funds from the joint account with his wife 2. WON legal compensation was proper in this case (legal compensation was alleged by the bank in the appeal) HELD

A2010 page Prof. Labitag 1. YES Ratio: There was verbal authorization as it was proven by preponderance of evidence Reasoning: Based on the testimony of the bank manager and the assistant bank manager, it was proven that he indeed gave his verbal authorization. Also, Reyes’ claim that he gave no such authorization was uncorroborated and he does not inspire credence for his previous fraudulent acts. He concealed from BPI the death of his grandmother, knew she was no longer entitled to receive pension and yet still deposited the warrant received after the death. Worse, he declared under the penalties of perjury in the withdrawal slip dated March 8, 1990 (when he closed the account) that his co-depositor, is still living (note: in joint “and/or” accounts, depositors sign in the deposit slip a statement that has the effect of “I certify that my co-depositor is still alive”). By his acts, private respondent has stripped himself of credibility. 2. YES Ratio: Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Reasoning: Article 1290 of the Civil Code provides that “when all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation.” Legal compensation operates even against the will of the interested parties and even without the consent of them. Article 1279 states that in order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. - The elements of legal compensation are all present in the case at bar. The obligors bound principally are at the same time creditors of each other. BPI stands as a debtor of Reyes, a depositor. At the same time, said bank is the creditor of Reyes with respect to the dishonored U.S. Treasury Warrant which the latter illegally transferred to his joint account. The debts involved consist of a sum of money. They are due, liquidated, and demandable. They are not claimed by a third person. Disposition Decision (of CA) is set aside and judgment of RTC is reinstated.

PHILIPPINE NATIONAL BANK V COURT OF APPEALS PANGANIBAN; July 24, 1996 NATURE Appeal assailing the petition of Court of Appeals affirming decision of Regional Trial Court. FACTS

Obligations and Contracts 101 - PNB applied/ appropriated the amounts of $2,627.11 and P34,340.38 from remittances of the plaintiff’s principal abroad. First remittance was made by the NCB of Jedah for the benefit of Ramon Lapez (petitioner) to be credited at his account at Citibank Greenhills; second was from Libya and was intended to be deposited at the plaintiff’s account with PNB. - Plaintiff demanded upon PNB for remittance of the equivalent of $2,627.11 by means of a letter. - There were two instances in the past, one in November 1980 and the other in January 1981 when the plaintiff’s account No. 830-2410 was doubly credited with the equivalents of $5,679.23 and $5,885.38 amounting to an aggregate amount of P87,380.44. For this PNB demanded upon the plaintiff for refund the double credits erroneously made on plaintiff’s account. - The deduction of P43,430.58 was made by PNB not without the knowledge and consent of the plaintiff who was issued a receipt by PNB. Code of Civil Procedure ART. 1279: In order that compensation may prosper, it is necessary: 1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; 2. That both debts consists in a sum of money xxx; 3. That the two debts are due; 4. That they be liquidated and demandable; 5. That over neither of them there be and retention or controversy, commenced by third persons and communicated in due time to the debtor. - In the case of $2,627.11 requisites 2 through 5 are present, except for no. 1 where the relationship between PNB and Lapez depends on the obligation. They are debtor-creditor only with respect to the double payments under a quasicontract (ART 2154 Civil Code, Lapez is obliged to return the double-credits); but are trustee-beneficiary as to the fund transfer of $2,627.11. pour autrui – a stipulation in facor of a third person, as with PNB and National Commercial Bank of Jedah, having Lapez as beneficiary. ISSUE WON a local bank, while acting as local correspondent bank, have the right to intercept funds being coursed through it by its foreign counterpart for transmittal and deposit to the account of an individual, and apply said funds to certain obligations owed to it by the said individual HELD Ratio PNB was is obligated to pay Lapez the amount of US $2,627.11 or its peso equivalent, with interest at the legal rate. Reasoning While it may be concluded that Lapez owes PNB the equivalent of the sums of $5,179.23 and $5,885.38 erroneously credited to his account, the defendant’s actuation in intercepting the amount of $2,627.11 supposed to be remitted to another bank is not only improper; it will also erode the trust and confidence of the international banking community in the banking system of the country. - It would have been different had the telex advice from NCB of Jeddah been for deposit to plaintiff’s account with the defendant bank (it was for Lapez’s account in Citibank). The set-off or compensation against the double payments is not in accordance with law. - The amount stated in the telegraphic money transfer is to be credited in Lapez’s account with Citibank, and presupposes a creditor-debtor relationship between the

A2010 page Prof. Labitag plaintiff, as creditor and the Citibank as debtor. Withal the telegraphic money transfer, no such creditor-debtor relationship could have been created between the plaintiff and defendant. All that PNB can do is transmit the telegraphic money transfer to Citibank so that the amount can be promptly credited to Lapez’s account with the same bank. - According to the theory of PNB: 1. CA ruled that petitioner bank could not do a shortcut and simply intercept funds coursed through it, for transmittal to another bank, and eventually to be deposited to the account of an individual who owes money to PNB; 2. Court ordered PNB to return the intercepted amount to said individual who in turn was found by CA to be indebted to PNB; 3. Therefore there must now be legal compensation of the amounts each owes the other, hence there is no need for petitioner bank to actually return the amount; 4. Finally, the petitioner ends up in the same position as when it first took the improper and unwarranted shortcut when it intercepted the transfer, notwithstanding the Decision saying that it could not be done. - The Supreme Court regarded this as a clever ploy to validate an improper act of PNB with the possible intention of using this case as a precedent for similar acts of interception in the future.

MIRASOL V CA QUISUMBING; February 1, 2001 FACTS - The Mirasols are sugarland owners and planters. In 1973-1974, they produced 70,501.08 piculs 1 of sugar, 25,662.36 of which were assigned for export. The following crop year, their acreage planted to the same crop was lower, yielding 65,100 piculs of sugar, with 23,696.40 piculs marked for export. - Private respondent Philippine National Bank (PNB) financed the Mirasols' sugar production venture for crop years, 1973-1974 and 1974-1975 under a crop loan financing scheme. Under said scheme, the Mirasols signed Credit Agreements, a Chattel Mortgage on Standing Crops, and a Real Estate Mortgage in favor of PNB. The Chattel Mortgage empowered PNB as the petitioners' attorney-in-fact to negotiate and to sell the latter's sugar in both domestic and export markets and to apply the proceeds to the payment of their obligations to it. - Exercising his law-making powers under Martial Law, then President Ferdinand Marcos issued Presidential Decree (P.D.) No. 579 2 in November, 1974. The decree authorized private respondent Philippine Exchange Co., Inc. (PHILEX) to purchase sugar allocated for export to the United States and to other foreign markets. The price and quantity was determined by the Sugar Quota Administration, PNB, the Department of Trade and Industry, and finally, by the Office of the President. The decree further authorized PNB to finance PHILEX's purchases. Finally, the decree directed that whatever profit PHILEX might realize from sales of sugar abroad was to be remitted to a special fund of the national government, after commissions, overhead expenses and liabilities had been deducted. The government offices and entities tasked by existing laws and administrative regulations to oversee the sugar export pegged the purchase price of export sugar in crop years 1973-1974 and 1974-1975 at P180.00 per picul.

Obligations and Contracts 102 - PNB continued to finance the sugar production of the Mirasols for crop years 1975-1976 and 1976-1977. These crop loans and similar obligations were secured by real estate mortgages over several properties of the Mirasols and chattel mortgages over standing crops. Believing that the proceeds of their sugar sales to PNB, if properly accounted for, were more than enough to pay their obligations, petitioners asked PNB for an accounting of the proceeds of the sale of their export sugar. PNB ignored the request. Meanwhile, petitioners continued to avail of other loans from PNB and to make unfunded withdrawals from their current accounts with said bank. PNB then asked petitioners to settle their due and demandable accounts. As a result of these demands for payment, petitioners on August 4, 1977, conveyed to PNB real properties valued at P1,410,466.00 by way of dacion en pago, leaving an unpaid overdrawn account of P1,513,347.78. - On August 10, 1982, the balance of outstanding sugar crop and other loans owed by petitioners to PNB stood at P15,964,252.93. Despite demands, the Mirasols failed to settle said due and demandable accounts. PNB then proceeded to extrajudicially foreclose the mortgaged properties. After applying the proceeds of the auction sale of the mortgaged realties, PNB still had a deficiency claim of P12,551,252.93. - Petitioners continued to ask PNB to account for the proceeds of the sale of their export sugar for crop years 1973-1974 and 1974-1975, insisting that said proceeds, if properly liquidated, could offset their outstanding obligations with the bank. PNB remained adamant in its stance that under P.D. No. 579, there was nothing to account since under said law, all earnings from the export sales of sugar pertained to the National Government and were subject to the disposition of the President of the Philippines for public purposes. ISSUES 1. WON the Trial Court has jurisdiction to declare a statute unconstitutional without notice to the Solicitor General where the parties have agreed to submit such issue for the resolution of the Trial Court (whether it was proper for the trial court to have exercised judicial review) 2. WON PD 579 and subsequent issuances 7 thereof are unconstitutional. 3. WON the Honorable Court of Appeals committed manifest error in not applying the doctrine of piercing the corporate veil between respondents PNB and PHILEX. 4. WON the Honorable Court of Appeals committed manifest error in upholding the validity of the foreclosure on petitioners property and in upholding the validity of the dacion en pago in this case. 5. WON the Honorable Court of Appeals committed manifest error in not awarding damages to petitioners grounds relied upon the allowance of the petition. HELD 1. YES. The Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation not only in this Court, but in all Regional Trial Courts. Pivotal issue: In this case, the Solicitor General was never notified about Civil Case No. 14725. Nor did the trial court ever require him to appear in person or by a representative or to file any pleading or memorandum on the constitutionality of the assailed decree. Hence, the Court of Appeals did not err in holding that lack of the required notice made it improper for the trial court to pass upon the constitutional validity of the questioned presidential decrees. 2. The present case was instituted primarily for accounting and specific performance. The Court of Appeals correctly ruled that PNB's obligation to render

A2010 page Prof. Labitag an accounting is an issue, which can be determined, without having to rule on the constitutionality of P.D. No. 579. In fact there is nothing in P.D. No. 579, which is applicable to PNB's intransigence in refusing to give an accounting. The governing law should be the law on agency, it being undisputed that PNB acted as petitioners' agent. In other words, the requisite that the constitutionality of the law in question be the very lis mota of the case is absent. Thus we cannot rule on the constitutionality of P.D. No. 579. 3. To resolve the third issue, petitioners ask us to apply the doctrine of piercing the veil of corporate fiction with respect to PNB and PHILEX. Petitioners submit that PHILEX was a wholly-owned subsidiary of PNB prior to the latter's privatization. - We note, however, that the appellate court made the following finding of fact: "1. PNB and PHILEX are separate juridical persons and there is no reason to pierce the veil of corporate personality. Both existed by virtue of separate organic acts. They had separate operations and different purposes and powers." 4. On the fourth issue, the appellate court found that there were two sets of accounts between petitioners and PNB, namely: "1. The accounts relative to the loan financing scheme entered into by the Mirasols with PNB (PNB's Brief, p. 16) On the question of how much the PNB lent the Mirasols for crop years 1973-1974 and 1974-1975, the evidence recited by the lower court in its decision was deficient. We are offered (sic) PNB the amount of FIFTEEN MILLION NINE HUNDRED SIXTY FOUR THOUSAND TWO HUNDRED FIFTY TWO PESOS and NINETY THREE Centavos (Ps15,964,252.93) but this is the alleged balance the Mirasols owe PNB covering the years 1975 to 1982. "2. The account relative to the Mirasol's current account Numbers 5186 and 5177 involving the amount of THREE MILLION FOUR HUNDRED THOUSAND Pesos (P3,400,000.00) PNB claims against the Mirasols. (PNB's Brief, p. 17) HTSaEC "In regard to the first set of accounts, besides the proceeds from PNB's sale of sugar (involving the defendant PHILEX in relation to the export portion of the stock), the PNB foreclosed the Mirasols' mortgaged properties realizing therefrom in 1982 THREE MILLION FOUR HUNDRED THIRTEEN THOUSAND Pesos (P3,413,000.00), the PNB itself having acquired the properties as the highest bidder. "As to the second set of accounts, PNB proposed, and the Mirasols accepted, a dacion en pago scheme by which the Mirasols conveyed to PNB pieces of property valued at ONE MILLION FOUR HUNDRED TEN THOUSAND FOUR HUNDRED SIXTY-SIX Pesos (Ps1,410,466.00) (PNB's Brief, pp. 16-17)." 25 - Petitioners now claim that the dacion en pago and the foreclosure of their mortgaged properties were void for want of consideration. Petitioners insist that the loans granted them by PNB from 1975 to 1982 had been fully paid by virtue of legal compensation. Hence, the foreclosure was invalid and of no effect, since the mortgages were already fully discharged. It is also averred that they agreed to the dacion only by virtue of a martial law Arrest, Search, and Seizure Order (ASSO). - We find petitioners' arguments unpersuasive. Both the lower court and the appellate court found that the Mirasols admitted that they were indebted to PNB in the sum stated in the latter's counterclaim. 26 Petitioners nonetheless insist that the same can be offset by the unliquidated amounts owed them by PNB for crop years 1973-74 and 1974-75. Petitioners' argument has no basis in law. For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil Code must be present. Said articles read as follows:

Obligations and Contracts 103 "ARTICLE 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. "ARTICLE 1279 In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts are due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor." In the present case, set-off or compensation cannot take place between the parties because: First, neither of the parties are mutually creditors and debtors of each other. Under P.D. No. 579, neither PNB nor PHILEX could retain any difference claimed by the Mirasols in the price of sugar sold by the two firms. P.D. No. 579 prescribed where the profits from the sales are to be paid, to wit: "SECTION 7 . . After deducting its commission of two and one-half (2-1/2%) percent of gross sales, the balance of the proceeds of sugar trading operations for every crop year shall be set aside by the Philippine Exchange Company, Inc,. as profits which shall be paid to a special fund of the National Government subject to the disposition of the President for public purposes." - Thus, as correctly found by the Court of Appeals, "there was nothing with which PNB was supposed to have off-set Mirasols' admitted indebtedness." - Second, compensation cannot take place where one claim, as in the instant case, is still the subject of litigation, as the same cannot be deemed liquidated. 5. In the instant case, petitioners have failed to show malice or bad faith 32 on the part of PNB in failing to render an accounting. Absent such showing, moral damages cannot be awarded. The same applies to attorney’s fees and costs of suit Disposition Petition is DENIED and the assailed decision of the respondent court in CA-G.R. CV 38607 AFFIRMED.

MILLAR V CA CASTRO; April 30, 1971 NATURE Petition for review on certiorari to review the decision of the Court of Appeals holding that the mortgage obligation superseded, through implied novation, the judgment debt FACTS - Petitioner Millar obtained a favorable judgment from CFI condemning Antonio Gabriel to ay P1,746.95 - Petitioner moved for the issuance of a writ of execution - As a result, sheriff seized Gabriel’s jeep - Gabriel pleaded with Millar to release the jeep under a chattel mortgage where the former, to secure payment of the judgment debt, mortgaged the jeep in favor of Millar. - The chattel mortgage provided payment of P1,700 in two installments on fixed dates - Gabriel failed to pay. Petitioner obtained writs of execution. Sheriff levied on property of respondent for execution sale.

A2010 page Prof. Labitag - Gabriel filed motion for suspension of the execution sale on the ground of satisfaction of payment by implied novation. - CA decided for Gabriel, holding that subsequent agreement of the parties impliedly novated the judgment obligation ISSUE WON the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the judgment obligation HELD NO Ratio CA – the chattel mortgage: Limits principal oblig from P1,746.95 to P1,700 Stipulates mode of payment in 2 installments while orig contract doesn’t Obligates Gabriel to pay liquidated damages in case of his default Secured the obligation; judgment debt, unsecured

SC Gabriel made partial payments between rendition of judgment and execution of chattel mortgage Stipulation for payment under chattel mortgage serves only as specific method for extinguishments Amount was paid as attorney’s fees, not liquidated damages Chattel agreement clearly shows purpose as solely to secure the satisfaction of the then existing liability.

Reasoning - Implied novation requires clear proof of complete incompatibility between two obligations. - The law requires no specific form. The test is WON two oblig can stand together. If they cannot, incompatibility arises, and the second oblig novates the first. - Where the new obligation merely reiterates the old obligation, such changes do not effectuate any substantial incompatibility between the 2. Disposition The decision of CA of implied novation is set aside.

DORMITORIO V FERNANDEZ FERNANDO; August 21, 1976 FACTS - The parties Lazalita and spouses Dormitorio in Civil Case No. 5111 and Civil Case No. 6553 are the same except that the plaintiffs in Civil Case No. 5111 were the defendants in Civil Case No. 6553, and vice-versa; ... - That in the "Agreed Stipulation of Facts" in Civil Case No. 6553 which was the basis of the Honorable Court judgment dated February 12, 1965, it was agreed by defendant spouses Dormitorio, who are the plaintiffs in Civil Case No. 5111 that the defendant Serafin Lazalita should be reimbursed for his expenses in transferring his house to another Lot to be assigned to him by the Municipality of Victorias, and that the Decision in Civil Case No. 5111 shall not be enforced and executed anymore; That by means of fraud, misrepresentation and concealment of the true facts of the

Obligations and Contracts 104 case, the plaintiffs were able to mislead the Honorable Court, thru an Ex-Parte Motion to issue by mistake an Order for the issuance of a Writ of Execution by making this Honorable Court believe that the Decision of September 5, 1961 is still enforceable and executory; ..." Respondent Judge granted the relief prayed for and set aside the writ of execution, in view of the conclusion reached by him that such later decision, arrived at as the result of a compromise between the same parties, evidenced by the agreed stipulation of facts, was clear proof of an animus novandi and thus superseded the previous judgment which as a result of an ex parte motion was mistakenly ordered executed. - The “Agreed Stipulation of Facts” states: “The Municipality of Victorias, is the owner of several parcels of lands which were consolidated and subdivided into small lots for sale to the inhabitants thereof. Serafin Lazalita, bought from the Municipality of Victorias, Lot No. 1, Block 16 payable in installment and in the year 1958, upon full payment by plaintiff Lazalita of the purchase price of the land, a deed of definite sale was executed in his favor by the then Municipal Mayor Montinola of Victorias and thereafter a Certificate of Title No. T-23098 covering the property, was issued him by the Register of Deeds. From February 7, 1948, until about eight continuous years thereafter, Lazalita had been in full and peaceful possession of the said land, and he introduced permanent and valuable improvements thereon and built a house of strong materials, valued at P5,000.00; Lazalita, was placed in possession of the said Lot No. 1, Block 16 of the subdivision plan of Victorias, by the persons designated by the Municipality to take charge of the sale of said lots to the people, and from the time, he had occupied by same, up to the present, there has not been a change in the location thereof, as described in the Certificate of Title covering the property, now registered in plaintiff's name. About the year 1955, however, the spouses Agustin Dormitorio and Leoncia D. Dormitorio, purchased also, from the defendant Municipality of Victorias, their lot known as Lot 2, Block 16. However, the spouses Dormitorio, have not taken actual possession of the land, they have purchased from the defendant Municipality of Victorias, up to the present. On December 12, 1958, the spouses Dormitorio, brought a suit against the plaintiff Lazalita, for Ejectment and the conflict between them was made known to the office of the Municipal Mayor and the Council of Victorias, who tried to settle the matter between the parties — Dormitorio and Lazalita. Later, a private Land Surveyor, was hired by the Municipality of Victorias, and it was found out that the Lot sold by the Municipality of Victorias, to Lazalita, was converted into the new Municipal. Road known as "Jover Street" and that the lot presently occupied by him, is supposed to be the lot No. 2, bought by the spouses Dormitorio from the Municipality of Victorias; and so, availing of the said discovery, the Court of First Instance of Negros Occidental, Branch V, Presided over by Hon. Jose F. Fernandez, rendered judgment in that case No. 5111, in favor of Dormitorio, ordering the plaintiff herein Lazalita, to vacate the land and to pay a monthly rental of P20.00, to said Dormitorio, besides his Attorney's fees. Lazalita, having failed to appeal from said judgment in Civil Case No. 5111 of this Honorable Court, brought this present action, against the Municipality of Victorias, and joined the Dormitorios, as formal parties, because of the value of his permanent improvements and building introduced or constructed on Lot No. 2, Block 16, ascertained to be that, very lot purchased by Dormitorio from the defendant Municipality of Victorias, which building and improvements, have far exceed then, the original purchase price of the land. That the present fair market value of residential lots in the Poblacion of Victorias, ranges between P15.00 to P25.00 per square meter and the lots in controversy, are saleable at present, at P20.00 per square meter. That the

A2010 page Prof. Labitag Municipality of Victorias is willing to amicably settle the case, now before this Honorable Court, by giving the plaintiff another lot, if they could open their newly proposed subdivision, or pay back Lazalita the amount necessary and just for plaintiff to acquire another lot for his residence, and for the expenses of transferring his present residential house thereto. ....:" - The parties did respectfully pray "that judgment be rendered by this Honorable Court, on the basis of the foregoing agreed stipulation of facts, and on such other basis just and equitable, without special pronouncement of costs." So it was granted in the disposition portion of such decision: "[Wherefore], judgment is hereby rendered in accordance with the above-mentioned Agreed Stipulation of Facts." - Insofar as pertinent, the assailed order is worded thus: "That the above-mentioned order of Execution to be set aside is based on the decision of the Honorable Court dated September 5, 1961 in the above-entitled case which is no longer enforceable, and executory by virtue of the "Agreed Stipulation of Facts" entered into by the Plaintiffs and Defendants in Civil Case No. 6553, and which said "Agreed Stipulation of Facts" was the basis for the judgment of the Honorable Court dated February 12, 1965. ISSUE WON Judge Fernandez committed a grave abuse of discretion when he ordered to set aside the writ of execution based on the “Agreed Stipulation of Facts” entered into by the plaintiffs and defendants in Civil Case No. 6553 HELD NO - There was no grave abuse of discretion when Judge Fernandez set aside the writ of execution. He had no choice on the matter. That was made even more evident in the answer to the petition filed by respondents. It must have been the realization by petitioners that certiorari certainly did not lie that led to their not only failing to make an attempt at a refutation of what was asserted in the answer but also failing to appear at the hearing when this case was set for oral argument. As noted at the outset, this petition must be dismissed. a) What was done by respondent Judge in setting aside the writ of execution in Civil Case No. 5111 finds support in the applicable authorities. In Santos v. Acuña, it was contended that a lower court decision was novated by subsequent agreement of the parties. Implicit in this Court's ruling is that such a plea would merit approval if indeed that was what the parties intended. Nonetheless, it was not granted, for as explained by the ponente, Justice J. B. L. Reyes: "Appellants understood and expressly agreed to be bound by this condition, when they stipulated that "they will voluntarily deliver and surrender possession of the premises to the plaintiff in such event" ... Hence, it is plain that in no case were the subsequent arrangements entered into with any unqualified intention to discard or replace the judgment in favor of the plaintiff-appellee; and without such intent or animus novandi, no substitution of obligations could possibly take place." When, after judgment has become final, facts and circumstances transpire which render its execution impossible or unjust, the interested party may ask the court to modify or alter the judgment to harmonize the same with justice and the facts" Molina v. de la Riva. The present case is far stronger, for there is a later decision expressly superseding the earlier one relied upon on which the writ of execution thereafter set aside was based.

Obligations and Contracts 105

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b) Nor can it be denied that as the later decision in Civil Case No. 6553 was the result of a compromise, it had the effect of res judicata. This was made clear in Salazar v. Jarabe. There are later decisions to the same effect. 15 The parties were, therefore, bound by it. There was thus an element of bad faith when petitioners did try to evade its terms. At first, they were quite successful. Respondent Judge, however, upon being duly informed, set matters right. He set aside the writ of execution. That was to act in accordance with law. He is to be commended, not condemned. c) There is no merit likewise to the point raised by petitioners that they were not informed by respondent Judge of the petition by private respondent to set aside the writ of execution. The order granting such petition was the subject of a motion for reconsideration. The motion for reconsideration was thereafter denied. Under the circumstances, the failure to give notice to petitioners had been cured. That is a well-settled doctrine. Their complaint was that they were not heard. They were given the opportunity to file a motion for reconsideration. So they did. That was to free the order from the alleged infirmity. Petitioners then cannot be heard to claim that they were denied procedural due process. Disposition Petition for certiorari is dismissed.

case directly to the Supreme Court for appeal. They base their claims on Arts. 1235 and 1253 of the Civil Code: Art. 1235 When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. Art. 1253 If the debt produces interest, payment of the principal shall not be deemed to have been made until interests have been covered. Petitioner’s claims 1. The lower court erred in concluding as a fact from the pleadings that the plaintiffappellee demanded, and the Luzon Surety Co. Inc. refused, the payment of interest in the amount of P 655.89, and in not finding and declaring that said plaintiffappellee waived or condoned the said interests. 2. The lower court erred in not finding and declaring that their obligation in favor of the plaintiff-appellee was totally extinguished by payment and/or condonation. 3. The lower court erred in not finding and declaring that the promissory note they executed in favor of the plaintiff-appellee was novated when the plaintiff-appellee unqualifiedly accepted the surety bond which merely guaranteed payment of the principal in the sum of P5, 000.

MAGDALENA ESTATES INC v RODRIGUEZ REGALA; December 17, 1966

ISSUES 1. WON there was a novation and/or modification of the obligation of the appellants in favor of the appellee when appellee accepted without reservation the subsequent agreement set forth in the surety bond 2. WON the appellee’s unqualified acceptance of payment made by the Luzon Surety Co. Inc. of P 5,000 amounted to a waiver or condonation on its part.

NATURE Appeal from a judgment of the CFI of Manila FACTS - Appellants (Antonio and Herminia Rodriguez) bought from the appellee Magdalena Estates, Inc.) a parcel of land in Quezon City. Because of an unpaid balance of P 5,000 on account of the purchase price of the lot, the appellants executed a promissory note on Jan. 4, 1957. - On the same date, the appellants and the Luzon Surety Co. Inc. executed a bond wherein the Surety will undertake the compliance with the obligation to pay the amount of P 5,000 (the unpaid balance of the purchase price of the parcel of land) within 60 days from Jan. 7, 1957; It was also stated that the Surety shall be notified in writing within 10 days from moment of default otherwise, their undertaking will automatically be null and void. - On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon Surety Co. Inc. paid to the appellee the sum of P 5,000. Subsequently, the appellee demanded from the appellants the payment of P 655.89 which is the alleged accumulated interests on the principal of P 5,000. Due to the refusal of the appellants to pay the said interest, the appellee started this suit in the Municipal Court of Manila to enforce the collection. - On Feb. 5, 1959, the said court rendered judgment in favor of the appellee and against the appellants, ordering the latter to pay jointly and severally the appellee the sum of P 655.89, with interest thereon at the legal rate, from Nov. 10, 1958, the date of the filing of the complaint, until the whole amount is fully paid. Not satisfied, appellants appealed to the CFI of Manila. The CFI rendered a decision ordering the defendants-appellants to pay jointly and severally to the plaintiff -appellee the sum of P 655.89, plus legal interest thereon from the date of the judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs. The appellants brought the

HELD 1. NO - The rule is settled that novation by presumption has never been favored. To be sustained, it needs to be established that the old and new contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in acts of similar import. Reasoning An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the terms of payment and adding other obligations not incompatible with the old one or wherein the old contract is merely supplemented by the new one. The mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. In the instant case, the surety bond is not a new and separate contract but an accessory of the promissory note. 2. NO - It is very clear in the promissory note that the principal obligation is the balance of the purchase price of P 5,000. In the surety bond, the Luzon Surety Co. Inc. undertook to pay this amount. The appellee did not protest nor object when it accepted the payment of P 5,000 because it knew that that was the complete amount undertaken by the surety as appearing in the contract. The liability of a surety is not extended, by implication, beyond the terms of his contract. It is for the same reason that the appellee cannot apply a part of the P 5,000 as payment for the accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the rules contained in Arts. 1252 to 1254 of the Civil Code apply to a person owing several debts of the same kind of a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular; his liability is confined to such obligation, and he is

Obligations and Contracts 106 entitled to have all payments made applied exclusively to said application and to no other. Besides, Art. 1253 of the Civil Code is merely directory, and not mandatory. Inasmuch as the appellee cannot protest for non-payment of the interest when it accepted the amount of P5,000 from the Luzon Surety Co., Inc., nor apply a part of that amount as payment for the interest, we cannot now say that there was a waiver or condonation on the interest due. Disposition The judgment appealed from is affirmed with costs against appellants.

REYES V SECRETARY OF JUSTICE 1996 FACTS - Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a domestic corporation engaged in credit financing. Graciela Eleazar, private respondent, is the president of B.E. Ritz Mansion International Corporation (BERMIC), a domestic enterprise engaged in real estate development. The other respondent, Armed Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI), is a corporation duly organized primarily to perform welfare services for the Armed Forces of the Philippines. - Eurotrust and Bermic entered into a loan agreement. Pursuant to the said contract, Eurotrust extended to Bermic P216.053,126.80 to finance the construction of the latter's Ritz Condominium and Gold Business Park. In turn, Bermic issued 21 postdated checks to cover payments of the loan packages. However, when those checks were presented for payment, the same were dishonored by the drawee bank, Rizal Commercial Banking Corporation (RCBC), due to stop payment order made by Graciela Eleazar. Despite Eurotrust's notices and repeated demands to pay, Eleazar failed to make good the dishonored checks, prompting Reyes to file against her several criminal complaints for violation of B.P. 22 and estafa under Article 315, 4th paragraph, No. 2 (d) of the Revised Penal Code. - Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, by buying from it government securities, conducted its own investigation and found that after Eurotrust delivered to AFP-MBAI the securities it purchased, the former borrowed the same securities but failed to return them to AFP-MBAI; and that the amounts paid by AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to Bermic and others. - On February 15, 1991, the representatives of Eurotrust and Bermic agreed that Bermic would directly settle its obligations with the real owners of the fundAFP-MBAI and DECS-IMC. Pursuant to this understanding, Bermic negotiated with AFP-MBAI and DECS-IMC and made payments to the latter. In fact, Bermic paid AFP-MBAI P31,711.11 and a check of P1-million. - However, Graciela Eleazar later learned that Elsa Reyes continued to collect on the postdated checks issued by her (Eleazar) contrary to their agreement. So, Bermic wrote to Eurotrust to hold the amounts "in constructive trust" for the real owners. But Reyes continued to collect on the other postdated checks dated April 17 to June 28, 1991. Upon her counsel's advise, Eleazar had the payment stopped. Hence, her checks issued in favor of Eurotrust were dishonored. - After investigation, the Office of the Provincial Prosecutor of Rizal issued a resolution dismissing the complaints filed by Elsa Reyes against Graciela Eleazar on the ground that when the latter assumed the obligation of Reyes to

A2010 page Prof. Labitag AFP-MBAI, it constituted novation, extinguishing any criminal liability on the part of Eleazar. - Reyes filed a petition for review of the said resolution with respondent Secretary of Justice contending that novation did not take place. - The Secretary of Justice dismissed the petition holding that "the novation of the loan agreement prevents the rise of any incipient criminal liability since the novation had the effect of canceling the checks and rendering without effect the subsequent dishonor of the already cancelled checks." - At the time of the pendency of the cases filed by Elsa Reyes against Graciela Eleazar, AFP-MBAI lodged a separate complaint for estafa and a violation of BP 22 against Elsa Reyes with the office of the city prosecutor of Quezon City docketed as I.S. 92-926. Between August 1989 and September 1990, Eurotrust offered to sell to AFP-MBAI various marketable securities, including government securities - AFP-MBAI decided to purchase several securities amounting to P120,000,000.00 from Eurotrust. From February 1990 to September 1990, a total of 21 transactions were entered into between Eurotrust and AFP-MBAI. Eurotrust delivered to AFP-MBAI treasury notes amounting to P73 million. However, Eurotrust fraudulently borrowed all those treasury notes from the AFP-MBAI for purposes of verification with the Central Bank. Despite AFP-MBAI's repeated demands, Eurotrust failed to return the said treasury notes. Instead it delivered 21 postdated checks in favor of AFP-MBAI which were dishonored upon presentment for payment. Eurotrust nonetheless made partial payment to AFPMBAI amounting to P35,151,637.72. However, after deducting this partial payment, the amounts of P73 million treasury notes with interest and P35,151,637.72 have remained unpaid. Consequently, AFP-MBAI filed with the Office of the City Prosecutor of Quezon City a complaint for violation of BP 22 and estafa against Elsa Reyes. - Reyes interposed the defense of novation and insisted that AFP-MBAI's claim of unreturned P73 million worth of government securities has been satisfied upon her payment of P30 million. With respect to the remaining P43 million, the same was paid when Eurotrust assigned its Participation Certificates to AFPMBAI. - Office of the City Prosecutor of Quezon City issued a resolution recommending the filing of an information against Reyes for violation of BP 22 and estafa. - Reyes filed a petition for review with respondent Secretary of Justice. The latter dismissed the petition on the ground that only resolutions of the prosecutors dismissing criminal complaints are cognizable for review by the Department of Justice. - On February 2, 1994, petitioner seeking the nullification of either of the two resolutions of the respondent Secretary of Justice filed a petition for certiorari, prohibition and mandamus with the respondent court which, however, denied and dismissed her petition. Her motion for reconsideration was likewise denied in a Resolution 5 dated June 27, 1995. Hence, this present petition. - The first Department of Justice Resolution dated January 23, 1992 which sustained the Provincial Prosecutor's decision dismissing petitioner's complaints against respondent Eleazar for violation of B.P. 22 and estafa ruled that the contract of loan between petitioner and respondent Eleazar had been novated when they agreed that respondent Eleazar should settle her firm's (BERMIC) loan obligations directly with AFP-MBAI and DECS-IMC instead of

Obligations and Contracts 107 settling it with petitioner Reyes. This finding was affirmed by the respondent court which pointed out that "the first contract was novated in the sense that there was a substitution of creditor" 6 when respondent Eleazar, with the agreement of Reyes, directly paid her obligations to AFP-MBAI. ISSUE WON novation took place in the instant case HELD NO Ratio In order that a novation can take place, the concurrence of the following requisites is indispensable: a) there must be a previous valid obligation, b) there must be an agreement of the parties concerned to a new contract, c) there must be the extinguishment of the old contract, and d) there must be the validity of the new contract. - Last three essential requisites of novation are wanting in the instant case. No new agreement for substitution of creditor war forged among the parties concerned which would take the place of the preceding contract. The absence of a new contract extinguishing the old one destroys any possibility of novation by conventional subrogation - Nothing therein that would evince that respondent AFP-MBAI agreed to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of loan. It is evident that the two letters merely gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar only. There was no mention whatsoever of AFP-MBAI's consent to the new agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAI's intention to be the substitute creditor in the loan contract. - Novation by substitution of creditor requires an agreement among the three parties concerned — the original creditor, the debtor and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties, Hence, there is no novation if no new contract was executed by the parties. - The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them does not ipso facto result in novation. There must be an express intention to novate — animus novandi. Novation is never presumed. - A thorough examination of the records shows that no hard evidence was presented which would expressly and unequivocably demonstrate the intention of respondent AFP-MBAI to release petitioner from her obligation to pay under the contract of sale of securities. It is a rule that novation by substitution of debtor must always be made with the consent of the creditor. - The consent of the creditor to a novation by change of debtor is as indispensable as the creditor's consent in conventional subrogation in order that a novation shall legally take place. The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to assume the obligation of petitioner under the contract of sale of securities, when there is clearly no agreement to release petitioner from her responsibility, does not constitute novation. The foregoing elements are found wanting in the case at bar. Disposition ACCORDINGLY, finding no reversible error in the decision appealed from dated May 12, 1995, the same is hereby AFFIRMED in all respects.

A2010 page Prof. Labitag CONCHINGYAN V R & B SURETY & INSURANCE FELICIANO; June 30,1987 NATURE Certified to the SC by the CA as one involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of the SC. FACTS - In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of credit from P400,000 to P800,000 (the "Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000, representing the increment in its line of credit. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by R & B Surety and Insurance Co., Inc. ("R & B Surety") in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond. - In consideration of R & B Surety's issuance of the Surety Bond, two identical indemnity agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CM and by petitioner Joseph Cochingyan, Jr.; the latter signed not only as President of CCM but also in his personal and individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc.(PACOCO), Jose K. Villanueva and Liu Tua Beh; Mr. Villanueva signed both as Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal capacity. Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY BOND for a period beginning x x x x until the same is CANCELLED and/or DISCHARGED." - When PAGRICO, failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000. R & B Surety made a series of payments to PNB by virtue of that demand totaling P70,000 evidenced by detailed vouchers and receipts. - R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Beh in the CFI of Manila. - Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R & B Surety: (i) did not expess the true intent of the parties thereto in that he had been asked by R & B Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety had assured him

Obligations and Contracts 108 that the execution of the agreement was a mere formality and that he was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity Agreement as against him. - Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R & B Surety only "for accomodation purposes" and that it did not express their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond. - The Trust Agreement referred to by both petitioners was executed on 28 December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows: 'WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000 issued by R & B Surety at the instance of PAGRICO on December 21, 1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an advance line of P400,000 to P800,000; 'WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount of P900,000 in favor of the BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the PACOCO; 'WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded compliance by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds; 'WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby agrees to pay the obligations of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from the net profits arising from the procurement of reparations consumer goods made thru the allocation of WARVETS. [war veterans?] x x x This agreement shall not in any manner release the R & B and CONSOLACION from their respective liabilities under the bonds mentioned above. - The CFI of Manila rendered a decision in favor of R & B Surety, ordering the defendants to pay the total amount of the liability (P400,000) plus interest, unpaid premiums and attorney’s fees. - Not satisfied with the decision of the trial court, the petitioners appealed to the CA which certified the case to the SC as one raising only questions of law. ISSUES

A2010 page Prof. Labitag 1. WON the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements 2. WON the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement 3. WON the filing of this complaint was premature since the PNB had not yet filed a suit against R & B Surety for the forfeiture of its Surety Bond HELD 1. NO Ratio Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly discernible. Reasoning Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved - an obligation is extinguished and a new one is created in lieu thereof. If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one. - If subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a cosurety. The Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and nothing else) would sustain a finding of novation by implication. But where, as in this case, the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. 2. NO Ratio Any extension of time granted by a creditor to any of the first-tier obligors could not prejudice the second-tier parties. Reasoning The petitioner-indemnitors are, as it were, second-tier parties so far as the PNB was concerned. The record is bereft of any indication that the petitionersindemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B

Obligations and Contracts 109 Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty" -could apply in the instant case. 3. NO Ratio Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. While in a contract of indemnity against loss an indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. Reasoning Petitioners are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B Surety for the collection of its matured obligation under the Surety Bond. Disposition Petitioners' appeal is DENIED for lack of merit and the decision of the trial court is AFFIRMED in toto.

BROADWAY CENTRUM CONDOMINIUM CORP. V TROPICAL HUT FOOD MARKET, INC FELICIANO; July 5, 1993 FACTS - On Nov. 28, 1980, petitioner Broadway Centrum Condominium Corporation (Broadway) and private respondent Tropical Hut Food Market, Inc. (Tropical) executed a contract of lease. Broadway, as lessor, agreed to lease a 3,042.19 square meter portion of the Broadway Centrum Commercial Complex for 10 years from Feb. 1, 1981 to Feb. 1, 1991, renewable for a like period upon the mutual agreement of both parties. The rental provision provides: - The lessee agrees to pay the lessor a basic monthly rental of P120,000 during the first 3 years allowing 2 months grace period on rental for renovation from Dec. 1, 1980 to Jan. 31, 1981. The basic rent will be increased to P140,000 during the next 3 years then P165,000 for the last 4 years. The 1st payment is to be made in advance on or before Dec. 1, 1980 and succeeding payments to be made without necessity of the services of a collector w/in the 1st 5 dayss of the month. - No problems were experienced on the first year but on the following year, Tropical wrote to Broadway stating that Tropical’s rental payments were equal to 7.31% of its actual sales, which was based merely on Tropical’s sales projections of P120,000 a day (which it obviously did not meet); the current rate was too high considering its other branches paid rent below the normal 1.5% of sales. Tropical proposed to reduce the rent to P50,000 or 2% of their monthly sales whichever was higher up to the end of the 3rd year of the contract. Broadway responded stating that Tropical’s financial trouble was within the control of its management and offered several suggestions to improve sales. In the meantime, Broadway offered a counter-

A2010 page Prof. Labitag proposal consisting of a conditional reduction of the rental by P20,000 for a limited period of 4 months, to be repaid spread over the last 6 months of the years only if a target 15% of sales is achieved. The proposal emphasized that any reduction in rent was merely a temporary suspension of the original rate and was not an amendment thereto. - Officers of both parties met and it was found that Tropical’s low sales was a result of the temporary closure of Dona Juana Rodriguez Ave. (a major thoroughfare adjacent to Broadway) due to a road expansion project. Broadway’s president, Mrs. Orosa was aware of this and finally made formal the provisional and temporary agreement to reduce the monthly fees to 2% of Tropical’s gross receipts or P60,000, whichever was higher. Again, it was emphasized that said agreement was not an amendment to the contract. Also, an area of 466.56 square meters was to be returned by the next month. - Months later, Dona Juana Rodriguez Ave. had reopened; Broadway informed Tropical that the concession could no longer be extended and, in light of the cessation of its business constraints, increased rent gradually from P80,000 effective Jan. 1983, to P100,000 on April 1993 until further notice. - In a letter dated Jan. 4, 1983, a Mr. Que of Tropical appealed to Broadway to maintain the provisional rates until sales increased, but Broadway refused, arguing that they sustained losses as well. Tropical continued renegotiating but was turned down. In its desire to keep Tropical as a tenant, Broadway extended the P100,000 rent increase to July of the same year. Tropical’s last counter-offer was not accepted and Broadway urged them to pay immediately to minimize the 2% penalty on delayed payments. On May 5, 1983, Mr. Gue of Tropical argued that Broadway cannot arbitrarily and unilaterally increase rent , which is a matter that should be mutually agreed upon. On the same day, Mrs. Orosa responded with dismay, reiterating that the provisional agreement was not an amendment to the contract and was done merely in assistance; she demanded the payment for their back accounts amounting to P100,000 lest paragraph 5 of the contract be implemented. A week later, Tropical filed a complaint before the RTC of QC seeking a restraining order or preliminary injunction to prevent Broadway from invoking Sec 5 of the contract and asking the court to decree that the provisional agreement be implemented while Tropical’s sales remain low. Pending the case, Broadway increased rent to P140,000 to which Tropical reacted by filing a supplemental complaint with the TC raising WON the agreement dated April 20, 1982 novated the Nov. 28, 1980 lease contract. The court judged in favor of Tropical, making the writ of preliminary injunction permanent, reducing the rental agreement until able to pay, declaring the Nov. 1980 contract partially novated/modified by the provisional agreement, and fixing the monthly rentals to the reduced area of the leased premises. On appeal, the CA affirmed the decision, stating that the reduction of the leased space constituted valuable consideration for reduction of rental while Tropical’s sales remained low. ISSUE WON the letter-agreement dated April 20, 1982 had novated the Contract of Lease dated Nov 28, 1980 HELD NO - Novation is the extinguishment of an obligation by the substitution with a subsequent one, which terminates it, either by changing its object or principal

Obligations and Contracts 110 conditions or by substituting a new debtor, or by subrogating a 3 rd person to the rights of the creditor. Novation is never presumed; the will to novate must appear by express agreement of both parties. Clearly, Broadway’s constant emphasis that the “provisional and temporary agreement should not be interpreted as amendment to the contract” meant that it could terminate the reduced concessional rates at any time without the consent of Tropical. - The notarized lease of contract of Nov. 1980 made it clear that the provisional agreement was not an alteration or waiver of the Lease Contract itself. Also, negotiations before the execution of the letter-agreement indicated clearly that they were negotiating a temporary/provisional reduction and Tropical itself proposed a change only up to the end of the 3rd year. Over the course of the grueling renegotiations, Mrs. Orosa repeatedly stressed that the provisions were not amendments and were merely offered as an assistance. - The court found that Tropical’s theory that Broadway had agreed to maintain the reduced rent so long as sales stayed low was merely an afterthought. - The CA’s finding that the surrender of the 466.56 square meters by Tropical constituted valuable consideration doesn’t hold. Broadway reduced rent by 50% while the portion of the leased space was reduced only by 15%, hence no presumption can be made that the returned space was a consideration for the reduction in rent. Moreover, rent was not specified on a per square meter basis. Disposition Wherefore, the Petition for Review on Certiorari is hereby given due course, and the comment filed by the private respondent Tropical is hereby treated as its answer and the Decision dated Jan. 30 1987 of CA and the Decision dated 14 March 1985 of the TC are hereby REVERSED and SET ASIDE. Tropical’s complaint is dismissed and is hereby required to pay the ff rental rates: 1. P80,000.00 per month from 1 January 1983 up to 30 June 1983; 2. P100,000.00 per, month from 1 July 1983 up to 31 January 1984; 3. P140,000.00 per month from 1 February 1984 to 1 February 1987; and 4. P160,000.00 per month from 1 February 1987 to 31 January 1991. - The penalty of 2% per month on unpaid rentals specified in Sec 5 of the Nov. 1980 Contract of Lease is, hereby equitably REDUCED to 10% per annum computed from accrual of such rentals as above specified until fully paid. In addition, private respondent Tropical shall pay to petitioner Broadway attorney's fees in the amount of ten percent (10%) (and not twenty percent [20%] as specified in Section 33 of the Contract of lease) of the total amount due and payable to petitioner Broadway under this Decision. Costs against, private respondent.

CALIFORNIA BUS LINE V STATE INVESTMENT QUISUMBING; December 11, 2003 NATURE Petition for Review on certiorari of a decision of the CA FACTS - In 1979, Delta Motors Corporation (Delta) applied for financial assistance from respondent State Investment House, Inc. (SIHI), a domestic corporation engaged in the business of quasi-banking. SIHI agreed to extend a credit line to Delta for P25M in 3 separate credit agreements. Delta eventually became indebted to SIHI. - In April 1979 to May 1980, petitioner California Bus Lines, Inc. (CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and 2 units of M.A.N. Diesel

A2010 page Prof. Labitag Conversion Engines from Delta. To secure the payment of the 35 buses, CBLI and its president executed 16 promissory notes in favor of Delta. CBLI [a] promised to pay Delta or order, P2.314M payable in 60 monthly installments with interest at 14% per annum (p.a), [b] promised to pay the holder of the said notes 25% of the amount due on the same as attorney’s fees and expenses of collection, [c] executed chattel mortgages over the 35 buses in Delta’s favor. - When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta in Oct. 1981, to cover its overdue obligations under the promissory notes. The restructuring agreement provided for a new schedule of payments of CBLI’s past due installments, extending the period to pay, and stipulating daily remittance instead of the previously agreed monthly remittance of payments. In case of default, Delta would have the authority to take over the management and operations of CBLI until CBLI remitted and/or updated CBLI’s past due account. CBLI and Delta also increased the interest rate to 16%. - In Dec. 1981, Delta executed a Continuing Deed of Assignment of Receivables in favor of SIHI as security for the payment of its obligations to SIHI per the credit agreements. In view of Delta’s failure to pay, the loan agreements were restructured under a Memorandum of Agreement dated March 1982. Delta obligated itself to pay a fixed monthly amortization of P0.4M to SIHI and to discount with SIHI P8M worth of receivables with the understanding that SIHI shall apply the proceeds against Delta’s overdue accounts. - CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten CBLI with the enforcement of the management takeover clause. CBLI filed a complaint for injunction at CFI Rizal, Pasay City, (now RTC Pasay City). In due time, Delta filed amended answer with applications for issuance of a writ of preliminary mandatory injunction to enforce the management takeover clause and a writ of preliminary attachment over the buses it sold to CBLI. RTC granted Delta’s prayer on account of the fraudulent disposition by CBLI of its assets. - In Sept.1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of Sale assigning to SIHI 5 of the 16 promissory notes from CBLI At the time of assignment, these 5 promissory notes had a total value P16.1M inclusive of interest at 14% p.a. SIHI subsequently sent a demand letter to CBLI requiring CBLI to remit the payments due on the 5 promissory notes directly to it. CBLI replied informing SIHI that Delta had taken over its management and operations. - Thereafter, Delta and CBLI entered into a compromise agreement in July 1984. CBLI agreed that Delta would exercise its right to extrajudicially foreclose on the chattel mortgages over the 35 bus units. RTC Pasay approved this compromise agreement. Following this, CBLI vehemently refused to pay SIHI the value of the 5 promissory notes, contending that the compromise agreement was in full settlement of all its obligations to Delta including its obligations under the promissory notes. - On Dec 26, 1984, SIHI filed a complaint against CBLI in RTC Manila, to collect on the 5 promissory notes with interest at 14% p.a. SIHI also prayed for the issuance of a writ of preliminary attachment against the properties of CBLI. - On Dec 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages pursuant to its compromise agreement with CBLI. Delta then filed in the RTC Pasay a motion for execution of the judgment based on the compromise agreement which was granted. - In view of Delta’s petition and motion for execution per the judgment of compromise, the RTC Manila granted SIHI’s application for preliminary attachment on Jan. 4, 1985. Consequently, SIHI was able to attach and physically take

Obligations and Contracts 111 possession of 32 buses belonging to CBLI. However, acting on CBLI’s motion to quash the writ of preliminary attachment, the same court resolved in Jan. 1986, to discharge the writ of preliminary attachment. SIHI assailed the discharge of the writ before the IAC (now Court of Appeals) CA granted SIHI’s petition in and ruled that the writ of preliminary attachment issued by RTC Manila should stay. - Meanwhile, pursuant to the Jan. 3, 1985 Order of RTC of Pasay, the sheriff of Pasay City conducted a public auction and issued a certificate of sheriff’s sale to Delta on April 2, 1987, attesting to the fact that Delta bought 14 of the 35 buses for P3.92M. On April 7, 1987, the sheriff of Manila, by virtue of the writ of execution dated March 27, 1987, sold the same 14 buses at public auction in partial satisfaction of the judgment SIHI obtained against Delta. - SIHI moved to sell the 16 buses of CBLI which had previously been attached by the sheriff pursuant to the Jan 4, 1985, Order of RTC of Manila. SIHI’s motion was granted on Dec. 16, 1987. In Nov. 1988, however, SIHI filed an urgent ex-parte motion to amend this order claiming that its new counsel made a mistake in the list of buses in the Motion to Sell it had earlier filed. SIHI explained that 14 of the buses listed had already been sold to Delta on April 2, 1987, by virtue of the Jan. 3, 1985 Order of the RTC of Pasay, and that 2 of the buses listed had been released to a third party. - CBLI opposed SIHI’s motion to allow the sale of the 16 buses. On May 3, 1989, RTC Manila denied SIHI’s urgent motion to allow the sale of the 16 buses listed in its motion to amend. RTC ruled that the best interest of the parties might be better served by denying further sales of the buses and to go direct to the trial of the case on the merits. - RTC and CA Ruling. Judgment discharged CBLI from liability on the 5 promissory notes. RTC also favorably ruled on CBLI’s compulsory counterclaim. It directed SIHI to return the 16 buses or to pay CBLI P4M representing the value of the seized buses, with interest at 12% p.a. RTC held that the restructuring agreement between Delta and CBLI novated the 5 promissory notes; hence, at the time Delta assigned the 5 promissory notes to SIHI, the notes were already merged in the restructuring agreement and cannot be enforced against CBLI. SIHI appealed to the Court of Appeals. CA reversed RTC ruling. Hence this appeal. ISSUES 1. WON the Restructuring Agreement between CBLI and Delta novated the 5 promissory notes Delta assigned to respondent SIHI 2. WON the Compromise Agreement between Delta and CBLI superseded and/or discharged the subject 5 promissory notes HELD 1. NO Ratio An agreement subsequently executed between a seller and a buyer that provides for a different schedule and manner of payment, to restructure the mode of payments by the buyer so that it could settle its outstanding obligation in spite of its delinquency in payment is not novation. Reasoning [a] Novation Defined and its Requisites. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the creditor. Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of

A2010 page Prof. Labitag a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. For novation to take place, 4 essential requisites have to be met, namely, (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. [b] Express and Implied Novation. There are 2 ways which could indicate the presence of novation and thus produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly or expressly stated and declared in unequivocal terms. The second is implied novation. when the old and the new obligations are incompatible on every point. The test of incompatibility is whether the 2 obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily, changes that breed incompatibility must be essential in nature and not merely incidental. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation. [c] In this case, the attendant facts do not make out a case of novation. The restructuring agreement between Delta and CBLI executed shows that the parties did not expressly stipulate that the restructuring agreement novated the promissory notes. Absent an unequivocal declaration of extinguishment of the preexisting obligation, only a showing of complete incompatibility between the old and the new obligation would sustain a finding of novation by implication. However, our review of its terms yields no incompatibility between the promissory notes and the restructuring agreement. Furthermore, obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, and adds other obligations not incompatible with the old ones, or where the new contract merely supplements the old one 2. NO Ratio A compromise agreement determines the rights and obligations of only the parties to it. Reasoning: [a] Having previously assigned the 5 promissory notes to SIHI, Delta had no more right to compromise the same. Delta’s limited authority to collect for SIHI stipulated in the Sept. 13, 1985, Deed of Sale cannot be construed to include the power to compromise CBLI’s obligations in the said promissory notes. An authority to compromise, by express provision of Article 1878 of the Civil Code, requires a special power of attorney, which is not present in this case. Furthermore, the compromise agreement itself provided that it covered the rights and obligations only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the new creditor of CBLI in the subject promissory notes. [b] The assignment of the 5 notes operated to create a separate and independent obligation on the part of CBLI to SIHI, distinct and separate from CBLI’s obligations to Delta. And since there was a previous revocation of Delta’s authority to collect for SIHI, Delta was no longer SIHI’s collecting agent. CBLI, in turn, knew of the assignment and Delta’s lack of authority to compromise the subject notes, yet it readily agreed to the foreclosure Disposition CA ruling affirmed. CBLI is ordered to pay SIHI the value of the 5 promissory notes less the proceeds from the sale of the attached 16 buses.

GARCIA V LLAMAS PANGANIBAN; DEC 8, 2003

Obligations and Contracts 112 FACTS - On Dec. 23 1996, Petitioner Romeo Garcia and Eduardo de Jesus borrowed P400,000 from Respondent Dionisio Llamas. On the same day, they executed a promissory note wherein they bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interest per month - The loan was not paid, despite the repeated demands by the respondent. He then filed for the recovery of said amount. Garcia averred that he assumed no liability under the promissory note because he signed it merely as an accommodation party for de Jesus; and, alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had been paid by de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of the check and respondent’s acceptance thereof novated or superseded the note. - Respondent however said that the said check has bounced - De Jesus in his answer said that out of the supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance interest thereon for two months. He claims to have paid P120,000 of the debt. He also claims that the respondent acted in bad faith in instituting the case, since the respondent has agreed to accept the benefits de Jesus would receive for his retirement. The respondent nonetheless filed the instant case while his retirement was being processed. - The trial court found in favor of the respondent, ordering petitioner and de jesus to pay P400,000.00 representing the principal amount plus 5% interest thereon per month from January 23, 1997 until the same shall have been fully paid, less the amount of P120,000.00 representing interests already paid by x x x de Jesus. - The CA affirmed the trial court’s ruling regarding Garcia. IT ruled that no novation has taken place respondent accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the loan that was covered by the promissory note jointly and severally undertaken by petitioner and De Jesus. Respondent’s acceptance of the check did not serve to make De Jesus the sole debtor because, first, the obligation incurred by him and petitioner was joint and several; and, second, the check -- which had been intended to extinguish the obligation -- bounced upon its presentment. ISSUES 1. WON there was novation in the obligation 2. WON the defense that petitioner was only an accommodation party had any basis 3. Won the CA was correct in treating the case as a summary judgement HELD 1. NO novation took place. The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answers for it. Verily, the two can stand together. - Neither could the payment of interests change the terms and conditions of the obligation. Such payment was already provided for in the promissory note and, like the check, was totally in accord with the terms thereof.

A2010 page Prof. Labitag - Also unmeritorious is petitioner’s argument that the obligation was novated by the substitution of debtors. In order to change the person of the debtor, the old one must be expressly released from the obligation, and the third person or new debtor must assume the former’s place in the relation. Novation is never presumed. - Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor expressly consent to the substitution of a new debtor. - De Jesus also is not a third person to the obligation, since he was a joint and solidary obligor of the loan 2. NO - The petitioner’s reasoning is untenable, since this is not a negotiable instrument. He cannot avail of the Negotiable Instrument’s Law’s provisions on the liabilities and defenses of an accommodation party. Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value even if, at the time of its taking, the latter knew the former to be only an accommodation part 3. YES - A summary judgment is a procedural device designed for the prompt disposition of actions in which the pleadings raise only a legal, not a genuine, issue regarding any material fact. Consequently, facts are asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or specific denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shown by the pleadings, depositions or admissions - Petitioner’s Answer apparently raised several issues -- that he signed the promissory note allegedly as a mere accommodation party, and that the obligation was extinguished by either payment or novation. However, these are not factual issues requiring trial. Disposition Petition denied

QUINTO V PEOPLE VITUG; April 14, 1999 NATURE Appeal from decision of CA finding petitioner guilty of estafa FACTS - Petitioner Leonida Quinto received in trust several pieces of jewelry from Aurelia Cariaga with a total value of P36,000 with the purpose of selling the same on a commission basis and with the express obligation to turn over the proceeds of sale thereof or to return the jewelry within 5 days if not sold - The prosecution claimed that petitioner asked for more time to sell the items but failed to conclude any sale. After 6 months, Aurelia sent a demand letter for the return of the items which petitioner ignored. - The defense proffered that petitioner had sold several pieces of jewelry for Aurelia, and it happened on some occasions that the buyers were unable to pay in full. When this happened, petitioner brought the buyers to meet Aurelia who agreed to accept payment in installments. Petitioner claims that the contract between herself and Aurelia was effectively novated when the latter agreed to accept payment in installments directly from the buyers ISSUE

Obligations and Contracts 113 WON there was novation of the contract HELD NO. Ratio Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. There are two ways which could indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation. The changes alluded to by petitioner consists only in the manner of payment. There was really no substitution of debtors since private complainant merely acquiesced to the payment but did not give her consent to enter into a new contract. The fact alone that the creditor receives guaranty or accepts payments from a third party who has agreed to assume the obligation does not constitute an extinctive novation absent an agreement that the first debtor shall be released from responsibility. Disposition Petition dismissed. Decision affirmed

LICARIOS V GATMAITAN GONZAGA-REYES; August 9, 2001 NATURE A petition for review on certiorari under Rule 45 of the Rules of Court. FACTS - The Anglo-Asean Bank and Trust Limited (Anglo-Asean)  is a private bank registered and organized to do business under the laws of the Republic of Vanuatu but not in the Philippines. Its business consists primarily in receiving fund placements by way of deposits from institutions and individual investors from different parts of the world and thereafter investing such deposits in money market placements and potentially profitable capital ventures in Hongkong, Europe and the United States for the purpose of maximizing the returns on those investments. - Enticed by the lucrative prospects of doing business with Anglo-Asean, Abelardo Licaros, a Filipino businessman, decided to make a fund placement with said bank sometime in the 1980’s. However, this overseas fund investment was not exactly what he envisioned it to be  He encountered difficulties in retrieving his interests/profits and even his very investment. - Fearing that he might not get back nay of his investments, Licaros decided to seek the counsel of Antonio P. Gatmaitan who was a reputable banker and investment

A2010 page Prof. Labitag manager. He had been extending managerial, financial and investment consultancy services to various firms and corporations both here and abroad. - So willing to help, Gatmaitan voluntarily offered to assume the payment of AngloAsean’s indebtedness to Licaros subject to certain terms and conditions. Gatmaitan In order to effectuate and formalize their respective commitments, they executed a notarized MEMORANDUM OF AGREEMENT on July 29,’88 - In line w/ this agreement, Gatmaitan executed a NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS in favor of Licaros. In the promissory note, Gatmatian promises to pay Abelardo an amount of P3,150,000 without interest as material consideration for the full settlement of his money claims from ANGLO-ASEAN BANK. As a security for the payment of this promissory note, he iaasiged 70% of all cash dividends from his shares of stock in the Prudential Life Realty, Inc. and Prudential Life Plan, Inc. - Gatmaitan then tried to claim the S150,000 from Anglo-Asean. They said they will look into the matter but nothing was heard from the bank since. Because of Gatmaitan’s inability to collect, he did not bother anymore to make good his promise to pay Licaros the amount stated in his promissory note. Licaros, however, thought differently. He felt that he had a right to collect on the basis of the promissory note regardless of the outcome of Gatmaitan's recovery efforts. - Thus, in July 1996, Licaros, thru counsel, addressed successive demand letters to Gatmaitan, demanding payment of the latter’s obligations under the promissory note. Gatmaitan, however, did not accede to these demands. - Licaros then filed a complaint to the RTC. RTC ruled in favor of Licaros. But the appellate court reversed the decision, hence this petition. ISSUE Whether the memorandum of Agreement between petitioner and respondent is one of assignment of credit or one of conventional subrogation. WON such agreement (MOA) was perfected HELD 1. It is a conventional subrogation. - That Gatmaitan and Licaros had intended to treat their agreement as one of conventional subrogation is plainly borne by a stipulation in their Memorandum of Agreement, to wit: “WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their mutual prestations which they now record herein with the express conformity of the third parties concerned” (emphasis supplied), which third party is admittedly Anglo-Asean Bank. Had the intention been merely to confer on appellant the status of a mere “assignee” of appellee’s credit, there is simply no sense for them to have stipulated in their agreement that the same is conditioned on the “express conformity” thereto of Anglo-Asean Bank. That they did so only accentuates their intention to treat the agreement as one of conventional subrogation. And it is basic in the interpretation of contracts that the intention of the parties must be the one pursued 2. NO - The subject Memorandum of Agreement expressly requires the consent of AngloAsean to the subrogation and the two failed to obtain such. - Doubtless, the absence of such conformity on the part of Anglo-Asean, which is thereby made a party to the same Memorandum of Agreement, prevented the

Obligations and Contracts 114 agreement from becoming effective, much less from being a source of any cause of action for the signatories thereto. - The fact that Anglo-Asean Bank did not give such consent rendered the agreement inoperative considering that, as previously discussed, the consent of the debtor is needed in the subrogation of a third person to the rights of a creditor. Ratio assignment of credit  has been defined as the process of transferring the right of the assignor to the assignee who would then have the right to proceed against the debtor. The assignment may be done gratuitously or onerously, in which case, the assignment has an effect similar to that of a sale. On the other hand, subrogation  has been defined as the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Conventional subrogation is that which takes place by agreement of parties. Distinctions: “Under our Code, however, conventional subrogation is not identical to assignment of credit. In the former, the debtor’s consent is necessary; in the latter it is not required. Subrogation extinguishes the obligation and gives rise to a new one; assignment refers to the same right which passes from one person to another. The nullity of an old obligation may be cured by subrogation, such that a new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditor’s right to another. Disposition WHEREFORE, the instant petition is DENIED and the Decision of the Court of Appeals dated February 10, 2000 and its Resolution dated April 7, 2000 are hereby AFFIRMED.

ASTRO ELECTRONICS CORP. V PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORP. AUSTRIA-MARTINEZ; September 23, 2003 NATURE Petition for review on certiorari under Rule 45 of the Rules of Court of the decision of the Court of Appeals affirming the decision of the RTC of Makati, then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics Corp. (Astro) were ordered to pay respondent Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee), jointly and severally, the amount of P3,621,187.52 with interests and costs FACTS - Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to P3M with interest and secured by three promissory notes. In each of these promissory notes, it appears that petitioner Roxas signed twice, as President of Astro and in his personal capacity. Roxas also signed a Continuing Surety ship Agreement in favor of Philtrust Bank, as President of Astro and as surety. - Philguarantee guaranteed in favor of Philtrust the payment of 70% of Astro’s loan, subject to the condition that upon payment by Philguanrantee of said amount, it shall be proportionally subrogated to the rights of Philtrust against Astro. - As a result of Astro’s failure to pay its loan obligations, despite demands, Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,

A2010 page Prof. Labitag Philguarantee filed against Astro and Roxas a complaint for sum of money with the RTC of Makati. - On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court that Roxas failed to explain satisfactorily why he had to sign twice in the contract and therefore the presumption that private transactions have been fair and regular must be sustained Respondent’s Comment - Roxas disclaims any liability on the instruments, alleging that he merely signed the same in blank and the phrases “in his personal capacity” and “in his official capacity” were fraudulently inserted without his knowledge. ISSUES 1. WON Roxas should be jointly & severally liable (solidary) with Astro for the sum awarded by the RTC 2. WON Philguarantee has the right to proceed against petitioners HELD 1. YES Ratio In signing his name aside from being the President of Astro, Roxas became a co-maker of the promissory notes and cannot escape any liability arising from it. Reasoning Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes are makers, promising that they will pay to the order of the payee or any holder according to its tenor. Thus, even without the phrase “personal capacity,” Roxas will still be primarily liable as a joint and several debtor under the notes considering that his intention to be liable as such is manifested by the fact that he affixed his signature on each of the promissory notes twice which necessarily would imply that he is undertaking the obligation in two different capacities, official and personal. - Portions of his signatures covered portions of the typewritten words “personal capacity” indicating with certainty that the typewritten words were already existing at the time Roxas affixed his signatures thus demolishing his claim that the typewritten words were just inserted after he signed the promissory notes. If what he claims is true, then portions of the typewritten words would have covered portions of his signatures, and not vice versa. - It devolves upon Roxas to overcome the presumptions that private transactions are presumed to be fair and regular and that a person takes ordinary care of his concerns. Bare allegations, when unsubstantiated by evidence, documentary or otherwise, are not equivalent to proof under our Rules of Court. 2. YES Ratio Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights of Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the value of 70% of roxas and Astro Electronics Corp.’s loan obligation. In compliance with its contract of “Guarantee” in favor of Philtrust. Reasoning Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Instances of legal subrogation are those provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that which takes place by agreement of the parties. Roxas’ acquiescence is not necessary for subrogation to take place because the instant case is one of the legal subrogation that occurs by operation of law, and

Obligations and Contracts 115 without need of the debtor’s knowledge. Further, Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against Roxas and Astro because the “guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.” Disposition WHEREFORE, finding no error with the decision of the Court of Appeals dated December 10, 1998, the same is hereby AFFIRMED in toto.

GSIS V COURT OF APPEALS DAVIDE; January 29, 1993 FACTS - Several years back, the Queen's Row Subdivision, Inc. (QRSI) entered into a construction project agreement with the Government Service Insurance System (GSIS) by virtue of which the latter agreed to extend a financing loan to the former for the construction and development of a residential subdivision, comprising some four hundred ninety-three (4,493) housing units, situated at Molino, Bacoor, Cavite; these units were to be sold to GSIS members in accordance with the System's housing program. - Pursuant to said project agreement, QRSI entered into a construction contract with private respondent Valencia involving various phases of land development in the said subdivision. Upon accomplishing and completing his undertaking under the contract, Valencia demanded payment from QRSI. Despite repeated demands, however, QRSI refused to pay. Valencia then filed the complaint in the aforementioned Civil Case No. BCV-78-33, an action for a sum of money with prayer for the issuance of a writ of preliminary attachment. During the trial of the case, Valencia, after manifesting that he was not seeking any relief against the personal funds of petitioner GSIS, proceeded to present his evidence. No evidence was offered by both the petitioner and QRSI. - On 25 March 1982, Valencia filed a motion for execution pending appeal. Actually, no motion for reconsideration or notice of appeal was filed by both QRSI and the petitioner. Although the motion was granted by the trial court, the writs issued as a consequence thereof were returned unsatisfied. Thereupon, private respondent Valencia filed a Motion for Examination of Debtors of the Judgment Debtor. With the permission of the trial judge, a certain Mr. Valeriano M. Espiritu, a plaintiff in a separate collection suit against both the petitioner and QRSI, 4 was joined as movant with Valencia. Acting on said motion, the trial court ordered Mr. Armando Diaz, Assistant General Manager for Loans and Investments of the GSIS, to appear and testify in accordance with Sections 38 to 40, Rule 39 of the Rules of Court. - On 10 November 1982, respondent Valencia filed a petition to cite petitioner in contempt of court for the latter's failure to comply with the writ of execution. On 15 November 1982, the trial court issued an order directing the petitioner to comply with the writ of execution and instructing Mr. Diaz to appear on 26 November 1982, petitioner filed an Urgent Motion for Reconsideration of the 15 November 1982 Order. Pending resolution of this motion, petitioner partially paid respondent Valencia on 26 November 1982 the amount of ONE HUNDRED FIFTY FOUR THOUSAND FOUR HUNDRED SEVENTY SIX and 14/100 PESOS (P154,476.14) out of the retained funds held for the account of QRSI. - Thereafter, on 20 October 1983, another alias writ of execution was issued by the trial court.

A2010 page Prof. Labitag - On 5 December 1983, respondent Sheriff served upon the petitioner a notice of garnished upon all monies and credits belonging to QRSI which were under the control and possession of the petitioner. An answer to the Sheriff's notice was submitted by the latter stating that the GSIS is not a debtor of QRSI; that it has no credits, monies or interests belonging to QRSI in its possession or control; and that it is in fact the biggest creditor of QRSI whose outstanding account as of 9 December 1983 stood at FIFTY EIGHT MILLION TWO HUNDRED SIXTY ONE THOUSAND SEVEN HUNDRED SEVENTY THREE and 19/100 PESOS (58,261,773.19). - In its 5 July 1985 Order, the trial court ruled that the petitioner was holding funds for QRSI; it thus directed the petitioner to pay both Valencia and Valeriano Espiritu the amount adjudged and covered by the writs of execution after deducting the payments previously made. - Petitioner's motion for reconsideration of the said order was denied by the trial court in its Order of 22 May 1986 on the ground that, inter alia, the claim that QRSI is obligated to the GSIS was not established by evidence during the trial of the case. - On 9 June 1986, the trial court again issued an alias writ of execution. Consequently, notices of garnishment were served by the Sheriff upon the petitioner and the Philippine National Bank (PNB). On 13 June 1986, petitioner filed a motion for the reconsideration of the 22 May 1986 Order and on 16 June 1986, it filed a Notice of Appeal Ad Cautelam from the Orders of 5 July 1985 and 22 May 1986. It thereafter filed its motion to quash the alias writ of execution. - In its Order of 10 July 1986, the trial court denied the aforesaid motion for reconsideration. - The petitioner thus filed on 18 September 1986 with the Court of Appeals a petition for certiorari and prohibition to set aside the aforesaid Orders of 5 July 1985, 22 May 1986 and 10 July 1986, as well as the alias writ of execution of 9 June 1986 and the Notices of Garnishment of 10 June 1986. The case was docketed as CA-G. R. No. 09956. - In its Decision promulgated on 17 April 1986, the Court of Appeals dismissed the aforesaid petition principally on the ground that the trial court's Decision of 2 March 1982 "has long become final" as neither QRSI nor the herein petitioner had moved for its reconsideration or appealed therefrom within the reglementary period. It considered as "inexcusable" petitioner's contention — that it did not need to appeal the decision because according to the trial court, "defendant GSIS shall not be personally liable for the obligation of QRSI" — because the following portion of the trial court's decision: "3. Requiring defendant GSIS to hold whatever amounts it has granted to, retained and obtained for defendant Queen's Row, and to deliver same to plaintiff by way of payment of the aforecited amount ordered recovered by plaintiff, the same to be credited as payment made by defendant Queen's Row. It is distinctly made clear that defendant GSIS shall not be personally liable for the said obligation of co-defendant Queen's Row, except, as herein aboveordered; however, pending payment of the said claim of plaintiff, defendants are ordered to respect and satisfy the contractor's lien in favor of the plaintiff as provided for by law." constitutes: ". . . a final or definitive judgment on the merits from which the party adversely affected can make an appeal. Said decision imposes an obligation on GSIS which GSIS has acquiesced to do by its failure to appeal therefrom." and that:

Obligations and Contracts 116 "Consequently, when GSIS conformed to the decision and allowed it to attain finality, it in effect admitted that indeed it has in its possession or control credits, monies, and interests belonging to QRSI and therefore it obliged itself to pay the latter's obligation to Valencia as in fact, it did make a partial payment thereto in the amount of P154,476.14 (Annexes "A" and "B", p. 141, Ibid) on November 26, 1982. - And as pointed out by the private respondent in its Comment to the petition, the challenged decision has not only become final and executory but has in fact been partially executed by virtue of the payment on November 26, 1982 by GSIS pursuant to a writ of execution issued against it out of its retentions. The fact or payment meanwhile also constitutes as (sic) a waiver of the legal compensation being invoked by petitioner GSIS." - Unsatisfied with the said decision, petitioner came to this Court by way of a petition for review under Rule 45 of the Rules of Court; the case was docketed as G. R. No. 87980. In the Resolution of 27 November 1989, this Court denied the petition because of the petitioner's failure to show that the appellate court's decision is not supported by substantial evidence and that the conclusions therein are contrary to law and jurisprudence. This Court stated: "A careful review of the petition shows that it has no merit. The decision of the respondent Regional Trial Court had long become final before the appeal to the Court of Appeals was made. The Argument that Queen's Row owes GSIS certain sums of money was rejected by the two courts below because it was never raised during the trial and no evidence was presented on the matter. The respondent court correctly applied PD 1594 on government infrastructure contracts regarding progress payments and the withholding of retention money everytime a certain percentage of the work is completed by the respondent and they have been sold by the GSIS to its members. The argument of the petitioner that a separate action should be filed by the private respondent against GSIS was correctly rejected because the GSIS was a party to the case from the very start. As pointed out by the respondent, the legal compensation invoked by the GSIS whereby there would be compensation as between GSIS and Queen's Row was waived by the fact that GSIS made partial payments to Valencia." - The motion to reconsider this Resolution was denied with finality in the Resolution of 15 January 1990. - Thereafter, respondent Valencia moved for the issuance of an alias writ or execution for the amount of FIVE MILLION SEVEN HUNDRED FIFTY NINE THOUSAND SIX HUNDRED SEVENTY SEVEN and 97/100 PESOS (P5,759,677.97). An opposition thereto was filed by the petitioner contesting only the amount due and payable, particularly the interests imposed therein. On 7 June 1990, the trial court issued an order.

MANILA RAILROAD CO. V COMPANIA TRANSATLANTICA STREET; October 26, 1918 NATURE Appeal from a judgment of the Court of the First Instance of Manila FACTS -The Manila Railroad Company purchased two locomotive boilers in Europe and contracted with the Compañia Trasatlántica to transport the same to Manila by its steamship named Alicante. The tackle and equipment of the steamship Alicante

A2010 page Prof. Labitag being insufficient to discharge said locomotive boilers from the ship to the shore, the Compañia Trasatlántica. entered into a contract with the Atlantic, Gulf & Pacific Company by virtue of the terms of which the latter company agreed to discharge the said locomotive boilers from the said steamship Alicante by using its (Atlantiic) tackle and equipment for that purpose. In the effort of the Atlantic, Gulf & Pacific Company to discharge the said locomotive boilers from the said steamship. The Atlantic Company sent out its crane in charge of foreman Leyden. In preparing to hoist the first boiler the sling was unfortunately adjusted near the middle of the boiler, and it was thus raised nearly in a horizontal position. The boiler was too long to clear the hatch in this position, and after one end of the boiler had emerged on one side of the hatch, the other still remained below on the other side. When the boiler had been gotten into this position and was being hoisted still further, a rivet near the head of the boiler was caught under the edge of the hatch. The weight on the crane was thus increased by a strain estimated at fifteen tons with the result that the cable of the sling parted and the boiler fell to the bottom of the ship's hold. The sling was again adjusted to the boiler but instead of being placed near the middle it was now slung nearer one of the ends, as should have been done at first. The boiler was again lifted; but as it was being brought up, the bolt at the end of the derrick boom broke, and again the boiler fell. The boiler was damaged and brought back to Europe for repair which cost P22, 343.29. - The judge of the Court of First Instance gave judgment in favor of the plaintiff against the Atlantic Company, but absolved the Steamship Company from the complaint. The plaintiff has appealed from the action of the court in failing to give judgment against the Steamship Company, while the Atlantic Company has appealed from the judgment against it. ISSUES 1. WON the Steamship Company is liable to the plaintiff by reason of having delivered the boiler in question in a damaged condition 2. WON the Atlantic Company is liable to be made to respond to the steamship company for the amount the latter may be required to pay to the plaintiff for the damage done 3. WON the Atlantic Company is directly liable to the plaintiff, as the trial court held. HELD 1. YES - Under the contract for transportation from England to Manila, the Steamship Company is liable to the plaintiff for the injury done to the boiler while it was being discharged from the ship. The obligation to transport the boiler necessarily involves the duty to convey and deliver it in a proper condition according to its nature, and conformably with good faith, custom, and the law (art. 1258, Civ. Code). The contract to convey imports the duty to convey and deliver safely and securely with reference to the degree of care which, under the circumstances, are required by law and custom applicable to the case. The duty to carry and to carry safely is all one. Such being the contract of the Steamship Company, said company is necessarily liable, under articles 1103 and 1104 of the Civil Code, for the consequences of the omission of the care necessary to the, proper performance of its obligation. Nor does the Steamship Company escape liability by reason of the fact that it employed a competent independent contractor to discharge the boilers. in the performance of this service the Atlantic Company was no more than a servant or employee of the

Obligations and Contracts 117 Steamship Company, and it has never yet been held that the failure to comply with a contractual obligation can be excused by showing that such delinquency was due to the negligence of, one to whom the contracting party had committed the performance of the contract. 2. YES - The defense of the Atlantic Company comprises two contentions, to-wit, first, that by the terms of the engagement in accordance with which the Atlantic Company agreed to render the service, all risk incident to the discharge of the boilers was assumed by the Steamship Company; and secondly, that the AtIantic Company should be absolved under the last paragraph of article 1903 of the Civil Code, inasmuch as it had used due care in the selection of the employee whose negligent act caused the damage in question. - Atlantic agreed to lift the boilers out of the Alicante, as upon other later occasions, but the Steamship Company was notified that the service would only be rendered upon the distinct understanding that the, Atlantic Company would not be responsible for damage - As to the first defense, Court held that every contract for the prestation of service has an inseparable implicit obligation, the duty to exercise due care in the accomplishment of the work; and no reservation whereby the person rendering the services seeks to escape from the consequences of a violation of this obligation can be viewed with favor. - As to the second defense, the Court held that the obligation of the Atlantic Company was created by contract, and the defense of due diligence of a father could only be used in cases where negligence arises in the absence of an agreement. - The Atlantic Company is liable to the Steamship Company for the damages brought upon the latter by the failure of the Atlantic Company to use due care in discharging the boiler, regardless of the fact that the damage was caused by the negligence of an employee who was qualified for the work and who had been chosen by the Atlantic Company with due care. 3. NO - If there had been no contract of any sort between the Atlantic Company and the Steamship Company, an action could have been maintained by the Railroad Company, as owner, against the Atlantic Company to recover the damages sustained by the former. But there was a contract. - The Railroad Company can have no right of action to recover damages from the Atlantic Company for the wrongful act which constituted the violation of said contract. The rights of the plaintiff can only be made effective through the Compañia Trasatlántica de Barcelona with whom the contract of affreightment was made.

DKC HOLDINGS CORP. V CA YNARES-SANTIAGO; April 5, 2000 NATURE - Petition for review on certiorari seeking reversal of December 5, 1994 Decision of the CA entitled "DKC Holdings Corporation vs. Victor U. Bartolome, et al.", affirming in toto the January 4, 1993 Decision of RTC Valenzuela which dismissed the civil case and ordered petitioner to pay P30,000.00 as attorney’s fees.

A2010 page Prof. Labitag FACTS - March 16, 1988 – a 14,021 sq mtr parcel of land in Malinta, Valenzuela originally owned by Victor Bartolome’s deceased mother, Encarnacion Bartolome, a lot in front of one of the textile plants of DKC Holdings Corp. and a potential warehouse site, was subject to a Contract of Lease with Option to Buy between DKC and Encarnacion Bartolome which option must be exercised within a period of two years counted from the signing of the Contract > DKC to pay P3,000.00 a month as consideration for the reservation of its option and within the two-year period > DKC shall serve formal written notice upon Encarnacion Bartolome of its desire to exercise its option. > in case DKC chose to lease the property, it may take actual possession of the premises > the lease shall be for a period of six years, renewable for another six years, and the monthly rental fee shall be P15,000.00 for the first six years and P18,000.00 for the next six years, in case of renewal - DKC regularly paid the monthly P3,000.00 provided for by the Contract to Encarnacion until her death in January 1990 and thereafter, coursed its payment to Victor Bartolome, being the sole heir of Encarnacion, however, he refused to accept these payments - January 10, 1990 - Victor executed an Affidavit of Self-Adjudication over all the properties of Encarnacion, including the subject lot. - March 14, 1990 – DKC 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 for the month of March but Victor refused to accept the tendered rental fee and to surrender possession of the property to DKC - DKC thus opened a savings account with the China Banking Corporation, Cubao, in the name of Victor Bartolome and deposited therein the P15,000.00 rental fee for March as well as P6,000.00 reservation fees for February and March - DKC also tried to register and annotate the Contract on the title of Victor to the property but the Register of Deeds, only accepting the required fees, refused to register or annotate or even enter it in the day book or primary register - April 23, 1990 – DKC filed complaint for specific performance and damages against Victor and the Register of Deeds and prayed for > surrender and delivery of possession of the subject land in accordance with the Contract terms > surrender of title for registration and annotation thereon of the Contract > payment of P500,000.00 as actual damages, P500,000.00 as moral damages, P500,000.00 as exemplary damages and P300,000.00 as attorney’s fees. - May 8, 1990 - Andres Lanozo claimed that he is a tenant-tiller of the subject property, which was agricultural riceland, for forty-five years and questioned the jurisdiction of the lower court over the property and invoked the Comprehensive Agrarian Reform Law to protect his rights that would be affected by the dispute between the original parties to the case - January 4, 1993 - RTC Valenzuela dismissed the complaint and ordered petitioner to pay Victor P30,000.00 as attorney’s fees - CA affirmed the decision in toto - Petitioner’s Claim CA erred in Ruling that: 1. provision on the notice to exercise option was not transmissible 2. notice of option must be served by DKC upon Encarnacion Bartolome personally 3. contract was one-sided and onerous in favor of DKC

Obligations and Contracts 118 4. existence of a registered tenancy was fatal to the validity of the contract 5. Victor Bartolome was liable to DKC Holdings for attorney’s fees ISSUES 1. WON Contract of Lease with Option to Buy entered into by the late Encarnacion Bartolome with DKC Holdings was terminated upon her death 2. WON DKC Holdings had complied with its obligations under the contract and with the requisites to exercise its option HELD 1. NO, It binds her sole heir, Victor, even after her demise. - A1311 CC provides 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. - General Rule: heirs are bound by contracts entered into by their predecessors-ininterest Exception: when the rights and obligations arising therefrom are not transmissible by (1) their nature (2) stipulation or (3) provision of law - there is neither contractual stipulation nor legal provision making the rights and obligations under the contract intransmissible; moreover, the nature of the rights and obligations are, by their nature, transmissible. - Nature of Intransmissible Rights as explained by Arturo Tolentino Among contracts which are intransmissible are those which are purely personal, either by provision of law, such as in cases of partnerships and agency, or by the very nature of the obligations arising therefrom, such as those requiring special personal qualifications of the obligor. It may also be stated that contracts for the payment of money debts are not transmitted to the heirs of a party, but constitute a charge against his estate. Thus, where the client in a contract for professional services of a lawyer died, leaving minor heirs, and the lawyer, instead of presenting his claim for professional services under the contract to the probate court, substituted the minors as parties for his client, it was held that the contract could not be enforced against the minors; the lawyer was limited to a recovery on the basis of quantum meruit. - In American jurisprudence (W)here acts stipulated in a contract require the exercise of special knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal qualification of one or both parties, the agreement is of a personal nature, and terminates on the death of the party who is required to render such service - Contracts to perform personal acts which cannot be as well performed by others are discharged by the death of the promissor. Conversely, where the service or act is of such a character that it may as well be performed by another, or where the contract, by its terms, shows that performance by others was contemplated, death does not terminate the contract or excuse nonperformance. Here, no personal act is required from the late Encarnacion Bartolome and the obligation of Encarnacion in the contract to deliver possession of the subject property to petitioner upon the

A2010 page Prof. Labitag exercise by the latter of its option to lease the same may very well be performed by her heir Victor. - heirs cannot escape the legal consequence of a transaction entered into by their predecessor-in-interest because they have inherited the property subject to the liability affecting their common ancestor. > 1903, it was held that "(H)e who contracts does so for himself and his heirs." > 1952, predecessor was duty-bound to reconvey land to another, and at his death the reconveyance had not been made, the heirs can be compelled to execute the proper deed for reconveyance - In Parañaque Kings Enterprises vs. Court of Appeals where Raymundo alleged that he is not privy to the lease contract, not being the lessor nor the lessee referred to therein, SC ruled he is nevertheless a proper party because he stepped into the shoes of the owner-lessor of the land as, by virtue of his purchase. He assumed all the obligations of the lessor under the lease contract. And he received benefits in the form of rental payments. Here the subject matter is also a lease, which is a property right and 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. 2. YES, the payment by DKC of the reservation fees during the two-year period within which it had the option to lease or purchase the property is not disputed and it was also proper to address notice to exercise option to Victor as heir of Encarnacion. - payment of such reservation fees, except those for February and March, 1990 were admitted by Victor - DKC followed the requirements by > paying the P15,000.00 monthly rental fee on the subject property by depositing the same in China Bank Savings Account in the name of Victor as the sole heir of Encarnacion Bartolome, for the months of March to July 30, 1990, or a total of 5 months, despite the refusal of Victor to turn over the subject property > informed other party of its intention to exercise its option to lease through its letter dated Match 12, 1990, well within the two-year period for it to exercise its option Disposition Instant Petition for Review is GRANTED. The Decision of the Court of Appeals and RTC Valenzuela are both SET ASIDE and a new one rendered ordering private respondent Victor Bartolome to: (a) surrender and deliver possession of that parcel of land by way of lease to petitioner and to perform all obligations of his predecessor-in-interest, Encarnacion Bartolome, under the subject Contract of Lease with Option to Buy; (b) surrender and deliver his copy of Transfer Certificate of Title to Register of Deeds for registration and annotation thereon of the subject Contract of Lease with Option to Buy; (c) pay costs of suit. Respondent Register of Deeds is ordered to register and annotate the subject Contract of Lease with Option to Buy at the back of Transfer Certificate of Title upon submission by DKC of a copy thereof to his office.

GUTIERREZ HERMANOS V ORENSE TORRES; December 4, 1914 NATURE

Obligations and Contracts 119 Appeal from a judgment of CFI Albay ruling in favor of plaintiff FACTS - ORENSE is the owner a parcel of land (with masonry house, and with the nipa roof erected) situated in the pueblo of Guinobatan, Albay. This property has been recorded in the new property registry in his name. - Feb 14, 1907 - Jose DURAN, a nephew of Orense, executed before a notary a public instrument that he sold and conveyed to the plaintiff company the said property for P1,500 and that the vendor Duran reserved to himself the right to repurchase it for the same price within a period of four years. - Gutierrez Hermanos had not entered into possession of the purchased property, because of its continued occupancy by ORENSE and DURAN by virtue of a contract of lease executed by the plaintiff to Duran, effective up to February 14, 1911. - After the lapse of the four years stipulated for the redemption, the defendant refused to deliver the property to the purchaser. Gutierrez Hermanos then charged DURAN with estafa, for having represented himself in the said deed of sale to be the absolute owner of the land. - During that trial, when ORENSE was called as a witness, he admitted that he consented to Duran’s selling of property under right of redemption. Because of this, the court acquitted DURAN for charge of estafa. - Mar 5, 1913 – Gutierrez Hermanos then filed a complaint in the CFI Albay against Engracio ORENSE. Petitioners' Claim - The instrument of sale of the property, executed by Jose Duran, was publicly and freely confirmed and ratified by ORENSE. In order to perfect the title to the said property, all plaintiff had to do was demand of Orense to execute in legal form a deed of conveyance. But Orense refused to do so, without any justifiable cause or reason, and so he should be compelled to execute the said deed by an express order of the court. - Jose DURAN is notoriously insolvent and cannot reimburse the plaintiff company for the price of the sale which he received, nor pay any sum for the losses and damages occasioned by the sale. Also, Duran had been occupying the said property since February 14, 1911, and refused to pay the rental notwithstanding the demand made upon him at the rate of P30 per month. - Plaintiff prays that the land and improvements be declared as belonging legitimately and exclusively to him, and that defendant be ordered to execute in the plaintiff's behalf the said instrument of transfer and conveyance of the property and of all the right, interest, title and share which the defendant has. Respondents' Comments - Facts in the complaint did not constitute a cause of action. - He is the lawful owner of the property claimed in the complaint, and since his ownership was recorded in the property registry, this was conclusive against the plaintiff. - He had not executed any written power of attorney nor given any verbal authority to Jose DURAN to sell the property to Gutierrez Hermanos. - His knowledge of the sale was acquired long after the execution of the contract of sale between Duran and Gutierrez Hermanos, and he did not intentionally and deliberately perform any act such as might have induced the plaintiff company to believe that Duran was empowered and authorized by the defendant. ISSUES

A2010 page Prof. Labitag 1. WON Orense is bound by Duran’s act of selling plaintiff’s property 2. WON contract of sale is valid HELD 1. YES Ratio It having been proven at the trial that he gave his consent to the said sale, it follows that the defendant conferred verbal, or at least implied, power of agency upon his nephew Duran, who accepted it in the same way by selling the said property. The principal must therefore fulfill all the obligations contracted by the agent, who acted within the scope of his authority. (Civil Code, arts. 1709, 1710 and 1727) Reasoning Article 1259 of the Civil Code prescribes: "No one can contract in the name of another without being authorized by him or without his legal representation according to law. A contract executed in the name of another by one who has neither his authorization nor legal representation shall be void, unless it should be ratified by the person in whose name it was executed before being revoked by the other contracting party.” - The sworn statement made by the defendant, Orense, while testifying as a witness at the trial of Duran for estafa, virtually confirms and ratifies the sale of his property effected by his nephew, Duran, and, pursuant to article 1313 of the Civil Code, remedies all defects which the contract may have contained from the moment of its execution. 2. YES Ratio Even if the sale of the property was null and void in the beginning, it became perfectly valid and cured of the defect of nullity it bore at its execution by the owner’s confirmation of the said contract of sale and consent to its execution. Reasoning The contract of sale of the said property contained in the notarial instrument of Feb 14, 1907, is alleged to be invalid, null and void under the provisions of par 5 of sec 335 of the Code of Civil Procedure, because the authority which Orense may have given to Duran to make the said contract of sale is not shown to have been in writing and signed by Orense. But record shows that he gave his consent as proven in his own sworn testimony. This meets the requirements of the law and legally excuses the lack of written authority. As they are a full ratification of the acts executed by his nephew Jose Duran, they produce the effects of an express power of agency. - Also, pursuant to article 1309 of the Code, the right of action for nullification that could have been brought became legally extinguished from the moment the contract was validly confirmed and ratified. - If the defendant Orense acknowledged and admitted under oath that he had consented to Jose Duran's selling the property in litigation to Gutierrez Hermanos, it is not just nor is it permissible for him afterward to deny that admission, to the prejudice of the purchaser, who gave P1,500 for the said property. Disposition Judgment appealed from is affirmed.

GABRIEL V MONTE DE PIEDAD LAUREL; April 14, 1941 NATURE Petition for review on certiorari.

Obligations and Contracts 120 FACTS - Petitioner was a jewel appraiser in the pawnshop of Monte de Piedad from 1913 to May 1933. - On December 1932, he executed a chattel mortgage to secure the payment of deficiencies caused by his erroneous appraisal of jewels pawned to the appellee, amounting to toP14,679.07, with 6% interest from said date (paid by installments of P300/month). - To recover balance of P11,345.75 of aforementioned sum, Monte de Piedad filed a civil case against petitioner. - Petitioner, in his answer, denied all specifications therein and also denied under oath the genuineness of the execution of the alleged chattel mortgage attached thereto. He alleged that 1) the chattel mortgage was part of a scheme by respondent to cover for losses incurred in its pawnshop department; 2) a criminal action had been instituted against him where said chattel mortgage was presented but he was acquitted therein; and 3) the said acquittal was a bar to the civil case. Petitioners' Claim - By way of cross-complaint, the petitioner alleged 1) that the chattel mortgage was entered into by E. Marco for and in behalf of Monte de Piedad, without being authorized to do so by the latter; 2) that he was induced, through false representation, to sign said mortgage against his will; 3) that the chattel mortgage was based upon all nonexisting subject matter and nonexisting consideration; and 4) that the chattel mortgage was null and void ab initio. - By way of counterclaim, the petitioner alleged 1) that the payments made by him were made through deceit and consisted of P300 monthly deductions to his salary; 2) that he received P356.25 a month as expert appraiser and that he was separated arbitrarily at the end of May 1933 from plaintiff entity without lawful cause and one month notice and plaintiff failed to pay him his salaries for May and June 1933, in accordance with law; and 3) that due to the criminal and the present case, he suffered damages and losses both materially and in his reputation in the amount of at least P15,000.00 ISSUE WON the provisions of the chattel mortgage are contrary to law, morals and public policy rendering it ineffective and the principal obligation secured by it void HELD Ratio Courts should not rashly extend the rule which holds that a contract is void as against public policy. Reasoning The term “public policy” is vague and uncertain in meaning, floating and changeable in connotation. In absence of express legislation or constitutional prohibition, a court, in order to declare a contract void as against public policy, must find that the contract as to the consideration or thing to be done, has a tendency to injure the public, is against the public good, or contravenes some established interests of society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the security of individual rights, whether of personal liability or of private property. The contract at bar does not militate against the public good. Neither does it contravene the policy of the law nor the established interests of the society. As to petitioner’s contention that the chattel mortgage lacks consideration, it was already established that it was executed voluntarily by the him to guarantee deficiencies resulting from his erroneous appraisal of the jewels. A preexisting

A2010 page Prof. Labitag admitted liability is a good consideration for a promise. The fact that the bargain is a hard one will not deprive it of its validity. A contract is to be judged by its character, and courts will look to the substance and not to the mere form of the transaction. The freedom of contract is both a constitutional and statutory right and to uphold this right, courts should move with all the necessary caution and prudence in holding contracts void. Disposition The petition is hereby dismissed and the judgment sought to be reviewed is affirmed, with costs against the petitioner.

PAKISTAN INTERNATIONAL AIRLINES CORPORATION v. OPLE FELICIANO; September 28, 1990 NATURE Petition for certiorari to review the order of the Minister of Labor FACTS - On 2 December 1978, petitioner Pakistan International Airlines Corporation (PIA), a foreign corporation licensed to do business in the Philippines, executed in Manila two separate contracts of employment, one with private respondent Farrales and the other with private respondent Mamasig. The contracts provided in pertinent portion as follows: "5. DURATION OF EMPLOYMENTAND PENALTY This agreement is for a period of three years, but can be extended by the mutual consent of the parties. xxxxxxxxx 6. TERMINATION xxxxxxxxx Notwithstanding anything to contrary as herein provided, PIA reserves the right to terminate this agreement at any time by giving the EMPLOYEE notice in writing in advance one month before the intended termination or in lieu thereof, by paying the EMPLOYEE wages equivalent to one month's salary. xxxxxxxxx 10. APPLICABLE LAW: This agreement shall be construed and governed under and by the laws of Pakistan, and only the Courts of Karachi, Pakistan shall have the jurisdiction to consider any matter arising out of or under this agreement. - Respondents then commenced training in Pakistan. After their training period, they began discharging their job functions as flight attendants, with base station in Manila and flying assignments to different parts of the Middle East and Europe. - On 2 August 1980, roughly one year and four months prior to the expiration of the contracts of employment, PIA sent separate letters both dated 1 August 1980 to private respondents Farrales and Mamasig advising both that their services as flight attendants would be terminated "effective 1 September 1980, conformably to clause 6 (b) of the employment agreement [they had] executed with [PIA]." - On 9 September 1980, private respondents Farrales and Mamasig jointly instituted a complaint for illegal dismissal and non-payment of company benefits and bonuses, against PIA with the then Ministry of Labor and Employment (MOLE). After several unfruitful attempts at conciliation, both parties were ordered to submit their position papers and evidence supporting their respective positions. The PIA

Obligations and Contracts 121 submitted its position paper, but no evidence, and there claimed that both private respondents were habitually absent and bringing in from abroad sizeable quantities of "personal effects"; and that PIA personnel at the Manila International Airport had been discreetly warned by customs officials to advise private respondents to discontinue that practice. PIA further claimed that the services of both private respondents were terminated pursuant to the provisions of the employment contract. - In his Order dated 22 January 1981, Regional Director Estrella ordered the reinstatement of private respondents with full backwages or, in the alternative, the payment to them of the amounts equivalent to their salaries for the remainder of the fixed three-year period of their employment contracts; the payment to private respondent Mamasig of an amount equivalent to the value of a round trip ticket Manila-USA-Manila; and payment of a bonus to each of the private respondents equivalent to their one-month salary. The Order stated that 1) private respondents had attained the status of regular employees after they had rendered more than a year of continued service; 2) the stipulation limiting the period of the employment contract to three years was null and void as violative of the provisions of the Labor Code and its implementing rules and regulations on regular and casual employment and, 3) the dismissal, having been carried out without the requisite clearance from the MOLE, was illegal and entitled private respondents to reinstatement with full backwages. - On appeal, in an Order dated 12 August 1982, Hon. Leogardo, Jr., Deputy Minister, MOLE, adopted the findings of fact and conclusions of the Regional Director and affirmed the latter's award save for the portion thereof giving PIA the option, in lieu of reinstatement, "to pay each of the complainants [private respondents] their salaries corresponding to the unexpired portion of the contract[s] [of employment] x ''. - In the instant Petition for Certiorari, PIA assails the award of the Regional Director and the Order of the Deputy Minister for having been issued in disregard and in violation of Petitioner's rights under the employment contracts with private respondents. PIA invokes paragraphs 5 and 6 of its contract of employment with private respondents Farrales and Mamasig, arguing that its relationship with them was governed by the provisions of its contract rather than by the general provisions of the Labor Code. Paragraph 5 of that contract set a term of three years for that relationship, extendible by agreement between the parties; while paragraph 6 provided that, notwithstanding any other provision in the contract, PIA had the right to terminate the employment agreement at any time by giving one-month's notice to the employee or, in lieu of such notice, one-month's salary. ISSUE WON the principle of party autonomy in contracts is absolute HELD NO - A contract freely entered into should, of course, be respected since a contract is the law between the parties. The principle of party autonomy in contracts is not, however, an absolute principle. The rule in Article 1306, of our Civil Code is that the contracting parties may establish such stipulations as they may deem convenient, "provided they are not contrary to law, morals, good customs, public order or public policy." Thus, counter-balancing the principle of autonomy of contracting parties is the equally general rule that provisions of applicable law, especially provisions

A2010 page Prof. Labitag relating to matters affected with public policy, are deemed written into the contract. Put a little differently, the governing principle is that parties may not contract away applicable provisions of law especially peremptory provisions dealing with matters heavily impressed with public interest. The law relating to labor and employment is clearly such an area and parties are not at liberty to insulate themselves and their relationships from the impact of labor laws and regulations by simply contracting with each other. It is thus necessary to appraise the contractual provisions invoked by petitioner PIA in terms of their consistency with applicable Philippine law and regulations. - Both the Labor Arbiter and the Deputy Minister, MOLE, in effect held that paragraph 5 of that employment contract was inconsistent with Articles 280 and 281 of the Labor Code as they existed at the time the contract of employment was entered into, and hence refused to give effect to said paragraph 5. These Articles are as follows: "Art. 280. Security of Tenure.-In cases of regular employment, the employer shall not terminate the services of an employee except for a just cause or when authorized by this Title. An employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and to his backwages computed from the time his compensation was withheld from him up to the time his reinstatement. Article 281. Regular and Casual Employment.-The provisions of written agreement to the contrary notwithstanding and regardless of the oral agreements of the parties, an employment shall be deemed to be regular where the employee has been engaged to perform activities which are usually necessary or desirable in the usual business or trade of the employer, except where the employment has been fixed for a specific project or undertaking the completion or termination of which has been determined at the time of the engagement of the employee or where the work or services to be performed is seasonal in nature and the employment is for the duration of the season. - An employment shall be deemed to be casual if it is not covered by the preceding paragraph: provided, that, any employee who has rendered at least one year of service, whether such service is continuous or broken, shall be considered as regular employee with respect to the activity in which he is employed and his employment shall continue while such actually exists.'' (Italics supplied) - In Brent School, Inc., et al. v. Ronaldo Zamora, etc., et al., the Court had occasion to examine in detail the question of whether employment for a fixed term has been outlawed under the above quoted provisions of the Labor Code. After an extensive examination of the history and development of Articles 280 and 281, the Court reached the conclusion that a contract providing for employment with a fixed period was not necessarily unlawful. The critical consideration is the presence or absence of a substantial indication that the period specified in an employment agreement was designed to circumvent the security of tenure of regular employees which is provided for in Articles 280 and 281 of the Labor Code. This indication must ordinarily rest upon some aspect of the agreement other than the mere specification of a fixed term of the employment agreement, or upon evidence aliunde of the intent to evade. - Examining the provisions of paragraphs 5 and 6 of the employment agreement between PIA and private respondents, we consider that those provisions must be read together and when so read, the fixed period of three years specified in paragraph 5 will be seen to have been effectively neutralized by the provisions of paragraph 6 of that agreement. Paragraph 6 in effect took back from the employee

Obligations and Contracts 122 the fixed three-year period ostensibly granted by paragraph 5 by rendering such period in effect a facultative one at the option of the employer PIA. For PIA claims to be authorized to shorten that term, at any time and for any cause satisfactory to itself, to a one-month period, or even less by simply paying the employee a month's salary. Because the net effect of paragraphs 5 and 6 of the agreement here involved is to render the employment of private respondents Farrales and Mamasig basically employment at the pleasure of PIA, the Court considers that paragraphs 5 and 6 were intended to prevent any security of tenure from accruing in favor of private respondents even during the limited period of three years, and thus to escape completely the thrust of Articles 280 and 281 of the Labor Code. - PIA cannot take refuge in paragraph 10 of its employment agreement which specifies, firstly; the law of Pakistan as the applicable law of the agreement and, secondly, lays the venue for settlement of any dispute arising out of or in connection with the agreement "only [in] courts of Karachi, Pakistan". The first clause of paragraph 10 cannot be invoked to prevent the application of Philippine labor laws and regulations to the subject matter of this case, i.e., the employeremployee relationship between petitioner PIA and private respondents. We have already pointed out that that relationship is much affected with public interest and that the otherwise applicable Philippine laws and regulations cannot be rendered illusory by the parties agreeing upon some other law to govern their relationship. - Neither may PIA invoke the second clause of paragraph 10, specifying the Karachi courts as the sole venue for the settlement of disputes between the contracting parties. Even a cursory scrutiny of the relevant circumstances of this case will show the multiple and substantive contacts between Philippine law and Philippine courts, on the one hand, and the relationship between the parties, upon the other: the contract was not only executed in the Philippines, it was also performed here, at least partially; private respondents are Philippine citizens and residents, while petitioner, although a foreign corporation, is licensed to do business (and actually doing business) and hence resident in the Philippines; lastly, private respondents were based in the Philippines in between their assigned flights to the Middle East and Europe. All the above contracts point to the Philippine courts and administrative agencies as a proper forum for the resolution of contractual disputes between the parties. Under these circumstances, paragraph 10 of the employment agreement cannot be given effect so as to oust Philippine agencies and courts of the jurisdiction vested upon them by Philippine law. Finally, and in any event, the petitioner PIA did not undertake to plead and prove the contents of Pakistan law on the matter; it must therefore be presumed that the applicable provisions of the law of Pakistan are the same as the applicable provisions of Philippine law.

CUI V ARELLANO UNIVERSITY CONCEPCION; May 30, 1961 NATURE Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila, absolving defendant Arellano University from plaintiff's complaint, with costs against the plaintiff, and dismissing defendant's counterclaim, for insufficiency of proof thereon. FACTS

A2010 page Prof. Labitag - Before the school year 1948-1949 Cui took up a preparatory law course in Arellano University, after which he enrolled in the College of Law of said university starting school year 1948-1949. - Plaintiff took up his law studies in the defendant university up to and including the first semester of the fourth year. During all the school years in which plaintiff was studying law in defendant law college, Francisco R. Capistrano, brother of the mother of plaintiff, was the dean of the College of Law and legal counsel of the defendant university. - Cui enrolled for the last semester of his law studies in the defendant university but failed to pay his tuition fees. - Since his uncle, Dean Capistrano, severed his connection with Arellano University and has accepted the deanship and chancellorship of the College of Law of Abad Santos University, Cui left Arellano University and enrolled for the last semester of his fourth year law in Abad Santos. Cui graduated from Abad Santos University. - Plaintiff, during all the time he was studying law in Arellano University, was awarded scholarship grants, for scholastic merit, so that his semestral tuition fees were returned to him after the end of each semester. From Cui’s first semester of his first year law up to and including the first semester of his last year in Arellano, the total amount of tuition fees he paid, which was refunded to him, is P1,033.87. - Before being awarded scholarship grants, Cui was made to sign the following contract, covenant and agreement: 'In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school without having refunded to the University (defendant) the equivalent of my scholarship cash. (Sgd.) EMETERIO CUI'." - Aug 16, 1949, the Director of Private Schools issued Memorandum No. 38, series of 1949, which reads in part: "1. … some schools offer full or partial scholarships to deserving students…. Such inducements … should be encouraged. But to stipulate the condition that such scholarships are good only if the students concerned continue in the same school nullifies the principle of merit in the award of these scholarships. "2. … such scholarships are merited and earned. The amount in tuition and other fees corresponding to these scholarships should not be subsequently charged to the recipient students when they decide to quit school or to transfer to another institution…. "3 Several complaints have actually been received from students who have enjoyed scholarships, full or partial, to the effect that they could not transfer to other schools since their credentials would not be released unless they would pay the fees corresponding to the period of the scholarships. Where the Bureau believes that the right of the student to transfer is being denied on this ground, it reserves the right to authorize such transfer." - After graduating from Abad Santos University, he applied to take the bar examinations. He petitioned Arellano University to provide him his transcript of records. The defendant refused until after Cui had paid back the P1,033.87. - Cui asked the Bureau of Private Schools to pass upon the issue on his right to secure the transcript of his record in Arellano University, without being required to refund P1,033.87. The Bureau of Private Schools upheld the position taken by the plaintiff and so advised the defendant. This notwithstanding, Arellano University refused to issue transcript of record, unless refund were made, and even recommended to said Bureau that it issue a written order directing the defendant to release said transcript of record, "so that the case may be presented to the court

Obligations and Contracts 123 for judicial action". Cui was thus constrained to pay P1,033.87, in order that he could take the bar examinations in 1953. - Defendant claims that the provisions of its contract with plaintiff are valid and binding, and that the memorandum above-referred to is null and void. ISSUE WON the provision of the contract between plaintiff and defendant, whereby Cui waived his right to transfer to another school without refunding to the latter the equivalent of his scholarships in cash, is valid HELD NO. The stipulation in question is contrary to public policy and hence, null and void. - In order to declare a contract void as against public policy, a court must find that the contract as to consideration or the thing to be done, contravenes some established interest of society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the security of individual rights. (Gabriel vs. Monte de Piedad) - The Court’s decision was mainly a quotation of the letter of Bureau of Private Schools, which the Court held as correctly argued. It says in part: - If Arellano University understood clearly the real essence of scholarships and the motives which prompted the Bureau to issue Memorandum No. 38, s. 1949, it should have not entered into a contract of waiver with Cui on September 10, 1951, which is a direct violation of our Memorandum and an open challenge to the authority of the Director of Private Schools because the contract was repugnant to sound morality and civic honesty. - Scholarships are awarded in recognition of merit, not to keep outstanding students in school to bolsters prestige. In the understanding of that university, scholarships award is a business scheme designed to increase the business potential of an educational institution. Thus conceived it is not only inconsistent with sound policy but also good morals. - Morals, as defined by Manresa, is good customs; those generally accepted principles of morality which have received some kind of social and practical confirmation. - The practice of awarding scholarships to attract students and keep them in school is not good customs nor has it received some kind of social and practical confirmation except in some private institutions as in Arellano University. Disposition The decision appealed from is reversed, and another one shall be entered sentencing the defendant to pay to the plaintiff the sum of P1,033.87, with interest thereon at the legal rate from September 1, 1954, date of the institution of this case, as well as the costs, and dismissing defendant's counterclaim.

ARROYO V BERWIN CARSON; March 3, 1917 FACTS - Both plaintiff and defendant are residents of the municipality of Iloilo - Defendant is a procurador judicial in the law office of the Attorney John Bordman and is duly authorized by the court to practice in justice of the peace courts of the Province of Iloilo Defendant represented Marcela Juaneza in the justice of the peace court of Iloilo in the proceeding for theft prosecuted by the plaintiff Ignacio Arroyo

A2010 page Prof. Labitag - On August 14, 1914, the defendant requested the plaintiff to agree to dismiss the said criminal proceeding and stipulated with the plaintiff that his client Marcela Juaniza would recognize the plaintiff’s ownership in the land situated on Calle San Juan of the municipality of Iloilo where his said client ordered the cane cut, which land and which cut cane are referred to in the cuase for theft. Furthermore, the defendant agreed that the plaintiff should obtain a Torrens title to the said land during the next term of the court and that defendant’s client Marcel Juaneza would not oppose the application for registration to be filed by the said applicant provided that the plaintiff would ask the prosecuting attorney to dismiss the said proceedings filed against Marcela Juaneza and Alejandro Castro for the crime of theft - Plaintiff on his part complied with the agreement - In exchange, the defendant did not comply with the agreement - Plaintiff delivered to the defendant a written agreement for signature of the said Marcel Juaneza attesting that the defendant’s said client recognized the plaintiff’s ownership of the land and that she would not oppose the plaintiff’s application for registration - The defendant has not returned to the plaintiff the said written agreement notwithstanding the demands of the latter ISSUE WON the agreement between the plaintiff and the defendant had valid stipulations HELD NO It was contrary to public policy. The SC affirmed the decision of the trial judge dismissing the complaint on the ground of the illegality of the consideration of the alleged contract. An agreement by the owner of stolen goods to stifle the prosecution of the person charged with the theft, for a pecuniary or other valuable consideration, is manifestly contrary to public policy and the due administration of justice. Article 1255, CC: - The contracting parties may make the agreement and establish the clauses and conditions which they may deem advisable, provided they are not in contravention of law, morals, or public order. Article 1275, CC: - Contracts without consideration or with an illicit one have no effect whatsoever. A consideration is illicit when it is contrary to law and good morals.

FILIPINAS COMPAÑIA DE SEGUROS, ET AL. V MANDANAS CONCEPCION; June 20, 1966 NATURE Special Civil Action For Declaratory Relief FACTS - 39 non-life insurance companies instituted this action in the CFI of Manila, to secure a declaration of legality of Article 22 of the Constitution of the Philippine Rating Bureau, of which they are members, inasmuch as respondent Insurance

Obligations and Contracts 124 Commissioner (who regulates the business concerned and of the transactions involved therein) assails its validity upon the ground that it constitutes an illegal or undue restraint of trade. - Subsequent to the filing of the petition, 20 other non-life insurance companies, likewise, members of said Bureau were allowed to intervene in support of the petition. - CFI- rendered judgment declaring that the aforementioned Article 22 is neither contrary to law nor against public policy; it may be lawfully observed and enforced. - Hence this appeal by respondent Insurance Commissioner, who insists that the Article in question constitutes an illegal or undue restraint of trade and, hence, null and void. - In said Article 22, members of the Bureau "agree not to represent nor to effect reinsurance with, nor to accept reinsurance from any company, body, or underwriter, licensed to do business in the Philippines not a member in good standing of the Bureau", and so the said provision is illegal as a combination in restraint of trade according to Mandanas. ISSUE WON the purpose or effect of Art 22 of the Constitution of the Philippine Rating Bureau is illegal as a combination in restraint of trade HELD “Nothing is unlawful, or immoral, or unreasonable, or contrary to public policy either in the objectives thus sought to be attained by the Bureau, or in the means availed of to achieve said objectives, or in the consequences of the accomplishment thereof.” - The purpose of said Article 22 is not to eliminate competition, but to promote ethical practices among non-life insurance companies, although, incidentally it may discourage, and hence, eliminate unfair competition, through underrating, which in itself is eventually injurious to the public. Salvador Estrada’s (Chairman of the Bureau) testimony4 shows that the limitation upon reinsurance contained in the 4

He declared that the purpose of Article 22 is to maintain a high degree or standard of ethical practice, so that insurance companies may earn and maintain the respect of the public, because the intense competition between the great number of non-life insurance companies operating in the Philippines is conducive to unethical practices, oftentimes taking the form of underrating; that to achieve this purpose it is highly desirable to have cooperative action between said companies in the compilation of their total experience in the business, so that the Bureau could determine more accurately the proper rate of premium to be charged from the insured; that, several years ago, the very Insurance Commissioner had indicated to the Bureau the necessity of doing something to combat underrating, for, otherwise, he would urge the amendment of the law so that appropriate measures could be taken therefore by his office; that much of the work of the Bureau has to do with rate-making and policy-wording; that rate-making is actually dependent very much on statistics; that, unlike life insurance companies, which have tables of mortality to guide them in the fixing of rates, non-life insurance companies have, as yet, no such guides; that, accordingly, non-life insurance companies need an adequate record of losses and premium collections that will enable them to determine the amount of risk involved in each type of risk and, hence, to determine the rates or premiums that should be charged in insuring every type of risk; that this information cannot be compiled without full cooperation on the part of the companies concerned, which cannot be expected from non-members of the Bureau, over which the latter has no control;

A2010 page Prof. Labitag aforementioned Article 22 does not affect the public at all, for, whether there is reinsurance or not, the liability of the insurer in favor of the insured is the same. Besides, there are sufficient foreign reinsurance companies operating in the Philippines from which non-members of the Bureau may secure reinsurance. What is more, whatever the Bureau may do in the matter of rate-fixing is not decisive insofar as the public is concerned, for no insurance company in the Philippines may charge a rate of premium that has not been approved by the Insurance Commissioner as per Circular No. 54. - In compliance with the aforementioned Circular No. 54, in April, 1954, the Bureau applied for the license required therein, and submitted with its application a copy of said Constitution. On April 28, 1954, respondent's office issued to the Bureau the license applied for, certifying not only that it had complied with the requirements of Circular No. 54, but, also, that the license empowered it "to engage in the making of rates or policy conditions to be used by insurance companies in the Philippines". - Subsequently, thereafter, the Bureau applied for and was granted yearly the requisite license to operate in accordance with the provisions of its Constitution. - During all this time, respondent's office did not question, but impliedly acknowledged, the legality of Article 22. It was not until March 11, 1960, that it assailed its validity. Reasoning - The test on whether a given agreement constitutes an unlawful machination or a combination in restraint of trade: Ferrazini vs. Gsell- is, whether, under the particular circumstances of the case and the nature of the particular contract involved in it, the contract is, or is not, unreasonable. This view was reiterated in Ollendorf vs. Abrahamson and Red Line Transportation Co. vs. Bachrach Motor Co. (67 Phil. 77), in the following language: ...The general tendency, we believe, of modern authority, is to make the test whether the restraint is reasonably necessary for the protection of the contracting parties. If the contract is reasonably necessary to protect the interest of the parties, it will be upheld. xxx xxx xxx ...we adopt the modern rule that the validity of restraints upon trade or employment is to be determined by the intrinsic reasonableness of the restriction in each case, rather than by any fixed rule, and that such restrictions may be upheld when not contrary to the public welfare and not greater than is necessary to afford a fair and reasonable protection to the party in whose favor it is imposed. (Ollendorf vs. Abrahamson, 38 Phil. 585.) ...The test of validity is whether under the particular circumstances of the case and considering the nature of the particular contract involved, public interest and welfare are not involved and the restraint is not only reasonably necessary for the protection of the contracting parties but will not affect the public interest or service. (Red Line Transportation Co. vs. Bachrach Motor Co.) Disposition The decision appealed from should be, as it is hereby AFFIRMED, without costs.

and that, in addition to submitting information about their respective experience, said Bureau members must, likewise, share in the rather appreciable expenses entailed in compiling the aforementioned data and in analyzing the same

Obligations and Contracts 125 BUSTAMANTE V ROSEL PARDO; November 29, 1999 NATURE Petition for review on certiorari to annul the decision of CA reversiong and setting aside the decision of the RTC of QC FACTS - March 8, 1987 – Norma Rosel entered into a loan agreement with Natalia Bustamante and her late husband Ismael. The contract indicated that the Bustamantes wanted to borrow P100,000 for a period of 2 years conted from March 1, 1987 with an interest of 18% per annum. This was guaranteed by a collateral 79 sqm parcel of land inclusive of the apartment built on it. In the event that the borrowers fail to pay, the lender has the option to buy or purchase the collateral for P200,000 inclusive of the borrowed money and interest. - When the loan was about to mature, Rosel proposed to buy the land at the set price in the loan agreement. The Bustamantes refused to sell and requested for extension of time and offered to sell another residential lot in Proj 8, QC with the principal loan and interest to be paid as down payment. Rosel refused to extend the payment of the loan and to accept the other lot offered as it was occupied by squatters and that the Bustamantes were not the owners of the land but were mere land developers entitled to the subdivision shares or commission if and when they developed at least ½ of the subdivision area. - March 1, 1989 – petitioners tendered payment of the loan to respondents, which the latter refused to accept, insisting on petitioner’s signing of a prepared deed of absolute sale of the collateral. - February 28, 1990 – the respondents filed with the RTC of QC for specific performance with consignation against petitioner and her spouse - March 4, 1990 – respondents sent a demand letter asking petitioner to sell the collateral pursuant to the option to buy in the loan agreement. - March 5, 1990 – petitioner filed in the RTC a petition for consignation and deposited P153,000 with the City Treasurer of QC on August 10, 1990 - When petitioner refused to sell the collateral and barangay conciliation failed, respondents consigned the amount of P47,500.00 with the trial court. Respondents considered the principal loan of P100,000.00 and 18% interest per annum thereon, which amounted to P52,500.00. The principal loan and the interest taken together amounted to P152,500.00, leaving a balance of P 47,500.00.10 - TC denied the plaintiff’s prayer for the defendants’ execution of the Deed of Sale to convey the collateral in the plaintiffs’ favor. It also ordered the defendants to pay the loan with interest at 18% per annum commencing on March 2, 1989 up to and until August 10, 1990, when defendants deposited the amount with the Office of the City Treasurer. - July 8, 1996 – CA reversed the ruling of the RTC - January 20, 1997 – Court required respondents to comment on the petition, which the respondents filed February 27. - February 9, 1998 – SC resolved to deny the petition on the ground that there was no reversible error in the decision of the CA in ordering the execution of the necessary deed of sale in conformity with the stipulated agreement.

A2010 page Prof. Labitag - The petitioner filed a motion for reconsideration of the denial alleging that the real intention of the parties to the loan was to put up the collateral as guarantee similar to an equitable mortgage according to Article 1602 of the Civil Code. - Respondents filed an opposition to petitioner's motion for reconsideration. They contend that the agreement between the parties was not a sale with right of repurchase, but a loan with interest at 18% per annum for a period of two years and if petitioner fails to pay, the respondent was given the right to purchase the property or apartment for P200,000.00, which is not contrary to law, morals, good customs, public order or public policy. ISSUES 1. WON petitioner failed to pay the loan at its maturity date 2. WON the stipulation in the loan contract was valid and enforceable. HELD 1. NO, the petitioner did not fail to pay the loan. Reasoning The petitioner tendered payment to settle the loan which respondents refused to accept, insisting that petitioner sell to them the collateral of the loan. 2. NO, the stipulation in the loan is void as it constitutes pactum commisorium. Reasoning We note the eagerness of respondents to acquire the property given as collateral to guarantee the loan. The sale of the collateral is an obligation with a suspensive condition. It is dependent upon the happening of an event, without which the obligation to sell does not arise. Since the event did not occur, respondents do not have the right to demand fulfillment of petitioner's obligation, especially where the same would not only be disadvantageous to petitioner but would also unjustly enrich respondents considering the inadequate consideration (P200,000.00) for a 70 square meter property. - Although the contract has the force of law, an exception is Art 13065. There revealed a subtle intention of the creditor to acquire the property given as security for the loan, which is embraced in the concept of pactum commissorium. - Elements of pactum commissorium: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. Disposition WHEREFORE, we GRANT petitioner's motion for reconsideration and SET ASIDE the Court's resolution of February 9, 1998. We REVERSE the decision of the Court of Appeals

DIZON V GABORRO GUERRERO; 2002 NATURE Petition for review on certiorari of the decision of the CA FACTS - Jose Dizon owned three parcels of land totaling 130.58 hectares which were mortgaged to DBP as security for a loan amounting to P38,000 with a second 5

The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy

Obligations and Contracts 126 mortgage lien in favor of PNB to secure another indebtedness amounting to P93,831.91. Dizon failed to pay the amortizations to DBP causing the latter to foreclose on the mortgage. The said lots were sold subsequently to DBP through an auction conducted by the sheriff. Dizon executed a deed of sale in favor of DBP through an auction. Dizon himself executed a deed of sale in favor of DBP on November 12, 1959 which deed was recorded in the office of the Register of Deeds on October 6, 1960. - Alfredo Garborro, who was initially interested in leasing the properties as they were then idle, met with Dizon sometime prior to October 6, 1959. As the mortgage was already foreclosed by DBP, the leasing project was abandoned. Instead, they entered into a deed of sale with assumption of mortgage conveyed ownership of the properties to Gaborro. In addition, the parties executed anoher agreement which granted Dizon the option to repurchase the properties at the price of P131,831.91 which represented the total principal amounts due to both the DBP and PNB. It should likewise be mentioned that the consideration for the sale is also the same amount as the loans outstanding to both DBP and PNB. - Upon execution of the documents, Gaborro took possession f the properties and wrote a letter to DBP advising them of his purchase of the property of Dizon and offering to pay the obligations under the same terms and conditions within ten years. The Bank agreed provided only that the initial payment be 20% of the loan amount.. Accordingly, DBP and Gaborro executed a Deed of Conditional sale over the propertied for P136,090.95, payble 20% downpayment and the balance over ten years. In addition, Dizon also executed an assignment of his right of redemption and assumption of obligation in favor of Gaborro. - On July 5, 1961, Dizon, through his lawyer, wrote a letter to Gaborro offering to reimburse him of what he paid to the bnks contending the the transaction entered between them was one of antichresis.When Gaborro did not agree, Dizon filed suit alleging that the documents xecuted did not express the true intention and agreement between the parties and as the real agreement was not for an absolute deed of sale but for an equitable mortgage or conveyance by way of security for the reimbursement or refund by Dizon to Gaborro of any and all sums which the latter may have paid on account of the debts from both DBP and PNB. ISSUE WON the original agreement may be properly reformed HELD YES - The Deed of Sale with Assumption cannot be considered as a real and unconditional sale of the parcels of land on the grounds that there was no money consideration, it being admitted that the consideration mentioned in the agreement was not actually paid. Besides, the propert in question at the time of the execution of the said instrument was already sold by auction to DBP. The only legal effect is with regard the option Deed which granted Petitioner the right to recover the properties upon reimbursing Gaborro the sums of money the he may have paid to both the DBP and PNB as amortization on the mortgage. - The findings of the trial court and the Court of Appeals that the true intention of the parties is that Gaborro will assume and pay the indebtness of Dizon and in return Gaborro shall enjoy possession, enjoyment and the use of the properties until Dizon fully reimbursed him of the amounts paid to the said financial institutions. As

A2010 page Prof. Labitag noted by the SC, the agreement is one of those innominate contracts under Article 1307 of the Civil Code ehereby the petitioner and respondent agree “to give and to do” certain rights and obligations respecting the lands and the mortgage debts of the petitioner which would be acceptable to the bank but partaking of the nature of the antichresis. - Mistake is a ground for the reformation of an instrument when, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement. It was a mistake for the parties to execute the deed of sale with assumption of mortgage & the option to purchase real estate. Hence these must be reformed in accordance with the intention and legal righs and obligations of the parties.

FLORENTINO V ENCARNACION, SR. GUERRERO; September 30, 1977 NATURE APPEAL from the decision of the Court of First Instance of Ilocos Sur. Arciaga, J. FACTS - On May 22, 1964, the petitioners-appellants and the petitioners-appelleed filed with CFI an application for the registration under Act 496 of a parcel of agricultural land located at Cabugao, Ilocos Sur. The application alleged among other things that the applicants are the common and pro-indiviso owners in fee simple of the said land with the improvements existing thereon; that to the best of the knowledge and belief, there is no mortgage, hen or encumbrance of any kind whatsoever affecting said land, nor any other person having any estate or interest thereon, legal or equitable, remainder, reservation at in expectancy; that said applicants had acquired the aforesaid land thru and by inheritance from their predecessors in interest, their aunt, Doña Encarnacion Florentino, and Angel Encarnacion acquired their respective shares of the land thru purchase from the original heirs, Jesus, Caridad, Lourdes and Dolores, all surnamed Singson, on one hand and from Asuncion Florentino on the other. - After due notice and publication, the Court set the application for hearing. Only the Director of Lands filed an opposition but was later withdrawn so an order of general default was issued. Upon application of the applicants, the Clerk of Court was commissioned and authorized to receive the evidence of the applicants and ordered to submit the same for the Court's proper resolution. - Exhibit O-1 embodied in the deed of extrajudicial partition (Exhibit O), which states that with respect to the land situated in Barrio Lubong, Dacquel, Cabugao, Ilocos Sur, the fruits thereof shall serve to defray the religious expenses, was the source of contention in this case (Spanish text). Florentino wanted to include Exhibit O-1 on the title but the Encarnacions opposed and subsequently withdrawn their application on their shares, which was opposed by the former. - The Court after hearing the motion for withdrawal and the opposition issued an order and for the purpose of ascertaining and implifying that the products of the land made subject matter of this land registration case had been used in answering for the payment of expenses for the religious functions specified in the Deed of Extrajudicial Partition which was no registered in the office of the Register of Deeds from time immemorial; and that the applicants knew of this arrangement and the

Obligations and Contracts 127 Deed of Extrajudicial Partition of August 24, 1947, was not signed by Angel Encarnacion or Salvador Encarnacion, Jr. - CFI: The self-imposed arrangement in favor of the Church is a simple donation, but is void since the donee has not accepted the donation and Salvador Encarnacion, Jr. and Angel Encarnacion had not made any oral or written grant at all so the court allowed the religious expenses to be made and entered on the undivided shares, interests and participations of all the applicants in this case, except that of Salvador Encarnacion, Sr., Salvador Encarnacion, Jr. and Angel Encarnacion." - The petitioners-appellants filed their Reply to the Opposition reiterating their previous arguments, and also attacking the jurisdiction of the registration court to pass upon the validity or invalidity of the agreement Exhibit O-1, alleging that such is litigable only in an ordinary action and not proper in a land registration proceeding. - The Motion for Reconsideration and of New Trial was denied for lack of merit, but the court modified in highlighting that the donee Church has not showed its clear acceptance of the donation, and is the real party of this case, not the petitionersappellants ISSUES 1. WON the lower own erred in concluding that the stipulation embodied in Exhibit O on religious expenses is just an arrangement stipulation, or grant revocable at the unilateral option of the co-owners 1.1 WON the lower court erred in finding and concluding that the encumbrance or religious expenses embodied in Exhibit O, the extrajudicial partition between the co-heirs, is binding only on the applicants Miguel Florentino, Rosario Encarnacion de Florentino, Manuel Arce, Jose Florentino, Antonio Florentino, Victorino Florentino, Remedios Encarnacion and Severina Encarnacion 2. WON the lower court erred in holding that rule that the petitioners-appellants are not the real parties in interest, but the Church 3. WON the lower court as a registration court erred in passing upon the merits of the encumbrance (Exhibit O-1) as the same was never put to issue and as the question involved is an adjudication of rights of the parties HELD 1. YES The court erred in concluding that the stipulation is just an arrangement stipulation. It cannot be revoked unilaterally. Ratio The contract must bind both parties, based on the principles (1) that obligation wising from contracts have the force of law between the contracting parties; and (2) that them must be mutuality between the parties band on their essential equality, to which is repugnant to have one party bound by the contract leaving the other free therefrom. Reasoning The stipulation (Exhibit O-1) is part of an extrajudicial partition (Exh. O) duly agreed and signed by the parties, hence the same must bind the contracting parties thereto and its validity or compliance cannot be left to the will of one of them - The said stipulation is a stipulation pour autrui. A stipulation pour autrui is a stipulation in favor of a third person conferring a clear and deliberate favor upon him, and which stipulation is merely a part of a contract entered into by the parties, neither of whom acted as agent of the third person, and such third person may

A2010 page Prof. Labitag demand its fulfillment provided that he communicates his acceptance to the obligor before it is revoked. -Requisites: (1) that the stipulation in favor of a third person should be a part, not the whole, of the contract, (2) that the favorable stipulation should not be conditioned or compensated by any kind of obligation whatever; and (3) neither of the contracting parties bears the legal representation or authorization of third party. -Valid stipulation pour autrui: it must be the purpose and intent of the stipulating parties to benefit the third person, and it is not sufficient that the third person may be incidentally benefited by the stipulation. The intention of the parties may be disclosed by their contract. It matters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promise to the third person. That no such obligation exists may in some degree assist in determining whether the parties intended to benefit a third person. -The evidence on record shows that the true intent of the parties is to confer a direct and material benefit upon the Church. - While a stipulation in favor of a third person has no binding effect in itself before its acceptance by the party favored, the law does not provide when the third person must make his acceptance. As a rule, there is no time limit; such third person has all the time until the stipulation is revoked. Here, We find that the Church accepted (implicitly) the stipulation in its favor before it is sought to be revoked by some of the coowners. 1.1 YES The court should have found the other co-owners to be bound by the extrajudicial partition. Ratio Being subsequent purchasers, they are privies or successors in interest; it is axiomatic that contracts are enforceable against the parties and their privies. Reasoning The co-owners are shown to have given their conformity to such agreement when they kept their peace in 1962 and 1963, having already bought their respective shares of the subject land but did not question the enforcement of the agreement as against them. They are also shown to have knowledge of Exhibit O-1 as they had admitted in a Deed of Real Mortgage executed by them. 2. YES Ratio That one of the parties to a contract pour autrui is entitled to bring an action for its enforcement or to prevent its breach is too clear to need any extensive discussion. Upon the other hand, that the contract involved contained a stipulation pour autrui amplifies this settled rule only in the sense that the third person for whose benefit the contract was entered into may also demand its fulfillment provided he had communicated his acceptance thereof to the obligor before the stipulation in his favor is revoked. Reasoning The annotation of Exhibit O-1 on the face of the title to be issued in this case is merely a guarantee of the continued enforcement and fulfillment of the beneficial stipulation. 3. NO Ratio The otherwise rigid rule that the jurisdiction of the Land Registration Court, being special and limited in character and proceedings thereon summary in nature, does not extend to cases involving issues properly litigable in other independent suits or ordinary civil actions Reasoning The peculiarity of the exceptions is based not alone on the fact that Land Registration Courts are likewise the same Courts of First Instance, but also the following premises: (1) Mutual consent of the parties or their acquiescence in submitting the aforesaid issues for determination by the court in the registration proceedings; (2) Full opportunity given to the parties in the presentation of their

Obligations and Contracts 128 respective sides of the issues and of the evidence in support thereto; (3) Consideration by the court that the evidence already of record is sufficient and adequate for rendering a decision upon these issues. -Also, the case has been languishing in our courts for thirteen long years. To require that it be remanded to the lower own for another proceeding under its general jurisdiction is not in consonance with our avowed policy of speedy justice. Disposition IN VIEW OF THE FOREGOING, the decision of the Court of First Instance of Ilocos Sur in Land Registration Case No. N-310 is affirmed but modified to allow the annotation of Exhibit O-1 as an encumbrance on the face of the title to be finally issued in favor of all the applicants (herein appellants and herein appellees) in the registration proceedings below.

COQUIA V FIELDMEN’ S INSURANCE CO., INC. CONCEPCION; November 29, 1968 NATURE Appeal from a decision of the Court of First Instance of Manila FACTS - On Dec. 1, 1961, The Fieldmen’s Insurance Co. issued in favor of the Manila Yellow Taxicab Co. a common carrier accident insurance policy, covering the period from Dec. 1, 1961 to Dec. 1, 1962. It was stipulated in said policy that the “Company will indemnify the Insured in the event of accident against all sums which the Insured will become legally liable to pay for the death or bodily injury to any fare-paying passenger including the driver, conductor and/or inspector who is riding in the motor vehicle insured at the time of accident or injury.” On Feb. 10, 1962, as a result of a vehicular accident in Pangasinan, Carlito Coquia, driver of one of the taxi cabs covered by said policy, was killed. The Insured filed therefor a claim for P5,000.00 to which the Company replied with an offer to pay P2,000.00, by way of compromise. The Insured rejected the same and made a counter-offer for P4,000.00, but the Company did not accept it. Because of the failure of the Company and the Insured to agree with respect to the amount to be paid to the heirs of the driver, the Insured and the parents of Carlito, the Coquias, finally brought this action against the Company to collect the proceeds of the aforementioned policy. The trial court rendered a decision sentencing the Company to pay to the plaintiffs the sum of P4,000.00 and the costs. Hence, this appeal by the Company, which contends that plaintiffs have no cause of action because: 1) the Coquias have no contractual relation with the Company; and 2) the Insured has not complied with the provisions of the policy concerning arbitration based on Sec 17 of the policy reading: “If any difference or dispute shall arise with respect to the amount of the Company's liability under this Policy, the same shall be referred to the decision of a single arbitrator to be agreed upon by both parties or failing such agreement of a single arbitrator, to the decision of two arbitrators, one to be appointed in writing by each of the parties within one calendar month after having

A2010 page Prof. Labitag been required in writing so to do by either of the parties and in case of disagreement between the arbitrators, to the decision of an umpire who shall have been appointed in writing by the arbitrators before entering on the reference and the costs of and incident to the reference shall be dealt with in the Award. And it is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this Policy that the award by such arbitrator, arbitrators or umpire of the amount of the Company's liability hereunder if disputed shall be first obtained.” ISSUE WON the Coquias have cause of action HELD YES Ratio 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. Reasoning Although in general, only parties to a contract may bring an action based thereon, this rule is subject to exceptions, one of which is found in the second paragraph of Art. 1311 of the Civil Code of the Philippines. This is but a restatement of a well-known principle concerning contracts pour autrui, the enforcement of which may be demanded by a third party for whose benefit it was made, although not a party to the contract, before the stipulation in his favor has been revoked by the contracting parties. The policy in question provides, inter alia, that the Company ‘will indemnify any authorized driver who is driving the motor vehicle’ of the Insured and, in the event of death of said driver, the Company shall, likewise, ‘indemnify his personal representatives.’ Thus, the policy is typical of contracts pour autrui, this characteristic being made more manifest by the fact that the deceased driver, paid fifty percent of the premiums, which were deducted from his weekly commissions. Under these conditions, the Coquias – who, admittedly are the sole heirs of the deceased – have a direct cause of action against the Company, and, since they could have maintained this action themselves, without the assistance of the Insured, it goes without saying that they could and did properly join the latter in filing the complaint hereon. The second defense cannot stand because none of the parties invoked this section, or made any reference to arbitration, during the negotiations preceding the institution of the present case. Their aforementioned acts or omissions had the effect of a waiver of their respective right to demand an arbitration. The test for determining whether there has been a waiver in a particular case is as follows: "Any conduct of the parties inconsistent with the notion that they treated the arbitration provision as in effect, or any conduct which might be reasonably construed as showing that they did not intend to avail themselves of such provision, may amount to a waiver thereof and estop the party charged with such conduct from claiming its benefits". Disposition Decision appealed from is affirmed.

CONSTANTINO V ESPIRITU DIZON; May 31, 1971 NATURE

Obligations and Contracts 129 Direct appeal on a question of law taken by Pastor B. Constantino from an order of the Court of First Instance of Rizal denying his motion for the admission of his amended complaint in Civil Case No. 5924, entitled "Pastor B. Constantino vs. Herminia Espiritu." FACTS - Constantino had by a fictitious deed of absolute sale conveyed to Espiritu for a consideration of P8,000.00, the two-storey house and four (4) subdivision lots in the name of Pastor B. Constantino, married to Honorata Geukeko, with the understanding that Espiritu would hold the properties in trust for their illegitimate son, Pastor Constantino, Jr., still unborn at the time of the conveyance - Espiritu mortgaged said properties to the Republic Savings Bank of Manila twice to secure payment of two loans, one of P3,000.00 and the other of P2,000.00, and that thereafter she offered them for sale. - The complaint then prayed for the issuance of a writ of preliminary injunction restraining Espiritu and her agents or representatives from further alienating or disposing of the properties, and for judgment ordering her to execute a deed of absolute sale of said properties in favor of Pastor B. Constantino, Jr., the beneficiary (who, at the filing of said complaint, was about five years of age), and to pay attorney's fees in the sum of P2,000.00. - TCT No, 20714 in the name of plaintiff was partially cancelled and in lieu thereof, TCT No. 32744 was issued by the Register of Deeds of Rizal in the name of appellee Herminia Espiritu. - Espiritu moved to dismiss the complaint on the ground that it stated no cause of action because Pastor Constantino, Jr., the beneficiary of the alleged trust, was not included as party-plaintiff, and on the further ground that cause of action was unenforceable under the Statute of Frauds. - Constantino argued that the Statute of Frauds does not apply to trustee - The trial court dismissed the complaint, with costs. ISSUES 1. WON the contract of sale entered into between appellant and appellee was subject to the agreement that appellee would hold the properties in trust for their unborn child 2. WON the contract in question is not enforceable by action by reason of the provisions of the Statute of Frauds HELD 1. This is a question of fact that appellee may raise in her answer for the lower court to determine after trial. - The contract between him and appellee was a contract pour autrui, although couched in the form of a deed of absolute sale, and that appellant's action was, in effect, one for specific performance. - That one of the parties to a contract is entitled to bring an action for its enforcement or to prevent its breach is too clear to need any extensive discussion. - The contract contained a stipulation pour autrui amplifies this settled rule only in the sense that the third person for whose benefit the contract was entered into may also demand its fulfillment provided he had communicated his acceptance thereof to the obligor before the stipulation in his favor is revoked. - It appearing that the amended complaint submitted by appellant to the tower court impleaded the beneficiary under the contract as a party co-plaintiff, it seems

A2010 page Prof. Labitag clear that the three parties concerned therewith would, as a result, be before the court and the latter's adjudication would be complete and binding upon them. 2. YES The contention that the contract in question is not enforceable by action by reason of the provisions of the Statute of Frauds does not appear to be unquestionable, it being clear upon the facts alleged in the amended complaint that the contract between the parties had already been partially performed by the execution of the deed of sale, the action brought below being only for the enforcement of another phase thereof, namely, the execution by appellee of a deed of conveyance in favor of the beneficiary thereunder.

INTEGRATED PACKAGING CORP V CA, FIL- ANCHOR PAPER CO, INC. QUISUMBING; June 8, 2000 NATURE Petition to review the CA decision of April 20, 1994, reversing the judgment of the RTC in an action for recovery of sum of money filed by private respondent against petitioner FACTS - May 5, 1978: Petitioner and private respondent executed an order agreement: respondent bound itself to deliver 3,450 reams of printing paper (coated, 2 sides basis, 80 lbs, short grain) under the following schedule: May and June 1978: 450 reams at P290/ream August and September: 450 reams at P290/ream January 1979: 575 reams at P307.20/ream March: 575 reams at P307.20/ream July: 575 reams at P307.20/ream October: 575 at P307.20/ream S.O.P. of parties: materials were to be paid w/in 30-90 days from delivery - June 7, 1978: petitioner entered into contract with Philacor to print 3 volumes of books, 1 volume by November, 1978; another by November, 1979, and the last one by November, 1980. - July 30, 1979: respondent had delivered to petitioner 1,097 reams out of the 3,450. - Petitioner alleged it wrote private respondent that further delay in delivering the balance would greatly prejudice petitioner - June, 1980 – July, 1981: respondent delivered various quantities amounting to P766,101.70. - Petitioner had difficulties paying - Respondent made a formal demand for petitioner to settle the outstanding account - Petitioner made partial payments of P97,200.00 applied to its back accounts -Petitioner entered into additional printing contract with Philacor but unfortunately failed to comply with its contract - Thus, Philacor demanded compensation from petitioner for the delay and damage suffered

Obligations and Contracts 130 - August 14, 1981: respondent filed with RTC a collection suit against petitioner for the sum of P766,101.70, the unpaid purchase price of printing paper bought by petitioner on credit - Petitioner denied the allegations of complaint. Counterclaim: that private respondent was able to deliver only 1,097 reams, which was short of 2,875 reams, in total disregard of their agreement; that private respondent failed to deliver despite demand therefore, hence petitioner suffered damages and failed to realize expected profits; and that their complaint was prematurely filed - respondent submitted a supplemental complaint, alleging that petitioner made additional purchases of printing paper on credit amounting to P94,200; and that petitioner refused to pay its outstanding obligation. - July 5, 1990: Trial court: 1. petitioner should pay respondent P763,101.70. 2. petitioner’s claim meritorious: if not for the delay of private respondent to deliver printing paper, petitioner could have sold books to Philacor and realized a profit of P790,324.30 from the sale 3. petitioner suffered dislocation of contracts as a result of respondent’s failure: awarded moral damages - CA reversed and set aside decision. 1. Ordered petitioner to pay respondent P763,101.70 2. deleted the P790,324.30 compensatory damages and moral damages Petitioners' Claim [I] the court of appeals erred in concluding that private respondent did not violate the order agreement. [ii] the court of appeals erred in concluding that respondent is not liable for petitioner’s breach of contract with philacor. [iii] the court of appeals erred in concluding that petitioner is not entitled to damages against private respondent. ISSUES Substantive 1. WON private respondent violated the order agreement 2. WON private respondent is liable for petitioner’s breach of contract with Philacor HELD 1. NO Ratio When there is a contract of sale of goods to be delivered by stated installments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more installments, or the buyer neglects or refuses without just cause to take delivery of or pay for one or more installments, it depends in each case on the terms of the contract and the circumstances of the case, whether the breach of contract is so material as to justify the injured party in refusing to proceed further and suing for damages for breach of the entire contract, or whether the breach is severable, giving rise to a claim for compensation but not to a right to treat the whole contract as broken. (art. 1583) Reasoning In this case, as found a quo petitioner’s evidence failed to establish that it had paid for the printing paper covered by the delivery invoices on time. Consequently, private respondent has the right to cease making further delivery, hence the private respondent did not violate the order agreement. On the contrary, it was petitioner which breached the agreement as it failed to pay on time the materials delivered by private respondent. Respondent appellate court correctly ruled that private respondent did not violate the order agreement.

A2010 page Prof. Labitag 2. NO Ratio Aforesaid contracts could not affect third persons like private respondent because of the basic civil law principle of relativity of contracts which provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof. Reasoning The order agreement entered into by petitioner and private respondent has not been shown as having a direct bearing on the contracts of petitioner with Philacor. The paper specified in the order agreement between petitioner and private respondent are markedly different from the paper involved in the contracts of petitioner with Philacor. The demand made by Philacor upon petitioner for the latter to comply with its printing contract is dated February 15, 1984, which is clearly made long after private respondent had filed its complaint on August 14, 1981. This demand relates to contracts with Philacor dated April 12, 1983 and May 13, 1983, which were entered into by petitioner after private respondent filed the instant case. Disposition The instant petition is DENIED. The decision of the Court of Appeals is AFFIRMED. Costs against petitioner.

DAYWALT V LA CORP DE LOS PADRES AGUSTINOS RECOLETOS STREET; February 4, 1919 NATURE Appeal from judgment of CFI Manila FACTS - In 1902, Teodorica Endencia, an unmarried woman Mindoro, executed a contract where she obligated herself to convey to Geo. W. Daywalt, a tract of land situated in the barrio of Mangarin, Bulalacaoose, MIndoro - It was agreed that a deed should be executed as soon as the title is perfected in the proceedings of the Court of Land Registration and a Torrens title procured therefore in Endencia’s name - A decree recognizing the right of Endencia as owner was entered in said court in August 1906, but the Torrens certificate was not issued until later - The parties made a new contract with a view to carrying their original agreement into effect; this new contract was executed in the form of deed of conveyance and is dated 16 Aug 1906 - The price is P4,000 and the area of the land enclosed in the boundaries is 452 hectares and a fraction - The second contract was not immediately carried into effect for the reason that the Torrens certificate was not yet obtainable - On Oct 3 1908, the parties entered into another agreement, replacing the old; said agreement bound Endencia to deliver the land, upon receiving the Torrens title, to the Hongkong and Shanghai Bank in Manila, to be forwarded to the Crocker National Bank in San Francisco, where it was to be delivered to the plaintiff upon payment of a balance of P3,100 - The Torrens certificate was in time issued to Teodorica Endencia, but in the course of the proceedings in the registration of the land, it was found by official survey that the area of the tract inclosed in the boundaries stated in the contract was about

Obligations and Contracts 131 1,248 hectares instead of 452 hectares as stated in the contract. Due to this, Endencia became reluctant to transfer the whole tract to the purchaser Daywalt; this led to litigation which upon appeal to the SC, Daywalt obtained a decree for specific performance; such decree appears to have become finally effective in early 1914 - The defendant, La Corporacion de los Padres Recoletos, is a religious corporation. The corporation was was at this time the owner of an estate in Mindoro known as the San Jose Estate and also of a property immediately adjacent to the land which Endencia had sold to Daywalt - Its representative, Fr. Sanz, had long been well acquainted with Endencia and exerted over her an influence and ascendency due to his religious character as well as to the personal friendship which existed between them; and Endencia was accustomed to seek, and was given the advice of Father Sanz and other members of his order - Fr Sanz was aware of the contract of 1902 (1st contract to sell); Sanz and the other members also knew about the 2nd contract executed in 1903 - When the Torrens certificate was finally issued in 1909 in favor of Endencia, she delivered it for safekeeping to the defendant corporation, and it was then taken to Manila where it remained in the custody and under the control of P. Juan Labarga - When La Corporation sold the San Jose Estate in 1909, some 2,368 head of cattle were removed to the estate of the corporation immediately adjacent to the property which the plaintiff had purchased from Teodorica Endencia - As Teodorica still retained possession of said property Father Sanz entered into an arrangement with her where large numbers of cattle belonging to the defendant corporation were pastured upon said land during a period extending from June 1, 1909, to May 1, 1914 - Daywalt sought to recover from corporation P24,000 as damages for the use and occupation of the land by reason of pasturing the cattle during the said period - TC fixed damages at P2,497 - Plaintiff appealed for higher damages; defendant did not question the fact of awarding damages per se in the first cause of action - Plaintiff, in a 2nd cause of action, also sought to recover from defendant P500,000, as damages on the ground that said corporation, for its own selfish purposes, unlawfully induced Endencia to refrain from the performance of her contract for the sale of the land in question and to withhold delivery to the plaintiff of the Torrens title, and further, maliciously and without reasonable cause, maintained her in her defense to the action of specific performance which was finally decided in favor of the plaintiff in this court - Plaintiff claimed that in 1911, he, as the owner of the land which he bought from Endencia entered into a contract with S. B. Wakefield, of San Francisco, for the sale and disposal of said lands to a sugar growing and milling enterprise, the successful launching of which depended on the ability of Daywalt to get possession of the land and the Torrens certificate of title, however, the Torrens title was still in Labarga’s hands, the latter having refused to turn said title over to Endencia; thus, the contract could not be consummated - Plaintiff alleged that, by interfering in the performance of the contract in question and obstructing the plaintiff in his efforts to secure the certificate of title to the land, the defendant corporation made itself a co-participant with Teodorica Endencia in the breach of said contract ISSUES

A2010 page Prof. Labitag 1. WON damages in the 1st cause of action should be increased 2. WON La Corporation who is not a party to the contract of sale of land will be liable for the damages by colluding with the vendor and maintaining her in the effort to resist an action for specific performance HELD 1. NO -The trial court estimated the rental value of the land for grazing purposes at 50 centavos per hectare per annum, and roughly adopted the period of four years as the time for which compensation at that rate should be made. -The SC is of the opinion that the damages assessed are sufficient to compensate the plaintiff for the use and occupation of the land during the whole time it was used -There is evidence in the record strongly tending to show that the wrongful use of the land by the defendant was not continuous throughout the year but was confined mostly to the season when the forage obtainable on the land of the defendant was not sufficient to maintain its cattle, for which reason it became necessary to allow them to go over to pasture on the land in question 2. NO -To our mind a fair conclusion on this feature of the case is that Fr Juan Labarga and his associates believed in good faith that the contract could not be enforced and that Endencia would be wronged if it should be carried into effect -Whatever may be the character of the liability which a stranger to a contract may incur by advising or assisting one of the parties to evade performance, there is one proposition upon which all must agree. This is that the stranger cannot become more extensively liable in damages for the nonperformance of the contract than the party in whose behalf he intermeddles. To hold the stranger liable for damages in excess of those that could be recovered against the immediate party to the contract would lead to results at once grotesque and unjust. -The defendant’s liability cannot exceed Endencia’s (the principal of the contract) (Court proceeds to determine Endencia’s liability-- the damages laid under the second cause of action in the complaint could not be recovered from her, first, because the damages in question are special damages which were not within contemplation of the parties when the contract was made, and secondly, because said damages are too remote to be the subject of recovery) -Plaintiff relies on English and US decisions which have ruled that a person who is a stranger to a contract may, by an unjustifiable interference in the performance thereof, render himself liable for the damages consequent upon non-performance, as recognized in Gilchrist v Cuddy -Upon the said authorities it is enough if the wrongdoer having knowledge of the existence of the contract relation in bad faith sets about to break it up. Whether his motive is to benefit himself or gratify his spite by working mischief to the employer is immaterial -If a party enters into contract to go for another upon a journey to a remote and unhealthful climate, and a third person with a bona fide purpose of benefiting the one who is under contract to go dissuades him from the step, no action will lie. But if the advice is not disinterested and the persuasion is used for "the indirect purpose of benefiting the defendant at the expense of the plaintiff," the intermedler is liable if his advice is taken and the contract broken -No question can be made as to the liability of one who interferes with a contract existing between others by means which under known legal canons can be

Obligations and Contracts 132 denominated an unlawful means. Thus, if performance is prevented by force, intimidation, coercion, or threats, or by false or defamatory statements, or by nuisance or riot, the person using such unlawful means is under all the authorities liable for the damage which ensues -Article 1902 of the Civil Code declares that any person who by an act or omission characterized by fault or negligence, causes damage to another shall be liable for the damage so done. The SC takes the rule to mean that a person is liable for damage done to another by any culpable act; and by "culpable act" we mean any act which is blameworthy when judged by accepted legal standards. Nevertheless, it must be admitted that the codes and jurisprudence of the civil law furnish a somewhat uncongenial field in which to propagate the idea that a stranger to a contract may be sued for the breach thereof -Article 1257 of the Civil Code declares that contracts are binding only between the parties and their privies. In conformity with this it has been held that a stranger to a contract has no right of action for the nonfulfillment of the contract except in the case especially contemplated in the second paragraph of the same article -If the two antagonistic ideas which we have just brought into juxtaposition are capable of reconciliation, the process must be accomplished by distinguishing clearly between the right of action arising from the improper interference with the contract by a stranger thereto, considered as an independent act generative of civil liability, and the right of action ex- contractu against a party to the contract resulting from the breach thereof

SO PING BUN V CA QUISUMBING; September 21, 1999 NATURE Petition for review on certiorari of a decision of the Court of Appeals FACTS - In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into lease agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI) - Subjects of four (4) lease contracts were premises located at Nos. 930, 930-Int., 924-B and 924-C, Soler Street, Binondo, Manila which Tek Hua used as storage space for its textiles -The contracts each had a one-year term. They provided that should the lessee continue to occupy the premises after the term, the lease shall be on a month-tomonth basis. - When the contracts expired, the parties did not renew the contracts, but Tek Hua continued to occupy the premises -In 1976, Tek Hua Trading Co. was dissolved. Later, the original members of Tek Hua Trading Co. including Manuel C. Tiong, formed Tek Hua Enterprising Corp., herein respondent corporation. - When So Pek Giok, managing partner of Tek Hua Trading, died in 1986, So Pek Giok’s grandson, petitioner So Ping Bun, occupied the warehouse for his own textile business, Trendsetter Marketing -On March 1, 1991, private respondent Tiong, president of Tek Hua Enterprising Corp sent a letter to petitioner So Ping Bun asking him to vacate the premises -Petitioner refused to vacate and instead, on March 4, 1992, petitioner requested formal contracts of lease with DCCSI in favor of Trendsetter Marketing

A2010 page Prof. Labitag -DCCSI acceded to petitioner’s request -Private respondents filed a petition for injunction, pressing for the nullification of the lease contracts between DCCSI and petitioner. They also claimed damages. -Trial Court ruled in favor of respondents -CA affirmed ISSUES 1. WON So Ping Bun is guilty of tortuous interference of contract 2. WON So Ping Bun should be liable for attorney’s fees HELD 1. YES Ratio There is tort interference when during the existence of a valid contract, a third person, to whom the existence of such contract is known, interferes without legal justification or excuse. Reasoning A duty which the law of torts is concerned with is respect for the property of others, and a cause of action ex delicto may be predicated upon an unlawful interference by one person of the enjoyment by the other of his private property. -This may pertain to a situation where a third person induces a party to renege on or violate his undertaking under a contract. -In the case at bar, petitioner’s Trendsetter Marketing asked DCCSI to execute lease contracts in its favor, and as a result petitioner deprived respondent corporation of the latter’s property right. Clearly, and as correctly viewed by the appellate court, the three elements of tort interference, (1) existence of a valid contract; (2) knowledge on the part of the third person of the existence of contract; and (3) interference of the third person is without legal justification or excuse, are present in the instant case. -In Gilchrist vs. Cuddy, the court held that where there was no malice in the interference of a contract, and the impulse behind one’s conduct lies in a proper business interest rather than in wrongful motives, a party cannot be a malicious interferer. -In the instant case, though petitioner took interest in the property of respondent corporation and benefited from it, nothing on record imputes deliberate wrongful motives or malice on him. -Section 1314 of the Civil Code categorically provides that, “Any third person who induces another to violate his contract shall be liable for damages to the other contracting party” -Lack of malice, however, precludes damages. But it does not relieve petitioner of the legal liability for entering into contracts and causing breach of existing ones. The respondent appellate court correctly confirmed the permanent injunction and nullification of the lease contracts between DCCSI and Trendsetter Marketing, without awarding damages. 2. YES Ratio When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest, the recovery of attorney’s fees is allowed. Reasoning Art. 2208 of the Civil Code reads: In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except:

Obligations and Contracts 133 (2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest -The court has consistently held that the award of considerable damages should have clear factual and legal bases - Considering that the respondent corporation’s lease contract, at the time when the cause of action accrued, ran only on a month-to-month basis whence before it was on a yearly basis, the reduced amount of attorney’s fees ordered by the Court of Appeals is still exorbitant in the light of prevailing jurisprudence. Consequently, the amount of two hundred thousand (P200,000.00) awarded by respondent appellate court should be reduced to one hundred thousand (P100,000.00) pesos as the reasonable award for attorney’s fees in favor of private respondent corporation. Disposition The petition is DENIED. The assailed Decision and Resolution of the Court of Appeals are hereby AFFIRMED, with MODIFICATION that the award of attorney’s fees is reduced from two hundred thousand (P200,000.00) to one hundred thousand (P100,000.00) pesos.

ROSENSTOCK V BURKE AVANCENA; September 26, 1924

NATURE Appeal from the Judgment of the CFI of Manila FACTS - Burke owned a yacht known as Bronzewing. Elser, the plaintiff, negotiated for the purchase of the yacht. The plan of Elser was to create a yacht club and sell it afterwards for P120,000. P20,00 to be retained by Elser and P100,000 to be paid to Burke. Elser requested that a voyage be down to the south using the said yacht for purposes of advertising and creating opportunities for the sale. However, the yacht needed some repairs for the voyage thus making the plaintiff pay for such repair. Elser never accepted the offer for the purchase rather requested that the engine should replaced thus asking for a loan of P20, 000. After a talk with the bank manager Mr. Avery, they agreed that the yacht was to be sold to Elser for the amount of P80,000. Elser agreed but stated in the letter that he is in a position to entertain the purchase of the said yacht. The case focuses on the recovery of the money used to repair the yacht in the amount of P6,139.28 that is asked by Elser. The trial court ruled in favor of Elser and asked Burke to pay for P6,139.28 with legal interest of 6 percent per annum as well as the Cooper Company the sume of P1,730.84 with legal interest of 6 per cent. The plaintiff is then asked to comply with the conditions stated in the letter. Hence this appeal coming from the plaintiff. ISSUUES 1. WON the contract is valid and binding against the plaintiff 2. WON plaintiff is required to pay for the repairs of the yacht HELD 1. NO - The court looked at the intent of the plaintiff in using the language. Instead of using clear and simple words such as I offer to purchase, I want to purchase, or I am in the position to purchase he used the word entertain which implies that he is in a position to deliberate whether or not he would purchase such yacht. It is a mere invitation that is discretionary upon him.

A2010 page Prof. Labitag 2. YES - The fact that the defendant was to ask for nothing in exchange for the travel thus making the repair the only exchange that is expected. Disposition The petitioner is not obliged to buy the yacht but is ordered to pay for the repairs done.

MALBAROSA V COURT OF APPEALS CALLEJO; April 30, 2003 NATURE Petition for review on certiorari of the decision of the CA. FACTS - The petitioner Salvador 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 him a 1982 model Mitsubishi Gallant Super Saloon car and was also issued membership certificates in the Architectural Center, Inc. - On January 8, 1990, Malabarosa tendered his resignation from all his positions in the SEADC group of companies and reiterating his request for the payment of his incentive compensation for 1989 which is approximately P395,000.00 according to him. - SEADC, through its President Louis Da Costa, accepted his resignation and entitled him to an incentive amounting to P251,057.67, which was lower than Malbarosa's expectation. It is to be satisfied by transferring to him the car assigned to him, which estimated fair market value is P220,000.00 and the membership share of SEADC subsidiary, Tradestar International Inc. in the Architectural Center, Inc. amounting to P60,000.00. - The respondent prepared the letter-offer dated march 14, 1990 and required Malbarosa to affix his conformity on the space provided therefor and the date thereof on the right bottom position of the letter. - On March 16, 1990, Da Costa met with the petitioner and handed to him the original copy of the letter-offer for his consideration but he refused to sign it, instead said that he will review the offer first. More than two weeks have passed and Da Costa never heard feedback from Malbarosa. Thus he decided to finally withdraw his offer on April 3, 1996. However, Malbarosa transmitted the copy of the signed Letter-offer to respondent on April 7, 1996 and he alleged that he has affixed his signature on it since March 28, 1996 but failed to communicate his acceptance immediately. Procedure - Due to petitioner's refusal to return the vehicle after April 3, 1996, the respondent filed a complaint for recovery of personal property with replevin, with damages and atty's fee. - RTC – issued a writ of replevin - CA – affirmed RTC's decision ISSUES 1. WON there was a valid acceptance on Malbarosa's part of the March 14, 1990 Letter-offer of the respondent

Obligations and Contracts 134 2. WON there was an effective withdrawal by the respondent of said Letter-offer HELD 1. NO. - Article 1318 of CC says that “There is no contract unless the following requisites concur: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract (3) cause of the obligation which is established In this case, there is no contract as Malbarosa failed to meet the requirements of a valid acceptance to wit: (a) may be express or implied (b) must be absolute, unconditional and without variance of any sort from the offer © must be made known to the offeror (d) must be made in the manner prescribed by the offeror Reasoning Malabarosa communicated his acceptance only after the knowledge of revocation or withdrawal of his offer. He should have transmitted his conformity while the offer was subsisting. The time given to him was long enough. 2. YES - Implicit in the authority given to Philtectic Corporation to demand for and recover from the petitioner the subject car and to institute the appropriate action against him to recover possession of the car is the authority to withdraw the respondent's Letter-offer. Disposition Decision of the CA is AFFIRMED.

JARDINE DAVIES INC. V COURT OF APPEALS BELLOSILLO; June 19, 2000 NATURE Action for specific performance FACTS - Controversy started in 1992 at height of power crisis. Petitioner Pure Foods Corp decided to install 2 1500 KW generators in food processing plant in Marikina. - A bidding for supply and installation of generators was held. Out of 8 prospective bidders who attended pre-bidding conference, 3 bidders (FEMSCO, MONARK and ADVANCE POWER) submitted bid proposals and gave bid bonds equivalent to 5% of their respective bids, as required. - In a letter, Purefoods confirmed the award of contract to FEMSCO. FEMSCO submitted the required performance bond (P1,841,187.90) and contractor’s all-risk insurance policy (P6,137,293.00) w/c Purefoods acknowledged in a letter. FEMSCO also made arrangements w/ its principal and started by purchasing materials. Purefoods on the other hand returned FEMSCO’s Bidder’s Bond (P1M) as requested.

A2010 page Prof. Labitag - However, Purefoods unilaterally cancelled the award. FEMSCO protested and sought a meeting. Before the matter could be resolved, Purefoods awarded the project and entered into contract with Jardine w/c was not one of the bidders. - FEMSCO wrote to Purefoods and Jardine, but its letters unheeded, FEMSCO sued them both. ISSUES 1. WON there existed a perfected contract bet Purefoods and FEMSCO 2. WON there is showing that Jardine induced/connived with Purefoods to violate Purefoods’ contract with FEMSCO HELD 1. YES - Contract: juridical convention manifested in legal form, by virtue of w/c one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do. It binds the parties and has the force of law between them. - Requisites of contract: - consent of the parties - object/subject matter of the contract - cause of the obligation - In this case, the controversy lies in the consent (whether there was acceptance). Contracts are perfected by mere consent, acceptance by the offeree of the offer made by the offeror. Acceptance may be express or implied. For a contract to arise, acceptance must be made known to the offeror. Acceptance can be withdrawn or revoked before it is made known to offeror. - Art 1326 of Civil Code applies: Advertisements for bidders are simply invitations to make proposals. The bid proposals/quotations of the bidders are the offers. The reply of petitioner Purefoods is the acceptance/rejection of the offers. - Purefoods’ letter to FEMSCO constituted acceptance. While the letter enumerated “basic terms and conditions”, these were imposed on the performance of the obligation rather than on the perfection of the contract. These two things are different. While failure to comply w/ CONDITION ON PERFECTION OF CONTRACT results in failure of a contract, failure to comply w/ CONDITION ON PERFORMANCE OF THE OBLIGATION merely gives other party options and/or remedies. - Even granting that the letter of Purefoods is just a conditional counter-offer, FEMSCO’s submission of bond and insurance was implied acceptance, and acknowledgment by Purefoods, not to mention its return of the Bidder’s Bond, manifests its knowledge that FEMSCO consented to the offer. 2. NO - The similarity in the design submitted to Purefoods by both Jardine and FEMCO and the tender of a lower quotation by Jardine are insufficient to show that Jardine induced Purefoods to violate contract with FEMSCO.

SANCHEZ V RIGOS CONCEPCION; June 14, 1972 NATURE

Obligations and Contracts 135 - Appeal from a decision of the Court of First Instance of Nueva Ecija to the Court of Appeals FACTS - April 3, 1961 – Sanchez and Rigos executed an instrument called “Option to Purchase” - Rigos committed to sell to Sanchez a parcel of land in Nueva Ecija for the sum of P1,510.00. - Within two years from the said date, if Sanchez shall not exercise his right to buy the property, the option shall be terminated - Within the said period, Sanchez made several attempts to pay P1,510.00 to Rigos but Rigos rejected these payments - March 12, 1963 – Sanchez deposited the amount in the Court of First Instance in Nueva Ecija - Feb. 28, 1964 – Rigos ordered by the lower court to accept the payments of Sanchez and to execute in Sanchez’s favor the deed of conveyance for the property. Petitioners’ Claim - By virtue of the document executed, Rigos had agreed and committed to sell the property and he, in turn, agreed and committed to buy. - Thus the promise contained in the contract is reciprocally demandable. Respondents’ Comments - The contract is a unilateral promise to sell. - The contract was unsupported by any valuable consideration and is thus null and void when viewed in the light of the Civil Code. ISSUE WON a promise to buy and sell existed between the parties involved HELD YES Ratio An accepted unilateral promise' can only have a binding effect if supported by a consideration, which means that the option can still be withdrawn, even if accepted, if the same is not supported by any consideration. 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. Reasoning - The case is dependent on A1479 of the Civil Code which states that: “An accepted unilateral promise to buy or to 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.” - The document drawn between Rigos and Sanchez does not require Sanchez to purchase the property. It is not a contract to buy and sell. - Rigos committed to sell the property to Sanchez but the document does not state that the promise or undertaking is supported by consideration distinct from the price stipulated. - The lower court relied on A1354. The Supreme Court however makes the following notes with regard to the use of that provision vis-à-vis A1479:

A2010 page Prof. Labitag - A1354 applies to contracts in general whereas A1479 refers to sales in particular (specifically to a unilateral promise to buy and sell), making A1479 the controlling provision. - For the unilateral promise to be binding, there must be a concurrence of a condition, that it be supported by a consideration distinct from price. The promise cannot compel the promisor to comply with the promise unless there is the existence of that distinct consideration. In this case, this was not alleged by Sanchez. - Rigos stated that there was indeed the absence of that consideration which Sanchez did not oppose - Despite this differences, later jurisprudence states that A1354 and A1479 have no differences and can actually be harmonized.

ADELFA PROPERTIES, INC. V COURT OF APPEALS REGALADO; January 25, 1995 NATURE - Petition for review on certiorari of the judgment of the Court of Appeals. FACTS - Private respondent Rosario Jimenez-Castañeda and Salud Jimenez and their brothers, Jose and Dominador Jimenez, were the registered co-owners of a parcel of land consisting of 17,710 sqm., situated in Barrio Culasi, Las Piñas, Metro Manila. - On July 28, 1988, Jose and Dominador Jimenez sold their share consisting of onehalf of said parcel of land, specifically the eastern portion thereof, to herein petitioner pursuant to a "Kasulatan sa Bilihan ng Lupa." Subsequently, a "Confirmatory Extrajudicial Partition Agreement" was executed by the Jimenezes, wherein the eastern portion of the subject lot, with an area of 8,855 sqm. was adjudicated to Jose and Dominador Jimenez, while the western portion was allocated to private respondents. - Thereafter, petitioner expressed interest in buying .the western portion of the property from private respondents. Accordingly, on November 25, 1989, an "Exclusive Option to Purchase" was executed between petitioner and private respondents, under the following terms and conditions: 1. The selling price of said 8,655 sqm. of the subject property is P2,856,150; 2. The sum of P50,000 which the private respondents received from ADELFA PROPERTIES, INC. as an option money shall be credited as partial payment upon the consummation of the sale and the balance in the sum of P2,806,150 to be paid on or before November 30, 1989; 3. In case of default on the part of ADELFA PROPERTIES, INC. to pay said balance in accordance with paragraph 2 , the option shall be cancelled and 50% of the option money to be forfeited in our favor and we will refund the remaining 50% of said option money upon the sale of said property to a third party; 4. All expenses including the corresponding capital gains tax, cost of documentary stamps are for the account of the VENDORS, and expenses for the registration of the deed of sale in the Registry of Deeds are for the account of ADELFA PROPERTIES, INC. - Considering, however, that the owner's copy of the TCTcertificate of title issued to respondent Salud Jimenez had been lost, a petition for the re-issuance of a new owner's copy of said certificate of title was filed in court through Atty. Bayani L.

Obligations and Contracts 136 Bernardo, who acted as private respondents' counsel. Eventually, a new owner's copy of the certificate of title was issued but it remained in the possession of Atty. Bernardo until he turned it over to petitioner Adelfa Properties, Inc. - Before petitioner could make payment, it received summons on November 29, 1989, together with a copy of a complaint filed by the nephews and nieces of private respondents against the latter, Jose and Dominador Jimenez, and petitioner in the RTC of Makati, for annulment of the deed of sale in favor of Household Corporation and recovery of ownership of the property covered . - As a consequence, in a letter dated November 29,1989, petitioner informed private respondents that it would hold payment of the full purchase price and suggested that private respondents settle the case with their nephews and nieces, adding that "x x x if possible, although November 30, 1989 is a holiday, we will be waiting for you and said plaintiffs at our office up to 7:00 p.m." Another letter of the same tenor and of even date was sent by petitioner to Jose and Dominador Jimenez. Respondent Salud Jimenez refused to heed the suggestion of petitioner and attributed the suspension of payment-of the purchase price to "lack of word of honor." - On December 7, 1989, petitioner caused to be annotated on the title of the lot its option contract with private respondents, and its contract of said with Jose and Dominador Jimenez, - On December 14, 1989, private respondents sent Francisca Jimenez to see Atty. Bernardo, in his capacity as petitioner's counsel, and to inform the latter that they were cancelling the transaction. In turn, Atty. Bernardo offered to pay the purchase price provided that P500,000 be deducted therefrom for the settlement of the civil case. This was rejected by private respondents. On December 22, 1989, Atty. Bernardo wrote private respondents on the same matter but this time reducing the amount from P500,000 to P300,000, and this was also rejected by the latter. - On February 23, 1990, the RTC of Makati dismissed civil case. Thus, on February 28, 1990, petitioner caused to be annotated anew on the TCT the exclusive option to purchase. On the same day, private respondents executed a Deed of Conditional Sale in favor of Emylene Chua over the same parcel of land for P3,029,250, of which P1,500,000 was paid to private respondents on said date, with the balance to be paid upon the transfer of title to the specified one-half portion. - On April 16, 1990, Atty. Bernardo wrote private respondents informing the latter that in view of the dismissal of the case against them, petitioner was willing to pay the purchase price, and he requested that the corresponding deed of absolute sale be executed. This was ignored by private respondents. - On July 27, 1990, private respondents' counsel sent a letter to petitioner enclosing therein a check for P25,000 representing the refund of 50% of the option money paid under the exclusive option to purchase. Private respondents then requested petitioner to return the owner's duplicate copy of the certificate of title of respondent Salud Jimenez. Petitioner failed to surrender the certificate of title, hence private respondents filed a civil case in the RTC of Pasay City for annulment of contract with damages, praying, among others, that the exclusive option to purchase be declared null and void; that defendant, herein petitioner, be ordered to return the owner's duplicate certificate of title; and that the annotation of the option contract on the TCT be cancelled. - Emylene Chua, the subsequent purchaser of the lot, filed a complaint in intervention. - The trial court rendered judgment holding that the agreement entered into by the parties was merely an option contract, and declaring that the suspension of payment by herein petitioner constituted a counter-offer which, therefore, was

A2010 page Prof. Labitag tantamount to a rejection of the option. It likewise ruled that petitioner could not validly suspend payment in favor of private respondents on the ground that the vindicatory action filed by the latter's kin did not involve the western portion of the land covered by the contract between petitioner and private respondents, but the eastern portion thereof which was the subject of the sale between petitioner and the brothers Jose and Dominador Jimenez. The trial court then directed the cancellation of the exclusive option to purchase, declared the sale to intervenor Emylene Chua as valid and binding, and ordered petitioner to pay damages and attorney's fees to private respondents, with costs. - On appeal, the Court of Appeals affirmed in toto the decision of the court a quo and held that the failure of petitioner to pay the purchase price within the period agreed upon was tantamount to an election by petitioner not to buy the property; that the suspension of payment constituted an imposition of a condition which was actually a counter-offer amounting to a rejection of the option; and that Article 1590 of the Civil Code on suspension of payments applies only to a contract of sale or a contract to sell, but not to an option contract which it opined was the nature of the document subject of the case at bar. Said appellate court similarly upheld the validity of the deed of conditional sale executed by private respondents in favor of intervenor Emylene Chua. ISSUES 1. WON the "Exclusive Option to Purchase" executed between petitioner Adelfa Properties, Inc. and private respondents is a contract to sell, rather than a contract of sale 2. WON there was a valid suspension of payment of the purchase price by said petitioner, and the legal effects thereof on the contractual relations of the parties HELD 1. YES. - In a contract of sale, the title passes to the vendee upon the delivery of the thing sold; whereas in a contract to sell, by agreement the ownership is reserved in the vendor and is not to pass until the full payment of the price. In a contract of sale, the vendor has lost and cannot recover ownership until and unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor until the full payment of the price, such payment being a positive suspensive condition and failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective. Thus, a deed of sale is considered absolute in nature where there is neither a stipulation in the deed that title to the property sold is reserved in the seller until the full payment of the price, nor one giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period. - The parties never intended to transfer ownership to petitioner except upon full payment of the purchase price. Firstly, the exclusive option to purchase, although it provided for automatic rescission of the contract and partial forfeiture of the amount already paid in case of default, does not mention that petitioner is obliged to return possession or ownership of the property as a consequence of nonpayment. There is no stipulation anent reversion or reconveyance of the property to herein private respondents in the event that petitioner does not comply with its obligation. With the absence of such a stipulation, although there is a provision on the remedies available to the parties in case of breach, it may legally be inferred

Obligations and Contracts 137 that the parties never intended to transfer ownership to the petitioner prior to completion of payment of the purchase price. - Moreover, that the parties really intended to execute a contract to sell, and not a contract of sale, is bolstered by the fact that the deed of absolute sale would have been issued only upon the payment of the balance of the purchase price, as may be gleaned from petitioner's letter dated April 16, 1990 wherein it informed private respondents that it "is now ready and willing to pay you simultaneously with the execution of the corresponding deed of absolute sale." - Secondly, it has not been shown that there was delivery of the property, actual or constructive, made to herein petitioner. The exclusive option to purchase is not contained in a public instrument the execution of which would have been considered equivalent to delivery. Neither did petitioner take actual, physical possession of the property at any given time. It is true that after the reconstitution of private respondents' certificate of title, it remained in the possession of petitioner's counsel, Atty. Bayani L. Bernardo, who thereafter delivered the same to herein petitioner. Normally, under the law, such possession by the vendee is to be understood as a delivery. However, private respondents explained that there was really no intention on their part to deliver the title to herein petitioner with the purpose of transferring ownership to it. They claim that Atty. Bernardo had possession of the title only because he was their counsel in the petition for reconstitution. We have no reason not to believe this explanation of private respondents, aside from the fact that such contention was never refuted or contradicted by petitioner. - The title of a contract does not necessarily determine its true nature. The fact that the document under discussion is entitled "Exclusive Option to Purchase" is not controlling where the text thereof shows that it is a contract to sell. An option, as used in the law on sales, is a continuing offer or contract by which the owner stipulates with another that the latter shall have the right to buy the property at a fixed price within a certain time, or under, or in compliance with, certain terms and conditions, or which gives to the owner of the property the right to sell or demand a sale. It is also sometimes called an "unaccepted offer." An option is not of itself a purchase, but merely secures the privilege to buy. It is not a sale of property but a sale of the right to purchase. It is simply a contract by which the owner of property agrees with another person that he shall have the right to buy his property at a fixed price within a certain time. He does not sell his land; he does not then agree to sell it; but he does sell something, that is, the right or privilege to buy at the election or option of the other party. Its distinguishing characteristic is that it imposes no binding obligation on the person holding the option, aside from the consideration for the offer. Until acceptance, it is not, properly speaking, a contract, and does not vest, transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but is merely a contract by which the owner of property gives the optionee the right or privilege of accepting the offer and buying the property on certain terms. - On the other hand, a contract like a contract to sell, involves a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. Contracts, in general, are perfected by mere consent, which is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. - The distinction between an "option" and a contract of sale is that an option is an unaccepted offer. It states the terms and conditions on which the owner is willing to

A2010 page Prof. Labitag sell his land, if the holder elects to accept them within the time limited. If the holder does so elect, he must give notice to the other party, and the accepted offer thereupon becomes a valid and binding contract. If an acceptance is not made within the time fixed, the owner is no longer bound by his offer, and the option is at an end. A contract of sale, on the other hand, fixes definitely the relative rights and obligations of both parties at the time of its execution. The offer and the acceptance are concurrent, since the minds of the contracting parties meet in the terms of the agreement. - A perusal of the contract in this case readily shows that there is indeed a concurrence of petitioner's offer to buy and private respondents' acceptance thereof. The rule is that except where a formal acceptance is so required, although the acceptance must be affirmatively and clearly made and must be evidenced by some acts or conduct communicated to the offeror, it may be made either in a formal or an informal manner, and may be shown by acts, conduct, or words of the accepting party that clearly manifest a present intention or determination to accept the offer to buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a party recognizing the existence of the contract of sale. - The records also show that private respondents accepted the offer of petitioner to buy their property under the terms of their contract. At the time petitioner made its offer, private respondents suggested that their transfer certificate of title be first reconstituted, to which petitioner agreed. As a matter of fact, it was petitioner's counsel, Atty. Bayani L. Bernardo, who assisted private respondents in filing a petition for reconstitution. After the title was reconstituted, the parties agreed that petitioner would pay either in cash or manager's check the amount of P2,856,150 for the lot. Petitioner was supposed to pay the same on November 25, 1989, but, it later offered to make a down payment of P50,000, with the balance of P2,806,150 to be paid on or before November 30, 1989. Private respondents agreed to the counter-offer made by petitioner. As a result, the so-called exclusive option to purchase was prepared by petitioner and was subsequently signed by private respondents, thereby creating a perfected contract to sell between them. - It cannot be gainsaid that the offer to buy a specific piece of land was definite and certain, while the acceptance thereof was absolute and without any condition or qualification. - The agreement as to the object, the price of the property, and the terms of payment was clear and well-defined. No other significance could be given to such acts than that they were meant to finalize and perfect the transaction. The parties even went beyond the basic requirements of the law by stipulating that "all expenses including the corresponding capital gains tax, cost of documentary stamps are for the account of the vendors, and expenses for the registration of the deed of sale in the Registry of Deeds are for the account of Adelfa Properties, Inc." Hence, there was nothing left to be done except the performance of the respective obligations of the parties. - There already existed a perfected contract between the parties at the time the alleged counter-offer was made. Thus, any new offer by a party becomes binding only when it is accepted by the other. In the case of private respondents, they actually refused to concur in said offer of petitioner, by reason of which the original terms of the contract continued to be enforceable. At any rate, the same cannot be considered a counteroffer for the simple reason that petitioner's sole purpose was to settle the civil case in order that it could already comply with its obligation. In fact it was even indicative of a desire by petitioner to immediately comply therewith, except that it was being prevented

Obligations and Contracts 138 from doing so because of the filing of the civil case which, it believed in good faith, rendered compliance improbable at that time. In addition, no inference can be drawn from that suggestion given by petitioner that it was totally abandoning the original contract. - More importantly, it will be noted that the failure of petitioner to pay the balance of the purchase price within the agreed period was attributed by private respondents to "lack of word of honor" on the part of the former. The reason of "lack of word of honor" is to us a clear indication that private respondents considered petitioner already bound by its obligation to pay the balance of the consideration. In effect, private respondents were demanding or exacting fulfillment of the obligation from herein petitioner. With the arrival of the period agreed upon by the parties, petitioner was supposed to comply with the obligation incumbent upon it to perform, not merely to exercise an option or a right to buy the property. -The test in determining whether a contract is a "contract of sale or purchase" or a mere "option" is whether or not the agreement could be specifically enforced. There is no doubt that the obligation of petitioner to pay the purchase price is specific, definite and certain, and consequently binding and enforceable. Had private respondents chosen to enforce the contract, they could have specifically compelled petitioner to pay the balance of P2,806,150. This is distinctly made manifest in the contract itself as an integral stipulation, compliance with which could legally and definitely be demanded from petitioner as a consequence. 2. YES. - At a glance, it is easily discernible that, although the complaint prayed for the annulment only of the contract of sale executed between petitioner and the Jimenez brothers, the same likewise prayed for the recovery of therein plaintiffs share in that parcel of land. In other words, the plaintiffs therein were claiming to be coowners of the entire parcel of land and not only of a portion thereof nor did their claim pertain exclusively to the eastern half adjudicated to the Jimenez brothers. Such being the case, petitioner was justified in suspending payment of the balance of the purchase price by reason of the aforesaid vindicatory action filed against it. The assurance made by private respondents that petitioner did not have to worry about the case because it was pure and simple harassment is not the kind of guaranty contemplated under the exceptive clause in Article 1590 wherein the vendor is bound to make payment even with the existence of a vindicatory action if the vendee should give a security for the return of the price. - Be that as it may, and the validity of the suspension of payment notwithstanding, the private respondents may no longer be compelled to sell and deliver the subject property to petitioner for two reasons, that is, petitioner's failure to duly effect the consignation of the purchase price after the disturbance had ceased; and, secondarily, the fact that the contract to sell had been validly rescinded by private respondents - As early as February 28, 1990 when petitioner caused its exclusive option to be annotated anew on the certificate of title, it already knew of the dismissal of the civil case. However, it was only on April 16, 1990 that petitioner, through its counsel, wrote private respondents expressing its willingness to pay the balance of the purchase price upon the execution of the corresponding deed of absolute sale. At most that was merely a notice to pay. There was no proper tender of payment nor consignation in this case as required by law. The mere sending of a letter by the vendee expressing the intention to pay, without the accompanying payment, is not considered a valid tender of payment. Besides, a mere tender of payment is not sufficient. to compel private respondents to deliver the property and execute the

A2010 page Prof. Labitag deed of absolute sale. It is consignation which is essential in order to extinguish petitioner's obligation to pay the balance of the purchase price. The rule is different in case of an option contract or in legal redemption or in a sale with right to repurchase; wherein consignation is not necessary because these cases involve an exercise of a right or privilege (to buy, redeem or repurchase) rather than the discharge of an obligation, hence tender of payment would be sufficient to preserve the right or privilege. This is because the provisions on consignation are not applicable when there is no obligation to pay. A contract to sell, as in the case before us, involves the performance of an obligation, not merely the exercise of a privilege or a right. Consequently, performance or payment may be effected not by tender of payment alone but by both tender and consignation. - Furthermore, petitioner no longer had the right to suspend payment after the disturbance ceased with the dismissal of the civil case filed against it. Necessarily, therefore, its obligation to pay the balance again arose and resumed after it received notice of such dismissal. Unfortunately, petitioner failed to seasonably make payment, as in fact it has failed to do so up to the present time, or even to deposit the money with the trial court when this case was originally filed therein. - By reason of petitioner's failure to comply with its obligation, private respondents, elected to resort to and did announce the rescission of the contract through its letter to petitioner dated July 27, 1990. That written notice of rescission is deemed sufficient under the circumstances. Article 1592 of the Civil Code which requires rescission either by judicial action or notarial act is not applicable to a contract to sell." Furthermore, judicial action for rescission of a contract is not necessary where the contract provides for automatic rescission in case of breach, as in the contract involved in the present controversy. - In the case at bar, it has been shown that although petitioner was duly furnished and did receive a written notice of rescission which specified the grounds therefor, it failed to reply thereto or protest against it. Its silence thereon suggests an admission of the veracity and validity of private respondents' claim. Furthermore, the initiative of instituting suit was transferred from the rescinder to the defaulter by virtue of the automatic rescission clause in the contract. But then, the records bear out the fact that aside from the lackadaisical manner with which petitioner treated private respondents' letter of cancellation, it utterly failed to seriously seek redress from the court for the enforcement of its alleged rights under the contract. If private respondents had not taken the initiative of filing a civil case, evidently petitioner had no intention to take any legal action to compel specific performance from the former. By such cavalier disregard, it has been effectively estopped from seeking the affirmative relief it now desires but which it had theretofore disdained.

ASIAIN V JALANDONI MALCOLM; October 23, 1923 FACTS - Luis Asiain, the plaintiff-appellant in this case, is the owner of the hacienda known as "Maria" situated in the municipality of La Carlota, Province of Occidental Negros, containing about 106 hectares. Benjamin Jalandoni, the defendant-appellee, is the owner of another hacienda adjoining that of Asiain. Asiain and Jalandoni happening to meet on one of the days of May, 1920, Asiain said to Jalandoni that he was willing to sell a portion of his hacienda for the sum of P55,000. With a wave of his hand, Asiain indicated the tract of land in question, affirming that it contained between 25

Obligations and Contracts 139 and 30 hectares, and that the crop of sugar cane then planted would produce not less than 2,000 piculs of sugar. But as Jalandoni remained doubtful as to the extent of the land and as to the amount of the crop on it, Asiain wrote Jalandoni a letter assuring the latter of the accuracy of his assessment of the area and the amount of sugar it could produce and that in case it turned out to be inaccurate, he would be willing to compensate for it. - Sometime later, in July of the same year, Asiain and Jalandoni having met at Iloilo, they prepared and signed the memorandum-agreement where Asiain spouses promised to sell to Jalandoni parcels of land containing “25 hectares more or less” and producing an estimated crop of 2000 piculs. During all of the period of negotiations, Jalandoni remained a doubting Thomas and was continually suggesting that, in his opinion, the amount of the land and of the crop was overestimated. Asiain on his part always gave assurances in conformity with the letter which he had written intended to convince Jalandoni that the latter was in error in his opinion. As a result, the parties executed the another agreement reaffirming their previous agreement and that in case the vendor should withdraw from the contract and desist from signing the document of final sale, the purchaser shall have the right to collect from said vendor all such amount as may have been advanced on account of this sale, with an indemnity of P15,000 as penalty. In case it is the purchaser who should withdraw from the contract of sale, then he will lose all such amount as may have been paid in advance on account of, this transaction. - Once in possession of the land, Jalandoni did two things. He had the sugar cane ground in La Carlota Sugar Central with the result that it gave an output of 800 piculs and 28 cates of centrifugal sugar. When opportunity offered, he secured the certificate of title of Asiain and procured a surveyor to survey the land. According to this survey, the parcel in question contained an area of 18 hectares, 54 ares, and 22 centiares. - Of the purchase price of P55,000, Jalandoni had paid P30,000, leaving a balance unpaid of P25,000. To recover the sum of P25,000 from Jalandoni or to obtain the certificate of title and the rent from him, action was begun by Asiain in the Court of First Instance of Occidental Negros. To the complaint, an answer and a countercomplaint were interposed by the defendant, by which it was asked that he be absolved from the complaint, that the contract be annulled, both parties to return whatever they had received, and that he recover from the plaintiff the sum of P3,600 annually as damages. In a well-reasoned decision, the Honorable Eduardo Gutierrez David, Judge of First Instance, declared null the document of purchase and its related memorandum; absolved Jalandoni from the payment of P25,000; ordered the Asiain to return to the defendant the sum of P30,000 with legal interest from July 12, 1920; ordered the Jalandoni to turn over to the plaintiff the tract of land and the certificate of title No. 468, and absolved the Asiain from the countercomplaint, without special finding as to the costs. It is from said judgment that the plaintiff has appealed. - The plaintiff contends that in the case of Irureta Goyena vs. Tambunting ([1902], 1 Phil., 490), the rule announced in the syllabus is: "An agreement to purchase a certain specified lot of land at a certain specified price is obligatory and enforceable regardless of the fact that its area is less than that mentioned in the contract." ISSUE 1. WON the lower court erred in nullifying the document of purchase and its related memorandum on the ground of mutual mistake under the Civil Code and thereafter restoring the parties to their original position.

A2010 page Prof. Labitag 2. WON the stipulation “more or less” saves the contract from being declared null and void. HELD 1. NO Ratio Mutual mistake of the contracting parties to a sale in regard to the subjectmatter of the sale which is so material as to go to the essence of the contract, is a ground for relief and rescission. Reasoning A comparative study of the American authorities throws considerable light on the situation. In volume 39 Cyc., page 1250, under the subject "Vendor and Purchaser," is found the following: "If, in a contract of sale the quantity of the realty to be conveyed is indicated by a unit of area, as by the acre, a marked excess or deficiency in the quantity stipulated for is a ground for avoiding the contract. Since it is very difficult, if not impossible, to ascertain the quantity of a tract with perfect accuracy, a slight excess or deficiency does not affect the validity of the contract. "Where, however, the contract is not for the sale of a specific quantity of land, but for the sale of a particular tract, or designated lot or parcel, by name or description, fix a sum in gross, and the transaction is bona fide, a mutual mistake as to quantity, but not as to boundaries, will not generally entitle the purchaser to compensation, and is not ground for rescission. But it is well settled that a purchaser of land, when it is sold in gross, or with the description, 'more-or less,' or 'about,' does not thereby ipso-facto take all risk of quantity in the tract. If the difference between the real and the represented quantity is very great, both parties act obviously under a mistake which it is the duty of a court of equity to correct.' And relief will be granted when the mistake is so material that if the truth had been known to the parties the sale would not have been made." - A mutual mistake as to the quantity of the land sold may afford ground for equitable relief. As has been said, if, through gross and palpable mistake, more or less land should be conveyed than was in the contemplation of the seller to part with or the purchaser to receive, the injured party would be entitled to relief in like manner as he would be for an injury produced by a similar cause in a contract of any other species. And when it is evident that there has been a gross mistake as to quantity, and the complaining party has not been guilty of any fraud or culpable negligence, nor has he otherwise impaired the equity resulting from the mistake, he may be entitled to relief from the technical or legal effect of his contract, whether it be executed or only executory. It has also been held that where there is a very great difference between the actual and the estimated quantity of acres of land sold in gross, relief may be granted on the ground of gross mistake. - EXCEPTION TO MUTUAL MISTAKE. Relief, however, will not be granted as a general rule where it appears that the parties intended a contract of hazard, as where the sale is a sale in gross and not by acreage or quantity as a basis for the price; and it has been held that a mistake on the part of the vendor of a town lot sold by description as to number on the plat, as to its area or dimensions, inducing a sale thereof at a smaller price than he would, have asked had he been cognizant of its size, not in any way occasioned or concealed by conduct of the purchaser, constitutes no ground for the rescission of the contract. The apparent conflict and discrepancies in the adjudicated eases involving mistakes as to quantity arise not from a denial of or a failure to recognize the general principle, but from the difficulty of its practical application in particular eases in determining the questions

Obligations and Contracts 140 whether the contract was one of hazard as to quantity or not and whether the variance is unreasonable. The relative extent of the surplus or deficit -cannot furnish, per se, an infallible criterion in each caw for its determination, but each case must be considered with reference not only to that but its other peculiar circumstances. The conduct of the parties, the value, extent, and locality of the land, the date of the contract, the price, and other nameless circumstances, are always important, and generally decisive. In other words, each case must depend on its own peculiar circumstances and surroundings. - "The rule denying relief in ease of a deficit or an excess is frequently applied in equity as well as at law, but a court of equity will not interfere on account of either a surplus or a deficiency where it is clear that the parties intend a contract of hazard, and it is said that although this general rule may not carry into effect the real intention of the parties. It is calculated to prevent litigation. From an early date courts of equity under their general jurisdiction to grant relief on the ground of mistake have in case of a mistake in the estimation of the acreage in the tract sold and conveyed interposed their aid to grant relief to the vendor where there was a large surplus over the estimated acreage, and to the purchaser where there was, a large deficit. For the purpose of determining whether relief shall be granted the courts have divided the cases into two general classes: (1) Where the sale is of a specific quantity which is usually denominated a sale by the acre; (2) where the sale is of a specific tract by name or description, which is usually called a sale in gross. * * * " "Sales in gross for the purpose of equitable relief may be divided into various subordinate classifications; (1) sales strictly and essentially by the tract, without reference in the negotiation or in the consideration to any designated or estimated quantity of acres; (2) sales of the like in which, though a supposed quantity by estimation is mentioned or referred to in the contract, the reference was made only for the purpose of description, and under such circumstances or in such a manner as to show that the parties intended to risk the contingency of quantity, whatever it might be, or how much it might exceed or fall short of that which was mentioned in the contract; (3) sales in which it is evident, from extraneous circumstances of locality, value, price, time, and the conduct and conversations of the parties, that they did not contemplate or intend to risk more than the usual rates of excess or deficit in similar cases, or than such as might reasonably be calculated on as within the range of ordinary contingency; (4) sales which, though technically deemed and denominated sales in gross, are in fact sales by the acre, and so understood by the parties. Contracts belonging to either of the two first mentioned classes, whether executed or executory, should not be modified by the chancellor when there has been no fraud. But in sales of either the third or fourth kind, an unreasonable surplus or deficit may entitle the injured party to equitable relief, unless he has, by his conduct, waived or forfeited his equity. * * * " - Coordinating more closely the law and the facts in the instant case, we reach the following conclusions: This was not a contract of hazard. It was a sale in gross in which there was a mutual mistake as to the quantity of land sold and as to the amount of the standing crop. The mistake of fact as disclosed not alone by the terms of the contract but by the attendant circumstances, which it is proper to consider in order to throw light upon the intention of the parties, is, as it is sometimes expressed, the efficient cause of the concoction. The mistake with

A2010 page Prof. Labitag reference to the subject-matter of the contract is such that, at the option of the purchaser, it is rescindable. Without such mistake the agreement would not have been made and since this is true, the agreement is inoperative and void. It is not exactly a case of over reaching on the plaintiff's part, or of misrepresentation and deception, or of fraud, but is more nearly akin to a bilateral mistake for which relief should be granted. Specific performance of the contract can therefore not be allowed at the instance of the vendor. 2. NO. Ratio The use of "more or less" or similar, words in designating quantity covers only a reasonable excess or deficiency and that when a vendee of land enters into a contract of sale with the vendor with the description "more or less," he does not thereby ipso facto take all risk of quantity in the land. Reasoning The memorandum-agreement between Asiain and Jalandoni contains the phrase "more or less." It is the general view that this phrase or others of like import, added to a statement of quantity, can only be considered as covering inconsiderable or small differences one way or the other, and do not in themselves determine the character of the sale as one in gross or by the acre. The use of this phrase in designating quantity covers only a reasonable excess or deficiency. Such words may indeed relieve from exactness but not from gross deficiency. - The apparent conflict and discrepancies in the adjudicated cases arise not from a denial of or a failure Ito recognize the general principles. These principles, as commonly agreed to, may be summarized as follows: A vendee of land when it is sold in gross or with the description "more or less" does not thereby ipso facto take all risk of quantity in the land. The use of "more or less" or similar, words in designating quantity covers only a reasonable excess or deficiency. Disposition The ultimate result is to put the parties back in exactly their respective positions before they became involved in the negotiations and before accomplishment of the agreement. This was the decision of the trial judge and we think that decision conforms to the facts, the law, and the principles of equity. Judgment is affirmed, without prejudice to the right of the plaintiff to establish in this action in the lower court the amount of the rent of the land pursuant to the terms of the complaint during the time the land was in the possession of the defendant, and to obtain judgment against the defendant for that amount, with costs against the appellant. So ordered.

THEIS V COURT OF APPEALS HERMOSISIMA; February 12, 1997 FACTS - Respondent Calsons Development Corporation is the owner of three (3) adjacent parcels of land covered by Transfer Certificate of Title (TCT) Nos. 15515 (parcel no. I), 15516 (parcel no. 2) and 15684 (parcel no. 3. All three parcels of land are situated in Tagaytay City. Adjacent to parcel no. 3, which is the lot covered by TCT No. 15684 is a vacant lot denominated as parcel no. 4. - In 1985, private respondent constructed a two-storey house on parcel no. 3. The lots covered by TCT No. 15515 and TCT no. 15516, which are parcel no. 1 and parcel no. 2, remained idle. - In a survey conducted in 1985, parcel no. 3, where the two-storey house stands, was erroneously indicated to be covered not by TCT No. 15684 but by TCT No.

Obligations and Contracts 141 15515. while the two idle lands (parcel nos. 1 and 2) were mistakenly surveyed to be located on parcel no. 4 instead (which was not owned by private respondent) and covered by TCT Nos. 15516 and 15684. - On October 26, 19 87, unaware of the mistake, private respondent, sold parcel no. 4 to petitioners. - When the petitioners went to Tagaytay to look over the vacant lots and to plan the construction of their house thereon, they discovered that parcel no. 4 was owned by another person. They also discovered that the lots actually sold to them were parcel nos. 2 and 3 covered by TCT Nos. 15516 and 15684, respectively. - Petitioners insisted that they wanted parcel no. 4, which is the idle lot adjacent to parcel no. 3, and persisted in claiming that it was parcel no. 4 that private respondent sold to them. However, private respondent could not have possibly sold the same to them for it did not own parcel no. 4 in the first place. - To remedy the mistake, private respondent offered parcel nos. 1 and 2 covered by TCT Nos. 15515 and 15516, respectively, as these two were precisely the two vacant lots which private respondent owned and intended to sell when it entered into the transaction with petitioners. - Petitioners adamantly rejected the good faith offer. They refused to yield to reason and insisted on taking parcel no. 3, covered by TCT No. 155864 and upon which a two-storey house stands, in addition to parcel no. 2, covered by TCT No. 15516. - Such refusal of petitioners prompted private respondent to make another offer, the return of an amount double the price paid by petitioners. Petitioners still refused. - Private respondent was then compelled to file an action for annulment of deed of sale and reconveyance of the properties. - The trial court rendered judgment in favor of private respondent. - Aggrieved by the decision of the trial court, petitioners sought its reversal from respondent Court of Appeals. Respondent court, however, did not find the appeal meritorious and accordingly affirmed the trial court decision. ISSUE WON the Deed of Sale may be annulled on the ground of consent given through mistake. HELD YES. - Clearly, there was honest mistake on the part of plaintiff-appellee in the sale of Parcel No. 4 to defendants-appellants which plaintiff-appellee tried to remedy by offering defendants-appellants instead his Parcels Nos. 1 or 2, or reimbursement of the purchase price in double amount. - Respondent court correctly affirmed the findings and conclusions of the trial court in annulling the deed of sale as the former are supported by evidence and the latter are in accordance with existing law and jurisprudence. - Art. 1390 of the New Civil Code provides: “The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence, or fraud.” - Private respondent obviously committed an honest mistake in selling parcel no. 4. As correctly noted by the Court of Appeals, it is quite impossible for said private respondent to sell the lot in question as the same is not owned by it. The good faith of the private respondent is evident in the fact that when the mistake was

A2010 page Prof. Labitag discovered, it immediately offered two other vacant lots to the petitioners or to reimburse them with twice the amount paid. - As enunciated in the case of Mariano vs. Court of Appeals: "A contract may be annulled where the consent of one of the contracting parties was procured by mistake, fraud, intimidation, violence, or undue influence." "Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract." - Tolentino explains that the concept of error in this article must include both ignorance, which is the absence of knowledge with respect to a thing, and mistake properly speaking, which is a wrong conception about said thing, or a belief in the existence of some circumstance, fact, or event, which in reality does not exist. In both cases, there is a lack of full and correct knowledge about the thing. The mistake committed by the private respondent in selling parcel no. 4 to the petitioners falls within the second type. Verily, such mistake invalidated its consent and as such, annulment of the deed of sale is proper. Disposition Petition was DISMISSED and the decision of the Court of Appeals AFFIRMED. Costs against the petitioner.

HEIRS OF WILLIAM SEVILLA V SEVILLA YNARES-SANTIAGO; April 30, 2003 NATURE Petition for certiorari to review CA decision affirming in toto RTC (Dipolog City) decision declaring, inter alia, the questioned Deed of Donation Inter Vivos valid and binding on the parties. FACTS -10 December 1973: Filomena Almirol de Sevilla died intestate leaving 8 children: William(†), Peter, Leopoldo, Felipe, Rosa, Maria(†), Luzvilla, and Jimmy(†). The estate includes (a) three parcels of land (forming part of conjugal properties with late husband) and (b) another parcel co-owned with her sisters Honorata and Felisa (both single and without issue) where commercial and residential buildings have been erected. When Honorata died intestate, her 1/3 undivided share in the said parcel was transmitted to Felisa and the heirs of Filomena (½ share each). - During the lifetime of Felisa and Honorata, they lived in the house of Filomena, together with their nephew Leopoldo Sevilla and his family, who attended to the needs of the three women. - Before Felisa’s death, she executed a last will and testament (25Nov1985) devising her ½ share in subject lot to the spouses Leopoldo Sevilla and Belen Leyson. Later, Felisa executed another document “Donation Inter Vivos” (8Aug1986) ceding to Leopoldo her ½ undivided share in subject lot. Leopoldo accepted such in the same document. - Sept 3, 1986: Felisa Almirol and Peter Sevilla, in his own behalf and in behalf of her siblings (heirs of Filomena), executed a Deed of Extra-judicial Partition of the 1/3 share of Honorata Almirol to the heirs of Filomena and to Felisa. Thereafter, Leopoldo, Peter and Luzvilla Sevilla obtained the cancellation of the old title of the subject lot and the issuance of new titles to Felisa and the heirs of Filomena. The requested titles were left unsigned by the Register of Deeds of Dipolog City,

Obligations and Contracts 142 pending submission by Peter Sevilla of a Special Power of Attorney authorizing him to represent his siblings (the other heirs of Filomena). - 21 June 1990: Felipe, Rosa, & the heirs of William, Jimmy & Maria filed the instant case against Leopoldo, Peter and Luzvilla for annulment of the Deed of Donation and the Deed of Extrajudicial Partition, Accounting, Damages, with prayer for Receivership and for Partition of the properties of the late Filomena Almirol de Sevilla. Petitioners’ Claim (1) that the Deed of Donation is tainted with fraud because Felisa (81 y/o) was seriously ill and of unsound mind at the time of the execution thereof; and (2) that the Deed of Extra-judicial Partition is void because it was executed without their knowledge and consent. Respondents' Comments There was no fraud or undue pressure in the execution of the questioned documents. (1) that Felisa was of sound mind at the time of the execution of the assailed deeds; that she freely and voluntarily ceded her undivided share in the questioned lot in consideration of Leopoldo’s and his family’s love, affection, and services rendered in the past. (2) they were willing to have the other properties of Filomena partitioned among her heirs in accordance with the law on intestate succession. Dipolog City RTC Ruling - upheld the validity of the Deed of Donation and declared the Deed of Extra-judicial Partition unenforceable (for lack of the req’d SPA). The conjugal property (3lots) was equally divided among the 8 heirs. The lot owned by Filomena, Felisa, and Honorata was divided equally into two, between Leopoldo on one hand, and the 7 heirs on the other (Rosa’s name was omitted; I suppose it was by mistake). CA affirmed. MFR denied. ISSUES 1. WON the Donation Inter Vivos executed by Felisa Almirol in favor of Leopoldo Sevilla is valid 1a. WON its execution was attended by fraud 2. WON the Deed of Extrajudicial Partition is valid HELD 1. YES Ratio Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. Like any other contract, an agreement of the parties is essential, and the attendance of a vice of consent renders the donation voidable. Reasoning At the time Felisa executed the deed of donation, (having inherited half of Honorata’s share) she was already the owner of 1/2 undivided portion of the lot in question. This ½ share is considered a present property which she can validly dispose of at the time of the execution of the deed of donation. 1a. NO Ratio There is FRAUD when, through the 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. 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. Certain circumstances are considered: the

A2010 page Prof. Labitag confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. -Fraud and undue influence that vitiated a party’s consent must be established by full, clear and convincing evidence, otherwise, the latter’s presumed consent to the contract prevails. Reasoning -Factual findings of the trial court, if affirmed by the Court of Appeals, are entitled to great respect. The lower courts correctly found out that neither fraud nor undue influence can be inferred from the circumstances alleged by the petitioners. -Ei incumbit probatio qui dicit, non qui negat. He who asserts, not he who denies, must prove. The self-serving testimony of the petitioners are vague on what acts of Leopoldo Sevilla constituted fraud and undue influence and on how these acts vitiated the consent of Felisa Almirol. -Petitioners failed to show proof why Felisa should be held incapable of exercising sufficient judgment in ceding her share to respondent Leopoldo. The notary public who notarized the Deed of Donation testified that Felisa confirmed to him her intention to donate her share in the questioned lot to Leopoldo. He stressed that though the donor was old, she was of sound mind and could talk sensibly. There is nothing in the record that discloses even an attempt by petitioners to rebut said declaration of the notary public. 2. NO - The Deed of Extra-judicial Partition is void ab initio and not merely unenforceable. Ratio Legal consent presupposes capacity. There is said to be no consent, and consequently, no contract when the agreement is entered into by one in behalf of another who has never given him authorization therefor unless he has by law a right to represent the latter (Delos Reyes v. Court of Appeals). -A donation inter vivos is immediately operative and final. As a mode of acquiring ownership, it results in an effective transfer of title over the property from the donor to the donee and the donation is perfected from the moment the donor knows of the acceptance by the donee. And once a donation is accepted, the donee becomes the absolute owner of the property donated. Reasoning At the time Felisa executed the deed of extra-judicial partition dividing the share of her deceased sister Honarata between her and the heirs of Filomena, she was no longer the owner of the ½ undivided portion of the questioned lot, having previously donated the same to Leopoldo who accepted the donation in the same deed. -Felisa did not possess the capacity to give consent to or execute the deed of partition inasmuch as she was neither the owner nor the authorized representative of Leopoldo to whom she previously transmitted ownership of her share. Disposition ½ shall go to Leopoldo by virtue of the deed of donation, while the other half shall be divided equally among the heirs of Filomena Almirol de Sevilla including Leopoldo Sevilla, following the rules on intestate succession. - CA decision affirmed with modifications. The Deed of Extra-judicial Partition is declared void, and the name of Rosa Sevilla is ordered included in the disposition portion of the trial court’s judgment.

DUMASUG V MODELO TORRES; March 16, 1916

Obligations and Contracts 143 NATURE Appeal from judgment of CFI Cebu FACTS - Andrea Dumasug cannot write (no mention if she can read). Modelo persuaded Dumasug to affix her mark (since she didn’t know how to write) on a document, falsely and maliciously making her believe that it contained an engagement on the part of Dumasug to pay Modelo a certain sum of money to pay for the expenses of an earlier lawsuit wherein Modelo gave “advice” to Dumasug . However, 3 months after the execution of the document, Modelo took possession of Dumasug’s carabao and two parcels of land, and notified Dumasug that she had conveyed to him through a deed of absolute sale the said properties. Apparently, the document provided that Dumasug, in exchange of P333.49 received from Modelo, agreed to convey to Modelo the properties. - Dumasug then filed in the CFI a petition to declare null and void and of no effect the document/ contract allegedly entered into by her and Modelo. CFI ruled in her favor, ordering Modelo to restore the animal and the lands, pay any loss and damages to Dumasug, and pay the costs of the suit. Modelo appealed. - Respondent (Modelo): the lands and animal were payment from Dumasug for debts incurred by her on several occasions, in the amounts of P101.87 and P46.77 (money used as attorney’s fees and traveling expenses in the earlier suit) ISSUE WON the instrument of purchase of two parcels of land and the work animal is null and void HELD YES, the instrument is null and void for lack of consent Ratio The consent given in this case was a consent given by mistake, thus the document is null and void, as provided in Article 1265 and 1266 of the Civil Code. Reasoning The error (in consent) invalidates the contract, as it goes into the very substance of the thing which is the subject matter of the contract. Had she understood the contents of the said document, she would neither have accepted nor authenticated it by her mark. It is undeniable that she was deceived in order to obtain her consent. The document is of no value whatever for the reason that it is not the one which, of her own free will, she authenticated with her mark. The consent given by plaintiff being null and void, the document is consequently also null, void, and of no value or effect. Article 1303 of the Civil Code is therefore, applicable, which prescribes that: "when the nullity of an obligation has been declared, the contracting parties shall restore to each other the things which have been the object of the contract with their fruits, and the value with its interest." Disposition Judgment Affirmed .

HEMEDES V COURT OF APPEALS GONZAGA-REYES; October 8, 1999 NATURE Petitions for review on certiorari of a decision and resolution of the Court of Appeals. FACTS

A2010 page Prof. Labitag - The controversy involves a question of ownership over an unregistered parcel of land, identified as Lot 6, plan PSU-111331, with an area of 21,773 sq. m., situated in Sala, Cabuyao, Laguna, originally owned by the late Jose Hemedes, father of Maxima Hemedes and Enrique D. Hemedes. - On March 22, 1947 Jose Hemedes executed a document entitled “Donation Inter Vivos with Resolutory Conditions,” where he conveyed ownership over the subject land, in favor of his 3rd wife, Justa Kausapin, subject to the following: Upon death or marriage of the DONEE, property shall revert to any of the children or their heirs of the DONOR expressly designated by the DONEE; “xxx” - Pursuant to the first condition, Kausapin executed on September 27, 1960 a “Deed of Conveyance of Unregistered Real Property by Reversion” conveying to Maxima Hemedes the subject property. - Original Certificate of Title was issued in the name of Maxima Hemedes, with the annotation that Justa Kausapin shall have the usufructuary rights over the parcel of land described during her lifetime or widowhood. - R & B Insurance claims that Maxima Hemedes and her husband constituted a real estate mortgage over the subject property in its favor to serve as security for a loan which they obtained in the amount of P6k.On February 22, 1968, R&B Insurance extrajudicially foreclosed the mortgage since Maxima Hemedes failed to pay the loan even after it became due in August 2, 1964. The land was sold at a public auction with R&B Insurance as the highest bidder, and a certificate of sale was issued in its favor. Since Maxima failed to redeem the property within the redemption period, R&B executed an Affidavit of Consolidation and acquired TCT in its name. - Despite earlier conveyance, Kausapin executed a “Kasunduan” on May 27, 1971 whereby she transferred the same land to her stepson Enrique D. Hemedes, pursuant to the resolutory condition in the deed of donation executed in her favor. - On February 28, 1979 Enrique sold the property to Dominium Realty and Construction Corporation. On April 10, 1981 Kausapin executed an affidavit affirming the conveyance of the property in favor of Enrique, at the same time denying the conveyance made to Maxima. - Dominium leased the property to Asia Brewery, who even before the signing of the contract of lease, constructed two warehouses. Upon learning of said constructions, R&B sent Asia Brewery a letter informing of its ownership, and the right to appropriate the constructions since Asia Brewery is a builder in bad faith. Maxima also wrote a letter wherein she asserted that she is the rightful owner of the subject property. Petitioner’s Claim - Maxima Hemedes argues that Justa Kausapin's affidavit should not be given any credence since she is obviously a biased witness as it has been shown that she is dependent upon Enrique D. Hemedes for her daily subsistence, and she was most probably influenced by Enrique D. Hemedes to execute the "Kasunduan" in his favor. Respondents’ Comments - The deed of conveyance in favor of Maxima Hemedes was in English and that it was not explained to Justa Kausapin. Thus, Maxima Hemedes failed to discharge her burden, pursuant to Article 1332 of the Civil Code, to show that the terms thereof were fully explained to Justa Kausapin. ISSUES

Obligations and Contracts 144 1. Which of the two conveyances by Justa Kausapin, the first in favor of Maxima Hemedes, and the second in favor of Enrique Hemedes, effectively transferred ownership over the property? 2. WON R&B Insurance should be considered an innocent purchaser of the land in question. HELD 1. Ratio A party to a contract cannot just evade compliance with his contractual obligations by the simple expedient of denying the execution of such contract. Reasoning If, after a perfect and binding contract has been executed between the parties, it occurs to one of them to allege some defect therein as a reason for annulling it, the alleged defect must be conclusively proven, since the validity and fulfillment of contracts cannot be left to the will of one of the contracting parties. - Moreover, public respondent's reliance upon Justa Kausapin's repudiation of the deed of conveyance is misplaced for there are strong indications that she is a biased witness. The trial court found that Justa Kausapin was dependent upon Enrique D. Hemedes for financial assistance. Justa Kausapin was already 80 years old, suffering from worsening physical infirmities and completely dependent upon her stepson Enrique D. Hemedes for support. It is apparent that Enrique could easily have influenced his aging stepmother to donate the subject property to him. Although it is a well-established rule that the matter of credibility lies within the province of the trial court, such rule does not apply when the witness' credibility has been put in serious doubt, such as when there appears on the record some fact or circumstance of weight and influence, which has been overlooked or the significance of which has been misinterpreted. - Public respondent was in error when it sustained the trial court's decision to nullify the "Deed of Conveyance of Unregistered Real Property by Reversion" for failure of Maxima Hemedes to comply with article 1332 of the Civil Code, which states: When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. Article 1330 A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. - In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. Fraud, on the other hand, is present 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. 2. Ratio The annotation of usufructuary rights in favor of Justa Kausapin upon Maxima Hemedes' OCT does not impose upon R & B Insurance the obligation to investigate the validity of its mortgagor's title. Reasoning Usufruct gives a right to enjoy the property of another with the obligation of preserving its form and substance. The usufructuary is entitled to all the natural, industrial and civil fruits of the property and may personally enjoy the thing in usufruct, lease it to another, or alienate his right of usufruct, even by a gratuitous title, but all the contracts he may enter into as such usufructuary shall terminate upon the expiration of the usufruct.

A2010 page Prof. Labitag - it is a well-established principle that every person dealing with registered land may safely rely on the correctness of the certificate of title issued and the law will in no way oblige him to go behind the certificate to determine the condition of the property. An innocent purchaser for value is one who buys the property of another without notice that some other person has a right to or interest in such property and pays a full and fair price for the same at the time of such purchase or before he has notice of the claim of another person. - Clearly, only the jus utendi and jus fruendi over the property is transferred to the usufructuary. The owner of the property maintains the jus disponendi or the power to alienate, encumber, transform, and even destroy the same. This right is embodied in the Civil Code, which provides that the owner of property the usufruct of which is held by another, may alienate it, although he cannot alter the property's form or substance, or do anything which may be prejudicial to the usufructuary. - Even assuming in gratia argumenti that R & B Insurance was obligated to look beyond the certificate of title and investigate the title of its mortgagor, still, it would not have discovered any better rights in favor of private respondents. Enrique D. Hemedes and Dominium base their claims to the property upon the "Kasunduan" allegedly executed by Justa Kausapin in favor of Enrique Hemedes. As we have already stated earlier, such contract is a nullity as its subject matter was inexistent. - is a well-settled principle that where innocent third persons rely upon the correctness of a certificate of title and acquire rights over the property, the court cannot just disregard such rights. Otherwise, public confidence in the certificate of title, and ultimately, the Torrens system, would be impaired for everyone dealing with registered property would still have to inquire at every instance whether the title has been regularly or irregularly issued. Disposition The donation in favor of Enrique D. Hemedes is null and void for the purported object thereof did not exist at the time of the transfer, having already been transferred to Maxima Hemedes.

SEPARATE OPINION VITUG [ concur] - A donation would not be legally feasible if the donor has neither ownership nor real right that he can transmit to the donee. Unlike an ordinary contract, a donation, under Article 712, in relation to Article 725 of the Civil Code is also a mode of acquiring and transmitting ownership and other real rights by an act of liberality whereby a person disposes gratuitously that ownership or real right in favor of another who accepts it. It would be an ineffecacious process if the donor would have nothing to convey at the time it is made. - Article 744 of the Civil Code states that the "donation of the same thing to two or more different donees shall be governed by the provisions concerning the sale of the same thing to two or more persons," i.e., by Article 1544 of the same Code, as if so saying that there can be a case of "double donations" to different donees with opposing interest. A donation once perfected would deny the valid execution of a subsequent inconsistent donation (unles perhaps if the prior donation has provided a suspensive condition which still pends when the later donation is made).

MELO [concur]

- The Opinion will have far-searching ramifications on settled doctrines concerning the finality and conclusiveness of the factual findings of the trial court in view of its

Obligations and Contracts 145 unique advantage of being able to observe at first-hand the demeanor and deportment of witnesses, and especially when such findings of facts are affirmed by the Court of Appeals, which is the final arbiter of questions of fact. - “All these conditions are present in the case at bar, and I have grave reservation about the propriety of setting aside time-tested principles in favor of a finding that hinges principally on the credibility of a single witness, whom we are asked to disbelieve on the basis merely of her recorded testimony without the benefit of the advantage that the trial court had, disregarding in the process another longestablished rule - that mere relationship of a witness to a party does not discredit his testimony in court.” - MAXIMA failed to comply with the requirements laid down by Article 1332 of the Civil Code. MAXIMA admitted the entire document was written in English, a language not known to Justa Kausapin. Yet, MAXIMA failed to introduce sufficient evidence that would purportedly show that the deed of conveyance was explained to Justa Kausapin before the latter allegedly affixed her thumbmark. - MAXIMA failed to repudiate the allegation of Justa Kausapin disclaiming knowledge of her having executed such a deed. Justa Kausapin claimed that it was only during the hearing conducted on 07 December 1981 that she first caught glimpse of the deed of conveyance She therefore could not have possibly affixed her thumbmark on said document. Affiant disowned the alleged 'Deed of Conveyance of Unregistered Real Property by Reversion" invoked by defendant Maxima Hemedes, and expressly stated that she never granted any right over the property to Maxima Hemedes, whether as owner or mortgagor, that she never allowed her to use the land as security or collateral for loan. - It must be remembered that Justa Kausapin had a legal right to such financial assistance, not only from respondent Enrique Hemedes, but also from Maxima Hemedes, who are both her stepchildren. If one must impute improper motives in favor of Enrique, one could just as easily ascribe these to Maxima. - There are other indications which led this Court to believe that neither defendant Maxima Hemedes nor defendant R & B INSURANCE consider themselves the owner of the property in question. Both of these claimants never declared themselves as owners of the property for tax purposes; much less did they pay a single centavo in real estate taxes.

KATIPUNAN V KATIPUNAN SANDOVAL-GUTIERREZ; January 30, 2002 NATURE Petition for review on certiorari assailing the Decision of the Court of Appeals which set aside the Decision of the Regional Trial Court (RTC) of Manila, Branch 28, in Civil Case No. 87-39891 for annulment of a Deed of Absolute Sale. FACTS - Respondent Braulio Katipunan, Jr. is the owner of a 203 square meter lot and a five-door apartment constructed thereon located at 385-F Matienza St., San Miguel, Manila. The lot is registered in his name under TCT No. 109193 of the Registry of Deeds of Manila. The apartment units are occupied by lessees. - On December 29, 1985, respondent, assisted by his brother, petitioner Miguel Katipunan, entered into a Deed of Absolute Sale with brothers Edgardo Balguma and Leopoldo Balguma, Jr. (co-petitioners), represented by their father Atty.

A2010 page Prof. Labitag Leopoldo Balguma, Sr., involving the subject property for a consideration of P187,000.00. Consequently, respondent’s title to the property was cancelled and in lieu thereof, TCT No. 168394 was registered and issued in the names of the Balguma brothers. In January, 1986, Atty. Balguma, then still alive, started collecting rentals from the lessees of the apartments. - On March 10, 1987, respondent filed with the RTC of Manila, Branch 21, a complaint for annulment of the Deed of Absolute Sale, docketed as Civil Case No. 87-39891.He averred that his brother Miguel, Atty. Balguma and Inocencio Valdez (defendants therein, now petitioners) convinced him to work abroad. They even brought him to the NBI and other government offices for the purpose of securing clearances and other documents which later turned out to be falsified. Through insidious words and machinations, they made him sign a document purportedly a contract of employment, which document turned out to be a Deed of Absolute Sale. By virtue of the said sale, brothers Edgardo and Leopoldo, Jr. (co-defendants), were able to register the title to the property in their names. Respondent further alleged that he did not receive the consideration stated in the contract. He was shocked when his sister Agueda Katipunan-Savellano told him that the Balguma brothers sent a letter to the lessees of the apartment informing them that they are the new owners. Finally, he claimed that the defendants, now petitioners, with evident bad faith, conspired with one another in taking advantage of his ignorance, he being only a third grader. - In their answer, petitioners denied the allegations in the complaint, alleging that respondent was aware of the contents of the Deed of Absolute Sale and that he received the consideration involved; that he also knew that the Balguma brothers have been collecting the rentals since December, 1985 but that he has not objected or confronted them; and that he filed the complaint because his sister, Agueda Savellano, urged him to do so. - Twice respondent moved to dismiss his complaint (which were granted) on the grounds that he was actually instigated by his sister to file the same; and that the parties have reached an amicable settlement after Atty. Balguma, Sr. paid him P2,500.00 as full satisfaction of his claim. In granting his motions for reconsideration, the trial court was convinced that respondent did not sign the motions to dismiss voluntarily because of his poor comprehension, as shown by the medical report of Dr. Annette Revilla, a Resident Psychiatrist at the Philippine General Hospital. - The trial court noted that respondent was not assisted by counsel in signing the said motions, thus it is possible that he did not understand the consequences of his action. - The trial court set the case for pre-trial. The court likewise granted respondent’s motion to appoint Agueda Savellano as his guardian ad litem. - The trial court dismissed the complaint, holding that respondent failed to prove his causes of action since he admitted that: (1) he obtained loans from the Balgumas; (2) he signed the Deed of Absolute Sale; and (3) he acknowledged selling the property and that he stopped collecting the rentals. - Court of Appeals reversed ISSUE WON the consent of Braulio Katipunan, Jr., in the sale of his property was vitiated rendering the Deed of Absolute sale voidable

Obligations and Contracts 146 HELD YES - A contract of sale is born from the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. This meeting of the minds speaks of the intent of the parties in entering into the contract respecting the subject matter and the consideration thereof. Thus, the elements of a contract of sale are consent, object, and price in money or its equivalent. Under Article 1330 of the Civil Code, consent may be vitiated by any of the following: (a) mistake, (2) violence, (3) intimidation, (4) undue influence, and (5) fraud. The presence of any of these vices renders the contract voidable. Respondent signed the deed without the remotest idea of what it was.The circumstances surrounding the execution of the contract manifest a vitiated consent on the part of respondent. Undue influence was exerted upon him by his brother Miguel and Inocencio Valdez (petitioners) and Atty. Balguma. It was his brother Miguel who negotiated with Atty. Balguma. However, they did not explain to him the nature and contents of the document. Worse, they deprived him of a reasonable freedom of choice. It bears stressing that he reached only grade three. Thus, it was impossible for him to understand the contents of the contract written in English and embellished in legal jargon. His lack of education, coupled with his mental affliction, placed him not only at a hopelessly disadvantageous position visà-vis petitioners to enter into a contract, but virtually rendered him incapable of giving rational consent. To be sure, his ignorance and weakness made him most vulnerable to the deceitful cajoling and intimidation of petitioners. - A contract where one of the parties is incapable of giving consent or where consent is vitiated by mistake, fraud, or intimidation is not void ab initio but only voidable and is binding upon the parties unless annulled by proper Court action. The effect of annulment is to restore the parties to the status quo ante insofar as legally and equitably possible-- this much is dictated by Article 1398 of the Civil Code. As an exception however to the principle of mutual restitution, Article 1399 provides that when the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution, except when he has been benefited by the things or price received by him. Thus, since the Deed of Absolute Sale between respondent and the Balguma brothers is voidable and hereby annulled, then the restitution of the property and its fruits to respondent is just and proper. Petitioners should turn over to respondent all the amounts they received starting January, 1986 up to the time the property shall have been returned to the latter. - Article 24 of the Civil Code enjoins courts to be vigilant for the protection of a party to a contract who is placed at a disadvantage on account of his ignorance, mental weakness or other handicap, like respondent herein. We give substance to this mandate.

MARTINEZ V HSBC MORELAND; February 19, 1910 NATURE An action to annul a contract on the ground that plaintiff's consent thereto was obtained under duress FACTS

A2010 page Prof. Labitag - Under the contract, she agreed to a conveyance of several properties to Aldecoa & Co. and the Hongkong and Shanghai Bank as settlement of their claims against her and her husband who in order to escape criminal charges had escaped to Macao, a territory no covered by any extradition treaty. - It was established at the trial that during the period of negotiation, representations were made to her by the defendants and concurred in by her lawyers, that if she assented to the requirements of the defendants, the civil suit against herself and her husband would be dismissed and the criminal charges against the latter withdrawn; but if she refused, her husband must either spend the rest of his life in Macao or be criminally prosecuted. ISSUE WON there was duress, which would invalidate the contract HELD - In order that this contract can be annulled it must be shown that the plaintiff never gave her consent to the execution thereof. It is however necessary to distinguish between real duress and the motive which is present when one gives his consent reluctantly. A contract is valid even though one of the parties entered into it against his wishes and desired or even against his better judgment. Contracts are also valid even though they are entered into by one of the parties without hope of advantage or profit. - A contract whereby reparation is made by one party for injuries which he has willfully inflicted upon another is one which from its nature is entered into reluctantly by the party making the reparation. He is confronted with a situation in which he finds the necessity of making the reparation or of taking the consequences, civil or criminal, of his unlawful acts. He makes the contract of reparation with extreme reluctance and only by the compelling force of the punishment threatened. Nevertheless, such contract is binding and enforceable. - It is disputed that the attorneys for the plaintiff in this case advised her that, from the facts which they had before them, facts of which she was fully informed, her husband had been guilty of embezzlement and misappropriation in the management of the business of Aldecoa & Co. and that, in their judgment, if prosecuted therefore, he would be convicted. In other words, under the advice of her counsel, the situation was so presented to her that it was evident that in signng the agreement, she had all to gain and nothing tolose, whereas in refusing to sign said agreement, she had all to lose and nothing to gain. In the one case, she would lose her property to save her husband. In the other, she would lose her property and her husband, too. The argument this presented to her by her attorneys addressed itself to judgment and not to fear. If appealed to reason and not to passion. It asked her to be moved by common sense and not by love of family. It spoke to her own interests as much as to those of her husband. The argument went ot her financial interests as well as to those of the defendants. It spoke to her business judgment as well as to her wifely affections. - From the opinions of her attorneys as they were presented to her upon facts assumed by all to be true, the SC did not see how she could reasonably have reached a conclusion other than that which she did reach. It is of no consequence here whether, as a matter of law, she would have been deprived of her alleged interests in the properties mentioned in the manner described and advised by her attorneys. The important thing is that she believed and accepted their judgment and acted upon it. The question is not did she make a mistake; but did she consent;

Obligations and Contracts 147 not was she wrongly advised, but was she coerced; not was she wise, but was she under duress. Disposition - From the whole case SC was of the opinion that the finding of the court below that the plaintiff executed the contract in suit of her own free will and choice and not from duress is fully sustained by the evidence. - The judgment of the court below was affirmed with cost against the appellant.

HILL V VELOSO ARELLANO; July 24, 1915 NATURE Appeal from a judgment of the CFI absolving defendants from the complaint FACTS - Defendant Veloso and Domingo Franco jointly and severally executed a promissory note in the amount of P6,319 on behalf of Michael & Co. for goods to be received by the former’s company, La Cooperativa Filipina - Goods were proven to have been delivered to La Cooperativa - P2,000 was already paid. - Promissory note was indorsed to Plaintiff Hill. - Hill brought the present suit to recover the P4,319 balance. - Veloso alleged that she was deceived by Franco into signing a blank sheet of paper by saying that it was for a promissory note to be executed by Veloso for P8,000 for the benefit of the minor children of one Ricablanca, mother and former guardian of said children - The new guardian is one Levering, to whom Veloso thought the obligation was due as guardian of the estate of the minor children. - Upon Franco’s death, Veloso alleged that she discovered that the former apparently used her signature to execute the contract with Michael & Co, now indorsed to Hill. - Therefore, she alleges that she has no transaction with Michael & Co. nor with the plaintiff, and as they had not received any kind of goods whatever from said firm. - During the pendency of the suit initiated by Hill, Levering commenced proceedings to recover the P8,000. - Veloso answered that her debt was to Ricablanca in her own right, and not in her capacity as guardian of her minor children. ISSUE WON the promissory note is binding on the defendants HELD NO Ratio There is no other signed document than the promissory note presented with the intention, on its being signed, of securing the payment of the goods sold to the La Cooperativa. And the facts constituting the consideration for the contract contained in the promissory note are fully proven. Reasoning - With regard to the P8,000, what is natural and logical is that Veloso would have refused to execute her obligation to Levering in the first instance (i.e. when she

A2010 page Prof. Labitag signed the blank sheet of paper thinking it was for the P8,000) as she did reject it in 1912 saying she did not consider herself in debt to the minors, but to their mother. - It is of no importance whether La Cooperativa exclusively belonged to Veloso or Franco, the obligation being joint. - Deceit alleged could not annul the consent of the contracting parties to the promissory note, nor exempt Veloso from the obligation incurred. - There is deceit when by words or insidious machinations on the part of one of the contracting parties, the other is induced to execute a contract which without them he would not have made. - Franco is not one contracting party with regard to Veloso as the other. They are both but one single contracting party in a relation with or against Michael & Co. - Franco could be as a third person inducing deceit. But, there is no reason for making one of the parties suffer for the consequences of the act of a third person in whom the other contracting party may have reposed an imprudent confidence. - It has been fully proven that the goods, the consideration for the debt, were received by La Cooperativa. It was likewise proven that La Cooperativa belonged to the defendant, and that the goods came from Michael & Co. Disposition Judgment appealed from is reversed against defendant Veloso ordering the payment of the P4,319 with the stipulated interest.

TUASON V MARQUEZ MALCOLM; November 3, 1923 NATURE Petition to review the decision of the CFI. FACTS - On March 5, 1921, Crisanto Marquez, the owner of the electric light plan of Lucena Tayabas, called Sucesores del Lucena Electric, gave an option to Antonio Tuason for the purchase of the plant for P14,400. The option was taken advantage of by Mariano S. Tuason. - The agreement was, that Tuason was to pay Marquez a total of P14,400; P2,400 within sixty days, and the remainder, P12,000, within a year. The first installment was paid subsequent to the sixty-day period; the second installment has not been paid. - Tuason being once in possession of the electric light plant, it was run under the management of the Consolidated Electric Company for about sixteen months, that is, from March 20, 1921, to July 19, 1922. On the date last mentioned, the property was sold under execution by reason of a judgment. The purchaser at said sale was Gregorio Marquez, brother of Crisanto Marquez, who paid P5,501.57 for the property. - It appears that originally in either 1913 or 1914, a franchise for thirty-five years was granted the Lucena Electric Company. The rights of this company passed to Crisanto Marquez at a sheriff's sale on September 10, 1919. The company seems never to have functioned very efficiently either at that time or at any other time, as appears from the constant complaint of the municipal authorities of Lucena. Evidently, Marquez became disgusted with the business, with the result that on February 28, 1921, that is, prior to the accomplishment of the contract, he announced to the Public Utility Commissioner his intention to give up the franchise.

Obligations and Contracts 148 - On March 29, 1921, that is, subsequent to the accomplishment of the contract, the Public Utility Commissioner took action and declared cancelled the franchise acquired by Crisanto Marquez from the Lucena Electric Light, Ice & Water Company. - Tuason and his outfit were permitted to operate the company pursuant to a special license which was to continue until they obtained a new franchise. The new franchise was finally granted by the Public Utility Commissioner with certain conditions, which amounted to a renovation of the entire plant. It was then, following a knowledge of what was expected by the Government, and following the execution sale, that Tuason conceived the idea of bringing action against Marquez for a rescission of the contract. - In the complaint filed in the CFI of Manila, Tuason, the plaintiff, asked for judgment against Crisanto Marquez, defendant, for a total of P37,400. The answer and crosscomplaint of the defendant asked for a dismissal of the action and for an allowance of a total of P12,654.50 from the plaintiff. The case was submitted on an agreed statement of facts in relation with certain telegrams of record. Judgment was rendered, absolving the defendant from the complaint and permitting the defendant to recover from the plaintiff P12,240, with legal interest from August 1, 1922. The P12,000 of this judgment represented the amount still due on the contract, and P240 represented rent which the plaintiff was expected to pay the defendant. - The plaintiff claims in effect that the contract should be rescinded and that he should be allowed his damages, on account of the misrepresentation and fraud perpetrated by the defendant in selling an electric light plan with a franchise, when the defendant had already given up his rights to that franchise. ISSUE WON the sale may be rescinded on the ground of misrepresentation and fraud. HELD - The contract in making mention of the property of the electric light company, merely renewed a previous inventory of the property. The franchise, therefore, was not the determining cause of the purchase. Indeed, the franchise was then in force and either party could easily have ascertained its status by applying at the office of the Public Utility Commissioner. The innocent non-disclosure of a fact does not effect the formation of the contract or operate to discharge the parties from their agreement. - The equitable doctrine termed with questionable propriety "estoppel by laches," has particular applicability to the facts before us. Inexcusable delay in asserting a right and acquiescene in existing conditions are a bar to legal action. The plaintiff operated the electric light plant for about sixteen months without question; he made the first payment on the contract without protest; he bestirred himself to secure what damages he could from the defendant only after the venture had proved disastrous and only after the property had passed into the hands of a third party. - There is no proof of fraud on the part of the defendant and find the plaintiff is estopped to press his action. Disposition Judgment is affirmed.

RURAL BANK OF STA. MARIA V CA GONZAGA-REYES; September 14, 1999

A2010 page Prof. Labitag NATURE Consolidated petitions for review on certiorari FACTS - A parcel of land of about 49,969 m2 registered in the name of Manuel Behis and his wife, Cristina Behis was mortgaged in favor of the Bank in a real estate mortgage as security for loans. - On Jan. 2, 1985, Manuel sold the land to Rosario Rayandayan and Carmen Arceño (herein respondents) in a Deed of Absolute Sale with Assumption of Mortgage for P250K. This deed bore the signature of his wife which he took upon himself to sign. - On the same day, Rayandayan and Arceño, together with Manuel Behis executed another Agreement embodying the real consideration of the sale of the land in the sum of P2.4M to be paid in installments with P10K paid upon signing and in case of default in the installments, Manuel Behis shall have legal recourse to the portions of the land equivalent to the unpaid balance of the amounts in installments. The title to the land remained in the name of Manuel Behis however. - Pursuant to their two contracts with Manuel Behis, plaintiffs were only able to pay under P300K (which included hospitalization, medical and burial expenses until he died on June 21, 1985). - Thereafter, Rayandayan and Arceño negotiated with the principal stockholder of the Bank, Engr. Edilberto Natividad for the assumption of the indebtedness of Manuel Behis and the subsequent release of the mortgage on the property by the bank. Rayandayan and Arceño did not show to the bank the Agreement with Manuel Behis providing for the real consideration of P2.4M for the sale of the property to the former. Subsequently, the Bank consented to the substitution of respondents as mortgage debtors in place of Manuel Behis in a Memorandum of Agreement between private respondents and the Bank with restructured and liberalized terms for the payment of the mortgage debt. Instead of the bank foreclosing immediately for non-payment of the delinquent account, petitioner Bank agreed to receive only a partial payment of P 143K by installment on specified dates. After payment thereof, the bank agreed to release the mortgage of Manuel Behis; to give its consent to the transfer of title to the private respondents; and to the payment of the balance of P200K under new terms with a new mortgage to be executed by the private respondents over the same land. - The Bank failed to comply with its obligation and on Jan.7, 1986, which prompted respondents to demand that the Bank comply with its obligation under the Memorandum of Agreement to (1) release the mortgage of Manuel Behis, (2) give its consent for the transfer of title in the their name, and (3) execute a new mortgage with plaintiffs for the balance of P200K over the same land. - On July 28, 1986, an Assignment of Mortgage was entered into between Halsema and The Bank in consideration of the total indebtedness of Manuel Behis. - Because of non-compliance with their MOA, Rayandayan and Arceño instituted an action for specific performance, declaration of nullity and/or annulment of assignment of mortgage and damages on Sept. 5, 1986. A judgment was rendered declaring that the deed of sale with assumption of mortgage be taken together valid until annulled or cancelled. As well as declaring the MOA as annulled due to the fraud of Rayandayan & Arceño. - In sum, the Court of Appeals in its assailed decision: (1) affirmed the validity of the Memorandum of Agreement between parties thereto; (2) reversed and set aside the finding of the trial court on the bad faith of Rayandayan and Arceño in concealing the real purchase price of the land sold to them by Manuel Behis during

Obligations and Contracts 149 negotiations with the bank on the assumption of the mortgage debt; (3) modified the trial court's finding as to the damages due Rayandayan and Arceño from the bank by adding P229,135.00 as actual damages; (4) dismissed the counterclaim for damages by the bank and deleted the portion on the set-off of damages due between the bank on the one hand, and Rayandayan and Arceño on the other ISSUES 1. WON the private respondents’ withholding of material information from petitioner Bank would render their Memorandum of Agreement (MOA) voidable on the ground that its consent to enter the agreement was vitiated by fraud 2. WON the SC should modify the damages awarded by the lower court HELD 1. NO We cannot see how the omission or concealment of the real purchase price could have induced the bank into giving its consent to the agreement; or that the bank would not have otherwise given its consent had it known of the real purchase price Ratio The kind of fraud that will vitiate a contract are those insidious words or machinations resorted to by one of the contracting parties to induce the other to enter into a contract which without them he would not have agreed to. The fraud must be the determining cause of the contract, or must have caused the consent to be given. Reasoning The consideration for the purchase of the land between Manuel Behis and herein private respondents Rayandayan and Arceño could not have been the determining cause for the petitioner bank to enter into the memorandum of agreement. To all intents and purposes, the bank entered into said agreement in order to effect payment on the indebtedness of Manuel Behis - The bank received payments due under the Memorandum of Agreement, even if delayed. It initially claimed that the sale with assumption of mortgage was invalid not because of the concealment of the real consideration of P2,400,000.00 but because of the information given by Cristina Behis, the widow of the mortgagor Manuel Behis that her signature on the deed of absolute sale with assumption of mortgage was forged. Thus, the alleged nullity of the Memorandum of Agreement, of counterclaim only after it was sued. - Indeed, whether the consideration of the sale with assumption of mortgage was P250,000.00 as stated in Exhibit A, or P2,400,000.00 as stated in the Agreement, Exhibit 15, should not be of importance to the bank. Whether it was P 250, 000 or P 2,400,000, the bank's security remained unimpaired - Pursuant to Art.1339 of the Civil Code, silence or concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or unless according to good faith and the usages of commerce the communication should be made. Verily, private respondents Rayandayan and Arceño had no duty, and therefore did not act in bad faith, in failing to disclose the real consideration of the sale between them and Manuel Behis - The bank had other means and opportunity of verifying the financial capacity of private respondents and cannot avoid the contract on the ground that they were kept in the dark as to the financial capacity by the non-disclosure of the purchase price. As correctly pointed out by respondent court, the bank security remained unimpaired regardless of the consideration of the sale. Under the term of the Memorandum of Agreement, the property remains as security for the payment of the indebtedness, in case of default of payment. Thus, petitioner bank does not and can not even allege that the agreement was operating to its disadvantage. If fact, the bank admits that no damages has been suffered by it.

A2010 page Prof. Labitag 2. NO The Court may no longer examine the amounts awarded by the trial court and affirmed by the appellate court. Reasoning Petitioner Bank does not question the actual damages awarded to private respondents in the amount of P 229,135 but only the moral damages, exemplary damages, atty’s fees, and litigation expenses. As petitioner Bank did not appeal from the decision of the trial court. It is well-settled that a party who does not appeal from a decision of the lower court may not obtain any affirmative relief from the appellate court other than what he has obtained from the lower court. - In addition, the Bank’s imputation of bad faith to private respondents, premised on the same non-disclosure of the real purchase price of the sale so as to preclude their entitlement to damages must necessarily be resolved in the negative. Disposition petition is denied & decision of the CA is affirmed

AZARRAGA V GAY VILLAMOR; December 29, 1928 FACTS - January 17, 1921, the plaintiff sold two parcels of lands to the defendant for the lump sum of P47,000, payable in installments. - The conditions of the payment were: P5,000 at the time of signing the contract Exhibit A; P20,000 upon delivery by the vendor to the purchaser of the Torrens title to the first parcel described in the deed of sale, P10,000 upon delivery by the vendor to the purchaser of Torrens title to the second parcel; and lastly the sum of P12,000 one year after the delivery of the Torrens title to the second parcel. - The vendee paid P5,000 to the vendor when the contract was signed. The vendor delivered the Torrens title to the first parcel to the vendee who, pursuant to the agreement, paid him P20,000. In the month of March 1921, Torrens title to the second parcel was issued and forthwith delivered by the vendor to the vendee who, however, failed to pay the P10,000 as agreed, neither did she pay the remaining P12,000 one year after having received the Torrens title to the second parcel. - The plaintiff here claims the sum of P22,000, with legal interest from the month of April 1921 on the sum of P10,000, and from April 1922 on the sum of P12,000, until full payment of the amounts claimed. - Defendant admits that she purchased the two parcels of land referred to by plaintiff, but alleges in defense: (a) That the plaintiff knowing that the second parcels of land he sold had an area of 60 hectares, by misrepresentation lead the defendant to believe that said second parcel contained 98 hectares, and thus made it appear in the deed of sale and induced the vendee to bind herself to pay the price of P47,000 for the two parcels of land, which he represented contained an area of no less than 200 hectares, to which price the defendant would not have bound herself had she known that the real area of the second parcel was 60 hectares, and, consequently, she is entitled to a reduction in the price of the two parcels in proportion to the area lacking which ought to be reduced to P38,000 - The lower court, having found no fraud when the parties agreed to the lump sum for the two parcels of land described in the deed Exhibit A, following article 1471 of the Civil Code, ordered the defendant to pay the plaintiff the sum of P19,300 with legal interest at 8 per cent per annum from April 30, 1921 on the sum of P7,300, and from April 30, 1922, on the sum of P12,000.

Obligations and Contracts 150 ISSUE WON there was fraud in the circumstances leading to the agreement in the contract HELD NO - There is no evidence of record that the plaintiff made representation to the defendant as to the area of said second parcel, and even if he did make such false representations as are now imputed to him by the defendant, the latter accepted such representations at her own risk and she is the only one responsible for the consqunces of her inexcusable credulousness. In the case of Songco vs. Sellner (37 Phil., 254), the court said: The law allows considerable latitude to seller's statements, or dealer's talk; and experience teaches that it as exceedingly risky to accept it at its face value. Assertions concerning the property which is the subject of a contract of sale, or in regard to its qualities and characteristics, are the usual and ordinary means used by sellers to obtain a high price and are always understood as affording to buyers no grund from omitting to make inquires. A man who relies upon such an affirmation made by a person whose interest might so readily prompt him to exaggerate the value of his property does so at his peril, and must take the consequences of his own imprudence. - The defendant had ample opportunity to appraise herself of the condition of the land which she purchased, and the plaintiff did nothing to prevent her from making such investigation as she deemed fit, and as was said in Songco vs. Sellner, supra, when the purchaser proceeds to make investigations by himself, and the vendor does nothing to prevent such investigation from being as complete as the former might wish, the purchaser cannot later allege that the vendor made false representations to him. - "One who contracts for the purchase of real estate in reliance on the representations and statements of the vendor as to its character and value, but after he has visited and examined it for himself, and has had the means and opportunity of verifying such statements, cannot avoid the contract on the ground that they were false or exaggerated."- She did not complain of the difference in the area of said second parcel until the year 1926. - More so, it appears that by the contract Exhibit A, the parties agreed to the sale of two parcels of land, the first one containing 102 hectares, 67 ares and 32 centares, and the second one containing about 98 hectares, for the lump sum of P47,000 payable partly in cash and partly in installments. Said two parcels are defind by means of the boundaries given in the instrument. Therefore, the case falls within the provision of article 1471 of the Civil Code, which reads as follows: ART. 1471. In case of the sale of real estate for a lump sum and not at the rate of a specified price for each unit of measure, there shall be no increase or decrease of the price even if the area be found to be more or less than that stated in the contract. - As the hectares were paid due to a lump sum and not based of a defined unit of measure – if the sale was made for a price per unit of measure or number, the consideration of the contract with respect to the vendee, is the number of such units, or, if you wish, the thing purchased as determined by the stipulated number of units. But if, on the other hand, the sale was made for a lump sum, the consideration of the contract is the object sold, independently of its number or measure, the thing as determined by the stipulated boundaries, which has been called in law a determinate object.

A2010 page Prof. Labitag - From all this, it follows that the provisions of article 1471 concerning the delivery of determinate objects had to be materially different from those governing the delivery of things sold a price per unit of measure or number. - The reason for the regulation is clear and no doubts can arise from its application. It is concerned with determinate objects. The consideration of the contract, and the thing to be delivered is a determinate object, and not the number of units it contains. The price is determined with relation to it; hence, its greater or lesser area cannot influence the increase or decrease of the price agreed upon. We have just learned the reason for the regulation, bearing in mind that the Code has rightly considered an object as determinate for the purposes now treated, when it is a single realty as when it is two or more, so long as they are sold for a single price constituting a lump sum and not for a specified amount per unit of measure or number.

TRINIDAD V IAC CRUZ; December 3, 1991 NATURE Petition for review on certiorari FACTS - Sometime in early 1969, Laureta Trinidad, petitioner, approached Vicente J. Francisco and offered to buy the property. The house was Bungalow No. 17, situated at Commonwealth Village in Quezon City. Francisco was willing to sell. Trinidad inspected the house and lot and examined a vicinity map which indicated drainage canals along the property. The purchase price was P70,000 with a down payment of P17,500. The balance was to be paid in 5 equal annual installments not later than July 1 of each year at 12% interest per annum. - On March 29,1969, Trinidad paid Francisco P5,000 as earnest money and entered into the possession of the house. She heard from her new neighbors that two buyers had previously vacated the property because it was subject to flooding. She talked to Francisco who told her everything had been fixed and the house would never be flooded again. Thus assured, she gave him P12,500 to complete the down payment. They signed the Contract of Conditional Sale on August 8,1969. - The Contract of Conditional Sale contains a *condition that should Trinidad fail to make any of the payments the contract shall be considered automatically rescinded and cancelled without the necessity of notice or of any judicial declaration to that effect, and any and all sums paid shall be considered rents and liquidated damages for the breach, and Trinidad shall vacate the property peacefully. - Trinidad paid the installment for 1970 and 1971 on time but asked Francisco for an extension of 60 days to pay the third installment due on July 1, 1972. However, she eventually decided not to continue paying the amortizations because the house was flooded again on July 18, 21, and 30, 1972, the waters rising to as high as five feet on July 21. Upon her return from the US on October 11, 1972, she wrote the City Engineer's office of QC and requested an inspection to determine the cause of the flooding. The finding of City Engineer Pantaleon P. Tabora was that "the lot is low and is a narrowed portion of the creek." - On January 10, 1973, Trinidad filed her complaint against Francisco alleging that she was induced to enter into the contract of sale because of his misrepresentations. She asked that the agreement be annulled and her payments

Obligations and Contracts 151 refunded to her, together with the actual expenses she had incurred for the "annexes and decorations" she had made on the house. She also demanded the actual cost of the losses she had suffered as a result of the floods, moral and exemplary damages in the sum of P200,000 and P10,000 attorney's fees. - Francisco denied the charge of misrepresentation and stressed that Trinidad had thoroughly inspected the property before she decided to buy it. The claimed creek was a drainage lot, and the floods complained of were not uncommon in the village and indeed even in the Greater Manila area if not the entire Luzon. In any event, the floods were fortuitous events not imputable to him. He asked for the rescission of the contract and the forfeiture of the payments made by the plaintiff plus monthly rentals with interest of P700 for the property from July 2, 1972, until the actual vacation of the property by the plaintiff. He also claimed litigation expenses, including attorney's fees. - Pendente lite, Vicente J. Francisco died and was eventually substituted by his heirs, two of whom, Trinidad J. Francisco and Rosario F. Kelemen, filed their own joint memorandum. ISSUE WON there was misrepresentation on the part of Francisco to justify the rescission of the sale and the award of damages to the petitioner HELD NO Ratio One who contracts for the purchase of real estate in reliance on the representations and statements of the vendor as to its character and value, but after he has visited and examined it for himself and has had the means and opportunity of verifying such statements, cannot avoid the contract on the ground that they were false and exaggerated. Reasoning It has not been satisfactorily established that Francisco inveigled the petitioner through false representation to buy the subject property. Assuming that he did make such representations, as the petitioner contends, she is deemed to have accepted them at her own risk and must therefore be responsible for the consequences of her careless credulousness. The law allows considerable latitude to seller's statements, or dealer's talk, and experience teaches that it is exceedingly risky to accept it at its face value. Assertions concerning the property, subject of a contract of sale, or in regard to its qualities and characteristics, are the usual and ordinary means used by sellers to obtain a high price and are always understood as affording to buyers no ground for omitting to make inquiries. A man who relies upon such affirmation made by a person whose interest might so readily prompt him to exaggerate the value of his property does so at his peril, and must take the consequences of his own imprudence. What we see here is a bad bargain, not an illegal transaction vitiated by fraud. While we may commiserate with the petitioner for a purchase that has proved unwise, we can only echo what Mr. Justice Moreland observed in Vales v. Villa: “Courts cannot follow one every stop of his life and extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts. Courts cannot constitute themselves guardians of persons who are not legally incompetent. Courts operate not because one person has been defeated or overcome by another, but because he has been defeated or overcome illegally. Men may do foolish things, make ridiculous contracts, use miserable judgment, and lose money by them-indeed, all they have

A2010 page Prof. Labitag in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of law, the commission of what the law knows as an actionable wrong before the courts are authorized to lay hold of the situation and remedy it.” The fraud alleged by the petitioner has not been satisfactorily established to call for the annulment of the contract. This finding is based on the following considerations. - First, it was the petitioner who admittedly approached the private respondent, who never advertised the property nor offered it for sale to her. - Second, the petitioner had full opportunity to inspect the premises, including the drainage canals indicated in the vicinity map that was furnished her, before she entered into the contract of conditional sale. - Third, it is assumed that she made her appraisal of the property not with the untrained eye of the ordinary prospective buyer but with the experience and even expertise of the licensed real estate broker that she was. If she minimized the presence of the drainage canals, she has only her own negligence to blame. - Fourth, seeing that the lot was depressed and there was a drainage lot abutting it, she cannot say she was not forewarned of the possibility that the place might be flooded. Notwithstanding the obvious condition of the property, she still decided to buy it. - Fifth, there is no evidence except her own testimony that two previous owners of the property had vacated because of the floods and that Francisco assured her that the have would not be flooded again. The supposed previous owners were not presented as witnesses and neither were the neighbors. Francisco himself denied having made the alleged assurance. - Sixth, the petitioner paid the 1970 and 1971 amortizations even if, according to her Complaint, "since 1969 said lot had been under floods of about one (1) foot deep,"' and despite the floods of September and November 1970. - Seventh, it is also curious that notwithstanding the said floods, the petitioner still "made annexes and decorations on the house," all of a permanent nature, for which she now claims reimbursement from the private respondent. Regarding Trinidad’s refusal to continue paying the amortizations, we cannot say that the petitioner was, strictly speaking, in default in the payment of the remaining amortizations in the sense contemplated in the contract. If she asked for the annulment of the contract and the refund to her of the payments she had already made, plus damages, it was because she felt she had the right to do so. Given such circumstances, the Court feels that the stipulation [see condition in facts] should not be strictly enforced, to justify the rescission of the contract. To make her forfeit the payments already made by her and at the same time return the property to the private respondents for standing up to what she considered her right would, in our view, be unfair and unconscionable. Justice demands that we moderate the harsh effects of the stipulation. Disposition Appealed decision is AFFIRMED with modification.

SONGCO V SELLNER STREET; December 4, 1917 FACTS - In Dec. 1915, the defendant George Sellner, was the owner of a sugar farm at FloridaBlanca, Pampanga adjacent to another sugar farm owned by plaintiff Lamberto Songco. Sellner wished to mill his cane at a sugar central in nearby

Obligations and Contracts 152 Dinalupijan but the owners of the mill would not promise to take it. Sellner found out that the central was going to mill Songco’s cane and decided to buy it and run his own cane at the same time the latter’s cane was to be milled. Sellner also desired to get a right of way over Songco’s land for converting his own cane to the central. He bought the cane for an agreed sum of P12,000 and executed 3 promissory notes of P4,000, paying for two; an action was instituted to recover the 3rd for which a judgment was rendered in favor of the plaintiff and to which defendant has appealed. - The defendant denied all allegations of the complaint, further asserting by way of special defense that the defendant obtained the note by means of fraudulent representations. The note, on which the action was brought, was admitted in court as evidence. ISSUES 1. WON the court erred in admitting the note as evidence even though its genuineness and due execution were not proven 2. WON plaintiff is guilty of false representation HELD 1. NO - Under Sec 103 of the Code of Civil Procedure, it is necessary that the genuineness and due execution of a written instrument be specifically denied by the defendant under oath before such an issue is raised. The answer to the effect that the note was procured by fraudulent representation is actually an admission of its genuineness and due execution since it seeks to avoid the instrument on a ground not affecting either. Furthermore, the defendant admits the note’s execution in his answer. 2. NO - Songco estimated that his cane would produce 3,000 piculs of sugar but instead produced 2,017. Although Songco had grossly exaggerated his estimate, the court finds that Sellner is still bound to pay the price stipulated. Matters of opinion, judgment, probability or expectation are not actionable deceits and cannot void a contract. Jurisprudence dictates that one may not rely on a vendor’s misrepresentations as to the value of his goods if that person is given an ample opportunity to investigate/examine the goods. Using expert knowledge to take advantage of the ignorance of another may be grounds for relief; however, the court finds Sellner’s relative inexperience lacking. - An incident to the action was that the plaintiffs sued out an attachment against the defendant on the ground that he was disposing of his property in fraud of his creditors. This was refuted upon a showing that defendant had not attempted to convey away his property, and thus damages were awarded to him equal to the cost of procuring the dissolution of the attachment. The defendant assigns error to the court’s refusal to award further damages, claiming that the attachment caused a creditor to withhold credit, forcing him to sell sugar at lower prices and losing money. The damages were remote and speculative; the plaintiff cannot be held accountable for such complications leading to said damages. Disposition From what has been said it follows that the judgment of the court below must be affirmed, with costs against the appellant.

MERCADO V ESPIRITU

A2010 page Prof. Labitag TORRES; December 1, 1917 NATURE Appeal from a judgment of the Court of First Instance Bulacan FACTS - The annulment of a deed of sale regarding parcels of land was sought on the ground that the two of the four parties (Domingo Mercado and Josefa Mercado) thereto were minors (under the Civil Code), 18 and 19 years old, respectively on the date the instrument was executed. In the deed of sale, however, these minors stated that they were of legal age at the time they executed and signed it; and they made the same manifestation before the notary public when the document was prepared. ISSUE WON the minors Domingo and Josefa misrepresented themselves in the sale of the real estate thus making the deed of sale valid HELD YES - The courts have laid down the rule that the sale of real estate, effected by minors who have already passed the ages of puberty and adolescence and are near the adult age, when they pretend to have already reached their majority, while in fact they have not, is valid, and they cannot be permitted afterwards to excuse themselves from compliance with the obligation assumed by them or seek their annulment. This doctrine is entirely in accord with the provisions of our law on estoppel. Disposition CFI ruling affirmed. Petition dismissed.

BRAGANZA V VILLA ABRILLE CONCEPCION; May 14, 1954 NATURE Petition for review of the Court of Appeal's decision FACTS - Rodolfo and Guillermo Braganza, received from Villa Abrille, as a loan, on October 30, 1944 P70,000 in Japanese war notes. They promised to pay him P10,000 "in legal currency of the P. I. two years after the cessation of the present hostilities or as soon as International Exchange has been established in the Philippines", plus 2 % per annum. Payment was not made, thus, Villa Abrille sued them. - Rodolfo and Guillermo claimed to have received P40,000 only. They also claim that they were minors when they signed the promissory note. The trial court ordered them solidarily to pay Fernando F. de Villa Abrille the sum of P10,000 plus 2 % interest from October 30, 1944

Obligations and Contracts 153 ISSUE WON the minors are liable for the said loan HELD NO - From the minors' failure to disclose their minority in the same promissory note they signed, it does not follow as a legal proposition, that they will not be permitted thereafter to assert it. They had no juridical duty to disclose their inability. - In order to hold infant liable, however, the fraud must be actual and not constructure. It has been held that his mere silence when making a contract as to age does not constitute a fraud which can be made the basis of an action of deceit - However, they are not entirely absolved from monetary responsibility. They shall make restitution to the extent that they have profited by the money they received. (Art. 1340) Disposition Decision reversed

RODRIGUEZ V RODRIGUEZ REYES; July 31, 1967 NATURE Appeal from a judgment of the CFI FACTS - Concepcion Felix, widow of the late Don Felipe Calderon and with whom she had one living child, Concepcion Calderon, contracted a second marriage on June 20, 1929, with Domingo Rodriguez, a widower with four children by a previous marriage, named Geronimo, Esmeragdo, Jose and Mauricio, all surnamed Rodriguez. - Prior to her marriage to Rodriguez, Concepcion Felix was the registered owner of 2 fishponds. Under date of January 24, 1934, Concepcion Felix appeared to have executed a deed of sale conveying ownership of the aforesaid properties to her daughter, Concepcion Calderon, for the sum of P2,500.00 which the latter in turn appeared to have transferred to her mother and stepfather by means of a document dated January 27, 1934. Both deeds were registered in the Office of the Register of Deeds of Bulacan on January 29, 1934, as a consequence of which, the original title were cancelled and TCT Nos. 13815 and 13816 were issued in the names of the spouses Domingo Rodriguez and Concepcion Felix. - On March 6, 1953, Doming Rodriguez died intestate, survived by the widow, Concepcion Felix, his children Geronimo, Esmeragdo and Mauricio and grandchildren Oscar, Juan and Ana, surnamed Rodriguez, children of a son, Jose, who had predeceased him. On March 16, 1953, the above-named widow, children and grandchildren of the deceased entered into an extrajudicial settlement of his (Domingo's) estate, consisting of one-half of the properties allegedly belonging to the conjugal partnership. Among the properties listed as conjugal were the two parcels of land in Bulacan, Bulacan, which, together with another piece of property, were divided among the heirs. - On October 12, 1954, the Rodriguez children executed another document granting unto the widow lifetime usufruct over one-third of the fishpond which they received as hereditary share in the estate of Domingo Rodriguez, which grant was accepted by petitioner. Then in a contract dated December 15, 1961, the widow appeared to

A2010 page Prof. Labitag have leased from the Rodriguez children and grandchildren the fishpond for a period of 5 years commencing August 16, 1962. for an annual rental of P7,161.37. At about this time. it seemed that the relationship between the widow and her stepchildren had turned for the worse. Thus, when she failed to deliver to them the balance of the earnings of the fishponds, in the amount of P3,000.00, her stepchildren endorsed the matter to their lawyer who, on May 16, 1962, sent a letter of demand to the widow for payment thereof. - On May 28, 1962, petitioner filed the present action in the CFI of Manila. The action to declare null and void the deeds of transfer of plaintiff's properties to the conjugal partnership was based on the alleged employment or exercise by plaintiff’s deceased husband of force and pressure on her, that the conveyances of the properties from plaintiff to her daughter and then to the conjugal partnership of plaintiff and her husband are both without consideration, that plaintiff participated in the extrajudicial settlement of estate (of the deceased Domingo Rodriguez) and in other subsequent deeds or instruments involving the properties in dispute, on the false assumption that the said properties had become conjugal by reason of the execution of the deeds of transfer in 1934, that laboring under the same false assumption, plaintiff delivered to defendants. as income of the properties from 1953 to 1961, the total amount of P56,976.58. As alternative cause of action, she contended that she would claim for her share, as surviving widow of 1/5 of the properties in controversy, should such properties be adjudicated as belonging to the conjugal partnership. ISSUES 1. WON plaintiff can recover the illegally donated properties 2. WON plaintiff is estopped from questioning the transfer of properties 3. WON plaintiff’s cause of action has prescribed 4. WON the conveyances of title are void ab initio HELD 1. NO Ratio In contracts invalidated by illegal subject matter or illegal causa, Article 1305 and 1306 of the Civil Code then in force apply rigorously the rule in pari delicto non oritur actio, denying all recovery to the guilty parties inter se. And appellant is clearly as guilty as her husband in the attempt to evade the legal interdiction. 2. YES Ratio Having taken part in the questioned transactions, petitioner was not the proper party to plead lack of consideration to avoid the transfers On top of it, she entered into a series of subsequent transactions with respondents that confirmed the contracts that she now tries to set aside. There was ratification or confirmation by the plaintiff of the transfer of her property, by her execution (with the other heirs) of the extrajudicial settlement of estate. 3. YES Ratio Duress being merely a vice or defect of consent, an action based upon it must be brought within four years after it has ceased, and the present action was instituted only in 1962, 28 years after the intimidation is claimed to have occurred, and no less than 9 years after the supposed culprit died in 1953. Likewise, the action for rescission of the deed of extrajudicial settlement should have been filed within 4 years from its execution. 4. NO

Obligations and Contracts 154 Ratio Although the two documents were executed for the purpose of converting plaintiff's separate properties into conjugal assets of the marriage with Domingo Rodriguez, the consent of the parties thereto was voluntary, contrary to the allegations of plaintiff and her witness. In the first transaction, the price of P2,500.00 is recited in the deed itself; in the second, the consideration set forth is P3,000.00. Since in each conveyance the buyer became obligated to pay a definite price in money, such undertakings constituted in themselves actual causa or consideration for the conveyance of the fishponds. That the prices were not paid does not make the sales inexistent for want of causa. The characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties. But appellant contends that the sale by her to her daughter, and the subsequent sale by the latter to appellant and her late husband were done for the purpose of converting the property from paraphernal to conjugal, thereby vesting a half interest in Rodriguez, and evading the prohibition against donations from one spouse to another during coverture. If this is true, then the appellant and her daughter must have intended the two conveyances to be real and effective; for appellant could not intend to keep the ownership of the fishponds and at the same time vest half of them in her husband.

SUNTAY V CA HERMOSISIMA; December 19,1995 NATURE Petition for Review on Certiorari of the Amended Decision of respondent Court of Appeals and of its Resolution denying petitioner's motion for reconsideration. FACTS - Federico Suntay is a wealthy land owner and rice miller from Bulacan. He owned a 5,118 square-meter land in Bulacan. On it was a rica mill, a warehouse and other improvements. - Federico applied as a miller-contractor of the then National Rice and Com Corporation (NARIC). His application was prepared by his nephew lawyer Rafael Suntay. But it was disapproved because at that time he was tied up w/ several unpaid loans. - For purposes of circumvention, he had thought of allowing Rafael to make the application for him. Rafael prepared an absolute deed of sale whereby Federico, for and in consideration of P20,000.00 conveyed to Rafael said parcel of land with all its existing structures. - Federico claims that the sale was merely fictitious/simulated and has been executed only for purposes of accommodation. - Less than three months after this conveyance, Rafael sold it back to Federico for the same amount of P20,000. It was notarized by Atty. Herminio V. Flores. - However, the said document was not the said deed of sale but a certain "real estate mortgage of a parcel of land to secure a loan of P3,500.00 in favor of the Hagonoy Rural Bank. It could not be found in the notarial register as well - Federico through his new counsel requested that Rafael have TCT No. T-36714 so that he can have the counter deed of sale in favor registered in his . But the request was turned down.

A2010 page Prof. Labitag - So Federico’s counsel filed a case in the CFI. The trial court upheld the validity and genuineness of the deed of sale executed by Federico in favor of Rafael, but it ruled that the counter-deed, executed by Rafael in favor of Federico, was simulated and without consideration, hence, null and void ab initio. (it was not dated, not notarized and above all it has no consideration because plaintiff did not pay defendant the consideration of the sale in the sum of P20,000.00) - CA ruled the same. BUT it then reversed itself upon petition and said that the first Deed of Sale was a mere accommodation arrangement executed without any consideration and therefore a simulated contract of sale. Considering the ff. circumstances: > the 2 instruments were executed closely one after the other > the close relationship bet. the parties >the value and location of the property purportedly sold . (P20,000) > Rafael also never assumed ownership nor did eh gather any benefit. - Rafael Suntay on the other hand insists that the transaction was a veritable sale. ISSUE WON the deed of sale executed in favor of Rafael Suntay was valid HELD NO Reasoning The history and relationship of trust, interdependence and intimacy between the late Rafael and Federico is an unmistakable token of simulation. It has been observed that fraud is generally accompanied by trust. - The late Rafael insisted that the sale to him of his uncle's property was in fact a "dacion en pago" in satisfaction of Federico's unpaid attorney's fees. But such claim cannot prosper. He did not even tell Federico that he considered such to be his fee. Federico was also liquid enough to pay him. - All circumstances point to the conclusion that such was simulated transaction. Ratio A contract of purchase and sale is void and produces no effect whatsoever where the same is without cause or consideration in that the purchase price, which appears thereon as paid, has in fact never been paid by the purchaser to the vendor two veritable legal presumptions: first, that there was sufficient consideration for the contract 45 and, second, that it was the result of a fair and regular private transaction.46 These presumptions if shown to hold, infer prima facie the transaction's validity, except that it must yield to the evidence adduced. Disposition WHEREFORE, the Amended Decision promulgated by the Court of Appeals on December 15, 1993 in CA-G.R. CV No. 08179 is hereby AFFIRMED IN TOTO.

BLANCO V QUASHA YNARES-SANTIAGO; November 17, 1999 NATURE Petition for review on certiorari; CA reversed trial court’s decision FACTS - Mary Ruth C. Elizalde was an American national who owned a house and lot (2,500 sqm) in Forbes Park, Makati, - During her lifetime, on May 22, 1975, she, through attorney-in-fact Don Manuel Elizalde, entered into a Deed of Sale over the property in favor of Parex Realty

Obligations and Contracts 155 Corporation (Parex), for and in consideration of the amount of P625,000.00 payable in twenty-five (25) equal annual installments of P25,000.00 commencing on May 22, 1975 and ending on May 22, 1999. - Also on May 22, 1975, simultaneously with the execution of the Deed of Sale, Parex executed a Contract of Lease4 with Mary Ruth C. Elizalde, whereby the same parcel of land was leased to the latter for a term of twenty five (25) years for a monthly rental of P2,083.34, or P25,000.08 a year. The rental payments shall be credited to and applied in reduction of the agreed yearly installments of the purchase price of the property. - Parex, was registered with the Securities and Exchange Commission on May 10, 1974 with the following incorporators, namely, Cirilo F. Asperilla, Jr., Alonzo Q. Ancheta, William H. Quasha, Delfin A. Manuel, Jr. and Edgardo F. Sundiam.3 - By virtue of the sale, the title was issued in the name of Parex Realty Corporation on May 27, 1975 - Mary Ruth Elizalde executed a Confirmation and Ratification of the Deed of Sale. Despite the transfer of title, however, she continued to pay the Forbes Park Association dues, garbage fees, and the realty taxes on the property during the term of the lease until her demise in 1990. - Elizalde passed away on March 1, 1990. On March 26, 1990, Atty. Daisy P. Arce of the law firm of Quasha, Asperilla, Ancheta, Peña and Nolasco, on behalf of some heirs of Mary Ruth Elizalde, sent a letter to Peter Wohlfeiler, Esq., who was handling the legal affairs of the other heirs, informing him that Elizalde left property (the subject of this case) - Petitioner J.R. Blanco, special administrator of the estate of Elizalde demanded from respondents, the individual stockholders and directors of Parex, the reconveyance of the title to the property to the estate of Mary Ruth Elizalde or, in the alternative, to assign all shares of Parex to said estate. Respondents ignored. - Petitioner alleged that the sale of the property by Elizalde to Parex was absolutely simulated and fictitious and, therefore, null and void. According to petitioner, the alleged sale was executed upon advice of Elizalde's lawyers, namely, the individual respondents herein, in order to circumvent the effects of this Court's ruling in Republic v. Quasha12 which held that “under the 'Parity Amendment' to our Constitution, citizens of the United States and corporations and business enterprises owned or controlled by them can not acquire and own, save in cases of hereditary succession, private agricultural lands in the Philippines and that all other rights acquired by them under said amendment will expire on 3 July 1974.13” - Petitioner further alleges that a few months before July 3, 1974, respondents rushed the organization and incorporation of Parex. On May 24, 1974, Presidential Decree No. 471 was issued limiting the duration of leases of private lands to aliens to 25 years renewable for another 25 years. Hence, petitioner posits that the Quasha law firm caused Elizalde to simulate a sale of her land to Parex. Simultaneously with the execution of the contract of sale, Parex and Elizalde entered into a lease contract whereby Parex leased back to Elizalde the same land for a period of 25 years at a monthly rental of P2,083.34 which, when computed, totals P25,000.00 in a year. Hence, petitioner prayed that the land be reconveyed to the estate of Elizalde, arguing that she did not receive a single centavo from the transactions. - Regional Trial Court rendered judgment in favor of the plaintiff and against the defendants declaring the sale executed by Elizalde in favor of Parex to be fictitious and simulated;

A2010 page Prof. Labitag - Court of Appeals set aside the appealed judgment and dismissed petitioner's action for reconveyance. - Petitioner filed a motion for reconsideration with motion for the inhibition of all three members of the appellate court's Fourth Division, namely, Justices Ramon A. Barcelona, Minerva Gonzaga-Reyes and Demetrio G. Demetria, pleading circumstances which allegedly show attempts on the part of the Quasha Law Firm to influence Mr. Justice Barcelona.—denied by CA for being patently groundless and without basis in fact and law. - In his motion for the inhibition of the above-named Court of Appeals Justices, petitioner alleges the following circumstances: 1.The petitioner wrote the Clerk of the Court of Appeals as to why there was still no ponente to adjudicate the case notwithstanding that one was ordered re-raffled two years before. 2.A clerk of the Court of Appeals handwrote thereon as follows: J. Galvez J. R. Barcelona -for completion of records -for decision (raffled on 7-1696) and promised a formal written reply. 3.The petitioner's curiosity was thereby aroused because after 7-16-96 there was a non-adjudicatory Resolution dated 20 November 1996 of Justice Ricardo P. Galvez with none of the two concurring Justices being Barcelona. 4.Consequently, the petitioner caused his messenger to follow-up the said promised formal written reply, at one such on 20 January 1998 said messenger was informed by a clerk of Justice Barcelona's Office that Atty. Fernando F. Viloria of the private respondents' Quasha law firm in the company of Manuel Barcelona who is the brother of Justice Barcelona was in the office of Justice Barcelona on 16 January 1998. - Petitioner further alleges that the parties, through their respective counsel, have entered into a compromise agreement and that petitioner had moved that the CA call the parties to a preliminary conference. However, one day after respondents filed their opposition, the CA through Justice Barcelona promulgated the assailed Resolution Respondents’ Comment - petition must be dismissed because it raises questions of fact and not of law. -Respondents deny that Atty. Fernando Viloria went to Justice Barcelona's office, and claims that petitioner's allegations to this effect are double hearsay-- having been obtained from information supposedly relayed first by a Court of Appeals clerk to petitioner's messenger, then by the messenger to petitioner. - that the sale-lease-back agreement was valid, and deny the existence of any compromise agreement between the parties. ISSUES 1. WON the sale-lease-back is simulated 2. WON there was influence peddling HELD 1. NO - In order to determine whether or not the sale-lease-back agreement is simulated, there is a need to look into the true intent or agreement of the parties. To do so, however, is to pass upon a factual issue, a function that is not within the province of this Court. The findings of the Court of Appeals are binding and conclusive on us, especially, the conclusion of the appellate court is more in accord with the documents on record.

Obligations and Contracts 156 - The Court finds nothing wrong with the arrangement stated in the contract for the same is not contrary to law, morals, good customs, public order, or public policy, but rather, for the convenience of both parties. The requisites of a contract of sale have been complied with, and that the parties intended to be bound by the deed of sale and for it to produce legal effects. Reasoning To begin with, this Court is not a trier of facts. It is not its function to examine and determine the weight of the evidence supporting the assailed decision - 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. 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. The characteristic of simulation is the fact that the apparent contract is not really desired nor intended to produce legal effects nor in any way alter the juridical situation of the parties. - Court of Appeals based its ruling on the following factual findings: First, Elizalde decided to transfer, as in fact she did, the ownership of the subject property. Second, the vendee, Parex obligated itself to pay a price certain for the property. Although no actual exchange of money was made, yet payment was effected between the vendee and the vendor by mutual arrangement. Third, Elizalde never contested the sale of the property. Fourth, Mary Ruth Elizalde, during her lifetime, never contested the cancellation of Certificate of Title. - By preponderance of evidence, therefore, the defendants were able to prove that the deed of sale executed by Elizalde in favor of Parex is a valid and binding contract which transferred ownership of the property to the said corporation. - We are not prepared to delve into the motive of Elizalde in transferring the land only and not the house thereon, inasmuch as that involves a factual question. To resolve the issue of whether or not the sale-lease-back was simulated, it is imperative that we look into the true intention of the parties, rather than the correct interpretation of the written stipulations in the contracts. That, again, is a question of fact. 2. NO - It is purely speculative and unfounded. Moreover, it is anchored on evidence that can only be characterized as double hearsay. Being based on incompetent evidence, the charge does not merit the attention of this Court. Disposition To recapitulate, therefore, we find that the Court of Appeals committed no reversible error to warrant this appeal. Accordingly, we affirm the appealed decision of the Court of Appeals in toto and dismiss the instant petition.WHEREFORE, the petition is DISMISSED.

BLAS V SANTOS LABRADOR; March 29, 1961 NATURE Appeal from a judgement of the Court of the First Instance of Rizal FACTS - Simeon Blas married twice. His first marriage was with Marta Cruz. They had 3 children only one of whom, Eulalia left children namely Maria, Marta and Lazaro. Lazaro laft 3 legitimate children. Maria and Lazaro’s children are plaintiffs herein.

A2010 page Prof. Labitag Simeon Blas contracted another marriage with Maxima Santos when Marta Cruz died. Ti should be noted that when Marta Cruz died, there was no liquidation of the couple’s property. A week before the death of Simeon Blas, he executed a will which stated that half of their property (with Maxima) is the share of his wife.another document (exibit A) was executed by Maxima Santos which states that one-half of her share of the properties left to her by her husband, she would give to the heirs and legatees or the beneficiaries (plaintiffs) named in the will of her husband. - This action was instituted by plaintiffs against the administratrix of the estate of Maxima Santos, to secure a judicial declaration that one-half of the properties left by said Maxima Santos Vda. de Blas and requesting that the said properties so promised be adjudicated to the plaintiffs. - Trial court held that said Exhibit "A" has not created any right in favor of plaintiffs which can serve as a basis of the complaint; that neither can it be considered as a valid and enforceable contract for lack of consideration and because it deals with future inheritance. The court also declared that Exhibit "A" is not a will because it does not comply with the requisites for the execution of a will; nor could it be considered as a donation. - Both the court below in its decision and the appellees in their brief before us, argue vehemently that the heirs of Simeon Blas and his wife Marta Cruz can no longer make any claim for the unliquidated conjugal properties acquired during said first marriage, because the same were already included in the mass of properties constituting the estate of the deceased Simeon Blas and in the adjudications made by virtue of his will, and that the action to recover the same has prescribed. ISSUE WON plaintiffs can make a claim for half of the properties received by Maxima Santos after the death of Simeon Blas HELD YES Ratio The principal basis for the plaintiffs' action in the case at bar is the document Exhibit "A". Plaintiffs-appellants argue before the Court that Exhibit "A" is both a trust agreement and a contract in the nature of a compromise to avoid litigation. Defendants-appellees, in answer, claim that it is neither a trust agreement nor a compromise agreement. The Court finds that the preparation and execution of Exhibit "A" was ordered by Simeon Blas evidently to prevent his heirs by his first marriage from contesting his will and demanding liquidation of the conjugal properties acquired during his -first marriage, and an accounting of the fruits and proceeds thereof from the time of the death of his first wife. Exhibit "A", therefore, appears to be the compromise defined in Article 1809 of the Civil Code of Spain, in force at the time of the execution of Exhibit "A", which provides as follows: "Compromise is a contract by which each of the parties in interest, by giving, promising, or retaining something avoids the provocation of a suit or terminates one which has already been instituted." The agreement or promise that Maxima Santos makes in Exhibit "A" is to hold onehalf of her said share in the conjugal assets in trust for the heirs and legatees of her husband in his will, with the obligation of conveying, the same to such of his heirs or legatees as she may choose in her last will and testament. Under Exhibit "A",

Obligations and Contracts 157 therefore, Maxima Santos contracted the obligation and promised to give one-half of the above indicated properties to the heirs and legatees of Simeon Blas *this case is under future inheritance so this next paragraph is important - The Court also rejects the defendant’s contention that Exibit A is a contract on future inheritance. It is an obligation or promise made by the maker to transmit one-half of her share in the conjugal properties acquired with her husband, which properties are stated or declared to be conjugal properties in the will of the husband. The conjugal properties were in existence at the time of the execution of Exhibit "A" on December 26, 1936. The properties mentioned were even included by Maxima in the inventory of her husband’s property. The document refers to existing properties which she will receive by operation of law on the death of her husband, because it is her share in the conjugal assets. - It will be noted that what is prohibited to be the subject matter of a contract under Article 1271 of the Civil Code is "future inheritance." To us future inheritance is any property or right not in existence or capable of determination at the time of the contract, that a person may in the future acquire by succession. The properties subject of the contract Exhibit "A" are well-defined properties, existing at the time of the agreement, which Simeon Blas declares in his testament as belonging to his wife as her share in the conjugal partnership. - It is also claimed that the case at bar are concluded by the judgment rendered in the proceedings for the settlement of the estate of Simeon Blas for the reason that the properties left by him be longed to himself and his wife Maxima Santos; that the project of partition in the said case. But the main ground upon which plaintiffs base their present action is the document Exhibit "A", already fully considered above. As this private document contains the express promise made by Maxima Santos to convey in her testament, upon her death, one-half of the conjugal properties she would receive as her share in the conjugal properties, the action to enforce the said promise did not arise until and after her death when it was found that she did not comply with her above-mentioned promise. It may be added that plaintiffsappellants did not question the validity of the project of partition precisely because of the promise made by Maxima Santos in the compromise Exhibit "A". Disposition The defendant-appellee, administratrix of the estate of Maxima Santos, is ordered to convey and deliver one-half of the properties adjudicated to Maxima Santos as her share in the conjugal properties to the heirs and the legatees of her husband Simeon Blas.

TANEDO V COURT OF APPEALS PANGANIBAN; January 22, 1996 NATURE Petition for review on certiorari under Rule 45 of the Rules of Court to set aside and reverse the Decision of the Court of Appeals on September 26, 1991 affirming the decision of RTC Tarlac, Tarlac denying reconsideration on May 27, 1992. FACTS - October 20, 1962 - Lazardo Tañedo executed a notarized deed of absolute sale in favor of his eldest brother, Ricardo Tañedo, and the latter’s wife, Teresita Barera (private respondents) whereby in consideration of P1,500.00, “one hectare of whatever share I shall have over Lot No. 191 of the cadastral survey of Gerona, Province of Tarlac… the said property being his future inheritance from his parents”

A2010 page Prof. Labitag - February 28, 1980 - Lazaro executed an “Affidavit of Conformity” upon death of his father Matias to “re-affirm, respect. acknowledge and validate the sale I made in 1962.” - January 13, 1981 - Lazaro executed another notarized deed of sale in favor of private respondents covering his “undivided ONE TWELVE (1/12) of a parcel of land known as Lot 191” where he acknowledged receipt of P 10,000.00 as consideration - February 1981 - Ricardo learned that Lazaro sold the same property to his children (petitioners) through a deed of sale dated December 29, 1980 conveying to his ten children his allotted portion under the extrajudicial partition executed by the heirs of Matias - June 7, 1982 – Sps Ricardo Tanedo recorded the Deed of Sale in their favor in the Registry of Deeds - July 16, 1982 – Lazaro’s children filed a complaint for rescission (plus damages) of the deeds of sale executed by Lazaro in favor of Sps Ricardo Lazao covering the property inherited by Lazaro from his father. - Petitioners also presented in evidence (1) a private writing purportedly prepared and signed by Matias dated December 28, 1978, stating that it was his desire that whatever inheritance Lazaro would receive from him should be given to his (Lazaro’s) children (2) a typewritten document dated March 10, 1979 signed by Lazaro in the presence of two witnesses, wherein he confirmed that he would voluntarily abide by the wishes of his father, Matias, to give to his (Lazaro’s) children all the property he would inherit from the latter (3) a letter dated January 1, 1980 of Lazaro to his daughter, Carmela, stating that his share in the extrajudicial settlement of the estate of his father was intended for his children - Sps Ricardo Tanedo presented “Deed of Revocation of a Deed of Sale” dated March 12, 1981 where Lazaro revoked the sale in favor of his children for the reason that it was “simulated or fictitious - without any consideration whatsoever.” - after the case was filed, Lazaro executed a sworn statement which virtually repudiated the contents of the Deed of Revocation of a Deed of Sale and the Deed of Sale in favor of the Sps Ricardo Tanedo. However, Lazaro testified that he sold the property to Ricardo, and that it was a lawyer who induced him to execute a deed of sale in favor of his children after giving him five pesos (P5.00) to buy a “drink” - TC: decided in favor of Sps Ricardo Tanedo and that Lazaro’s children failed “to adduce a preponderance of evidence to support (their) claim.” - CA: affirmed the decision of the trial court, ruling that the Deed of Sale dated January 13, 1981 was valid and that its registration in good faith Petitioners Claim TC committed errors in 1. concluding that the Contract of Sale of October 20, 1962 is merely voidable or annulable and not void ab initio pursuant to A1347 par2 CC involving ‘future inheritance’ 2. holdings Sps Ricardo Tanedo acted in good faith in registering the deed of sale of January 13, 1981 with the Register of Deeds of Tarlac and therefore ownership of the land passed on to them 3. ignoring and failing to consider the testimonial and documentary evidence of Lazaro’s children which clearly established by preponderance of evidence that they are indeed the legitimate and lawful owners of the property in question

Obligations and Contracts 158 4. that the decision is contrary to law and the facts of the case and the conclusions drawn from the established facts are illogical and off-tangent - Allegations made by petitioners in their basic petition and in their memorandum 1. TC allegedly ignored the claimed fact that Ricardo “by fraud and deceit and with foreknowledge” that the property in question had already been sold to petitioners, made Lazaro execute the deed of January 13, 1981 2. There is allegedly adequate evidence to show that only 1/2 of the purchase price of P10,000.00 was paid at the time of the execution of the deed of sale, contrary to the written acknowledgment, thus showing bad faith 3. There is allegedly sufficient evidence showing that the deed of revocation of the sale in favor of petitioners “was tainted with fraud or deceit.” 4. There is allegedly enough evidence to show that private respondents “took undue advantage over the weakness and unschooled and pitiful situation of Lazaro Tanedo . . .” and that respondent Ricardo Tañedo “exercised moral ascendancy over his younger brother he being the eldest brother and who reached fourth year college of law and at one time a former Vice-Governor of Tarlac, while his younger brother only attained first year high school” 5. TC erred in not giving credence to petitioners’ evidence, especially Lazaro Tañedo’s Sinumpaang Salaysay dated July 27, 1982 stating that Ricardo Tañedo deceived the former in executing the deed of sale in favor of private respondents. ISSUES 1. WON sale of a future inheritance is valid 2. WON the subsequent execution on January 13, 1981 (and registration with the Registry of Property) of a deed of sale covering the same property to the same buyers is valid 3. WON this Court may review the findings of the respondent Court in a. holding that the buyers acted in good faith in registering the said subsequent deed of sale and b. failing to consider petitioners’ evidence c. its conclusions “being illogical and off-tangent” HELD * “errors” which are reviewable by this Court in this petition for review on certiorari are only those allegedly committed by the respondent Court of Appeals and not directly those of the trial court, which is not a party here. * The “assignment of errors” in the petition quoted above is therefore totally misplaced, and for that reason, the petition should be dismissed. But in order to give the parties substantial justice we have decided to delve into the issues as above re-stated. 1. NO. - A1347 CC no contract may be entered into upon a future inheritance except in cases expressly authorized by law. TF contract made in 1962 is not valid and cannot be the source of any right nor the creator of any obligation between the parties and also, “affidavit of conformity” dated February 28, 1980, that validates or ratifies the 1962 sale, is also useless 2. YES In land, an immovable property, ownership shall belong to the buyer who in good faith registers it first in the registry of property

A2010 page Prof. Labitag - the documents that are critical to the resolution of this case are: (a) the deed of sale of January 13, 1981 in favor of private respondents covering Lazaro’s undivided inheritance of one-twelfth (1/12) share in Lot No. 191, which was subsequently registered on June 7, 1982 (b) the deed of sale dated December 29, 1980 in favor of petitioners covering the same property. - These two documents were executed after the death of Matias (and his spouse) and after a deed of extrajudicial settlement of his (Matias’) estate was executed, thus vesting in Lazaro actual title over said property. In other words, these dispositions, though conflicting, were no longer infected with the infirmities of the 1962 sale. - Critical in determining which of these two deeds should be given effect is the registration of the sale in favor of private respondents with the register of deeds on June 7, 1982. - A1544 CC governs the preferential rights of vendees in cases of multiple sales, as follows: If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property. Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property. Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. - Also, between two purchasers, the one who registered the sale in his favor has a preferred right over the other who has not registered his title, even if the latter is in actual possession of the immovable property 3. NO. - CA, reviewing TC’s findings, refused to overturn the latter’s assessment of the testimonial evidence, as follows: “We are not prepared to set aside the finding of the lower court upholding Ricardo Tanedo’s testimony, as it involves a matter of credibility of witnesses which the trial judge, who presided at the hearing, was in a better position to resolve.” - all the above contentions involve questions of fact, appreciation of evidence and credibility of witnesses, which are not proper in this review. It is well-settled that the Supreme Court is not a trier of facts. - In petitions for review under Rule 45 of the Revised Rules of Court, only questions of law may be raised and passed upon. Absent any whimsical or capricious exercise of judgment, and unless the lack of any basis for the conclusions made by the lower courts be amply demonstrated, the Supreme Court will not disturb their findings. We are far from convinced that both courts gravely abused their respective authorities and judicial prerogatives. Disposition Petition is DENIED and the Decision of the Court of Appeals is AFFIRMED

LIGUEZ V COURT OF APPEALS REYES; December 18, 1957

Obligations and Contracts 159 NATURE Petition for review by certiorari of a decision of the CA, affirming the CFI Davao’s decision dismissing Liguez’ complaint for recovery of land FACTS - Conchita LIGUEZ filed a complaint against the widow and heirs of the late Salvador LOPEZ so as to recover a parcel of 51.84 hectares of land, situated in barrio BogacLinot, in Mati, Davao. She claimed to be its legal owner, pursuant to a deed of donation of said land, executed in her favor by the owner, Salvador Lopez, on 18 May 1943. - The defense interposed was that the donation was null and void for having an illicit causa or consideration, which was the plaintiff's entering into marital relations with Salvador Lopez, a married man. Also, the property had already been adjudicated to the appellees as heirs of Lopez. > Findings of the Court of Appeals: - The deed of donation was prepared by the Justice of the Peace of Mati, Davao, before whom it was signed and ratified on the said date. At that time, Liguez was a minor and only 16 years of age. When the donation was made, Lopez had been living with the parents of Liguez for barely a month. The donation was made in view of the desire of Lopez to have sexual relations with Liguez. Lopez had confessed to his love for appellant to the instrumental witnesses, with the remark that her parents would not allow Lopez to live with her unless he first donated the land in question. After the donation, Conchita Liguez and Salvador Lopez lived together in the house that was built upon the latter's orders, until Lopez was killed on July 1, 1943. - The donated land originally belonged to the conjugal partnership of Salvador Lopez and his wife, Maria Ngo. The widow and children of Lopez were in possession of the land and made improvements. The deed of donation was never recorded. Court of Appeal’s Ruling - The deed of donation was inoperative, and null and void (1) because the husband, Lopez, had no right to donate conjugal property to the plaintiff appellant; and (2) because the donation was tainted with illegal cause or consideration, of which donor and donee were participants. - CA rejected appellant's claim on the basis of "in pari delicto non oritur actio" rule as embodied in Art.1412 of the New Civil Code.6 Petitioners' Claim - CFI and CA erred in holding the donation void for having an illicit cause or consideration. Under Art 1274 of the Civil Code of 1889, "in contracts of pure beneficence the consideration is the liberality of the donor", and that liberality can never be illegal, since it is neither against law or morals or public policy. ISSUES 6

ART. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking; (2) When only one of the contracting parties is at fault, he cannot recover, what he has given by reason of the contract, or ask for fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise.

A2010 page Prof. Labitag 1. 2. 3. 4.

WON WON WON WON

donation was predicated upon an illicit causa the “in pare delicto” rule is applicable to the case heirs of Lopez can plead illegality of deed of donation Liguez is entitled to the land donated by Lopez

HELD 1. YES Ratio The motive may be regarded as causa when it predetermines the purpose of the contract. The cohabitation was an implied condition to the donation, and being unlawful, it necessarily tainted the donation itself. Reasoning Art 1274 is not applicable because liberality of the donor therein is deemed causa in those contracts that are of "pure" beneficence. These are contracts designed solely and exclusively to procure the welfare of the beneficiary, without any intent of producing any satisfaction for the donor. Art 1274 also provides that in remuneratory contracts, the consideration is the service or benefit for which the remuneration is given; causa is not liberality in these cases because the contract or conveyance is not made out of pure beneficence, but "solvendi animo." - In making the donation, the late Lopez was not moved exclusively by the desire to benefit Conchita Liguez, but also to secure her cohabiting with him, so that he could gratify his sexual impulses. This is clear from the confession of Lopez to the witnesses Rodriguez and Ragay, that he was in love with appellant, but her parents would not agree unless he donated the land in question to her. Therefore, the donation was but one part of an onerous transaction (at least with appellant's parents) that must be viewed in its totality. - Appellant sought to differentiate between the alleged liberality of Lopez, as causa for the donation in her favor, and his desire for cohabiting with appellant, as motives that impelled him to make the donation. She quoted from Manresa and the jurisprudence of this Court on the distinction that must be maintained between causa and motives. However, Manresa himself expressly exempted from the rule those contracts that are conditioned upon the attainment of the motives of either party. 2. NO Reasoning It cannot be said that both parties had equal guilt when we consider that as against Lopez, who was a man advanced in years and mature experience, the appellant was a mere minor, 16 years of age, when the donation was made. There is no finding made by the Court of Appeals that she was fully aware of the terms of the bargain entered into by and Lopez and her parents. Her acceptance in the deed of donation did not necessarily imply knowledge of conditions and terms not set forth therein. The facts are of the case are actually more suggestive of seduction than of immoral bargaining on the part of appellant. - Memo auditor propriam turpitudinem allegans. The rule that parties to an illegal contract, if equally guilty, will not be aided by the law but will both be left where it finds them, has been interpreted by this Court as barring the party from pleading the illegality of the bargain either as a cause of action or as a defense. 3. NO Reasoning The deed of donation is regular on its face, and to defeat its effect, the appellees must plead and prove that it is illegal. But such plea on the part of the Lopez heirs is not receivable, since Lopez, himself, if living, would be barred from setting up that plea; and his heirs can have no better rights than Lopez himself.

Obligations and Contracts 160 4. YES Ratio The prima facie donation inter vivos and its acceptance by the donees having been proved by means of a public instrument, and the donor having been duly notified of said acceptance, the contract is perfect and obligatory, unless an exception is proved which is based on some legal reason opportunely alleged by the donor or his heirs. (Lopez v. Olbes) - The donation made by the husband in contravention of law is not void in its entirety, but only in so far as it prejudices the interest of the wife, because said property was conjugal in character and the right of the husband to donate community property is strictly limited by law (Civil Code of 1889, Arts. 1409, 1415, 1413)7 Reasoning Only the court of origin that settled the estate of the late Salvador Lopez. has the requisite data to determine whether the donation is inofficious or not. To determine the prejudice to the widow, it must be shown that the value of her share in the property donated can not be paid out of the husband's share of the community profits. - The situation of the children and forced heirs of Lopez approximates that of the widow. As privies of their parent, they are barred from invoking the illegality of the donation. But their right to a legitime out of his estate is not thereby affected, since the legitime is granted them by the law itself. The forced heirs are then entitled to have the donation set aside in so far as in officious: i.e., in excess of the portion of free disposal. In computing the legitimes, the value of the property to Liguez, should be considered part of the donor's estate. - With regard to the improvements in the land in question, the same should be governed by the rules of accession and possession in good faith, it being undisputed that the widow and heirs of Lopez were unaware of the donation in favor of the appellant when the improvements were made. Disposition Decisions appealed from are reversed and set aside, and the appellant Conchita LIGUEZ declared entitled to so much of the donated property as may be found, upon proper liquidation, not to prejudice the share of the widow Maria Ngo in the conjugal partnership with Salvador P. Lopez or the legitimes of the forced heirs of the latter. The records are ordered remanded to the court of origin for further proceedings in accordance with this opinion.

CARANTES V COURT OF APPEALS CASTRO; April 25, 1977 NATURE Appeal by certiorari from the decision of the Court of Appeals. FACTS

7

ART. 1409. The conjugal partnership shall also be chargeable with anything which may have been given or promised by the husband alone to the children born of the marriage in order to obtain employment for them or give then, a profession or by both spouses by common consent, should they not have stipulated that such expenditures should be borne in whole or in part by the separate property of one of them.". ART. 1415. The husband may dispose of the property of the conjugal partnership for the purposes mentioned in Article 1409. ART. 1413. In addition to his powers as manager the husband may for a valuable consideration alienate and encumber the property of the conjugal partnership without the consent of the wife.

A2010 page Prof. Labitag - Mateo Carantes was the original owner of Lot No. 44 situated at Loakan, Baguio City. In 1913 he died and was survived by his widow Ogasia and six children, namely, Bilad Lauro, Crispino, Maximino, Apung and Sianang, all surnamed Crantes. - In 1930, construction of the Loakan airport was commenced by the Government. Because a portion of Lot No. 44 was needed for the landing field, the Government instituted proceedings for its expropriation. For this purpose, Lot No. 44 was subdivided into Lot Nos. 44-A, 44-B, 44-C, 44-D and 44-E. The Government expropriated Lot No. 44-A. - In 1933, special proceedings were filed to settle the estate of Mateo Carantes where his son, herein petitioner Maximino Carantes was appointed judicial administrator. On June 20, 1939, Maximino, as administrator, filed a project of partition wherein he listed himself, and his brothers and sisters, or the latter’s surviving children as the heirs of Mateo Carantes. At that time, negotiations were under way for the Government’s purchase of Lot Nos. 44-B and 44-C, so Maximino only listed Lot Nos. 44-D and 44-E as the properties to be divided. - On October 23, 1939 a deed denominated “Assignment of Right to Inheritance” was executed by four of Mateo Carantes’ children, namely, Bilad, Sianang, Lauro and Crispino, and the heirs of Apung Carantes, Namely, Pitag, Bill, Alson, Eduardo and Juan, assigning to Maximino Carantes their rights to inheritance in Lot No. 44. The stated monetary considerato]ion for the assignment was P1.00. However, the document contains a recital to the effect that the said lots, “by agreement of all the direct heirs and heirs by representation of the deceased Mateo Carntes as expressed and conveyed verbally by him during his lifetime, rightly and exclusively belong to the particular heir, Maximino Carantes, now and in the past in the exclusive, continuous, peaceful and notorious possession of the same for more than ten years.” On the same date Maximino sold to the Government Lot Nos. 44-B and 44-C and divided the proceeds of the sale among himself and the other heirs of Mateo. - On February 6, 1940, the heirs of Mateo petitioned for the cancellation of the Original Certificate of Title of Lot No.44 and had it replaced with Transfer Certificate of Title 2533 declaring the five children of Mateo and the children of Apung Carantes (representing their deceased father) as co-owners of Lot No. 44. - On March 16, 1940, Maximino registered the deed of “Assignment of Right to Inheritance” and accordingly, TCT 2533 was cancelled and was replaced with TCT 2540 in the name of Maximino Carantes. - On February 21, 1947, pursuant to the deed of sale executed by Maximino in favor of the Government, TCT 2540 was cancelled and replaced with TCT T-98 (covering Lot Nos. 44-A, 44-B and 44-C) in the Government’s name and TCT T-99 (covering Lot Nos. 44-D and 44-E) in Maximino’s name, who has up to the present remained the registered owner of said lots. - On September 4, 1958 a complaint was filed by Bilad, Lauro and Crispino and some of the heirs of Apung and of Sianang against Maximino. They alleged that they only executed the deed of “Assignment of Right to Inheritance” because they were made to believe that it merely authorized Maximino to convey portions of Lot No. 44 to the Government in their behalf to minimize expenses and facilitate the transaction; and that it was only on February 18, 1958, when the plaintiffs secured a copy of the deed, that they came to know that the same assigned in favor of Maximino their rights to inheritance from Mateo Carantes. - On September 10, 1958 the defendant filed a motion to dismiss on the grounds 1) that plaintiffs’ cause of action was barred by the statute of limitation because the deed of assignment was recorded in the Registry of Property at the latest on

Obligations and Contracts 161 February 21, 1947, hence cause of action accrued from said date, and pursuant to Art. 1144 of the New Civil Code, it must be brought within ten years so plaintiffs’ right to file the complaint had already prescribed on September 4, 1958; and 2) the complaint states no cause of action because ownership of the property became vested in Maximino by acquisitive prescription ten years from its registration in his name on February 21, 1947. - On January 28, 1965, the RTC decided that since an action on fraud prescribes after 4 years from discovery, the discovery deemed to have been on March 16, 1940 when Maximino registered the deed of assignment, the plaintiffs’ cause of action had prescribed. The plaintiffs’ motion for reconsideration was denied. And so they appealed in the CA and it reversed the RTC’s ruling. ISSUE WON respondent court is correct in reversing the RTC’s decision HELD Ratio Total absence of consideration is what renders a contract absolutely void and inexistent. Reasoning The CA points out that the deed of assignment is void ab initio and inexistent on the grounds that real consent was wanting and the consideration of P1.00 is so shocking to the conscience that there was in fact no consideration, hence the action for declaration of its inexistence does not prescribe. BUT the sum of P1.00 is clear evidence that there was no absence of consideration. In addition, the document recites that the decedent Mateo Carantes had, during his lifetime, expressed to the signatories to the contract that the property subjectmatter thereof rightly and exclusively belonged to petitioner Maximino Carantes. This acknowledgment by the signatories definitely constitutes valuable consideration for the contract. As for fraud and the prescription of action, the Court agrees with the RTC. Disposition ACCORDINGLY, the judgment of the Court of Appeals appealed from is set aside, and another entered dismissing the complaint in Civil Case No. 804 of the Court of First Instance of Baguio. No costs. Voting Makasiar, Munoz Palma and Martin, JJ., concur. Teehankee, J., concur on the ground that respondents’ action based on constructive trust prescribed after ten years.

BUENAVENTURA V CA CARPIO; Novermber 20, 2003 NATURE Petition for review on certiorari of a decision of the Court of Appeals FACTS - Respondent spouses Leonardo Joaquin and Feliciana Landrito are the parents of petitioners Consolacion, Nora, Emma and Natividad as well as of respondents Fidel, Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed Joaquin. The married Joaquin children are joined in this action by their respective spouses. - Sought to be declared null and void ab initio are six deeds of sale of real property executed by respondent parents in favor of their respondent children and the

A2010 page Prof. Labitag corresponding certificates of title issued in their names. In seeking the declaration of nullity of the said deeds of sale and certificates of title, petitioners, in their complaint, aver that the deeds of sale are simulated as they are, are null and void ab initio because (1) there was no actual valid consideration for the deeds of sale x x x over the properties in litis; (2) assuming that there was consideration in the sums reflected in the questioned deeds, the properties are more than three-fold times more valuable than the measly sums appearing therein; (3) the deeds of sale do not reflect and express the true intent of the parties (vendors and vendees); and (4) the purported sale of the properties in litis was the result of a deliberate conspiracy designed to unjustly deprive the rest of the compulsory heirs (petitioner children) of their legitime. - Respondents aver that (1) petitioner siblings do not have a cause of action against them as well as the requisite standing and interest to assail their titles over the properties in litIs; (2) the sales were with sufficient considerations and made by respondent parents voluntarily, in good faith, and with full knowledge of the consequences of their deeds of sale; and (3) the certificates of title were issued with sufficient factual and legal basis. - The trial court ruled in favor of the respondents and dismissed the complaint. The Court of Appeals affirmed the decision of the trial court. Hence, this petition. Petitioners assert that their respondent siblings did not actually pay the prices stated in the Deeds of sale to their respondent father. Thus, petitioners ask the court to declare the Deeds of Sale void. Petitioners also ask that assuming that there is consideration, the same is grossly inadequate as to invalidate the Deeds of Sale. ISSUES 1. WON the Deeds of Sale are void for lack of consideration 2. WON the Deeds of Sale are void for gross inadequacy of price HELD 1. NO - It is not the payment of price that determines the validity of a contract of sale. Payment of the price has nothing to do with the perfection of the contract. Payment of the price goes into the perfection of the contract. Failure to pay the consideration is different from lack of consideration. The former results in a right to demand the fulfillment or cancellation of the obligation under an existing valid contract while the latter prevents the existence of a valid contract. - Petitioners failed to show that the prices in the Deeds of Sale were absolutely simulated. To prove simulation, petitioners presented Emma Joaquin Valdoz’s testimony stating that their father, respondent Leonardo Joaquin, told her that he would transfer a lot to her through a deed of sale without need for her payment of the purchase price. The trial court did not find the allegation of absolute simulation of price credible. Petitioners’ failure to prove absolute simulation of price is magnified by their lack of knowledge of their respondent siblings’ financial capacity to buy the questioned lots. On the other hand, the Deeds of Sale which petitioners presented as evidence plainly showed the cost of each lot sold. Not only did respondents’ minds meet as to the purchase price, but the real price also stated in the Deeds of Sale. As of the filing of the complaint, respondent siblings have also fully paid the price to their respondent father. 2. NO - Art. 1355 of the Civil Code states:

Obligations and Contracts 162 “Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake, or undue influence. (Emphasis supplied) - Art. 1470 of the Civil Code further provides: “Gross inadequacy of price does not affect a contract of sale, except as may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract.” (Emphasis supplied) - Petitioners failed to prove any of the instances mentioned in art. 1355 and 1470 of the Civil Code which would invalidate, or even affect, the Deeds of Sale. Indeed, there is no requirement that the price be equal to exact value of the subject matter of the sale. All the respondents believed that they received the commutative value of what they gave. “Men may do foolish things, make ridiculous contracts, use miserable judgment, and lose money by them—indeed, all they have in the world; but not for that alone can the law intervene and restore. There must be, in addition, a violation of the law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the situation and remedy it (Vales V Villa).” - Moreover, the factual findings of the appellate court are conclusive on the parties and carry greater weight when they coincide with the factual findings of the trial court. In the instant case, the trial court found that the lots were sold for a valid consideration, and that the defendant children actually paid the purchase price stipulated in their respective Deeds of Sale. Actual payment of the purchase price by the buyer to the seller is a factual finding that is now conclusive upon us.

HERNAEZ V DELOS ANGELES REYES; April 30, 1969 NATURE Petition for a writ of certiorari to set aside certain orders of the Court of First Instance of Quezon City (Branch IV), in its Civil Case No. Q-10288, dismissing a complaint for breach of contract and damages, denying reconsideration, refusing to admit an amended complaint, and declaring the dismissal final and unappealable. FACTS - Petitioner Marlene Dauden Hernaez, a motion picture actress, filed a complaint against Hollywood Far East Productions, Inc., and its President and General Manager, Ramon Valenzuela, to recover P14,700.00 representing a balance allegedly due for her services as leading actress in two motion pictures produced by the company, and to recover damages. - CFI QC (Judge Walfrido delos Angeles, presiding) ordered the complaint dismissed, mainly because the "claim of plaintiff was not evidenced by any written document, either public or private" and the complaint "was defective on its face" for violating Articles 1356 and 1358 of the Civil Code of the Philippines, and for containing defective allegations. - Plaintiff sought reconsideration of the dismissal and for admission of an amended complaint. The court denied reconsideration and the leave to amend. A second motion for reconsideration was filed, which the court also denied for being pro forma, as its allegations "are, more or less, the same as the first motion," and for not being accompanied by an affidavit of merits, and further declared the dismissal final and unappealable.

A2010 page Prof. Labitag - respondent lower court argues that the proposed amended complaint did not vary in any material respect from the original complaint except in minor details, and suffers from the same vital defect of the original complaint, which is the violation of Article 1356 of the Civil Code, in that the contract sued upon was not alleged to be in writing; that by Article 1358 the writing was absolute and indispensable, because the amount involved exceeds five hundred pesos; and that the second motion for reconsideration did not interrupt the period for appeal, because it was not served on three days notice. ISSUES 1. WON lower court erred in denying plaintiff’s motions for reconsideration and leave to amend 2. WON lower court abused its discretion in ruling that a contract for personal services involving more than P500.00 was either invalid or unenforceable under the last paragraph of Article 1358 of the Civil Code of the Philippines HELD 1. YES When a court sustains a demurrer or motion to dismiss it is error for the court to dismiss the complaint without giving the party plaintiff an opportunity to amend his complaint if he so chooses. Insofar as the first order of dismissal did not provide that the same was without prejudice to amendment of the complaint, or reserve to the plaintiff the right to amend his complaint, the said order was erroneous; and this error was compounded when the motion to accept the amended complaint was denied in the subsequent order of 3 October 1966. Petitioner-plaintiff was within her rights in filing her so-called second motion for reconsideration, which was actually a first motion against the refusal to admit the amended complaint. - The second motion for reconsideration was addressed to the court's refusal to allow an amendment to the original complaint, and this was a ground not invoked in the first motion for reconsideration. Thus, the second motion to reconsider was really not pro forma, as it was based on a different ground, even if in its first part it set forth in greater detail the arguments against the correctness of the first order to dismiss. As to the lack of 3 days notice, the record shows that respondent-appellees had filed their opposition to the second motion to reconsider; so that even if it were true that respondents were not given the full 3 days' notice, they were not deprived of any substantial right. Therefore, the claim that the first order of dismissal had become final and unappealable must be overruled. 2. YES The ruling contested betrays a basic and lamentable misunderstanding of the role of the written form in contracts, as ordained in the Civil Code. In general, contracts are valid and binding from their perfection regardless of form, whether they be oral or written. This is plain from Articles 1315 and 1356 of the Civil Code. "ART. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law." "ART. 1356. Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present.. . ." - These essential requisites referred to in Art 1356 CC are normally (1) consent, (2) proper subject matter, and (3) consideration or causa for the obligation assumed (Article 1318). Once the three elements exist, the contract is generally valid and

Obligations and Contracts 163 obligatory, regardless of the form, whether oral or written, in which they are couched. - To this general rule, the Code admits exceptions, set forth in the second portion of Article 1356: "However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable ….” - There are thus two exceptions to the general rule: (a) Contracts for which the law itself requires that they be in some particular form (writing) in order to make them valid and enforceable (solemn contracts). (b) Contracts that the law requires to be proved by some writing (memorandum) of its terms. Their existence not being provable by mere oral testimony (unless wholly or partly executed), these contracts are exceptional in requiring a writing embodying the terms thereof for their enforceability by action in court. - The contract sued upon by petitioner, i.e. compensation for services, does not come under either exception. It is true that it appears included in Article 1358, last clause, providing that "all other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one." But Article 1358 nowhere provides that the absence of written form in this case will make the agreement invalid or unenforceable. On the contrary, Article 1357 clearly indicates that contracts covered by Article 1358 are binding and enforceable by action or suit despite the absence of writing. "ART. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. - NOTE: It is not enough that the law should require that the contract be in writing, as it does in Article 1358. The law must further prescribe that without the writing the contract is not valid or not enforceable by action. Disposition The order dismissing the complaint is set aside, and the case is ordered remanded to the court of origin for further proceedings not at variance with the decision. Costs to be solidarily paid by private respondents Hollywood Far East Productions, Inc., and Ramon Valenzuela.

GARCIA V BISAYA REYES; 1955 FACTS - On May 20, 1952, plaintiff filed a complaint against the defendants in the Court of First Instance of Oriental Mindoro, alleging that: On November 12, 1938, defendants executed in favor of plaintiff a deed of sale covering a parcel of land therein described. - That the said land "was erroneously designated by the parties in the deed of sale as an unregistered land (not registered under Act 496, nor under the Spanish Mortgage Law) when in truth and in fact said land is a portion of a big mass of land registered under Original Certificate of Title No. 6579 in the Office of the Register of Deeds of Oriental Mindoro" - That despite persistent demand from plaintiff to have the error corrected, defendants have refused to do so. Plaintiff, therefore, prayed for judgment ordering defendants to make the aforesaid correction in the deed of sale.

A2010 page Prof. Labitag - Defendants denied having executed the alleged deed of sale and pleaded prescription as a defense - Without trial on the merits and merely upon motion, the lower court dismissed the case on the ground that plaintiff's action had already prescribed. From this order plaintiff has appealed directly to the SC ISSUES 1. WON the action for reformation of instruments has already prescribed 2. WON the action for reformation of instruments may prosper HELD 1. NO - Both appellant and appellees apparently regard the present action as one for the reformation of an instrument under Chapter 4, Title II, Book IV of the new Civil Code. Specifically, the object sought is the correction of an alleged mistake in a deed of sale covering a piece of land. The action. being upon a written contract, it should prescribe in ten years counted from the day it could have been instituted. Obviously, appellant could not have instituted his action to correct an error in a deed until that error was discovered. There being nothing in the pleadings to show that the error was discovered more than ten years before the present action was filed on May 20, 1952, while, on the other hand, there is allegation that the error was discovered "only recently", we think the action should not have been dismissed as having already prescribed before the factual basis for prescription had been established and clarified by evidence. 2. NO - Appellant's complaint states no cause of action, for it fails to allege that the instrument to the reformed does not express the real agreement or intention of the parties. Such allegation is essential since the object sought in an action for reformation is to make an instrument conform to the real agreement or intention of the parties. But the complaint does not even allege what the real agreement or intention was. Moreover, courts do not reform instruments merely for the sake of reforming them, but only to enable some party to asserts right under them as reformed. Disposition Order of dismissal is affirmed not because of prescription but because of failure to state the cause of action

BENTIR AND PORMIDA V LEANDA AND LEYTE GULF TRADERS, INC. KAPUNAN; April 12, 2000 NATURE Certiorari with prayer for a writ of preliminary injunction FACTS - May 15, 1992- Leyte Gulf Traders, Inc. filed a complaint for reformation of instrument, specific performance, annulment of conditional sale and damages with prayer for writ of injunction against Yolanda Rosello-Bentir and the spouses Samuel and Charito Pormida. - LGT Inc alleged that it entered into a contract of lease of a parcel of land with Bentir for a period of 20 years starting May 5, 1968.

Obligations and Contracts 164 - LGT Inc said the lease was extended for another 4years or until May 31, 1992. - May 5, 1989- Bentir sold the leased premises to spouses Samuel and Charito Pormada. - LGT Inc questioned the sale alleging that it had a right of first refusal. It sought the reformation of the expired contract of lease on the ground that its lawyer inadvertently omitted to incorporate in the contract of lease executed in 1968, the verbal agreement or understanding between the parties that in the event Bentir leases or sells the lot after the expiration of the lease, LGT Inc has the right to equal the highest offer. - In due time, petitioners filed their answer alleging that the inadvertence of the lawyer who prepared the lease contract is not a ground for reformation. - They further contended that respondent corporation is guilty of laches for not bringing the case for reformation of the lease contract within the prescriptive period of 10 years from its execution. - LGT Inc then filed its reply and on November 18, 1992, filed a motion to admit amended complaint. Said motion was granted by the lower court. - Thereafter, Petitioners filed a motion to dismiss reiterating that the complaint should be dismissed on the ground of prescription. - Dec. 15, 1995- TC through Judge Pedro S. Espina issued an order dismissing the complaint premised on its finding that the action for reformation had already prescribed. - Dec. 29, 1995- LGT Inc filed a MR of the order dismissing the complaint. - Jan 11, 1996, LGT Inc filed an urgent ex-parte motion for issuance of an order directing the petitioners, or their representatives or agents to refrain from taking possession of the land in question. - March 28, 1996 - the case was re-raffled and assigned to RTC, Tacloban City, presided by herein respondent judge Mateo M. Leanda. - May 10, 1996 – Leanda reversed the order of dismissal on the grounds that the action for reformation had not yet prescribed and the dismissal was "premature and precipitate", denying LGT Inc of its right to procedural due process. - June 10, 1996- Leanda issued an order for status quo ante, enjoining petitioners to desist from occupying the property. - Jan. 17, 1997- CA affirmed the assailed decision of Leanda; denied MR ISSUE WON the complaint for reformation has prescribed and has not, WON LGT Inc is entitled to the remedy of reformation sought HELD YES, it has prescribed. LGT Inc is no longer entitled to the reformation sought. Reasoning The remedy of reformation of an instrument is grounded on the principle of equity where, in order to express the true intention of the contracting parties, an instrument already executed is allowed by law to be reformed. - The right of reformation is necessarily an invasion or limitation of the parol evidence rule since, when a writing is reformed, the result is that an oral agreement is by court decree made legally effective. - Consequently, the courts, as the agencies authorized by law to exercise the power to reform an instrument, must necessarily exercise that power sparingly and with great caution and zealous care. Moreover, the remedy, being an extraordinary one, must be subject to limitations as may be provided by law. Our law and

A2010 page Prof. Labitag jurisprudence set such limitations, among which is laches. A suit for reformation of an instrument may be barred by lapse of time. - The prescriptive period for actions based upon a written contract and for reformation of an instrument is ten (10) years under Article 1144 of the Civil Code. - Prescription is intended to suppress stale and fraudulent claims arising from transactions like the one at bar which facts had become so obscure from the lapse of time or defective memory. - In the case at bar, respondent corporation had 10 years from 1968, the time when the contract of lease was executed, to file an action for reformation. Sadly, it did so only on May 15, 1992 or twenty-four (24) years after the cause of action accrued, hence, its cause of action has become stale, hence, time-barred. - If, according to LGT Inc., there was an agreement between the parties to extend the lease contract for 4 years after the original contract expired in 1988, then Art. 1670 would not apply as this provision speaks of an implied new lease (tacita reconduccion) where at the end of the contract, the lessee continues to enjoy the thing leased "with the acquiescence of the lessor", so that the duration of the lease is "not for the period of the original contract, but for the time established in Article 1682 and 1687." In other words, if the extended period of lease was expressly agreed upon by the parties, then the term should be exactly what the parties stipulated, not more, not less. - Even if the supposed 4-year extended lease be considered as an implied new lease under Art. 1670, "the other terms of the original contract" contemplated in said provision are only those terms which are germane to the lessee's right of continued enjoyment of the property leased. The prescriptive period of 10 years provided for in Art. 1144 applies by operation of law, not by the will of the parties. Therefore, the right of action for reformation accrued from the date of execution of the contract of lease in 1968. - Even if we were to assume for the sake of argument that the instant action for reformation is not time-barred, LGT Inc's action will still not prosper because under Sec 1, Rule 64 of the New Rules of Court, an action for the reformation of an instrument is instituted as a special civil action for declaratory relief. - Purpose of an action for declaratory relief- to secure an authoritative statement of the rights and obligations of the parties for their guidance in the enforcement or compliance and not to settle issues arising from an alleged breach thereof. - Here, LGT Inc. brought the present action for reformation after an alleged breach or violation of the contract was already committed by Bentir. Consequently, the remedy of reformation no longer lies. Disposition Petition is GRANTED. J. Leanda’s decision is reversed and set aside. J. Espina’s decision dismissing the reformation is reinstated. _____________________ Art. 1144. The following actions must be brought within ten years from the time the right of action accrues: (1) Upon a written contract; (2) Upon an obligation created by law; (3) Upon a judgment. Art. 1670. If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with the acquiescence of the lessor, and unless a notice to the contrary by either party has previously been given, it is understood that there is an implied new lease, not for the period of the original contract, but for the time

Obligations and Contracts 165 established in articles 1682 and 1687. The other terms of the contract shall be revived.

ATILANO V ATILANO MAKALINTAL; May 21, 1969

NATURE Appeal from the decision of the Court of First Instance FACTS - In 1916, Eulogio Atilano I acquired, by purchase from one Gerardo Villanueva, lot No. 535 of the then municipality of Zamboanga. The vendee thereafter obtained transfer certificate of title No. 1134 in his name. In 1920 he had the land subdivided into five parts. On May 18 of the same year, after the subdivision had been effected, Eulogio Atilano I, for the sum of P150.00, executed a deed of sale covering lot No. 535-E in favor of his brother Eulogio Atilano II, who thereupon obtained transfer certificate of title No. 3129 in his name. Three other portions, namely lots Nos. 535-B, 535-C and 535-D, were likewise sold to other persons, the original owner, Eulogio Atilano I, retaining for himself only the remaining portion of the land, presumably covered by the title to lot No. 535-A. Upon his death the title to this lot passed to Ladislao Atilano, defendant in this case, in whose name the corresponding certificate (No. T-5056) was issued. - On December 6, 1952, Eulogio Atilano II and his children obtained transfer certificate of title No. 4889 over lot No. 535-E in their names as co-owners. Then, on July 16, 1959, desiring to put an end to the co-ownership, they had the land resurveyed so that it could properly be subdivided; and it was then discovered that the land they were actually occupying on the strength of the deed of sale executed in 1920 was lot No. 535-A and not lot 535-E, as referred to in the deed, while the land which remained in the possession of the vendor, Eulogio Atilano I, and which passed to his successor, defendant Ladislao Atilano, was lot No. 535-E and not lot No. 535-A. - On January 25, 1960, the heirs of Eulogio Atilano II, who was by then also deceased, filed the present action in the CFI of Zamboanga, alleging, that they had offered to surrender to the defendants the possession of lot No. 535-A and demanded in return the possession of lot No. 535-E, but that the defendants had refused to accept the exchange. The plaintiffs' insistence is quite understandable, since lot No. 535-E has an area of 2,612 sq m, as compared to the 1,808 squaremeter area of lot No. 535-A. - In their answer to the complaint the defendants alleged that the reference to lot No. 535-E in the deed of sale of May 18, 1920 was an involuntary error; that the intention of the parties to that sale was to convey the lot correctly identified as lot No. 535-A; that since 1916, when he acquired the entirety of lot No. 535, and up to the time of his death, Eulogio Atilano I had been possessing and had his house on the portion designated as lot No. 535-E, after which he was succeeded in such possession by the defendants herein; and that as a matter of fact Eulogio Atilano I even increased the area under his possession when on June 11, 1920 he bought a portion of an adjoining lot, No. 536, from its owner Fruto del Carpio. On the basis of the foregoing allegations the defendants interposed a counterclaim, praying that the plaintiffs be ordered to execute in their favor the corresponding deed of transfer with respect to lot No. 535-E.

A2010 page Prof. Labitag - The trial court rendered judgment for the plaintiffs since the property was registered under the Land Registration Act the defendants could not acquire it through prescription. There can be no dispute as to the correctness of this legal proposition; but the defendants, aside from alleging adverse possession in their answer and counterclaim, also alleged error in the deed of sale of May 18, 1920 ISSUE WON the trial court rendered proper judgment for the plaintiffs since the property was registered under the Land Registration Act the defendants could not acquire it through prescription HELD NO. The court erred in granting the plaintiffs the lot. Reasoning When one sells or buys real property, one sells or buys the property as he sees it, in its actual setting and by its physical metes and bounds, and not by the mere lot number assigned to it in the certificate of title. The portion correctly referred to as lot No. 535-A was already in the possession of the vendee, Eulogio Atilano II, who had constructed his residence therein, even before the sale in his favor even before the subdivision of the entire lot No. 535 at the instance of its owner, Eulogio Atillano I. In like manner the latter had his house on the portion correctly identified, after the subdivision, as lot No. 535-E, even adding to the area thereof by purchasing a portion of an adjoining property belonging to a different owner. The two brothers continued in possession of the respective portions the rest of their lives, obviously ignorant of the initial mistake in the designation of the lot subject of the 1920 until 1959, when the mistake was discovered for the first time. - The real issue here is not adverse possession, but the real intention of the parties to that sale. From all the facts and circumstances we are convinced that the object thereof, as intended and understood by the parties, was that specific portion where the vendee was then already residing, where he reconstructed his house at the end of the war, and where his heirs, the plaintiffs herein, continued to reside thereafter: - The new Civil Code provides a remedy for such a situation by means of reformation of the instrument. This remedy is available when, there having been a meeting of the funds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement by reason of mistake, fraud, inequitable conduct on accident (Art. 1359, et seq.) In this case, the deed of sale executed in 1920 need no longer reformed. The parties have retained possession of their respective properties conformably to the real intention of the parties to that sale, and all they should do is to execute mutual deeds of conveyance. Disposition WHEREFORE, the judgment appealed from is reversed. The plaintiffs are ordered to execute a deed of conveyance of lot No. 535-E in favor of the defendants, and the latter in turn, are ordered to execute a similar document, covering lot No. 595-A, in favor of the plaintiffs. Costs against the latter.

SARMING V DY QUISUMBING; June 6, 2002 NATURE Petition for review on certiorari of decision of CA

Obligations and Contracts 166 FACTS - Respondents are the successors in interest of the original plaintiff Alejandra Delfino while the petitioners are successors in interest of the original defendant Silveria Flores. - Silveria Flores and her brother Jose jointly owned a piece of land denominated as Lot 4163 covered by OCT 3129-A. Said property was inherited from their parents. The other inherited property designated as Lot 5734 covered by OCT 4918 were jointly owned by Silveria, Jose, and Venancio with each occupying a third of the said lot. - In January 1956, the grandchildren of Jose and then owners of the half interest in Lot 4163 sold said half interest to Alejandra Delfino when Silveria declined to purchase same. - Prior to the preparation of the documents, the lawyer, Atty. Pinili, called a conference of all the parties concerned to a conference. In this conference, Silveria declared that she owned half of the property and that the grandchildren of Jose were owners of the other half. Silveria confirmed that she was selling also to Alejandra three tree of coconut at the property of the heirs of Jose for P15.00. It was further noted that the natural division of the property two rows of coconut trees planted in the middle of the property. - The lawyer requested for the title of the land to draw up the Settlement of Estate and Sale contract between the parties. Instead of delivering OCT 3129-A, the daughter of Silveria instead gave OCT 4918. The lawyer drafted the document based on this title. Same was signed in the presence of Silveria. - The buyer of the property took possession of the lot where she introduced improvements. Silveria, on the other hand, continued to reside on the other half. - Two years later, when Alejandra purchased the adjoining property, it was discovered the error in her title on the original property. The error was confirmed through subsequent checking at the Registry of Deeds. With money from Alejandra, the title to Lot 4163 was released to Silveria who promised to give said title to Atty Pinili so that a reformation of the deed of sale could be prepared. Silveria never complied with the promise. Alejandra then filed with the RTC a suit for reformation of contract with damages before the RTC of Negros Oriental. - The RTC ruled in favor of Alejandra in 1992. On appeal to the CA, the decision of the lower court was affirmed. Hence the appeal to the SC. ISSUES 1. WON there is cause of action for reformation of instrument against Silveria as she was not a party to the sale 2. WON reformation of subject deed is proper by reason of mistake in designating the correct lot number 3. WON the heirs of Alejandra Delfino are entitled to actual and moral damages including attorney’s fees HELD 1. YES Ratio Participation is not an element to determine the existence of a cause of action. The rule is that only the allegations in the complaint may properly be considered in ascertaining the existence of a cause of action. The test of the sufficiency of the facts found in the complaint as constituting a cause of action is whether or not, admitting the facts alleged, the court can render a valid judgment upon the same in accordance with the prayer in the complain.

A2010 page Prof. Labitag Reasoning While it is not required that a party participate to determine the existence of a cause of action, in the case at bar, it was shown that Silveria in fact participated therein as part of the deed is the sale of her three coconut trees to Alejandra. Silveria’s name did not appear as seller as she did not in fact sell her half of the property to the buyer. The buyer bought the half of the lot belonging to the heirs of Silveria’s brother. It was likewise shown during the hearing that it was Silveria and her children who turned over the property to Allejadra .It was established that the wrong title was given to the lawyer when the deed was being prepared. So the document was done by reason of mistake, and the document did not express the tru intention of the parties. 2. YES Ratio Reformation is that remedy in equity by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties as provided in Article 1359 of the Civil Code. Due to the mistake in the designation of the lot subject of the deed, reformation of the deed is the proper remedy to reflect the true intent of the parties. Reasoning The claim of Silveria that she owned Lot 4163 cannot be given credence in view of the fact that one of the stipulations in the hearing is the fact that Silveria is occupying half of the said property. The Court questioned this as they did not find it usual that Silveria would not have objected to Alejandra occupying half of what she claims as hers alone from the very beginning. 3. NO Ratio There is no evidentiary support to grant the award of actual damages. In the absence of showing that the petitioners acted in bad faith or with malice, the ward of moral damages is improper.

BORROMEO V COURT OF APPEALS FERNANDO; September 28, 1972 NATURE PETITION for review by certiorari of a decision of the Court of Appeals FACTS - Before 1933, defendant [Jose A. Villamor] was a distributor of lumber belonging to Mr. Miller who was the agent of the Insular Lumber Company in Cebu City. Defendant being a friend and former classmate of plaintiff [Canuto O. Borromeo] used to borrow from the latter certain amounts from time to time. - On one occasion, defendant borrowed from plaintiff a large sum of money for which he mortgaged his land and house in Cebu City to pay some pressing obligation with Mr. Miller. - Mr. Miller filed a civil action against the defendant and attached his properties including those mortgaged to plaintiff, inasmuch as the deed of mortgage in favor of plaintiff could not be registered because not properly drawn up. - Plaintiff then pressed the defendant for settlement of his obligation, but defendant instead offered to execute a document promising to pay his indebtedness even after the lapse of ten years. Liquidation was made and defendant was found to be indebted to plaintiff in the sum of P7,220.00, for which defendant signed a promissory note therefor on November 29, 1933 with interest at the rate of 12% per annum, agreeing to pay as soon as I have money'.

Obligations and Contracts 167 - The note further stipulates that defendant 'hereby relinguish, renounce, or otherwise waive my rights to the prescriptions established by our Code of Civil Procedure for the collection or recovery of the above sum of P7,220.00. * * * at any time even after the lapse of ten years from the date of this intrument'. - After the execution of the document, plaintiff limited himself to verbally requesting defendant to settle his indebtedness from time to time. Plaintiff did not file any complaint against the defendant within ten years from the execution of the document as there was no property registered in defendant's name, who furthermore assured him that he could collect even after the lapse of ten years. After the last war, plaintiff made various oral demands, but defendants failed to settle his account - CFI: Villamor ordered to pay Borromeo (represented by his heirs) the sum of P7,220.00 within ninety days from the date of the receipt of such decision with interest at the rate of 12% per annum from the expiration of such ninety-day period. - CA: reversed CFI ruling ISSUE WON the CA erred in reversing the ruling of the CFI in finding the lack of validity of the stipulation amounting to a waiver in line with the principle "that a person cannot renounce future prescription" HELD YES Ratio Between two possible interpretations, that which saves rather than destroys is to be preferred. It is a fundamental principle in the interpretation of contracts that while ordinarily the literal sense of the words employed is to be followed, such is not the case where they "appear to be contrary to the evident intention of the contracting parties," which "intention shall prevail." The terms, clauses and conditions contrary to law, morals and public order (in this case the contested stipulation) should be separated from the valid and legal contract when such separation can be made because they are independent of the valid contract which expresses the will of the contracting parties. Reasoning There is nothing implausible in the view that such language renouncing the debtor's right to the prescription established by the Code of Civil Procedure should be given the meaning, as noted in the preceding sentence of the decision of respondent Court, that the debtor could be trusted to pay even after the termination of the ten-year prescriptive period. (so CA should have interpreted the stipulation based on the context of the friendship between the two parties) - 'Where an agreement founded on a legal consideration contains several promises, or a promise to do several things, and a part only of the things to be done are illegal, the promises which, can be separated, or the promise, so far as it can be separated, from the illegality, may be valid. The rule is that a lawful promise made for a lawful consideration is not invalid merely because an unlawful promise was made at the same time and for the same consideration, and this rule applies, although the invalidity is due to violation of a statutory provision, unless the statute expressly or by necessary implication declares the entire contract void. - The first ten years after November 29, 1933 should not be counted in determining when the action of creditor, now represented by petitioners, could be filed. From the joint record on appeal, it is undoubted that the complaint was filed on January 7, 1953. If the first ten-year period was to be excluded, the creditor had until

A2010 page Prof. Labitag November 29, 1953 to start judicial proceedings. After deducting the first tenyear period which expired on November 29, 1943, there was the additional period of still another ten years.29 Nor could there be any legal objection to the complaint by the creditor Borromeo of January 7, 1953 embodying not merely the fixing of the period within which the debtor Villamor was to pay but likewise the collection of the amount that until then was not paid. Disposition Wherefore, the decision of respondent Court of Appeals of March 7, 1964 is reversed, thus giving full force and effect to the decision of the lower court of November 15, 1956. With costs against private respondents.

KASILAG V RODRIGUEZ IMPERIAL; December 7, 1939 NATURE Appeal from the decision of the Court of Appeals FACTS - On May 16, 1932, Emiliana Ambrosio and Marcial Kasilag executed a public deed (Exhibit 1) saying that Kasilag bought Lot no. 285 (6.7540 hectares) under Homestead Certificate Title No. 325, with the assessed value of P940, from Ambrosio for the sum of P1000. Other stipulations are as follows: > that Ambrosio encumbers and hypothecates by way of mortgage the land improvements, consisting of 4 mango trees, 110 hills of bamboo trees, 1 tamarind and 6 boñga trees, of which Ambrosio is the absolute owner. The condition of said mortgage is such that if the party of Ambrosio shall pay, Kasilag, his heirs, assigns, or executors, on or before the 16th day of November, 1936, or 4½ years after date of the execution of the instrument, the sum of P1,000 with interest at 12 per cent per annum, then the mortgage shall become null and void; otherwise the same shall remain in full force and effect, and subject to foreclosure in the manner and form provided by law for the amount due thereunder, with costs and also attorney's fees in the event of such foreclosure. (Art VI) Ambrosio shall also pay all taxes and assessments which are or may become due on the land and improvements during the term of the agreement (Art VII) Within 30 days after execution of agreement, Ambrosio shall file a motion before the Court of First Instance at Balanga, Bataan, P. I., requesting cancellation of Homestead Certificate of Title No. 325, in lieu thereof, of a certificate of title under the provisions of Land Registration Act No. 496, as amended by Act 3901. (Art VIII) If upon the expiration of the period of time 4 years stipulated in this mortgage, the mortgagor should fail to redeem this mortgage, she would execute a deed of absolute sale of the property herein described for the same amount as this mortgage, including all unpaid interests at the rate of 12 per cent per annum, in favor of the mortgagee. (Art IX) In the event the land transfer is not approved by the Court, the foregoing contract of sale shall automatically become null and void, and the mortgage stipulated shall remain in full force and effect - In 1933, Ambrosio was unable to pay the stipulated interests as well as the tax on the land and its improvements. For this reason, she and the Kasilag entered into another verbal contract whereby she conveyed to the latter the possession of the land on condition that the latter would not collect the interest on the loan, would attend to the payment of the land tax, would benefit by the fruits of the land, and

Obligations and Contracts 168 would introduce improvements thereon. By virtue of this verbal contract, the petitioner entered upon the possession of the land, gathered the products thereof, did not collect the interest on the loan, introduced improvements upon the land valued at P5,000, according to him and on May 22, 1934 the tax declaration was transferred in his name and on March 6, 1936 the assessed value of the land was increased from P1,020 to P2,180. - The children and heirs of the deceased Ambrosio, commenced this civil case to recover from Kasilag the possession of the land and its improvements; that the petitioner pay to them the sum of P650 being the approximate value of the fruits which he received from the land; that the petitioner sign all the necessary documents to transfer the land and its possession to the respondents; that the petitioner be restrained, during the pendency of the case, from conveying or encumbering the land and its improvements; that the registrar of deeds of Bataan cancel certificate of title No. 325 and issue in lieu thereof another in favor of the respondents, and that the petitioner pay the costs of suit - The CA held that the contract is entirely null and void and without effect; that the heirs of Ambrosio, are the owners of the disputed land, with its improvements, in common ownership with their brother Gavino Rodriguez; that Kasilag acted in bad faith and should yield possession of the land in their favor, with all the improvements; that the plaintiffs-respondents jointly and severally pay to the defendant-petitioner the sum of P1,000 with interest at 6 percent per annum from the date of the decision. It also ordered the registrar of deeds of Bataan to to issue another certificate of title in favor of the plaintiffs-respondents and their brother Gavino Rodriguez, as undivided owners in equal parts, free of all liens and incumbrances except those expressly provided by law, without special pronouncement as to the cost. ISSUES 1. WON the contract entered into between the parties was one of absolute sale of the land and its improvements and that the agreement is null and void 2. WON petitioner acted in bad faith in taking possession of the land HELD 1. NO Ratio In the interpretation of contracts, the intention of the contracting parties should always prevail because their will has the force of law between them. Furthermore, terms, clauses and conditions contrary to law, morals and public order should be separated from the valid and legal contract and when such separation can be made because they are independent of the valid contract which expresses the will of the contracting parties. Reasoning Art 1281 of the Civil Code: if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations shall be followed; and if the words appear to be contrary to the evident intention of the contracting parties, the intention shall prevail. Where an agreement founded on a legal consideration contains several promises, or a promise to do several things, and a part only of the things to be done are illegal, the promises which can be separated, or the promise, so far as it can be separated, from the illegality, may be valid. The rule is that a lawful promise made for a lawful consideration is not invalid merely because an unlawful promise was made at the same time and for the same consideration, and this rule applies, although the invalidity is due to violation of a statutory provision, unless the statute expressly or

A2010 page Prof. Labitag by necessary implication declares the entire contract void. The contract set out in the agreement should be interpreted in accordance with these rules. - As the terms thereof are clear and leave no room for doubt, it should be interpreted according to the literal meaning of its clauses. The parties entered into a contract of mortgage of the improvements on the land acquired as homestead, to secure the payment of the indebtedness for P1,000 and the stipulated interest thereon. The principal contract is that of loan and the accessory that of mortgage of the improvements upon the land acquired as a homestead. There is no question that the first of this contract is valid as it is not against the law. The second, or the mortgage of the improvements, is expressly authorized by section 116 of Act No. 2874, as amended by section 23 of Act No. 3517. - The subsequent verbal pacts made by the parties independently were calculated to alter the mortgage a contract clearly entered into, converting the latter into a contract of antichresis. (Article 1881 of the Civil Code.) The contract of antichresis, being a real encumbrance burdening the land, is illegal and void as expressly prohibited by section 116 of Act No. 2874. 2. NO Ratio Gross and inexcusable ignorance of law may not be the basis of good faith, but possible, excusable ignorance may be such basis. Reasoning The Civil Code does not expressly define what is meant by bad faith, but section 433 provides that "Every person who is unaware of any flaw in his title, or in the manner of its acquisition, by which it is invalidated, shall be deemed a possessor in good faith"; and provides further, that "Possessors aware of such flaw are deemed possessors in bad faith". It is a fact that the petitioner is not conversant with the laws because he is not a lawyer. In accepting the mortgage of the improvements he proceeded on the well-grounded belief that he was not violating the prohibition regarding the alienation of the land. In taking possession thereof and in consenting to receive its fruits, he did not know, as clearly as a jurist does, that the possession and enjoyment of the fruits are attributes of the contract of antichresis and that the latter, as a lien, was prohibited by section 116. These considerations again bring us to the conclusion that, as to the petitioner, his ignorance of the provisions of section 116 is excusable and may, therefore, be the basis of his good faith. Disposition The appealed decision is reversed, and we hereby adjudge: (1) that the contract of mortgage of the improvements, set out in Exhibit 1, is valid and binding; (2) that the contract of antichresis agreed upon verbally by the parties is a real incumbrance which burdens the land and, as such, is a null and without effect; (3) that the petitioner is a possessor in good faith; (4) that the respondents may elect to have the improvements introduced by the petitioner by paying the latter the value thereof, P3,000, or to compel the petitioner to buy and have the land where the improvements or plants are found, by paying them its market value to be filed by the court of origin, upon hearing the parties; (5) that the respondents have a right to the possession of the land and to enjoy the mortgaged improvements; and (6) that the respondents may redeem the mortgage of the improvements by paying to the petitioner within three months the amount of P1,000, without interest, as that stipulated is set off by the value of the fruits of the mortgaged improvements which petitioner received, and in default thereof the petitioner may ask for the public sale of said improvements for the purpose of applying the proceeds thereof to the payment of his said credit.

Obligations and Contracts 169 SEPARATE OPINION VILLA- REAL [ concur & dissent] -The obligation contracted by said mortgagor was no more than a conditional promise to sell. Now, then, is this a promise to sell valid? Like any other onerous, consensual and mutually binding contract, that of promise to sell requires for its legal existence and validity the concurrence of consent, consideration and subjectmatter. The contract before us dos not show what is the cause or consideration for such promise to sell. Assuming that it was the economic impotence of the mortgagor to redeem the mortgaged improvements, before she could be compelled to comply with her obligation to sell, there is need to wait until she should fail of funds or to abandonment. The cause will come into being only upon the happening of said event after the four and half years and only then will the said contract of promise to sell have juridical existence. The P1,000 and its interest, should the mortgagor fail to redeem the improvements upon the maturity of the indebtedness, would be the consideration of the sale; because the promise to sell is a contract different and distinct from that of sale and each requires a consideration for its existence and validity - The terms of the contract are clear and explicit and do not leave room for doubt that the intention of the contracting parties was to constitute a mortgage on the improvements of the land in litigation to secure the payment of the loan for P1,000, within interest thereon at 12 per cent per annum. It cannot be said that this contract is simulated because the assessed value of the improvements is P860 only. It is well known that rural properties are valued for assessment purposes not less than half of their market value - The fact that after one year the contracting parties had novated the contract of loan secured by a mortgagee, converting the same into a contract of anti-chresis because of the mortgagor's failure to pay the accrued interest, does not show that they intended to enter into a contract of sale, because the conversion in this case of the contract of loan secured by a mortgage into one of antichresis was accidental, due to the mortgagor's default in the payment of unpaid interest for the first year. If the parties' intention from the beginning had been to sell the property, the mortgagee would have immediately entered upon the possession of the land instead of waiting until after the expiration of one year. - The verbal contract of antichresis, entered into by the petitioner Marcial Kasilag and Emiliana Ambrosio, being null and void ab initio and without any legal effect because it is in violation of the express prohibition of section 116 of Act No. 2874 as amended by section 23 of Act No. 3517, (article 4 of the Civil Code), the contracting parties should restore to each other the things which have been the subject-matter of the contract, together with their fruits, and the price paid therefor, together with interest, pursuant to Article 1303 of the same Code - As to the improvements introduced upon the land by the petitioner, having done so with the knowledge and consent of its owner Emiliana Ambrosio, the former acted in good faith, and under article 361 of the Civil Code, the owner of the land may have the said improvements upon paying the indemnity provided in articles 453 and 454, or may compel the said Marcial Kasilag, who introduced the said improvements, to pay the price of the land. If the herein respondents, as heirs of Emiliana Ambrosio, do not wish or are unable to pay for said improvements, and Marcial Kasilag does not wish or is unable to pay the land, said petitioner would lose

A2010 page Prof. Labitag his right of intention over the same provided that he may remove the improvements which he had introduced in good faith - As a result of the nullity of the contract of antichresis the petitioner should return to the respondents the products of the mortgaged improvements, and the latter should pay to the petitioner the amount of the loan plus interest due and unpaid at the rate of 12 per cent per annum from the date of the contract until fully paid

LAUREL [ concur in the result] - It is, evident that the projected sale has and may never come into being, because under Article IX of Exhibit 1, it became automatically null and void. This view, incidentally, precludes further consideration of the validity or invalidity of the sale clause of Exhibit 1, as it will purely academic to dwell upon the nature and effect of a contract that has passed out of existence in the contemplation of the parties - Exhibit 1 is essentially and fundamentally a mortgage upon the improvements found on the questioned homestead, with a conditional clause for the future sale of said homestead and improvements which has become a "dead twig" still attached to a living tree because the condition has never been performed - The question next at hand is whether or not the mortgage constituted upon the improvement's of the homestead is valid. It is, under express provisions of section 116 of the Public Land Act, before and after its amendment, reading pertinently that "the improvements or crops on the land may be mortgaged or pledged to qualified persons, associations, or corporations." I find no occasion to dispute this legislative policy however mistaken it may be. It is sufficient to observe that what the law permits may be done. Upon the other hand, I find no occasion to test the legality of the sale provisions of Exhibit 1, as I have heretofore said, this question is, in my opinion, moot. Moreover, the petitioner, technically, is barred from raising this question, as he did not appeal from and, therefore, abided by the decision of the trial court which outlawed this sale clause as violative of the provisions of section 116 of the Public Land Act. - We may concede, as assumed by the appealed decision, that the petitioner was cognizant of said section 116, but this is not saying that petitioner knew that his possession came under the phrase "incumbrance or alienation" prohibited by law, and that the petitioner, therefore, knew that his possession was illegal. The import of the phrase "incumbrance or alienation" is a subject upon which "men of reason may reasonably differ," in the same way that we ourselves have differed in the deliberation of this case. It is not correct to assume that the petitioner had knowledge of the illegality of his possession. The contrary assumption, namely, that petitioner had no idea of such illegality, would have been more in accord with the experience of everyday, for petitioner would not have invested money and labor in the land and assumed obligations incumbent upon the homesteader if he had even the least suspicion that all his efforts would count for nothing and would in the end entangle him in a mild scandal. As possession in bad faith does not necessarily mean possession illegal under the law, it being necessary that the possessor be aware of such illegality, it follows that the petitioner's possession of the homestead of the respondents was in good faith.

CONCEPCION [ dissent]

Obligations and Contracts 170 - I believe that the contract which the parties intended to execute is a promise to sell the land, for which reason Ambrosio retained the right of ownership of the land and its improvements while the deed of the promised sale had not been executed. - Under these circumstances, the conclusion of law that Kasilag acted in bad faith is not supported by the established facts - Wherefore, the plaintiffs are bound to comply with the contract as heirs of Ambrosio, by executing in favor of Kasilag the deed of sale of the land, but should the sale, for any reason, be not approved, Kasilag may collect the amount of P1,000 with all the interest thereon, and may execute the judgment obtained by him upon the land and all its improvements, deducting, however, in his favor the value of the improvements which he introduced upon the land in good faith

MORAN [ dissent] - Although the document Exhibit 1 states that it is a mortgage of the improvements, with a stipulation regarding a future sale of the land in case of failure to comply with the mortgage obligations, in reality the true contract between the parties is one of absolute sale in the light of the circumstances of the case - The Homestead Act has been enacted for the welfare and protection of the poor. The law gives a needy citizen a piece of land where he may build a modest house for himself and family and plant what is necessary for subsistence and for the satisfaction of life's other needs. The right of the citizens to their homes and to the things necessary for their subsistence is as vital as the right to life itself. They have a right to live with a certain degree of comfort as become human beings, and the State which looks after the welfare of the people's happiness is under a duty to safeguard the satisfaction of this vital right. Moreover, a man with a home and a means of subsistence is a lover of peace and order and will profess affection for his country, whereas one without a home and in penury is not only a social parasite but also a dangerous element in the social order. The Homestead Act at once aims at the promotion of wholesome and happy citizenship and the wiping out of the germs of social discontent found everywhere. Considering the social and economic ends of the Homestead Act, the courts should exercise supreme care and strict vigilance towards faithful compliance with all its benign provisions and against the defeat, directly or indirectly, of its highly commendable purposes. And it is my firm conviction that where, as in the present case, a rich and clever man attempts to wrest a homestead granted to a poor and ignorant woman, the slightest tokens of illegality should be enough to move the courts to apply the strong arm of the law

AVANCEÑA [ dissent]

I concur in this dissenting opinion of Justice Moran.

UNIVERSAL FOOD CORP V COURT OF APPEALS CASTRO; May 13, 1970 NATURE Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals FACTS

A2010 page Prof. Labitag - Magdalo V Francisco discovered or invented a formula for the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce - The manufacture of this product was used in commercial scale in 1942, and in the same year registered his trademark in his name as owner and inventor with the Bureau of Patents - Due to lack or sufficient capital to finance the expansion of the business, he secured the financial assistance of Tirso T. Reyes who, after a series of negotiations, formed with other defendant Universal Food Corporation eventually leading to the execution of Bill of Assignment - Magdalo V Francisco was appointed Chief Chemist with a salary of P300.00 a month, and Victoriano V Francisco was appointed auditor and superintendent with a salary of P250.00 a month. - Magdalo V Francisco when preparing the secret materials inside the laboratory, never allowed anyone, not even his own son, or the President and General Manager Reyes or defendant, to enter the laboratory in order to keep the formula secret to himself. - He expressed a willingness to give the formula to defendant provided that the same should be placed or kept inside a safe to be opened only when he is already incapacitated to perform his duties as Chief Chemist, but defendant never acquired a safe for that purpose. - Reyes wrote him to permit one or two members of his family to observe the preparation of the 'Mafran Sauce', but said request was denied - Due to the alleged scarcity and with prices or raw materials, Secretary-Treasurer Ciriaco L. de Guzman that only Supervisor Ricardo Francisco should be retained in the factory and that the salary of Magdalo V Francisco, should be stopped for the time being until the corporation should resume its operation. - Reyes issued a memorandum to Victoriano Francisco ordering him to report to the factory and produce a 'Mafran Sauce' at the rate of not less than 100 cases a day so as to pope with the orders of the corporation's various distributors and dealers, and with Instructions to take only the necessary daily employees without employing permanent employees - Another memorandum was issued by Reyes instructing the Assistant Chief Chemist Ricardo Francisco to recall all daily employees connected in the production of Mafran Sauce and also some additional daily employees for the production of Porky Pops - Another memorandum instructing Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky Pops with further instructions to hire daily laborers in order to cope with the full blast production - Magdalo V Francisco received his salary as Chief Chemist in the amount of P300.00 a month only until his services were terminated. - Reyes authorized Zarraga and de Bacula to look for a buyer of the corporation Including its trademarks, formula and assets at a price of not less than P300.000.00 - Due to these successive memoranda, without Magdalo, V Francisco being recalled back to work, the letter riled the present action ISSUES 1. WON by virtue of the term of the Bill of Assignment, Magdalo V Francisco ceded and transferred to the petitioner corporation the formula for Mafran sauce

Obligations and Contracts 171 2. WON Magdalo V Francisco was dismissed from his position as chief chemist of the corporation without justifiable cause, and in violation of paragraph 5-(a) of the Bill of Assignment which in part provides that his appointment is "permanent in character" 3. WON rescission of the Bill of Assignment is proper 4. WON the corporation is liable to pay the patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for Mafran sauce remained with the corporation 5. WON it can bbe inferred from the appellate court’s decision that what was meant to be returned to the patentee is not the formula itself, but only its use and the right to such use HELD 1. What was actually ceded and transferred by the patentee Magdalo V Francisco in favor of the petitioner corporation was only the use of the formula. The Bill of Assignment vested in the petitioner corporation no title to the formula. - One of the principal considerations of the Bill of Assignment is the payment of "royalty of 2% of the net annual profit" which the petitioner corporation may realize by and/or out of its production of Mafran sauce and other food products, etc. The word "royalty," when employed in connection with a license under a patent, means the compensation paid for the use of a patented invention. - The intention of the patentee at the time of its execution was to part, not with the formula for Mafran sauce, but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the invention. - Should dissolution or the petitioner corporation eventually take place, "the property rights and interests over said trademark and formula shall automatically revert" to the patentee. - Facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the patentee. - A conveyance should be interpreted to effect "the least transmission of rights." 2. YES The petitioner, acting through its corporate officers, schemed and maneuvered to ease out, separate and dismiss the said from the service as permanent chief chemist, in flagrant violation of the Bill of Assignment. The fact that a month after the institution of the action for rescission, the petitioner corporation, thru Reyes requested the patentee to report for duty, is of no consequence. 3. YES Appellees had no alternative but to rile the present action for rescission and damages. - The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between fulfillment and rescission of the obligation, with payment of damages in either case. - There is no controversy that the provisions of the Bill of Assignment are reciprocal in nature. The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. - The dismissal of Magdalo V Francisco as the permanent chief chemist of the corporation is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part.

A2010 page Prof. Labitag 4. YES The corporation could not escape liability to pay the patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for Mafran sauce remained with the corporation. - The contract placed the use of the formula for Mafran sauce with the petitioner, subject to defined limitations. One of the considerations for the transfer of the use thereof was the undertaking on the part of the petitioner corporation to employ the patentee as the Second Vice President and Chief Chemist on a permanent status, at a monthly salary of P300, unless "death or other disabilities" supervened. 5. YES It is a logical inference from the appellate court's decision that what was meant to be returned to the patentee is not the formula itself, but only its use and the right to such use. Article 1385 of the New Civil Code provides that rescission creates the obligation to return the things which were the object of the contract.

ORIA V MCMICKING MORELAND; January 18, 1912 NATURE Appeal from a judgment of the CFI of Manila FACTS - Aug. 1909- Gutierrez Hermanos brought action against Oria Hermanos for the recovery of P147,204.28 (CASE NO. 7289) - Mar. 1910- Gutierrez Hermanos began another action against Oria Hermanos for recovery of P12,318.57 (CASE NO. 7719) - Apr. 1910- members of the company of Oria Hermanos dissolved their relations and entered into liquidation - The managing partner in liquidation Tomas Oria y Balbas entered into contract with the plaintiff in this case Manuel Oria Gonzalez - Contract was for the purpose of selling and transferring to the plaintiff all the property owned by Oria Hermanos. - Among goods transferred: Steamship Serantes, the subject of this litigation - Sep. 17, 1910- Case 7719 resolved by CFI in favor of Gutierrez, against Oria. Affirmed by SC. - Sheriff demanded that Tomas Oria y Balbas make payment of the judgment. -Tomas replied there were no funds to pay - Sheriff levied upon Steamship Serantes, took possession, announced it for sale at public auction. - 3 days before the sale, the plaintiff in this action presented to the sheriff a written statement claiming to be the owner of the Steamship, to have the right of possession by reason of the sale to him by Oria Hermanos of all the property of said company, including the steamer Serantes - Sheriff required Gutierrez Hermanos to present a bond for his protection, and proceeded to sell the steamship to the Gutierrez Hermanos. - Oct. 19, 1911- plaintiff began present action: (1) for the issuance of a preliminary injunction to prevent the sale of said steamship, (2) for the declaration that the plaintiff is the owner of the steamship and is that the defendant be required to restore the same to the plaintiff and to pay P10,000 in damages for its detention

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- Trial court found in favor of defendant. Complaint was dismissed. From that judgment this appeal is taken.

NATURE Appeal from the judgment of the CFI of Negros Occidental

ISSUES WON the sale from Oria Hermanos to Manuel Oria y Gonzalez is fraudulent against the creditors of Oria Hermanos, making the transfer of the steamship void as to the creditors, and as to Gutierrez Hermanos in particular

FACTS - On January 30, 1951 the defendants Leon Garibay, Margarita G. Saldejeno, and Timoteo Tubungbanua entered into a Contract of Partnership under the firm name "Isabela Sawmill" - On April 25, 1958, an action to dissolve the partnership was filed by the spouses Cecilio Saldajeno and Margarita G. Saldajeno against Isabela Sawmill, Leon Garibay, and Timoteo Tubungbanua - On April 27, 1958 the defendants Leon Garibay, Timoteo Tubungbanua and Margarita G. Saldajeno entered into a "Memorandum of Agreement” - On May 26, 1958 the defendants Leon Garibay, Timoteo Tubungbanua and Margarita G. Saldajeno executed a document entitled "Assignment of Rights with Chattel Mortgage" in favor of Saldejano - Thereafter the defendants Leon Garibay and Timoteo Tubungbanua did not divide the assets and properties of the "Isabela Sawmill" between them, but they continued the business of said partnership under the same firm name "Isabela Sawmill". - The chattel mortgage was later foreclosed - On May 18, 1959 the Provincial Sheriff of Negros Occidental published two (2) notices that he would sell at public auction on June 5, 1959 at Isabela, Negros Occidental certain trucks, tractors, machinery, office equipment and other things - On October 15, 1969 the Provincial Sheriff of Negros Occidental executed a Certificate of Sale in favor of the defendant Margarita G. Saldajeno - On October 20, 1959 the defendant Margarita G. Saldajeno executed a deed of sale in favor of the Pan Oriental Lumber Company transferring to the latter for the sum of P45,000.00 the trucks, tractors, machinery, and other things that she had purchased at a public auction - Plaintiffs herein are creditors of the defendant partnership - Breakdown of Outstanding Balance a. Oppen, Esteban, Inc.- P1,288.89 b. Agustin E. Tonssay- P933.73 c. Manuel G. Singsong- P3,580.50, P143.00 d. Jose L. Espinos- P1,579.44 e. Bacolod Southern Lumber Yard- P1,048.78 f. Jose Balzunce- P2,052.10 - They sued the defendants to recover the sums of money they have advanced to the partnership, and asked for the nullity of the chattel mortgage. - CFI of Negros Occidental ruled in favor of plaintiffs, saying that plaintiffs, as creditors of the defendant partnership, have a preferred right over the assets of the said partnership, and over the proceeds of their sale at the public auction. - Saldejanos appealed - CA certified the case to SC considering that the resolution of appeal involves purely questions of law

HELD YES Ratio A conveyance is fraudulent if it is a trick and contrivance to defeat creditors, or if it conserves to the debtor a special right. If defective in either of these particulars, although good between the parties involved in the conveyance, it is voidable as to creditors. Reasoning The following are some of the circumstances attending sales which have been denominated by the courts badges of fraud: > the fact that the consideration of the conveyance is fictitious/inadequate > a transfer made by a debtor after suit has been begun, and while it is pending against him > a sale upon credit by an insolvent debtor > evidence of large indebtedness or complete insolvency > the transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially > the fact that the transfer is made between father and son, when there are present other of the above circumstances > the failure of the vendee to take exclusive possession of all the property - The case at bar presents every one of the badges of fraud above enumerated. Tested by the inquiry, does the sale prejudice the rights of creditors, the result is clear. The sale in the form in which it was made leaves the creditors substantially without recourse. The property of the company is gone, its income is gone, the business itself is likely to fail, the property is being dissipated, and is depreciating in value. As a result, even if the claims of the creditors should live twelve years and the creditors themselves wait that long, it is more than likely that nothing would be found to satisfy their claims at the end of the long wait - Since the record shows that there was no property with which the judgment in question could be paid, the defendants were obliged to resort to and levy upon the steamer in suit. The court below was correct in finding the sale fraudulent and void as to Gutierrez Hermanos in so far as was necessary to permit the collection of its judgment. As a corollary, the court below found that the evidence failed to show that the plaintiff was the owner or entitled to the possession of the steamer in question at the time of the levy and sale complained of, or that he was damaged thereby. Defendant had the right to make the levy and test the validity of the sale in that way, without first resorting to a direct action to annul the sale. The creditor may attack the sale by ignoring it and seizing under his execution the property, or any necessary portion thereof, which is the subject of the sale. Disposition Judgment affirmed.

SINGSONG V ISABELA SAWMILL FERNANDEZ; February 28, 1979

ISSUES 1. WON the Court of First Instance of Negros Occidental had no jurisdiction over the case because the plaintiffs Oppen, Esteban, Inc., Agustin R. Tonsay, Jose L. Espinos and the Bacolod Southern Lumber Yard sought to collect sums of money, the

Obligations and Contracts 173 biggest amount of which was less than P2,000.00 and, therefore, within the jurisdiction of the municipal court 2. WON the chattel mortgage may no longer be annulled because it had been judicially approved by the Court of First Instance of Negros Occidental and said chattel mortgage had been ordered foreclosed by the same court (different branch from that which gave the judgment subject of this appeal) 3. WON plaintiffs cannot bring an action to annul the chattel mortgage of the properties of the partnership executed by Leon Garibay and Timoteo Tubungbanua in favor of Margarita G. Saldajeno 4. WON appellants are liable for attorney’s fees HELD 1. NO This contention is devoid of merit because all the plaintiffs also asked for the nullity of the assignment of right with chattel mortgage. -This cause of action is not capable of pecuniary estimation and falls under the jurisdiction of the Court of First Instance. Ratio Where the basic issue is something more than the right to recover a sum of money and where the money claim is purely incidental to or a consequence of the principal relief sought, the action is as a case where the subject of the litigation is not capable of pecuniary estimation and is cognizable exclusively by the Court of First Instance. 2. NO Ratio One branch of the Court of First Instance of Negros Occidental can take cognizance of an action to nullify a final judgment of the other two branches of the same court. Reasoning On the question of whether a court may nullify a final judgment of another court of co-equal, concurrent and coordinate jusridiction, this Court originally ruled that a court has no power to interfere with the judgments or decrees of a court of concurrent or coordinate jurisdiction having equal power to grant the relief sought by the injunction. -This was pursuant to the policy of judicial stability -In December 1971, however, this court re-examined and reversed its earlier doctrine on the matter. In Dupla V Court of Appeals, the SC declared that a court of first instance or a branch thereof has the authority and jurisdiction to take cognizance of, and to act in, suit to annul final and executory judgment or order rendered by another court of first instance or by another branch of the same court. 3. NO Ratio A contract cannot be assailed by one who is not a party thereto. However, when a contract prejudices the rights of a third person, he may file an action to annul the contract. Reasoning This Court has held that a person, who is not a party obliged principally or subsidiarily under a contract, may exercise an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention. -The plaintiffs-appellees were prejudiced in their rights by the execution of the chattel mortgage over the properties of the partnership "Isabela Sawmill" in favor of Margarita G. Saldajeno by the remaining partners, Leon Garibay and Timoteo Tubungbanua, hence, they have a right to file an action to nullify the chattel mortgage.

A2010 page Prof. Labitag 4. NO Ratio There will be no liability for attorney’s fees absent a showing of wanton disregard of the rights of the plaintiffs. Disposition The decision appealed from is hereby affirmed with the elimination of the portion ordering appellants to pay attorney's fees and with the modification that the defendants, Leon Garibay and Timoteo Tubungbanua, should reimburse the defendants-appellants, Margarita G. Saldajeno and her husband Cecilio Saldajeno, whatever they shall pay to the plaintiffs-appellees.

CADWALLER & CO. V SMITH, BELL, AND CO. TRACEY; February 9, 1907 NATURE Appeal from a judgment of the C FI of Manila FACTS Cadwaller & Co. as assignees of the Pacific Export Lumber Company (PELC) asks for the amount of $3,486 which is the sum differential of the money that turned over to them and the money actually received. PELC exported cedar piles to be bought by Peabody & Company (defendant/appellee) for the amount of $12 apiece however later on it was found out that P&C was able to negotiate with the government and sold the piles for $19 apiece. Hence this case. ISSUE WON there is a breach of duty from which the defendant should not benefit from HELD YES, there is a breach of duty. The concealment from their principal of the negotiation with the Government resulted in a sale at $19 apiece and in misrepresenting the condition of the market is a breach of duty. The contract of sale is founded on fraud and is subject to the annulment of the aggrieved party (CC Arts. 1265 and 1269). The defendants are not entitled to retain their commission realized upon the piles included under the annulled contract. However this is only for those that are subsequently sold at the time of the negotiation with the Government and its selling at the amount of $19 apiece. Disposition Judgment modified

UY SOO LIM V TAN UNCHUAN FISHER; September 7, 1918 NATURE

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APPEAL from a judgment of the CFI of Cebu FACTS - In this case, the legitimate children (Francisca and Concepcion), the legal wife (Candida Vivares) and the second wife (Chan Quieg) of the deceased Santiago Pastrano Uy Toco are questioning the fairness and legality of the lion's share received by Uy Soo Lim, the illegitimate child of the deceased. Santiago, in his last will and testament gave the 7/9 share of his large estate to Uy Soo Lim, leaving his legal heirs with so litte to enjoy. - The court issued an order requiring Benito Tan Unchuan, as executor of the testamentary estate of Santiago pastrano, to deliver to Basilio Uy Bundan, guardian of minors Francisca, Concepcion, Uy Soo Lim, the property . - The abovementioned heirs opposed the distribution of the property in accordance with what was stipulated in the will. At the end, an agreement was reached between Choa Tek Hee (lawyer of the plaintiff) and the the plaintiff, of the one part, and Tan Unchuan and Del Rosario, an attorney of Cebu, representing the interest of Candida, Francisca and Concepcion, on the other, to submit the entire matter in dispute to the judgment of three respectable Chinese merchants/lawyers designated. - These advisers came to the conclusion that the sum of P82,500 should be accepted by plaintiff in full satisfaction and relinquisment of all his right, title, and interest in and to the estate of the deceased Santiago Pastrano, and this recommendation was accepted by Choa Tek Hee and plaintiff and by Tan Unchuan and Del Rosario. - Candida and Concepcion later sold their shares to Francisca. But after the agreed amount was paid in installments by the Francisca and after the plaintiff spent most of it, Uy Soo Lim, three (3) years after attaining the age of majority, commenced this present action to rescind and annul the contract by which he had sold and trasferred to Francisca Pastrano his interest in the estate of Santiago Pastrano. ISSUE WON the plaintiff might have the right to rescind this contract on the ground of minority HELD NO. The right of the minor to rescind, upon attaining his majority, a contract entered into during his minority is subject to to the conditions (1) that the election to rescind must be made within a reasonable time after majority and (2) that all of the consideration which was in the minor's possession upon his reaching the majority must be returned. The disposal of any part of th econsideration after the attainment of majority imports an affirmance of the contract. Reasoning Because, with full knowledge of his rights in the premises, he failed to disaffirm his contract within a reasonable time after reaching majority; and Because he not only failed to tender, or offer, to produce and pay the consideration in esse when he reached majority, and when he filed his action, but proceeded, after such events, to demand, collect and dispose of such consideration, when according to his own statement under oath he had no other funds with which to make reimbursement. Disposition The judgment of the trial court is without erro and it is therefore, AFFIRMED.

PHILIPPINE NATIONAL BANK V PHILIPPINE VEGETABLE OIL CO. MALCOLM; January 14, 1927 NATURE Appeal from a judgment of the CFI of Manila FACTS - In 1920, Phil Vegetable was in debt to the extent of around P30M. PNB was the largest creditor, w/ Phil Vegetable owing it P17M. The PNB loan was secured by a real and chattel mortgage for P3.5M. Phil Vegetable executed another chattel mortgage in favor of the bank on its vessels to guarantee around P4M. - Bankruptcy was imminent. Phil Vegetable General Manager Whitaker made his first offer to pledge certain private properties to secure creditors of Phil Vegetable. A creditors’ meeting was held and a receiver for the Phil Vegetable was appointed by the CFI. - During the period when receiver was in control of Phil Vegetable’s property, an agreement was perfected by Phil Vegetable, Whitaker, and some creditors whereby creditors transferred to Whitaker a part of their claims against Phil Vegetable. PNB was not a direct party to the agreement though the officials had full knowledge of its accomplishment and its GM placed his OK at the end of the final draft. - The next move of PNB was to obtain a new mortgage fr Phil Vegetable. (2/20/1922) - Receivership for Phil Vegetable was terminated. Phil Vegetable’s plant was definitely closed. - PNB filed action to foreclose its mortgage on Phil Vegetable’s property. Phil Vegetable countered with special defenses. ISSUES 1. WON mortgage was null bec at time of its execution all the properties of Phil Vegetable was under receiver and neither the approval of the receiver nor the court had been obtained 2. WON PNB failed to comply w/ contract that it was alleged to have celebrated w/ Phil Vegetable that it would furnish funds to the company so that it could continue operating its factory and WON Whitaker has established his right to recover damages fr PNB by reason of the latter’s alleged refusal to finance the operation of Phil Vegetable HELD 1. NO (It is merely voidable or valid until annulled) - PNB challenged the right of Whitaker as intervenor. PNB is right. Phil Vegetable is the defendant, the corporation has not appealed. Whitaker was one of the largest individual stockholders. It was he who asked for appointment of receiver. It was he who was the leading figure in the negotiations. It was he who pledged own property to assist in rehab of Phil Vegetable. Whitaker is more vitally interested in case than Phil Vegetable. If the mortgage had been the free act of Phil Vegetable, it could not be heard to allege its own fraud, and only a creditor could take advantage of fraud to intervene to avoid conveyance.

Obligations and Contracts 175 - Mssrs. Wilson and Cuaderno, PNB Directors, were serving as Phil Vegetable Directors after Wilson suggested reorganization of Phil Vegetable so that the bank might have close working relationship w/ Phil Vegetable. Wilson became Pres of Phil Vegetable. - Mortgage was not ratified before notary public until 3/8/22 and was not recorded in registry of property until 3/21/22. In other words, mortgage was executed by PNB thru its GM and another corp before the termination of receivership of the said corp, but was not acknowledged or recorded until after termination of the receivership. - It must be evident that PNB could secure no new mortgage while the prop of Phil Vegetable was in custodia legis. Phil Vegetable was then inhibited fr giving mortgage on its property. The receiver was not a party to the mortgage. Court had not authorized receiver to consent to the execution of a new mortgage. The Court would want to protect rights of all creditors and not just one particular creditor. - While the mortgage could not have been executed w/o dissolution of the receivership, dissolution was apparently secured through representations that PNB would continue to finance the operations of Phil Vegetable. Instead of so doing, the bank within less than 2 mos after the mortgage was recorded, withdrew its support. - Another reason is that the mortgage was accomplished when PNB was an influence in affairs of Phil Vegetable thru Wilson and Cuaderno. On one hand was PNB in person and on the other hand was PNB by proxy. It is unconscionable to allow the bank after the hands of the creditors were tied, to appropriate to itself all the property of Phil Vegetable. - The setting aside of this mortgage does not mean PNB is left w/o security. Even before the receivership, PNB already had 3 mortgages on property of Phil Vegetable. They’re still in effect and can be foreclosed. 2. NO - As disclosed in docs such as minutes of mtgs, there has been no promise made by PNB to continue indefinitely its backing of the Phil Vegetable. - Whitaker was in no way personally responsible for obligations of Phil Vegetable. Nevertheless, he signed in creditors’ agreement. Now the creditors have large amt of his property. The Court sympathizes with him but said that sympathy cannot be transmuted into legal authoritativeness.

SEPARATE OPINION AVANCEÑA AND VILLAMOR [ concur & dissent] - The alleged fraud in the mortgage is unsupported by the record. Fraud is never presumed.

JOHNSON [ dissent] - The mortgage is a valid and subsisting contract. - PNB promised to furnish sufficient funds.

STREET [ concur & dissent] - Intervenor can’t recover damages fr PNB. - I agree w/ CJ that judgment of foreclosure should be affirmed

A2010 page Prof. Labitag LIMKETKAI V COURT OF APPEALS MELO; December 1, 1995 FACTS - May 14, 1976 – Philippine Remnants Co., Inc. constituted BPI as its trustee to manage, administer and sell its real estate property. This includes the disputed parcel of land in Bagong Ilog, Pasig. - June 23, 1988 – Revilla, a licensed broker, was given the authority by BPI to sell the land for P1000 per square meter. - Lim of Limketkai Milling agreed to buy the property and by July 1988, Lim and Limketkai visited BPI to confirm the sale. - They were entertained by BPI VP Albano and AVP Aromin. Limketkai requested that the price be lowered to P900 per square meter while Albano said that the price was P1100 per square meter. They finally agreed to the price of P1000 per square meter and that the payment be given in cash. - Lim requested if it was possible to draw up payment terms, despite the previous agreement to pay in cash. The BPI officials responded by saying that it would be all right to try to apply for payment terms but if the said payment terms were to be disapproved, payment would have to be in cash. - July 11, 1988 – Albano dictated the terms through which the installment payment would be approved. Lim wrote BPI through Albano, embodying the initial payment at 10% and the remaining 90% payable within 90 days. - Lim later learned that his offer to pay on terms had been frozen. - July 18, 1988 – Lim went to BPI to pay the total amount (P33,056,000) in cash to Albano but Albano refused to accept it, saying that he no longer had the authority to sell the property. Lim then went to VP Bona who also would not accept the payment. - Aug. 25, 1988 – Limketkai filed an action for specific performance with damages. - BPI already issued a deed of sale for the land to National Bookstore. - Trial court ruling: - Declare the deed of sale to NBS null and void - Ordered BPI to issue deed of sale in favor or Limketkai - Ordered BPI and NBS to pay actual and consequential damages to Limketkai - The CA reversed the decision of the trial court thus the appeal. Petitioners’ Claim - The contract to sell and to buy was perfected on July 11, 1988 when its top officials and broker Revilla finalized the details with BPI Vice-Presidents Merlin Albano and Rolando V Aromin at the BPI offices, Respondents’ Comments - What transpired on this date were part of continuing negotiations to buy the land and not the perfection of the sale. - Vice-Presidents Aromin and Albano had no authority to bind BPI on this particular transaction. - The subsequent attempts of petitioner to pay under terms instead of full payment in cash constitutes a counter-offer which negates the existence of a perfected contract. ISSUES 1. WON the contract between BPI and Limketkai had been perfected

Obligations and Contracts 176 2. WON the bank officials were authorized to transact and enter into such contract 3. WON competent evidence is available to support the contention that the contract was indeed perfected 4.WON the sale of the land to NBS pending litigation was effected in good faith HELD 1. YES. The contract had already been perfected. Ratio A contract undergoes various stages that include its negotiation or preparation, its perfection and, finally, its consummation. Negotiation covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected). The perfection of the contract takes place upon the concurrence of the essential elements thereof. A contract which is consensual as to perfection is so established upon a mere meeting of minds, i.e., the concurrence of offer and acceptance, on the object and on the cause thereof. Reasoning The negotiation or preparation stage started with the authority given by Philippine Remnants to BPI to sell the lot, followed by (a) the authority given by BPI and confirmed by Philippine Remnants to broker Revilla to sell the property, (b) the offer to sell to Limketkai, (c) the inspection of the property and finally (d) the negotiations with Aromin and Albano at the BPI offices. - The perfection of the contract took place when Aromin and Albano, acting for BPI, agreed to sell and Alfonso Lim with Albino Limketkai, acting for petitioner Limketkai, agreed to buy the disputed lot at P1,000.00 per square meter. Aside from this there was the earlier agreement between petitioner and the authorized broker. There was a concurrence of offer and acceptance, on the object, and on the cause thereof. - The fact that the deed of sale still had to be signed and notarized does not mean that no contract had already been perfected. 2. YES The bank officials were authorized to transact with Limketkai for the sale of the parcel of land. Ratio Accordingly a banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person for his own ultimate benefit. Reasoning Revilla (the broker) was authorized by BPI to transact business in their stead. - If Revilla were given the authority, it would be senseless to doubt whether or not the bank officials were given the same authority. Aromin had been with the bank for a relatively long period of time (since 1969) and had handled real estate matters since 1985. - There is no proof that Aromin was acting for his own benefit. 3. YES The evidence presented was substantial. Ratio Any document or writing which satisfies the requirements of a statute as to content and signature can be regarded as a memorandum or a note. 4. YES The sale of the land to NBS was done in bad faith. Ratio It is the very nature of the deed of absolute sale between BPI and NBS which, however, clearly negates any allegation of good faith on the part of the buyer.

A2010 page Prof. Labitag Instead of the vendee insisting that the vendor guarantee its title to the land and recognize the right of the vendee to proceed against the vendor if the title to the land turns out to be defective as when the land belongs to another person, the reverse is found in the deed of sale between BPI and NBS. Any losses which NBS may incur in the event the title turns out to be vested in another person are to be borne by NBS alone. BPI is expressly freed under the contract from any recourse of NBS against it should BPI's title be found defective. Reasoning NBS ignored the notice of lis pendens when it bought the lot. - NBS and BPU conspired to prevent Limketkai from acquiring the property. - The sale was supposed to be done by a broker but top BPI officials took over when a close friend became interested. - BPI Senior VP Barcelon admitted that he and NBS President Ramos were friends. - Feliciano, in behalf of NBS, tried to pay off Limketkai so that the latter would drop the case

SWEDISH MATCH V COURT OF APPEALS TINGA; October 20, 2004 NATURE Petitioners seek a reversal of the order of the CA which overturned the trial court’s order] dismissing the respondents’ complaint for specific performance and remanded the case to the trial court for further proceedings. FACTS - Swedish Match, AB (SMAB) is a Swedish corporation that had three subsidiary corporations in the Philippines: Phimco Industries, Inc. (Phimco), Provident Tree Farms, Inc. (PTFI), and OTT/Louie, Inc. - Sometime in 1988, STORA, the then parent company of SMAB, decided to sell SMAB and the latter’s worldwide match, lighter and shaving products operation to Eemland Management Services, now known as Swedish Match NV of Netherlands, (SMNV). - Enriquez, VP of SMSA - the management company of the Swedish Match group, was commissioned and granted full powers to negotiate by SMNV Enriquez was held under strict instructions that the sale of Phimco shares should be executed on or before 30 June 1990, in view of the tight loan covenants of SMNV Enriquez came to the Philippines in November 1989 and informed the Philippine financial and business circles that the Phimco shares were for sale. - Several interested parties tendered offers to acquire the Phimco shares, among whom was respondent ALS Management & Development Corporation and with its President and GM Antonio Litonjua. Litonjua submitted to SMAB a firm offer to buy all of the latter’s shares in Phimco and all of Phimco’s shares in PTFI and OTT/Louie (Phils.), Inc. for the sum of P750M.. - Through its CEO Rossi, SMAB informed respondents that their price offer was below their expectations but urged them to undertake a comprehensive review and analysis of the value and profit potentials of the Phimco shares, with the assurance that respondents would enjoy a certain priority although several parties had indicated their interest to buy the shares. Thereafter, an exchange of correspondence ensued between petitioners and respondents regarding the projected sale of the Phimco shares. Litonjua offered to buy the disputed shares, excluding the lighter division for $30.6M, which per another letter of the same date was increased to US$36 million. Litonjua stressed that the bid amount could be

Obligations and Contracts 177 adjusted subject to availability of additional information and audit verification of the company finances. - Rossi sent a letter informing Litonjua that ALS should undertake a due diligence process or pre-acquisition audit and review of the draft contract for the Match and Forestry activities of Phimco at ALS’ convenience. However, Rossi made it clear that at the completion of the due diligence process, ALS should submit its final offer in US dollar terms not later than 30 June 1990, for the shares of SMAB corresponding to ninety-six percent (96%) of the Match and Forestry activities of Phimco. Rossi added that in case the global deal presently under negotiation for the Swedish Match Lights Group would materialize, SMAB would reimburse up to US$20,000.00 of ALS’ costs related to the due diligence process. - Litonjua informed Rossi that it may not be possible for them to submit their final bid on 30 June 1990, citing the advice to him of the auditing firm that the financial statements would not be completed until the end of July. Litonjua added that he would indicate in their final offer more specific details of the payment mechanics and consider the possibility of signing a conditional sale at that time. - Two days prior to the deadline for submission of the final bid, Litonjua again advised Rossi that they would be unable to submit the final offer by 30 June 1990, considering that the acquisition audit of Phimco and the review of the draft agreements had not yet been completed. He said, however, that they would be able to finalize their bid on 17 July 1990 and that in case their bid would turn out better than any other proponent, they would remit payment within 10 days from the execution of the contracts. - Enriquez sent notice to Litonjua that they would be constrained to entertain bids from other parties in view of Litonjua’s failure to make a firm commitment for the shares of Swedish Match in Phimco by 30 June 1990. - In a letter dated 3 July 1990, Rossi informed Litonjua that on 2 July 1990, they signed a conditional contract with a local group for the disposal of Phimco. He told Litonjua that his bid would no longer be considered unless the local group would fail to consummate the transaction on or before 15 September1990. - Irked by SMAB’s decision to junk his bid, Litonjua asserted that, for all intents and purposes, the US$36 million bid which he submitted on 21 May 1990 was their final bid based on the financial statements for the year 1989. He pointed out that they submitted the best bid and they were already finalizing the terms of the sale. He stressed that they were firmly committed to their bid of US$36 million and if ever there would be adjustments in the bid amount, the adjustments were brought about by SMAB’s subsequent disclosures and validated accounts, such as the aspect that only 96% of Phimco shares was actually being sold and not 100%. - More than two months from receipt of Litonjua’s last letter, Enriquez advised the former that the proposed sale of SMAB’s shares in Phimco with local buyers did not materialize. Enriquez then invited Litonjua to resume negotiations with SMAB for the sale of Phimco shares. He indicated that SMAB would be prepared to negotiate with ALS on an exclusive basis for a period of fifteen (15) days from 26 September 1990 subject to the terms contained in the letter. Additionally, Enriquez clarified that if the sale would not be completed at the end of the fifteen (15)-day period, SMAB would enter into negotiations with other buyers. - Litonjua expressed his objections to the totally new set of terms and conditions for the sale of the Phimco shares and emphasized that the new offer constituted an attempt to reopen the already perfected contract of sale of the shares in his favor. He intimated that he could not accept the new terms and conditions contained therein. Thus, ALS filed before the RTC of Pasig a complaint for specific performance

A2010 page Prof. Labitag with damages, with a prayer for the issuance of a writ of preliminary injunction, against defendants, now petitioners. - SMAB alleged that respondents have no cause of action, contending that no perfected contract, whether verbal or written, existed between them. Petitioners added that respondents’ cause of action, if any, was barred by the Statute of Frauds since there was no written instrument or document evidencing the alleged sale of the Phimco shares to respondents. - The RTC dismissed respondents’ complaint. The CA reversed the trial court’s decision. ISSUES 1. WON the CA erred in reversing the trial court’s decision dismissing the complaint for being unenforceable under the Statute of Frauds 2. WON there was a perfected contract of sale between petitioners and respondents with respect to the Phimco shares. HELD 1. YES. The Statute of Frauds embodied in Article 1403, paragraph (2), of the Civil Code[22] requires certain contracts enumerated therein to be evidenced by some note or memorandum in order to be enforceable. The term “Statute of Frauds” is descriptive of statutes which require certain classes of contracts to be in writing. The Statute does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable.[23] Evidence of the agreement cannot be received without the writing or a secondary evidence of its contents. - The Statute, however, simply provides the method by which the contracts enumerated therein may be proved but does not declare them invalid because they are not reduced to writing. By law, contracts are obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. Consequently, the effect of non-compliance with the requirement of the Statute is simply that no action can be enforced unless the requirement is complied with.Clearly, the form required is for evidentiary purposes only. Hence, if the parties permit a contract to be proved, without any objection, it is then just as binding as if the Statute has been complied with. - The purpose of the Statute is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses, by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged. However, for a note or memorandum to satisfy the Statute, it must be complete in itself and cannot rest partly in writing and partly in parol. The note or memorandum must contain the names of the parties, the terms and conditions of the contract, and a description of the property sufficient to render it capable of identification. Such note or memorandum must contain the essential elements of the contract expressed with certainty that may be ascertained from the note or memorandum itself, or some other writing to which it refers or within which it is connected, without resorting to parol evidence. - Contrary to the CA’s conclusion, the exchange of correspondence between the parties hardly constitutes the note or memorandum within the context of Art 1403.

Obligations and Contracts 178 Rossi’s letter, heavily relied upon by respondents, is not complete in itself. First, it does not indicate at what price the shares were being sold. In paragraph (5) of the letter, respondents were supposed to submit their final offer in U.S. dollar terms, at that after the completion of the due diligence process. The paragraph undoubtedly proves that there was as yet no definite agreement as to the price. Second, the letter does not state the mode of payment of the price. In fact, Litonjua was supposed to indicate in his final offer how and where payment for the shares was planned to be made. 2. NO In the case of a contract of sale, required is the concurrence of three elements, to wit: (a) consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price; (b) determinate subject matter, and (c) price certain in money or its equivalent. Such contract is born from the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. - In general, contracts undergo three distinct stages, to wit: negotiation; perfection or birth; and 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. Perfection or birth of the contract takes place when the parties agree upon the essential elements of the contract. Consummation occurs when the parties fulfill or perform the terms agreed upon in the contract, culminating in the extinguishment thereof. A negotiation is formally initiated by an offer. A perfected promise merely tends to insure and pave the way for the celebration of a future contract. An imperfect promise (policitacion), on the other hand, is a mere unaccepted offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. At any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal. - An offer would require, among other things, a clear certainty on both the object and the cause or consideration of the envisioned contract. Consent in a contract of sale should be manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer.[41] - Quite obviously, Litonjua’s letter proposing the acquisition of the Phimco shares for US$36 million was merely an offer. This offer, however, in Litonjua’s own words, “is understood to be subject to adjustment on the basis of an audit of the assets, liabilities and net worth of Phimco and its subsidiaries and on the final negotiation between ourselves.” Litonjua repeatedly stressed in his letters that they would not be able to submit their final bid by 30 June 1990. With indubitable inconsistency, respondents later claimed that for all intents and purposes, the US$36 million was their final bid. If this were so, it would be inane for Litonjua to state, as he did, in his letter dated 28 June 1990 that they would be in a position to submit their final bid only on 17 July 1990. The lack of a definite offer on the part of respondents could not possibly serve as the basis of their claim that the sale of the Phimco shares in their favor was perfected, for one essential element of a contract of sale was obviously wanting —the price certain in money or its equivalent. The price must be certain, otherwise there is no true consent between the parties.[44] There can be no sale without a price. Quite recently, this Court reiterated the long-standing doctrine that the

A2010 page Prof. Labitag manner of payment of the purchase price is an essential element before a valid and binding contract of sale can exist since the agreement on the manner of payment goes into the price such that a disagreement on the manner of payment is tantamount to a failure to agree on the price. - Granting arguendo, that the amount of US$36 million was a definite offer, it would remain as a mere offer in the absence of evidence of its acceptance. To produce a contract, there must be acceptance, which may be express or implied, but it must not qualify the terms of the offer. The acceptance of an offer must be unqualified and absolute to perfect the contract. In other words, it must be identical in all respects with that of the offer so as to produce consent or meeting of the minds. Respondents’ attempt to prove the alleged verbal acceptance of their US$36 million bid becomes futile in the face of the overwhelming evidence on record that there was in the first place no meeting of the minds with respect to the price. It is dramatically clear that the US$36 million was not the actual price agreed upon but merely a preliminary offer which was subject to adjustment after the conclusion of the audit of the company finances. Respondents’ failure to submit their final bid on the deadline set by petitioners prevented the perfection of the contract of sale. It was not perfected due to the absence of one essential element which was the price certain in money or its equivalent. - Respondents’ plea of partial performance should likewise fail. The acquisition audit and submission of a comfort letter, even if considered together, failed to prove the perfection of the contract. Quite the contrary, they indicated that the sale was far from concluded. Respondents conducted the audit as part of the due diligence process to help them arrive at and make their final offer. On the other hand, the submission of the comfort letter was merely a guarantee that respondents had the financial capacity to pay the price in the event that their bid was accepted by petitioners. - The Statute of Frauds is applicable only to contracts which are executory and not to those which have been consummated either totally or partially. If a contract has been totally or partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits already derived by him from the transaction in litigation, and at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby. This rule, however, is predicated on the fact of ratification of the contract within the meaning of Article 1405 of the Civil Code either (1) by failure to object to the presentation of oral evidence to prove the same, or (2) by the acceptance of benefits under them. In the instant case, respondents failed to prove that there was partial performance of the contract within the purview of the Statute.

CARBONNEL V PONCIO CONCEPCION; May 12,1958 NATURE APPEAL from an order of the Court of First Instance of Rizal. Caluag, J. FACTS - Plaintiff Rosario Carbonnel filed this case with the Court of First Instance of Rizal alleging that on January 27, 1955, she purchased from defendant Jose Poncio, at P9.50 a square meter, a parcel of land of about 195 square meters, more or less, located in San Juan del Monte, Rizal. Plaintiff allegedly paid P247.26 on account of

Obligations and Contracts 179 the price and assumed Poncio's obligation with the Republic Savings Bank amounting to P1,177.48, with the understanding that the balance would be payable upon execution of the corresponding deed of conveyance. Poncio however allegedly refused to convey the title to the plaintiff and conveyed the same property to defendants Infante spouses who knew of the first sale to plaintiff. - Plaintiff prayed, therefore, that she be declared owner of the land in question; that the sale to the Infantes be annulled; that Poncio be required to execute the corresponding deed of conveyance in plaintiff's favor; that the Register of Deeds of Rizal be directed to issue the corresponding title in plaintiff's name; and that defendants be sentenced to pay damages. Defendants moved to dismiss said complaint upon the ground that plaintiff's claim is unenforceable under the Statute of Frauds, and that said pleading does not state facts sufficient to constitute a cause of action. The motion was denied, "without prejudice to considering, when this case is decided on the merits, whether the same falls under the Statute of Frauds." - As the case came up for trial, on February 23, 1956, plaintiff introduced the testimony of one Constancio Meonada, who corroborated the existence of a document written in Ivatan (Batanes language) purporting to effect the sale, which was translated as follows: "From this date, January 27, Jose Poncio may stay in this lot that I bought from him until one year without payment. After that one year and he cannot find any place where to transfer his house, he can also stay in this lot and he will pay according to agreement. - Then, taking the witness stand, plaintiff testified that she has known Poncio since childhood, he being related to her mother; that Poncio's lot adjoins her lot, in San Juan, Rizal; that one day Poncio told her that he wanted to sell his property; that, after both had agreed on its price, he said that his lot is mortgaged to the Republic Savings Bank; and that, at noon time, on the same clay, he came back stating that both would "go to the bank to pay the balance in arrears." At this juncture, defense counsel moved to strike out the statement of the witness, invoking, in support of the motion, the Statute of Frauds. Later on, the lower court issued an order dismissing plaintiff's complaint, without costs, upon the ground that her cause of action is unenforceable under the Statute of Frauds. The counterclaims were, also, dismissed. - Hence, this appeal by plaintiff with the theory that the Statute of Frauds cannot be invoked by respondents because it only applies to executory contracts. As borne by the evidence, there was already partial performance. The nature of the contract in this case is therefore no longer covered by the term “executory.” ISSUE WON the lower court erred in holding that the Statute of Frauds bars the plaintiff’s cause of action. HELD YES Ratio The Statute of Frauds is applicable only to executory contracts not to contracts that are totally or partially performed. Reasoning “It is well settled in Great Britain and in this country, with the exception of a few states, that a sufficient part performance by the purchaser under a parol contract for the sale of real estate removes the contract from the operation of the statute of frauds." (49 Am. Jur. 722-723.)

A2010 page Prof. Labitag - In the words of former Chief Justice Moran: "The reason is simple. In executory contracts there is a wide field for fraud because unless they be in writing there is no palpable evidence of the intention of the contracting parties. The statute has precisely been enacted to prevent fraud." (Comments on the Rules of Court, by Moran, Vol. 111 [1957 ed.], p. 178.) However, if a contract has been totally or partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits already derived by him from the transaction in litigation, and, at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby. - For obvious reasons, it is not enough for a party to allege partial performance in order to hold that there has been such performance and to render a decision declaring that the Statute of Frauds is inapplicable. But neither is such party required to establish such partial performance by documentary proof before he could have the opportunity to introduce oral testimony on the transaction. Indeed, such oral testimony would usually be unnecessary if there were documents proving partial performance. Thus, the rejection of any and all testimonial evidence on partial performance, would nullify the rule that the Statute of Frauds is inapplicable to contracts which have been partly executed, and lead to the very evils that the statute seeks to prevent. - The true basis of the doctrine of part performance according to the overwhelming weight of authority, is that it would be a fraud upon the plaintiff if the defendant were permitted to escape performance of his part of the oral agreement after he has permitted the plaintiff to perform in reliance upon the agreement. The oral contract is enforced in harmony with the principle that courts of equity will not allow the statute of frauds to be used as all instrument of fraud. In other words, the doctrine of part performance was established for the same purpose for which the statute of frauds itself was enacted, namely, for the, prevention of, and fraud, and arose from the necessity of preventing, the statute from becoming an agent of fraud for it could not have been the intention of the statute to enable any party to commit a fraud with impunity." (49 Am. Jur., 725-726; italics supplied.) - When the party concerned has pleaded partial performance, such part is entitled to a reasonable chance to establish by parol evidence the truth of this allegation, as well as the contract itself. "The recognition of the exceptional effect of part performance in taking an oral contract out of the statute of frauds involves the principle that oral evidence is admissible in such cases to prove both the contract and the part performance of the contract" (49 Am. Jur., 927). - Upon submission of the case for decision on the merits, the Court should determine whether said allegation is true, bearing in mind that parol evidence is easier to concoct and more likely to be colored or inaccurate than documentary evidence. If the evidence of record fails to prove clearly that there has been partial performance, then the Court should apply the Statute of Frauds, if the cause of action involved falls within the purview thereof. If the Court is, however, convinced that the obligation in question has been partly executed and that the allegation of partial performance was not resorted to as a devise to circumvent the Statute, then the same should not be applied. - Apart from the foregoing, there are in the case at bar several circumstances indicating that plaintiff's claim might not be entirely devoid of factual basis. Thus, for instance, Poncio admitted in his answer that plaintiff had offered several times to purchase his land. The fact that Poncio’s bank book is with the plaintiff should be also clarified in a full trial.

Obligations and Contracts 180 - Without expressing any opinion on the merits of plaintiff's claim, it is clear, therefore, that she is entitled, legally as well as from the viewpoint of equity, to an opportunity to introduce parol evidence in support of the allegations of her second amended complaint. Wherefore, the order appealed from is hereby set aside, and let this case be REMANDED to the lower court for further proceedings not inconsistent with this decision, with the costs of this instance against defendantsappellees. It is so ordered.

UBARRA V MAPALAD PER CURIAM; March 22,1993 NATURE ADMINISTRATIVE MATTER in the Supreme Court. Grave Misconduct. FACTS - Complainant Atty. Manuel T. Ubarra, on behalf of his client Juanito A. Calderon, charges respondent, the Presiding Judge of the MTC of Pulilan, Bulacan, with grave misconduct, knowingly rendering an unjust judgment, the violation of the Canons of Judicial Ethics and the failure to decide within the mandated ninety-day period Criminal Case No. 89-3905. - Juanito A. Calderon, the offended party in said Criminal Case No. 89-3905 and Criminal Case No. 90-4056, another action for Grave Threats. - Calderon alleges in his affidavit that in the course of the trial of Criminal Case No. 89-3905 before the MTC, he noted that accused Roberto Crude worked as a houseboy of the respondent; by that time, he (Calderon) had already observed the latter's partiality in favor of the said accused - Criminal Case No. 89-3905 was submitted for decision on 27 March 1990; on 9 August 1991, Roberto Crude married Annabelle V Manlangit, respondent's youngest sister; it was the respondent herself who solemnized that marriage at her office, as evidenced by the marriage contract; despite such marriage, respondent did not inhibit herself from hearing Criminal Case No 89-3905 and instead proceeded to render and promulgate, on 17 October 1991, a judgment acquitting Cruda, her brother-in-law. - The answer to the letter-complaint, filed by the respondent was devoted mostly to a narration of her sincere and honest efforts to reform and rehabilitate Roberto Cruda. - She denies having knowingly rendered an unjust judgment in favor of her brotherin-law because she "was persuaded to dismiss the same not on account that the guilt of Cruda was not proven beyond reasonable doubt but by the very reason that both the private complainant and the accused therein were in pari delicto." - The Court referred the case to the Executive Judge of the RTC of Malolos, Bulacan who recommended that proper penalty be imposed upon the respondent Judge. ISSUE WON the respondent have knowingly rendered an unjust judgment HELD NO. Under the pari delicto doctrine, where the parties to a controversy are equally culpable or guilty, they shall have no action against each other, and it shall leave

A2010 page Prof. Labitag the parties where it finds them. This doctrine finds expression in the maxims “ex dolo malo non oritur actio' and 'in pari delicto potior est conditio defendentis.” - The Court found the application of the pari delicto theory in a criminal case to be strange, to say the least. In the first place, the rule on pari delicto is a rule in civil law. It is principally governed by Articles 1411 and 1412 of the Civil Code under the Chapter on Void or Inexistent Contracts, and presupposes a situation where the parties are in culpability similarly situated, i.e., in eodem loco. - That this rule can by no means apply in a criminal ease is evidenced by the aforesaid Article 1411 which provides in part that "When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted." Secondly, in view of the broader grounds of public policy, the rule may not be invoked against the State. Thirdly, in the prosecution of public crimes, the complainant is the State while the private offended party is but a complaining witness. Any criminal act perpetrated by the latter on the occasion of the commission of the crime, or which may have given rise to the criminal act imputed to the accused is not the act or conduct of the State and can by no means bind it under the doctrine of pari delicto. To rule otherwise would be to establish a dangerous doctrine which would irreparably weaken the very foundations of the criminal justice system and frustrate the administration of justice. Whatever wrongful act may have been committed by the offended party may only be invoked to justify the accused's own act or mitigate his liability. - In spite of all this, however, the respondent may not necessarily be liable for rendering an unjust judgment as there is no convincing evidence on record to show that she knew such judgment to be unjust and that she rendered the same with the conscious and deliberate intent to commit an injustice. She could only be, as she is hereby found, guilty of gross ignorance of the law. - The Court noted with grave concern the respondent's revelation in her Answer that "she interceeded in the settlement of the cases pending against" Roberto Cruda. By such admission, it is clear that the respondent acted as counsel for the accused. It is therefore evident that she is guilty of improper conduct, which could only serve to diminish public confidence in the integrity and impartiality of the judiciary. Her behavior amounted to a violation of Rule 2.01, Canon 2 of the Code of Judicial Conduct. Disposition For grave misconduct, gross inefficiency and neglect of duty, gross ignorance of the law and conduct prejudicial to the best interest of the service, respondent JUDGE LUZVIMINDA M. MAPALAD was DISMISSED from the service with forfeiture of all benefits, except for the monetary value of her accrued leaves, and with prejudice to re-employment in any branch or service of the government, including government owned or controlled corporations.

MODINA V COURT OF APPEALS YNARES-SANTIAGO; April 30, 2003 NATURE Petition for certiorari to review CA decision affirming the RTC decision in the case entitled “Serafin Modina v Ernesto Hontarciego, Paulino Figueroa and Ramon Chiang v Merlinda Plana Chiang, intervenors”, which declared as void and inexistent the deed of definite sale dated December 17, 1975 as well as the Certificates of Title Nos. T-86912, T-86913, T-86914 in the name of Ramon Chiang.

Obligations and Contracts 181 FACTS -The parcels of land in question are those under the name of Ramon Chiang (CHIANG). He theorized that subject properties were sold to him by his wife, Merlinda Plana Chiang (MERLINDA), as evidenced by a Deed of Absolute Sale dated December 17, 1975, and were subsequently sold by CHIANG to petitioner Serafin Modina (MODINA), as shown by the Deeds of Sale, dated August 3, 1979 and August 24, 1979, respectively. -MODINA brought a Complaint for Recovery of Possession with Damages against the private respondents Ernesto Hontarciego, Paul Figueroa and Teodoro Hipalla before the Iloilo City RTC. MERLINDA presented a Complaint-in-intervention, seeking the declaration of nullity of the Deed of Sale between her husband and MODINA on the ground that the titles of the parcels of land in dispute were never legally transferred to her husband. Fraudulent acts were allegedly employed by him to obtain a Torrens Title in his favor. However, she confirmed the validity of the lease contracts with the other private respondents. -MERLINDA also admitted that the said parcels of land were those ordered sold by Branch 2 of CFI Iloilo in “Intestate Estate of Nelson Plana” where she was appointed as the administratix, being the widow of the deceased, her first husband. An Authority to Sell was issued by the said Probate Court for the sale of the same properties. -RTC decided in favor of MERLINDA: (1) declaring as void and inexistent the sale of subject lots by MERLINDA in favor of CHIANG as well as the Certificates of Title in the name of Ramon Chiang; (2) declaring as void and inexistent the sale of the same properties by CHIANG in favor of MODINA as well as Certificates of Title in the name of Serafin Modina; (3) ordering the Register of Deeds of Iloilo to cancel said certificates of title in the names of Ramon Chiang and Serafin Modina and to reinstate the original Certificates of Title in the name of Nelson Plana; (4) ordering MODINA to vacate and restore possession of the lots in question to MERLINDA; (5) ordering CHIANG to restitute and pay to MODINA the sum of P145.8k; and (6) ordering MODINA to pay Ernesto Hontarciego the sum of P44.5k (actual and compensatory damages) +P5k (attorney’s fees), with costs in favor of said defendants against the plaintiff. CA affirmed RTC decision in toto. ISSUES 1a. WON MERLINDA is barred by the principle of in pari delicto from questioning subject Deed of Sale 1b. WON the sale of subject lots should be nullified 2. WON MODINA was a purchaser in good faith 3. WON RTC decision was tainted with excess of jurisdiction 4. WON only 3/4 of subject lots should be returned to the private respondent HELD 1a. NO Ratio As the contracts under controversy are inexistent contracts within legal contemplation, Articles 1411 and 1412 of the New Civil Code are inapplicable. In pari delicto doctrine applies only to contracts with illegal consideration or subject

A2010 page Prof. Labitag matter, whether the attendant facts constitute an offense or misdemeanor or whether the consideration involved is merely rendered illegal. Reasoning RTC & CA’s statements that it is likewise null and void for being violative of Article 1490 should just be treated as an obiter dictum as the issue of whether the parcels of land in dispute are conjugal in nature or they fall under the exceptions provided for by law, was neither raised nor litigated upon before the lower court. 1b. YES Since one of the characteristics of a void or inexistent contract is that it does not produce any effect, MERLINDA can recover the property from petitioner who never acquired title thereover. 2. NO MODINA is not a purchaser in good faith. CA found that there were circumstances known to MODINA which rendered their transaction fraudulent under the attendant circumstances. - There are circumstances which are indicia of bad faith on his part. (1) He asked his nephew, Placido Matta, to investigate the origin of the property and the latter learned (a) that the same formed part of the properties of MERLINDA’s first husband; (b) that the said sale was between the spouses; and (2) When the property was inspected, MODINA met all the lessees who informed that subject lands belong to MERLINDA and they had no knowledge that the same lots were sold to the husband. Ratio As a general rule, in a sale under the Torrens system, a void title cannot give rise to a valid title. The exception is when the sale of a person with a void title is to a third person who purchased it for value and in good faith. - A purchaser in good faith is one who buys the property of another without notice that some other person has a right to or interest in such property and pays a full and fair price at the time of the purchase or before he has notice of the claim or interest of some other person in the property. - A purchaser cannot close his eyes to facts which would put a reasonable man upon his guard to make the necessary inquiries, and then claim that he acted in good faith. His mere refusal to believe that such defect exists, or his wilful closing of his eyes to the possibility of the existence of a defect in his vendor’s title, will not make him an innocent purchaser for value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice of the defect as would have led to its discovery had he acted with that measure of precaution which may reasonably be required of a prudent man in a like situation. 3. YES Ratio A CFI (now RTC) has jurisdiction over a case brought to rescind a sale made upon prior authority of a Probate Court. This does not constitute an interference or review of the order of a co-equal Court since the Probate Court has no jurisdiction over the question of title to subject properties. Consequently, a separate action may be brought to determine the question of ownership 4. NO Ratio In a Petition for Review, only questions of law may be raised. An issue which was neither averred in the Complaint nor raised during the trial before the lower court cannot be raised for the first time on appeal, as such a recourse would be offensive to the basic rules of fair play, justice, and due process. - This issue was never an issue before the lower court and therefore, the petitioner cannot do it now.

Obligations and Contracts 182 Disposition Petition denied. CA decision affirmed.

RELLOSA V GAW CHEEN HUM BAUTISTA-ANGELO; September 29, 1953 NATURE Petition for review by certiorari of a decision of the Court of Appeals FACTS - On February 2, 1944, Dionisio Rellosa sold to Gaw Chee Hun a parcel of land, together with the house erected thereon, situated in the City of Manila, Philippines, for the sum of P25,000. The vendor remained in possession of the property under a contract of lease entered into on the same date between the same parties. - The sale was executed subject to the condition that the vendee, a Chinese citizen, would obtain the approval of the Japanese Military Administration in accordance with Seirei No. 6 issued on April 2, 1943, by the Japanese authorities. The said approval has not been obtained. Even if said requirement were met, the sale would at all events be void under article XIII, section 5, of our Constitution, Seirei No. 6. Prohibits an alien from acquiring any private land not agricultural in nature during the occupation unless the necessary approval is obtained from the Director General of the Japanese Military Administration. Petitioner’s Claim - The sale in question cannot have any validity under Seirei 6 in view of the failure of respondent to obtain the requisite approval; - It was error for the Court of Appeals to declare said directive without any binding effect because the occupation government could not have issued it under article 43 of the Hague Regulations which command that laws that are municipal in character of an occupied territory should be respected and cannot be ignored unless prevented by military necessity. Respondent’s Comment The sale referred to in the complaint was absolute and unconditional and was in every respect valid and binding between the parties, it being not contrary to law, morals and public order, and that plaintiff is guilty of estoppel in that, by having executed a deed of lease over the property, he thereby recognized the title of defendant to that property. ISSUES 1. WON the sale in question is valid 2. If it were valid, WON an action may be maintained under the principle of pari delicto HELD 1. Ratio The plaintiffs are now prevented from invoking the Constitution or the doctrine in the Krivenko case so if their purpose is to recover the lands that they have voluntarily parted with, because of their guilty knowledge that what they were doing was in violation of the Constitution Reasoning A party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out. The law will not aid either party to an illegal agreement; it leaves the parties where it finds them.

A2010 page Prof. Labitag - The law that should govern the particular transaction is not the above directive but the Constitution adopted by the then Republic of the Philippines on September 4, 1943, because the transaction was executed on February 2, 1944. Article VIII, Sec. 5. No private agricultural land shall be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines. - Private agricultural land includes residential lands, as this has already been interpreted in the affirmative by this court in the recent case of Krivenko v. Register of Deeds, 79 Phil. 461, wherein this court held that "under the Constitution aliens may not acquire private or public agricultural lands, including residential lands." - ‘In Pari delicto potior est conditio defendentis’: The proposition is universal that no action arises, in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed to be sold or delivered, or the money agreed to be paid, or damages for its violation. No affirmative relief of any kind will be given to one against the other. - The doctrine is subject to one important limitation: whenever public policy is considered as advanced by allowing either party to sue for relief against the transaction. The cases in which this limitation may apply include the class of contracts which are intrinsically contrary to public policy, contracts in which the illegality itself consists in their opposition to public policy, and any other species of illegal contracts in which, from their particular circumstances, incidental and collateral motives of public policy require relief, e.g. usurious contracts, marriagebrokerage contracts and gambling contracts. - The contract in question does not come under this exception because it is not intrinsically contrary to public policy, It is illegal because it is against the Constitution. Nor may it be contended that to apply the doctrine of pari delicto would be tantamount to contravening the fundamental policy embodied in the constitutional prohibition in that it would allow an alien to remain in the illegal possession, of the land, because in this case the remedy is lodged elsewhere. To adopt the contrary view would be merely to benefit petitioner and not to enhance public interest. 2. Ratio The petitioner is prohibited from invoking Pari Delicto. Reasoning There are at present two ways by which this situation may be remedied: action for reversion; escheat to the state. - Escheat proceedings may be instituted as a consequence on a violation of article XIII, section 5 of our Constitution, which prohibits transfers of private agricultural lands to aliens, whereas an action for reversion is expressly authorized by the Public Land Act. Escheat is an incident or attribute of sovereignty, and rests on the principle of the ultimate ownership by the state of all property within its jurisdiction. - If escheat lies against aliens holding lands in those states of the Union where common law prevails or where similar constitutional or statutory prohibitions exist, no cogent reason is perceived why similar proceedings may not be instituted in this jurisdiction. - By following either of these remedies, or by approving an implementary law as above suggested, we can enforce the fundamental policy of our Constitution regarding our natural resources without doing violence to the principle of pari

Obligations and Contracts 183 delicto. With these remedies there is no justifiable reason for pursuing the extreme unusual remedy now vehemently urged by the amici curiae. Disposition The sale in question is null and void, but plaintiff is barred from taking the present action under the principle of pari delicto.

PHILIPPINE BANKING CORPORATION V LUI SHE CASTRO; September 12, 1967 NATURE APPEAL from judgment of the Court of First Instance of Manila FACTS - Justina Santos and her sister Lorenza were the owners of a piece of land in Manila located on Rizal Avenue and opens into Florentino Torres street at the back and Katubusan street on one side. In it are two residential houses with entrance on Florentino Torres street and the Hen Wah Restaurant with entrance on Rizal Avenue. The sisters lived in one of the houses, while Wong Heng, a Chinese, lived with his family in the restaurant. Wong had been a long-time lessee of a portion of the property, having a monthly rental of P2,620. - On Sept. 22, 1957 Justina Santos became the owner of the entire property as her sister died with no other heir. Then already well advanced in yrs., being at the time 90 yrs. old, blind, crippled and an invalid, she was left with no other relative to live with. Her only companions in the house were her 17 dogs and 8 maids (kamusta naman.). Wong himself was the trusted man to whom she delivered various amounts for safekeeping, including rentals from her property at the corner of Ongpin and Salazar streets and the rentals which Wong himself paid as lessee of a part of the Rizal Avenue property. Wong also took care of the payment, in her behalf, of taxes, lawyers’ fees, funeral expenses, masses, salaries of maids and security guard, and her household expenses. - “In grateful acknowledgement of the personal services of the Lessee to her,” Santos executed on NoV 15, 1957, a contract of lease in favor of Wong, covering the portion then already leased to him and another portion fronting Florentino Torres street. The lease was for 50 yrs., although the lessee was given the right to withdraw at any time from the agreement; the monthly rental was P3,120. The contract covered only a portion of the land. 10 days later (NoV 25), the contract was amended so as to make it cover the entire property, including the portion on which the house of Santos stood, at an additional monthly rental of P360. For his part Wong undertook to pay, out of the rental due from him, an amount not exceeding P1,000 a month for the food of her dogs and the salaries of her maids. - On Dec. 21 she executed contract giving Wong the option to buy the leased premises for P120,000, payable within ten yrs. at a monthly installment of P1,000. The option, written in Tagalog, imposed on him the obligation to pay for the food of the dogs and the salaries of the maids in her household, the charge not to exceed P1,800 a month and was conditioned on his obtaining Philippine citizenship, a petition for which was then pending in the CFI of Rizal. However, this application for naturalization was withdrawn when it was discovered that he was not a resident of Rizal. On Oct 28, 1958 she filed a petition to adopt him and his children on the erroneous belief that adoption would confer on them Philippine citizenship. The error was discovered and the proceedings were abandoned.

A2010 page Prof. Labitag - On NoV 18, 1958 she executed 2 other contracts, one extending the term of the lease to 99 yrs., and another fixing the term of the option at 50 yrs. - In two wills executed on Aug 24 and 29, 1959, she bade her legatees to respect the contracts she had entered into with Wong, but in a codicil (a post-script) of a later date (NoV 4, 1959) she appears to have a change of heart. Claiming that the various contracts were made by her because of machinations and inducements practiced by him, she now directed her executor to secure the annulment of the contracts. Note: both Santos and Wong died while case was pending, and both were replaced by Phil. Banking Corp. (PBC) and Lui She (the wife) respectively. Lower court declared contracts null and void save for the lease contract executed Nov 15, 1957. Both parties appealed. Petitioner’s arguments - the contracts were obtained by Wong “through fraud, misrepresentation, inequitable conduct, undue influence and abuse of confidence and trust of and (by) taking advantage of the helplessness of the plaintiff and were made to circumvent the constitutional prohibition prohibiting aliens from acquiring lands in the Philippines and also of the Philippine Naturalization Laws.” - lease contract should have been annulled with the 4 other contracts because it lacks mutuality; because it included a portion which, at the time, was in custodia legis because the contract was obtained in violation of the fiduciary relations of parties; because her consent was obtained through undue influence, fraud and misrepresentation; and because the lease contract, like the other contracts, is absolutely simulated. Respondent’s arguments - admitted he enjoyed her trust and confidence as proof of which he volunteered the information that, in addition to the sum of P3,000 which he said she had delivered to him for safekeeping, another sum of P22,000 had been deposited in a joint account which he had with one of her maids. But he denied having taken advantage of her trust in order to secure the execution of the contracts in question. ISSUES 1. WON the provision “lessee may at any time withdraw from the agreement” makes the contract invalid 2. WON the property cannot be leased for being in custodio legis, thus making contract of lease void 3. WON contracts are void for being violative of fiduciary relationship, contrary to Art. 16468 4. WON consent of Santos was valid 5. WON the contracts are void for trying to circumvent Philippine laws against alienation of property to foreigners HELD 1. NO Ratio The stipulation in the contract does not violate Art.1308 CC, for it is considered as a resolutory condition to the contract, permitting the cancellation of such contract. 8

Disqualifies agents from leasing the property whose administration or sale may have been entrusted to them

Obligations and Contracts 184 Reasoning It is claimed that the stipulation offends Art. 1308 CC which provides that "the contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." As was held in Taylor v Uy Tiong Piao, “art. 1256 [now art. 1308] CC in our opinion creates no impediment to the insertion in a contract for personal service of a resolutory condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen, does not make either the validity or the fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of the option is as much in the fulfillment of the contract as any other act which may have been the subject of agreement, Indeed, the cancellation of a contract in accordance with conditions agreed upon beforehand is fulfillment.” The right of the lessee to continue the lease or to terminate it is so circumscribed by the term of the contract that it cannot be said that the continuance of the lease depends upon his will. At any rate, even if no term had been fixed in the agreement, this case would at most justify the fixing of a period but not the annulment of the contract. 2. NO Ratio Ownership of the property (that used to belong to her sister) transferred to Santos upon the death of the sister, thus enabling her to bind such in contracts Reasoning Santos became the owner of the entire property upon the death of her sister Lorenza on September 22, 1957 by force of art. 777 CC. Hence, when she leased the property on NoV15, she did so already as owner thereof. 3. NO Ratio Art.1646 is not violated for Wong was never an agent for Santos. Reasoning The relationship of the parties, although admittedly close and confidential, did not amount to an agency so as to bring the case within the prohibition of the law. Atty. Yumol testified that she signed the lease contract in the presence of her close friend and her maid who was constantly by her side. Any of them could have testified on the undue influence that Wong supposedly wielded over Santos, but neither of them was presented as a witness. The truth is that even after giving his client time to think the matter over, the lawyer could not make her change her mind. 4. YES Ratio Consent given by her voluntarily and on well-informed bases, as shown by the testimonies of her lawyer, is valid. Reasoning There is no merit in the claim that her consent to the lease contract, as well as to the rest of the contracts in question, was given out of a mistaken sense of gratitude to Wong who, she was made to believe, had saved her and her sister from a fire that destroyed their house during the liberation of Manila. As it was with the lease contract so it was with the rest of the contracts - the consent of Santos was given freely and voluntarily. As Atty. Alonzo, testifying for her, said: “In nearly, all documents, it was either Wong or Judge Torres [who] … used to tell me what the documents should contain. But, … , I would always ask the old woman about them and invariably the old woman used to tell me: “That’s okay. It’s all right.” 5. YES, contracts are void

A2010 page Prof. Labitag Ratio The collection of contracts, as well as the intentions of Santos, shows a scheme to circumvent the Constitutional prohibition against the transfer of land of aliens, thus making each contract void. Reasoning “The illicit purpose then becomes the illegal cause rendering the contracts void.” Taken singly, the contracts show nothing that is necessarily illegal, but considered collectively, they reveal an insidious pattern to subvert by indirection what the Constitution directly prohibits. To be sure, a lease to an alien for a reasonable period is valid, so is an option giving an alien the right to buy real property on condition that he is granted Philippine citizenship. However, if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests himself in stages not only of the right to enjoy the land (jus possidendi, jus utendi, jus fruendi and jus abutendi), but also of the right to dispose of it (jus disponendi) rights the sum total of which make up ownership. It is just as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until ultimately all the rights of which ownership is made up are consolidated in an alien. And yet this is just exactly what the parties in this case did within this pace of one year, with the result that Santos’ ownership of her property was reduced to a hollow concept. If this can be done, then the Constitutional ban against alien landholding in the Phil, as announced in Krivenko, is in grave peril. Disposition: Contracts annulled and set aside.

SEPARATE OPINION FERNANDO [ concur]

-he is in full agreement with the majority opinion. He wrote this separate opinion only to discuss the consequences of the ruling of the Krivenko case (wherein alien ownership of Philippine land is declared illegal) -the Krivenko case interpreted the provision in the Constitution that prohibited alien land ownership. The provision took effect on NoV 15, 1935 when the Commonwealth Government was established. The interpretation as set forth in the Krivenko decision was only handed down on NoV 15, 1947. Prior to that date there were many who were of the opinion that the phrase agricultural land should be construed strictly and not be made to cover residential and commercial lots. Acting on that belief, several transactions were entered into transferring such lots to alien vendees by Filipino vendors. After the Krivenko decision, some Filipino vendors sought recovery of the lots in question on the ground that the sales were null and void. -No definite ruling was made by this Court until September of 1953, when Rellosa V Gaw Chee Hun, Bautista V Uy Isabelo, Talento V Makiki, Caoile V Chiao Peng, were decided. -in Rellosa, it was held that while the sale by a Filipino-vendor to an alien-vendee of a residential or a commercial lot is null and void as held in the Krivenko case, still the Filipino-vendor has no right to recover under a civil law doctrine, the parties

Obligations and Contracts 185 being in pari delicto. The only remedy to prevent this continuing violation of the Constitution is either escheat or reversion. - Had the sale by and between Filipino-vendor and alien-vendee occurred after the decision in the Krivenko case, then the above view would be correct that both Filipino-vendor and alien-vendee could not be considered as innocent parties within the contemplation of the law. Both of them should be held equally guilty of evasion of the Constitution. According to the Rellosa opinion, both parties are equally guilty of evasion of the Constitution, based on the broader principle that "both parties are presumed to know the law." - After the Krivenko decision, there is no doubt that continued possession by alienvendee of property acquired before its promulgation is violative of the Constitution. The question then as now, therefore, was and is how to divest the alien of such property rights on terms equitable to both parties. - Alien-vendee is incapacitated or disqualified to acquire and hold real estate. That incapacity and disqualification should date from the adoption of the Constitution on NoV 15, 1935. Such incapacity and disqualification, however, was made known to Filipinovendor and to alien-vendee only upon the promulgation of the Krivenko decision on NoV 15, 1947. Alien-vendee therefore, cannot be allowed to continue owning and exercising acts of ownership over said property, when it is clearly included within the Constitutional prohibition. Alien-vendee should thus be made to restore the property with its fruits and rents to Filipino vendor, its previous owner, if it can be shown that in the utmost good faith, he transferred his title over the same to alien-vendee, upon restitution of the purchase price. - It ought to follow then, if such a continuing violation of the fundamental law is to be put an end to, that the Filipino-vendor, who in good faith entered into a contract with an incapacitated person, transferring ownership of a piece of land after the Constitution went into full force and effect, should, in the light of the ruling in the Krivenko case, be restored to the possession and ownership thereof, where he has filed the appropriate case or proceeding. Any other construction would defeat the ends and purposes not only of this particular provision in question but the rest of the Constitution itself.

FRENZEL V CATITO CALLEJO; July 11, 2003 NATURE Petition for review of the decision of the CA ordering the dismissal of Frenzel’s complaint against Catito. FACTS - Frenzel is a rich Australian guy legally married to a Filipina - Catito is a Filipina legally married to a German guy - They hooked up. Frenzel buys Catito businesses and land, all of which are registered under Catito’s name (i.e. deeds of sale, receipts, TCTs). - The relationship goes sour. Frenzel filed a complaint against Catito for recovery of real and personal property. ISSUE

A2010 page Prof. Labitag WON the transactions are illegal per se or merely prohibited, as Frenzel contends, thereby entitling him to recover under Art 1416 HELD Ratio The sales of three parcels of land in favor of the petitioner who is a foreigner is illegal per se. The transactions are void ab initio because they were entered into in violation of the Constitution. Thus, to allow the petitioner to recover the properties or the money used in the purchase of the parcels of land would be subversive of public policy. Art 1416 applies only to those contracts which are merely prohibited, in order to benefit private interests. It does not apply to contracts void ab initio Reasoning Lands of the public domain, which include private lands, may be transferred or conveyed only to individuals or entities qualified to acquire or hold private lands or lands of the public domain. Aliens, whether individuals or corporations, have been disqualified from acquiring lands of the public domain - The said transactions are in violation of the Constitution; hence, are null and void ab initio. A contract that violates the Constitution and the law, is null and void and vests no rights and creates no obligations. The law will not aid either party to an illegal contract or agreement; it leaves the parties where it finds them Disposition The petition is DISMISSED. The decision of the Court of Appeals is AFFIRMED in toto

VILLARROEL V ESTRADA EN BANC; December 19, 1940 NATURE Petition to review the decision of the CFI. FACTS - On May 9, 1912, Alexander F. Callao, mother of Juan F. Villarroel, obtained from the spouses Mariano Estrada and Severina debt of P1,000, payable after seven years. - Alejandra, passed away, leaving Villaroel as sole heir. The spouses Mariano Estrada and Severina also passed away, leaving Bernardino Estrada as sole heir. - On August 9, 1930, Villaroel gave a document to Estrada, in which he declared in owing the amount of P1,000, with an interest of 12 percent per year. This action turns on the collection of this amount. - The Court of First Instance of Lagoon, in as interposed this action, and decided for Villaroel to pay the amount demanded of P1,000 with its legal interests of 12 percent from August 9, 1930 to its complete payment. Villaroel appealed. ISSUE WON Villaroel should pay the amount despite the prescription of the original debt HELD - The present action is not based on the original obligation contracted by the mother Villaroel, which has prescribed, but on that which he contracted on August 9, 1930 when assuming the fulfillment of that obligation. Being the sole heir of the indebted one, with right her inheritance, that debt which was contracted by his mother legally, although no longer effective by prescription, now is, nevertheless, a

Obligations and Contracts 186 moral obligation. That consideration is sufficient to create and to make his obligation voluntarily contracted, effective August of 1930. - The rule in which a new promise to pay a prescribed debt must be done only by the same person or another who is legally authorized by her, is not applicable to the present case, because Villaroel voluntarily wanted to assume this obligation. Disposition The appealed sentence is confirmed, with costs to the apellant.

FISHER V ROBB VILLAREAL; November 2, 1939 NATURE Appeal from a judgment of the CFI of Manila, which ordered defendant Robb to pay plaintiff Fisher the sum of P 2,000 with interest FACTS - On Sept. 1935, defendant-appellant John Robb was asked by the board of directors of the Philippine Greyhound Club Inc. (PGCI) to study the operation of a dog racing course in Shanghai. - In Shanghai, he met plaintiff-appellee, A.O. Fisher who happened to be the manager of the dog racing course. During their time together, Plaintiff became interested in the PGCI and asked to become a stockholder. He later on subscribed to PGCI and sent a payment of P 3,000 for the 1 st installment of his subscription. Robb returned to Manila from Shanghai shortly thereafter. - After a few months, the PGCI Board issued a call for the 2nd installment of Fisher’s subscription, hence, defendant-appellant Robb sent a radiogram requesting payment of the 2nd installment. Fisher duly complied and sent P 2,000 directly to PGCI. - The PGCI however, due to the manipulations of some of its members, crumbled not too long after. - Defendant-appellant Robb, who was organizing a new company called the Philippine Racing Club, immediately endeavored to save the investment of those who had subscribed to the PGCI, by having the Philippine Racing Club acquire the remaining assets of the PGCI. - Robb wrote a letter to Fisher explaining in detail the critical condition of the PGCI, and outlining his plans to save the properties and assets of the plaintiff-appellee and that he felt morally responsible to the stockholders who had paid their second installment. - In answer to said letter, the plaintiff-appellee wrote the defendant-appellant requiring him to return the entire amount paid by him to the PGCI. Upon receiving this letter, the defendant-appellant answered the plaintiff-appellee on March 16, 1936, to the effect that it was not his duty under the law to reimburse the plaintiffappellee for any loss which he might have suffered in connection with the PGCI in the same way that he could not expect anyone to reimburse him for his own losses which were much more than those of the plaintiff-appellee. - In his letter dated March 16, 1936, defendant-appellant stated that he felt a moral responsibility for the 2nd payments which were made to carry out his plan and that he, along with a certain Mr. Hilscher, would see to it that the stockholders who made 2nd payments will be paid back as soon as possible out of their very own personal funds. He stressed that they were doing so not because of any obligation

A2010 page Prof. Labitag but simply because they had taken it upon themselves to do it; they felt they had a personal responsibility to those who made their 2nd payments. - Finally, in the same letter, Robb stated that he was to receive certain shares for his services as promoter of the new Philippine Racing Club & as soon as he receives it, he will be in a position to compensate the few others who made the 2nd payment. He restated that the payments will come from his personal funds in an effort to make things easier for those who were sport enough to try to save the Greyhound org. by making 2nd payments. ISSUE WON the promise made by defendant-appellant is the sufficient consideration contemplated under Art. 1261 (as an essential element for the legal existence of an onerous contract which would bind the promisor to comply with his promise) HELD NO Ratio A mere moral obligation or conscientious duty arising wholly from ethical motives or a mere conscientious duty unconnected with any legal obligation, will not furnish a consideration for executory promise. Reasoning The promise made by an organizer of a dog racing course to a stockholder to return to him certain amounts paid by the latter in satisfaction of his subscription upon the belief of said organizer that he was morally responsible because of the failure of the enterprise, is not the consideration required by article 1261 of the Civil Code as an essential element for the legal existence of an onerous contract which would bind the promisor to comply with his promise. -The promise which defendant-appellant made to the plaintiff-appellee was prompted by a feeling of pity, resulting from the loss which the latter had suffered because of the failure of the enterprise. The obligation which said defendantappellant had contracted with the plaintiff-appellee is, therefore, purely moral and, as such, not demandable in law but only in conscience, over which human judges have no jurisdiction. Disposition The appealed judgment is reversed and the defendant is absolved from the complaint with costs to the plaintiff.

KALALO V LUZ ZALDIVAR; July 31, 1970 FACTS - On November 17, 1959, plaintiff-appellee Octavio A. Kalalo hereinafter referred to as appellee), a licensed civil engineer doing business under the firm name of O. A. Kalalo and Associates, entered into an agreement (Exhibit A ) 1 with defendantappellant Alfredo J . Luz (hereinafter referred to as appellant), a licensed architect, doing business under firm name of A. J. Luz and Associates, whereby the former was to render engineering design services to the latter for fees, as stipulated in the agreement. The services included design computation and sketches, contract drawing and technical specifications of all engineering phases of the project designed by O. A. Kalalo and Associates bill of quantities and cost estimate, and consultation and advice during construction relative to the work. The fees agreed upon were percentages of the architect's fee, to wit: structural engineering, 12-½%; electrical engineering, 2-%.

Obligations and Contracts 187 - On December 1 1, '1961, appellee sent to appellant a statement of account (Exhibit "1"), 3 to which was attached an itemized statement of defendantappellant's account (Exh. "1-A"), according to which the total engineering fee asked by appellee for services rendered amounted to P116,565.00 from which sum was to be deducted the previous payments made in the amount of P57,000.00, thus leaving a balance due in the amount of P59,565.00. - On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said fees, according to appellant. amounted to P10,861.08 instead of the amount claimed by the appellee. On June 14, 1962 appellant sent appellee a check for said amount, which appellee refused to accept as full payment of the balance of the fees due him. - Defendant Lus sent to plaintiff a resume of fees due to the latter by virtue of service agreement done by plaintiff Kalalo. Said fees, according to appellantdefendant amounted to P10,861.08, instead of the amount claimed by the plaintiff which is P59,565.00, a balance due of the service rendered. A check for P10,861.08 was sent by defendant, which appellee-plaintiff refused to accept as full payment of the balance of the fees due him. - On August 10, 1962, appellee filed a complaint against appellant, containing four causes of action. In the first cause of action, appellee alleged that for services rendered in connection with the different projects therein mentioned there was due him fees in sum s consisting of $28,000 (U.S.) and P100,204.46, excluding interests, of which sums only P69,323.21 had been paid, thus leaving unpaid the $28,000.00 and the balance of P30,881.25. In the second cause of action, appellee claimed P17,000.00 as consequential and moral damages; in the third cause of action claimed P55,000.00 as moral damages, attorney's fees and expenses of litigation; and in the fourth cause of action he claimed P25,000.00 as actual damages, and also for attorney's fees and expenses of litigation. - Trial Court held in favor of plaintiff that the defendant pay the sums of money demanded. Defendant appealed to the SC. ISSUE WON the payment for the project rendered must be on the basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time of payment of the judgment HELD - We have taken note of the fact that on August 25, 1961, the date when appellant said his obligation to pay appellee's fees became due, there was two rates of exchange, to wit: the preferred rate of P2.00 to $1.00, and the free market rate. It was so provided in Circular No. 121 of the Central Bank of the Philippines, dated March 2, 1961. amending an earlier Circular No. 117, and in force until January 21, 1962 when it was amended by Circular No. 133 - Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the amount of $28,000.00. Appellee, however, cannot oblige the appellant to pay him in dollars, even if appellant himself had received his fee for the IRRI project in dollars. This payment in dollars is prohibited by Republic Act 529 which was enacted on June 16, 1950. - Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the enactment of the Act and require payment in a particular kind of coin or currency other than the Philippine currency the same shall be discharged

A2010 page Prof. Labitag in Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred. As We have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case now before Us the obligation of appellant to pay appellee the 20% of $140,000.00, or the sum of $28,000.00, accrued on August 25, 1961, or after the enactment of Republic Act 529. It follows that the provision of Republic Act 529 which requires payment at the prevailing rate of exchange when the obligation was incurred cannot be applied. Republic Act 529 does not provide for the rate of exchange for the payment of obligation incurred after the enactment of said Act. The logical Conclusion, therefore, is that the rate of exchange should be that prevailing at the time of payment. - It is our considered view, therefore, that appellant should pay the appellee the equivalent in pesos of the $28,000.00 at the free market rate of exchange at the time of payment.

MANILA LODGE NO. 761 BENEVELONT & PROTECTIVE ORDER OF THE ELKS V CA CASTRO; September 30, 1976 NATURE Petitions for review on certiorari of the decision of the Court of Appeals FACTS - On June 26, 1905 the Philippine Commission enacted Act No. 1360 which authorized the City of Manila to reclaim a portion of Manila Bay. The reclaimed area was to form part of the Luneta extension. The Act provided that the reclaimed area "shall be the property of the City of Manila" and that the City of Manila is authorized to set aside a tract of the reclaimed land formed by the Luneta extension at the north end for a hotel site, and to lease the same, with the approval of the Governor General, to a responsible person or corporation for a term not to exceed 99 years. Subsequently, the Philippine Commission passed on May 18, 1907 Act No. 1657, amending Act No. 1360, so as to authorize the City of Manila either to lease or to sell the portion set aside as a hotel site. - The total area reclaimed was a little over 25 hectares. The City of Manila applied for the registration of the reclaimed area, and on January 20, 1911, original certificate of title was issued in the name of the City of Manila. The title described the registered land as "un terreno conocido con el nombre de Luneta Extension, situado en el distrito de la Ermita." [Translation: A land known under the name of Luneta Extension, situated in the district of Ermita.] - The registration was subject, however, to the encumbrances mentioned in Article 39 of the Land Registration Act as may be subsisting and "sujeto a las disposiciones y condiciones inipuestas en la Ley No. 1360; y sujeto tambien a los contratos de venta, celebratlos y oborgados por ta Ciudad de Manila a favor del Army and Navy Club y la Manila Lodge No. 761. Benevolent and Protective Order of Elks, fechados en 29 de Diciembre de 1908 y 16 de Enero de 1909." [Translation: Subject to the dispositions and conditions provided by Act No. 1360; and subject also to contracts of sale celebrated and entered into by the City of Manila in favor of the Army and Navy Club and Manila Lodge No. 761 Benevolent and Protective Order of Elks (BPOE for short), dated 29th of December 1908 and 16th of January 1909.]

Obligations and Contracts 188 - On July 13, 1911, the City of Manila conveyed 5,543.07 square meters of the reclaimed area to the Manila Lodge No. 761, BPOE on the basis of which a transfer certificate of title was issued to the latter over the "parcela de terreno que es parte de la Luneta Extension, Situada en el Distrito de la Ermita." [Translation: Parcel of land which is part of the Luneta Extension, situated in the District of Ermita] - At the back of this title was an annotated document which in part reads as follows: "que la citada ciudad de Manila tendra derecho a su opcion de recompray la expresada propiedad para fines puldicos solamente, en cualquier tiempo despues de cincuenta anos desde el 13 de Julio de 1911, previo pago a la entidad compradora, o a sus sucesores del precio de la venta de la misma propiedad, mas el valor que entoces tengan las mejores." [Attempted Translation: That the said city of Manila has the legal option to repurchase the said property solely for public purposes, at any time after fifty years from the 13th of July 1911, at the price previously paid to the buying entity or the future market price of the property, whichever value is higher.] - In January 1963 the BPOE petitioned the CFI of Manila, Branch IV, for the cancellation of the right of the City Manila to repurchase the property. This petition was granted on February 15, 1963. - On November 19, 1963 the BPOE sold for the sum of P4,700,000 the land together with all the improvements thereon to the Tarlac Development Corporation (TDC, for short) which paid P1,700,000 as down payment and mortgaged to the vendor the same realty to secure the payment of the balance to be paid in quarterly installments. At the time of the sale, there was no annotation of any subsisting lien on the title to the property. On December 12, 1963 TCT No. 73444 was issued to TDC over the subject land still described as "Una parcela de terreno, que es parte de la Luneta Extension, situada en el Distrito de Ermita." - In June 1964 the City of Manila filed with the CFI of Manila a petition for the reannotation of its right to repurchase. The court, after hearing, issued an order, dated November 19, 1964, directing the Regrister of Deeds of the City of Manila to reannotate in toto the entry regarding the right of the City of Manila to repurchase the property after fifty years. From this order TDC and BPOE appealed to this Court which on July 31, 1968 affirmed the trial court's order of reannotation, but reserved to TDC the right to bring another action for the clarification of its rights. - After trial the court a quo rendered on July 14, 1972 its decision finding the subject land to be part of the "public park or plaza" and, therefore, part of the public domain. The court consequently declared that the sale of the subject land by the City of Manila to Manila Lodge No. 761, BPOE, was null and void; that plaintiff TDC was a purchaser thereof in good faith and for value from BPOE and can enforce its rights against the latter; and that BPOE is entitled to recover from the City of Manila whatever consideration it had paid the latter. - In its decision promulgated on June 30, 1975, the CA concurred in the findings and conclusions of the lower court. ISSUES 1. WON the property subject of the action was patrimonial property of the City of Manila and not a park or plaza 2. WON the City of Manila is estopped from questioning the validity of the sale it executed on July 13, 1911 conveying the subject property to the Manila Lodge No. 761, BPOE

A2010 page Prof. Labitag 3. WON the CA has departed from the accepted and usual course of judicial proceedings in that it did not make its own findings but simply recited those of the lower court\ HELD 1. NO We hold that it is of public dominion, intended for public use. Reasoning Firstly, if the reclaimed area was granted to the City of Manila as its patrimonial property, the City could, by virtue of its ownership, dispose of the whole reclaimed area without need of authorization to do so from the lawmaking body. Thus Article 348 of the Civil Code of Spain provides that "ownership is the right to enjoy and dispose of a thing without further limitations than those established by law." The right to dispose (jus disponendi) of one's property is an attribute of ownership. Act No. 1360, as amended, however, provides by necessary implication, that the City of Manila could not dispose of the reclaimed area without being authorized by the lawmaking, body. Thus the statute provides that "the City of Manila is hereby authorized to set aside a tract at the north end, for a hotel site, and to lease the same x x x should the municipal board x x x deem it advisable, it is hereby authorized x x x to sell said tract of land x x x." If the reclaimed area were patrimonial property of the City, the latter could dispose of it without need of the authorization provided by the statute, and the authorization to set aside, lease, or sell given by the statute would indeed be superfluous. To so construe the statute as to render the term "authorize," which is repeatedly used by the statute, superfluous would violate the elementary rule of legal hermeneutics that effect must be given to every word, clause, and sentence of the statute and that a statute should be so interpreted that no part thereof becomes inoperative or superflous. To authorize means to empower, to give a right to act. Act No. 1360 furthermore qualifies the verb "authorize" with the adverb "hereby," which means "by means of this statue or section." Hence without the authorization expressly given by Act No. 1360, the City of Manila could not lease or sell even the northern portion; much less could it dispose of the whole reclaimed area. Consequently, the reclaimed area was granted to the City of Manila, not as its patrimonial property. At most, only the northern portion reserved as a hotel site could be said to be patrimonial property, for, by express statutory provision it could be disposed of, and the title thereto would revert to the City should the grantee fail to comply with the terms provided by the statute. - Secondly. the reclaimed area is an "extension to the Luneta in the City of Manila." If the reclaimed area is an extension of the Luneta, then it is of the same nature or character as the old Luneta. Anent this matter, it has been said that a power to extend or continue an act or business cannot authorize a transaction that is totally distinct. It is not disputed that the old Luneta is a public park or plaza and it is so considered by Section 859 of the Revised Ordinances of the City of Manila. Hence the "extension to the Luneta" must be also a public park or plaza and for public use. TDC, however, contends that the subject property cannot be considered an extension of the old Luneta because it is outside of the limits of the old Luneta when extended to the sea. This is a strained interpretation of the term "extension," for an "extension" it has been held, "signifies enlargement in any direction-in length, breadth, or circumstances. - Thirdly, the reclaimed area was formerly a part of the Manila Bay. A bay is nothing more than an inlet of the sea. Pursuant to Article 1 of the Law of Waters of 1866, bays, roadsteads, coast sea, inlets and shores are parts of the national domain open

Obligations and Contracts 189 to public use. These are also property of public ownership devoted to public use, according to Article 339 of the Civil Code of Spain. When the shore or part of the bay is reclaimed, it does not lose its character of being property for public use. - Fourthly, Act 1360, as amended, authorized the lease or sale of the northern portion of the reclaimed area as a hotel site. The subject property is not that northern portion authorized to be leased or sold; the subject property is the southern portion. Hence, applying the rule of expresio unius est exlusio alterius, the City of Manila was not authorized to sell the subject property. The application of this principle of statutory construction becomes the more imperative in the case at bar inasmuch as not only must the public grant of the reclaimed area to the City of Manila be, as above stated, strictly construed against the City of Manila, but also because a grant of power to a municipal corporation, as happens in this case where the city is authorized to lease or sell the northern portion of the Luneta extension, is strictly limited to such as are expressly or impliedly authorized or necessarily incidental to the objectives of the corporation. - Fifthly, Article 344 of the Civil Code of Spain provides that property of public use, in provinces and in towns, comprises the provincial and town roads, the squares, streets, fountains, and public waters, the promenades, and public works of general service paid for by such towns or provinces." A park or plaza, such as the extension to the Luneta, is undoubtedly comprised in said article. - We have demonstrated that the Luneta extension was intended to be property of the City of Manila for public use. But, could not said property later on be converted, as the petitioners contend, to patrimonial property? It could be. But this Court has already said, in Ignacio v. The Director of Lands that it is only the executive and possibly the legislative department that has the authority and the power to make the declaration that said Property is no longer required for public use, and until such declaration is made the property must continue to form part of the public domain. In the case at bar, there has been no such explicit or unequivocal declaration. It should be noted that courts are undoubtedly not primarily called upon, and are not in a position, to determine whether any public land is still needed for the purposes specified in Article 4 of the Law of Waters. 2. NO Ratio The Government is never estopped by mistakes or errors on the part of its agents and estoppel does not apply to a municipal corporation to validate a contract that is prohibited by law or its against public policy. Reasoning The sale of July 13, 1911 executed by the City of Manila to Manila Lodge was certainly a contract prohibited by law. Estoppel cannot be urged even if the City of Manila accepted the benefits of such contract of sale and the Manila Lodge No. 761 had performed its part of the agreement, for to apply the doctrine of estoppel against the City of Manila in this case would be tantamount to enabling it to do indirectly what it could not do directly. The sale of the subject property executed by the City of Manila to the Manila Lodge No. 761, BPOE, was void and inexistent for lack of subject matter. [a park is outside the commerce of man] It suffered from an incurable defect that could not be ratified either by lapse of time or by express ratification. The Manila Lodge No. 761 therefore acquired no right by virtue of the said sale. Hence to consider now the contract inexistent as it always has been, cannot be an impairment of the obligations of contracts, for there was in contemplation of law, no contract at all. The inexistence of said sale can be set up against anyone who asserts a right arising from it, not only against the first vendee, the Manila Lodge No. 761, BPOE, but also against all its Successors, including the TDC, which are not protected by law. The doctrine of bone fide purchaser without

A2010 page Prof. Labitag notice, being claimed by the TDC, does not apply where there is a total absence of title in the vendor, and the good faith of the purchaser TDC cannot create title where none exists. The restoration or restitution of what has been given is in order. 3. NO. We have shown in our discussion of the first issue that the decision of the trial court is fully in accordance with law. It follows that when such decision was affirmed by the CA, the affirmance was likewise in accordance with law. Hence, no useful purpose will be served in further discussing this issue. Disposition The petitions are denied for lack of merit and the decision of the CA is affirmed, at petitioners' cost.

MIGUEL V CATALINO REYES; November 29, 1968 NATURE An Appeal from the judgment of the CFI of Baguio dismissing the plaintiff’s complaint for recovery of possession of a parcel of land and declaring the defendant the true owner thereof. FACTS - The land in dispute is located in Benguet, Mountain Province and is covered by Original Certificate of Title No. 31 issued on Dec. 27, 1927 in the name of Bacaquio (Bakekew), a widower, with no annotated encumbrances or sales. - Plaintiff Grace Ventura is the only child of Bacaquio by his first wife, Debsay, and the other appellants Simeon, Emilia and Marcelina Miguel are his children by his 3rd wife, Cosamang. . The 3 successive wives have all died. - Bacaquio, who died in 1943, acquired the land from his 2nd wife and sold it to Catalino Agyapao, father of the defendant, Florendo Catalino, for P300 in 1928. No formal deed of sale was executed but for more than 30 years since 1928, Florendo and his father had been in possession of the land in the concept of owner, paying taxes and adding improvements. In 1949, Grace Ventura, alone, ‘sold’ the land anew for P300 to Agyapao who in turn sold it to his son, the defendant. - On Jan. 22, 1962, appellants brought suit to the TC against Catalino for recovery of said land, claiming to be the children and heirs of the original registered owner, averring that defendant took the land and gathered its produce unlawfully w/o their consent. The defendant pleaded ownership and adverse possession for 30 years, and counterclaimed for attorney’s fees. The court dismissed the complaint, ordering the Register of Deeds to issue a transfer certificate. Hence this appeal assailing the TC’s findings of fact and law. However, since this is a direct appeal from the TC, where the property’s value does not exceed P200,000, only issues of law are reviewable by the SC. ISSUE WON the TC erred in awarding the land in dispute to Catalino HELD NO - The appellants assail the admission of evidence of an exhibit with a decision in favor of the defendant by the council of Barrio of San Pascual. The Court concurs that the decision is ultra vires since barrio councils have no judicial powers (AVIII S1, Constitution; S12 Barrio Charter). The sale by Bacaquio to Catalino Agyapao is null

Obligations and Contracts 190 and void for lack of executive approval, hence, in law, Bacaquio remained the owner until it was passed on to his heirs by succession upon his death. - Notwithstanding these errors, the Court believes that the judgment in favor of Agyapao should be sustained. Despite the invalidity of the sale, Bacaquio suffered Agyapao to enter, posses and enjoy the land without protest from 1928-1943, and the appellants in turn took no steps to reivindicate the lot from 1944-1962. As held in Mejia de Lucas v. Gamponia, even granting that the title does not prescribe, their inaction of 34 years justifies the defendant’s equitable defense of laches, wherein the original owner’s right to recover the property has been converted into a stale demand. - As in the Gamponia case, the four elements of laches are present in the case at bar, namely: (a) conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of which complaint is made and for which the complaint seeks a remedy; (b) delay in asserting the complainant's rights, the complainant having had knowledge or notice, of the defendant's conduct and having been afforded an opportunity to institute a suit; (c) lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit; and (d) injury or prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held to be barred. - In the present case, the appellants knew the 1928 sale was invalid and did not have to wait for 34 years to institute a suit, clearly bringing prejudice to the defendant who was made to feel secure of his ownership over the lot. - As held in Nielson & Co. v. Lepanto Consolidated Mining Co., prescription is concerned with the fact of delay (matter of time), while laches with the effect of delay (a question of inequity), and thus both apply independently of each other. - Since the appellants are barred from recovery, the Court was justified in ordering that Bacaquio’s certificate be cancelled and the new transfer certificate in defendant’s name be issued by the Register of Deeds. Disposition FOR THE FOREGOING REASONS, the appealed decision is hereby affirmed, with costs against the plaintiffs-appellants.

ANNOTATION 32 SCRA 542 - The Annotation is about the "Significant Applications of Extinctive Prescription." It starts at 32 SCRA 526. For our puposes, what is significant is the part that is discussed from 32 SCRA 542. - Limitation of Actions in Implied or Constructive Trust - In a long line of cases, the Supreme Court used to adopt the view that the right of action of a cestui que trust against the trustee in an implied or constructive trust does not prescribe. But as early as 1956 a minority in the SC viewed with doubt the continued validity of the principle of imprescriptibility of actions based on constructive or implied trusts. - In a 1958 case, SC through JBL Reyes, expressed the view that in a constructive trust, imposed as it is by law, where no promise or fiduciary relation exists, the socalled trustee does not recognize any trust and has no interest to hold for the beneficiary; thus, the beneficiary can be barred to enforce the trust, unless there's concealment of the facts giving rise to the trust. - Despite SC view in Diaz v Gorricho and reiterated in subsequent cases, to the effect that an action upon a constructive trust is subject to prescription, a contrary

A2010 page Prof. Labitag view appeared to have been adopted in at least 3 cases decided subsequent to the Diaz doctrine - In Juan et al v Zuñiga: When an heir through fraudulent representation, or by pretending to be the sole heir of the deceased, succeeded in having the title over a real property registered in his name to the exclusion of the other heirs, a constructive trust is created in favor of the defrauded heir and grants to the latter the right to vindicate the property regardless of the lapse of time. - In Caladiao v Vda de Blas: SC declared that an action to compel reconveyance of property with Torrens Title does not prescribe if the registered owner had obtained registration in bad faith and the property is still in the latter's name., bec the registration is in the nature of a continuing and subsisting trust - The consensus of opinion: The prescription of action for recvonveyance based on implied or constructive trust is now a settled question in our jurisdiction. Correspondingly, where implied trust is present, the action to recover the propertyprescribes after the lapse of 10 years unless a fiduciary relation exists and the trustee recognizes the trust.

SALAO V SALAO AQUINO; Martch 16, 2003 NATURE Appeal from the decision of the trial court FACTS - Manuel Salao and Valentina Ignacio begot 4 children, Patricio, Alejandra, Juan (Banli) and Ambrosia. Manuel died in 1885. Patricio died in 1886 and was survived by his son Valentin. - When Valentina died, her estate was administered by Ambrosia. It was partitioned extra-judicially to Alejandra, Juan, Ambrosia and Valentin. Valentin was given lad which has an appraised value of 13,501 which exceeded Valentin's distributive share. So in the deed of partition he was directed to pay to his co-heirs the sum of P5,365.75 - In 1911, prior to Valentina’s death, Juan and Ambrosia secured a Torrens title for a forty-seven-hectare fishpond located at Sitio Calunuran, Lubao, Pampanga. The Calunuran fishpond is the bone of contention in this case - Plaintiffs aver that Valentin Salao and Alejandra Salao also participated in the acquisition of the said fishpond. Defendants contend that the Calunuran fishpond consisted of lands purchased by Juan Y. Salao, Sr. and Ambrosia Salao - However, there can be no controversy as to the fact that after Juan Y. Salao, Sr. and Ambrosia Salao secured a Torrens title for the Calunuran fishpond in 1911 they exercised dominical rights over it to the exclusion of their nephew, Valentin Salao - On May 27, 1911 Ambrosia Salao bought for four thousand pesos from the heirs of Engracio Santiago a parcel of swampland. Ambrosia Salao and Juan Salao filed an application for the registration of that land in their names and it was granted by the CFI. That Pinanganacan or Lewa fishpond adjoins the Calunuran fishpond. - Juan Y. Salao, Sr. died on November 3, 1931. Valentin Salao died on February 9, 1933. His estate, which consists of 2 fishponds he had inherited in 1918 from his grandmother, Valentina Ignacio, was partitioned to her two daughters, Benita SalaoMarcelo and Victorina Salao-Alcuriza. No mention of the alleged 1/3 interest in the Calunuran and Lewa fishponds was mentioned.

Obligations and Contracts 191 - On April 8, 1940 Ambrosia Salao donated to her grandniece, plaintiff Benita Salao. On that occasion she could have asked Ambrosia Salao to deliver to her and to the children of her sister, Victorina, the Calunuran fishpond if it were true that it was held in trust by Ambrosia as the share of Benita's father in the alleged joint venture. But she did not make any such demand. It was only after Ambrosia Salao's death that she thought of filing an action for the reconveyance. - About a year before Ambrosia Salao's death on September 14, 1945. she donated her one-half proindiviso share in the two fishponds in question to her nephew, Juan S. Salao, Jr. (Juani). He was already the owner of the the other half of the said fishponds, having inherited it from his father, Juan Y. Salao, Sr. - The lawyer of Benita Salao and the Children of Victorina Salao in a letter dated January 26, 1951 informed Juan S. Salao, Jr. that his clients had a one-third share in the two fishponds. Juani did not refused to give their alleged share. - Benita Salao and her nephews and niece filed a complaint against Juani. They asked for the annulment of the donation to Juan S. Salao, Jr. and for the reconveyance to them of the Calunuran fishpond. . Salao, Jr. in his answer pleaded as a defense the indefeasibility of the Torrens title secured by his father and aunt. He also invoked the Statute of Frauds, prescription and laches. - Juan S. Salao, Jr. died in 1958 at the age of seventy-one. He was substituted by his widow, Mercedes Pascual and his six children and by the administrator of his estate. In the intestate proceedings for the settlement of his estate the two fishponds in question were adjudicated to his seven legal heirs in equal shares with the condition that the properties would remain under administration during the pendency of this case. - The trial court found that there was no community of property among Juan Y. Salao, Sr., Ambrosia Salao and Valentin Salao when the Calunuran and Pinanganacan (Lewa) lands were acquired. There was however, co-ownership between 1914, the time of Valentina’s death, thru 1918, the time the estate was partitioned. The trial court surmised that the co-ownership which existed from 1914 to 1918 misled the plaintiffs and their witnesses and caused them to believe erroneously that there was a co-ownership in 1905 or thereabouts. They also rationalized that Valentin's omission during his lifetime to assail the Torrens titles of Juan and Ambrosia signified that "he was not a co-owner" of the fishponds. It also held that the donation to Juani was validly executed. - Both parties appealed. The plaintiffs appealed because their action for reconveyance was dismissed. The defendants appealed because their counterclaim for damages was dismissed ISSUES 1. WON the Calunuran fishpond was held in trust for Valentin Salao by Juan Y. Salao, Sr. and Ambrosia Salao 2. WON plaintiffs' action for reconveyance had already prescribed. 3. WON the defendant’s are entitled to damages HELD 1. NO - Not a scintilla of documentary evidence was presented by the plaintiffs to prove that there was an express trust over the Calunuran fishpond in favor of Valentin Salao. Purely parol evidence was offered by them to prove the alleged

A2010 page Prof. Labitag trust. Their claim that in the oral partition in 1919 of the two fishponds the Calunuran fishpond was assigned to Valentin Salao is legally untenable. - Parol evidence cannot be used to prove an express trust concerning realty - Plaintiffs' pleadings and evidence cannot be relied upon to prove an implied trust. The trial court's firm conclusion that there was no community of property during the lifetime of Valentina; Ignacio or before 1914 is substantiated by defendants' documentary evidence - The existence of the alleged co-ownership over the lands supposedly inherited from Manuel Salao in 1885 is the basis of plaintiffs' contention that the Calunuran fishpond was held in trust for Valentin Salao. - But that co-ownership was not proven by any competent evidence. It is quite improbable because the alleged estate of Manuel Salao was likewise not satisfactorily proven. There were inconsistencies in the plaintiff’s original complaint, amended complaint and brief over the number of hectares which were under coownership (2,7 and 11 hectares respectively). They theorized that the eleven hectares "were, and necessarily, the nucleus, nay the very root, of the property now in litigation. But the eleven hectares were not proven by any trustworthy evidence - The 1919 partition of Valentina Ignacio's estate covered about 17 hectares of fishponds and ricelands. If at the time that partition was made there were 11 hectares of land belonging to Manuel Salao those eleven hectares would have been partitioned in writing like Valentina’s estate. It is incredible that the 47 hectare fishpond would be adjudicated to Valentin by mere word of mouth, when the partition for the 17 hectare estate of Valentina was put into writing. - The improbability of the alleged oral partition becomes more evident when it is borne in mind that the two fishponds were registered land. That means that any transaction affecting the registered land should be evidenced by a registerable deed. The fact that Valentin Salao and his successors-in-interest never bothered in 40 years to procure any documentary evidence to establish their alleged interest is very suggestive of the absence of such interest. - The matter can also be viewed in another way. In the partition of Valentina Ignacio's estate, Valentin was obligated to pay P3,355.25 to Ambrosia Salao. If Valentin really had a share in the fishponds, Ambrosia could have just deducted from his share of earnings of the fishponds. However, there was no such stipulation. - A Torrens title is generally a conclusive of the ownership of the land referred to therein (Sec. 47, Act 496). A strong presumption exists that Torrens titles were regularly issued and that they are valid. - There was no resulting trust in this case because there never was any intention on the part of Juan Y. Salao, Sr., Ambrosia Salao and Valentin Salao to create any trust. There was no constructive trust because the registration of the two fishponds in the names of Juan and Ambrosia was not vitiated by fraud or mistake. 2. YES - Plaintiffs' action is clearly barred by prescription or laches. Under Act No. 190, whose statute of limitation would apply if there were an implied trust in this case, the longest period of extinctive prescription was only ten years. - The Calunuran fishpond was registered in 1911. The written extrajudicial demand for its reconveyance was made by the plaintiffs in 1951. Their action was filed in 1952 or after the lapse of more than forty years from the date of registration 3. NO

Obligations and Contracts 192 - Although the defendant’s causes of action turned out to be unfounded, the pertinacity and vigor with which they pressed their claim indicate their sincerity and good faith. (incurred expenses, presented 15 witnesses) - There is the further consideration that the parties were descendants of common ancestors, the spouses Manuel Salao and Valentina Ignacio, and that plaintiffs' action was based on their honest supposition that the funds used in the acquisition of the lands in litigation were earnings of the properties allegedly inherited from Manuel Salao. - Considering those circumstances, it cannot be concluded with certitude that plaintiffs' action was manifestly frivolous or was primarily intended to harass the defendants. An award for damages to the defendants does not appear to be just and proper. Disposition Decision affirmed

FABIAN v FABIAN CASTRO; January 29, 1968 NATURE Appeal taken from the decision of the CFI dismissing plaintiff’s complaint for reconveyance FACTS - On January 1, 1909, Pablo Fabian bought from the Philippine Government lot 164 of the Friar Lands Estate in Muntinlupa, Rizal. He died on August 2, 1928, survived by four children, namely, Esperanza, Benita I, Benita II, and Silbina. - On October 5, 1928 Silbina Fabian and Teodora Fabian, niece of the deceased, executed an affidavit and on November 14, 1928 the acting Director of Lands, on behalf of the Government, sold lot 164, under deed 17272, to Silbina and Teodora Fabian. - In 1929, the vendees took physical possession thereof, cultivated it, and appropriated the produce therefrom (and concededly have up to the present been appropriating the fruits from the land exclusively for themselves). In that same year, they declared the lot in their names for taxation purposes under tax declaration 3374. Since 1929 up to the present, they have been paying the real estate taxes thereon. - On July 18, 1960 the plaintiffs filed the present action for reconveyance against the defendants spouses, averring that Silbina and Teodora, through fraud perpetrated in their affidavit, made it appear that "el finado Pablo Fabian no dejo ningun otro heredero sino los declarantes con derecho a heredar el lote No. 164 de la hacienda de Muntinlupa", which is a false narration of facts because Silbina knew that she is not the only daughter and heir of the deceased Pablo Fabian, and Teodora likewise knew all along that, as a mere niece of the deceased, she was precluded from inheriting from him in the presence of his four surviving daughters. - The defendants claim that Pablo Fabian was not the owner of lot 164 at the time of his death on August 2, 1928 because he had not paid in full the amortizations on the lot; that they are the absolute owners thereof, having purchased it from the Government for the sum of P120, and from that year having exercised all the attributes of ownership thereof up to the present; and that the present action for reconveyance has already prescribed.

A2010 page Prof. Labitag - The lower court rendered judgment on June 28, 1962, declaring that the defendants spouses had acquired a valid and complete title to the property by acquisitive prescription, and accordingly dismissed the complaint, with costs against the plaintiffs. ISSUES 1. WON Pablo Fabian was the owner of lot 164 at the time of his death, in the face of the fact, admitted by the defendants-appellees, that he had not then paid the entire purchase price thereof 2. WON laches may bar an action to enforce a constructive trust 3. WON title to the land has vested in the appellees through the mode of acquisitive prescription HELD 1. YES Ratio Lot 164 was a part of the Friar Lands Estate of Muntinlupa, Rizal; its sale to Pablo Fabian was therefore governed by Friar Lands Act. While under section 15 of the said Act, title to the land sold is reserved to the Government until the purchaser makes full payment of all the required installments and the interest thereon, this legal reservation refers to the bare, naked title. The equitable and beneficial title really went to the purchaser the moment he paid the first installment and was given a certificate of sale. The assignment and sale of the lot to the defendants. Silbina and Teodora were therefore null and void as to that portion sold to Teodora, and as well as to that portion which lawfully devolved in favor of the appellants. To the extent of the participation of the appellants, application must be made of the principle that if property is acquired through fraud, the person obtaining it is considered a trustee of an implied trust for the benefit of the person from whom the property comes. Reasoning The reservation of the title in favor of the Government is made merely to protect the interest of the Government so as to preclude the purchaser from encumbering or disposing of the lot purchased before the payment in full of the purchase price. Outside of this protection the Government retains no right as an owner. And when said purchaser finally pays the final installment on the purchase price and is given a deed of conveyance and a certificate of title, the title at least in equity, retroacts to the time he first occupied the land, paid the first installment and was issued the corresponding certificate of sale. 2. YES Ratio In constructive trusts, the rule is that laches constitutes a bar to actions to enforce the trust, and repudiation is not required, unless there is a concealment of the facts giving rise to the trust. Reasoning Assignment of sale certificate 547 was effected on October 5, 1928; and the actual transfer of lot 164 was made on the following November 14. It was only on July 8, 1960, 32 big years later, that the appellants for the first time came forward with their claim to the land. It is not seriously asserted that the appellees concealed the facts giving rise to the trust. On the contrary, the stipulation of facts of the parties states with striking clarity "that defendants herein have been in possession of the land in question since 1928 up to the present publicly and continuously under claim of ownership; they have cultivated it, harvested and appropriated the fruits for themselves." 3. YES

Obligations and Contracts 193 Ratio An action for reconveyance of real property based upon a constructive or implied trust, resulting from fraud, may be barred by the statute of limitations, and the action therefor may be filed within four years from the discovery of the fraud, the discovery in that case being deemed to have taken place when new certificates of title were issued exclusively in the names of the respondents therein. Reasoning Upon the undisputed facts in the case at bar, not only had laches set in when the appellants instituted their action for, reconveyance in 1960, but as well their right to enforce the constructive trust had already prescribed. Ten years actual adverse possession by any person claiming to be the owner for that time of any land or interest in land, uninterruptedly continued for ten years by occupancy, descent, grants, or otherwise, in whatever way such occupancy may have commenced or continued, shall vest in every actual occupant or possessor of such land a full and complete title. Disposition The judgment a quo, dismissing the complaint, is affirmed. No pronouncement as to costs. Voting Concepcion, C.J., Reyes, J.B.L., Dizon, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur. Makalintal, J., concurs in the result.

BUENO V REYES MAKALINTAL; April 28, 1969 NATURE An appeal from the decision of the CFI dismissing the plaintiff’s complaint FACTS - In January 1936, FRANCISO REYES filed an answer in a cadastral case claiming LOT NO. 2357 to be his and his 2 brothers Juan and Mateo. - 23 yrs. later the plaintiffs in this case filrd an action of reconveyance of Lot 2357. They said that the land did not belong to Reyes and his brothers - the land was originally owned by Jorge Bueno. When he died, his 3 children inherited it: Brigida, Eugenia and Rufino. BRigida and Eugenia then died leavingthe land to their respective children and Rufino who are now the plaintiffs in this case. Francisco was Eugenia’s husband. Thus, it is claimed that the land should belong to his children and his wife’s siblings, Brigida nd Rufino\ - The defendants Juan and Mateo Reyes filed their answer (Francisco died already) , in which they raised a number of defenses, including laches, imprescriptibility of title, and prescription of action. The last defense was upheld by the court and now subject of this appeal - Upon appeal, the appellants/plaintiffs assigned the ff. errors: (1) in the dismissal of the complaint on the ground of prescription; and (2) in the dismissal of the complaint "even in relation to appellants surnamed Reyes, the children of Francisco Reyes - Both the appellees and the court below proceeded on the theory that the action for reconveyance was predicated on the existence of an implied trust, and that such an action prescribes in 10 years. The appellants counter, in this appeal, that the trust was not implied but express, and that in any case even an implied trust, according to some decisions of this Court, is imprescriptible. On the other hand, the appellants counter by saying that the trust was not implied but express, and is in any case imprescriptible

A2010 page Prof. Labitag ISSUES WON the action for reconveyance prescribes in 10 years HELD Yes Reasoning - The appellants counter argument is untenable.

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What was apparently designed to be an express trust was for the late Francisco H. Reyes to file an answer in the cadastral proceeding and to obtain title to the land for and in behalf of all the heirs of Jorge Bueno. But such express trust failed to materialize. - If any trust can be deduced at all from the foregoing facts it was an implied one - While there are some decisions which hold that an action upon a trust is imprescriptible, without distinguishing between express and implied trusts, the better rule, as laid down by this Court in other decisions, is that prescription does supervene where the trust is merely an implied one. - Upon the general proposition that an action for reconveyance such as the present is subject to prescription in ten years the appellees and the court a quo are correct. The question here, however is: from what time should the prescriptive period be counted, in the light of the allegations in the complaint? - the cause of action upon such trust must be deemed to have accrued only upon the discovery of such bad faith or mistake, or to put it more specifically, upon the discovery by the appellants that Francisco H. Reyes, in violation of their agreement with him, had obtained registration of the disputed property in his own name and in the names of his brothers. - It would not do to say that the cadastral proceeding itself, by virtue of its nature as a proceeding in rem, was constructive notice to the appellants, for as far as they were concerned the cadastral answer they had authorized Francisco H. Reyes to file was not adverse to them; and neither he nor the appellee may invoke the constructive-notice rule on the basis of their own breach of the authority thus given. On top of all this, it was the appellants and not the appellees who were in possession of the property as owners, continuously up to 1962, when for the first time the latter appeared upon the scene and tried to get such possession, thereby revealing to them the fact of the mistaken or fraudulent registration. - But the foregoing are not facts already established by evidence. They are merely alleged in the complaint. These are matters of defense that must be substantiated at the trial. - With this view we take of the case, it is unnecessary to take Lip the second error assigned. Ratio - If any trust can be deduced at all from the foregoing facts it was an implied one, arising by operation of law not from any presumed intention of the parties but to satisfy the demands of justice and equity and as A protection against unfair dealing or downright fraud. Indeed, in this kind of implied trust, commonly denominated constructive, as distinguished from resulting, trust, there exists a certain antagonism between the cestui que trust and the trustee. - Thus, for instance, under Article 1456 of the Civil Code, "if property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of a" implied trust for the benefit of the person from whom the property

Obligations and Contracts 194 comes." In a number of cases this Court has held that registration of property by one person in his name, whether by mistake or fraud, the real owner being another person, impresses upon the title so acquired the character of a constructive trust for the real owner, which would justify an action for reconveyance. - J.B.L. Reyes in J.M. Tuason and Co., Inc. v. Magdangal: "Under Section 40 of the old Code of the Civil Procedure, all actions for recovery of real property prescribes in 10 years, excepting actions based on continuing or subsisting trusts that were considered by Section 38 as imprescriptible. As held in the case of Diaz v. Gorricho, however, the continuing or subsisting trusts contemplated in Section 38 of the Code of Civil Procedure referred only to express unrepudiated trusts, and did not include constructive trusts where no fiduciary relation exists and the trustee does not recognize the trust of all." Disposition the order appealed from is set aside and the case is remanded for further proceedings.

TAMAYO V CALLEJO CONCEPCION; July 28, 1972 FACTS - This action was brought by Aurelio Callejo, originally against Mariano Tamayo only, and, later, against his brother Marcos Tamayo, also, for the reconveyance of the northern portion of a parcel of land in the names of said brothers. CFI dismissed the complaint. Court of Appeals reversed and the land was declared reconveyed unto him - It appears that the spouses Vicente Tamayo and Cirila Velasco Tamayo owned a parcel of land in the barrio of Oalsic or Gualsic. Prior to Feb. 1, 1912, said spouses sold part of the northern portion of said land to Fernando Domantay, who took possession thereof. - Sometime after this sale, but before said date, Vicente Tamayo died. His widow having waived her rights to the remaining portion of their original property in favor of her children Mariano Tamayo and Marcos Tamayo, these brothers were, on February 1, 1912, declared sole heirs of the deceased. The brothers applied for the registration in their names, of a tract of land of about 383,509 square meters, alleging that they had thus inherited the same from their deceased father. - judgment was rendered, directing the registration, in the name of Mariano Tamayo and Marcos Tamayo, of 205,421 sqm only of the land applied for, said applicants having acknowledged that the remaining portion thereot belonged to the estate of Gregorio Flor Mata, deceased. - Not long after Fernando Domantay sold his above-mentioned land of 22,125-1/3 square meters to Aurelio Callejo, who took possession thereof since then. - Subsequently, Marcos Tamayo sold his undivided share in the property (the 200k sqm land) to his brother Mariano Tamayo. Then, Mariano sold 70,000 sqm to Proceso Estacio, upon whose request surveyor Fidel Diaz went to the land for the purpose of preparing a subdivision plan and segregating the 7 hectares thus conveyed by Mariano Tamayo, but Diaz did not accomplish his purpose, for he was not allowed by Callejo to enter the portion held by the latter.

A2010 page Prof. Labitag - Callejo asked Mariano Tamayo to cause to be excluded the land held by the former, but the latter refused to do so. - Then Callejo filed his present complaint for reconveyance and damages - Having failed to answer the amended complaint, defendant Marcos Tamayo was declared in default, whereas defendant Mariano Tamayo filed his answer with counterclaim. His main defense was that the land claimed by Callejo is outside the perimeter of the area covered by the aforementioned certificates of title. - Mariano Tamayo pleaded also the statute of limitations. - CFI rendered a decision dismissing the complaint, upon the ground that the land Purchased by Fernando Domantay from the parents of Mariano and Marcos Tamayo is not included in said titles - this decision was reversed by CA which found that the land claimed by Callejo is part of the land covered by the aforementioned certificates of title held by Tamayo, and overruled the plea of prescription set up by Mariano Tamayo, upon the theory that the title to said portion of land now claimed by Callejo, and, before, by Fernando Domantay, is held in trust by the Tamayos and that the action to enforce said trust does not prescribe. - Tamayo maintains that the Court of Appeals has erred: (1) "in not holding that the respondent Aurelio Callejo's cause of action, if any, had already prescribed"; (2) "in holding that the petitioner's failure to appeal from the decision that did not grant him affirmative relief on the matter of possession, constituted res adjudicata thereon"; (3) "in disregarding the judicial admission made by the respondent Callejo and his counsel"; (4) "in making conclusions not supported by the facts on record", (5) "in not affirming the decision rendered by the trial court." ISSUES 1. WON Callejo’s cause of action had already prescribed 2. WON petitioner’s failure to appeal from the decision that did not grant him affirmative relief constituted res judicata 3. WON the judicial admission made by Callejo and his counsel should have been disregarded 4. WON the court made conclusions not supported by facts 5. WON the Callejo has the right to demand a reconveyance HELD 1. NO Ratio Where an implied trust was created in favor of Domantay by the erroneous inclusion in the Tamayo brothers' certificate of title of the parcel of land formerly sold by their parents to Domantay (who in turn sold it to Aurelio Callejo) and on June 28, 1918, Mariano Tamayo, on his behalf and that of his brother Marcos, expressly recognized the said previous sale by their parents to Domantay, such express recognition had the effect of imparting to the aforementioned trust the nature of an express trust which is not subject to the statute of limitations, at least, until repudiated, in which event the period of prescription begins to run only from the time of the repudiation. In the instant case, repudiation took place only in early June, 1952, when Mariano Tamayo rejected Callejo's demand that the disputed portion be excluded from TCT No. 5486 in the former's name. When the instant case for reconveyance was filed on June 25, 1952, the period of prescription had barely begun to run. Reasoning It should be noted that although the trust created by the application for registration filed by Mariano and Marcos Tamayo, on or about September 29,

Obligations and Contracts 195 1913, and the inclusion in OCT No. 2612, issued in their names, on November 15, 1915, of the tract of land previously sold by their parents to Fernando Domantay and later conveyed by him to Aurelio Callejo - may have had a constructive or implied nature, its status was substantially affected on June 28, 1918, by the following facts, namely: On the date last mentioned, Fernando Domantay and petitioner Mariano Tamayo executed the public instrument whereby Mariano explicitly acknowledged that his deceased parents had sold to Domantay the parcel of land of about 22,125/13 square meters. then held by the latter, and stipulating that Domantay is the absolute owner of said land, free from any lien or encumbrance thereon. This express recognition by Mariano Tamayo of the previous sale, made by their parents, to Fernando Domantay had the effect of imparting to the aforementioned trust the nature of an express trust - it having been created by the will of the parties, "no particular words" being "required for the creation of an express trust, it being sufficient that a trust is clearly intended" - which express trust is a "Continuing and subsisting" trust, not subject to the statute of limitations, at least, until repudiated, in which event the period of prescription begins to run only from the time of the repudiation. The latter did not take place until early in June, 1952, when Mariano Tamayo rejected Aurelio Callejo's demand. But, then, the case at bar was filed weeks later when the period of prescription had barely begun to run. 2. Ratio Petitioner's pretense is manifestly devoid of merit, for the Court of Appeals had explicitly acknowledged Callejo's title over the disputed land and declared the same reconveyed to him. This necessarily implied that Callejo is entitled to remain in possession of said land. 3. Ratio The finding of the Court of Appeals to the effect that the land sold by petitioner's parents to Domantay is within the perimeter of the property covered by TCT No. 5486 is essentially a question of fact, and, consequently, the finding to this effect is final and not subject to review in the present appeal on certiorari. (Note: see the original for the factual finding of the CA. Bottomline, the land in question is shown to be Callejo’s and not Tamayo’s.) 4. Ratio Petitioner's argument that the conclusion of the Court of Appeals to the effect that Lot No, 12340 was acquired by respondent Callon from Maximo Rico "is not supported by any direct testimonial evidence", is in the nature of a negative pregnant. It does not deny the existence of indirect testimonial evidence, such as the circumstances considered by the Court of Appeals. Neither does it assail the existence of direct documentary evidence. In short, it does not deny the existence of substantial evidence in support of the contested conclusion of fact of the Court of Appeals. 5. Ratio Petitioner questions the right of Callejo to demand a reconveyance, insofar as it may affect the portion of 70,000 square meters sold by him to Proceso Estacio, upon the ground that the latter is a purchaser in good faith for value. This is, however, a defense not available to petitioner herein, aside from the fact that he has not even pleaded it in the trial court or otherwise raised it either in that court or in the Court of Appeals. - We note that the Disposition part of the decision of the Court of Appeals declares that the land in question is "declared reconveyed" to said respondent. Such reconveyance cannot, however, be deemed

A2010 page Prof. Labitag made without a survey defining with precision the metes and bounds of the area to be segregated for herein respondent, Aurelio Callejo. Disposition Accordingly, this case should be remanded to the court of origin for the preparation of a subdivision plan of the portion thus to be segregated and the judicial approval of such plan, and only after such approval has become final and executory may the reconveyance be either made or deemed effected. So modified, the appealed decision of the Court of Appeals is hereby affirmed in all other respects, with the costs of this instance against petitioner Mariano Tamayo.

Obligations and Contracts page 196

A2010 Prof. Labitag